Financial Report From an all-time high of $6.3 million in 1974, the foundation's revenues have decreased to $4.1 million in 1975, to $4 million in 1976, and to $3.4 million in the fiscal year just completed. Of the three main sources of revenue-royalties on patents owned by Research Corporation, royalties paid by Research-Cottrell, Inc. (formerly the wholly-owned subsidiary of the foundation) and investment income-the greatest reductions have occurred in the patent area, where valuable patents have expired and significant revenue has been withheld by a current licensee. Revenues from investments and from Research-Cottrell have remained reasonably stable. Investment income has failed to grow because capital drawdowns from portfolios in excess of income have offset normal growth in dividends. The reduction of the royalty rate on patents and know-how, in accord with the agreement with Research-Cottrell, has reduced revenues from that source. These varied sources of income point up one of the major differences between Research Corporation and other private foundations: its "endowment" consisted originally not of real property or securities, but of patent rights of uncertain value donated by Frederick Gardner Cottrell. Subsequent major sources of income have been patents on inventions donated in whole or in part to the foundation by public spirited inventors who followed Dr. Cottrell's precept. Patents expire 17 years after issuing and thus do not provide royalties indefinitely. The foundation has consistently placed support of essential programs first. At one point, in 1932, when the cupboard was practically bare, the Board authorized the sale of security investments to pay grants and operating expenses, and two years later the Board approved borrowing against future revenues, so strongly did it believe that the foundation should fulfill its chartered purposes in technology transfer and support of research in the sciences. Continuing in this manner, in nine of the ten years since 1967 Research Corporation has paid out more for grants, operating programs and expenses than it has taken in, the consequent drawdowns from capital aggregating nearly $15 million. In keeping with this long tradition, in adopting the budget for fiscal 1978 the Board authorized a $2 million expenditure from capital. These substantial appropriations of capital for operating purposes have contributed to the diminution in investment funds. However, the difficult climate in equity markets in general during recent years is of vastly greater importance in this regard. Thus portfolio holdings (including Research-Cottrell) which peaked at $96.7 million in 1972, at 1977 fiscal year end were $45 million. A large proportion of the shrinkage is attributable to a more realistic market evaluation of Research-Cottrell shares. Investment Policy and Performance At fiscal year end 64% of the market value of the managed portfolios consisted of equity investments, 26% was in high grade bonds-mostly U.S. Government obligations-and the remaining 10% was in liquid short-term or cash equivalent holdings. When Research-Cottrell stock holdings are combined with the managed funds, 74% of the foundation's investment assets were in equities. This reflects the Finance Committee's continuing belief that, despite the disappointing performance of equity markets in the last nine years, carefully selected equity investments will provide a higher total return over a long period of time than fixed income and other alternative investment vehicles. In 1976 the Finance Committee authorized the investment of $10.5 million of the foundation's managed assets in two mutual funds. Except for the Research-Cottrell shares, the remaining investments are in two equity accounts and one bond account, each individually managed. During most of the last nine years, the foundation's managed funds have slightly lagged the performance of the stock averages. The bond fund has mitigated the price volatility of the equity portfolio, both on the upside and downside and, in balance, has added positively to the performance of the combined fund. The Financial Outlook As noted earlier, the foundation depends on three major sources to finance its programs. These three sources vary in their relative contributions from one period to another. Investment income has assumed greater importance as Research-Cottrell stock holdings were liquidated to permit greater diversification. In 1977, $1.8 million came from investment portfolio income, $806,000 from Research-Cottrell royalties and dividends, and $592,000 net royalties from the foundation's patent portfolio. In addition, $182,000 came as contributions from individuals, other foundations and corporations in support of Research Corporation programs. Not included in the foregoing figures is $833,000 paid by the foundation to universities and inventors as their shares of royalties on inventions administered by Research Corporation. In the next year or two it is expected that the revenue contribution from the investment portfolio in the form of dividends and interest will diminish slightly, primarily because of the continued depletion of invested funds to support current levels of foundation programs. Royalties from Research-Cottrell on the sale of electrostatic precipitators will continue into fiscal 1979. The dividend rate on the ResearchCottrell shares, formerly eight cents per share, was doubled for the last quarter of 1977; if this rate is continued, income from this source will rise from the $55,600 received in 1977 to $111,200 in 1978. The greatest unknown factor in forecasting income, and by far the most critical for the foundation's future, is royalties derived from the patent portfolio. The time between filing a patent application and re ceiving any royalties can be estimated far more closely than the amount of royalties to be expected. Royalties to be received in the next few years will in all probability be limited to those inventions already "in house," but it has proven difficult to estimate with accuracy the revenue levels to be expected from individual patents. In conclusion, foundation revenues are not presently anticipated to rise appreciably in the near or intermediate term future. However, the patent portfolio contains many potentially valuable assets, so there always exists the possibility—as the past has demonstrated—that significant new royalties may be forthcoming. BAYARD R. HAND Vice President-Finance |