SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1996
Commission File Number 0-7704
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1681234
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
122 East 42nd Street, New York, New York 10168
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (2l2) 687-4741
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
The number of shares outstanding of the Registrant's Common Stock, par
value $.10 per share, as of November 1, 1996 was 5,301,887.
<PAGE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
INDEX
Page
Part I. Financial Information
Condensed Consolidated Balance Sheets
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations
Nine and Three Months Ended September 30, 1996
and 1995 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995
(unaudited) 5
Notes to Condensed Consolidated Financial
Statements 6-7
Management's Discussion and Analysis of Financial
Conditions and Results of Operations 8-9
Part II. Other Information 10
Page 2
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REFAC TECHNOLOGY DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
SEPT. 30 DEC. 31
ASSETS 1996 1995
<S> <C> <C>
Current Assets (UNAUDITED) *
Cash and cash equivalents $1,528,124 $893,744
Marketable securities 7,642,789 5,276,302
Investments being held to maturity 6,276,879 5,245,365
Accounts receivable 979,799 1,290,704
Prepaid expenses 22,219 14,272
Total current assets 16,449,810 12,720,387
Property and equipment, net 146,545 151,165
Securities acquired in association with licensing
activities 22,159,729 21,551,772
Investments being held to maturity 908,294 1,766,993
Other assets 1,436,458 1,162,114
$41,100,836 $37,352,431
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable 45,520 232,924
Accrued expenses 493,373 397,907
Amounts payable under service agreements 215,392 356,110
Income taxes payable 440,570 464,889
Total current liabilities 1,194,855 1,451,830
Deferred income taxes 6,949,765 6,816,020
Minority interest 24,902 0
Stockholders' Equity
Common stock, $.10 par value 530,189 529,989
Additional paid in capital 8,875,274 8,870,724
Retained earnings 10,152,664 6,700,644
Unrealized gain on securities acquired in
association with licensing activites, net
of taxes 13,167,525 12,713,389
Cumulative translation adjustment 205,662 269,835
Total stockholders' equity 32,931,314 29,084,581
$41,100,836 $37,352,431
<FN>
*Derived from audited financial statements
See accompanying notes to the condensed consolidated financial statements
Page 3
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REFAC TECHNOLOGY DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues $2,656,134 $3,097,538 $763,068 $1,119,101
Service revenues
Gains on securities acquired in
associaiton with licensing activities 3,085,925 152,968 588,215 0
Dividends from securities acquired in
association with licensing activities 454,860 0 151,620 0
Sales 218,385 119,997 57,720 33,743
Total revenues 6,415,304 3,370,503 1,560,623 1,152,844
Costs and Expenses
Service expenses 582,906 654,259 115,310 214,187
Selling, general and administrative expenses 1,335,919 1,114,843 421,563 320,446
Cost of good sold 157,497 83,337 43,405 19,408
Total operating expenses 2,076,322 1,852,439 580,278 554,041
Operating income 4,338,982 1,518,064 980,345 598,803
Other Income and Expenses
Gain on marketable securities transactions 10,073 27,707 793 22,464
Net change in unrealized (losses) gains on
marketable securities (142,236) 150,211 5,794 (8,016)
Dividend and interest income 779,501 779,874 293,489 218,959
Gains (losses) from foreign currency transactions 2,152 (715) 1,484 508
Income before provision for taxes on income
and minority interest 4,988,472 2,475,141 1,281,905 832,718
Provision for taxes on income 1,556,397 887,303 398,702 345,609
Income before minority interest
Minority interest 19,945 0 7,147 0
Net Income 3,452,020 1,587,838 890,350 487,109
Earnings per common share
Net income $0.65 $0.30 $0.17 $0.09
Weighted average number of shares outstanding 5,301,887 5,314,771 5,301,887 5,296,853
<FN>
See accompanying notes to the condensed consolidated financial statements
Page 4
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REFAC TECHNOLOGY DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine months ended September 30,
1996 1995
<S> <C> <C>
Cash Flows from Operating Activities
Net income $3,452,020 $1,587,838
Adjustments to reconcile net income to net cash
(used in) provided by operating activities
Depreciation and amortization 66,021 60,093
Amortization of discount on U.S. Treasury Bills (29,619) (205,640)
Net gain on sale of securities acquired in
association with licensing activities (3,085,925) 0
net gain on sales of securities (10,073) (27,707)
Net change in unrealized loss (gain) on
marketable securities 142,236 (150,211)
Deferred income taxes (13,965) 79,202
(Increase) decrease in assets:
Accounts receivable 310,905 (172,535)
Prepaid expenses (7,947) 228,617
Proceeds from sale of marketable securities 1,333,790 876,438
Purchase of marketable securities (3,825,683) (2,125,398)
Other assets (274,344) (213,788)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (91,938) 59,233
Amounts payable under service agreements (140,718) (210,727)
Income taxes payable (24,319) 231,148
Net cash (used in) provided by operating activities (2,199,559) 16,563
Cash Flows from Investing Activities
Proceeds from sales of securities acquired in
association with licensing activities 3,165,734 173,386
Proceeds from maturity of investments being held
to maturity 2,310,585 10,503,385
Purchase of investments being held to maturity (2,448,457) (15,331,378)
Additions to patents and trademarks (44,898) (44,208)
Additions to property and equipment (89,602) (17,751)
Net cash provided by (used in) investing activities 2,893,362 (4,716,566)
Cash Flows from Financing Activities
Acquisition and retirement of common stock 0 (287,808)
Proceeds from exercise of stock options 4,750 0
Net cash provided by (used in) financing activities 4,750 (287,808)
Effect of exchange rate changes on cash (64,173) (13,514)
Net (decrease) increase in cash and cash equivalents 634,380 (5,001,325)
Cash and cash equivalents at the beginning of period 893,744 5,641,885
Cash and cash equivalents at the end of period $1,528,124 $640,560
<FN>
See accompanying notes to the condensed consolidated financial statements
Page 5
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REFAC TECHNOLOGY DEVELOPMENT CORPORATION
Notes to Condensed Consolidated Financial Statements
1. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments (all of
which were normal recurring adjustments) necessary to present fairly the
consolidated financial position of REFAC Technology Development Corporation
(the "Company") at September 30, 1996 and December 31, 1995, and the results of
its operations and its cash flows for the nine and three month interim periods
presented.
The accounting policies followed by the Company are set forth in
Note l to the Company's consolidated financial statements in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995, which is
incorporated herein by reference.
2. The results of operations for the nine months and the quarter ended
September 30, 1996 are not necessarily indicative of the results to be expected
for the full year.
3. In the ordinary course of its patent licensing and enforcement
activities, the Company becomes engaged in the prosecution of infringement
actions against various companies. Such actions are initiated only after the
Company satisfies itself that (a) the claims of the patent have substantial
merit and (b) there are specific grounds for asserting infringement. Such
litigation often induces various defenses including, among others, challenging
the validity of the patents and seeking reimbursement from the Company of the
legal costs of defense. Such reactions are conventional aspects of the conduct
of the Company's patent licensing and enforcement activities. the Company from
time to time has been the target of several such actions. At September 30, 1996
and December 31, 1995 there were no such claims pending against the Company.
4. In accordance with SFAS No. 115, the Company categorizes and accounts
for its investment holdings as follows:
Trading securities are securities bought and held for the
purpose of selling them in the near term. Unrealized gains and
losses are included in current period earnings. The Company's
investment in marketable securities (principally holdings in
preferred stocks and government agency bonds)
falls into this category.
Held to maturity securities are measured at amortized cost.
This categorization is permitted only if the Company has the
positive intent and ability to hold these securities to maturity.
The Company's investments in U.S. Treasury Bills and Notes fall
into this category.
Available for sale securities are securities which do not
qualify as either held to maturity or trading securities.
Unrealized gains and losses are reported as a separate component
of stockholders' equity, net of applicable deferred income taxes
on such unrealized gains and losses at current income tax rates.
The Company's investments in securities acquired in association
with licensing activities fall into this category. Such
securities at September 30, 1996 consisted of 332,842 shares of
Three-Five Systems, Inc. (which trades on the New York Stock
Exchange under the symbol TFS), 399,000 shares of KeyCorp
(which trades on the NYSE under the symbol KEY) and 16,100 shares
of DBT Online (which trades on the NASDAQ under the symbol
DBTO, previously Patlex Corporation traded on the NASDAQ under
the symbol PTLX).
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
Management's Discussion and Analysis
of Financial Conditions and Results of Operations
Revenues
Total operating revenues increased $3,045,000 for the nine months ended
September 30, 1996 as compared to the corresponding period in 1995, and by
$408,000 for the third quarter of 1996 versus the same period in the prior year.
Service revenue accounted for 41% and 92% of operating revenues for the nine
months ended September 30, 1996 and 1995, respectively. Gains and dividends
from securities acquired in association with licensing activities accounted for
55% and 5% of operating revenues for the nine months ended September 30, 1996
and 1995, respectively. The increase in income associated with securities
acquired in association with licensing activities is principally due to the
increase in revenues from shares sold in the current period versus the
corresponding period of 1995. As deemed in the Company's interest and as future
market conditions permit, the Company intends from time to time to sell part of
the portfolio of such securities. the increase in sales, which totalled 4% and
3% of total revenues for the first nine months of 1996 and 1995, respectively,
is principally related to sales of products by Advanced Resin Technology, Inc.
("ART"). In December 1995, the Company acquired a controlling interest in ART,
a manufacturer of a patented line of thermoplastic polyurethane hot melt
adhesives and elastomers. At September 30, 1996, the Company owned
approximately 87% of ART.
Service revenues decreased by $441,000 for the nine months ended September
30, 1996 from the corresponding period in 1995, and decrease $356,000 for the
third quarter of 1996 versus the same period in the prior year. In both cases,
the changes resulted from a decrease of recurring revenues from established
licensing relationships due mainly to the impact of the higher U.S. dollar on
foreign service revenues and a decrease of non-recurring revenues which are
recognized upon the completion of new, single-payment license agreements.
Recurring service revenues from established licensing relationships, represented
88% of service revenues for the nine months ended September 30, 1996, as
compared to 81% in the same period of 1995.
Service expenses represents payments to REFAC clients under contractually
stipulated terms, and hence tend to increase or decrease as a function of
service revenues. Also included in service expenses are various other costs
directly related to the development, maintenance, administration and enforcement
of patent and licensing programs, notably legal and other external professional
fees, and costs associated with patent research, upkeep and amortization.
Service expenses as a percentage of service revenues increased from 21% in the
nine month period of 1995 to 22% in the corresponding period of the current
year. The increase in this ratio is attributable to an increase in patent
expenses and legal fees relating to recurring licensing revenue.
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
Management's Discussion and Analysis
of Financial Conditions and Results of Operations
(Continued)
Selling, general and administrative expenses increased by $221,000 for the
nine month period of 1996 versus the comparable period of 1995. This increase
is due to the acquisition of an 87% interest in ART which had approximately
$264,000 in selling, general and administrative expenses for the first nine
months of 1996.
For the nine months ended September 30, 1996 the Company had losses on its
marketable securities of $132,000 consisting of realized gains of $10,000 and
unrealized losses of $142,000 as compared to realized gains of $28,000 and
unrealized gains of $150,000 for the corresponding period of 1995. The loss in
1996 was principally attributable to the adverse impact that rising interest
rates had on the value of the Company's investment in preferred stocks and
governmental aqgency bonds.
Dividend and interest income consist of investment income from the
Company's portfolio of marketable securities, and was relatively stable as
compared to the prior period.
The Company's licensing and technology transfer operations has not in the
past been materially affected by inflation. Likewise, while currency
flucuations can influence service revenues, the diversity of foreign income
sources tends to offset individual changes in currency valuations.
Liquidity and Capital Resources
The Company's liquidity position at September 30, 1996, included cash and
cash equivalents of approximately $1,528,000 and publicly-traded securities and
U.S. Treasury Bills and Notes having a market value of over $14,828,000. In
addition, the Company's long-term investment portfolio had a market value of
over $22,160,000 at September 30, 1996.
On September 30, 1996, the Company had no non-current debt. Other than
the commitment under the headquarters premises lease, the Company has no
significant commitments. The Company believes its liquidity position is more
than adequate to meet all current and projected financial needs.
Part II. Other Information
Item 6. Exhibit and Reports on Form 8-K
(a) See exhibit index attached hereto.
(b) Reports on Form 8-K filed during the quarter: None
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REFAC Technology Development Corporation
November 11, 1996 /s/Eugene M. Lang
E. M. Lang, Chairman and Chief
Executive Officer
November 11, 1996 /s/Robert Rescigno
Robert Rescigno, Controller and Principal
Accounting and Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit Page
No. No.
28 Note 1 to the Company's Consolidated financial
statements contained in the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1995 is incorporated herein by
reference.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<PERIOD-TYPE> 9-MOS
<CASH> 1528124
<SECURITIES> 36987691
<RECEIVABLES> 979799
<ALLOWANCES> 10861
<INVENTORY> 22219
<CURRENT-ASSETS> 16449810
<PP&E> 298381
<DEPRECIATION> 151836
<TOTAL-ASSETS> 41100836
<CURRENT-LIABILITIES> 1194855
<BONDS> 0
0
0
<COMMON> 530189
<OTHER-SE> 32401125
<TOTAL-LIABILITY-AND-EQUITY> 41100836
<SALES> 2656134
<TOTAL-REVENUES> 6415304
<CGS> 582906
<TOTAL-COSTS> 2076322
<OTHER-EXPENSES> (649490)
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 4988472
<INCOME-TAX> 1556397
<INCOME-CONTINUING> 3432075
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<EPS-PRIMARY> .65
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