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, 1997
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, 1997 was 3,634,887.
<PAGE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
INDEX
Page
Part I. Financial Information
Condensed Consolidated Balance Sheets
September 30, 1997 (unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Operations
Nine and Three Months Ended September 30, 1997 and 1996
(unaudited) 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996
(unaudited) 5
Notes to Condensed Consolidated Financial
Statements 6-8
Management's Discussion and Analysis of Financial
Conditions and Results of Operations 9-10
Part II. Other Information 11
<TABLE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
SEPT. 30, DEC. 31,
ASSETS 1997 1996
<S> <C> <C>
Current Assets (UNAUDITED) *
Cash and cash equivalents $1,492,420 $15,412,077
Marketable securities - 2,298,298
Royalties receivable 734,703 762,555
Accounts receivable 513,350 100,805
Prepaid expenses 74,197 70,369
Total current assets 2,814,670 18,644,104
Property and equipment, net 158,026 159,403
License related securities 23,952,696 22,891,653
Investments being held to maturity 3,342,073 -
Other assets 1,733,344 1,974,418
$32,000,809 $43,669,578
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $87,925 $125,578
Accrued expenses 468,335 435,959
Amounts payable under service agreements 224,993 268,235
Dividend payable - 2,700,943
Income taxes payable 285,396 131,988
Total current liabilities 1,066,649 3,662,703
Deferred income taxes 7,994,899 7,125,217
Other liabilites-deferred compensation 445,058 445,058
Minority interest - 17,301
Stockholders' Equity
Common stock, $.10 par value 540,939 540,189
Additional paid-in-capital 9,379,277 9,251,182
Retained earnings 13,033,894 8,699,265
Unrealized gain on license related
securities, net of taxes 14,282,290 13,735,650
Cumulative translation adjustment 184,325 193,013
Treasury stock, at cost (14,874,862) -
Receivable from issuance of common
stock warrant (51,660) -
Total stockholders' equity 22,494,203 32,419,299
$32,000,809 $43,669,578
<FN>
*Derived from audited financial statements
See accompanying notes to the condensed consolidated financial statements
Page 3
</TABLE>
<TABLE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Nine months ended Three months ended
Sept. 30, Sept. 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues
Service revenues $2,688,555 $2,656,134 $975,385 $ 763,068
Gains on license related securities 4,738,010 3,085,925 2,562,905 588,215
Dividends from license related
securities 471,240 454,860 157,080 151,620
Sales 345,402 218,385 149,159 57,720
Total revenues 8,243,207 6,415,304 3,844,529 1,560,623
Costs and Expenses
Service expenses 578,239 582,906 142,693 115,310
Selling, general and administrative
expenses 1,674,135 1,335,919 546,323 421,563
Cost of goods sold 276,575 157,497 122,964 43,405
Total operating expenses 2,528,949 2,076,322 811,980 580,278
Operating income 5,714,258 4,338,982 3,032,549 980,345
Other Income and Expenses
Gains on marketable securities
transactions 67,331 10,073 (1,584) 793
Net change in unrealized losses on
marketable securities - (142,236) - 5,794
Dividend and interest income 208,962 779,501 75,451 293,489
Gains from foreign currency transactions 11,611 2,152 1,022 1,484
Income before provision for taxes on
income and minority interest 6,002,162 4,988,472 3,107,438 1,281,905
Provision for taxes on income 1,697,741 1,556,397 936,994 398,702
Income before minority interest 4,304,421 3,432,075 2,170,444 883,203
Minority interest 30,208 19,945 7,393 7,147
Net Income $4,334,629 $3,452,020 $2,177,837 $ 890,350
Earnings per common share $1.13 $0.65 $0.57 $0.17
Weighted average number of shares
outstanding 3,851,383 5,301,887 3,816,025 5,301,887
<FN>
See accompanying notes to the condensed consolidated financial statements
Page 4
</TABLE>
<TABLE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Ended
Sept. 30,
1997 1996
<S> <C> <C>
Cash FLows from Operating Activities
Net income $4,334,629 $3,452,020
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 95,748 66,021
Amortization of discount on U.S. Treasury Bills - (29,619)
Net gain on sales of license related securities (4,738,010) (3,085,925)
Net gain on sale of securities (67,331) (10,073)
Net change in unrealized (gain) loss on
marketable securities (27,963) 142,236
Deferred income taxes 508,963 (13,965)
(Increase) decrease in assets:
Royalty receivable 27,852 -
Accounts receivable (360,921) 310,905
Prepaid expenses (3,828) (7,947)
Proceeds from sale of marketable securities 2,393,592 1,333,790
Purchase of marketable securities - (3,825,683)
Other assets 196,840 (274,344)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (22,578) (91,938)
Amounts payable under service agreements (43,242) (140,718)
Income taxes payable 153,408 (24,319)
Net cash provided by (used in) operating activities 2,447,159 (2,199,559)
Cash Flows from Investing Activities
Proceeds from sales of license related securities 4,738,010 3,165,734
Proceeds from maturity of investments being held
to maturity - 2,310,585
Purchase of investments being held to maturity (3,495,721) (2,448,457)
Additions to patents and trademarks - (44,898)
Additions to property and equipment (50,137) (89,602)
Net cash provided by investing activities 1,192,152 2,893,362
Cash Flows from Financing Activities
Proceeds from exercise of stock options 17,344 4,750
Proceeds from short-term borrowings 815,828 -
Repayment of short-term borrowings (815,828) -
Dividends paid (2,700,943) -
Acquisition of treasury stock (14,874,862) -
Net cash (used in) provided by financing activities (17,558,461) 4,750
Effect of exchange rate changes on cash (507) (64,173)
Net (decrease) increase in cash and cash equivalents(13,919,657) 634,380
Cash and cash equivalents at beginning of period 15,412,077 893,744
Cash and cash equivalents at end of period $1,492,420 $1,528,124
<FN>
Effective April 7, 1997, the Company issued a warrant for the issuance of common
stock for $103,320 under the terms of which $51,660 was receivable on
September 30, 1997.
See accompanying notes to the condensed consolidated financial statements.
Page 5
</TABLE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
Notes to Condensed Consolidated Financial Statements
<PAGE>
NOTE 1 - GENERAL
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, 1997 and December 31, 1996, 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, 1996, which is incorporated herein
by reference.
The results of operations for the nine months and quarter ended September 30,
1997 are not necessarily indicative of the results to be expected for the full
year.
NOTE 2 - Marketable Securities, License Related Securities and Investments Being
Held to Maturity
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.
Held to maturity securities are measured at amortized cost. This
categorization is used only if the Company has the positive intent and
ability to hold these securities to maturity.
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 license related securities fall into
this category.
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
Notes to Condensed Consolidated Financial Statements
(Continued)
NOTE 3 - Derivatives
The Company owns 374,000 shares of KeyCorp Common Stock (NYSE-KEY) which, as
of September 30, 1997 had a market value of $23,796,000 representing 70% of the
Company's net worth (after the appropriate tax provision). In order to minimize
the Company's exposure against a decline in the value of KeyCorp, on September
12, 1997 the Company entered into thirteen (13) individual derivative contracts
with Union Bank of Switzerland ("UBS") providing for both put options and call
options. The "put options" give the Company the right to sell the KeyCorp stock
covered by the option to UBS at the agreed upon option price even if the market
price is lower on the settlement date. The call options give UBS the right to
require the Company to sell the KeyCorp common stock covered by the option at
the agreed upon option price even if the market price is higher on the
settlement date. If the price is between the put and call option prices on the
settlement date both options lapse. Thirteen individual contracts were entered
into, the first contract covering 24,000 shares and the remaining 12 contracts
covering 25,000 shares of KeyCorp. The first contract expires on December 31,
1997 and each of the remaining contracts expires at the end of each calendar
quarter until December 31, 2000. The schedule below details the expiration
dates and the pricing for each of the contracts.
<TABLE>
<CAPTION>
Expiration Number Put Value of Call Value of
Date of Shares Option Put Option Option Call Option
Price Price
<C> <C> <C> <C> <C> <C>
12/31/97 24,000 $54.8523 $1,316,455 $65.457 $1,570,968
03/31/98 25,000 $54.8523 $1,371,308 $66.371 $1,659,275
06/30/98 25,000 $54.8523 $1,371,308 $67.773 $1,694,325
09/30/98 25,000 $54.8523 $1,371,308 $68.870 $1,721,750
12/31/98 25,000 $54.8523 $1,371,308 $70.028 $1,750,700
03/31/99 25,000 $54.8523 $1,371,308 $70.698 $1,767,450
06/30/99 25,000 $54.8523 $1,371,308 $71.917 $1,797,925
09/30/99 25,000 $54.8523 $1,371,308 $73.136 $1,828,400
12/31/99 25,000 $54.8523 $1,371,308 $74.355 $1,858,875
03/31/00 25,000 $54.8523 $1,371,308 $74.965 $1,874,125
06/30/00 25,000 $54.8523 $1,371,308 $76.184 $1,904,600
09/30/00 25,000 $54.8523 $1,371,308 $77.403 $1,935,075
12/31/00 25,000 $54.8523 $1,371,308 $78.744 $1,968,600
</TABLE>
Page 7
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
Notes to Condensed Consolidated Financial Statements
(Continued)
NOTE 4 - New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share, which is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. Early adoption of the new standard is not permitted.
The new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The pro forma effect on
the Company of adopting the new standard would be basic earnings per share of
$1.18 and $0.65, and diluted earnings per share of $1.13 and $0.65, for the nine
months ended September 30, 1997 and 1996, respectively, and basic earnings per
share of $0.59 and $0.17, and dilutive earnings per share of $0.57 and $0.17,
for the three months ended September 30, 1997 and 1996, respectively.
Page 8
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Total operating revenues increased by $1,828,000 for the nine months ended
September 30, 1997 as compared to the corresponding period in 1996, and
increased by $2,284,000 for the third quarter of 1997 versus the same period in
the prior year. Service revenues accounted for 33% and 41% of operating
revenues for the nine months ended September 30, 1997 and 1996, respectively.
Gains and dividends from license related securities accounted for 63% and 55% of
operating revenues for the nine months ended September 30, 1997 and 1996,
respectively. Sales totaled 4% of total revenues for the first nine months of
1997 and 1996.
Service revenues increased by $32,000 for the nine months ended September 30,
1997 from the corresponding period in 1996, and increased $212,000 for the third
quarter of 1997 versus the same period in the prior year. The increase in the
nine month period, and the third quarter, resulted from an increase of recurring
revenues from new licensing relationships. Recurring service revenues from
established licensing relationships, represented 89% of service revenues for the
nine months ended September 30, 1997 and 1996.
Income from license related securities increased by $1,668,000 principally due
to the increase in revenues from shares sold in the nine months ended September
30, 1997 versus the corresponding period of 1996. Income from license related
securities increased by $2,070,000 in the third quarter of 1997 versus the
corresponding period of 1996. This increase was due to an increase in revenues
from shares sold in the current period versus the corresponding period of the
prior year. See Note 3 regarding certain put and call options covering most of
the Company's license related securities. With respect to license related
securities that are not covered by such options, as deemed in the Company's
interest and as future market conditions permit, the Company intends from time
to time to sell part of such securities.
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 was 22% in each of the nine
month periods of 1997 and 1996.
Selling, general, and administrative expenses increased $338,000 for the nine
month period of 1997 versus the comparable period of 1996, primarily due to
increased compensation and additional staff members. Moreover, in the nine
month period of 1997, the Company incurred $46,300 in fees for public relations
and a financial consultant, whereas it had no expense for such services in the
corresponding nine month period of 1996.
Page 9
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(Continued)
For the nine months ended September 30, 1997, the Company had realized gains on
its marketable securities of $67,000 as compared to realized gains of $10,000
and unrealized losses of $142,000 for the corresponding period of 1996. 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 agency bonds, which has since been liquidated.
Dividend and interest income decreased by $571,000 for the nine months ended
September 30, 1997, from the corresponding period in 1996. The year-to-date
decrease in dividends and interest income is directly related to the decrease
in the amount of marketable securities owned by the company during the nine
months ended September 30, 1997, versus the corresponding period of 1996. The
Company liquidated a large portion of its marketable securities in the fourth
quarter of 1996 to fund a stock repurchase from its former Chairman in January
of 1997.
The Company's income from licensing and technology transfer operations has not
in the past been materially affected by inflation. Likewise, while currency
fluctuations 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, 1997, included cash and cash
equivalents of approximately $1,492,000 and U.S. Treasury Notes, maturing in
1999, having a market value of approximately $3,342,000. In addition, the
Company's license related securities, which consisted of principally common
stock and options of KeyCorp (NYSE-KEY), had a market value of approximately
$23,953,000 at September 30, 1997. The Company has established a line-of-credit
for approximately $12,300,000 with Union Bank of Switzerland. This line-of
credit is collateralized by the Company's holdings in KeyCorp. As of September
30, 1997, the Company has not used this credit facility.
On September 30, 1997, the Company had no long-term debt. Other than the
commitment under the lease for its principal office, and commitments for office
and lab facilities of Advanced Resin Technology, Inc., a majority owned
subsidiary, and retirement agreement with its former Chairman (which has been
provided for in the Company's financial statements), the Company has no
significant commitments. The Company believes its liquidity position is more
than adequate to meet all current and projected financial needs.
Page 10
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 14, 1997 /s/Robert L. Tuchman
Robert L. Tuchman, President and Chief
Executive Officer
November 14, 1997 /s/Robert Rescigno
Robert Rescigno, Treasurer and Chief
Accounting 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, 1996 is incorporated herein by
reference.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<PERIOD-TYPE> 9-MOS
<CASH> 1492420
<SECURITIES> 27294769
<RECEIVABLES> 1258914
<ALLOWANCES> 10861
<INVENTORY> 74197
<CURRENT-ASSETS> 2814670
<PP&E> 382817
<DEPRECIATION> 224791
<TOTAL-ASSETS> 32000809
<CURRENT-LIABILITIES> 1066649
<BONDS> 0
0
0
<COMMON> 540939
<OTHER-SE> 21953264
<TOTAL-LIABILITY-AND-EQUITY> 32000809
<SALES> 2688555
<TOTAL-REVENUES> 8243207
<CGS> 578239
<TOTAL-COSTS> 2528949
<OTHER-EXPENSES> (287904)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6002162
<INCOME-TAX> 1697741
<INCOME-CONTINUING> 4304421
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4334629
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.13
