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 June 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 August 1, 1997 was 3,634,387.
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REFAC TECHNOLOGY DEVELOPMENT CORPORATION
INDEX
Page
Part I. Financial Information
Condensed Consolidated Balance Sheets
June 30, 1997 (unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Operations
Six and Three Months Ended June 30, 1997 and 1996 (unaudited 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996
(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
<TABLE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
JUNE 30, DEC. 31,
ASSETS 1997 1996
<S> <C> <C>
Current Assets (UNAUDITED) *
Cash and cash equivalents $1,522,047 $15,412,077
Marketable securities - 2,298,298
Royalties receivable 631,242 762,555
Accounts receivable 170,694 100,805
Prepaid expenses 106,444 70,369
Total current assets 2,430,427 18,644,104
Property and equipment, net 165,536 159,403
License related securities 23,089,203 22,891,653
Investments being held to maturity 1,085,224 -
Other assets 1,816,202 1,974,418
$28,586,592 $43,669,578
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $91,690 $125,578
Accrued expenses 479,918 435,959
Amounts payable under service agreements 210,602 268,235
Dividend payable - 2,700,943
Income taxes payable 125,888 131,988
Total current liabilities 908,098 3,662,703
Deferred income taxes 7,375,708 7,125,217
Other liabilites-deferred compensation 445,058 445,058
Minority interest - 17,301
Stockholders' Equity
Common stock, $.10 par value 540,439 540,189
Additional paid-in-capital 9,365,175 9,251,182
Retained earnings 10,856,057 8,699,265
Unrealized gain on license related
securities, net of taxes 13,872,465 13,735,650
Cumulative translation adjustment 201,774 193,013
Treasury stock, at cost (14,874,862) -
Receivable from issuance of common
stock warrant (103,320) -
Total stockholders' equity 19,857,728 32,419,299
$28,586,592 $43,669,578
<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>
Six months ended Three months ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues
Service revenues $1,713,170 $1,893,066 $839,945 $1,133,978
Gains on license related securities 2,175,105 2,497,710 1,450,532 898,352
Dividends from license related
securities 314,160 303,240 157,080 151,620
Sales 196,243 160,665 152,103 40,813
Total revenues 4,398,678 4,854,681 2,599,660 2,224,763
Costs and Expenses
Service expenses 435,546 467,596 249,674 299,588
Selling, general and administrative
expenses 1,127,812 914,356 587,760 468,708
Cost of goods sold 153,611 114,092 115,416 48,932
Total operating expenses 1,716,969 1,496,044 952,850 817,228
Operating income 2,681,709 3,358,637 1,646,810 1,407,535
Other Income and Expenses
Gains on marketable securities
transactions 68,915 9,280 49,651 1,367
Net change in unrealized losses on
marketable securities - (148,030) - (37,681)
Dividend and interest income 133,511 486,012 34,223 286,762
Gains (losses) from foreign currency
transactions 10,589 668 (49) 519
Income before provision for taxes on
income and minority interest 2,894,724 3,706,567 1,730,635 1,658,502
Provision for taxes on income 760,747 1,157,695 424,485 527,542
Income before minority interest 2,133,977 2,548,872 1,306,150 1,130,960
Minority interest 22,815 12,798 10,931 7,472
Net Income $2,156,792 $2,561,670 $1,317,081 $1,138,432
Earnings per common share $0.57 $0.48 $0.35 $0.21
Weighted average number of shares
outstanding 3,686,956 5,301,887 3,629,332 5,301,887
<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>
Six Months Ended
June 30,
1997 1996
<S> <C> <C>
Cash FLows form Operating Activities
Net income $2,156,792 $2,568,262
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 62,905 51,360
Amortization of discount on U.S. Treasury Bills - (14,331)
Net gain on sales of license related securities (2,175,105) (2,497,710)
Net gain on sale of securities (68,915) (9,280)
Net change in unrealized (gain) loss on
marketable securities (26,379) 148,030
Deferred income taxes 183,324 (85,976)
(Increase) decrease in assets:
Royalty receivable 131,313 -
Accounts receivable (69,889) 181,387
Prepaid expenses (36,075) (5,226)
Proceeds from sale of marketable securities 2,393,592 1,115,282
Purchase of marketable securities - (2,410,839)
Other assets 129,211 (199,840)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (7,230) (130,664)
Amounts payable under service agreements (57,633) (46,040)
Income taxes payable (6,100) (39,339)
Net cash provided by (used in) operating activities 2,609,811 (1,374,924)
Cash Flows from Investing Activities
Proceeds from sales of license related securities 2,181,537 2,550,902
Proceeds from maturity of investments being held
to maturity - 680,585
Purchase of investments being held to maturity (1,085,224) (1,220,381)
Additions to property and equipment (40,033) (12,879)
Net cash provided by investing activities 1,056,280 1,998,227
Cash Flows from Financing Activities
Proceeds from exercise of stock options 5,219 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 (17,570,586) 4,750
Effect of exchange rate changes on cash 14,465 (46,827)
Net (decrease) increase in cash and cash equivalents(13,890,030) 581,226
Cash and cash equivalents at beginning of period 15,412,077 893,744
Cash and cash equivalents at end of period $1,522,047 $1,474,970
<FN>
Effective April 7, 1997, the Company issued a warrant for the issuance of common
stock for $103,320 under the terms of which $103,320 was receivable at
June 30, 1997.
See accompanying notes to the consolidated financial statements.
Page 5
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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 June 30, 1997 and December 31, 1996, and the results of its operations and
its cash flows for the six 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 six months and quarter ended June 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 permitted 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 - 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
$0.58 and $0.48, and diluted earnings per share of $0.57 and $0.48, for the six
months ended June 30, 1997 and 1996, respectively, and basic earnings per share
of $0.36 and $0.21, and dilutive earnings per share of $0.35 and $0.21, for the
three months ended June 30, 1997 and 1996, respectively.
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Total operating revenues decreased by $456,000 for the six months ended June
30, 1997 as compared to the corresponding period in 1996, and increased by
$375,000 for the second quarter of 1997 versus the same period in the prior
year. Service revenues accounted for 39% of operating revenues for the six
months ended June 30, 1997 and 1996. Investment income (gains and dividends)
from license related securities accounted for 57% and 58% of operating revenues
for the six months ended June 30, 1997 and 1996, respectively. Sales totaled
4% and 3% of total revenues for the first six months of 1997 and 1996,
respectively.
Service revenues decreased by $180,000 for the six months ended June 30, 1997
from the corresponding period in 1996, and decreased $294,000 for the second
quarter of 1997 versus the same period in the prior year. The decrease in the
six month period, and the second quarter, resulted from a decrease of recurring
revenues from established licensing relationships. While the Company expects
a decline in recurring royalties for fiscal 1997, it anticipates that it will
be able to offset the decline in whole or in part by new recurring royalty
agreements. Recurring service revenues from established licensing
relationships, represented 82% of service revenues for the six months ended
June 30, 1997 as compared to 84% in the same period of 1996.
Investment income from license related securities decreased by $312,000
principally due to the decrease in revenues from shares sold in the first
quarter of 1997 versus the corresponding period of 1996. Income from license
related securities increased by $556,000 in the second 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. As deemed in the Company's interest and as future market
conditions permit, the Company intends form 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 25% in each of the six
month periods of 1997 and 1996.
Selling, general, and administrative expenses increased $213,000 for the six
month period of 1997 versus the comparable period of 1996, primarily due to
increased compensation and additional staff members. Moreover, in the six month
period of 1997, the Company incurred $27,300 in fees for public relations and a
financial consultant, whereas it had no expense for such services in the
corresponding six month period of 1996.
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(Continued)
For the six months ended June 30, 1997, the Company had realized gains on its
marketable securities of $69,000 as compared to realized gains of $9,000 and
unrealized losses of $148,000 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.
Dividend and interest income decreased by $353,000 for the six months ended
June 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 six
months ended June 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 the former Chairman.
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 June 30, 1997, included cash and cash
equivalents of approximately $1,522,000 and U.S. Treasury Notes having a market
value of approximately $1,085,000. In addition, the Company's license related
securities had a market value of approximately $23,089,000 at June 30, 1997.
On June 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. and retirement agreement
for the former Chairman (which has been provided for), 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
August 12, 1997 /s/Robert L. Tuchman
Robert L. Tuchman, President and Chief
Executive Officer
August 12, 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> JUN-30-1997
<PERIOD-TYPE> 6-MOS
<CASH> 1522047
<SECURITIES> 24174427
<RECEIVABLES> 812797
<ALLOWANCES> 10861
<INVENTORY> 57768
<CURRENT-ASSETS> 2430427
<PP&E> 367818
<DEPRECIATION> 202282
<TOTAL-ASSETS> 28586592
<CURRENT-LIABILITIES> 908098
<BONDS> 0
0
0
<COMMON> 540439
<OTHER-SE> 19317289
<TOTAL-LIABILITY-AND-EQUITY> 28586592
<SALES> 1713170
<TOTAL-REVENUES> 4398678
<CGS> 435546
<TOTAL-COSTS> 1716969
<OTHER-EXPENSES> (213015)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2894724
<INCOME-TAX> 760747
<INCOME-CONTINUING> 2133977
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2156792
<EPS-PRIMARY> .57
<EPS-DILUTED> .57
