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 March 31, 1998
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 May 1, 1998 was 3,793,761.
<PAGE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
INDEX
Page
Part I. Financial Information
Condensed Consolidated Balance Sheets
March 31, 1998 (unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997
(unaudited) 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997
(unaudited) 5
Notes to Condensed Consolidated Financial
Statements 6-9
Management's Discussion and Analysis of Financial
Conditions and Results of Operations 10-13
Part II. Other Information 13
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<TABLE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
MAR. 31 DEC. 31
ASSETS 1998 1997
<S> <C> <C>
Current Assets (UNAUDITED) *
Cash and cash equivalents $2,757,990 $2,867,563
Marketable securities - 2,503,000
Royalties receivable 696,879 662,976
Accounts receivable, net 1,111,432 814,599
Prepaid expenses 74,244 55,069
Total current assets 4,640,545 6,903,207
Property and equipment, net 736,367 445,866
License-related securities 21,503,823 22,777,247
Investments being held to maturity 1,122,907 1,229,028
Other assets 721,313 712,731
Goodwill, net 4,988,385 5,073,414
$33,713,340 $37,141,493
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $167,970 $126,446
Accrued expenses 392,453 548,165
Amounts payable under license agreements 247,178 234,993
Deferred revenue 196,727 103,235
Notes payable-former Human Factors shareholders - 5,309,564
Income taxes payable 816,882 258,508
Total current liabilities 1,821,210 6,580,911
Deferred income taxes 7,069,580 7,493,016
Other liabilities-deferred compensation 445,058 445,058
Minority interest 8,968 -
Stockholders' Equity
Common stock, $.10 par value 544,940 541,340
Additional paid-in-capital 9,974,548 9,440,573
Retained earnings 15,112,669 13,890,734
Unrealized gain on license-related securities 13,024,606 13,752,459
Cumulative translation adjustment - 198,362
Treasury stock, at cost (13,874,488) (14,774,300)
Receivable from issuance of common stock and
warrants (413,751) (426,660)
Total stockholders' equity 24,368,524 22,622,508
$33,713,340 $37,141,493
<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>
Three Months Ended March 31,
1998 1997
<S> <C> <C>
Revenues
Royalties $760,412 $873,225
Service fees 911,872 -
Realized gains on license-related securities 1,682,156 724,573
Dividend income from license-related securities 164,500 157,080
Sales 27,815 44,140
Total revenues 3,546,755 1,799,018
Costs and Expenses
Service expenses 923,460 244,510
Selling, general and administrative expenses 720,847 481,414
Cost of goods sold 14,397 38,195
Total operating expenses 1,658,704 764,119
Operating income 1,888,051 1,034,899
Other income and expenses
(Loss) gain on marketable securities tranactions (2,693) 19,264
Dividend and interest income 38,782 99,288
Gains from foreign currency transactions - 10,638
Income before provision for taxes on income
and minority interest 1,924,140 1,164,089
Provision for taxes on income 696,647 336,262
Income before minority interest 1,227,493 827,827
Minority interest in subsidiary loss 2,532 11,884
Net income $1,230,025 $839,711
Basic earnings per common share $0.32 $0.23
Diluted earnings per common share $0.32 $0.22
<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>
Three Months Ended March 31,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities
Net income $1,230,025 $839,711
Adjustments for reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 146,367 29,403
Net gain on sale of securities (1,679,463) (724,520)
Deferred income taxes 9,528 33,603
Other 2,727 (26,379)
(Increase) decrease in assets:
Royalties receivable (33,903) (220,366)
Accounts receivable (283,924) 5,135
Prepaid expenses (19,175) (11,996)
Proceeds from sale of marketable securities 2,500,307 2,324,677
Other assets (172,531) 474,659
Increase (decrease) in liabilties:
Accounts payable and accrued expenses (105,220) (123,387)
Amounts payable under service agreements 12,185 (62,805)
Deferred revenue 93,492 -
Income taxes payable 558,374 46,486
Net cash provided by operating activities 2,258,789 2,584,221
Cash Flows from Investing Activities
Proceeds from sales of license-related
securities 1,834,591 731,356
Purchase of investments being held to maturity 106,121 -
Additions to property and equipment (344,574) (26,857)
Net cash provided by investing activities 1,596,138 704,499
Cash Flows from Financing Activities
Proceeds from exercise of stock options 85,500 5,219
Proceeds from short-term borrowings - 815,828
Repayment of short-term borrowing - (815,828)
Repayment of note payable-former Human Factors
shareholders (4,050,000) -
Dividends paid - (2,700,943)
Acquisition of treasury stock - (14,874,862)
Net cash used in financiang activities (3,964,500) (17,570,586)
Effect of exchange rate changes on cash - 1,684
Net decrease in cash and cash equivalents (109,573) (14,280,182)
Cash and cash equivalents at beginning fo period 2,867,563 15,412,077
Cash and cash equivalents at end of period $2,757,990 $1,131,895
<FN>
See accompanying notes to the condensed consolidated financial statements
Page 5
</TABLE>
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 March 31, 1998 and December 31, 1997, and the results of its operations, its
cash flows and comprehensive income for the three month interim period
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, 1997, which is incorporated herein
by reference.
2. The results of operations for the quarter ended March 31, 1998 are
not necessarily indicative of the results to be expected for the full year.
3. 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.
4. The Company owns 645,000 shares of KeyCorp Common Stock (NYSE-
KEY) which, as of March 31, 1998 had a market value of $24,389,063. 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 gives
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. Eleven individual contracts remain
each covering 50,000 shares of KeyCorp. The contracts expire 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.
Put Option Call Option
Expiration Number Strike Price Aggregate Strike Price Aggregate
Date of Shares Per Share (1) Per Share (1)
06/30/98 50,000 $27.42615 $1,371,308 $33.8865 $1,694,325
09/30/98 50,000 $27.42615 $1,371,308 $34.4350 $1,721,750
12/31/98 50,000 $27.42615 $1,371,308 $35.0140 $1,750,700
03/31/99 50,000 $27.42615 $1,371,308 $35.3490 $1,767,450
06/30/99 50,000 $27.42615 $1,371,308 $35.9585 $1,797,925
09/30/99 50,000 $27.42615 $1,371,308 $36.5680 $1,828,400
12/31/99 50,000 $27.42615 $1,371,308 $37.1775 $1,858,875
03/31/00 50,000 $27.42615 $1,371,308 $37.4825 $1,874,125
06/30/00 50,000 $27.42615 $1,371,308 $38.0920 $1,904,600
09/30/00 50,000 $27.42615 $1,371,308 $38.7015 $1,935,075
12/31/00 50,000 $27.42615 $1,371,308 $39.3720 $1,968,600
5. The following table reconciles the numerators and
denominators of the basic and diluted earnings per share
computations pursuant to SFAS No. 128, "Earnings Per Share."
March 31,
Description 1998 1997
Basic shares 3,793,761 3,626,887
Dilution: Stock Options and Warrants 56,341 118,333
Diluted Shares 3,850,102 3,745,220
Income available to common shareholders $1,230,025 $839,711
Basic earnings per share $0.32 $0.23
Diluted earnings per share $0.32 $0.22
6. During the three months ended March 31, 1998, the Company
operated principally in two industry segments - - - "Licensing of
Intellectual Property Rights" and "Product Design and Development".
The Company only operating in the Licensing of Intellectual
Property Rights segment during the first quarter of 1997.
The accounting policies used to develop segment information
correspond to those described in the summary of significant
accounting policies (See Note 1 of the 1997 Annual Report).
Segment profit or loss is based on profit or loss from operations
before the provision or benefit for income taxes. The reportable
segments are distinct business units operating in different
industries and are separately managed. The following information
about the business segments are for the three months ended March
31, 1998.
Licensing of
Intellectual Product
Property Design and
Description Rights Development Total
Total revenues $2,652,274 $894,481 $3,546,755
Depreciation and amortization* 19,566 126,801 146,367
Interest income, net 35,998 2,784 38,782
Segment profit (loss) 1,928,542 (4,402) 1,924,140
Segment assets 26,965,113 6,662,727 33,627,840
Expenditure for segment assets 39,319 305,255 344,574
* The amortization expense for the Product Design
and Development segment includes $85,029 of
goodwill recorded in connection with the
acquisition of Human Factors.
7. As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130).
Although the adoption of SFAS 130 has no impact on the Company's net income or
stockholders' equity, it does require that the Company report and display
comprehensive income and its components. Comprehensive income consists of net
income or loss for the current period as well as income, expenses, gains, and
losses arising during the period that are included in separate components of
equity. It includes the unrealized gains and losses on the Company's license-
related securities, which prior to adoption were reported separately in
stockholders' equity (See Note 1 above). Available for sale securities reported
in prior year financial statements have been reclassified to conform to SFAS
130.
The components of comprehensive income, net of related tax, for the
three-month periods ended March 31, 1998 and 1997 are as follows:
Description 1998 1997
Net income $1,230,025 $839,711
Other comprehensive income, net of tax
Unrealized gains (losses) on
license-related securities 345,882 (474,640)
Reclassification adjustment: gains previously
recognized for comprehensive income (1,073,735) (441,071)
Comprehensive income 502,172 (76,000)
The components of accumulated other comprehensive income, net of related
tax, at March 31, 1998 and December 31, 1997 consist of unrealized gains on
license-related securities, net of tax and amounted to $13,024,606 and
$13,752,459, respectively.
<PAGE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Total operating revenues for the three months ended March 31, 1998 were
$3,547,000 as compared to $1,799,000 for the comparable period in 1997. The
increase of $1,748,000, or 97%, is principally due to a $958,000 increase in
gains on the sale of license-related securities and the inclusion of $894,000
in revenues derived by Human Factors Industrial Design, Inc. ("Human Factors"),
which the Company acquired in November, 1997.
License-related securities consisted of 700,000 shares of KeyCorp common
stock as ofDecember 31, 1997 and 645,000 shares as of March 31, 1998. KeyCorp
had a 2-for-1 stock split of such common stock on March 9, 1998 and all
references in this Report to the number of KeyCorp shares have been adjusted
to reflect such stock split. The Company intends to sell its remaining holdings
of KeyCorp over a three year period and, as of March 31, 1998 had contracts for
eleven successive quarterly puts and calls, each of which covers 50,000 KeyCorp
shares. See Note 4 to the Consolidated Financial Statements for additional
details concerning such securities.
Income from license-related securities (realized gains on sales and
dividend income) accounted for 52% and 49% of operating revenues for the three
months ended March 31, 1998 and 1997, respectively.
Royalties consist of recurring royalty payments for the use of licensed
patents and trademarks as well as non-recurring, lump sum license payments.
Revenues from non-recurring agreements vary from period to period depending upon
the nature of the licensing programs pursued for various technologies in a
particular year and the timing of successful completion of licensing agreements.
Total royalties decreased by $113,000 or 13% in the quarter ended March 31,
1998 as compared to the same period of 1997. For the three months ended March
31, 1998, non-recurring royalties decreased by $100,000 (to zero), while
recurring royalties decreased $13,000 or 2% as compared to the same period of
1997. In spite of the lack of non-recurring royalties during the first
quarter of 1998, the Company anticipates that non-recurring royalties will be
a material component of royalties in the future.
Service fees consist of the product design and development fees charged by
Human Factors ($894,000) and the consulting and trademark licensing agency fees
charged by Selective Licensing & Promotion, Ltd. ($20,000). Since Human Factors
was acquired in November, 1997 and Selective Licensing & Promotion, Ltd.
("Selective Licensing") was formed in January, 1998, the Company did not have
comparable service fee income in the first quarter of 1997.
Service expenses for the licensing business consist principally of amounts
paid to licensors at contractually stipulated percentages of the Company's
specific patent and product revenues and, in addition, includes expenses
related to the investigation, marketing, administration, enforcement,
maintenance and prosecution of patent and license rights and related licenses.
Licensing-related service expenses for the three months ended March 31, 1998
represented 41% of licensing-related service revenues, compared with 28% 1997.
Service expenses for Human Factors' product design and development business
consist of professional staff and other expenses incurred in connection with
providing services to Human Factors' clients. As mentioned herein, Human
Factors was acquired in November, 1997 so its results are not included in the
first quarter results of 1997. During the three months ended March 31, 1998,
product design and development service expenses represented 68% of total product
design and development service revenues.
In the aggregate, service expenses increased by $679,000 in the quarter
ended March 31, 1998 as compared to the same period of 1997, of which $604,000
is attributable to the product design and development service expenses incurred
by Human Factors.
Selling, general and administrative expenses increased by $239,000 or 50%
in the first quarter of 1998 as compared to the previous year. Substantially
all of such increase ($212,000) is attributable to Human Factors (acquired in
November, 1997) and included goodwill amortization of $85,000.
Other Income and Expenses
For the three months ended March 31, 1998, the Company had realized losses
on its marketable securities of $2,700 as compared to realized gains of $19,000
for the corresponding period of 1997. At March 31, 1998, the Company did not
have any securities classified as marketable or trading securities.
Dividend and interest income decreased by $61,000 for the three months
ended March 31, 1998 from the corresponding period in 1997. This decrease was
attributable to a reduction in the Company's cash and securities. See
"Liquidity and Capital Resources" below.
The Company's income from licensing 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.
The Company's income tax provision of $697,000 the first quarter of 1998
reflects an effective tax rate of 34% (the Federal statutory corporate income
tax rate), compared with rates of 29% in the same quarter of 1997. The increase
from the prior year is principally due to increased deferred income tax expense
in 1998 and a decrease in the benefits derived from statutory dividend
received exclusions from taxable income.
Liquidity and Capital Resources
Cash, cash equivalents, and marketable securities decreased $2,613,000 from
$5,371,000 at December 31, 1997 to $2,758,000 at March 31, 1998. The decrease
is due to the payment of the remainder of the purchase price for Human Factors
in January, 1998.
In January of 1997 (declared in December 1996), the Company paid a cash
dividend of approximately $2,700,000, or $0.50 per share. In November of 1997,
the Company announced that it will no longer pay annual dividends and will use
its earnings to fund continuing growth.
In November 1997, the Company acquired 100% of Human Factors from its
stockholders for $6 million ($4.5 million cash and 119,374 shares valued at
$1.5 million) and committed to invest $1 million in such corporation.
In January 1998, the Company formed a new 81% owned subsidiary, Selective
Licensing & Promotion, Ltd. The Company has committed to invest up to
$1,000,000 over the next three years in this venture.
Additionally, the Company has commitments under leases covering its
facilities and under a Retirement Agreement with its former CEO and Chairman
(which has been provided for in the financial statements). Except as reflected
herein, the Company has no other significant commitments. The Company's long-
term investment portfolio had a market value of approximately $21,504,000
at March 31, 1998. The Company believes its liquidity position is adequate to
meet all current and projected financial needs.
Effective January 1, 1994, the Company adopted the provision of Statements
of Financial Accounting Standards ("SFAS") No. 115 that requires all securities
to be recorded at market value. The unrealized gain/(loss) from current
marketable securities is included in the Statement of Operations for 1996 and
1995 (there was no gain/(loss) in 1997). The unrealized gain from securities
acquired in association with license-related securities is included as a
separate component of Stockholders' Equity, net of income taxes, on the
Consolidated Balance Sheet. See Note 3 to the Consolidated Financial Statements
for additional details.
The Company utilizes purchased software; therefore, the year 2000 problem
will not be significant.
Forward Looking Statements
Statements about the Company's future expectations and all other statements
in this document other than historical facts are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, Section 21E
of the Securities Exchange Act of 1934, and as that term is defined in the
Private Securities Litigation Reform Act of 1995. The Company intends that
such forward-looking statements involve risks and uncertainties and are subject
to change at any time, and the Company's actual results could therefore differ
materially from expected or inferred results.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
Zoom Telephonics - The Company's litigation against Zoom
Telephonics was settled on April 23, 1998.
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
May 14, 1998
Robert L. Tuchman, President and
Chief Executive Officer
May 14, 1998
Robert Rescigno, Treasurer and Chief
Accounting Officer
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, 1997 is incorporated herein by
reference.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<PERIOD-TYPE> 3-MOS
<CASH> 2757990
<SECURITIES> 22626730
<RECEIVABLES> 1848917
<ALLOWANCES> 40606
<INVENTORY> 0
<CURRENT-ASSETS> 4640545
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0
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