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, 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 August 1, 1998 was 3,793,761.
<PAGE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
INDEX
Page
Part I. Financial Information
Condensed Consolidated Balance Sheets
June 30, 1998 (unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations
for the Six and Three months Ended June 30, 1998
and 1997 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Six months Ended June 30, 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 14
<TABLE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
JUNE 30, DEC.31
ASSETS 1998 1997
<S> <C> <C>
Current Assets (UNAUDITED) *
Cash and cash equivalents $3,571,222 $2,867,563
Marketable securities - 2,503,000
Royalties receivable 722,348 662,976
Accounts receivable, net allowance for doubtful
accounts of $34,000 in 1998 and $40,000 in 1997 1,073,224 814,599
Prepaid expenses 133,639 55,069
Total current assets 5,500,433 6,903,207
Property and equipment, net of accumulated
depreciation of $359,000 in 1998 and $251,000
in 1997 964,453 445,866
Licensing-related securities 19,302,160 22,777,247
Investments being held to maturity 1,508,122 1,229,028
Other assets 584,606 712,731
Goodwill, net accumulated amortization of $129,000
in 1998 and $28,000 in 1997 4,946,945 5,073,414
$32,806,719 $37,141,493
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable-former Human Factors shareholders - $5,309,564
Accounts payable 114,557 126,446
Accrued expenses 335,793 548,165
Amounts payable under service agreements 327,298 234,993
Deferred revenue 184,777 103,235
Income taxes payable 689,215 258,508
Total current liabilities 1,651,640 6,580,911
Deferred income taxes 6,377,574 7,493,016
Other liabilities-deferred compensation 445,058 445,058
Minority interest 8,219 -
Stockholders' Equity
Common stock, $.10 par value 544,940 541,340
Additional paid-in capital 9,974,548 9,440,573
Retained earnings 16,511,384 13,890,734
Unrealized gain on licensing-related securities,
net of taxes 11,568,680 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 (400,836) (426,660)
Total stockholders' equity 24,324,228 22,622,508
$32,806,719 $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>
Six months ended Three months ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues
Royalties and fees from licensing-
related activities $2,386,933 $1,713,170 $1,626,521 $839,945
Service fees 2,025,638 - 1,113,766 -
Gains on licensing-related
securities 3,445,071 2,175,105 1,762,915 1,450,532
Dividends from licensing-related
securities 314,900 314,160 150,400 157,080
Sales 32,450 196,243 4,635 152,103
Total revenues 8,204,992 4,398,678 4,658,237 2,599,660
Costs and Expenses
Licensing-related expenses 957,813 638,552 660,893 249,674
Service expenses 1,387,560 - 761,020 -
Selling, general and administrative
expenses 1,763,626 924,806 1,042,779 587,760
Cost of goods sold 14,397 153,611 - 115,416
Total operating expenses 4,123,396 1,716,969 2,464,692 952,850
Operating income 4,081,596 2,681,709 2,193,545 1,646,810
Other Income and Expenses
(Losses) gains on marketable
securities transactions (6,430) 68,915 (3,737) 49,651
Dividend and interest income 89,083 133,511 50,301 34,223
Gains (losses) from foreign currency
transactions - 10,589 - (49)
Income before provision for taxes
on income and minority interest 4,164,249 2,894,724 2,240,109 1,730,635
Provision for taxes on income 1,546,880 760,747 850,233 424,485
Income before minority interest 2,617,369 2,133,977 1,389,876 1,306,150
Minority interest 3,281 22,815 (749) 10,931
Net Income $2,620,650 $2,156,792 $1,389,127 $1,317,081
Diluted earnings per common share $0.66 $0.57 $0.35 $0.35
Basic eanings per common share $0.69 $0.58 $0.37 $0.36
<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>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities
Net income $2,620,650 $2,156,792
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 263,196 62,905
Net gain on sales of licensing-related
securities (3,445,071) (2,175,105)
Net loss (gain) on sale of securities 6,430 (68,915)
Net change in unrealized gain on marketable
securities - (26,379)
Deferred income taxes (238,697) 183,324
(Increase) decrease in assets:
Royalty receivable (59,372) 131,313
Accounts receivable (258,625) (69,889)
Prepaid expenses (78,570) (36,075)
Proceeds from sale of marketable securities 2,500,307 2,393,592
Other assets 99,232 129,211
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (216,042) (7,230)
Amounts payable under service agreements 92,305 (57,633)
Deferred revenue 81,542 -
Income taxes payable 430,707 (6,100)
Net cash provided by operating activities 1,797,992 2,609,811
Cash Flows from Investing Activities
Proceeds from sales of licensing-related securities3,749,856 2,181,537
Proceeds from sales of investments being held to
maturity 1,130,099 -
Purchase of investments being held to maturity (1,409,191) (1,085,224)
Additions to property and equipment (626,421) (40,033)
Net cash provided by investing activities 2,844,343 1,056,280
Cash Flows from Financing Activities
Proceeds from exercise of stock options 85,500 5,219
Proceeds from receivable from issuance of common
stock warrants 25,824 -
Proceeds from short-term borrowings - 815,828
Repayment of short-term borrowings - (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 financing activities (3,938,676) (17,570,586)
Effect of exchange rate changes on cash - 14,465
Net increase (decrease) in cash and cash equivalents 703,659 (13,890,030)
Cash and cash equivalents at beginning of period 2,867,563 15,412,077
Cash and cash equivalents at end of period $3,571,222 $1,522,047
<FN>
On January 6, 1998, the Company issued 107,374 shares of common stock to the
former shareholders of Human Factors in satisfaction of the loan payable.
See accompanying notes to the condensed consolidated financial statements.
Page 5
</TABLE>
<PAGE>
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 June 30, 1998 and December 31, 1997, and the results of its operations, its
cash flows and comprehensive income for the six 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 June 30, 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 licensing-related securities fall
into this category.
4. The Company owns 590,000 shares of KeyCorp Common Stock (NYSE-KEY)
which, as of June 30, 1998 had a market value of $21,018,750. 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. Ten 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
Number Strike Price Aggregate Strike Price Aggregate
Expiration of Per Share (1) Per Share (1)
Date Shares
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
(1) Number of shares multiplied by the option price.
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."
Six Months Ended Three Months Ended
June 30, June 30,
Description 1998 1997 1998 1997
Basic shares 3,777,963 3,629,387 3,793,761 3,629,332
Dilution: Stock Options
and Warrants 223,008 57,569 223,008 57,569
Diluted Shares 4,000,971 3,686,956 4,016,769 3,686,901
Income available to common
shareholders $2,620,650 $2,156,792 $1,389,127 $1,317,081
Basic earnings per share $0.69 $0.58 $0.37 $0.36
Diluted earnings per share $0.66 $0.57 $0.35 $0.35
6. During the six months ended June 30, 1998, the Company operated principally
in two industry segments - - - "Licensing of Intellectual Property Rights" and
"Product Design and Development." The Company only operated 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 six months ended June 30, 1998.
Licensing of
Intellectual Product
Property Design and
Description Rights Development Total
Total revenues $6,268,385 $1,936,607 $8,204,992
Depreciation and
amortization* 59,986 203,210 263,196
Interest income, net 98,695 (9,612) 89,083
Segment profit (loss) 2,600,993 19,657 2,620,650
Segment assets 25,779,312 7,027,680 32,806,992
Expenditure for segment assets 120,649 504,742 625,391
* The amortization expense for the Product Design and Development segment
includes $100,956 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 licensing-
related securities, which prior to adoption were reported separately in
stockholders' equity (See Note 1 above). Available for sale securities reported
in prior years financial statements have been reclassified to conform to SFAS
130.
The components of comprehensive income, net of related tax, for the six-month
periods ended June 30, 1998 and 1997 are as follows:
Description 1998 1997
Net income $2,620,650 $2,156,792
Other comprehensive income, net of tax
Unrealized gains (losses) on
licensing-related securities 74,148 1,510,666
Reclassification adjustment: gains previously
recognized for comprehensive income (2,273,747) (1,435,569)
Comprehensive income $421,051 $2,231,889
The components of accumulated other comprehensive income, net of related tax,
at June 30, 1998 and December 31, 1997 consist of unrealized gains on licensing-
related securities, net of tax and amounted to $11,568,680 and $13,752,459,
respectively.
The components of comprehensive income, net of related tax, for the three-
month periods ended June 30, 1998 and 1997 are as follows:
Description 1998 1997
Net income $1,389,127 $1,317,081
Other comprehensive income, net of tax
Unrealized gains (losses) on
licensing-related securities (271,734) 1,985,306
Reclassification adjustment: gains previously
recognized for comprehensive income (1,200,012) (994,498)
Comprehensive income $(82,619) $2,307,889
<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 six months ended June 30, 1998 were
$8,205,000 as compared to $4,399,000 for the comparable period in 1997. The
increase of $3,806,000, or 87%, is principally due to an increase of $674,000
in royalties from licensing-related activities, a $1,270,000 increase in gains
on the sale of licensing-related securities and the inclusion of $1,937,000 in
revenues derived by Human Factors Industrial Design, Inc. ("Human Factors"),
which the Company acquired in November, 1997.
Licensing-related securities consisted of 700,000 and 590,000 shares of KeyCorp
common stock as of December 31, 1997 and June 30, 1998, respectively. 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 June 30, 1998 had contracts for ten
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 licensing-related securities (realized gains on sales and dividend
income) accounted for 46% and 57% of operating revenues for the six months ended
June 30, 1998 and 1997, respectively.
Royalties from licensing-related activities 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 licensing-related royalties and fees increased by $787,000 or 94% in the
quarter ended June 30, 1998 as compared to the same period of 1997. For the
six months ended June 30, 1998, non-recurring royalties increased by $348,000,
while recurring royalties increased $326,000 or 23% as compared to the same
period of 1997. The Company anticipates that non-recurring royalties will
remain a material component of royalties in the future.
Service fees consist of the product design and development fees charged by
Human Factors ($1,937,000) and the royalty verification fees charged by REFAC
Services Corporation ("RSC") ($89,000). Since Human Factors was acquired in
November, 1997 and the royalty verification services provided by RSC began
early this year, the Company did not have comparable service fee income in the
second quarter of 1997.
Licensing-related 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 six months ended June 30, 1998
increased $319,000 as compared to the same period of 1997. This increase is
directly related to the increase in Royalties from licensing-related activities.
These expenses represented 40% of licensing-related service revenues, compared
with 37% in 1997.
Service expenses consist of professional staff and other expenses incurred in
connection with providing services to Human Factors' and RSC's clients. As
mentioned herein, Human Factors was acquired in November, 1997 so its results
are not included in the second quarter results of 1997 and RSC began providing
services in early 1998. During the six months ended June 30, 1998, service
expenses represented 68% of total service revenues.
Selling, general and administrative expenses increased by $839,000 or 91% for
the first six months of 1998 as compared to the previous year. The majority of
the increase ($706,000) is attributable to Human Factors (acquired in November,
1997) and included goodwill amortization of $101,000, and Selective Licensing
(formed in January, 1998). The remaining increase is attributable to increased
professional fees such as legal, accounting and public relations expenses.
Other Income and Expenses
For the six months ended June 30, 1998, the Company realized losses on its
marketable securities of $6,400 as compared to realized gains of $69,000 for
the corresponding period of 1997. At June 30, 1998, the Company did not have
any securities classified as marketable or trading securities.
Dividend and interest income decreased by $44,000 for the six months ended
June 30, 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 $1,547,000 for the first six months of
1998 reflects an effective tax rate of 37%, compared with rates of 26% for the
same period of 1997. The increase from the prior year is principally due to the
non-deductibility of the goodwill charge, an increased state tax rate 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 $1,800,000 from
$5,371,000 at December 31, 1997 to $3,571,000 at June 30, 1998. The decrease
is due to the payment of the remainder of the purchase price for Human Factors
in January, 1998, offset by earnings in the first half of 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., ("Selective Licensing"). The Company has committed
to extend up to $1,000,000 in financing to Selective Licensing during the period
ending January 2001, of which $300,000 has been provided as of June 30, 1998.
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 $19,302,000 at June 30,
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 licensing-related activities 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
August 14, 1998 /s/Robert L. Tuchman
Robert L. Tuchman, President and
Chief Executive Officer
August 14, 1998 /s/Robert Rescigno
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.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<PERIOD-TYPE> 6-MOS
<CASH> 3571222
<SECURITIES> 20810282
<RECEIVABLES> 1829572
<ALLOWANCES> 34000
<INVENTORY> 0
<CURRENT-ASSETS> 5500433
<PP&E> 1323453
<DEPRECIATION> 359000
<TOTAL-ASSETS> 32806719
<CURRENT-LIABILITIES> 1651640
<BONDS> 0
0
0
<COMMON> 544940
<OTHER-SE> 23779288
<TOTAL-LIABILITY-AND-EQUITY> 32806719
<SALES> 4412571
<TOTAL-REVENUES> 8204992
<CGS> 2345373
<TOTAL-COSTS> 4123396
<OTHER-EXPENSES> (82,653)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4164249
<INCOME-TAX> 1546880
<INCOME-CONTINUING> 2617369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2620650
<EPS-PRIMARY> .69
<EPS-DILUTED> .66
