<PAGE>
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, 1999
Commission File Number 0-7704
REFAC
(Exact name of registrant as specified in its charter)
Delaware 13-1681234
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
The Hudson River Pier
---------------------
115 River Road, Edgewater, New Jersey 07020-1099
------------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (201) 943-4400
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, 1999 was 3,795,261.
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INDEX
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<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. Financial Information
Condensed Consolidated Balance Sheets
September 30, 1999 (unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations
Nine Months Ended September 30, 1999 and 1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-8
Management's Discussion and Analysis of Financial
Conditions and Results of Operations 9-11
Part II. Other Information 12-13
</TABLE>
Page 2
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CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------- --------------------
(UNAUDITED)
ASSETS
- ------
<S> <C> <C>
Current Assets
Cash and cash equivalents $5,484,457 $2,973,344
Royalties receivable 1,050,050 776,433
Accounts receivable, net 987,195 944,526
Merchandise inventory 281,490 -
Prepaid expenses 458,860 220,895
------------------- --------------------
Total current assets 8,262,052 4,915,198
------------------- --------------------
Property and equipment, net 2,199,578 771,013
Licensing-related securities 9,224,594 15,067,535
Investments being held to maturity 3,331,080 4,093,156
Other assets 545,169 760,076
Goodwill, net 4,881,990 4,958,410
------------------- --------------------
$28,444,463 $30,565,388
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $129,728 $140,777
Accrued expenses 229,022 236,059
Amounts payable under license agreements 360,989 240,743
Letters of credit payable 279,750 -
Deferred revenue 125,634 216,693
Income taxes payable 585,955 75,544
------------------- --------------------
Total current liabilities 1,711,078 909,816
------------------- --------------------
Deferred income taxes 3,030,441 5,050,089
Other liabilities-deferred compensation 445,058 445,058
Stockholders' Equity
Common stock, $.10 par value 545,090 545,090
Additional paid-in capital 9,983,773 9,983,773
Retained earnings 21,375,290 18,621,522
Accumulated other comprehensive income 5,578,221 9,259,528
Treasury stock, at cost (13,874,488) (13,874,488)
Receivable from issuance of
common stock and warrants (350,000) (375,000)
------------------- --------------------
Total stockholders' equity 23,257,886 24,160,425
------------------- --------------------
$28,444,463 $30,565,388
=================== ====================
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
Page 3
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CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------------------- -------------------------------
1999 1998 1999 1998
-------------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Revenues
Licensing-related activities $2,967,102 $3,320,834 $1,037,856 $844,870
Product development fees 2,102,594 2,873,762 776,205 937,155
Realized gains on licensing-related securities 4,380,787 4,798,047 1,336,639 1,352,976
Dividend income from licensing-related securities 312,000 453,550 98,800 138,650
Sales 18,600 - 18,600 -
-------------------------------------- -------------------------------
Total revenues 9,781,083 11,446,193 3,268,100 3,273,651
-------------------------------------- -------------------------------
Costs and Expenses
Licensing-related activities 1,559,386 1,460,956 507,275 374,278
Product development expenses 1,768,044 1,875,606 557,201 614,626
Selling, general and administrative expenses 2,511,383 2,469,013 937,537 899,170
Goodwill amortization 154,698 151,229 52,473 50,273
Cost of goods sold 12,120 - 12,120 -
-------------------------------------- -------------------------------
Total operating expenses 6,005,631 5,956,804 2,066,606 1,938,347
-------------------------------------- -------------------------------
-------------------------------------- -------------------------------
Operating income 3,775,452 5,489,389 1,201,494 1,335,304
-------------------------------------- -------------------------------
Other income and (expenses)
Dividend and interest income 266,076 176,483 93,510 93,830
Loss from ceased operations - (100,791) - (28,302)
-------------------------------------- -------------------------------
Income before provision for taxes on income 4,041,528 5,565,081 1,295,004 1,400,832
Provision for taxes on income 1,287,761 1,885,116 412,912 338,236
-------------------------------------- -------------------------------
Net income $2,753,767 $3,679,965 $882,092 $1,062,596
====================================== ===============================
-------------------------------------- -------------------------------
Diluted earnings per common share $0.72 $0.94 $0.23 $0.28
====================================== ===============================
Basic earnings per common share $0.73 $0.97 $0.23 $0.28
====================================== ===============================
-------------------------------------- -------------------------------
Diluted weighted average shares outstanding 3,805,602 3,894,094 3,795,261 3,780,625
====================================== ===============================
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
Page 4
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998
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<S> <C> <C>
Cash Flows from Operating Activities
Net income $2,753,767 $3,679,965
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 383,000 402,025
Net gain on sale of licensing-related securities (4,380,787) (4,798,047)
Deferred income taxes
(Increase) decrease in assets:
Royalties receivable (273,617) (6,445)
Accounts receivable (42,669) (126,218)
Prepaid expenses (237,965) (49,480)
Merchandise inventory (281,490) -
Other assets 252,458 (300,987)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 10,784 (181,597)
Amounts payable under service agreements 120,246 33,551
Deferred revenue (91,059) 59,691
Income taxes payable 426,114 44,420
------------------- -----------------
Net cash provided by (used in) operating activities (1,361,218) (1,243,122)
------------------- -----------------
Cash Flows from Investing Activities
Proceeds from sales of investments being held to maturity 1,762,076 2,503,000
Proceeds from sales of licensing-related securities 4,810,255 5,241,247
Purchase of investments being held to maturity (1,000,000) (1,683,146)
Additions to property and equipment (1,700,000) (748,519)
------------------- -----------------
Net cash provided by investing activities 3,872,331 5,312,582
------------------- -----------------
Cash Flows from Financing Activities
Proceeds from exercise of stock options - 85,500
Proceeds from receivable from issuance of common stock warrants - 154,080
Repayment of notes payable - (4,050,000)
------------------- -----------------
Net cash used in financing activities - (3,810,420)
------------------- -----------------
Net increase in cash and cash equivalents 2,511,113 259,040
Cash and cash equivalents at beginning of period 2,973,344 2,867,563
------------------- -----------------
Cash and cash equivalents at end of period $5,484,457 $3,126,603
=================== =================
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
Page 5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 (the "Company") at September 30, 1999 and December
31, 1998, and the results of its operations, its cash flows and comprehensive
income for the nine 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, 1998, which is
incorporated herein by reference.
2. The results of operations for the nine months ended September 30,
1999 are not necessarily indicative of the results to be expected for the full
year.
3. 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."
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
================================================================================================================
Description 1999 1998 1999 1998
================================================================================================================
<S> <C> <C> <C> <C>
Basic shares 3,795,261 3,783,287 3,795,261 3,780,625
- ----------------------------------------------------------------------------------------------------------------
Dilution: stock options and warrants 10,341 110,807 0 0
- ----------------------------------------------------------------------------------------------------------------
Diluted shares 3,805,602 3,894,094 3,795,261 3,780,625
- ----------------------------------------------------------------------------------------------------------------
Income available to common shareholders $2,753,767 $3,679,965 $882,092 $1,062,956
- ----------------------------------------------------------------------------------------------------------------
Basic earnings per share $0.73 $0.97 $0.23 $0.28
- ----------------------------------------------------------------------------------------------------------------
Diluted earnings per share $0.72 $0.94 $0.23 $0.28
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
4. During the nine months ended September 30, 1999 and 1998, the
Company operated principally in two industry segments - - "Licensing of
Intellectual Property Rights" and "Product Design and Development". On September
10, 1999, the Company's Consumer Products Division commenced operations.
The accounting policies used to develop segment information
correspond to those described in the summary of significant accounting policies
(See Note 1 of the 1998 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 nine month period ended September 30, 1999.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
==========================================================================================================
Licensing of Product
Intellectual Design and Consumer
Description Property Rights Development Products Total
==========================================================================================================
<S> <C> <C> <C> <C>
Total revenues $7,660,000 $2,102,000 $19,000 $9,781,000
- ----------------------------------------------------------------------------------------------------------
Depreciation and amortization* 54,000 329,000 0 383,000
- ----------------------------------------------------------------------------------------------------------
Interest income (expense) 319,000 (53,000) 0 266,000
- ----------------------------------------------------------------------------------------------------------
Segment profit (loss) 4,932,000 (859,000) (31,000) 4,042,000
- ----------------------------------------------------------------------------------------------------------
Segment assets 20,235,000 7,434,000 775,000 28,444,000
- ----------------------------------------------------------------------------------------------------------
Expenditure for segment assets $442,000 $1,258,000 $0 $1,700,000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* The amortization expense for the Product Design and Development
segment includes $155,000 of goodwill recorded in connection with
the acquisition of Refac HumanFactors-ID in November, 1997.
5. As of January 1, 1998, the Company adopted 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, net
of taxes and foreign currency translation adjustments.
The components of comprehensive income (loss), net of related tax,
for the nine month periods ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
=====================================================================================================
Description 1999 1998
=====================================================================================================
<S> <C> <C>
Net income $2,754,000 $3,680,000
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Other comprehensive income (loss), net of tax
-----------------------------------------------------------------------------------------------------
Decrease in unrealized gains on licensing-related securities (3,681,000) (4,007,000)
-----------------------------------------------------------------------------------------------------
Foreign currency translation adjustment 0 (198,000)
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Comprehensive income (loss) ($927,000) ($525,000)
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</TABLE>
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The components of accumulated other comprehensive income, net of
related tax, at September 30, 1999 and 1998 consist of unrealized gains on
licensing-related securities, net of tax and amounted to $5,578,000 and
$9,745,000 respectively.
The components of comprehensive income (loss), net of related tax, for
the three month periods ended September 30, 1999 and 1998 are as follows:
<TABLE>
========================================================================================================
Description 1999 1998
========================================================================================================
<S> <C> <C> <C>
Net income $882,000 $1,063,000
- --------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
- --------------------------------------------------------------------------------------------------------
Decrease in unrealized gains on licensing-related securities (1,784,000) (1,824,000)
- --------------------------------------------------------------------------------------------------------
Comprehensive income (loss) ($902,000) ($761,000)
- --------------------------------------------------------------------------------------------------------
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Total Operating Revenues for the nine months ended September 30, 1999
were $9,781,000 as compared to $11,446,000 for the comparable period in 1998.
The decrease of $1,665,000, or 15%, is principally due to decreases in (i) gains
on the sale of licensing-related securities and dividends ($559,000), (ii)
product design and development fees ($752,000) and (iii) revenues from
licensing-related activities ($354,000).
Operating revenues are summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Description 1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C>
Revenues from licensing-related activities 30% 29%
- ---------------------------------------------------------------------------------
Realized gains on sales and dividends from 48% 46%
licensing-related securities
- ---------------------------------------------------------------------------------
Product design and development fees 22% 25%
- ---------------------------------------------------------------------------------
Total 100% 100%
- ---------------------------------------------------------------------------------
</TABLE>
Royalties and Fees 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 patent licensing income
decreased by $320,000 or 11% in the nine months ended September 30,1999 as
compared to the same period of 1998 and service income from royalty
verifications decreased by $82,000 in the comparable period. Trademark agency
fees increased by $49,000 or 25% for the nine months ended September 30, 1999 as
compared to the same period of 1998. Patent licensing royalties and
non-recurring license fees decreased by $175,000 and $145,000 respectively, as
compared to the same period of 1998. The Company anticipates that non-recurring
revenues will not be a material component of royalties after June 30, 2000.
Income from Licensing-Related Securities consist of gains on sales and
dividends received on securities acquired by the Company in connection with its
licensing activities. As of September 30, 1999, "licensing-related securities"
consisted of 325,000 shares of KeyCorp common stock. KeyCorp had a 2-for-1 stock
split of such common stock on March 9, 1998 and all references in this Form 10-Q
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 21 month
period and, as of September 30, 1999 has contracts for five successive quarterly
puts and calls, each of which covers 50,000 KeyCorp shares.
Page 9
<PAGE>
Product Design and Development Fees decreased by $771,000 in the nine
month period ended September 30, 1999 ($2,874,000) from the comparable period in
1998 ($2,103,000).
Licensing-Related Activities Expenses 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
expenses for the nine months ended September 30, 1999 were $1,559,000 as
compared to $1,461,000 in the same period in 1998.
Product Design and Development Expenses consist of professional staff and
other expenses incurred in connection with providing services to its clients.
During the nine months ended September 30, 1999, such expenses represented 84%
of related revenue as compared with 65% in 1998. The percentage increase in 1999
expenses is attributable to the decline in product design and development
revenues and the allocation of resources to proprietary product development.
Selling, General and Administrative Expenses increased by $42,000 or 2% in
the nine month period ended September 30, 1999 as compared to the previous year.
The increase is attributable to the newly formed Consumer Products Division.
Goodwill relates to the excess of the purchase price paid for Refac
HumanFactors-ID, in November 1997, and Funatik Inc. in September 1999, over
their fair market value of assets acquired with an amortization period of 25
years and 10 years respectively.
Other Income consisting of dividend and interest income increased by
$90,000 for the nine months ended September 30, 1999 from the corresponding
period in 1998. This increase was attributable to an increase in the Company's
cash and securities.
Other Expenses for the nine month period ended September 30, 1998 relate
to a loss of $101,000 before tax benefit, from ceased operations.
Inflation. The Company's income from licensing operations has not in the
past been materially affected by inflation. Likewise, while currency
fluctuations can influence licensing-related revenues, the diversity of foreign
income sources tends to offset individual changes in currency valuations.
Income Tax Provision. The Company's income tax provision of $1,288,000 for
the nine months ended September 30, 1999 reflects an effective tax rate of 32%.
This compares to the statutory rate of 34% in the same period in 1998. The
decrease in the effective income tax rate is due to HumanFactors-ID not being
subject to state and local income taxes and timing differences associated with
the Company's relocation to New Jersey.
Page 10
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LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash, cash equivalents, and U.S. Treasury Notes increased $1,750,000 from
$7,066,000 at December 31, 1998 to $8,816,000 at September 30, 1999.
Except as reflected herein, the Company has no other significant
commitments. The Company believes its liquidity position is adequate to meet all
current and projected financial needs.
The Company has examined the Year 2000 computer issue. This issue concerns
computer hardware and software systems' ability to recognize and process dates
after 1999 properly and accurately. The Company utilizes purchased software
which is Year 2000 compliant and does not expect Year 2000 issues to have a
material impact on its business, operations or financial condition. This is a
Year 2000 readiness disclosure entitled to a protection as provided in the Year
2000 Information and Readiness Disclosure Act.
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.
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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
November 12, 1999 s/s Robert L. Tuchman
---------------------------------------------------
Robert L. Tuchman, President and
Chief Executive Officer
November 12, 1999 s/s Elliott S. Greller
---------------------------------------------------
Elliott S. Greller, Vice President, Treasurer,
and Chief Financial Officer
Page 12
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EXHIBIT INDEX
Exhibit Page
No. No.
- ------- ----
27 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, 1998 is incorporated herein by
reference.
Page 13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REFAC AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5484457
<SECURITIES> 12555674
<RECEIVABLES> 2037245
<ALLOWANCES> 0
<INVENTORY> 281490
<CURRENT-ASSETS> 8262052
<PP&E> 2199578
<DEPRECIATION> 0
<TOTAL-ASSETS> 28944463
<CURRENT-LIABILITIES> 1711278
<BONDS> 0
0
0
<COMMON> 545090
<OTHER-SE> 22712796
<TOTAL-LIABILITY-AND-EQUITY> 28444463
<SALES> 18600
<TOTAL-REVENUES> 9781083
<CGS> 3339550
<TOTAL-COSTS> 6005631
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4041528
<INCOME-TAX> 1287761
<INCOME-CONTINUING> 2753767
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2753767
<EPS-BASIC> 0.73
<EPS-DILUTED> 0.72
</TABLE>
