<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 March 31, 1999
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, 1999 was 3,795,261.
<PAGE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
INDEX
-----
Page
----
Part I. Financial Information
Condensed Consolidated Balance Sheets
March 31, 1999 (unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1999 and 1998
(unaudited) 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 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
Page 2
<PAGE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31,
ASSETS 1999 1998
- ------
------------------------ ----------------------
(UNAUDITED)
<S> <C> <C>
Current Assets
Cash and cash equivalents $3,603,426 $2,973,344
Royalties receivable 781,867 776,433
Accounts receivable, net 665,829 944,526
Prepaid expenses 269,295 220,895
------------------------ ----------------------
Total current assets 5,320,417 4,915,198
------------------------ ----------------------
Property and equipment, net 759,960 771,013
Licensing-related securities 13,198,167 15,067,535
Investments being held to maturity 4,406,000 4,093,156
Other assets 975,763 760,076
Goodwill, net 4,817,398 4,958,410
------------------------ ----------------------
$29,477,705 $30,565,388
======================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $50,413 $140,777
Accrued expenses 179,158 236,059
Amounts payable under license agreements 167,359 240,743
Deferred revenue 180,208 216,693
Income taxes payable 4,032 75,544
------------------------ ----------------------
Total current liabilities 581,170 909,816
------------------------ ----------------------
Deferred income taxes 4,400,373 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 19,629,520 18,621,522
Accumulated other comprehensive income 8,117,209 9,259,528
Treasury stock, at cost (13,874,488) (13,874,488)
Receivable from issuance of common stock (350,000) (375,000)
------------------------ ----------------------
Total stockholders' equity 24,051,104 24,160,425
------------------------ ----------------------
$29,477,705 $30,565,388
======================== ======================
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
Page 3
<PAGE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---------------------- ---------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues
Licensing-related activities $964,586 $797,803
Product development fees 781,639 874,481
Realized gains on licensing-related securities 1,455,542 1,682,156
Dividend income from licensing-related securities 122,200 164,500
---------------------- ---------------------
Total revenues 3,323,967 3,518,940
---------------------- ---------------------
Costs and Expenses
Licensing-related activities 523,085 303,175
Product development fees 663,697 693,524
Selling, general and administrative expenses 684,919 493,926
Goodwill amortization 51,012 85,028
---------------------- ---------------------
Total operating expenses 1,922,713 1,575,653
---------------------- ---------------------
Operating income 1,401,254 1,943,287
Other income and (expenses)
Dividend and interest income 93,064 54,382
Loss from ceased operations - (73,529)
-----------------------------------------------
Income before provision for taxes on income 1,494,318 1,924,140
Provision for taxes on income 486,320 694,115
---------------------- ---------------------
Net income $1,007,998 $1,230,025
---------------------- ---------------------
Diluted earnings per common share $0.26 $0.32
====================== =====================
Basic earnings per common share $0.27 $0.32
====================== =====================
Weighted average shares outstanding 3,819,005 3,850,102
====================== =====================
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
Page 4
<PAGE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---------------------- ----------------------
Cash Flows from Operating Activities (UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net income $1,007,998 $1,230,025
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 59,253 146,367
Net gain on sale of securities (1,455,542) (1,679,463)
Deferred income taxes (47,090) 9,528
Other (110,877) 2,727
(Increase) decrease in assets:
Royalties receivable (5,434) (33,903)
Accounts receivable 278,697 (283,924)
Prepaid expenses 48,400 (19,175)
Proceeds from sale of marketable securities - 2,500,307
Other assets (49,675) (172,531)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (147,265) (105,220)
Amounts payable under service agreements (73,384) 12,185
Deferred revenue (36,485) 93,492
Income taxes payable (71,512) 558,374
---------------------- ----------------------
Net cash provided by (used in) operating activities (602,916) 2,258,789
---------------------- ----------------------
Cash Flows from Investing Activities
Proceeds from sales of licensing-related securities 1,594,042 1,834,591
Purchase of investments being held to maturity (312,844) 106,121
Additions to property and equipment (48,200) (344,574)
---------------------- ----------------------
Net cash provided by investing activities 1,232,998 1,596,138
---------------------- ----------------------
Cash Flows from Financing Activities
Proceeds from exercise of stock options - 85,500
Repayment of loans - (4,050,000)
------------------------------------------------
Net cash used in financing activities - (3,964,500)
------------------------------------------------
Net increase (decrease) in cash and cash equivalents 630,082 (109,573)
Cash and cash equivalents at beginning of period 2,973,344 2,867,563
---------------------- ----------------------
Cash and cash equivalents at end of period $3,603,426 $2,757,990
====================== ======================
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
Page 5
<PAGE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
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 Technology Development Corporation (the "Company")
at March 31, 1999 and December 31, 1998, and the results of its operations, 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, 1998, which is incorporated herein
by reference.
2. The results of operations for the quarter ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year. 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>
March 31,
- -----------------------------------------------------------------
Description 1999 1998
- -----------------------------------------------------------------
<S> <C> <C>
Basic shares 3,795,261 3,793,761
- -----------------------------------------------------------------
Dilution: Stock Options and Warrants 23,744 56,341
- -----------------------------------------------------------------
Diluted Shares 3,819,005 3,850,102
- -----------------------------------------------------------------
Income available to common stockholders $1,007,998 $1,230,025
- -----------------------------------------------------------------
Basic earnings per share $0.27 $0.32
- -----------------------------------------------------------------
Diluted earnings per share $0.26 $0.32
- -----------------------------------------------------------------
</TABLE>
3. During the three month periods ended March 31, 1999 and 1998 the Company
operated principally in two industry segments - - - "Licensing of Intellectual
Property Rights" and "Product Design and Development".
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 three month period ended March 31, 1999.
Page 6
<PAGE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Licensing of
Intellectual Product
Property Design and
Description Rights Development Total
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenues $ 2,542,328 $ 781,639 $ 3,323,967
- ---------------------------------------------------------------------------
Depreciation and amortization* 11,118 99,147 110,265
- ---------------------------------------------------------------------------
Interest income (expense) 103,558 (10,494) 93,064
- ---------------------------------------------------------------------------
Segment profit (loss) 1,659,232 (164,914) 1,494,318
- ---------------------------------------------------------------------------
Segment assets 22,782,703 6,695,002 29,477,705
- ---------------------------------------------------------------------------
Expenditure for segment assets 38,395 9,805 48,200
- ---------------------------------------------------------------------------
</TABLE>
* The amortization expense for the Product Design and Development segment
includes $51,012 of goodwill recorded in connection with the acquisition
of Human Factors Industrial Design, Inc., in November, 1997.
4. 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
three month periods ended March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Description 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 1,007,998 $ 1,230,025
- -----------------------------------------------------------------------------------------
Other comprehensive income, net of tax
- -----------------------------------------------------------------------------------------
Unrealized gains (losses) on licensing-related securities (1,142,319) 345,882
- -----------------------------------------------------------------------------------------
Reclassification adjustment: gains previously 0 (1,073,735)
recognized for comprehensive income
- -----------------------------------------------------------------------------------------
Comprehensive income (loss) $ (134,321) $ 502,172
- -----------------------------------------------------------------------------------------
</TABLE>
Page 7
<PAGE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The components of accumulated other comprehensive income, net of related
tax, at March 31, 1999 and December 31, 1998 consist of unrealized gains on
licensing-related securities, net of tax and amounted to $8,117,209 and
$9,259,528, respectively.
Page 8
<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 31,1999 were
$3,324,000 as compared to $3,519,000 for the comparable period in 1998. The
decrease of $195,000, or 6%, is principally due to a $270,000 decrease in gains
on the sale of licensing-related securities, a decrease of $92,000 derived from
product design and development fees offset by an increase in income from
licensing-related activities of $167,000.
Operating revenues are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Description 1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Revenues from licensing-related 29% 23%
activities
- ------------------------------------------------------------
Realized gains on sales and dividends 47% 52%
from licensing-related securities
- ------------------------------------------------------------
Product design and development fees 24% 25%
- ------------------------------------------------------------
Total 100% 100%
- ------------------------------------------------------------
</TABLE>
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 programs. Total license fees increased by
$167,000 or 21% in the quarter ended March 31, 1999 as compared to the same
period of 1998. For the three months ended March 31, 1999, non-recurring
license fees increased $277,000, while recurring royalties decreased $110,000
as compared to the same period of 1998. The Company anticipates that non-
recurring revenues will continue to be a material component of royalties in the
future.
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 March 31, 1999, "licensing-related securities"
consisted of 430,000 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 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 two year period
and,
Page 9
<PAGE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
as of March 31, 1999 had contracts for seven successive quarterly puts and
calls, each of which covers 50,000 KeyCorp shares.
PRODUCT DESIGN AND DEVELOPMENT FEES decreased by $93,000 in the quarter ended
March 31, 1999 ($781,000) from the comparable quarter in 1998 ($874,000).
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 quarter ended March 31, 1999 represented 54% of licensing-
related activities revenues, compared with 38% in 1998.
PRODUCT DESIGN AND DEVELOPMENT EXPENSES consist of professional staff and other
expenses incurred in connection with providing services to it's clients.
During the quarter ended March 31, 1999, product design and development
expenses represented 85% of product design and development revenue as compared
to 79% in 1998. The percentage increase in 1999 expenses is attributable to the
decline in total revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased by $191,000 or 39% in
the first quarter of 1999 as compared to the previous year. Of this increase,
$20,000 is attributable to Selective Licensing and Promotion, Ltd., (formed in
January 1998). The balance of $171,000, is attributable to payments made under
the Retirement Agreement with the Company's former Chairman ($38,000), general
corporation expenses ($30,000), payroll costs ($40,000), costs associated with
the Edgewater facility ($50,000) and sundry other costs ($13,000).
GOODWILL relates to the excess of the purchase price paid for Human Factors
Industrial Design, Inc., ("Human Factors"), in November 1997, over the fair
market value of Human Factor's assets acquired and is being amortized over a
period of 25 years.
OTHER INCOME consisting of dividend and interest income increased by $39,000 for
the quarter ended March 31, 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 three month period ended March 31, 1998 relate to a loss
of $74,000 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
Page 10
<PAGE>
REFAC TECHNOLOGY DEVELOPMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 $486,000 for the
first quarter of 1999 reflects an effective tax rate of 34% (the Federal
statutory corporate income tax rate), reduced by the statutory dividends
received exclusion to arrive at the net effective tax rate of 33%. This
compares to the rate of 36% in the same quarter of 1998.
Liquidity and Capital Resources
Cash, cash equivalents, and U.S. Treasury notes increased $943,000 from
$7,066,000 at December 31, 1998 to $8,009,000 at March 31, 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 December 31, 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.
Page 11
<PAGE>
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
/s/ Robert L. Tuchman
May 11, 1999 ----------------------------------------
Robert L. Tuchman, President and
Chief Executive Officer
May 11, 1999 /s/ Elliott S. Greller
----------------------------------------
Elliott S. Greller, Vice President,
Treasurer, and Chief Financial Officer
Page 12
<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, 1998 is incorporated herein by
reference.
Page 13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,603,426
<SECURITIES> 17,604,167
<RECEIVABLES> 1,447,696
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,320,417
<PP&E> 759,960
<DEPRECIATION> 0
<TOTAL-ASSETS> 29,477,705
<CURRENT-LIABILITIES> 581,170
<BONDS> 0
0
0
<COMMON> 545,090
<OTHER-SE> 23,506,014
<TOTAL-LIABILITY-AND-EQUITY> 29,477,705
<SALES> 964,586
<TOTAL-REVENUES> 3,323,967
<CGS> 1,186,782
<TOTAL-COSTS> 1,922,713
<OTHER-EXPENSES> (93,064)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,494,318
<INCOME-TAX> 486,320
<INCOME-CONTINUING> 1,007,998
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,007,998
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.26
</TABLE>
