<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 June 30, 1999
Commission File Number 0-7704
REFAC
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(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.)
The Hudson River Pier
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115 River Road, Edgewater, New Jersey 07020-1099
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(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 August 1, 1999 was 3,795,261.
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REFAC
INDEX
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Page
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Part I. Financial Information
Condensed Consolidated Balance Sheets
June 30, 1999 (unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations
Six Months Ended June 30, 1999 and 1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 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
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CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
- ------ ---------------------- --------------------
(UNAUDITED)
<S> <C> <C>
Current Assets
Cash and cash equivalents $3,593,206 $2,973,344
Royalties receivable 965,569 776,433
Accounts receivable, net 686,586 944,526
Prepaid expenses 408,606 220,895
---------------------- --------------------
Total current assets 5,653,967 4,915,198
---------------------- --------------------
Property and equipment, net 2,230,165 771,013
Licensing-related securities 12,112,610 15,067,535
Investments being held to maturity 4,050,000 4,093,156
Other assets 638,134 760,076
Goodwill, net 4,914,919 4,958,410
---------------------- --------------------
$29,599,795 $30,565,388
====================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $99,008 $140,777
Accrued expenses 289,980 236,059
Amounts payable under license agreements 201,562 240,743
Deferred revenue 150,123 216,693
Income taxes payable 194,560 75,544
---------------------- --------------------
Total current liabilities 935,233 909,816
---------------------- --------------------
Deferred income taxes 4,060,123 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 20,493,198 18,621,522
Accumulated other comprehensive income 7,361,808 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 24,159,381 24,160,425
---------------------- --------------------
$29,599,795 $30,565,388
====================== ====================
See accompanying notes to the unaudited condensed consolidated financial statements
</TABLE>
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REFAC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
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1999 1998 1999 1998
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<S> <C> <C> <C> C>
Revenues
Licensing-related activities $1,929,246 $2,475,964 $964,660 $1,678,161
Product development fees 1,326,389 1,936,607 544,750 1,062,126
Realized gains on licensing-related securities 3,044,148 3,445,071 1,588,606 1,762,915
Dividend income from licensing-related securities 213,200 314,900 91,000 150,400
--------------------------------------------------------------------
Total revenues 6,512,983 8,172,542 3,189,016 4,653,602
--------------------------------------------------------------------
Costs and Expenses
Licensing-related activities 1,052,111 1,041,112 529,026 766,314
Product development fees 1,228,205 1,215,401 564,508 556,158
Selling, general and administrative expenses 1,573,846 1,660,988 888,927 1,104,404
Goodwill amortization 102,225 100,956 51,213 15,928
--------------------------------------------------------------------
Total operating expenses 3,956,387 4,018,457 2,033,674 2,442,804
--------------------------------------------------------------------
Operating income 2,556,596 4,154,085 1,155,342 2,210,798
--------------------------------------------------------------------
Other income and (expenses)
Dividend and interest income 189,928 82,653 96,864 28,271
(Loss) gain from ceased operations - (72,489) - 1,040
--------------------------------------------------------------------
Income before provision for taxes on income 2,746,524 4,164,249 1,252,206 2,240,109
Provision for taxes on income 874,849 1,546,880 388,529 852,765
--------------------------------------------------------------------
Net income $1,871,675 $2,617,369 $863,677 $1,387,344
====================================================================
Diluted earnings per common share $0.49 $0.65 $0.23 $0.35
====================================================================
Basic earnings per common share $0.49 $0.69 $0.23 $0.37
====================================================================
Diluted weighted average shares outstanding 3,811,865 4,000,971 3,807,202 4,016,769
====================================================================
See accompanying notes to the unaudited condensed consolidated financial statements
</TABLE>
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------- -----------------
1999 1998
----------------- -----------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $1,871,675 $2,617,369
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 222,116 263,196
Net gain on sale of licensing-related securities (3,044,148) (3,438,641)
Deferred income taxes (176,619) (238,697)
(Increase) decrease in assets:
Royalties receivable (189,136) (59,372)
Accounts receivable 278,575 (258,625)
Prepaid expenses (187,711) (78,570)
Proceeds from sale of marketable securities - 2,500,307
Other assets 121,942 102,513
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 78,567 (216,042)
Amounts payable under service agreements (39,181) 92,305
Deferred revenue (66,570) 81,542
Income taxes payable 119,016 430,707
----------------- -----------------
Net cash provided by (used in ) operating activities (1,011,474) 1,797,992
----------------- -----------------
Cash Flows from Investing Activities
Proceeds from sales of investments being held to maturity 1,043,156 1,130,099
Proceeds from sales of licensing-related securities 3,288,006 3,749,856
Purchase of investments being held to maturity (1,000,000) (1,409,191)
Additions to property and equipment (1,699,826) (626,421)
----------------- -----------------
Net cash provided by investing activities 1,631,336 2,844,343
----------------- -----------------
Cash Flows from Financing Activities
Proceeds from exercise of stock options - 85,500
Proceeds from receivable from issuance of common stock warrants - 25,824
Repayment of notes payable - former Human Factors shareholders - (4,050,000)
----------------- -----------------
Net cash used in financing activities - (3,938,676)
----------------- -----------------
Net increase in cash and cash equivalents 619,862 703,659
Cash and cash equivalents at beginning of period 2,973,344 2,867,563
----------------- -----------------
Cash and cash equivalents at end of period $3,593,206 $3,571,222
================= =================
See accompanying notes to the unaudited condensed consolidated financial statements
</TABLE>
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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 June 30, 1999 and December 31,
1998, 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, 1998, which is incorporated
herein by reference.
2. The results of operations for the six months ended June 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>
- --------------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
June 30, June 30,
- --------------------------------------------------------------------------------------------------
Description 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic shares 3,795,261 3,777,963 3,795,261 3,793,761
- --------------------------------------------------------------------------------------------------
Dilution: Stock Options and Warrants 16,604 223,008 11,941 223,008
- --------------------------------------------------------------------------------------------------
Diluted Shares 3,811,865 4,000,971 3,807,202 4,016,769
- --------------------------------------------------------------------------------------------------
Income available to common shareholders $1,871,675 $2,617,369 $863,677 $1,387,344
- --------------------------------------------------------------------------------------------------
Basic earnings per share $0.49 $0.69 $0.23 $0.37
- --------------------------------------------------------------------------------------------------
Diluted earnings per share $0.49 $0.65 $0.23 $0.35
- --------------------------------------------------------------------------------------------------
</TABLE>
4. During the six months ended June 30, 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 six month period ended June 30, 1999.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
Licensing of
Intellectual Product
Property Design and
Description Rights Development Total
- --------------------------------------------------------------------------------
Total revenues $5,187,000 $1,326,000 $6,513,000
- --------------------------------------------------------------------------------
Depreciation and amortization* 27,000 195,000 222,000
- --------------------------------------------------------------------------------
Interest income (expense) 219,000 (29,000) 190,000
- --------------------------------------------------------------------------------
Segment profit (loss) 3,371,000 (624,000) 2,747,000
- --------------------------------------------------------------------------------
Segment assets $22,169,000 $7,431,000 $29,600,000
- --------------------------------------------------------------------------------
Expenditure for segment assets $442,000 $1,258,000 $1,700,000
- --------------------------------------------------------------------------------
* The amortization expense for the Product Design and Development segment
includes $102,000 of goodwill recorded in connection with the
acquisition of Human Factors.
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
six month periods ended June 30, 1999 and 1998 are as follows:
- --------------------------------------------------------------------------------
Description 1999 1998
- -------------------------------------------------------------------------------
Net income $1,872,000 $2,617,000
- -------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
- -------------------------------------------------------------------------------
Decrease in unrealized gains on
licensing-related securities (1,898,000) (2,184,000)
- --------------------------------------------------------------------------------
Foreign currency translation adjustment 0 (198,000)
- --------------------------------------------------------------------------------
Comprehensive income (loss) ($26,000) $235,000
- --------------------------------------------------------------------------------
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REFAC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The components of accumulated other comprehensive income, net of related
tax, at June 30, 1999 and 1998 consist of unrealized gains on licensing-related
securities, net of tax and amounted to $7,362,000 and $11,569,000 respectively.
The components of comprehensive income (loss), net of related tax, for the
three month periods ended June 30, 1999 and 1998 are as follows:
- --------------------------------------------------------------------------------
Description 1999 1998
- -------------------------------------------------------------------------------
Net income $864,000 $1,387,000
- -------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
- -------------------------------------------------------------------------------
Decrease in unrealized gains on
licensing-related securities (755,000) (1,456,000)
- --------------------------------------------------------------------------------
Comprehensive income (loss) $109,000 ($69,000)
- --------------------------------------------------------------------------------
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REFAC
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, 1999 were
$6,513,000 as compared to $8,173,000 for the comparable period in 1998. The
decrease of $1,660,000, or 20%, is principally due to decreases in (i) gains on
the sale of licensing-related securities and dividends ($503,000), (ii) product
design and development fees ($610,000) and (iii) revenues from licensing-related
activities ($547,000).
Operating revenues are summarized as follows:
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Description 1999 1998
----------------------------------------------------------------------
Revenues from licensing-related activities 30% 30%
----------------------------------------------------------------------
Realized gains on sales and dividends from
licensing-related securities 50% 46%
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Product design and development fees 20% 24%
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Total 100% 100%
----------------------------------------------------------------------
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
and trademark agency fees decreased by $476,000 or 20% in the six months ended
June 30,1999 as compared to the same period of 1998 and service income from
royalty verifications decreased by $71,000 in the comparable period. For the
six months ended June 30, 1999, patent licensing royalties, non-recurring
license fees, and trademark agency fees decreased by $174,000, $271,000, and
$31,000 respectively, as compared to the same period of 1998. The Company
anticipates that non-recurring revenues will be a material component of
royalties in 1999.
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 June 30, 1999, "licensing-related securities"
consisted of 380,000 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, as of June 30, 1999
Page 9
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has contracts for six successive quarterly puts and calls, each of which covers
50,000 KeyCorp shares.
Product Design and Development Fees decreased by $610,000 in the six month
period ended June 30, 1999 ($1,327,000) from the comparable period in 1998
($1,937,000).
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 six months ended June 30, 1999 were $1,052,000 as
compared to $1,041,000 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 six months ended June 30, 1999, such expenses represented 93% of
related revenue as compared with 64% in 1998. The percentage increase in 1999
expenses is attributable to the decline in product design and development
revenues.
Selling, General and Administrative Expenses decreased by $87,000 or 5% in
the six month period ended June 30, 1999 as compared to the previous year.
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
$107,000 for the six months ended June 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 six month period ended June 30, 1998, relate to a
loss of $72,000 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 $875,000 for
the six months ended June 30, 1999 reflects an effective tax rate of 32% . This
compares to the rate of 37% in the same period in 1998. The decrease in the
effective income tax rate is due to Human Factors not being subject to state and
local income taxes and timing differences associated with the
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Company's relocation to New Jersey.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash, cash equivalents, and U.S. Treasury Notes increased $577,000 from
$7,066,000 at December 31, 1998 to $7,643,000 at June 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
August 10, 1999 /s/ Robert L. Tuchman
___________________________________
Robert L. Tuchman, President and
Chief Executive Officer
August 10, 1999 /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
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-20-1999
<CASH> 3593206
<SECURITIES> 16162610
<RECEIVABLES> 1652155
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5653967
<PP&E> 2230165
<DEPRECIATION> 0
<TOTAL-ASSETS> 29599795
<CURRENT-LIABILITIES> 935233
<BONDS> 0
0
0
<COMMON> 545090
<OTHER-SE> 23614291
<TOTAL-LIABILITY-AND-EQUITY> 29599705
<SALES> 1929246
<TOTAL-REVENUES> 6512983
<CGS> 1052111
<TOTAL-COSTS> 3956387
<OTHER-EXPENSES> (189928)
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<INCOME-TAX> 874849
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<NET-INCOME> 1871675
<EPS-BASIC> 0.49
<EPS-DILUTED> 0.49
</TABLE>
