-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WWO8JCKlghE9B30li3RN5CMf8xcB8tuePSAy2/Cvf7wZu3mppUXdJwAHOppY4p8U VA5182ZwgFbsvF52/wKj/w== 0000082788-98-000005.txt : 19980518 0000082788-98-000005.hdr.sgml : 19980518 ACCESSION NUMBER: 0000082788-98-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: REFAC TECHNOLOGY DEVELOPMENT CORP CENTRAL INDEX KEY: 0000082788 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 131681234 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12776 FILM NUMBER: 98622047 BUSINESS ADDRESS: STREET 1: 122 EAST 42ND ST STE 4000 CITY: NEW YORK STATE: NY ZIP: 10168 BUSINESS PHONE: 2126874741 MAIL ADDRESS: STREET 2: 122 EAST 42ND ST STE 4000 CITY: NEW YORK STATE: NY ZIP: 10168 FORMER COMPANY: FORMER CONFORMED NAME: RESOURCES & FACILITIES CORP DATE OF NAME CHANGE: 19740509 FORMER COMPANY: FORMER CONFORMED NAME: REFAC INC DATE OF NAME CHANGE: 19720628 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 1998 Commission File Number 0-7704 REFAC TECHNOLOGY DEVELOPMENT CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-1681234 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 122 East 42nd Street, New York, New York 10168 (Address of principal executive offices)(Zip Code) Registrant's telephone number, including area code: (2l2) 687-4741 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the Registrant's Common Stock, par value $.10 per share, as of May 1, 1998 was 3,793,761. REFAC TECHNOLOGY DEVELOPMENT CORPORATION INDEX Page Part I. Financial Information Condensed Consolidated Balance Sheets March 31, 1998 (unaudited) and December 31, 1997 3 Condensed Consolidated Statements of Operations Three Months Ended March 31, 1998 and 1997 (unaudited) 4 Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 1998 and 1997 (unaudited) 5 Notes to Condensed Consolidated Financial Statements 6-9 Management's Discussion and Analysis of Financial Conditions and Results of Operations 10-13 Part II. Other Information 13 REFAC TECHNOLOGY DEVELOPMENT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
MAR. 31 DEC. 31 ASSETS 1998 1997 Current Assets (UNAUDITED) * Cash and cash equivalents $2,757,990 $2,867,563 Marketable securities - 2,503,000 Royalties receivable 696,879 662,976 Accounts receivable, net 1,111,432 814,599 Prepaid expenses 74,244 55,069 Total current assets 4,640,545 6,903,207 Property and equipment, net 736,367 445,866 License-related securities 21,503,823 22,777,247 Investments being held to maturity 1,122,907 1,229,028 Other assets 721,313 712,731 Goodwill, net 4,988,385 5,073,414 $33,713,340 $37,141,493 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $167,970 $126,446 Accrued expenses 392,453 548,165 Amounts payable under license agreements 247,178 234,993 Deferred revenue 196,727 103,235 Notes payable-former Human Factors shareholders - 5,309,564 Income taxes payable 816,882 258,508 Total current liabilities 1,821,210 6,580,911 Deferred income taxes 7,069,580 7,493,016 Other liabilities-deferred compensation 445,058 445,058 Minority interest 8,968 - Stockholders' Equity Common stock, $.10 par value 544,940 541,340 Additional paid-in-capital 9,974,548 9,440,573 Retained earnings 15,112,669 13,890,734 Unrealized gain on license-related securities 13,024,606 13,752,459 Cumulative translation adjustment - 198,362 Treasury stock, at cost (13,874,488) (14,774,300) Receivable from issuance of common stock and warrants (413,751) (426,660) Total stockholders' equity 24,368,524 22,622,508 $33,713,340 $37,141,493 *Derived from audited financial statements See accompanying notes to the condensed consolidated financial statements Page 3
REFAC TECHNOLOGY DEVELOPMENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31, 1998 1997 Revenues Royalties $760,412 $873,225 Service fees 911,872 - Realized gains on license-related securities 1,682,156 724,573 Dividend income from license-related securities 164,500 157,080 Sales 27,815 44,140 Total revenues 3,546,755 1,799,018 Costs and Expenses Service expenses 923,460 244,510 Selling, general and administrative expenses 720,847 481,414 Cost of goods sold 14,397 38,195 Total operating expenses 1,658,704 764,119 Operating income 1,888,051 1,034,899 Other income and expenses (Loss) gain on marketable securities tranactions (2,693) 19,264 Dividend and interest income 38,782 99,288 Gains from foreign currency transactions - 10,638 Income before provision for taxes on income and minority interest 1,924,140 1,164,089 Provision for taxes on income 696,647 336,262 Income before minority interest 1,227,493 827,827 Minority interest in subsidiary loss 2,532 11,884 Net income $1,230,025 $839,711 Basic earnings per common share $0.32 $0.23 Diluted earnings per common share $0.32 $0.22 See accompanying notes to the condensed consolidated financial statements. Page 4
REFAC TECHNOLOGY DEVELOPMENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 1998 1997 Cash Flows from Operating Activities Net income $1,230,025 $839,711 Adjustments for reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 146,367 29,403 Net gain on sale of securities (1,679,463) (724,520) Deferred income taxes 9,528 33,603 Other 2,727 (26,379) (Increase) decrease in assets: Royalties receivable (33,903) (220,366) Accounts receivable (283,924) 5,135 Prepaid expenses (19,175) (11,996) Proceeds from sale of marketable securities 2,500,307 2,324,677 Other assets (172,531) 474,659 Increase (decrease) in liabilties: Accounts payable and accrued expenses (105,220) (123,387) Amounts payable under service agreements 12,185 (62,805) Deferred revenue 93,492 - Income taxes payable 558,374 46,486 Net cash provided by operating activities 2,258,789 2,584,221 Cash Flows from Investing Activities Proceeds from sales of license-related securities 1,834,591 731,356 Purchase of investments being held to maturity 106,121 - Additions to property and equipment (344,574) (26,857) Net cash provided by investing activities 1,596,138 704,499 Cash Flows from Financing Activities Proceeds from exercise of stock options 85,500 5,219 Proceeds from short-term borrowings - 815,828 Repayment of short-term borrowing - (815,828) Repayment of note payable-former Human Factors shareholders (4,050,000) - Dividends paid - (2,700,943) Acquisition of treasury stock - (14,874,862) Net cash used in financiang activities (3,964,500) (17,570,586) Effect of exchange rate changes on cash - 1,684 Net decrease in cash and cash equivalents (109,573) (14,280,182) Cash and cash equivalents at beginning fo period 2,867,563 15,412,077 Cash and cash equivalents at end of period $2,757,990 $1,131,895 See accompanying notes to the condensed consolidated financial statements Page 5
REFAC TECHNOLOGY DEVELOPMENT CORPORATION Notes to Condensed Consolidated Financial Statements 1. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (all of which were normal recurring adjustments) necessary to present fairly the consolidated financial position of REFAC Technology Development Corporation (the "Company") at March 31, 1998 and December 31, 1997, and the results of its operations, its cash flows and comprehensive income for the three month interim period presented. The accounting policies followed by the Company are set forth in Note l to the Company's consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, which is incorporated herein by reference. 2. The results of operations for the quarter ended March 31, 1998 are not necessarily indicative of the results to be expected for the full year. 3. In accordance with SFAS No. 115, the Company categorizes and accounts for its investment holdings as follows: Trading securities are securities bought and held for the purpose of selling them in the near term. Unrealized gains and losses are included in current period earnings. Held to maturity securities are measured at amortized cost. This categorization is permitted only if the Company has the positive intent and ability to hold these securities to maturity. Available for sale securities are securities which do not qualify as either held to maturity or trading securities. Unrealized gains and losses are reported as a separate component of stockholders' equity, net of applicable deferred income taxes on such unrealized gains and losses at current income tax rates. The Company's investments in license-related securities fall into this category. 4. The Company owns 645,000 shares of KeyCorp Common Stock (NYSE- KEY) which, as of March 31, 1998 had a market value of $24,389,063. In order to minimize the Company's exposure against a decline in the value of KeyCorp, on September 12, 1997 the Company entered into thirteen (13) individual derivative contracts with Union Bank of Switzerland ("UBS") providing for both put options and call options. The "put options" give the Company the right to sell the KeyCorp stock covered by the option to UBS at the agreed upon option price even if the market price is lower on the settlement date. The call options gives UBS the right to require the Company to sell the KeyCorp common stock covered by the option at the agreed upon option price even if the market price is higher on the settlement date. If the price is between the put and call option prices on the settlement date both options lapse. Eleven individual contracts remain each covering 50,000 shares of KeyCorp. The contracts expire at the end of each calendar quarter until December 31, 2000. The schedule below details the expiration dates and the pricing for each of the contracts. Put Option Call Option Expiration Number Strike Price Aggregate Strike Price Aggregate Date of Shares Per Share (1) Per Share (1) 06/30/98 50,000 $27.42615 $1,371,308 $33.8865 $1,694,325 09/30/98 50,000 $27.42615 $1,371,308 $34.4350 $1,721,750 12/31/98 50,000 $27.42615 $1,371,308 $35.0140 $1,750,700 03/31/99 50,000 $27.42615 $1,371,308 $35.3490 $1,767,450 06/30/99 50,000 $27.42615 $1,371,308 $35.9585 $1,797,925 09/30/99 50,000 $27.42615 $1,371,308 $36.5680 $1,828,400 12/31/99 50,000 $27.42615 $1,371,308 $37.1775 $1,858,875 03/31/00 50,000 $27.42615 $1,371,308 $37.4825 $1,874,125 06/30/00 50,000 $27.42615 $1,371,308 $38.0920 $1,904,600 09/30/00 50,000 $27.42615 $1,371,308 $38.7015 $1,935,075 12/31/00 50,000 $27.42615 $1,371,308 $39.3720 $1,968,600 5. The following table reconciles the numerators and denominators of the basic and diluted earnings per share computations pursuant to SFAS No. 128, "Earnings Per Share." March 31, Description 1998 1997 Basic shares 3,793,761 3,626,887 Dilution: Stock Options and Warrants 56,341 118,333 Diluted Shares 3,850,102 3,745,220 Income available to common shareholders $1,230,025 $839,711 Basic earnings per share $0.32 $0.23 Diluted earnings per share $0.32 $0.22 6. During the three months ended March 31, 1998, the Company operated principally in two industry segments - - - "Licensing of Intellectual Property Rights" and "Product Design and Development". The Company only operating in the Licensing of Intellectual Property Rights segment during the first quarter of 1997. The accounting policies used to develop segment information correspond to those described in the summary of significant accounting policies (See Note 1 of the 1997 Annual Report). Segment profit or loss is based on profit or loss from operations before the provision or benefit for income taxes. The reportable segments are distinct business units operating in different industries and are separately managed. The following information about the business segments are for the three months ended March 31, 1998. Licensing of Intellectual Product Property Design and Description Rights Development Total Total revenues $2,652,274 $894,481 $3,546,755 Depreciation and amortization* 19,566 126,801 146,367 Interest income, net 35,998 2,784 38,782 Segment profit (loss) 1,928,542 (4,402) 1,924,140 Segment assets 26,965,113 6,662,727 33,627,840 Expenditure for segment assets 39,319 305,255 344,574 * The amortization expense for the Product Design and Development segment includes $85,029 of goodwill recorded in connection with the acquisition of Human Factors. 7. As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). Although the adoption of SFAS 130 has no impact on the Company's net income or stockholders' equity, it does require that the Company report and display comprehensive income and its components. Comprehensive income consists of net income or loss for the current period as well as income, expenses, gains, and losses arising during the period that are included in separate components of equity. It includes the unrealized gains and losses on the Company's license- related securities, which prior to adoption were reported separately in stockholders' equity (See Note 1 above). Available for sale securities reported in prior year financial statements have been reclassified to conform to SFAS 130. The components of comprehensive income, net of related tax, for the three-month periods ended March 31, 1998 and 1997 are as follows: Description 1998 1997 Net income $1,230,025 $839,711 Other comprehensive income, net of tax Unrealized gains (losses) on license-related securities 345,882 (474,640) Reclassification adjustment: gains previously recognized for comprehensive income (1,073,735) (441,071) Comprehensive income 502,172 (76,000) The components of accumulated other comprehensive income, net of related tax, at March 31, 1998 and December 31, 1997 consist of unrealized gains on license-related securities, net of tax and amounted to $13,024,606 and $13,752,459, respectively. REFAC TECHNOLOGY DEVELOPMENT CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Total operating revenues for the three months ended March 31, 1998 were $3,547,000 as compared to $1,799,000 for the comparable period in 1997. The increase of $1,748,000, or 97%, is principally due to a $958,000 increase in gains on the sale of license-related securities and the inclusion of $894,000 in revenues derived by Human Factors Industrial Design, Inc. ("Human Factors"), which the Company acquired in November, 1997. License-related securities consisted of 700,000 shares of KeyCorp common stock as ofDecember 31, 1997 and 645,000 shares as of March 31, 1998. KeyCorp had a 2-for-1 stock split of such common stock on March 9, 1998 and all references in this Report to the number of KeyCorp shares have been adjusted to reflect such stock split. The Company intends to sell its remaining holdings of KeyCorp over a three year period and, as of March 31, 1998 had contracts for eleven successive quarterly puts and calls, each of which covers 50,000 KeyCorp shares. See Note 4 to the Consolidated Financial Statements for additional details concerning such securities. Income from license-related securities (realized gains on sales and dividend income) accounted for 52% and 49% of operating revenues for the three months ended March 31, 1998 and 1997, respectively. Royalties consist of recurring royalty payments for the use of licensed patents and trademarks as well as non-recurring, lump sum license payments. Revenues from non-recurring agreements vary from period to period depending upon the nature of the licensing programs pursued for various technologies in a particular year and the timing of successful completion of licensing agreements. Total royalties decreased by $113,000 or 13% in the quarter ended March 31, 1998 as compared to the same period of 1997. For the three months ended March 31, 1998, non-recurring royalties decreased by $100,000 (to zero), while recurring royalties decreased $13,000 or 2% as compared to the same period of 1997. In spite of the lack of non-recurring royalties during the first quarter of 1998, the Company anticipates that non-recurring royalties will be a material component of royalties in the future. Service fees consist of the product design and development fees charged by Human Factors ($894,000) and the consulting and trademark licensing agency fees charged by Selective Licensing & Promotion, Ltd. ($20,000). Since Human Factors was acquired in November, 1997 and Selective Licensing & Promotion, Ltd. ("Selective Licensing") was formed in January, 1998, the Company did not have comparable service fee income in the first quarter of 1997. Service expenses for the licensing business consist principally of amounts paid to licensors at contractually stipulated percentages of the Company's specific patent and product revenues and, in addition, includes expenses related to the investigation, marketing, administration, enforcement, maintenance and prosecution of patent and license rights and related licenses. Licensing-related service expenses for the three months ended March 31, 1998 represented 41% of licensing-related service revenues, compared with 28% 1997. Service expenses for Human Factors' product design and development business consist of professional staff and other expenses incurred in connection with providing services to Human Factors' clients. As mentioned herein, Human Factors was acquired in November, 1997 so its results are not included in the first quarter results of 1997. During the three months ended March 31, 1998, product design and development service expenses represented 68% of total product design and development service revenues. In the aggregate, service expenses increased by $679,000 in the quarter ended March 31, 1998 as compared to the same period of 1997, of which $604,000 is attributable to the product design and development service expenses incurred by Human Factors. Selling, general and administrative expenses increased by $239,000 or 50% in the first quarter of 1998 as compared to the previous year. Substantially all of such increase ($212,000) is attributable to Human Factors (acquired in November, 1997) and included goodwill amortization of $85,000. Other Income and Expenses For the three months ended March 31, 1998, the Company had realized losses on its marketable securities of $2,700 as compared to realized gains of $19,000 for the corresponding period of 1997. At March 31, 1998, the Company did not have any securities classified as marketable or trading securities. Dividend and interest income decreased by $61,000 for the three months ended March 31, 1998 from the corresponding period in 1997. This decrease was attributable to a reduction in the Company's cash and securities. See "Liquidity and Capital Resources" below. The Company's income from licensing operations has not in the past been materially affected by inflation. Likewise, while currency fluctuations can influence service revenues, the diversity of foreign income sources tends to offset individual changes in currency valuations. The Company's income tax provision of $697,000 the first quarter of 1998 reflects an effective tax rate of 34% (the Federal statutory corporate income tax rate), compared with rates of 29% in the same quarter of 1997. The increase from the prior year is principally due to increased deferred income tax expense in 1998 and a decrease in the benefits derived from statutory dividend received exclusions from taxable income. Liquidity and Capital Resources Cash, cash equivalents, and marketable securities decreased $2,613,000 from $5,371,000 at December 31, 1997 to $2,758,000 at March 31, 1998. The decrease is due to the payment of the remainder of the purchase price for Human Factors in January, 1998. In January of 1997 (declared in December 1996), the Company paid a cash dividend of approximately $2,700,000, or $0.50 per share. In November of 1997, the Company announced that it will no longer pay annual dividends and will use its earnings to fund continuing growth. In November 1997, the Company acquired 100% of Human Factors from its stockholders for $6 million ($4.5 million cash and 119,374 shares valued at $1.5 million) and committed to invest $1 million in such corporation. In January 1998, the Company formed a new 81% owned subsidiary, Selective Licensing & Promotion, Ltd. The Company has committed to invest up to $1,000,000 over the next three years in this venture. Additionally, the Company has commitments under leases covering its facilities and under a Retirement Agreement with its former CEO and Chairman (which has been provided for in the financial statements). Except as reflected herein, the Company has no other significant commitments. The Company's long- term investment portfolio had a market value of approximately $21,504,000 at March 31, 1998. The Company believes its liquidity position is adequate to meet all current and projected financial needs. Effective January 1, 1994, the Company adopted the provision of Statements of Financial Accounting Standards ("SFAS") No. 115 that requires all securities to be recorded at market value. The unrealized gain/(loss) from current marketable securities is included in the Statement of Operations for 1996 and 1995 (there was no gain/(loss) in 1997). The unrealized gain from securities acquired in association with license-related securities is included as a separate component of Stockholders' Equity, net of income taxes, on the Consolidated Balance Sheet. See Note 3 to the Consolidated Financial Statements for additional details. The Company utilizes purchased software; therefore, the year 2000 problem will not be significant. Forward Looking Statements Statements about the Company's future expectations and all other statements in this document other than historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and as that term is defined in the Private Securities Litigation Reform Act of 1995. The Company intends that such forward-looking statements involve risks and uncertainties and are subject to change at any time, and the Company's actual results could therefore differ materially from expected or inferred results. Part II. Other Information Item 1. Legal Proceedings Zoom Telephonics - The Company's litigation against Zoom Telephonics was settled on April 23, 1998. Item 6. Exhibit and Reports on Form 8-K (a) See exhibit index attached hereto. (b) Reports on Form 8-K filed during the quarter: None Signatures Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REFAC Technology Development Corporation May 14, 1998 Robert L. Tuchman, President and Chief Executive Officer May 14, 1998 Robert Rescigno, Treasurer and Chief Accounting Officer EXHIBIT INDEX Exhibit Page No. No. 28 Note 1 to the Company's Consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 is incorporated herein by reference. EX-27 2 ARTICLE 5 FIN. DATA SCHEDULE FOR 1ST QTR. 10-Q WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1 DEC-31-1998 JAN-01-1998 MAR-31-1998 3-MOS 2757990 22626730 1848917 40606 0 4640545 995988 282515 33713340 1821210 0 0 0 544940 23823584 33713340 1672284 3546755 923460 1658704 (36089) 0 0 1924140 696647 1227493 0 0 0 1230025 .32 .32 -----END PRIVACY-ENHANCED MESSAGE-----