<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, 2000
Commission File Number 0-7704
REFAC
-----
(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
---------------------
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 14, 2000 was 3,795,261.
<PAGE>
REFAC
INDEX
-----
Page
----
Part I. Financial Information
Condensed Consolidated Balance Sheets
September 30, 2000 (unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations
Nine and three months ended September 30, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-10
Management's Discussion and Analysis of Financial
Conditions and Results of Operations 11-14
Part II. Other Information 15-16
Page 2
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CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------------- ---------------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $3,394,000 $5,158,000
Due from broker 1,313,000 -
Royalties receivable 1,259,000 1,153,000
Accounts receivable, net 1,517,000 1,425,000
Prepaid expenses 655,000 521,000
Inventory 151,000 -
--------------------- ---------------------
Total current assets 8,289,000 8,257,000
--------------------- ---------------------
Property and equipment, net 2,549,000 2,232,000
Licensing-related securities 3,339,000 7,145,000
Investments being held to maturity 5,033,000 3,331,000
Other assets 554,000 583,000
Goodwill, net 6,102,000 6,299,000
--------------------- ---------------------
$25,866,000 $27,847,000
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $262,000 $674,000
Accrued expenses 416,000 439,000
Amounts payable under service agreements 608,000 417,000
Income taxes payable 145,000 716,000
--------------------- ---------------------
Total current liabilities 1,431,000 2,246,000
--------------------- ---------------------
Deferred income taxes 815,000 2,365,000
Other liabilities-deferred compensation 421,000 445,000
Stockholders' Equity
Common stock, $.10 par value 545,000 545,000
Additional paid-in capital 9,984,000 9,984,000
Retained earnings 24,944,000 22,299,000
Accumulated other comprehensive income 1,975,000 4,212,000
Treasury stock, at cost (13,874,000) (13,874,000)
Receivable from issuance of common stock and warrants (375,000) (375,000)
--------------------- ---------------------
Total stockholders' equity 23,199,000 22,791,000
--------------------- ---------------------
$25,866,000 $27,847,000
===================== =====================
See accompanying notes to the unaudited condensed consolidated financial Statements
</TABLE>
Page 3
<PAGE>
REFAC
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------------------------------------
2000 1999
-------------------------------------------------------
<S> <C> <C>
Revenues
Licensing-related activities $2,954,000 $2,967,000
Creative consulting fees 5,100,000 2,103,000
Consumer product sales 736,000 19,000
Realized gains and dividends
on licensing-related securities 3,801,000 4,693,000
Dividend and interest income 350,000 266,000
-------------------------------------------------------
Total Revenues 12,941,000 10,048,000
-------------------------------------------------------
Costs and Expenses
Licensing-related activities 1,027,000 1,559,000
Creative consulting expenses 3,105,000 1,768,000
Consumer product sales costs 493,000 12,000
Selling, general and administrative expenses 4,509,000 2,666,000
-------------------------------------------------------
Total costs and expenses 9,134,000 6,005,000
-------------------------------------------------------
Income before provision for taxes on income 3,807,000 4,043,000
Provision for taxes on income 1,162,000 1,288,000
-------------------------------------------------------
Net income $2,645,000 $2,755,000
=======================================================
-------------------------------------------------------
Diluted earnings per share $0.70 $0.72
=======================================================
Basic earnings per share $0.70 $0.73
=======================================================
-------------------------------------------------------
Diluted weighted average shares outstanding 3,798,394 3,805,602
=======================================================
-------------------------------------------------------
Basic weighted average shares outstanding 3,795,261 3,795,261
=======================================================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
-------------------------------------------------------
2000 1999
-------------------------------------------------------
<S> <C> <C>
Revenues
Licensing-related activities $ 914,000 $1,038,000
Creative consulting fees 1,498,000 776,000
Consumer product sales 24,000 19,000
Realized gains and dividends
on licensing-related securities 1,195,000 1,435,000
Dividend and interest income 105,000 94,000
-------------------------------------------------------
Total Revenues 3,736,000 3,362,000
-------------------------------------------------------
Costs and Expenses
Licensing-related activities 246,000 507,000
Creative consulting expenses 840,000 557,000
Consumer product sales costs 17,000 12,000
Selling, general and administrative expenses 1,550,000 990,000
-------------------------------------------------------
Total costs and expenses 2,653,000 2,066,000
-------------------------------------------------------
Income before provision for taxes on income 1,083,000 1,296,000
Provision for taxes on income 264,000 413,000
-------------------------------------------------------
Net income $819,000 $883,000
=======================================================
-------------------------------------------------------
Diluted earnings per share $0.22 $0.23
=======================================================
Basic earnings per share $0.22 $0.23
=======================================================
-------------------------------------------------------
Diluted weighted average shares outstanding 3,795,261 3,795,261
=======================================================
-------------------------------------------------------
Basic weighted average shares outstanding 3,795,261 3,795,261
=======================================================
See accompanying notes to the unaudited condensed consolidated financial statements
</TABLE>
Page 4
<PAGE>
REFAC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------------------
2000 1999
---------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $2,645,000 $2,755,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 597,000 383,000
Realized gains on sale of licensing-related securities (3,612,000) (4,381,000)
Deferred compensation (24,000) --
Deferred income taxes (395,000) --
(Increase) decrease in assets:
Royalties receivable (106,000) (274,000)
Due from broker (1,313,000) --
Accounts receivable (92,000) (43,000)
Prepaid expenses (134,000) (238,000)
Other assets (58,000) --
Inventory (151,000) (281,000)
Other 70,000 252,000
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (435,000) 11,000
Amounts payable under service agreements 191,000 120,000
Deferred revenue -- (91,000)
Income taxes payable (571,000) 426,000
---------------------------------------
Net cash used in operating activities (3,388,000) (1,361,000)
---------------------------------------
Cash Flows from Investing Activities
Proceeds from sales of investments being held to maturity 1,783,000 1,762,000
Proceeds from sales of licensing-related securities 4,026,000 4,810,000
Purchase of investments being held to maturity (3,485,000) (1,000,000)
Purchase of property and equipment (700,000) (1,700,000)
---------------------------------------
Net cash provided by investing activities 1,624,000 3,872,000
---------------------------------------
Net increase in cash and cash equivalents (1,764,000) 2,511,000
Cash and cash equivalents at beginning of period 5,158,000 2,973,000
---------------------------------------
Cash and cash equivalents at end of period $3,394,000 $5,484,000
=======================================
See accompanying notes to the unaudited condensed consolidated financial statements
</TABLE>
Page 5
<PAGE>
REFAC
NOTES TO CONDENSED COSOLIDATED 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, 2000 and December
31, 1999, 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, 1999, which is incorporated
herein by reference.
2. The results of operations for the periods presented 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.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Description 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------
Basic shares 3,795,261 3,795,261 3,795,261 3,795,261
-------------------------------------------------------------------------------------------------
Dilution: Stock Options and Warrants 3,133 10,341 - -
-------------------------------------------------------------------------------------------------
Diluted Shares 3,798,394 3,805,602 3,795,261 3,795,261
-------------------------------------------------------------------------------------------------
Income available to common shareholders $2,645,000 $2,755,000 $ 819,000 $ 883,000
-------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.70 $ 0.73 $ 0.22 $ 0.23
-------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.70 $ 0.72 $ 0.22 $ 0.23
--------------------------------------------------------------------------------------------------
</TABLE>
4. During the nine months ended September 30, 1999, the Company operated
principally in two industry segments - - - "Licensing of Intellectual Property
Rights" and "Creative Consulting Services". In September 1999, the Company
formed Refac Consumer Products, Inc. for the purchase and manufacture of
consumer products and now operates in three industry segments.
The accounting policies used to develop segment information correspond
to those described in the summary of significant accounting policies (See Note 1
of the 1999 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. As of September 30, 2000, the Company has allocated dividend
and interest income to each segment. The prior period presentations have been
reclassified to conform to the
Page 6
<PAGE>
REFAC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
current period presentation.
The following information about the business segments is for the nine
month period ended September 30, 2000.
<TABLE>
<CAPTION>
Manufacture
Licensing of Creative and Marketing
Intellectual Consulting of Consumer
Description Property Rights Services Products Total
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 7,010,000 $ 5,180,000 $ 751,000 $12,941,000
---------------------------------------------------------------------------------------------------
Segment profit (loss), before taxes $ 5,095,000 ($271,000) ($1,017,000) $ 3,807,000
---------------------------------------------------------------------------------------------------
Segment assets $14,392,000 $10,147,000 $ 1,327,000 $25,866,000
---------------------------------------------------------------------------------------------------
</TABLE>
The following information about the business segments is for the nine
month period ended September 30, 1999.
<TABLE>
<CAPTION>
Manufacture
Licensing of Creative and Marketing
Intellectual Consulting of Consumer
Description Property Rights Services Products Total
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 7,701,000 $2,293,000 $ 54,000 $10,048,000
--------------------------------------------------------------------------------------------------
Segment profit (loss), before taxes $ 4,932,000 ($859,000) ($30,000) $ 4,043,000
--------------------------------------------------------------------------------------------------
Segment assets $20,235,000 $7,434,000 775,000 $28,444,000
--------------------------------------------------------------------------------------------------
</TABLE>
The following information about the business segments are for the three
month period ended September 30, 2000.
<TABLE>
<CAPTION>
Manufacture
Licensing of Creative and Marketing
Intellectual Consulting of Consumer
Description Property Rights Services Products Total
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $2,326,000 $1,403,000 $ 7,000 $3,736,000
--------------------------------------------------------------------------------------------------
Segment profit (loss), before taxes $2,044,000 ($491,000) ($470,000) $1,083,000
--------------------------------------------------------------------------------------------------
</TABLE>
The following information about the business segments are for the three
month period ended September 30, 1999.
Page 7
<PAGE>
REFAC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Manufacture
Licensing of Creative and Marketing
Intellectual Consulting of Consumer
Description Property Rights Services Products* Total
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $2,500,000 $843,000 $19,000 $3,362,000
--------------------------------------------------------------------------------------------------
Segment profit (loss), before taxes $1,562,000 ($235,000) ($31,000) $1,296,000
--------------------------------------------------------------------------------------------------
</TABLE>
* Segment commenced in September 1999.
5. 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 months ended September 30, 2000 are as follows:
<TABLE>
<CAPTION>
Description 2000
--------------------------------------------------------------------------------
<S> <C>
Net income $ 2,645,000
--------------------------------------------------------------------------------
Less: Comprehensive losses, net of tax
--------------------------------------------------------------------------------
Unrealized holding gains arising during the period on licensing-
related securities 260,000
--------------------------------------------------------------------------------
Reclassification adjustment for gain included currently in net
income ($2,497,000)
--------------------------------------------------------------------------------
Comprehensive income $ 408,000
--------------------------------------------------------------------------------
</TABLE>
The components of accumulated other comprehensive income, net of related
tax, at September 30, 2000, consist of unrealized gains on licensing-related
securities, net of tax, and amounted to $1,975,000.
6. At September 30, 2000, the Company had open letters of credit to
purchase goods for $35,000.
7. On December 31, 1995, an action was commenced in the United States
District Court for the Eastern District of New Jersey against the Company by the
executrix of the estate of a former officer of the Company for compensation
allegedly due the deceased officer under an employment arrangement. The time
within which the claimant had to file a Notice of Appeal with respect to the
Page 8
<PAGE>
REFAC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
summary judgment granted in favor of the Company expired during the quarter.
On December 20, 1999, a claim was brought against the Company, as a
nominal defendant, and certain of its directors in the Supreme Court of the
State of New York, New York County, by a shareholder alleging claims against the
Company and certain members of the Company's Board of Directors for breach of
fiduciary duty and waste arising out of a Stock Repurchase Agreement and a
Retirement Agreement entered into between the Company and its then Chairman and
Chief Executive Officer, Eugene Lang. On February 29, 2000, the Company,
together with all other defendants, filed a motion to dismiss the Complaint in
its entirety on the grounds that plaintiff's claims are time barred by the
statute of limitations and that the Complaint fails to state a claim upon which
relief may be granted. The defendants' motion to dismiss has been fully briefed
and the parties are awaiting a decision on the motion or instructions from the
court regarding oral argument. The Company believes that the claims against the
Company and its directors are without merit.
8. Certain prior period amounts have been reclassified to conform to
the current period presentation.
9. Inventories are stated at the lower of cost or market; cost is
determined using the first-in, first out method. Inventory consists of finished
goods for $140,000 and raw materials for $11,000.
10. Effect of Recently Issued Accounting Pronouncements. Accounting for
Derivative Instruments and Hedging Activities. In September 1998, the FASB
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which requires all entities to recognize all derivative instruments
on their balance sheet as either assets or liabilities measured at fair value.
SFAS No. 133 also specifies new methods of accounting for hedging transactions,
prescribes the items and transactions that my be hedged, and specifies detailed
criteria to be met to qualify for hedge accounting. SFAS No. 133, as amended by
SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. This
standard is not expected to have a material effect on the Company's financial
statements.
Page 9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
REVENUES for the nine months ended September 30, 2000 were $12,941,000 as
compared to $10,048,000 for the comparable period in 1999. The increase of
$2,893,000, or 29%, is principally due to increases in revenues from creative
consulting services ($2,997,000), sales of consumer products ($717,000) and
dividend and interest income ($84,000), offset by a decrease of $13,000 in
licensing-related activities and by a decrease of $892,000 in gains on the sale
of licensing-related securities and dividends.
Revenues for the three months ended September 30, 2000 were $3,736,000
as compared to $3,362,000 for the comparable period in 1999. The increase of
$374,000, or 11%, is principally due to increases in revenues from creative
consulting services ($722,000), sales of consumer products ($5,000) and dividend
and interest income ($11,000) offset by a decrease in licensing-related
activities $124,000, and by a decrease of $240,000 in gains on the sale of
licensing-related securities and dividends.
Revenues for the nine and three months are summarized as follows:
<TABLE>
<CAPTION>
For the Nine For the Three
Months Ended Months Ended
September 30, September30,
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Description 2000 1999 2000 1999
-----------------------------------------------------------------------------------
Revenues from licensing-related activities 23% 30% 24% 31%
-----------------------------------------------------------------------------------
Creative consulting services 39% 21% 40% 23%
-----------------------------------------------------------------------------------
Consumer product sales (commenced in September, 1999) 6% 0% 1% 1%
-----------------------------------------------------------------------------------
Realized gains on sales and dividends from licensing-
related securities 29% 47% 32% 42%
-----------------------------------------------------------------------------------
Dividends and interest 3% 2% 3% 3%
-----------------------------------------------------------------------------------
Total 100% 100% 100% 100%
-----------------------------------------------------------------------------------
</TABLE>
Licensing of Intellectual Property Rights
-----------------------------------------
Revenues from Licensing-Related Activities consist of recurring royalty
payments for the use of licensed patents and trademarks, non-recurring, lump sum
license payments, agency fees and service fees. Recurring patent licensing
income and trademark agency fees increased $416,000, or 18%, for the nine months
ended September 30, 2000 as compared to the same period of 1999. The
Page 10
<PAGE>
REFAC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
increase of recurring patent licensing income and trademark agency fees for the
nine months ended September 30, 2000 is attributable to the increase in (i)
trademark agency fees of $218,000 and (ii) patent licensing income of $236,000
offset by (iii) a decrease in patent enforcement fees of $38,000. 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. Non-recurring
license fees decreased by $414,000 for the nine months ended September 30, 2000
as compared to the same period of 1999.
Recurring patent licensing income and trademark agency fees increased
$62,000 for the three months ended September 30, 2000 as compared to the same
period of 1999. The increase of recurring patent licensing income and trademark
agency fees for the three months ended September 30, 2000 is attributable to the
increase (i) in patent licensing income of $53,000 and (ii) in patent
enforcement fees of $15,000 offset by a decrease in (i) trademark agency fees of
$6,000. 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. Non-recurring license fees decreased by $318,000 for the
three months ended September 30, 2000 as compared as compared to the same period
of 1999.
Expenses from Licensing-Related Activities consist principally of
amounts paid to licensors at contractually stipulated percentages of the
Company's specific licensing revenues and, in addition, includes expenses
related to the investigation, marketing, administration, enforcement,
maintenance and prosecution of patents, trademarks and license rights.
Licensing-related expenses decreased by $532,000 for the nine months ended
September 30, 2000, as compared to the same period of 1999. As a percentage of
licensing revenues, these expenses were 35% and 53% for the nine months ended
September 30, 2000 and 1999, respectively. The decrease is principally due to a
recoupment of expenses associated with one of the Company's patent licensing
projects and an increase in the percentage of agency fees earned which are
recorded net of expenses.
Licensing-related expenses decreased $261,000 for the three months
ended September 30, 2000, as compared to the same period of 1999. As a
percentage of licensing revenues, these expenses were 27% and 49% for the three
months ended September 30, 2000 and 1999, respectively. The decrease is
principally due to a recoupment of expenses associated with one of the Company's
patent licensing projects and an increase in the percentage of agency fees
earned which are recorded net of expenses.
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, 2000, licensing-related
securities consisted of 125,000 shares of KeyCorp common stock. The Company
intends to sell an additional 50,000 of such shares during the remaining three
months of 2000, and as of September 30, 2000, held two successive quarterly put
options (at $27.4262 per share) and had sold two successive quarterly call
options (at prices ranging from $38.7015 to
Page 11
<PAGE>
REFAC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
$39.3720 per share), each of which covers 50,000 shares.
Creative Consulting Services
----------------------------
Creative Consulting Fees consist of product development and graphic
design services. Total creative consulting fees increased by $2,997,000 for the
nine months ended September 30, 2000 versus the comparable period in 1999. This
increase includes $2,181,000 in graphic design fees billed by Refac David Morris
Creative, which the Company acquired in November 1999.
Total creative consulting fees increased by $722,000 for the three
months ended September 30, 2000 versus the comparable period in 1999. This
increase includes $761,000 in graphic design fees billed by Refac David Morris
Creative, which the Company acquired in November 1999.
Industrial design and engineering consulting services are provided by
Refac Human Factors-ID, a division of the Company's wholly-owned subsidiary,
Refac International, Ltd. ("RIL") which the Company acquired in November 1997,
and graphic design consulting services are provided by Refac David Morris
Creative, another division of RIL, which the Company acquired in November 1999.
By the end of the year, the Company plans to consolidate the operations of these
divisions and offer its creative services under the name RefacDesign.
In addition to its traditional fee-for-service consulting, RefacDesign
seeks opportunities, in appropriate situations, to share in the cost and risk of
brand and product development in return for future royalties or venture equity.
This is the basis upon which it is providing product development and graphic
design services to its affiliate, Refac Consumer Products, Inc. ("RCP"). See
"Manufacturing and Marketing of Consumer Products" below. Accordingly, while
incurring the current expense of providing such services, RefacDesign will not
derive any inter-company royalty revenues until RCP has sales from products
covered by this arrangement. RIL is the owner of all of the intellectual
property rights relating to the RCP product line that are not licensed from
third parties.
Expenses increased by $1,337,000 for the nine month period ended
September 30, 2000, as compared to 1999. This increase is principally due to
the inclusion of the expenses incurred by Refac David Morris Creative, which was
acquired in November 1999. As a percentage of creative consulting fees, the
cost of providing such services were 61% and 84% for the nine months ended
September 30, 2000 and 1999, respectively.
Expenses increased by $283,000 for the three month period ended
September 30, 2000, as compared to 1999. This increase is principally due to
the inclusion of the expenses incurred by Refac David Morris Creative, which was
acquired in November 1999. As a percentage of creative consulting fees, the
cost of providing such services were 56% and 72% for the nine months ended
September 30, 2000 and 1999, respectively.
Page 12
<PAGE>
REFAC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Manufacturing and Marketing of Consumer Products
-------------------------------------------------
The Company formed RCP in September 1999. Sales of $736,000 during
the nine months ended September 30, 2000 principally consist of sales of
imported consumer electronics sourced by RCP for a retailer. RCP introduced its
proprietary product line at the 2000 International Consumer Electronics Show in
Las Vegas, Nevada. Due to delays that the Company has experienced in
manufacturing these products, it expects only nominal sales in 2000.
RCP incurred losses of $547,000 during the six month period ended June
30, 2000 and $470,000 during the three months ended September 30, 2000. The
increase in the rate of loss for the quarter ended September 30, 2000 was
principally caused by the fact that RCP did not have any sales in the period to
the retailer mentioned above and a loss which it incurred when a factory failed
to deliver tooling and components for which it had advanced monies.
Additionally, RCP is continuing to invest its resources in developing 10 new
MTV: Music Television/TM/ products to be brought to market during 2001.
As mentioned above under "Creative Consulting Services", all of RCP's
industrial design, engineering and graphic design services are provided for by
RefacDesign, without current charge, in exchange for future royalties based upon
RCP's sales. Accordingly, RCP has no current costs for these services, but
will incur future royalty expense based on actual product sales which utilize
the creative work of RefacDesign.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased by $1,843,000
in the nine month period ended September 30, 2000 as compared to the previous
year. The increase is principally attributable to RCP ($602,000), Refac David
Morris Creative ($174,000), salaries ($584,000), rent ($345,000) and
professional fees ($138,000).
INCOME TAX PROVISION. The Company's income tax provision of $1,162,000
for the nine months ended September 30, 2000 reflects an effective tax rate of
34% (the Federal statutory corporate income tax rate), reduced by the statutory
dividends received exclusion to arrive at a net effective tax rate of 31%. The
net effective tax rate for the nine months ended September 30, 1999 was 32%.
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.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash, cash equivalents, corporate bonds and U.S. Treasury Notes
decreased $62,000 from $8,489,000 at December 31, 1999 to $8,427,000 at
September 30, 2000. The Company believes its liquidity position is adequate to
meet all current and projected financial needs.
Page 13
<PAGE>
As of September 30, 2000, the Company had open letters of credit to
purchase goods for $35,000.
The Company has commitments under leases covering its facilities and
under a Retirement Agreement with its founder and former Chief Executive Officer
(which has been provided for in the financial statements).
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 the "forward-looking statements" contained herein be subject to the above-
mentioned statutory safe harbors. Since these statements involve risk 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 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
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<PAGE>
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 14, 2000 /s/ Robert L. Tuchman
---------------------------------
Robert L. Tuchman, President and
Chief Executive Officer
November 14, 2000 /s/ Raymond A. Cardonne, Jr.
---------------------------------
Raymond A. Cardonne, Jr., CFO
(Principal Financial Officer)
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<PAGE>
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, 1999 is incorporated herein by
reference.
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