<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, 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 May 1, 2000 was 3,795,261.
<PAGE>
REFAC
INDEX
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Page
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Part I. Financial Information
Condensed Consolidated Balance Sheets
March 31, 2000 (unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-8
Management's Discussion and Analysis of Financial
Conditions and Results of Operations 9-12
Part II. Other Information 13-14
Page 2
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CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------------- --------------------
(UNAUDITED)
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $5,124,000 $5,158,000
Royalties receivable 1,038,000 1,153,000
Accounts receivable, net 1,906,000 1,425,000
Prepaid expenses 623,000 521,000
------------------- --------------------
Total current assets 8,691,000 8,257,000
------------------- --------------------
Property and equipment, net 2,573,000 2,232,000
Licensing-related securities 5,556,000 7,145,000
Investments being held to maturity 3,725,000 3,331,000
Other assets 636,000 583,000
Goodwill, net 6,245,000 6,299,000
------------------- --------------------
$27,426,000 $27,847,000
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $758,000 $674,000
Accrued expenses 408,000 439,000
Amounts payable under service agreements 623,000 417,000
Income taxes payable 698,000 716,000
------------------- --------------------
Total current liabilities 2,487,000 2,246,000
------------------- --------------------
Deferred income taxes 1,741,000 2,365,000
Other liabilities-deferred compensation 445,000 445,000
Stockholders' Equity
Common stock, $.10 par value 545,000 545,000
Additional paid-in capital 9,984,000 9,984,000
Retained earnings 23,218,000 22,299,000
Accumulated other comprehensive income 3,255,000 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 22,753,000 22,791,000
------------------- --------------------
$27,426,000 $27,847,000
=================== ====================
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
Page 3
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CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------------------------
2000 1999
-------------------------------------
Revenues
<S> <C> <C>
Licensing-related activities $1,062,000 $965,000
Creative services fees 1,850,000 782,000
Consumer product sales 707,000 -
Realized gains on licensing-related securities 1,233,000 1,456,000
Dividend income from licensing-related securities 77,000 122,000
Dividend and interest income 134,000 93,000
-------------------------------------
Total Revenues 5,063,000 3,418,000
-------------------------------------
Costs and Expenses
Licensing-related activities 433,000 523,000
Creative service expenses 1,196,000 664,000
Consumer product sales costs 474,000 -
Selling, general and administrative expenses 1,594,000 737,000
-------------------------------------
Total costs and expenses 3,697,000 1,924,000
-------------------------------------
Income before provision for taxes on income 1,366,000 1,494,000
Provision for taxes on income 447,000 486,000
-------------------------------------
Net income $919,000 $1,008,000
=====================================
-------------------------------------
Diluted earnings per share $0.24 $0.26
=====================================
Basic earnings per share $0.24 $0.27
=====================================
-------------------------------------
Diluted weighted average shares outstanding 3,804,661 3,819,005
=====================================
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
Page 4
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------------------------------
2000 1999
------------------- -------------------
Cash Flows from Operating Activities
<S> <C> <C>
Net income $919,000 $1,008,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 182,000 59,000
Realized gains on sale of licensing-related securities (1,233,000) (1,456,000)
Deferred income taxes (130,000) (47,000)
Other 3,000 (111,000)
(Increase) decrease in assets:
Royalties receivable 115,000 (5,000)
Accounts receivable (481,000) 279,000
Prepaid expenses (102,000) 48,000
Other assets (53,000) (50,000)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 53,000 (183,000)
Amounts payable under service agreements 206,000 (73,000)
Income taxes payable (18,000) (72,000)
------------------- -------------------
Net cash used in operating activities (539,000) (603,000)
------------------- -------------------
Cash Flows from Investing Activities
Proceeds from sales of licensing-related securities 1,371,000 1,594,000
Purchase of investments being held to maturity (394,000) (313,000)
Additions to property and equipment (472,000) (48,000)
------------------- -------------------
Net cash provided by investing activities 505,000 1,233,000
------------------- -------------------
Net (decrease) increase in cash and cash equivalents (34,000) 630,000
Cash and cash equivalents at beginning of period 5,158,000 2,973,000
------------------- -------------------
Cash and cash equivalents at end of period $5,124,000 $3,603,000
=================== ===================
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
Page 5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (all of which were
normal recurring adjustments) necessary to present fairly the consolidated
financial position of Refac (the "Company") at March 31, 2000 and December 31,
1999, 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, 1999, which is incorporated herein
by reference.
2. The results of operations for the three months ended March 31, 2000 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."
Three Months Ended
March 31,
- -----------------------------------------------------------------
Description 2000 1999
- -----------------------------------------------------------------
Basic shares 3,795,261 3,795,261
- -----------------------------------------------------------------
Dilution: stock options and warrants 9,400 23,744
- -----------------------------------------------------------------
Diluted shares 3,804,661 3,819,005
- -----------------------------------------------------------------
Income available to common shareholders $ 919,000 $1,008,000
- -----------------------------------------------------------------
Basic earnings per share $ 0.24 $ 0.27
- -----------------------------------------------------------------
Diluted earnings per share $ 0.24 $ 0.26
- -----------------------------------------------------------------
4. During the three months ended March 31, 1999, the Company operated
principally in two industry segments - - - "Licensing of Intellectual Property
Rights" and "Product Design and Development". On September 10, 1999, the
Company's Consumer Products commenced operations, thus for the three months
ended March 31, 2000 the Company operated 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. The following information about the business segments are
for the three month period ended March 31, 2000.
Page 6
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REFAC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Licensing of Manufacture
Intellectual Creative and Marketing
Property Consulting of Consumer
Description Rights Services Products Other Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 2,372,000 $ 1,850,000 $ 707,000 $134,000 $ 5,063,000
- ------------------------------------------------------------------------------------------------------------
Segment profit (loss) 999,000 (108,000) (106,000) 134,000 919,000
- ------------------------------------------------------------------------------------------------------------
Segment assets 16,349,000 10,135,000 942,000 -- 27,426,000
- ------------------------------------------------------------------------------------------------------------
Expenditure for segment assets $ 250,000 $ 211,000 $ 11,000 -- $ 472,000
- ------------------------------------------------------------------------------------------------------------
</TABLE>
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
three month periods ended March 31, 2000 and 1999 are as follows:
Description 2000 1999
- ---------------------------------------------------------------------------
Net income $ 919,000 $ 1,008,000
- ---------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
- ---------------------------------------------------------------------------
Unrealized gains (losses) on licensing-related (957,000) (1,142,000)
securities
- ---------------------------------------------------------------------------
Comprehensive income (loss) ($38,000) ($134,000)
- ---------------------------------------------------------------------------
The components of accumulated other comprehensive income, net of related
tax, at March 31, 2000 and December 31, 1999 consist of unrealized gains on
licensing-related securities, net of tax and amounted to $3,255,000 and
$4,212,000 respectively.
6. On April 12, 2000, the Company had open letters of credit to purchase
goods for $800,000.
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
Page 7
<PAGE>
REFAC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
of the Company for compensation allegedly due the deceased officer under an
employment arrangement. The Company believes that the claim is without any
merit.
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 Company believes that the claims against the Company and its directors are
without merit.
8. Certain 1999 items have been reclassified to conform with 2000
presentations.
Page 8
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REFAC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
REVENUES for the three months ended March 31, 2000 were $5,063,000 as
compared to $3,418,000 for the comparable period in 1999. The increase of
$1,645,000, or 48%, is principally due to increases in revenues from creative
consulting services ($1,068,000), licensing-related activities ($97,000), sales
of consumer products ($707,000) and dividend and interest income ($41,000)
offset by a decrease of $268,000 in gains on the sale of licensing-related
securities and dividends.
Revenues are summarized as follows:
Description 2000 1999
- -----------------------------------------------------------------------
Revenues from licensing-related activities 21% 28%
- -----------------------------------------------------------------------
Realized gains on sales and dividends from licensing- 26% 46%
related securities
- -----------------------------------------------------------------------
Creative consulting services 37% 23%
- -----------------------------------------------------------------------
Consumer product sales (acquired in September, 1999) 14% 0%
- -----------------------------------------------------------------------
Dividends and interest 2% 3%
- -----------------------------------------------------------------------
Total 100% 100%
- -----------------------------------------------------------------------
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 revenues from
established relationships increased by $183,000 in 2000 as compared to 1999.
The patent licensing income component of the 2000 recurring revenue increased
by $183,000 and is attributable to the increase in (i) trademark agency fees of
$181,000 and (ii) patent licensing income of $56,000 offset by (iii) a decrease
in patent enforcement fees of $54,000. 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 $97,000 as compared to the same period of 1999. Service income
from royalty verifications increased by $11,000 from 2000 to 1999.
Expenses from Licensing-Related Activities consist principally of amounts
paid to licensors at contractually stipulated percentages of the Company's
specific patent and product
Page 9
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REFAC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
revenues and, in addition, includes expenses related to the investigation,
marketing, administration, enforcement, maintenance and prosecution of patent,
trademarks and license rights and related licenses. Licensing-related expenses
decreased by $90,000 for the three months ended March 31, 2000. As a percentage
of licensing revenues, these expenses were 41% and 54% in 2000 and 1999,
respectively. The decrease in 2000 over 1999 is principally due to a recoupment
of expenses associated with one of the Company's patent licensing projects.
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, 2000, licensing-related securities
consisted of 225,000 shares of KeyCorp common stock. The Company intends to sell
an additional 150,000 of such shares during the remaining nine months of 2000,
and as of March 31, 2000, held three successive quarterly put options (at
$27.4262 per share) and had sold three successive quarterly call options (at
prices ranging from $38.0920 to $39.3720 per share), each of which covers 50,000
shares.
Creative Consulting Services
Creative Consulting Services consist of product development and graphic
design services provided by the Product Development Group (which operates under
the name Refac HumanFactors-ID and was acquired by the Company in November,
1997) and the Graphics Design Group (which operates under the name Refac David
Morris Creative and was acquired in November, 1999). Total creative consulting
fees increased by $1,068,000 for the three months ended March 31, 2000 versus
the comparable period in 1999, which includes an increase of $458,000 in Product
Development and the inclusion of $610,000 in Graphic Design services.
Expenses increased by $532,000 in the three month period ended March 31,
2000 as compared to 1999, which consists of an increase of $457,000 from the
Graphics Design Group and an increase in expenses of $75,000 incurred by the
Product Development Group.
Marketing of Consumer Products
In September, 1999 the Company acquired Funatik Inc. and merged it into
the newly formed Refac Consumer Products, Inc. ("RCP"). Sales of $707,000 during
the three months ended March 31, 2000 principally consist of sales of imported
consumer electronics sourced by RCP for a retailer. RCP introduced its
proprietary product line in January at the 2000 International Consumer
Electronics Show in Las Vegas, Nevada and expects that this line will contribute
to revenues during the second half of 2000.
Selling, General and Administrative Expenses increased by $857,000 in the
three month period ended March 31, 2000 as compared to the previous year. The
increase is principally
Page 10
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REFAC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
attributable to the acquisition of Funatik and the formation of RCP ($432,000),
the acquisition of the Graphic Design Group ($141,000), salaries ($72,000), rent
($94,000) and professional fees ($74,000).
Goodwill relates to the excess of the purchase price paid over the fair
market value of the tangible assets acquired in the Company's acquisitions of
the Product Development Group, Graphic Design Group and Funatik, Inc. Such
goodwill is being amortized over 25, 20 and 10 years, respectively, which is the
expected period of benefit.
Income Tax Provision. The Company's income tax provision of $447,000 for
the three months ended March 31, 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 the net effective tax rate of 33%. The net
effective tax rate for 1999 was also 33%.
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 increased
$360,000 from $8,489,000 at December 31, 1999 to $8,849,000 at March 31, 2000.
The Company believes its liquidity position is adequate to meet all current and
projected financial needs.
On April 12, 2000, the Company had open letters of credit to purchase goods
for $800,000.
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).
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. The Company
has not encountered any complications with the year 2000 issues. This is a Year
2000 readiness disclosure entitled to a protection as provided in the Year 2000
Information and Readiness Disclosure Act.
Page 11
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 12
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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
May 12, 2000 /s/ Robert L. Tuchman
-----------------------------------
Robert L. Tuchman, President and
Chief Executive Officer
May 12, 2000 /s/ David Capodanno
-----------------------------------
David Capodanno, Controller
(Principal Financial Officer)
Page 13
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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, 1999 is incorporated herein by
reference.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
2000 FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,124,000
<SECURITIES> 5,556,000
<RECEIVABLES> 1,906,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,691,000
<PP&E> 3,483,000
<DEPRECIATION> 910,000
<TOTAL-ASSETS> 27,426,000
<CURRENT-LIABILITIES> 2,487,000
<BONDS> 0
0
0
<COMMON> 545,000
<OTHER-SE> 22,208,000
<TOTAL-LIABILITY-AND-EQUITY> 27,426,000
<SALES> 5,063,000
<TOTAL-REVENUES> 5,063,000
<CGS> 0
<TOTAL-COSTS> 3,697,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,366,000
<INCOME-TAX> 447,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 919,000
<EPS-BASIC> .24
<EPS-DILUTED> .24
</TABLE>
