Refac Q3 2004 10-Q

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 o

PART I. FINANCIAL INFORMATION	1

Item 1. Financial Statements	1

Balance Sheets
September 30, 2004 (unaudited) and December 31, 2003	1

Statements of Operations
Three and Nine Months Ended September 30, 2004 and 2003 (unaudited)	2

Condensed Statements of Cash Flows
Nine Months Ended September 30, 2004 and 2003 (unaudited)	3

Notes to Condensed Financial Statements (unaudited)	4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3. Quantitative and Qualitative Disclosures About Market Risk	20

Item 4. Controls and Procedures	20

PART II. OTHER INFORMATION	21

Item 6. Exhibits	21

REFAC BALANCE SHEETS (Amounts in thousands, except share and per share data)
	September 30, 2004			December 31, 2003
	(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents	$	15,276		$	799
Royalties and accounts receivable		479			478
Notes receivable - current portion		63			302
Investments being held to maturity		14,173			28,682
Income taxes receivable		602			636
Prepaid expenses and other current assets		735			899
Restricted investments being held to maturity		4,732			-
Total current assets		36,060			31,796

Property and equipment - net		792			777
Available for sale securities		1,000			1,000
Notes receivable		157			205
Deferred incentive compensation		-			34
Deferred income taxes and other assets		452			468
Restricted investments being held to maturity		-			4,743
Total Assets	$	38,461		$	39,023

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	523		$	693
Deferred revenue		70			145
Deferred incentive compensation		1,046			400
Other liabilities		89			198
Total current liabilities		1,728			1,436
Deferred incentive compensation		-			946
Commitments and Contingencies
Temporary Equity		4,732			4,743
Stockholders’ Equity
Common stock, $.001 par value; authorized 20,000,000 shares; issued 7,006,049 as of December 31, 2003 and 7,016,049 as of September 30, 2004		7			7
Additional paid-in capital		22,921			22,742
Retained earnings		9,597			9,673
Treasury stock, at cost, 22,656 shares of common stock, $.001 par value in 2003 and 2004		(159	)		(159	)
Receivable from issuance of common stock		(365	)		(365	)
Total stockholders’ equity		32,001			31,898
Total Liabilities and Stockholders’ Equity	$	38,461		$	39,023

REFAC STATEMENTS OF OPERATIONS (Amounts in thousands, except share and per share data) (UNAUDITED)
	THREE MONTHS					NINE MONTHS
	ENDED SEPTEMBER 30,					ENDED SEPTEMBER 30,
	2004		2003			2004			2003
Revenues
Licensing-related activities	$	469	$	346		$	1,268			1,340
Related party consulting services		50		-			145			-
Total revenues		519		346			1,413			1,340

Costs and Expenses
Licensing-related activities		31		30			92			87
General and administrative expenses		409		594			1,760			3,586
Total costs and expenses		440		624			1,852			3,673

Other Income and Expenses
Dividend and interest income		108		102			304			221
Total other income and expenses		108		102			304			221

Income (loss) before provision or benefit for taxes		187		(176	)		(135	)		(2,112	)
Provision (benefit) for taxes on income (loss)		61		(80	)		(48	)		(658	)
Net income (loss) from continuing operations		126		(96	)		(87	)		(1,454	)
Income from discontinued operations - net of taxes		5		4			10			32
Net income (loss)	$	131		($92	)		($77	)		($1,422	)

Basic and diluted income (loss) per share:
From continuing operations	$	0.02		($0.01	)		($0.01	)		($0.28	)
From discontinued operations		0.00		0.00			0.00			0.01
Net income (loss)	$	0.02		($0.01	)		($0.01	)		($0.27	)

Basic weighted average shares outstanding		6,993,393		6,983,393			6,991,678			5,290,402
Diluted weighted average shares outstanding		6,996,963		6,983,393			6,991,678			5,290,402

REFAC
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(UNAUDITED)
	Nine Months Ended September 30,
	2004			2003

Cash Flows from Operating Activities		($321	)	$	2,796

Cash Flows from Investing Activities
Notes receivable		274			147
Proceeds from investments being held to maturity		60,955			(22,124	)
Purchase of investments being held to maturity		(46,434	)		-
Purchase of fixed assets		(141	)		(22	)
Net cash provided by (used in) investing activities		14,654			(21,999	)

Cash Flows from Financing Activities
Stock issuance costs		-			16,869
Appraisal settlement		-			(187	)
Proceeds from exercise of stock options		144			39
Net cash provided by financing activities		144			16,721

Net increase (decrease) in cash and cash equivalents		14,477			(2,482	)

Cash and cash equivalents at beginning of period		799			3,330
Cash and cash equivalents at end of period	$	15,276		$	848

1. The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q for quarterly reports under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three (3) and nine (9) month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report for the year ended December 31, 2003.

2. On January 27, 2004, the Company announced that it will focus its acquisition efforts on opportunities in the asset management sector of the financial services industry. The Company has engaged leading providers of executive search services to identify opportunities in this segment and to recruit individuals and/or teams within the industry to join the Company and build this business (See Note 11). In view of the costs associated with this search, the uncertainty as to when, and if, an acquisition will be made, the completion of the amortization of merger-related management incentive compensation during the first quarter, the Company's relocation to new offices at the end of the second quarter, an anticipated decline in income from the Company’s contract with Patlex Corporation and the settlement with one of its key commercial real estate subtenants (see Note 12D) the results for the nine months ended September 30, 2004 cannot be considered indicative of the results to be expected for the entire year.

3. On March 28, 2003, the Company entered into a stock purchase agreement with its controlling stockholder, Palisade Concentrated Equity Partnership, L.P. (“Palisade”), which closed on May 19, 2003. Pursuant thereto, Palisade acquired an additional 3,469,387 new shares of the Company’s common stock, at a price of $4.90 per share, or an aggregate price of approximately $17,000,000. Following the completion of the stock purchase transaction, Palisade’s ownership increased to approximately 90% of the Company’s outstanding shares. The purpose of the stock purchase transaction was to provide the Company with additional capital for making acquisitions.

4. On March 22, 2002, the Company announced that it was repositioning itself for sale or liquidation. Since that date, the Company has disposed of its operating segments with the exception of its licensing business and it has limited the operations of that segment to managing certain existing license agreements and related contracts. In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” the Creative Consulting Services and Manufacture and Marketing of Consumer Products groups are included in the statement of operations as discontinued operations, net of taxes, as they have been sold pursuant to the Company’s repositioning.

5. The Company’s operations in the licensing of intellectual property rights are not considered held for sale because of the Company’s intent to manage certain outstanding licensing-related agreements through their termination. While the Company’s licensing operations are still considered a continuing business, it has not undertaken any new technology licensing projects during the current or preceding five fiscal years and it is highly unlikely that it will undertake any such projects in the future. The statement of operations reflects the results of the licensing of intellectual property rights in its results of continuing operations.

On August 19, 2002, the Company entered into a merger agreement with Palisade, which provided for the merger (the “Palisade Merger”) of a Palisade subsidiary with the Company. On February 28, 2003, the Company’s shareholders adopted the merger agreement, as amended (the “Palisade Merger Agreement”), and the Palisade Merger was consummated. Under the terms of the Palisade Merger, for each share of the Company’s common stock, par value $.10 per share (“Old Refac Common Stock”), owned immediately prior to the effective time of the merger, stockholders (other than Palisade and stockholders who properly exercised appraisal rights) received or are expected to receive (i) $3.60 in cash, (ii) 0.2 shares of common stock, par value $.001 per share (“Common Stock”), and (iii) the non-transferable right (the “Payment Right”) to sell the shares of the Common Stock to the Company for a price (the “Payment Amount”) which depends upon the Company’s liquid distributable assets (“LDA”) as of June 30, 2005. This right to sell the shares is limited to stockholders who held their shares at the completion of the Palisade Merger and continue to hold their shares until the amount of liquid distributable assets at June 30, 2005 is determined.

The Company has treated the Palisade Merger as a recapitalization for accounting purposes and has adjusted the difference in the par value of the Old Refac Common Stock and the Common Stock from common stock to additional paid-in capital. Pursuant to the Palisade Merger Agreement, the treasury stock owned by the Company at the effective time of the Palisade Merger has been cancelled with a corresponding decrease to the Company’s retained earnings.

As the Payment Right represents a non-transferable right of stockholders to sell to the Company their shares of Common Stock received in the Palisade Merger for cash, the estimated Payment Amount ($7.08 per share as of September 30, 2004) has been reflected on the balance sheet as temporary equity with a similar amount reducing additional paid-in capital. Subsequent changes in the estimated Payment Amount through June 30, 2005, computed on a quarterly basis, will increase or decrease the temporary equity amount with an offsetting decrease or increase in additional paid-in capital.

6. The Company has adopted the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123.” The Statement requires prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company accounts for stock compensation awards under the intrinsic method of Accounting Principles Board Opinion No. 25. Opinion No. 25 requires compensation cost to be recognized based on the excess, if any, between the quoted market price of the stock at the date of grant and the amount an employee must pay to acquire the stock. All options awarded under all of the Company’s plans are granted with an exercise price at least equal to the fair market value on the date of the grant. The following table presents the effect on the Company’s net earnings and earnings per share for the three and nine month periods ended September 30, 2004 and 2003 had it adopted the fair value method of accounting for stock-based compensation under SFAS No. 123, “Accounting for Stock-Based Compensation.”

	Three Months Ended September 30,						Nine Months Ended September 30,
Description	2004			2003			2004			2003
Net income (loss), as reported	$	131,000			($92,000	)		($77,000	)		($1,422,000	)
Add: Additional compensation expense for modification of non-employee director stock options		-			-			-			48,000
Less: Total stock-based employee compensation expense determined under fair value based on methods for awards granted, modified, or settled, net of related tax effect		(19,000	)		(20,000	)		(86,000	)		(113,000	)

Proforma net income (loss)		112,000			($112,000	)		(163,000	)		($1,487,000	)
Income (loss) per share, as reported
Basic	$	0.02			($0.01	)		($0.01	)		($0.27	)
Diluted	$	0.02			($0.01	)		($0.01	)		($0.27	)
Proforma income (loss) per share
Basic	$	0.02			($0.02	)		($0.02	)		($0.28	)
Diluted	$	0.02			($0.02	)		($0.02	)		($0.28	)

	Three Months Ended September 30,					Nine Months Ended September 30,
Description	2004		2003			2004			2003
Basic shares		6,993,393		6,983,393			6,991,678			5,290,402
Dilution: stock options and warrants		3,570		-			-			-
Diluted shares		6,996,963		6,983,393			6,991,678			5,290,402
Income (loss) from continuing operations	$	126,000		($96,000	)		($87,000	)		($1,454,000	)
Basic income (loss)	$	0.02		($0.01	)		($0.01	)		($0.27	)
Diluted income (loss)	$	0.02		($0.01	)		($0.01	)		($0.27	)

There are approximately 4,212 options excluded from the earnings per share computation for the nine month period ended September 30, 2004 since their effect would be anti-dilutive. There were approximately 5,617 and 9,051 options excluded from the earnings per share computation for the three and nine month periods ended September 30, 2003, respectively, since their effect would be anti-dilutive.

Palisade Capital Management, L.L.C. (“PCM”), the investment manager for Palisade, on behalf of itself and/or portfolio companies of funds that it manages, requests, from time to time, that the Company provide certain consulting services. In consideration for these services, PCM pays the Company a basic monthly retainer of $5,000 subject to quarterly adjustment, by mutual agreement, at the end of each calendar quarter to reflect the services rendered during such quarter. Either party has the right to terminate this agreement at any time without any prior notice. Under this arrangement, the Company has earned $25,000 and $65,000 with respect to services rendered during the three and nine month periods ended September 30, 2004, respectively.

As of February 2004, the Corporation has agreed to provide consulting services directly to Neurologix, Inc., a public company in which PCM beneficially owns approximately 30% of the outstanding capital stock, at a basic monthly retainer of $5,000 subject to quarterly adjustment, by mutual agreement, at the end of each calendar quarter to reflect the services rendered during such quarter. Either party has the right to terminate this agreement at any time without any prior notice. Under this arrangement, the Company has earned $25,000 and $80,000 with respect to services rendered during the three and nine month periods ended September 30, 2004, respectively.

The Company is party to an employment contract with its President and Chief Executive Officer, which became effective upon the completion of the Palisade Merger, and, as amended and restated, has a term ending on March 31, 2005. During the term, the officer is entitled to an annual base salary of $300,000. Upon completion of the Palisade Merger, the officer received a signing bonus of $800,000 and is entitled to retention payments totaling $500,000 payable in fifteen (15) equal consecutive monthly installments of $33,000 each commencing on January 1, 2004. In addition, he is entitled to incentive compensation equal to an aggregate of 16% of “GLDA.” “GLDA” is defined in the employment agreement as the sum of the following:

·	the liquid distributable assets of the Company as of June 30, 2005, as calculated under the Palisade Merger Agreement, plus

·	the signing bonus, retention and incentive compensation payments paid or payable to him and the signing bonus and incentive compensation payments paid or payable to the Company’s Vice President as a result of the Palisade Merger, less

·	$17,844,000.

In 1996, the officer exercised options previously granted under the Company’s 1990 Stock Option Plan to purchase 100,000 shares of Old Refac Common Stock. In connection with such exercise, the Company provided the officer with a loan of $375,000 (which was reduced to $365,000 after the officer paid back $10,000). The note, as modified in March 2002, bears interest at the rate of 6% per annum and is payable in ten (10) equal annual installments commencing on December 31, 2004.

The Company is also party to an employment contract with its Vice President and Chief Financial Officer. As amended and restated, the officer’s current employment agreement became effective upon the completion of the Palisade Merger, and has a term ending on March 31, 2005. During the term, the officer is entitled to an annual base salary of $175,000. Upon completion of the Palisade Merger, the officer received a signing bonus of $314,000. In addition, he is entitled to the payment of incentive compensation equal to an aggregate of 4% of “GLDA.” “GLDA” is determined in the same manner as under the President and Chief Executive Officer’s employment agreement.

As a result of such amendments to the employment agreements, these officers received signing bonuses aggregating $1,114,000 on February 28, 2003. Additionally, as of December 31, 2003, the Company estimated that the management incentive compensation payable could aggregate $846,000. A deferred asset which was originally recorded in an amount equal to the estimated incentive compensation payable (subject to quarterly adjustment) has been amortized over the thirteen month period ending March 31, 2004. An amendment to the President and Chief Executive Officer’s agreement in November 2003 extended the term from March 31, 2004 to March 31, 2005 and recast the payment schedule for the retention bonuses. Such retention payments aggregating $500,000 which had been scheduled to be paid prior to March 31, 2004 are now payable in fifteen (15) equal consecutive monthly installments of $33,000 commencing January 1, 2004. As of October 31, 2003, the Company’s financial statements reflected an unamortized balance for such retention bonuses of $192,000. Commencing November 2003, this balance is being amortized over the extended employment agreement term at a monthly amortization of $11,000.

During 2003, the Company received federal income tax refunds of $4,254,000 resulting from carrying back a net capital loss incurred in 2002 with respect to its sale of Refac International, Ltd. (“RIL”) and its 2002 net operating loss. Even though the Company has received these tax refund payments, it remains subject to Internal Revenue Service (“IRS”) audit with respect thereto and, should there be an assessment for any amounts determined to have been erroneously refunded, interest would be payable on the amount assessed. Currently, in accordance with a requirement to examine refund claims over $2,000,000, IRS is reviewing the Company’s tax refunds. While IRS has advised the Company that its review does not constitute an audit, it can change the scope of its review at any time and can initiate an examination of all open tax years. In connection with the pending review and the outcome of any audit that IRS may initiate, the Company has established a reserve of approximately $275,000 as of September 30, 2004. While the Company believes that this reserve is adequate, since IRS has not completed its review and the statute of limitations has not passed, no assurances can be given as to the sufficiency of this reserve.

For the nine months ending September 30, 2004, the Company had a loss before taxes from continuing operations of $135,000 and a tax benefit of $48,000 or approximately 36% of such loss. The effective income tax rate on continuing operations for the nine months ended September 30, 2004 differs from the federal statutory rate of 34% principally due to the dividend received exclusion. The effective tax benefit from continuing operations during the nine months ended September 30, 2003 was 31% of the pre-tax loss. The effective tax benefit in such period was affected by expenses, principally merger related, that were deducted for financial reporting purposes but are not deductible for federal income tax purposes.

On January 27, 2004, the Company announced that it will focus its acquisition efforts on opportunities in the asset management sector of the financial services industry. The Company has engaged two leading providers of executive search services to identify opportunities in this segment and to recruit individuals and/or teams within the industry to join the Company and build this business. One agreement provides for the payment of a non-refundable retainer of $300,000 which was amortized over a five month period beginning February 1, 2004 and the other agreement, which was signed on October 11, 2004, provides for a non-refundable retainer of $100,000 which will be amortized over a six month period commencing October 1, 2004. In both instances, the retainer may be credited against a success-based fee based upon the first year total cash compensation of the team members recruited.

The Company also granted to the principal of one of the search firms an option to purchase 25,000 shares of the Company’s common stock at a per share exercise price of $5.02, which was equal to the fair market value of the Company’s common stock on the date of grant. The option vests upon the first anniversary date of the closing of the transaction contemplated in the engagement agreement (the "Closing") and shall have a term of five years from the date of grant. The fair value of the option will be measured using the Black-Scholes option-pricing model as of the Closing and expensed in its entirety as of such date.

In furtherance of its plan to reposition itself for sale or liquidation, on August 5, 2002, the Company sold certain assets, including certain accounts receivable, furniture and equipment, customer lists and goodwill, subject to certain liabilities, of its Graphic Design Group to a company formed by its president and former owner. The transaction was effective as of August 1, 2002 and the purchase price was $371,000 consisting of a lump-sum payment due on or before August 31, 2002 of $54,000 and a 6% promissory note for $317,000, which is payable in sixty (60) equal consecutive monthly installments of $6,000 commencing January 1, 2003.

On August 19, 2002, Refac International, Ltd. (“RIL”) sold its Gough licensing property and royalties receivable to Gough Holdings (Engineering), Ltd. (“GHE”) for $450,000, payable in five semi-annual installments, without interest, commencing September 30, 2002. GHE paid the first two installments aggregating $140,000 but asked the Company for an accommodation on the $100,000 third installment which was due on September 30, 2003. The Company agreed to accept payment of $30,000 in cash and GHE’s promissory note for the balance of $70,000. This note was payable in seven (7) equal consecutive monthly installments of $10,000 each, with interest at the rate of 10% per annum, with the first installment becoming due on November 1, 2003. On April 14, 2004, the Company and GHE entered into a discounted payment settlement agreement pursuant to which the Company received $215,000 on April 15, 2004. In connection with this settlement, the Company recorded a loss of $12,000 in the first quarter of 2004.

On September 20, 2002, RIL amended its agreement with OXO International (“OXO”), a division of World Kitchen, Inc. This amendment, which was approved by the court overseeing OXO’s bankruptcy, provided for payments to the Company of $550,000 of which $10,000 was for past due royalties; $180,000 for royalties for the six month period ending December 31, 2002 and $360,000 for royalties for the year ending December 31, 2003. As of February 2004, the $550,000 was paid in full.

On September 20, 2002, RIL sold its Product Design Group to Product Genesis, LLC (“PG”) for a variable purchase price based upon 2½% of net revenues up to an aggregate of $300,000. Due to the uncertainties of collection of the purchase price, the Company did not allocate any cost basis to this contract right and recorded the $36,000 received in 2003 from PG as income from such discontinued operations. In December 2003, PG notified the Company that it was discontinuing its product design operations and, in January 2004, it advised the Company that it had entered into an agreement with Factors NY, LLC, a company wholly-owned by a former employee of PG, to purchase the goodwill and certain assets of PG. By agreement, dated February 10, 2004, the Company agreed to accept the fixed payment of $30,000, payable in four equal payments during 2004, in full settlement of the contingent balance of the variable purchase price provided for in the purchase agreement pursuant to which the Company sold its product design business to PG. As of September 30, 2004, the Company had received three payments. The fourth payment was received in October 2004.

The Company also entered into a sublease with PG for 9,574 square feet of commercial rentable space with a termination date of November 15, 2009. On December 22, 2003, by lease amendment, the Company released its security interest in PG’s machinery, equipment, furniture, fixtures and chattels located at the leased premises in consideration of a cash security deposit in the sum of $75,000. The due and timely performance of PG’s obligations under the sublease has been guaranteed by its affiliated companies, Product Genesis, Inc. (“PG-INC”) and Product Genesis Business Trust ( “PGBT”). PG’s sale of the business referred to in the preceding paragraph does not include this sublease.

On July 6, 2004, the Company was notified by a representative of PG that, due to extreme financial hardship, neither PG, PG-INC nor PGBT would be able to pay the rent for July 2004, or any further rent or be further bound by the sublease. Based upon the prevailing real estate market conditions, the Company has been advised that it could take six to nine months or longer to sublease the premises and that the real estate market rental rate is substantially below the rent that PG was paying. The Company cannot make any assurances as to when or on what terms it can find a new subtenant.

$20,000	In twenty (20) consecutive monthly installments of $1,000 each due on the first day of each month commencing with the month of November 2004 and with the last payment being due on June 1, 2006
$30,000	In fifteen (15) consecutive monthly installments of $2,000 each due on the first day of each month commencing with the month of July 2006 and with the last payment being due on September 1, 2007

On September 30, 2002, the Company completed the transfer of the assets and assumption of the liabilities of its subsidiary, RIL, to the Company, excluding the capital stock of Refac Consumer Products, Inc. (“RCP”), a manufacturer of a line of consumer electronics products, and certain trademarks, patents and a patent application relating to RCP’s business. After such transfer, the Company sold RIL to RCP Products, LLC, a limited liability company established by a former employee, for $50,000 plus a variable purchase price based upon 2½% of the revenues received in excess of $1,000,000 from the sale of its consumer electronics products during the eight year period commencing January 1, 2003, up to a maximum of $150,000 in any given year and a cumulative total of $575,000. Due to the uncertainties of collection of the purchase price, the Company has not allocated any cost basis to this contract right and will record any monies that it may receive from RCP Products, LLC with respect thereto as income from such discontinued operations. As of September 30, 2004, the Company had not received any variable purchase price payments and based upon information provided by the purchaser, it does not expect to receive any such payments in the future.

In May 1999, the Company relocated its corporate offices and creative studio to newly constructed leased facilities in Edgewater, New Jersey. This lease expires on November 16, 2009 and provides for two successive five-year renewal options. In October 2001, the Company subleased a portion of its Edgewater facility, together with furniture, for an annualized payment of $270,000 through May 2005. The existing subtenant has informed the Company that it does not intend to renew its sublease. In connection with the sale of the Company’s Graphic Design Group, the Company also entered into a sublease with the acquiring company for 3,492 square feet of commercial rentable space. The sublease expires in mid-November 2009, which is co-terminus with the Company’s master lease. In connection with the sale of the Company’s Product Design Group, the Company entered into a sublease with the acquiring company for 9,574 square feet of commercial rentable space, which sublease was terminated by mutual agreement on October 5, 2004. See Note 12D for more information regarding such settlement.

In February 2003, the Company and its landlord amended the master lease to reduce the rentable square footage by 9,757 square feet and the aggregate rent payable over the remaining term of the lease by $840,000. Taking this amendment into account, the annual rent due under the lease in 2004 and thereafter is $446,000 subject to a maximum cost of living increase of 2.5% per annum.

The Company relocated its corporate office on May 1, 2003 to Fort Lee, New Jersey where it occupied approximately 1,185 gross rentable square feet under a sublease with PCS, an affiliate of PCM, at a monthly rent of $3,000. As of June 11, 2004, the Company commenced possession under a direct lease with the landlord for larger space in the same building encompassing 4,751 gross rentable square feet. The Company completed its move into such premises as of June 19, 2004. At such time, its sublease with PCS was terminated. The new lease expires on June 30, 2009 and provides for a five-year renewal option. The expected rent for the entire term of the sublease is $677,000, subject to escalations. Under the lease, the Company was required to pay $55,000 toward the construction of the premises.

By Agreement, dated as of January 31, 2002, the Company and Ms. Arlene Scanlan, who was then President of Refac Licensing, Inc. (“RL”), agreed to a termination of her employment agreement and stock options and to a conveyance of her 19% interest in RL to the Company. This termination agreement also requires Ms. Scanlan to pay the Company 50% of the first $3,000,000 that she, or any entity controlled by her, may receive relating to a certain lawsuit against Taco Bell Corp., entitled Wrench LLC, Joseph Shields and Thomas Rinks v. Taco Bell Corp. which was filed in the United States District Court for the Western District of Michigan. On June 4, 2003, the jury awarded $30,000,000 to the plaintiffs and, on September 30, 2003, the Court amended the judgment to include pre-judgment interest of $12,000,000. Based upon Ms. Scanlan’s interest in this judgment, when and if the judgment is paid, the Company would be entitled to the maximum of $1,500,000. While YUM! Brands, Inc. (“YUM”), which owns Taco Bell, has recorded a charge of $42,000,000 on it books, it maintains that the plaintiff’s claims are without merit and has appealed the verdict to the Sixth Circuit Court of Appeals. Due to the uncertainty as to the ultimate outcome of this litigation, the Company has not accrued any income with respect thereto.

Revenues from continuing operations for the three months ended September 30, 2004 were $519,000, as compared to revenues of $346,000 for the same period in 2003. Revenues from licensing-related activities increased by $123,000 in the third quarter of 2004 primarily due to its agreement with Patlex Corporation (“Patlex”) offset by the fact that the Company’s agreement with OXO International (“OXO”) terminated at the end of 2003 (See Note 12C to the condensed financial statements). OXO accounted for $90,000 of the Company’s licensing-related revenues in the third quarter of 2003. Revenues from related party consulting services, which were initiated in the fourth quarter of 2003, aggregated $50,000.

Revenues from continuing operations for the nine months ended September 30, 2004 were $1,413,000 as compared to revenues of $1,340,000 for the same period in 2003. Revenues from licensing-related activities decreased by $72,000, in the nine month period ended September 30, 2004, mostly related to the termination of OXO, offset by an increase in the Patlex income. OXO accounted for $270,000 of the Company’s licensing-related revenues during the nine months ended September 30, 2003. Offsetting the decline in licensing-related revenues were revenues from related party consulting of $145,000.

With the sale of the Heli-Coil, Dodge and Gough licensing properties in 2002 and the termination of its agreement with OXO in December 2003, the Company’s significant remaining licensing property is its agreement with Patlex. The Company’s income from its contract with Patlex is variable and is based upon revenues derived by Patlex from the licensing of two laser patents. The more significant of the two patents licensed by Patlex Corporation is the Gas Discharge Laser Patent (U.S. Patent No. 4,704,583), which expires on November 3, 2004. The other patent is the Brewster’s Angle Patent (U.S. Patent No. 4,746,201) which expires on May 24, 2005. Given the expiration of the Gas Discharge Patent on November 3, 2004, the Patlex income is expected to decline in the fourth quarter of 2004. Moreover, as a result of the expiration of the Gas Discharge Patent and the subsequent expiration of the Brewster’s Angle Patent on May 24, 2005, the Patlex income will be significantly lower in 2005 as compared to 2004 as this program winds down. Other license agreements are expected to provide gross revenues of approximately $55,000 during the last quarter of 2004 and $220,000 in 2005, after which such gross revenues will decrease significantly.

Expenses from the licensing of intellectual property rights consist principally of amounts paid to licensors at contractually stipulated percentages of the Company’s licensing revenues and, expenses related to the administration of the license rights and related licenses. Expenses related to the licensing of intellectual property rights increased by $1,000 for the three months ended September 30, 2004. These expenses increased by $5,000 for the nine months ended September 30, 2004.

General and administrative expenses decreased by $1,826,000 in the nine month period ended September 30, 2004 as compared to the previous year. This reduction is primarily the result of the absence in the first nine months of 2004 of certain non-recurring expenses that were incurred in the first nine months of 2003, such as merger-related costs of $484,000 and accelerated depreciation of leasehold improvements associated with a reduction of the Company’s leased premises in Edgewater, New Jersey of $273,000, and decreases in management incentive compensation of $1,208,000 and professional fees of $193,000 offset by the amortization of $300,000 in executive search firm retainer fees and amounts payable under the Retirement Agreement with the Company’s founder and former chief executive officer of $75,000.

Dividend and interest income increased by $6,000 for the three month period ended September 30, 2004 as compared to the previous year primarily as a result of increased interest rates. Dividend and interest income increased by $83,000 for the nine month period ended September 30, 2004 as compared to the previous year primarily as a result of the purchase of additional investments being held to maturity with cash proceeds from the realization of income tax refunds and Palisade’s investment of approximately $17,000,000 in May 2003.

Income Taxes - For the nine months ending September 30, 2004, the Company had a loss before taxes from continuing operations of $135,000 and a tax benefit of $48,000 or approximately 36% of such loss. The effective income tax rate on continuing operations for the nine months ended September 30, 2004 differs from the federal statutory rate of 34% principally due to the dividend received exclusion. The effective tax benefit from continuing operations during the nine months ended September 30, 2003 was 31% of the pre-tax loss. The effective tax benefit in such period was affected by expenses, principally merger related, that were deducted for financial reporting purposes but are not deductible for federal income tax purposes.

During 2003, the Company received federal income tax refunds totaling $4,254,000 resulting from carrying back a net capital loss incurred in 2002 with respect to its sale of Refac International, Ltd. (“RIL”) and its 2002 net operating loss. Even though the Company has received these tax refund payments, it remains subject to Internal Revenue Service (“IRS”) audit with respect thereto and, should there be an assessment for any amounts determined to have been erroneously refunded, interest would be payable on the amount assessed. Currently, in accordance with a requirement to examine refund claims over $2,000,000, IRS is reviewing the Company’s tax refunds. While IRS has advised the Company that its review does not constitute an audit, it can change the scope of its review at any time and can initiate an examination of all open tax years. In connection with the pending review and the outcome of any audit that IRS may initiate, the Company has established a reserve of approximately $275,000 as of September 30, 2004. While the Company believes that this reserve is adequate, since IRS has not completed its review and the statute of limitations has not passed, no assurances can be given as to the sufficiency of this reserve.

As of September 30, 2004, the Company had deferred tax assets relating to the State of New Jersey aggregating $267,000 of which $157,000 is attributable to New Jersey net operating loss carryforwards of $737,000 and $1,900,000 in 2004 and 2003, respectively, which can be applied against any New Jersey taxable income the Company might earn during the seven year period after the year in which such carryforward was recognized for tax purposes. The Company is currently focusing its acquisition efforts in the asset management sector of the financial services industry, and at this point, it cannot determine whether this business will generate any New Jersey taxable income. Due to such uncertainty, the Company has estimated that none of its New Jersey related deferred taxes assets will be realized and has established a full valuation allowance. The need for a valuation allowance will continue to be reviewed periodically and adjusted as necessary.

As of September 30, 2004, the Company had federal deferred tax assets aggregating $948,000 of which $282,000 is attributable to federal net operating loss carryforwards of $824,000 and $5,000 in 2004 and 2003, respectively, which can be used during the twenty year period after the year in which such carryforward was recognized for tax purposes. No valuation allowance has been taken for the Company’s federal deferred tax assets. The need for a valuation allowance will continue to be reviewed periodically and adjusted as necessary.

Results of Discontinued Operations - In furtherance of its plan to reposition itself for sale or liquidation, the Company sold its Creative Consulting Services and Manufacture and Marketing of Consumer Products groups in the third quarter of 2002. Income from discontinued operations in 2003 was principally attributable to the receipt of variable purchase price payments in connection with the sale of the Company’s Product Design Group. By agreement, dated February 10, 2004, the Company agreed to accept the fixed payment of $30,000, payable in four equal payments during 2004, in full settlement of the contingent balance of the variable purchase price provided for in the purchase agreement pursuant to which the Company sold its product design business to PG. As of September 30, 2004, the Company had received three payments. The fourth payment was received in October 2004.

Cash flow from investing activities also increased as a result of the maturity of these U.S. treasury bills and aggregated $14,654,000 for the period ended September 30, 2004. During the same period of the prior year, the Company invested $21,999,000 of which $17,000,000 came from proceeds from the Palisade private placement in May 2003 and $4,254,000 came from income tax refunds received in the second and third quarters.

Operations used $321,000 of cash during the nine months ended September 30, 2004 whereas during the same period in 2003 operations provided $2,796,000 of cash principally from the realization of part of the income tax refund due to the Company. The use of cash during the nine months ended September 30, 2004 exceeded the loss from operations primarily as a result of a reduction in liabilities including $109,000 in rental security deposits.

The Company believes its liquidity position is adequate to meet all of its current operating needs and existing obligations. However, it is currently focusing its acquisition and business development efforts on opportunities in the asset management sector of the financial services industry and, at this stage, the Company cannot predict what acquisition or business development opportunities will become available to it and the amount of capital resources that may be required to take advantage of any such opportunities. The Company does not have any long-term debt and has not established any acquisition-related lines of credit.

The Company’s portfolio of investments being held to maturity consists primarily of U.S. treasury bills bought with an original maturity of six months or less. The portfolio is invested in short-term securities to minimize interest rate risk and facilitate rapid deployment in support of the Company’s acquisition plans. The Company’s available for sale securities consist of variable cumulative preferred stock from a single issuer with a dividend rate which is determined by an auction method every forty-nine days.

Pursuant to the Palisade Merger Agreement, the Company has restricted $4,732,000 of its investments being held to maturity to maintain the Contingent Fund (as defined in the Palisade Merger Agreement). This amount is being shown as a short-term asset on the balance sheet as the Payment Right is not determinable and payable until after June 30, 2005. This right to sell the shares is limited to stockholders who held their shares at the completion of the Palisade Merger and continue to hold their shares until the amount of liquid distributable assets at June 30, 2005 is determined. Since the Company does not have direct access to stockholder trading information, the Company has not reduced the Contingent Fund. The Contingent Fund will be adjusted if the Company becomes aware of any actual sales of Common Stock issued in connection with the merger. As of September 30, 2004, the price of the Payment Right was estimated to be $7.08 per share and the closing price of Common Stock was $4.66 per share. Any Contingent Fund amounts that are related to Payment Rights that are not properly exercised within ninety days after the date that instructions are mailed will become unrestricted.

The Company has commitments under leases covering its facilities (see Note 13 to the condensed financial statements) and under a 1996 Retirement Agreement with its founder and former chief executive officer, which provides an annuity of $100,000 per annum during his life as well as medical and health benefits for him and his spouse during their lives. Provision was made for amounts payable under the Retirement Agreement in the Company’s 1996 financial statements based upon his then life expectancy. As of December 31, 2003, such liability was fully amortized. During 2004, such amounts payable have been expensed.

Payments Due By Period
Contractual Obligations	Total		Less than one year		1 - 3 Years		3 - 5 Years		More than 5 years
Operating lease Obligations	$	3,103,000	$	589,000	$	1,215,000	$	1,236,000	$	63,000
Management Incentive Compensation (see Note 9)	$	1,046,000		1,046,000		-		-		-

Pursuant to the terms of the Palisade Merger, the Company’s projected “Liquid Distributable Assets” (as defined in the Palisade Merger Agreement and referred to herein as “LDA”) is required for the calculation of the Payment Right, and the related Contingent Fund and temporary equity account as well as the management incentive compensation accrual. This calculation of LDA is dependent upon management’s judgments and estimates as to the amount of cash that the Company realizes by June 30, 2005 with respect to certain assets of the Company at the time of the Palisade Merger, the utilization of certain tax attributes and operating results from the time of the Palisade Merger through June 30, 2005. Management continually revises these estimates based on changes in actual results as they occur. The LDA is reviewed quarterly and adjusted to reflect any material changes in the estimate. Any changes in the LDA will also change the related Payment Right, Contingent Fund and management incentive compensation accrual.

In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 does not have a current effect on the Company’s financial statements.

This document includes certain statements of the Company that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and which are made pursuant to the Private Securities Litigation Reform Act of 1995. These forward-looking statements and other information relating to the Company are based upon the beliefs of management and assumptions made by and information currently available to the Company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, or performance, as well as underlying assumptions and statements that are other than statements of historical fact. When used in this document, the words “expects,” “anticipates,” “estimates,” “plans,” “intends,” “projects,” “predicts,” “believes,” “may” or “should,” and similar expressions, are intended to identify forward-looking statements. These statements reflect the current view of the Company’s management with respect to future events and are subject to numerous risks, uncertainties, and assumptions. Many factors could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements, including, among other things:

·	the inability to identify suitable acquisition opportunities in the asset management sector of the financial services industry and/or teams within the industry to join the Company and build this business;
·	the outcome of the current IRS review of the Company’s tax refunds aggregating $4,254,000 and the possibility that IRS can elect to change the scope of the review and/or audit other open tax years and determine that all or a material part of the refunds received in 2003 were erroneously refunded;
·	the failure to realize currently projected income from the Company’s remaining licensing properties;
·	the ability of the Company to sublease its Edgewater, New Jersey premises;
·	changes in the interest rate environment;
·	general economic conditions may be less favorable than expected; and
·	changes may occur in the securities markets.

Other factors and assumptions not identified above could also cause the actual results to differ materially from those set forth in the forward-looking statements. Although the Company believes these assumptions are reasonable, no assurance can be given that they will prove correct. Accordingly, you should not rely upon forward-looking statements as a prediction of actual results. Further, the Company undertakes no obligation to update forward-looking statements after the date they are made or to conform the statements to actual results or changes in the Company’s expectations.

As of September 30, 2004, the Company had investments held to maturity including restricted investments held to maturity of $18,905,000 primarily consisting of U.S. treasury bills with original maturities at the date of purchase of six months or less. These highly liquid investments are subject to interest rate and interest income risk and will decrease in value if market interest rates increase. Because the Company has the positive intent and ability to hold these investments until maturity, it does not expect any decline in value of its investments caused by market interest rate changes. As of September 30, 2004, the Company also had $1,000,000 in variable cumulative preferred stock from a single issuer with a dividend rate which is determined by an auction method every forty-nine days. Given the nature of this security, the Company does not believe the principal amount of this investment is subject to material risk. Declines in interest rates over time will, however, reduce our interest or dividend income. The Company has no derivative instruments, debt, or foreign operations. It does not use derivative financial instruments in its investment portfolio.

As of the end of the fiscal quarter ended September 30, 2004, the Company’s principal executive officer and principal financial officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) ). Based upon such evaluation, the Company’s principal executive officer and principal financial officer have concluded that, as of the end of such quarter, the Company’s disclosure controls and procedures are effective.

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

(a) EXHIBIT INDEX

Exhibit
No.
13	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, 2003 is incorporated herein by reference.

31.1	Rule 13a-14(a)/15(d)-14(a) Certification, Chief Executive Officer.

31.2	Rule 13a-14(a)/15(d)-14(a) Certification, Chief Financial Officer.

32.1	Section 1350 Certification, Chief Executive & Chief Financial Officers.

Delaware	13-1681234
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

	REFAC




November 12, 2004	/s/Robert L. Tuchman
	Robert L. Tuchman, President and
	Chief Executive Officer



November 12, 2004	/s/Raymond A. Cardonne
	Raymond A. Cardonne, Jr., Vice President
	And Chief Financial Officer
	(Principal Financial Officer)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
Description	2004			2003			2004			2003
Licensing-related activities		90	%		100	%		90	%		100	%
Related party consulting services		10	%		-			10	%		-
Total		100	%		100	%		100	%		100	%


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