-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OQ2/Y91MWQzP/CxnmzuHORKRbYCGKBVFtGd0sLxq2IioBtpxnQBY2kOgL6ZlEaXE 9yfkfLkEKBvHW3WtdN8DUA== 0000950130-00-001756.txt : 20000331 0000950130-00-001756.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950130-00-001756 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REFAC CENTRAL INDEX KEY: 0000082788 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 131681234 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12776 FILM NUMBER: 585571 BUSINESS ADDRESS: STREET 1: 115 RIVER ROAD CITY: EDGEWATER STATE: NJ ZIP: 07020-1099 BUSINESS PHONE: 2019434400 MAIL ADDRESS: STREET 2: 122 EAST 42ND ST STE 4000 CITY: NEW YORK STATE: NY ZIP: 10168 FORMER COMPANY: FORMER CONFORMED NAME: REFAC TECHNOLOGY DEVELOPMENT CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: RESOURCES & FACILITIES CORP DATE OF NAME CHANGE: 19740509 FORMER COMPANY: FORMER CONFORMED NAME: REFAC INC DATE OF NAME CHANGE: 19720628 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------------------------------------------- For the Fiscal Year Ended December 31, 1999 Commission File Number 0-7704 Delaware REFAC 13-1681234 - ---------------------------------- ----- ----------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 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 -------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share -------------------------------------- (Title of Class) 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 _____ ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K._____ The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 23, 2000 was $15,892,655. The number of shares outstanding of the registrant's Common Stock, par value $.10 per share, as of March 23, 2000 was 3,795,261. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- PART I Item 1 Annual Report to Stockholders of Refac for the year ended PART II Item 5 December 31, 1999, except for the inside front and back Item 6 cover and pages 2 through 12 thereof. Item 7 Item 8 PART III Item 10 Definitive Proxy Statement of Refac in connection with the Item 11 Annual Meeting of Stockholders to be held on May 12, 2000. Item 12 Item 13 PART I ------ Item 1. Business - ---------------- General - ------- Refac, a Delaware corporation incorporated in 1952 (the "Company" or "Registrant"), is engaged, through certain of its subsidiaries, in (i) new product development; (ii) graphic design and communications; (iii) brand, trademark and patent licensing; and (iv) the marketing of consumer electronic products. New Product Development - ----------------------- In November 1997, the Company acquired Human Factors Industrial Design, Inc. ("HFID"), an industrial design and engineering firm based in New York City. In December 1998, the Company merged HFID into its wholly-owned subsidiary, Refac International, Ltd. ("RIL"), and it now operates as Refac HumanFactors-ID ("HumanFactors-ID"), a division of RIL. Founded in 1974, HumanFactors-ID is a product development company that offers a broad range of research, design and engineering services to create innovative products for its clients. HumanFactors-ID merges the disciplines of applied human factors, industrial design and engineering and is known for its expertise in designing and/or engineering (i) consumer products, (ii) medical-surgical devices and (iii) medical and other industrial equipment. Prior to its acquisition by the Company, HumanFactors-ID primarily operated as a fee-for-service consultant. Now, in the appropriate circumstances, it will forego current fee income for a participation in the future success of a project on a royalty basis. As used herein, "product licensing" refers to products and/or product concepts developed by HumanFactors-ID which are then licensed to manufacturers. In situations where HumanFactors-ID does not own the intellectual -2- property rights and simply develops the products in exchange for a royalty fee, the income is treated as part of its product design and development activities. Competition. The industrial design industry is highly fragmented, with a ----------- lack of dominant market leaders. Since the barriers to entry, including capital requirements, are relatively low, there are a large number of small regional firms. HumanFactors-ID faces strong competition from other industrial design firms and its ability to attract clients is dependent upon its reputation and ability to deliver distinctive products that meet its clients' requirements in a timely fashion. In addition, the industrial design business is dependent on the ability to attract and retain personnel. Graphic Design and Communications - --------------------------------- On November 1, 1999, RIL acquired David Morris Creative, Inc., David Morris Associates, Inc., and David Morris Creative Associates Ltd., which businesses are now being operated as a division of RIL under the name of Refac David Morris Creative ("RDMC"). RDMC has designed graphic communications and marketing solutions for a wide variety of clients since 1990. Its array of graphic design services include brochures and collateral materials, brand and communications strategy, corporate identity, packaging and multimedia design. Competition. The graphic design industry is highly fragmented, with a ------------ lack of dominant market leaders. Since the barriers to entry, including capital requirements, are relatively low, there are a large number of small regional firms. RDMC faces strong competition from other graphic design firms and its ability to attract clients is dependent upon its reputation and ability to deliver distinctive graphics and communications services that meet its clients' requirements in a timely fashion. Licensing - --------- Brand and Trademark Licensing ----------------------------- In January 1998, the Company broadened its licensing business through the formation of Refac Licensing, Inc. (formerly known as Selective Licensing & Promotion, Ltd. and referred to herein as "RL"). RL is a full service trademark licensing agency and consultancy for brand and character licensing properties. The Company owns 81% of RL and Ms. Arlene Scanlan, the President and Chief Executive Officer of RL, owns the remaining 19%. RL currently acts as the licensing agent for the following properties: Autobytel.com/(R)/, Class of 2000/(R)/, Dr. Denton/(R)/, JoeCartoon, Psycho Chihuahua/(R)/, Rambling Ted/(R)/, Rocket Girl and Rockwell/(R)/. The Company has made a $1 million line of credit available to RL through December, 31, 2001, at the prime rate plus 2%, of which $646,635 had been drawn down as of December 31, 1999. Competition. Success in the trademark licensing agency business is ----------- principally dependent upon the strength of the properties that the agency represents. With respect to character or juvenile licensing, most of the movie and television production companies have their own licensing divisions -3- to license their properties. Thus, RL typically competes with other independent agencies for properties that have not yet become well-known but which it believes have the potential to be popular. It also competes with other agencies in brand licensing for the rights to well-known corporate trademarks. The Company believes that its product development and graphic design capabilities give it a distinct advantage in this area. Patent Licensing Operations ---------------------------- The Company's patent and technology licensing includes "New Technology Licensing" and "Patent Enforcement Licensing" projects. In both classes, the Company generally acquires from its clients ("Clients") the exclusive right to grant a license to third parties ("Licensees") to manufacture, use and/or sell, throughout the world or in specific markets, specific Client products and processes under their respective patents and/or in accordance with related technical know-how. The Company did not undertake any New Technology Licensing or Patent Enforcement Licensing projects during 1999. In recent years, a typical Client has been an individual or a small company for whom licensing offers important opportunities for accelerated product development, broadened commercialization and income. The Company also offers larger corporations a facility for exploiting idle patents, unused or abandoned products and technological developments. As a general policy, the Company shares equally with Clients the gross amount of revenues received from its licenses. Occasionally, in addition to or in lieu of money payments, the Company may receive equity considerations. New Technology Licensing. New Technology Licensing includes technologies ------------------------ that have not yet been successfully commercialized. These technologies generally offer certain benefits such as new features, improved performance, cost savings and/or favorable environmental, health or safety features. In order for the Company to attract Licensees for this type of technology, it has to present evidence that persuasively "proves the concept" of the invention, which often involves monetary investments. The Company currently prefers to limit its New Technology Licensing to projects in which it can have an equity position. The Company is selective in the products for which it undertakes licensing projects. It attempts to locate consumer and industrial technologies having distinctively advantageous features that are protected by patents and confidential know-how. Sometimes, the Company has the added right to license the Client's trademarks. However, historically, most of the Company's licensing opportunities have been referred to the Company by others due to the Company's professional reputation. All such opportunities are evaluated on the basis of their proprietary features, innovative merit, technological significance, competitive conditions and earning potential. Licensing and technology transfer strategies are studied with due consideration of the Client's objectives. The actual licensing process usually starts with the identification and qualification of suitable prospects. Information packages and license proposals are prepared subject to the Client's approval. When suitable prospective Licensees are identified, negotiations proceed with the goal of creating -4- income-producing agreements. Agreements may provide for single lump sum payments or, as is generally preferred, ongoing royalty payments based on sales of licensed products over an extended period of years. There is usually a substantial interval between the time license rights are acquired and the actual realization of license revenue. The interval is seldom less than two years, often longer. Not infrequently, licensing efforts prove unsuccessful. A licensing program may result in a succession of many non- exclusive agreements or a limited number of exclusive agreements covering defined areas of technology, fields of product application and marketing territories. The terms and conditions of these licenses and related agreements may vary depending upon whether they principally cover patent rights, trademarks, developments and improvements, exclusivity, trade secrets and/or copyrights. From time to time, licensing programs may result in the creation of new companies in which the Company and the Client may acquire or have the option to acquire equity or joint venture interests. Patent Enforcement Licensing. A prospective Client often notifies the ---------------------------- Company of its belief that its patents are being infringed by various manufacturers or other entities. In such event, before accepting a licensing responsibility, the Company intensively investigates relevant issues regarding the validity of the client's patent and the alleged infringement circumstances. If the Company concludes that there exists (i) substantial merit in the Client's patent position, (ii) a strong basis for concluding that infringement exists, (iii) substantial economic value to be gained and (iv) an opportunity to grant a license which will not conflict or interfere with the Client's business relationships, serious efforts are then made to license the patents to the putatively infringing party. If the Company is not successful in its efforts to enter into a licensing arrangement, which is often the case, the Company may consider it appropriate, with the Client as co-plaintiff, to initiate infringement litigation against the alleged infringer. Such litigation is often costly and lengthy with an uncertain outcome. Except for its contracts with Patlex Corporation and Emhart Fastening Teknologies, Inc. which accounted for 9.8% and 5.4%, respectively, of the Company's total revenues in 1999, the Company does not believe that the loss or termination of any contract it has with Clients would have a materially adverse effect on its business. The most commercially significant patent owned by Patlex Corporation is the Gas Discharge Laser Patent (U.S. Patent No. 4,704,583) which expires in November 2004. With respect to any patents or group of related patents that are now the subject of one or more income-producing licenses, the Company does not believe that there is any currently foreseeable circumstance under which the Company would lose its rights to grant licenses. Patents and Trademarks. The Company does not own any patents or trademarks ---------------------- that it deems important to its patent licensing business. -5- Competition. Success in the technology licensing business is ----------- principally dependent upon the ability of a technology to create a competitive advantage or solve a recognized problem in the marketplace and the availability of the financial and technical resources necessary to "prove the concept" and demonstrate the benefits of the invention to prospective Licensees. The Company competes against individuals, agents, universities, corporations and patent counsel in patent licensing and enforcement activities. The Company believes that its product design and development expertise gives it an advantage in this area for consumer products, medical devices and business equipment. Consumer Products - ----------------- In September 1999, the Company formed Refac Consumer Products, Inc. ("RCP") to develop and market a line of proprietary consumer electronics products and also acquired Funatik Inc. which was subsequently merged into RCP. The Funatik acquisition was primarily motivated by the sales and marketing expertise and capability of its two principals. This product line was introduced in January 2000 at the International Consumer Electronics Show in Las Vegas, Nevada. The product line, which will be manufactured in Asia, has been developed in-house by HumanFactors-ID and includes a Volkswagen New Beetle(TM) branded AM/FM digital stereo and multifunction CD player, travel clock, clock radio and sport radio; a RefacDesign(TM) branded MP3 Player, Universal MP3 Car Adapter, Digital Radio and Hand-Crank Emergency Radio and a Funatik(TM) branded Star Trek/(R)/ Lamp and a Golf Lamp. The Company established Refac (H.K.) Limited, a Hong Kong subsidiary, to facilitate the sourcing, manufacturing and quality control of the product line and to distribute the products outside of North America. Government Regulations - ---------------------- Federal, state and local environmental laws have had no material effect on capital expenditures, earnings or the competitive position of the Company. Employees - --------- As of December 31, 1999, the Company had a total of 59 full time employees. Financial Information About Foreign and Domestic Operations and Product Sales - ----------------------------------------------------------------------------- The Company's business is principally conducted in the United States. Information concerning the aggregate of the Company's foreign source revenues from domestic operations for the three years ended December 31, 1999 is set forth in Note 7 of the Notes to the Company's Consolidated Financial Statements found on pages 25 and 26 of the Company's 1999 Annual Report to Stockholders, which pages are incorporated herein by reference. The Company is subject to the usual risks of doing business abroad, particularly currency fluctuations and foreign exchange controls. -6- Item 2. Properties - ------------------- In May, 1999, the Company relocated its corporate headquarters and creative studios to 30,000-square-feet of newly constructed premises located at The Hudson River Pier, 115 River Road, Edgewater, New Jersey 07020. The lease for these new premises terminates in November 2009 and the Company has two successive five-year renewal options. These premises are occupied and used as the corporate offices and creative studios for the Company and its domestic subsidiaries, other than RL and Refac Financial Corporation ("RFC"). In connection with this relocation, the Company terminated, without liability, its lease for its corporate offices in New York City and subleased the offices and studio previously occupied by HumanFactors-ID (10,000 square feet located at 575 Eighth Avenue, New York, New York) for the remaining term of the lease. RL leases approximately 1,450 square feet in an office building located at 107 John Street, Southport, Connecticut under a lease which expires in 2003. RFC leases office facilities in Las Vegas, Nevada, which it considers to be suitable and adequate for its present needs. During 1999, RDMC occupied approximately 3,000 square feet of office and studio space in an office building located in Jersey City, New Jersey. In February 2000, RDMC relocated to the corporate headquarters and creative center in Edgewater and terminated its Jersey City lease without any liability. Item 3. Legal Proceedings - -------------------------- Suit by Former Officer. In December 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 Company believes that the claim is without any merit and intends to vigorously defend the claim against it. Suit by Shareholder. 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 purporting to state 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 in December 1996 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, and it intends to vigorously -7- defend all claims against it. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1999. Executive Officers of the Registrant - ------------------------------------ Information with respect to the executive officers of the Registrant is set forth below. Under the by-laws of the Registrant, each executive officer holds office from his election until the Board of Directors' meeting after the annual meeting of shareholders next following his election or until his successor is elected and qualified, or his earlier death, resignation or removal by the Board. There are no family relationships between any of the executive officers of the Registrant nor were there any special arrangements or understandings regarding the selection of any officer.
Served in Such Position or Office Name Age Continually Since Position (1) - ------------------------------------- --- ----------------- --------------------------------------- Robert L. Tuchman 57 1991 Chairman, President, Chief Executive Officer and General Counsel (2) Douglas M. Spranger 52 1998 Senior Vice President (3) Raymond A. Cardonne, Jr. 33 1997 Vice President and Secretary (4) Elliott S. Greller 57 1998 Vice President, Chief Financial Officer and Treasurer (5) - ----------
NOTES: (1) Each executive officer's term of office is until the next organizational meeting of the Board of Directors of the Company (traditionally held immediately after the Annual Meeting of Stockholders of the Company) and until the election and qualification of his or her successor. However, the Company's Board of Directors has the discretion to replace officers at any time. -8- (2) Mr. Tuchman succeeded Eugene M. Lang as Chief Executive Officer of the Company on January 6, 1997 and as Chairman of the Board of Directors on June 30, 1997. He also serves as General Counsel. From August 1, 1991 until January 6, 1997, Mr. Tuchman served as the Company's President and Chief Operating Officer. From May, 1994 to March, 1997 he held the position of Treasurer of the Company. (3) Mr. Spranger was Chief Executive Officer of HFID from its formation in 1974. HFID, which was acquired by the Company in November, 1997, was merged into RIL on December 31, 1998. Mr. Spranger became Senior Vice President of the Company and RIL in December 1998. His employment with the Company and stock options were terminated by mutual agreement as of December 31, 1999. See Exhibit 10(d). (4) Mr. Cardonne joined the Company in December 1997 as Vice President responsible for the licensing and commercialization of technologies and was elected to the additional position of Secretary in November 1998. Prior to joining Refac, from December 1994 through November 1997, Mr. Cardonne was a Vice President at Technology Management & Funding, L.P. From August 1993 to December 1994, he worked for NEPA Venture Funds, an early stage venture capital firm, and the Lehigh Small Business Development Center. He previously worked at Ford Electronics & Refrigeration Corporation from January 1990 to July 1993. (5) Mr. Greller joined the Company in March 1, 1998 as President of the Royalty Control Division of Refac Services Corporation, a wholly-owned subsidiary of the Company, that was merged into RIL on December 31, 1998. He became the Company's Vice President, Chief Financial Officer and Treasurer in September 1998. Prior to joining the Company, for more than fifteen years, Mr. Greller worked as an accountant and was the Chief Executive Officer and sole owner of the Royalty Control Group Company which provided royalty audit services to licensors. Mr. Greller's employment by the Company was terminated by mutual agreement as of March 3, 2000. PART II ------- Item 5. Market for the Company's Common Stock and Related Stockholder Matters - ------------------------------------------------------------------------------ The Company had 701 stockholders of record as of March 23, 2000. Other information required by this item is included on page 28 of the Company's Annual Report to Stockholders for the year ended December 31, 1999, which page is hereby incorporated by reference. Item 6. Selected Financial Data - -------------------------------- The information required by this item is included on page 28 of the Company's Annual -9- Report to Stockholders for the year ended December 31, 1999, which page is hereby incorporated by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - ------------- The information required by this item is included on pages 13 and 14 of the Company's Annual Report to Stockholders for the year ended December 31, 1999, which pages are hereby incorporated by reference. Item 8. Financial Statements - ----------------------------- The information required by this item is included on pages 15 through 19 of the Company's Annual Report to Stockholders for the year ended December 31, 1999, which pages are hereby incorporated by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure - -------------------- None. PART III -------- Item 10. Directors and Executive Officers of the Registrant - ----------------------------------------------------------- The information required by this item, except for certain information regarding executive officers included in Part I of this report, is included on pages 4 through 6 in the Company's definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held on May 12, 2000 and is hereby incorporated herein by reference. Item 11. Executive Compensation - -------------------------------- The information required by this item is included on page 7 in the Company's definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held on May 12, 2000 and is hereby incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ The information required by this item is included on pages 2 through 4 in the Company's definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held on May 12, 2000 and is hereby incorporated herein by reference. -10- Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information required by this item is included on pages 13 and 14 in the Company's definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held on May 12, 2000 and is hereby incorporated herein by reference. PART IV ------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------------------------------------------------------------------------- (a)(1) Financial Statements - --------------------------- See index to financial statements on the inside cover of the Company's Annual Report to Stockholders for the year ended December 31, 1999, which is hereby incorporated by reference. (a)(2) Schedules - ----------------- See index to financial statements on the inside cover of the Company's Annual Report to Stockholders for the year ended December 31, 1999, which is hereby incorporated by reference. (a)(3) Exhibits - ---------------- See the Exhibit Index attached hereto for a list of the exhibits filed or incorporated by reference as a part of this report. (b) Reports on Form 8-K - ------------------------ Current report on Form 8-K, dated November 1, 1999, with respect to RIL entering into an Asset Purchase Agreement with David Morris Creative, Inc., David Morris Associates, Inc., and David Morris Creative Associates Ltd. (collectively, the "Sellers"), and David M. Annunziato, President of each of the Sellers. -11- 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 Dated: March 23, 2000 /s/ Robert L. Tuchman ------------------------------------ Robert L. Tuchman, President, Chief Executive Officer and General Counsel Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. March 23, 2000 /s/ Robert L. Tuchman ------------------------------------ Robert L. Tuchman, President, Chief Executive Officer, General Counsel and Director (Principal Executive Officer) March 23, 2000 /s/ David Capodanno ------------------------------------ David Capodanno, Controller (Principal Financial Officer) March 23, 2000 /s/ Neil R. Austrian ------------------------------------ Neil R. Austrian, Director March 23, 2000 /s/ Robin L. Farkas ------------------------------------ Robin L. Farkas, Director -12- Signatures ---------- (Continued) March 23, 2000 /s/ Mark N. Kaplan ------------------------------------ Mark N. Kaplan, Director March 23, 2000 /s/ Herbert W. Leonard ------------------------------------ Herbert W. Leonard, Director March 23, 2000 /s/ Ira T. Wender ------------------------------------ Ira T. Wender, Director -13- EXHIBIT INDEX ------------- Exhibit No. Exhibit - ----------- ------- 3(a) Restated Certificate of Incorporation and Certificate of Amendment thereto. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988, SEC file number 0-7704. 3(b) The By-laws of the Company. Incorporated by reference to Exhibit 3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, SEC file number 0-7704. 10 (a) Amended and Restated Employment Agreement dated December 13, 1996 between the Company and Robert L. Tuchman (the "Tuchman Employment Agreement"). Incorporated by reference to Exhibit 10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996, SEC file number 0-7704. 10 (b) Amendment, dated January 20, 1999, extending the term of the Tuchman Employment Agreement is incorporated herein by reference to Exhibit 10 (b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 10 (c) Employment Agreement, dated November 25, 1997 between the Company and Douglas M. Spranger and an Amendment thereto, dated January 14, 1999, is incorporated herein by reference to Exhibit 10 (b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 10 (d) Agreement, dated as of December 31, 1999, between the Company, RIL and Douglas M. Spranger terminating his employment.* 10 (e) 1998 Stock Incentive Plan. Incorporated by reference to Exhibit A to the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders, SEC file number 0-7704. 10 (f) 1990 Stock Option and Incentive Plan. Incorporated by reference to Exhibit A to the Company's Proxy Statement for its 1990 Annual Meeting of Stockholders, SEC file number 0-7704. 13. 1999 Annual Report to Stockholders of the Company.* 21 List of subsidiaries of the Company.* 23. Consent of Grant Thornton LLP. * _____________________ * Filed herewith. EX-10.D 2 AGREEMENT, DATED 12/31/99, DOUGLAS SPRANGER EXHIBIT 10(d) AGREEMENT --------- AGREEMENT made as of the 31/st/ day of December, 1999 by and among: Refac International Ltd., a Nevada corporation having executive offices at The Hudson River Pier, 115 River Road, Edgewater, New Jersey 07020- 1099 (hereinafter referred to as "RIL"); Refac, a Delaware corporation having executive offices at The Hudson River Pier, 115 River Road, Edgewater, New Jersey 07020-1099 (formerly known as Refac Technology Development Corporation and referred to herein as "Refac"); and Douglas M. Spranger, an individual residing at 142 East 37th Street, New York, New York 10016 (hereinafter referred to as "Spranger"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Spranger has been employed by RIL and Refac pursuant to the Employment Agreement (as hereinafter defined); and WHEREAS, Spranger has a 30% interest in certain contingent payments provided for in Section 6.12 of a Merger Agreement (as hereinafter defined); and WHEREAS, in connection with the Employment Agreement and the Merger Agreement, Refac has granted to Spranger options to acquire 45,000 shares of its common stock pursuant to a Stock Option Agreement (as hereinafter defined); and WHEREAS, the parties want to provide for (i) the termination of the Employment Agreement, (ii) the termination of the Stock Option Agreement, (iii) the sale, transfer and assignment by Spranger to Refac of his interest in such contingent payments, (iv) a release of restrictions on Spranger engaging in professional consulting services relating to control rooms and (v) sales representation services that Spranger may provide to Refac HumanFactors-ID: NOW, THEREFORE, in consideration of the premises and the respective agreements of the parties herein contained, the parties hereto, intending to be legally bound, agree as follows: 1. Definition of Terms. -------------------- As used herein, the following terms shall have the following meanings: 1.1 "Agreement" means this agreement. 1.2 "Contingent Payment" means the 30% interest that Spranger holds in the contingent payments provided for in Section 6.12 of the Merger Agreement. 1.3 "Employment Agreement" means the Employment Agreement between HFID (as defined below) and Spranger, dated November 25, 1997, as amended by Agreement, dated as of January 1, 1999. 1.4 "HFID" means the product development business previously conducted by Human Factors Industrial Design, Inc. (which corporation was merged into RIL as of December 31, 1998) and which is currently being conducted by RIL under the name Refac HumanFactors-ID. 1.5 "Merger Agreement" means the Agreement and Plan of Merger by and among Refac, HFID Acquisition Corporation, Human Factors Industrial Design, Inc., and the principal stockholders of Human Factors Industrial Design, Inc., dated as of November 25, 1997. 1.6 "Stock Option Agreement" means the Stock Option Agreement, dated November 25, 1997, and amended on March 18, 1998, between Refac and Spranger providing for the grant to Spranger of an option to acquire 45,000 shares of Refac's common stock. 2. Termination of the Employment Agreement. ---------------------------------------- The parties hereby agree that the Employment Agreement shall be deemed terminated as of December 31, 1999. 3. Resignation from the Board of Directors of Refac and RIL. --------------------------------------------------------- Simultaneously with the execution of this Agreement, Spranger resigns as an officer and director of RIL and Refac and as the Chairman of HFID. 4. Termination of the Stock Option Agreement. ------------------------------------------ Simultaneously with the execution of this Agreement, the Stock Option Agreement shall terminate and be of no further force and effect whatsoever and Spranger shall deliver to Refac any original executed copies of the Stock Option Agreement (including the amendment thereto) in his possession to Refac. 5. Purchase of the Contingent Interest. ------------------------------------ 5.1 Spranger hereby represents and warrants to Refac that he has not sold, transferred or assigned all or any part of his interest in the Contingent Payment and has not granted any security interest or encumbered same in any manner whatsoever. 5.2 Spranger hereby sells, transfers and assigns all of his right, title and interest in and to the Contingent Payment to Refac in consideration of the sum of One Hundred Twenty-Five Thousand Dollars ($125,000.00), the receipt of which Spranger hereby acknowledges. 6. Control Room Consulting Services -------------------------------- 6.1 Refac and RIL hereby agree to release Spranger from any and all restrictions in the Merger Agreement and Employment Agreement that prohibit Spranger from soliciting or performing professional consulting services relating to the design of control rooms including, but not limited to, the Bapco project. 6.2 During the period commencing January 1, 2000 and ending December 31, 2001, HFID agrees to support any project that Spranger undertakes to design control rooms by providing staffing, if available and requested by Spranger, to work on the project. In such event, HFID shall bill Spranger for its staff time at HFID's regular hourly rates in effect at the time the services are rendered. 6.3 In consideration for the release of the restrictive covenants regarding the design of control rooms, Spranger agrees to pay HFID 25% of the amount that he, directly or indirectly, charges clients for the time that he personally devotes to this activity in year 2000 up to a maximum of $50,000. In year 2001, Spranger agrees to pay HFID 15% of the amount that he charges clients for the time that he personally devotes to this activity up to a maximum of $50,000. Thereafter, Refac and RIL would not have any interest in any control room design work performed by Spranger. 6.4 As used in this Paragraph 6, the term "Spranger" shall include any entity in which Spranger owns a 25% or greater interest or which he controls, it being understood and agreed that Spranger personally guarantees the performance of any and all obligations such entity may have to HFID. 6.5 During the period commencing January 1, 2000 and ending December 31, 2001, HFID agrees that it will not undertake any projects to design control rooms and agrees to refer any inquiries from prospective or past clients regarding such services to Spranger. 6.6 During the period commencing January 1, 2000 and ending December 31, 2001, Spranger agrees that he will refer to HFID, without compensation, all non- control room project inquiries from any company that was an HFID client during the period commencing January 1, 1995 and ending December 31, 1999. 6.7 HFID agrees that Spranger shall take possession of the original historical control room materials for his free and unencumbered use. Spranger agrees to provide HFID with an itemized list of all of such original historical control room materials. He further agrees that at any time and/or from time to time to give access to such materials to HFID and to permit HFID to make copies of all or part of such materials. This covenant shall continue during the five (5) year period ending December 31, 2004. 6.8 During the period commencing January 1, 2000 and terminating December 31, 2000, Refac shall make available to Spranger, without charge, an office at its corporate headquarters in Edgewater, New Jersey for his use in performing the services contemplated by this Paragraph 6 and the sales representation services provided for in Paragraph 7 hereof. 7. Sales Representative Services. ------------------------------ 7.1 RIL hereby retains Spranger as an independent sales representative for HFID on the following terms and conditions: 7.1.1 Period. The agency shall commence on the date hereof and shall be ------- terminable at any time and for any reason by RIL. 7.1.2 Compensation. Should Spranger introduce HFID to a prospective ------------ client that has not been an active HFID client during the period commencing January 1, 1995 and ending December 31, 1999 and which has not been specifically identified by HFID as a targeted prospect, HFID will pay Spranger a 7 1/2% commission on the first $100,000 of collected project fees and 5% of such collected project fees in excess of $100,000. Such commission will be payable within thirty (30) days after the end of the month in which the client makes payment to HFID. If any such client retains HFID for an additional project(s) within two (2) years from the commencement of the initial project, HFID shall also pay Spranger a 5% fee on such project(s). This right to compensation on additional projects shall continue even if RIL terminates this sales representation agency under Paragraph 7.1.1 above. All clients solicited by Spranger shall be subject to the fees and other terms and conditions established by HFID from time to time. Spranger understands and agrees that HFID shall not be obligated to accept any clients introduced by him and that HFID shall have the sole and absolute discretion to set credit limits, make adjustments, terms, allowances, and discounts, and to accept or reject any projects, as it may determine. Spranger shall not have any right or authority to create any obligation on behalf of HFID or to bind HFID in any manner. 7.1.3 Expenses. Spranger shall have the entire responsibility for and -------- shall pay all costs and expenses of doing business in connection with his sales representation activities hereunder. 7.1.4 Definition of Clients. As used in this Paragraph 7, the term --------------------- "clients" shall mean the business entities for which HFID performed services but shall not include any of the individuals employed by such entities. 8. Confidentiality, Non-Competition, etc. -------------------------------------- 8.1 As used in this Paragraph 8, "Refac Companies" means Refac and all of its subsidiary companies and "Confidential Information" means any confidential or proprietary information relating to the identity of customers of any of the Refac Companies, the identity of representatives of customers with whom any of the Refac Companies has dealt, the kinds of services provided by the Refac Companies to customers, the manner in which such services are performed or offered to be performed, the service needs of actual or prospective customers, pricing information, information concerning the creation, acquisition or disposition of products and services, customer maintenance listings, computer software applications, research and development data, knowhow, personnel information, corporate finance information, and other proprietary information and trade secrets. Notwithstanding the above, Confidential Information shall not include any information that: (i) is generally available to the public without conducting a substantial search of published literature; or (ii) is subject to disclosure pursuant to any order or regulation of any governmental, regulatory or administrative agency or authority or court of judicial authority. If a particular portion or aspect of Confidential Information becomes subject to either of the foregoing exceptions, all other portions or aspects of such information shall remain subject to this Paragraph 8. 8.2 Spranger acknowledges that (i) during the course of his employment he has had, and will continue to have, access to and knowledge of Confidential Information, (ii) the disclosure of any such Confidential Information to existing or potential competitors of HFID would place HFID at a competitive disadvantage and would do damage, monetary or otherwise, to HFID's business, and (iii) the trade secret status of the Confidential Information and that the Confidential Information constitutes a protectable business interest of HFID. Accordingly, Spranger agrees as follows: (i) During the five (5) year period commencing January 1, 2000, he shall not, directly or indirectly, whether individually, as a director, stockholder, owner, partner, employee, principal or agent of any business, or in any other capacity, make known, disclose, furnish, make available or utilize any of the Confidential Information, other than in the proper performance of the duties as a sales representation and/or consultant hereunder. (ii) Within thirty (30) days after the execution of this Agreement, Spranger agrees to return to Refac all Confidential Information, including all photocopies, extracts and summaries thereof, and any such information stored electronically on tapes, computer disks or in any other manner that he does not deem necessary for the rendition of the sales representation services provided for herein. Upon the termination of the sales representation services, the Confidential Information then in his possession shall be returned to the Refac Companies. 8.3 During the period that Spranger provides the sales representation services provided for herein and for a period of twenty-four (24) months thereafter, Spranger agrees that he will not, directly or indirectly, for his benefit or for the benefit of any other person, firm or entity, solicit the employment or services of, or hire, any person who was known to be employed by or was a known consultant to any of the Refac Companies during the course of his employment by HFID and sales representation services hereunder. 8.4 The provisions of this Paragraph 8 are in addition to any other obligations that Spranger may have to Refac under or by reason of the Employment Agreement and/or the Merger Agreement for confidentiality or non-competition. 9. Arbitration. ------------ Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in New York, New York, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The arbitrators, in their discretion, may direct that the successful party in any such arbitration shall be entitled to be reimbursed by the other party for reasonable attorneys' fees and expenses incurred in connection with such dispute or controversy. 10. Miscellaneous. -------------- 10.1 Section headings. Section headings contained in this Agreement ----------------- are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 10.2 Governing Law and Jurisdiction. This Agreement shall be governed by ------------------------------- and interpreted in accordance with the internal laws of the State of New York applicable to agreements entered into and to be performed wholly in New York, irrespective of such State's rules pertaining to conflicts of laws. 10.3 Waiver. No failure or delay by either party in exercising any ------- right, power, or remedy under this Agreement shall operate as a waiver of any such right, power, or remedy. No waiver of any provision of this Agreement shall be effective unless in writing and signed by the party against whom such waiver is sought to be enforced. Any waiver by either party of any provision of this Agreement shall not be construed as a waiver of any other provision of this Agreement, nor shall such waiver operate as or be construed as a waiver of such provision respecting any future event or circumstance. 10.4 Modification. No modification of any provision hereof shall be ------------- effective unless in writing and signed by both of the parties to this Agreement. 10.5 Severability. In the event any provision of this Agreement (or ------------- portion thereof) is determined by a court of competent jurisdiction to be invalid or otherwise unenforceable, such provision (or part thereof) shall be enforced to the extent possibly consistent with the stated intention of the parties, or, if incapable of such enforcement, shall be deemed to be deleted from this Agreement, while the remainder of this Agreement shall continue in full force and remain in effect according to its stated terms and conditions. 10.6 Further Action. The parties agree, upon the other party's request, --------------- to execute any and all documents and do all acts necessary to carry out the terms of this Agreement. 10.7 Entire Agreement. This Agreement, including the Exhibits hereto, ----------------- sets forth the entire agreement and understanding between the parties with respect to the subject matter hereof. This Agreement supersedes all prior and contemporaneous agreements, negotiations, and understandings between the parties, both oral and written. IN WITNESS WHEREOF, the parties have executed this Agreement on the date written below. Refac By: /s/ Robert L. Tuchman ----------------------- Robert L. Tuchman Title: President & CEO Date: January 11, 2000 ----------------------- Refac International, Ltd. By: /s/ Robert L. Tuchman ----------------------- Robert L. Tuchman Title: President & CEO Date: January 11, 2000 ----------------------- /s/ Douglas M. Spranger ----------------------- Douglas M. Spranger Date: January 11, 2000 ----------------------- EX-13 3 1999 ANNUAL REPORT EXHIBIT 13 REFAC AND SUBSIDIARIES ---------------------- FINANCIAL STATEMENTS OF ANNUAL REPORT ON FORM 10-K TO THE SECURITIES AND EXCHANGE COMMISSION YEAR ENDED DECEMBER 31, 1999 INDEX TO FINANCIAL STATEMENTS ----------------------------- 1. Financial Statements -------------------- The Consolidated Financial Statements to be included in Part II, Item 8 of this report are incorporated by reference to the Annual Report to Stockholders of Refac for the year ended December 31, 1999, copies of which are attached to this report. All schedules required by Item 14(a)(2) of this report have been omitted because they are inapplicable, not required, or the information is included elsewhere in the financial statements or accompanying notes. EXHIBIT 13 ---------- 1999 ANNUAL FINANCIAL REPORT ================================================================================ [LOGO OF REFAC] www.refac.com (2) ____ LETTER TO STOCKHOLDERS (6) ____ REFAC'S BUSINESSES (13) ____ MANAGEMENT'S DISCUSSION AND ANALYSIS (15) ____ CONSOLIDATED STATEMENTS (20) ____ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (27) ____ INDEPENDENT AUDITOR'S REPORT (29) ____ DIRECTORS AND OFFICERS AT A GLANCE For almost 50 years, Refac has been a recognized international leader in intellectual property management. [LOGO OF REFAC] Today, our expertise includes: new product development; graphic design and communications; brand and trademark licensing; technology and patent licensing; and intellectual venture capital. [GRAPHIC] www.refac.com CHAIRMAN'S LETTER - -------------------------------------------------------------------------------- TO OUR STOCKHOLDERS: Over the past two years, your Company has changed considerably. In 1997, we were known principally as a patent licensing and enforcement organization. Today, after a series of strategic acquisitions and a refining of our corporate image, we are becoming recognized globally for our expertise in all phases of the product evolution cycle--from concept to research, design, engineering, manufacturing, branding, packaging, licensing and patenting. 1999'S HIGHLIGHTS Among our major achievements in 1999 was the formation of Refac Consumer Products, Inc. (RCP) and the successful introduction at the January 2000 Consumer Electronics Show (CES) of our initial proprietary product line--consisting of a Volkswagen New Beetle(TM) branded AM/FM digital radio and multifunction CD player stereo, sport radio, travel clock and clock radio; a RefacDesign branded MP3 Player, MP3 Player Car Adapter, Digital Sport Radio and Hand-Cranked Emergency Radio with Dual Mode Flashlight; a Star Trek(R) Lamp; and a Funatik branded novelty Golf Lamp. Our investment in RCP is a good example of how we use our integrated creative and business expertise to build enterprise value. All of these products, with the exception of the lamps, were developed in-house by our Product Development Group. Our recently acquired Graphic Design Group is creating the packaging and collateral sales materials and the patenting, branding and licensing aspects are being handled by our Licensing Group. We have also established a Hong Kong subsidiary to facilitate the sourcing, manufacturing and quality control of the product line. Given the favorable reaction to the line at CES and the enthusiastic interest our sales force is experiencing with buyers, our next hurdle is to demonstrate that we can deliver quality goods in a timely manner. We shortened our corporate name to Refac, and introduced a new corporate logo and identity system to more accurately reflect the broadening of our services and capabilities and the future direction of our operations. We unveiled our new logo and corporate image in June 1999 at the New York Licensing Show, where our exhibit booth generated substantial interest not just for our licensing clients' properties, but also for the display of our Product Development Group's innovative designs. We relocated our corporate headquarters and creative center to a modern, state-of-the-art facility encompassing 30,000 square feet located on the banks of the Hudson River in Edgewater, New Jersey. This physical consolidation of the Refac companies enhances the integration of our core businesses, provides an inspiring environment for employees and clients and is strategic to our continued growth. Another major accomplishment was our November acquisition of David Morris Creative (DMC), a top regional graphic design firm that has created powerful graphic communications and marketing solutions for a wide variety of clients since 1990. DMC offers an array of graphic services including brand and communications strategy, corporate identity, packaging and multimedia design. Its roster of blue chip clients includes Sharp Electronics, Canon USA, Chubb Group of Insurance Companies, IBM, Siemens Medical Systems and Sony Electronics, Inc. Last month, we relocated DMC's operations to our corporate headquarters and creative center. PAGE - ---- 2 www.refac.com [PHOTO] PHOTOGRAPHED AT THE NEW EDGEWATER FACILITY, PICTURED LEFT TO RIGHT: BERT D. HEINZELMAN, SENIOR VICE PRESIDENT, REFAC AND PRESIDENT, REFAC HUMANFACTORS-ID; DAVID ANNUNZIATO, PRESIDENT AND CREATIVE DIRECTOR, REFAC DAVID MORRIS CREATIVE; ROBERT L. TUCHMAN, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, REFAC; STANLEY REIFF, PRESIDENT, REFAC CONSUMER PRODUCTS, INC.; ARLENE J. SCANLAN, PRESIDENT, REFAC LICENSING, INC. CHAIRMAN'S LETTER CONTINUED - -------------------------------------------------------------------------------- Late in the year, OXO introduced its Good Grips(R) and @Hand(R) hand tool lines, which we developed on a royalty basis. Each of these product lines consists of 19 SKUs and includes screwdrivers, hammers, pliers, tape measures and a utility knife. We captured a Good Design award from The Chicago Athenaeum: Museum of Architecture for these products which were also chosen as one of Today's Homeowner Magazine's Best New Products for 2000. Our Product Development Group has undertaken a confidential product design and development program with a leading manufacturer covering a new category for our proprietary work. This program includes a development fee and royalties based upon sales and joint ownership of the intellectual property rights. The product line is expected to be marketed late in 2001, at which time we will generate royalty based revenues. Our Licensing Group acquired the exclusive agency rights for the commercial development and promotion of The Joe Cartoon Co. and its www.joecartoon.com website, which has become one of the leading independent entertainment sites on the Internet and is known for its edgy animations and interactive games. Spurred by the viral distribution of its "Frog in a Blender," "Gerbil in a Microwave, " "Lump" and "Lemmings" animations, traffic to www.joecartoon.com grew at an explosive rate during 1999. For the month of February 2000, PC Data Online gave the www.joecartoon.com website an overall ranking of 519 (reporting 1.1 million unique users), and a 1.6% reach. FINANCIAL RESULTS Our consolidated net income for the year ended December 31, 1999 was $3,673,000, or $.97 per share (on a fully diluted basis), compared to $4,735,000, or $1.21 per share, in 1998. Revenues for 1999 were $14,452,000, down from 1998's $15,272,000. The decreases in net income and revenues were due largely to a decline in gains and dividends on licensing-related securities. These results are discussed in more detail under "Management's Discussion and Analysis" starting on page 13 of this Annual Report. THE YEAR AHEAD We believe that great design reinforces and builds the strength, recognition and equity of valuable brands. To maximize the fusion of great design and great brands, we compiled a team of award-winning product designers, talented graphic designers, skilled brand builders and experienced consumer product marketers. During 2000, we will leverage these uniquely combined strengths to drive revenue growth from our design services and licensing activities while capitalizing on the growth potential of our consumer products division. We will continue to review opportunities to invest our creative and business capital--which we call Intellectual Venture Capital--in appropriate new product ventures. We expect that RCP's sales will accelerate significantly during the second half of 2000 as the first New Beetle and RefacDesign products reach the marketplace. We will continue to invest creative and financial resources in RCP and have already begun developing an equally exciting 2001 product line. PAGE - ---- 4 www.refac.com The Volkswagen New Beetle Program combined our strengths in product development, brand building and consumer products. We have already begun discussions with new potential partners for similar programs, and will continue to seek additional opportunities to extend our proprietary product development program into new product categories. We expect the Joe Cartoon web site to become an increasingly valuable property and we will seek other Internet-related opportunities. Of course, our quest for the agency rights to other valuable properties and brands is ongoing. We plan to continue our work with the pilot study started last year to determine the efficacy of the Pyloricide compound to eliminate the H.pylori bacteria, a leading cause of peptic ulcers, but caution that the results to date have not been encouraging. We are more aggressively marketing our array of services to a wider range of industries. Our product designs and services will be displayed at no fewer than three major industry trade shows in 2000. We began the year by not only successfully introducing our consumer products line at the January CES, but we also generated valuable new business opportunities for our Product Development Group. We will also attend the Medical Design and Manufacturing East 2000 Show and Licensing 2000 and are exploring other opportunities to expand awareness of our design and licensing services as well as our product line. With our independent and integrated core competencies, Refac is well-positioned to make significant strides in year 2000 and we expect our consulting, manufacturing and marketing operations to provide a strong platform for building recurring income when the planned liquidation of our licensing-related securities position in KeyCorp (NYSE-KEY) is completed in 2001. An area of obvious concern to you, as well as to your Board of Directors and the management and employees of Refac, is our stock price. Our market value--probably the most important measure of our progress to you--did not fare well over the past year. While the overall market has been strong, there has been a marked lack of investor interest in micro-cap stocks. Yet, we are fundamentally more sound than we were a year ago with a clear direction and abundance of opportunity. Our management and key employees hold a considerable stake in your Company's success and we are committed to do everything in our power to grow our business and enhance stockholder value. Sincerely, /s/ Robert L. Tuchman Robert L. Tuchman Chairman & Chief Executive Officer PAGE ---- 5 Opportunities INTELLECTUAL VENTURE CAPITAL Refac seeks opportunities to invest its creative and business capital in new product development ventures that have long-term potential. Unlike our traditional fee-for-service consulting, we share in the cost and risk of brand and product development in appropriate situations in return for future royalties or venture equity. Our interest in providing this novel form of venture capital is stimulated by our confidence that we will help our partners bring superior products to the marketplace. Examples of our intellectual venture capital investments include the formation of Refac Consumer Products, Inc. and our royalty based development of the OXO hand tool product lines. NEW BEETLE/TM/ PRODUCTS - -------------------------------------------------------------------------------- [GRAPHIC] PORTABLE STEREO - -------------------------------------------------------------------------------- PAGE - ---- 6 SPORT RADIO [GRAPHIC] TRAVEL CLOCK [GRAPHIC] CLOCK RADIO [GRAPHIC] All products shown here were designed by Refac HumanFactors-ID www.refac.com PAGE ---- 7 PRODUCT DESIGN & DEVELOPMENT Refac's Product Development Group, which operates under the name Refac HumanFactors-ID, has created innovative, award-winning products for some of the most important and prestigious companies in the world. [GRAPHIC] [GRAPHIC] SCHICK(R) FX RAZOR OXO(R) JUICER We are a recognized leader in industrial design, human factors and engineering consulting. For more than 25 years, we have helped our clients bring hundreds of successful products to market, many representing major breakthroughs in innovation, technology and category positioning. Our talented product development team creates extraordinary solutions for our clients. www.refac.com All products shown here were designed by Refac HumanFactors-ID. PAGE - ---- 8 REFAC - -------------------------------------------------------------------------------- [GRAPHIC] - -------------------------------------------------------------------------------- HAND-CRANKED EMERGENCY RADIO/FLASHLIGHT - -------------------------------------------------------------------------------- PAGE ---- 9 Visual GRAPHIC DESIGN & COMMUNICATIONS Great visual communication is clear and concise telling the whole story at a glance. Refac's Graphic Design Group, which operates under the name Refac David Morris Creative, has been creating powerful graphic communications and marketing solutions for a wide variety of clients since 1990. As consultants, we offer a wide range of graphic and new media design services from brand and communications strategy, corporate identity and packaging to implementation. [GRAPHIC] - -------------------------------------------------------------------------------- MINOLTA PACKAGING BY REFAC DAVID MORRIS CREATIVE - -------------------------------------------------------------------------------- PAGE - ---- 10 BRAND & TRADEMARK LICENSING [GRAPHIC] ------------------- WWW.JOECARTOON.COM ------------------- Refac Licensing is a unique brand and trademark licensing agency. We create, develop, and execute long-term strategic programs that promote the valuable property of our clients. Our primary objective is to make sure that the brand's credentials are extended to new product categories, while helping to support and build brand awareness and generate royalty income. Unlike any other licensing agency in the world, Refac brings its integrated services together to explore just the right opportunities for licensors. We work with our clients and their licensees to develop new products and promotions, and follow each program through to completion. This unique approach ensures that end-products live up to the brand promise of value and quality. PATENT & TECHNOLOGY LICENSING [GRAPHIC] --------------------------- OFFICIAL SEAL OF THE PATENT & TRADEMARK OFFICE --------------------------- Refac's technology and patent licensing business includes the negotiation and administration of licenses and joint ventures involving patents, know-how and trademarks. We transform the potential value of partially developed or unutilized technologies and intellectual properties into revenue-bearing licensing agreements and enterprises. Our business process is one of discovering, assessing, protecting, licensing, managing and commercializing technologies throughout the world. www.refac.com PAGE ---- 11 OUR ENVIRONMENT With the Manhattan skyline as its backdrop, Refac's new corporate headquarters and creative center is located on The Hudson River Pier in Edgewater, New Jersey. This magnificent facility is the home of our core business units including: Refac International, Ltd. Refac HumanFactors-ID Refac David Morris Creative Refac Licensing, Inc. Refac Consumer Products, Inc. [GRAPHIC] www.refac.com PAGE - ---- 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS REFAC AND SUBSIDIARIES - -------------------------------------------------------------------------------- Results of Operations REVENUES were $14,452,000 in 1999 as compared to $15,272,000 in 1998 and $11,440,000 in 1997. The decrease from 1998 to 1999 of $820,000, or 5%, is principally due to decreases in (i) gains on sales of licensing-related securities and dividends ($1,003,000), (ii) creative consulting fees ($352,000) and (iii) revenues from licensing-related activities ($135,000) offset by sales of consumer products of $495,000, a new business segment started in September 1999, and dividend and interest income of $175,000. The increase from 1997 to 1998 of $3,832,000, or 33%, is due to the inclusion of $3,562,000, in revenues derived by the Company's Product Development Group (acquired in November 1997) and an increase of $971,000 in income from licensing-related activities, offset by a decrease in income from licensing-related securities ($551,000) and a decrease in dividends, interest and other income ($150,000). See Notes to the Consolidated Financial Statements. Revenues are summarized as follows:
Description 1999 1998 1997 --------------------------- Revenues from licensing-related activities 29% 28% 29% Realized gains on sales and dividends from licensing-related securities 42% 46% 66% Creative consulting services (Product Development and Graphic Design Groups acquired in November 1997 and 1999, respectively 23% 25% 2% Consumer product sales (acquired in September 1999) 3% -- -- Dividend, interest and other income 3% 1% 3% --------------------------- Total 100% 100% 100% ---------------------------
Licensing-Related Activities 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 decreased by $41,000 in 1999 as compared to 1998, and increased by $303,000 in 1998 as compared to 1997. The patent licensing income component of the 1999 recurring revenue increased by $49,000 and is attributable the increase in (i) trademark agency fees of $135,000 and (ii) patent enforcement fees of $115,000 offset by a decrease in patent licensing income of $201,000. Revenues from non-recurring agreements vary from year-to-year 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. During 1999, 1998 and 1997, non-recurring licensing revenues amounted to $880,000, $974,000 and $307,000, respectively. Service income from royalty verifications, which the Company first offered in March 1998, decreased by $90,000 from 1999 to 1998. EXPENSES FROM LICENSING-RELATED ACTIVITIES consist principally of amounts paid to licensors at contractually stipulated percentages of the Company's specific patent and product revenues and, in addition, includes expenses related to the investigation, marketing, administration, enforcement, maintenance and prosecution of patent, trademarks and license rights and related licenses. Licensing-related expenses for 1999 increased by $140,000 over 1998 and $845,000 over 1997. As a percentage of licensing revenues, these expenses were 51%, 46% and 34% in 1999, 1998 and 1997, respectively. The increase in 1999 over 1998 is principally due to an increase in licensing-related salaries and the increase in 1998 over 1997 was attributable to the inclusion of Refac Licensing, Inc. (formerly known as Selective Licensing & Promotion, Inc.), a brand and character licensing agency, which was formed in January 1998. Licensing-Related Securities 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 December 31, 1999, licensing-related securities consisted of 275,000 shares of KeyCorp common stock. KeyCorp had a 2-for-1 stock split of such common stock on March 9, 1998 and all references in this Report to the number of KeyCorp shares have been adjusted to reflect such stock split. The Company intends to sell 200,000 of such shares during 2000 and, as of December 13 31, 1999, had bought four successive quarterly put options (at $27.4262 per share) and had sold four successive quarterly call options (at prices ranging from $37.4825 to $39.3720 per share), each of which covers 50,000 shares. See Notes to the Consolidated Financial Statements for additional details concerning such securities. 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 income decreased by $352,000 in 1999 as compared to 1998 which consists of a decrease of $798,000 in Product Development and the inclusion of $446,000 in Graphic Design services. The reduction in Product Development fees is due, in part, to the Company's development of its own line of consumer electronic products which were introduced in January 2000 at the Consumer Electronics Show and performing some work on a royalty as opposed to a fee-for-service basis. EXPENSES increased by $258,000 in 1999 as compared to 1998, consisting of an increase of $315,000 from the Graphics Design Group and a decrease in expenses of $57,000 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 $495,000 during 1999 principally consists of sales of imported consumer electronic products sourced by RCP for a retailer. RCP introduced its initial proprietary product line at the January 2000 Consumer Electronics Show in Las Vegas, Nevada. The product line, which will be manufactured in Asia, was developed in-house by the Company's Product Development Group and includes a Volkswagen New Beetle(TM) licensed AM/FM Digital Stereo and Multifunction CD Player, Travel Clock, Clock Radio and Sport Radio, a RefacDesign(TM) branded MP3 Player, MP3 Player Car Adapter, Hand-Cranked Emergency Radio/Flashlight and Digital Radio. Refac also established a Hong Kong subsidiary to facilitate the sourcing, manufacturing and quality control of the product line. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased by $443,000 in 1999 over 1998, which increase is principally attributable to the acquisition of Funatik and the formation of RCP ($317,000) and the acquisition of the Graphic Design Group ($53,000). The increase in 1998 over 1997 of $1,946,000 is attributable to the inclusion in 1998 of the newly formed divisions of (i) Refac HumanFactors-ID (ii) Refac Licensing and (iii) Refac Biochemics Corporation. 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 ($4,936,000), Graphic Design Group ($1,344,000) and Funatik Inc. ($19,000). Such goodwill is being amortized over 25, 20 and 10 years, respectively, which is the expected period of benefit. Such amortization aggregated $219,000, $204,000 and $28,000 for 1999, 1998 and 1997, respectively, and is included in selling, general and administration expenses. INCOME TAX PROVISION. The Company's income tax provision of $1,657,000 in 1999 reflected an effective tax rate of 31%, compared with rates of 34% and 33% in the two previous years. The decrease of 3% from the effective statutory income tax rate of 34% is due to the consolidated group not being subject to state and local income taxes, other than statutory minimums and timing differences associated with the Company's relocation to New Jersey. INFLATION. The Company's income from licensing-related 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 income changes in currency valuations. LIQUIDITY AND CAPITAL RESOURCES. Cash, cash equivalents, corporate bonds and U.S. Treasury Notes increased by $1,423,000 to $8,489,000 at December 31, 1999 from $7,066,000 at December 31, 1998. The Company believes its liquidity position is adequate to meet all current and projected financial needs. The Company has commitments under leases covering its facilities (see Notes to the accompanying Consolidated Financial Statements), and under a Retirement Agreement with its founder and former Chief Executive Officer (which has been provided for in the financial statements). For information on leaseholds and other commitments and contingencies see Notes to the accompanying Consolidated 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 December 31, 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 protection as provided in the Year 2000 Information and Readiness Disclosure Act. 14 CONSOLIDATED BALANCE SHEETS REFAC AND SUBSIDIARIES
DECEMBER 31, ---------------------------------- 1999 1998 ---------------------------------- Assets Current Assets: Cash and cash equivalents $ 5,158,000 $ 2,973,000 Royalties receivable 1,153,000 776,000 Accounts receivable 1,425,000 945,000 Prepaid expenses and other current assets 521,000 221,000 ---------------------------------- Total current assets 8,257,000 4,915,000 ---------------------------------- Property and equipment - net 2,232,000 771,000 Licensing-related securities 7,145,000 15,068,000 Investments being held to maturity 3,331,000 4,093,000 Other assets 583,000 760,000 Goodwill, net of accumulated amortization of $451,000 in 1999 and $232,000 in 1998 6,299,000 4,958,000 ---------------------------------- $27,847,000 $30,565,000 ---------------------------------- Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 674,000 $ 354,000 Accrued expenses 439,000 236,000 Amounts payable under service agreements 417,000 240,000 Income taxes payable 716,000 75,000 ---------------------------------- Total current liabilities 2,246,000 905,000 ---------------------------------- Deferred income taxes 2,365,000 5,050,000 Other liabilities - deferred compensation 445,000 445,000 ---------------------------------- Commitments and Contingencies Stockholders' Equity Common stock, $.10 par value; authorized - 20,000,000 shares; issued 5,450,887 in 1999 and in 1998 545,000 545,000 Additional paid-in capital 9,984,000 9,984,000 Retained earnings 22,299,000 18,626,000 Accumulated other comprehensive income 4,212,000 9,259,000 Treasury stock, at cost 1,655,626 shares in 1999 and 1998 (13,874,000) (13,874,000) Receivable from issuance of common stock and warrants (375,000) (375,000) ---------------------------------- Total stockholders' equity 22,791,000 24,165,000 ---------------------------------- $27,847,000 $30,565,000 ----------------------------------
The accompanying notes are an integral part of the consolidated financial statements 15 CONSOLIDATED STATEMENTS OF OPERATIONS REFAC AND SUBSIDIARIES - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, -------------------------------------- 1999 1998 1997 -------------------------------------- Revenues Licensing-related activities $4,156,000 $ 4,291,000 $ 3,320,000 Creative services fees 3,396,000 3,748,000 186,000 Consumer product sales 495,000 -- -- Realized gains on licensing-related securities 5,614,000 6,435,000 6,936,000 Divided income from licensing-related securities 396,000 578,000 628,000 Divided and interest income 395,000 220,000 275,000 Realized gains on marketable securities -- -- 84,000 Gains from foreign currency transactions -- -- 1l,000 -------------------------------------- Total Revenues 14,452,000 15,272,000 11,440,000 -------------------------------------- Costs and Expenses Licensing-related activities $ 2,125,000 $ 1,985,000 $ 1,140,000 Creative service expenses 2,819,000 2,561,000 187,000 Consumer product sales costs 320,000 -- -- Selling, general and administrative expenses 3,858,000 3,415,000 1,469,000 Loss from ceased operations -- 121,000 846,000 Realized losses on marketable securities -- 2,000 -- -------------------------------------- Total costs and expenses 9,122,000 8,084,000 3,642,000 -------------------------------------- Income before provision for taxes on income 5,330,000 7,188,000 7,798,000 -------------------------------------- Provision for taxes on income 1,657,000 2,453,000 2,607,000 -------------------------------------- Net income $ 3,673,000 $ 4,735,000 $ 5,191,000 -------------------------------------- Basic earnings per share $ .97 $1.25 $1.42 Diluted earnings per share $ .97 $1.21 $1.36 --------------------------------------
The accompanying notes are an integral part of the consolidated financial statements - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME REFAC AND SUBSIDIARIES - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 ------------------------------------------ Net income $ 3,673,000 $ 4,735,000 $ 5,191,000 Other comprehensive income, net of tax: Unrealized holding (losses) gain (5,047,00) (4,492,000) 18,000 Foreign currency translation adjustment -- (200,000) 5,000 ------------------------------------------ Comprehensive (loss) income ($1,374,000) $ 43,000 $ 5,214,000 ------------------------------------------
The accompanying notes are an integral part of the consolidaled financial statements 16 CONSOLIDATED STATEMENTS OF CASH FLOWS REFAC AND SUBSIDIARIES - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 ------------------------------------------ Cash flows from Operating Activities Net Income $3,673,000 $4,735,000 $5,191,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 557,000 320,000 141,000 Realized gains on sale of licensing-related-services (5,614,000) (6,429,000) (7,003,000) Decrease (increase) in security deposit 100,000 (100,000) -- Deferred income taxes (191,000) 339,000 241,000 Write-down of long-term assets -- -- 450,000 (Increase) decrease in assets, net of effect of purchases: Accounts receivable (795,000) (409,000) 312,000 Prepaid expenses and other current assets (325,000) -- -- Proceeds from sale of marketable securities -- 2,503,000 2,392,000 Purchase of marketable securities -- -- (2,503,000) Other assets 212,000 (68,000) 421,000 Increase (decrease) in liabilities, net of effect of purchases: Accounts payable and accrued expenses 289,000 (189,000) (65,000) Amounts payable under service agreements 176,000 6,000 (33,000) Income taxes payable 640,000 (183,000) (123,000) ------------------------------------------ Net cash (used in) provided by operating activities (1,278,000) 525,000 (579,000) ------------------------------------------ Cash flows from Investing Activities Proceeds from sales of licensing-related securities 6,182,000 7,045,000 6,959,000 Proceeds from (purchase of) investments being held to maturity 762,000 (2,864,000) (856,000) Payment for purchase of HumanFactors-ID Industrial Design, Inc., net cash of acquired (275,000) -- (428,000) Payment for purchase of David Morris Creative, Inc., net of cash acquired (1,357,000) -- -- Payment for purchase of Funatik, Inc., net of cash acquired (50,000) -- -- Additional to property and equipment (1,799,000) (645,000) (88,000) ------------------------------------------ Net cash provided by investing activities 3,463,000 3,536,000 5,587,000 ------------------------------------------ Cash flows from Financing Activities Repayment of Note Payable-former Human Factors-ID shareholders -- (4,050,000) -- Repayment of loan -- (53,000) (60,000) Dividends paid -- -- (2,701,000) Proceeds from exercise of stock options and purchase of warrants -- 147,000 78,000 Acquisition of treasury stock -- -- (14,875,000) ------------------------------------------ Net Cash used in financing activities -- (3,956,000) (17,558,000) ------------------------------------------ Effect of exchange rate changes on cash -- -- 6,000 ------------------------------------------ Net increase (decrease) in cash and cash equivalents 2,185,000 105,000 (12,544,000) Cash and cash equivalents at beginning of period 2,973,000 2,868,000 15,412,000 ------------------------------------------ Cash and cash equivalents at end of period $5,158,000 $2,973,000 $2,868,000 ------------------------------------------ Income taxes paid $1,257,000 $2,496,000 $2,408,000 ------------------------------------------
For supplemental disclosure of non-cash investing and financing activities, see Notes to the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements. 17 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY REFAC AND SUBSIDIARIES - -------------------------------------------------------------------------------- Common Stock ------------------------- Years ended December 31, 1999, 1998, and 1997 Shares Amount ------------------------- Balance, December 31, 1996 5,401,887 $ 540,000 Net Income Shares issued on exercise of stock options 11,500 1,000 Issuance of compensatory stock options Other comprehensive income Issuance of stock for HumanFactors-ID acquisition Purchase of Treasury Stock ------------------------- Balance, December 31, 1997 5,413,387 541,000 Net Income Shares issued on exercise of stock options 37,500 4,000 Issuance of compensatory stock options Other comprehensive income Collection of warrants receivable Issuance of stock for HumanFactors-ID acquisition ------------------------- Balance, December 31, 1998 5,450,887 545,000 Net Income Other comprehensive income ------------------------- Balance, December 31, 1999 5,450,887 $545,000 ------------------------- The accompanying notes are an integral part of the consolidated financial statements. 18
Receivable Accumulated From Issuance of Additional Other Treasury Stock Common Stock Paid-In Retained Comprehensive Shares Amount and Warrants Capital Earnings Income - ------------------------------------------------------------------------------------------------------------------------ -- -- ($375,000) $9,252,000 $8,700,000 $13,928,000 5,191,000 (52,000) 128,000 11,000 23,000 (12,000) 101,000 50,000 1,775, 000 (14,875,000) - ------------------------------------------------------------------------------------------------------------------------ 1,763,000 (14,774,000) (427,000) 9,441,000 13,891,000 13,951,000 4,735,000 91,000 3,000 (4,692,000) 52,000 (107,374) 900,000 449,000 - ------------------------------------------------------------------------------------------------------------------------ 1,655,626 (13,874,000) (375,000) 9,984,000 18,626,000 9,259,000 3,673,000 (5,047,000) - ------------------------------------------------------------------------------------------------------------------------ 1,655,626 ($13,874,000) ($375,000) $9,984,000 $22,299,000 $4,212,000 - ------------------------------------------------------------------------------------------------------------------------
19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REFAC AND SUBSIDIARIES - -------------------------------------------------------------------------------- 1 Business and summary of significant accounting policies Refac, a Delaware corporation organized in 1952, is engaged directly and through certain of its subsidiaries in the business of new product development; graphic design and communications; brand and trademark licensing; technology and patent licensing; and the manufacture and marketing of consumer electronic products. In May 1999, the Company changed its name from REFAC Technology Development Corporation to Refac. A. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Refac and all of its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated. B. Securities Acquired in Association with Licensing Activities and Securities Held to Maturity The Company categorizes and accounts for its investment holdings as follows: o Held to maturity securities are recorded at amortized cost. This categorization is used only if the Company has the positive intent and ability to hold these securities to maturity. o Available for sale securities are securities which do not qualify as either held to maturity or trading securities. Unrealized gains and losses are reported as a separate component of stockholders' equity, net of applicable deferred income taxes on such unrealized gains and losses at current income tax rates. The Company's investment in licensing-related securities are included in this category. C. Derivatives The Company purchased put and wrote call options to hedge against market fluctuations in its holdings of KeyCorp common stock. The Company records these derivative financial instruments at fair value and reports them as available for sale securities. D. Income Taxes Deferred income taxes arise from temporary differences in the basis of assets and liabilities for financial reporting and income tax purposes. E. Earnings Per Share The following reconciles basic and diluted shares used in earnings per share computations. 1999 1998 1997 ----------------------------------- Basic shares 3,795,261 3,787,220 3,661,983 Dilution: Stock options and warrants 9,012 141,742 166,564 ----------------------------------- Diluted shares 3,804,273 3,928,962 3,828,547 ----------------------------------- In 1999, 1998 and 1997, options to purchase 859,250, 69,500 and 170,000 shares of common stock, respectively, were not included in the computation of diluted net income per share because the exercise prices of those options were greater than the average market price of the common stocks. F. Consolidated Statement of Cash Flows The Company considers all highly liquid investments and debt instruments purchased with an original maturity of three months or less to be cash equivalents. G. Revenue Recognition Royalty revenue is recognized when the licensee sells the product and service revenues are recognized as services are performed. Non-recurring lump sum payments that represent settlements of patent infringement claims are recognized when the settlements occur and collectibility is reasonably assured. 20 H. Using Estimates in Financial Statements In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as revenues and expenses during the reporting period. Actual results could differ from those estimates. I. Intangibles Patents are amortized on a straight-line basis over their statutory life or expected useful life, whichever is shorter. Goodwill is amortized on a straight-line basis over periods from 10 years to 25 years. The carrying values of the long-lived assets (including goodwill) are reviewed if the facts and circumstances suggest that such assets may be permanently impaired. If the expected future undiscounted cash flows derived from such assets is less than their carrying value, such value would be reduced accordingly. During 1997, the Company wrote down $128,000 of goodwill originally recorded in connection with its acquisition of Advanced Resin Technology, Inc. J. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided for on a straight-line basis with the estimated useful lives ranging from 3 to 7 years. Leasehold improvements are amortized over the lives of the respective leases. K. Reclassifications Certain reclassifications have been made to the 1998 and 1997 financial statements to conform them to the current presentation. L. Comprehensive Income 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. 2 Licensing-related securities and securities held to maturity SECURITIES HELD TO MATURITY at December 31, 1999 and 1998 consisted of U.S. Treasury Notes and corporate bonds with an amortized cost of $3,331,000 and $4,093,000, respectively. Licensing-related securities are as follows:
Fair Carrying Unrealized December 31, 1999 Value Cost Value Gain/(Loss) --------------------------------------------------------------- Keycorp (NYSE-KEY) $ 6,084,000 $ 762,000 $ 6,084,000 $ 5,322,000 KeyCorp Put Options 1,072,000 600,000 1,072,000 472,000 Keycorp Call Options (11,000) (600,000) (11,000) 589,000 --------------------------------------------------------------- $ 7,145,000 $ 762,000 $ 7,145,000 $ 6,383,000 --------------------------------------------------------------- December 31, 1998 --------------------------------------------------------------- Keycorp (NYSE-KEY) $ 15,360,000 $ 1,330,000 $ 15,360,000 $ 14,030,000 KeyCorp Put Options 758,000 1,112,000 758,000 (354,000) KeyCorp Call Options (1,050,000) (1,112,000) (1,051,000) 62,000 --------------------------------------------------------------- $ 15,068,000 $ 1,330,000 $ 15,067,000 $ 13,738,000 ---------------------------------------------------------------
In 1998, there was a 2-for-1 stock split of KeyCorps common stock. All references to the number of KeyCorp shares and put and call strike prices in the Notes to the Consolidated Financial Statements have been adjusted to reflect such stock split. At December 31, 1999, the Company held 275,000 shares of KeyCorp. The Company also had bought and sold 200,000 put and call options, respectively (50,000 of each option expiring quarterly in 2000). 21 At December 31, 1998, the Company held 480,000 shares of KeyCorp. The realized gains for licensing related securities accounted for on a first-in, first-out basis for the years ended December 31, 1999, 1998 and 1997 are summarized as follows: 1999 1998 1997 ----------------------------------------------- KeyCorp $5,614,000 $6,435,000 $1,438,000 DBT Online, Inc. - - 293,000 Three-Five Svstems, Inc. - - 5,205,000 ----------------------------------------------- $5,614,000 $6,435,000 $6,936,000 ----------------------------------------------- In order to minimize the Company's exposure against a decline in the value of KeyCorp, on September 12, 1997, the Company entered into thirteen (13) individual derivative contracts with Union Bank of Switzerland (UBS) providing for both put options and call options. The put options give the Company the right to sell the KeyCorp stock covered by the option to UBS at the agreed upon option price even if the market price is lower on the settlement date. The call options gives UBS the right to require the Company to sell the KeyCorp common stock covered by the option at the agreed upon option price even if the market price is higher on the settlement date. If the price is between the put and call option prices on the settlement date both options lapse. Thirteen individual contracts were entered into, the first contract covering 48,000 shares and the remaining 12 contracts covering 50,000 shares of KeyCorp. The first contract expired on December 31, 1997 and each of the remaining contracts expires at the end of each calendar quarter until December 31, 2000. Each put option has a strike price per share of $27.4262 and aggregates $1,372,000. Each call option has strike prices per share which range from $35.349 to $39.372 and aggregates from $1,874,000 to $1,969,000. 3 Income Taxes The provision for taxes on income for the years ended December 31, 1999, 1998 and 1997 are as follows: 1999 1998 1997 -------------------------------------------- Federal Current $1,910,000 $2,482,000 $2,338,000 Deferred (289,000) (114,000) 203,000 State and local 5,000 57,000 34,000 Foreign withholding taxes 31,000 28,000 32,000 -------------------------------------------- $1,657,000 $2,453,000 $2,607,000 -------------------------------------------- The provision for taxes on income for the years ended December 31, 1999, 1998 and 1997 differed from the amount computed by applying the statutory Federal income tax rate of 34% as follows: 1999 1998 1997 -------------------------------------------- Statutory rate 34% 34% 34% Dividend received exclusion (2%) (2%) (2%) Other (1%) 2% 1% -------------------------------------------- Provision for taxes on income 31% 34% 33% -------------------------------------------- The tax effect of temporary differences which gave rise to deferred tax assets and liabilities as of December 31, 1999 and 1998 are as follows: Assets 1999 1998 -------------------- Deferred rent and compensation/retirement $121,000 $185,000 Write-down of long term investments and other/net -- 1,000 KeyCorp put and call options basis differences -- 100,000 -------------------- 121,000 286,000 -------------------- 22
Liabilities KeyCorp common stock basis difference 2,429,000 5,221,000 Cash to accrual basis adjustment for the acquisition of Refac HumanFactors-ID 57,000 115,000 --------------------------------- 2,486,000 5,336,000 --------------------------------- Net Liability $2,365,000 $5,050,000 ---------------------------------
4 Property and Equipment consists of the following: DECEMBER 31, --------------------------------- 1999 1998 --------------------------------- Leasehold improvements $ 1,046,000 $ 111,000 Furniture and fixtures 718,000 175,000 Computer software and equipment 1,068,000 747,000 Automobile 29,000 -- Telephone system 45,000 -- Office equipment 57,000 130,000 Other equipment 102,000 -- --------------------------------- 3,065,000 1,163,000 Less accumulated depreciation (833,000) (392,000) --------------------------------- $2,232,000 $771,000 --------------------------------- 5 Stockholders' Equity Stock Option Plans The Company measures compensation using the intrinsic value approach under Accounting Principles Board (APB) Opinion No. 25. In May 1990, shareholders approved the 1990 Stock Option and Incentive Plan (the "1990 Plan") which authorizes the issuance of up to 300,000 shares of common stock and, in May 1997, the 1990 Plan was amended to provide for a 100,000 increase in the authorized shares. In May 1998, the shareholders approved the 1998 Stock Option and Incentive Plan (the 1998 Plan) which authorizes the issuance of up to 300,000 shares of common stock. Both Plans authorize the issuance of various incentives to employees (including officers and directors who are employees), including stock options, stock appreciation rights, and restricted performance stock awards. The Plans allow the stock option committee to determine type, shares and terms of the grants. Grants may be made at any time through March 14, 2000 under the 1990 Plan and May 10, 2008 under the 1998 Plan. In addition to the 1990 Plan and the 1998 Plan outlined above, on January 21, 1998, the Company granted an employee, options to purchase 50,000 shares of common stock at an exercise price of $10.625. In 1996 stock options to purchase 50,000 shares were granted to directors at an exercise price of $5.8125. On April 7, 1997, the Company sold a warrant to Palisade Capital, L.L.C. for a price of $103,320 to purchase 200,000 shares of common stock at $8.25 per share. On November 25, 1997, the Company issued non-qualified stock options to eleven employees to purchase 165,000 shares of common stock at an exercise price of $14 per share. On March 18, 1998, the exercise prices of 190,000 employee options were reduced to $9.50 per share. 23 The table below summarizes all option activity, excluding the warrant sale to Palisade Capital, L.L.C.:
Weighted Weighted Weighted average average average exercise exercise exercise 1999 price 1998 price 1997 price ------------------------------------------------------------------------ Outstanding at beginning of year 711,500 $8.67 541,000 $9.55 332,500 $ 6.79 Options granted 145,500 4.56 284,000 9.14 220,00 13.34 Options exercised -- -- (37,500) 2.53 (11,500) 2.27 Options canceled (157,250) 9.48 (76,000) 8.00 -- -- ------------------------------------------------------------------------- Outstanding at end of year 699,750 7.64 711,500 8.67 541,000 9.55 ------------------------------------------------------------------------- Exercisable at end of year 317,070 $8.28 266,400 $8.05 341,000 $ 6.97 ------------------------------------------------------------------------- The following table summarizes option data, excluding the warrant sale to Palisade Capital, L.L.C. as of December 31, 1999: Weighted Weighted Weighted Price average average average Range Outstanding at contract exercise Exercisable at exercise Minimum Maximum December life price December price 31, 1999 (years) 31, 1999 - --------------------------------------------------------------------------------------------------------- $3.81 $5.88 245,500 7.80 $5.08 40,000 $5.81 $6.38 $8.00 133,500 7.18 $7.29 171,450 $7.77 $9.25 $12.00 320,750 7.76 $9.74 105,620 $10.05 - --------------------------------------------------------------------------------------------------------- 699,750 317,070 - ---------------------------------------------------------------------------------------------------------
The exercise prices of all the options granted (qualified and non-qualified) are at fair value of common stock at date of grant. The fair value of each option grant is estimated as of the date of grant using the Black-Scholes option- pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997, respectively: no dividend yields; expected volatility of 54, 42 and 60 percent; risk-free interest rates of 6.5, 5.3 and 5.9 percent; and expected lives of 5, 5 and 10 years. The weighted-average fair value of options granted was $2.48, $3.96 and $9.97 for the years ended December 31, 1999, 1998 and 1997, respectively. The pro forma amounts had options been recorded at fair value, are indicated below:
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1999 1998 1997 ------------------------------------------------ Pro forma net income $ 3,527,000 $ 4,098,000 $ 5,098,000 Pro forma earnings per share Basic $ .93 $ 1.08 $1.39 Diluted $ .93 $ 1.04 $1.33
6 Commitments and Contingent Liabilities A. Commitments The Company has commitments under leases covering its facilities. In May 1999, the Company relocated its corporate offices and creative studio to newly constructed facilities in Edgewater, New Jersey. The lease has an initial term of 10 years, which commenced upon the completion of construction in May 1999. The Company has two successive five year renewal options. The total expected annual payments due under the lease are $184,387 during 1999, $471,917 during 2000 and $567,750 per annum, thereafter, with a maximum cost of living increase of 2.5% per annum starting in the fourth lease year. In connection with the relocation, the Company terminated its lease for its corporate offices in New York City and subleased the offices and studio previously occupied by Refac HumanFactors-ID for the remainder of the lease term. Rent expense covering all Company facilities was approximately $445,000, $382,000 and $189,000 for the years ended December 31, 1999, 1998 and 1997, respectively. In addition, the Company is liable for escalations as provided in the lease agreements. 24 B. Employment Agreement The Company's employment agreement with its President and Chief Executive Officer extends through December 31, 2003. The agreement provides for minimum annual compensation, and bonus as determined by the Board of Directors. The officer was also granted options to purchase 100,000 shares of common stock pursuant to the Company's 1990 Stock Option Plan. In 1996, the officer exercised previously granted options to purchase 100,000 shares of common stock. In connection with such exercise, the Company provided the officer with a loan of $375,000, bearing interest at the Long-Term Applicable Federal Rate and maturing December 13, 2006. On December 16, 1998, the Company granted the officer an additional option to purchase 50,000 shares. The officer contributed these options back to the Company in December 1999. C. Deferred Compensation/Post-Retirement Benefits On December 13, 1996, the Company entered into a retirement agreement with its then Chairman and Chief Executive Officer. For a period of three years commencing on July 1, 1997, the Chairman has agreed to act as a consultant. The retirement agreement also provides for an annuity of $100,000 per annum during his life; medical and health benefits for him and his spouse during their lives; and office facilities, equipment and personnel support for two years following his consulting services. In 1996, the Company expensed $445,000 for such retirement benefits, which represented the present value of the expected payments, following the consultancy period, based upon his then estimated life expectancy. D. Legal Proceedings 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 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 in December 1996 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. E. Contingent Letter of Credit At December 31, 1999, the Company had an open letter of credit to purchase goods for $438,000. 7 Segments and concentrations For 1996 and through November 25, 1997, the principal industry segment in which the Company operated was licensing of intellectual property rights. The accounting policies of the segments are the same as those disclosed in the summary of significant accounting policies. With its November 25, 1997 acquisition of HumanFactors-ID Industrial Design, Inc. (now referred to as Refac HumanFactors-ID), the Company began to provide product design and development and consulting services. The Company does not view Refac HumanFactors-ID's revenues for one month in 1997 as being significant to its 1997 results. On November 1, 1999, the Company acquired the graphic design and communication business of David Morris Creative, Inc. (now known as Refac David Morris Creative). Operations of the product design and development business of Refac HumanFactors-ID and the graphic design business of Refac David Morris Creative are reported as creative consulting services. With the purchase of the assets and assumption of the liabilities of Funatik, Inc. on September 10, 1999 and subsequent merger into the newly formed Refac Consumer Products, Inc., the Company is now also engaged in the manufacture and marketing of consumer products. 25 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 year ended December 31, 1999.
Manufacture Licensing of Creative and Marketing Intellectual Consulting of Consumer Description Property Rights Services Products Other Total -------------------------------------------------------------------------------- Total revenues $10,166,000 $3,396,000 $495,000 $395,000 $14,452,000 Segment profit (loss) 5,934,000 (857,000) (142,000) 395,000 $5,330,000 Segment assets 17,599,000 9,403,000 845,000 $27,847,000 Expenditure for segment assets 548,000 1,230,000 21,000 $1,799,000 -------------------------------------------------------------------------------- The following information about the business segments are for the year ended December 31, 1998. Description Licensing of Creative Intellectual Consulting Property Rights Services Other Total ------------------------------------------------------------------ Total revenues $11,304,000 $3,748,000 $220,000 $15,272,000 Segment profit (loss) 7,208,000 (119,000) 99,000 $7,188,000 Segment assets 23,706,000 6,859,000 -- $30,565,000 Expenditure for segment assets 157,000 488,000 -- $645,000 ------------------------------------------------------------------
Foreign source revenues of domestic operations amounted to: 1999 1998 1997 ------------------------------------------------- Europe $682,000 $844,000 $682,000 Asia 191,000 172,000 $234,000 ------------------------------------------------- $873,000 $1,016,000 $916,000 ------------------------------------------------- 8 Human Factors Industrial Design, Inc. Acquisition On November 25, 1997, the Company completed the purchase of the outstanding stock of Human Factors Industrial Design, Inc. (now called Refac HumanFactors- ID) for $6,000,000, of which $4,500,000 was payable in cash and $1,500,000 in Company stock (valued at $12.565 per share). The excess of the aggregate purchase price over the net tangible assets acquired was allocated to goodwill and is being amortized over 25 years. On December 30, 1998, Refac HumanFactors- ID was merged into Refac International, Ltd. The Company may also be required to make a contingent purchase price payment to the former Refac HumanFactors-ID shareholders if certain earnings targets, as defined in the purchase agreement, are met. Any contingent purchase price payment will be accounted for as additional purchase price consideration. In 1999, the Company agreed to pay an additional $275,000 to certain of the original shareholders who relinquished their rights to an additional contingent purchase price payment. 9 David Morris Creative Acquisition On November 1, 1999, the Company acquired certain assets and assumed certain liabilities of David Morris Creative, Inc. (now known as Refac David Morris Creative) for $1,525,000 in cash. The excess of the aggregate purchase price over the net tangible assets acquired was allocated to goodwill and is being amortized over 20 years. The operating results of Refac David Morris Creative have been included in the Company's consolidated financial statements since the date of acquisition. The proforma effect of results of operations for Refac David Morris Creative, for 1999 and 1998 are not material to the consolidated financial statements. 10 Preferred Stock The 6% noncumulative preferred stock of $100 par value is redeemable at $105 with 5,000 shares authorized and none issued. The serial preferred stock of $5 par value has 100,000 shares authorized and none issued. 26 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors Refac and Subsidiaries We have audited the accompanying consolidated balance sheets of Refac and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, comprehensive (loss) income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Refac and Subsidiaries at December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Grant Thornton LLP New York, New York February 29, 2000 27 UNAUDITED SELECTED QUARTERLY FINANCIAL DATA REFAC AND SUBSIDIARIES - --------------------------------------------------------------------------------
First Second Third Fourth 1999 Quarter Quarter Quarter Quarter ------------------------------------------------------ Total revenues $3,417,000 $3,286,000 $3,362,000 $4,387,000 Net income $1,008,000 $864,000 $882,000 $919,000 Net income per diluted common share $.26 $.23 $.23 $.24 ------------------------------------------------------ 1998 ------------------------------------------------------ Total revenues $3,573,000 $4,683,000 $3,367,000 $3,649,000 Net income $1,230,000 $1,389,000 $1,063,000 $1,053,000 Net income per diluted common share $.32 $.35 $.28 $.27 ------------------------------------------------------ The 1999 and 1998 unaudited selected quarterly financial data has been reclassified to conform with year-end presentations. 1999 1998 ------------------------------------------------------ Market Price of Common Stock High Low High Low ------------------------------------------------------ First Quarter 8 5/8 5 5/8 12 3/8 9 1/4 Second Quarter 7 3/8 6 13 7/16 8 7/8 Third Quarter 6 5/8 4 1/4 14 15/16 8 3/4 Fourth Quarter 4 5/8 3 1/2 9 3/4 6 11/16
The Company's common stock is listed on the American Stock Exchange under the symbol REF. 28 DIRECTORS AND OFFICERS REFAC AND SUBSIDIARIES - -------------------------------------------------------------------------------- Refac Directors Refac Officers Neil R. Austrian Robert L. Tuchman Chairman Chairman, Chief Executive Officer & iWon, Inc. General Counsel Robin L. Farkas Bert D. Heinzelman Private Investor Senior Vice President, Refac & President, Refac HumanFactors-ID Mark N. Kaplan Of Counsel Raymond A. Cardonne, Jr. Skadden, Arps, Slate, Meagher & Flom LLP Vice President & Secretary Herbert W. Leonard Counsel President Skadden, Arps, Slate, Meagher & Flom LLP Hamilton Associates New York, New York Robert L.Tuchman Independent Auditors Chairman, Chief Executive Officer & Grant Thornton LLP General Counsel, Refac New York, New York Ira T.Wender Transfer Agent Of Counsel ChaseMellon Shareholder Services Patterson, Belknap, Webb & Tyler LLP Ridgefield Park, New Jersey
Statements about the Company's future expectations and all other statements in this Annual Report 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 are subject to the safe harbors created thereby. Since these statements involve risks and uncertainties and are subject to change at any time, the Company's actual results could differ materially from expected or inferred results. DESIGNED BY REFAC DAVID MORRIS CREATIVE 29 [LOGO] REFAC Corporate Headquarters The Hudson River Pier 115 River Road Edgewater, NJ 07020-1099 Ph (201) 943-4400 Fx (201) 943-7400 refac@refac.com Branch Offices Southport, Connecticut Las Vegas, Nevada Hong Kong www.refac.com 30 EX-21 4 LIST OF SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Jurisdiction Name (l, 2) of Incorporation ---------------- ---------------- Advanced Resin Technology, Inc. (3) New Hampshire Refac International, Ltd. Nevada Refac Biochemics Corporation (4) Delaware Refac Consumer Products, Inc. Delaware Refac (H.K.) Limited Hong Kong Refac Financial Corporation Delaware Refac Licensing, Inc. (5) Delaware (1) The Consolidated Financial Statements, incorporated herein, include the accounts of the Registrant and all of the above subsidiaries. (2) Subsidiaries of subsidiaries are indented; unless otherwise indicated below, direct and indirect subsidiaries are 100% owned. (3) The Company owned approximately 87% and 93% of the outstanding capital stock of Advanced Resin Technology, Inc. as of December 31, 1997 and 1998, respectively. This subsidiary is inactive and is in the process of being liquidated. (4) The Company owned approximately 92% of the outstanding capital stock of Refac Biochemics Corporation as of December 31, 1999. (5) The Company owned approximately 81% of the outstanding capital stock of Refac Licensing, Inc. (formerly known as Selective Licensing & Promotion, Ltd.) as of December 31, 1999. EX-23 5 CONSENT OF GRANT THORNTON EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated February 29, 2000 accompanying the consolidated financial statements included in the Annual Report of Refac and Subsidiaries on Form 10-K for the year ended December 31, 1999. We hereby consent to the incorporation by reference of said report in the Registration Statement (Form S- 8 No. 333-76085) pertaining to the Stock Option and Incentive Plans of Refac and Subsidiaries. GRANT THORNTON LLP New York, New York February 29, 2000 -----END PRIVACY-ENHANCED MESSAGE-----