-----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, DVQ3OVqX4PEe9sWlxSHWKS/Z0zGviYtIBxXy/t7mFZ3vCrf/UvLs0OWlVf/faxDX QO7JMayoEoYAeJ8diOKFxg== 0000950130-01-001576.txt : 20010402 0000950130-01-001576.hdr.sgml : 20010402 ACCESSION NUMBER: 0000950130-01-001576 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 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-K405 SEC ACT: SEC FILE NUMBER: 001-12776 FILM NUMBER: 1587897 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-K405 1 0001.txt FORM 10-K405 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, 2000 Commission File Number 0-7704 REFAC ----- Delaware 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. X --- The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 22, 2001 was $9,488,153. The number of shares outstanding of the registrant's Common Stock, par value $.10 per share, as of March 22, 2001 was 3,795,261. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- PART I Item 1) Annual Report to Stockholders of Refac for the year PART II Item 5) ended December 31, 2000, except for the inside front Item 6) and back cover and pages 2 through 12 thereof. Item 7) Item 8) PART III Item 10) Definitive Proxy Statement of Refac in connection with Item 11) the Annual Meeting of Stockholders to be held on May Item 12) 11, 2001. Item 13) PART I ------ Item 1. Business - ---------------- General - ------- Refac was incorporated in the State of Delaware in 1952 and is referred to herein as the "Company" or "Registrant". For almost 50 years, the Company has been a recognized international leader in intellectual property management. Today, it is a leading consulting firm with expertise in product development, graphic design and communications, and licensing. In addition to its fee for service consulting business, the Company constantly looks for opportunities to invest its creative services and licensing skills in new product development ventures that involve brands and/or technologies and have substantial long-term potential. Intellectual Venture Capital - ---------------------------- The Company seeks opportunities to invest the industrial and graphic design services of RefacDesign and the licensing capabilities of Refac Licensing in new product development ventures involving brands and/or technologies. The Company refers to this activity as "Intellectual Venture Capital". In such instances, the Company shares in the cost and risk of brand and product development in return for future royalties or venture equity. An example of such an investment is its formation of Refac Consumer Products, Inc. ("RCP") and the acquisition of manufacturing and marketing licenses from MTV Consumer Products (electronic music products), Pennzoil(R) (automotive related products) and Volkswagen (New Beetle(TM) clock radio, sport radio and travel alarm clock). See "Manufacturing and Marketing of Consumer Products" below. Another example is the Company's development for OXO International of some of the OXO(R) Good Grips(R) housewares and, to date, all of the OXO Good Grips hand tools on a royalty basis. -2- Creative Design Consulting Services - ----------------------------------- Through December 2000, the Company provided industrial design and engineering consulting services through Refac HumanFactors-ID (acquired November 1997) and graphic design consulting services through Refac David Morris Creative (acquired November 1999). Both Refac HumanFactors-ID and Refac David Morris Creative operated as divisions of the Company's wholly-owned subsidiary, Refac International, Ltd. ("RIL"). In January 2001, the Company consolidated the operations of these divisions and now offers its creative services under the name RefacDesign. Industrial Design ----------------- RefacDesign offers a broad range of research, product design and engineering services to help it clients develop new products. It 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. Graphic Design -------------- RefacDesign also provides graphic design and communications for a wide variety of clients. Its array of graphic design services include brochures and collateral materials, brand and communications strategy, corporate identity, packaging and multimedia design. The following schedule sets forth the percentage of the Company's total revenues derived from Industrial Design and Graphic Design services: Industrial Graphic Year Design Design ---------------------------- 2000 23% 15% ---------------------------- 1999 20% 3% ---------------------------- 1998 25% 0% ---------------------------- Competition. The creative design consulting 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. RefacDesign faces strong competition from other design firms and its ability to attract clients is dependent upon its reputation and ability to deliver distinctive products, graphics and packaging that meet its clients' requirements in a timely fashion. In addition, the design business is dependent on the ability to attract and retain personnel. -3- Intellectual Property Licensing - ------------------------------- The Company offers patent, technology, copyright, brand and trademark licensing services through RIL and its 81% owned subsidiary, Refac Licensing, Inc. ("RL"). Patent and Technology Licensing Operations ------------------------------------------ The Company has been performing patent and technology licensing, which includes the negotiation and administration of licenses and joint ventures involving patents, know-how and related trademarks, for almost 50 years. Today, the Company is focused on managing established licensing relationships and acquiring the rights to license consumer and industrial technologies that have distinctively advantageous features, performance or costing and are protected by patents and confidential know-how ("New Technology Licensing ") projects. The Company did not undertake any New Technology Licensing projects during 1999 or 2000. Except for its contracts with Patlex Corporation and Emhart Fastening Teknologies, Inc. which accounted for approximately 10% and 6%, respectively, of the Company's total revenues in 2000, the Company does not believe that the loss or termination of any contract it has with its clients or licensees 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 and technology licensing business. Brand and Trademark Licensing ----------------------------- RL is a full service trademark licensing agency and consultancy for brand and character licensing properties. The properties that it currently represents include Dr. Denton(R), Hampsterdance(TM), JoeCartoon(TM), Psycho Chihuahua(R) and Rockwell(R) (terminates April 30, 2001). As part of the Company's Intellectual Venture Capital activities, the licensing groups are also focused on the licensing-in of intellectual property rights and the managing of relationships with such licensors. By way of example, these groups manage the Company's licensing relationships with MTV Consumer Products, Volkswagen and Pennzoil-Quaker State Company. Competition. Success in the licensing business is principally dependent ----------- upon the strength of the intellectual property rights represented and the ability to obtain same. Depending on the type of rights, the Company competes against individuals, agencies, universities, corporations and -4- attorneys. The Company believes that the creative capabilities of RefacDesign give it a distinct advantage in licensing programs that involve product development. Manufacturing and Marketing of 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. RCP's product line, which will be manufactured in Asia, has been developed in-house by RefacDesign and includes a MTV(TM) branded Digital Radio, Clock Radio, CD Player, Standard and Neckphones(TM) Headphones, Scooter Radio, FM Scan Radio, Beach Radio and Shower Radio; a Volkswagen New Beetle(TM) branded travel clock, clock radio and sport radio; a Refac(TM) branded Emergency Handcranked Radio with Beacon, Sonica(TM) Universal Voice Activated Remote Control, Digital Radio and Shower, Bath and Spa Stereo. In November 2000, the Company signed a licensing agreement with Pennzoil- Quaker State Company to develop a line of automotive-related consumer products under the Pennzoil(R) brand. The license includes cleaning products such as squeegees, chamois, and auto vacuums; electronic auto ionizers and/or air purifiers; maintenance accessories such as tire gauges and air pumps; tools such as ratchets, sockets and wrenches; and safety items such as mini-flashlights, electronic lock de-icers, anti-theft steering wheel clamps, portable radios, and FRS (Family Radio Service) devices. During the year, RCP experienced, and overcame, manufacturing challenges that delayed the market introduction of the products that it had exhibited at the 2000 Consumer Electronics Show. The MTV product line was introduced at the January 2001 Consumer Electronics Show. RCP is now marketing this product line as well as its New Beetle and Refac branded products to music retailers, electronic retailers, toy retailers and department stores. 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, 2000, the Company had a total of 63 full time employees. -5- 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, 2000 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 2000 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. Item 2. Properties - ------------------- In May 1999, the Company relocated its corporate headquarters and creative studios to a newly constructed facility encompassing approximately 30,000 square feet. These premises, which are located at The Hudson River Pier, 115 River Road, Edgewater, New Jersey, are occupied and used as the corporate offices and creative studios for the Company and its domestic subsidiaries, other than Refac Financial Corporation ("RFC"). The lease for these new premises terminates in November 2009 and the Company has two successive five-year renewal options. 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 Refac HumanFactors-ID (10,000 square feet located at 575 Eighth Avenue, New York, New York) for the remaining term of the lease. In February 2000, Refac David Morris Creative (acquired in November 1999) also relocated to this facility and terminated its Jersey City, New Jersey lease encompassing 3,000 square feet without any liability. In October 2000, RL also relocated its operations to the corporate headquarters and creative studios and terminated, without liability, its lease for approximately 1,450 square feet in Southport, Connecticut. RFC leases office facilities in Las Vegas, Nevada, which it considers to be suitable and adequate for its present needs. Item 3. Legal Proceedings - -------------------------- 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 16, 2001, the Court entered a memorandum decision and order granting the motion of the defendant directors and the Company to dismiss the complaint in its entirety. A judgment to that effect was entered on February 26, 2001. Plaintiff has filed a notice of appeal. -6- 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, 2000. 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 58 1991 Chairman, President, Chief Executive Officer and General Counsel (2) Bert D. Heinzelman 46 2000 Senior Vice President (3) Raymond A. Cardonne, Jr. 34 1997 Vice President, Chief Financial Officer, Treasurer, and Secretary (4)
- ---------- 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. (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. -7- (3) Mr. Heinzelman became Chief Executive Officer of the Company's Creative Consulting Group which now operates under the name of RefacDesign in November 2000. In March 2000, he became Senior Vice President of Refac. From December 1998 until November 2000, he served as the President of the Company's Product Development Group (which then operated under the name Refac HumanFactors-ID) and its Chief Executive Officer from May 1999. Mr. Heinzelman served as a Vice President of Human Factors Industrial Design, Inc. from 1985 through its acquisition by the Company in November 1997, and until it was merged into the Company's wholly owned subsidiary, Refac International, Ltd., on December 31, 1998. (4) Mr. Cardonne became Chief Financial Officer and Treasurer of the Company in August 2000. He has served as Secretary of the Company since November 1998 and as Vice President responsible for the licensing and commercialization of technologies since December 1997. 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. PART II ------- Item 5. Market for the Company's Common Stock and Related Stockholder Matters - ------------------------------------------------------------------------------ The Company had 656 stockholders of record as of March 22, 2001. 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, 2000, 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 Report to Stockholders for the year ended December 31, 2000, which page is hereby incorporated. 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, 2000, which pages are hereby incorporated by reference. -8- 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, 2000, 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 and 5 in the Company's definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held on May 11, 2001 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 11, 2001 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 and 3 in the Company's definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held on May 11, 2001 and is hereby incorporated herein by reference. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information required by this item is included on page 6 and pages 8 through 10 in the Company's definitive Proxy Statement in connection with the Annual Meeting of Stockholders to be held on May 11, 2001 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, 2000, which is hereby incorporated by reference. -9- (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, 2000, 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 - ------------------------ None. -10- 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 22, 2001 /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 22, 2001 /s/ Robert L. Tuchman ----------------------------------------- Robert L. Tuchman, President, Chief Executive Officer, General Counsel and Director (Principal Executive Officer) March 22, 2001 /s/ Raymond A. Cardonne, Jr. ----------------------------------------- Raymond A. Cardonne, Jr., Chief Financial Officer, Vice President, Treasurer and Secretary (Principal Financial Officer) March 22, 2001 /s/ Neil R. Austrian ----------------------------------------- Neil R. Austrian, Director March 22, 2001 /s/ Robin L. Farkas ----------------------------------------- Robin L. Farkas, Director March 22, 2001 /s/ Bert D. Heinzelman ----------------------------------------- Bert D. Heinzelman, Director -11- Signatures ---------- (Continued) March 22, 2001 /s/ Clark A. Johnson ----------------------------------------- Clark A. Johnson, Director March 22, 2001 /s/ Mark N. Kaplan ----------------------------------------- Mark N. Kaplan, Director March 22, 2001 /s/ Herbert W. Leonard ----------------------------------------- Herbert W. Leonard, Director March 22, 2001 /s/ Ira T. Wender ----------------------------------------- Ira T. Wender, Director -12- 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) 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 (d) 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. 2000 Annual Report to Stockholders of the Company.* 21. List of subsidiaries of the Company.* 23. Consent of Grant Thornton LLP. * _____________________ * Filed herewith. -13- EX-13 2 0002.txt ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13 REFAC AND SUBSIDIARIES ---------------------- FINANCIAL STATEMENTS OF ANNUAL REPORT ON FORM 10-K TO THE SECURITIES AND EXCHANGE COMMISSION YEAR ENDED DECEMBER 31, 2000 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, 2000, 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. 2000 ANNUAL REPORT [LOGO] Refac Letter to Stockholders 2 Refac's Businesses 6 Management's Discussion and Analysis 13 Consolidated Statements 15 Notes to Consolidated Financial Statements 20 Independent Auditor's Report 27 Directors and Officers 29 "We are excited to work with Refac on an MTV: Music Television consumer electronics product line. Music has always been what connected MTV: Music Television with its audience, thus the development of music-related products is a natural step for MTV Consumer Products. We are impressed with how Refac's design team has captured the spirit of MTV: Music Television and bottled it in physical form." -- Heidi Eskenazi, Vice President, MTV Consumer Products MTV: Music Television(TM) E-Z Snooze Clock Radio [GRAPHIC OMITTED] Refac at a glance For almost 50 years, Refac has been a recognized international leader in intellectual property management. Today, we are a leading consulting firm with expertise in product development, graphic design and communications, and licensing. In addition to our fee-for-service consulting business, we constantly look for opportunities to invest our creative services and licensing skills in new product development ventures that involve brands and/or technologies with significant long-term potential. chairman's letter to our stockholders: Throughout our history, Refac has been entrepreneurial and has enjoyed success in the licensing of intellectual property rights. When our investment interest broadened three years ago to include new product development ventures involving well-known brands, we made strategic acquisitions of creative firms specializing in industrial design (Human Factors Industrial Design in November 1997) and graphic design and communications (David Morris Creative in November 1999). Today, our combined creative group offers integrated services under the name RefacDesign, and our product development expertise and special ability to execute exciting brand enhancements are creating important new investment opportunities for us at an accelerating pace. We are committed to building shareholder value by investing our design, licensing and financial resources in new product and brand development ventures that have strong long-term potential. We made significant progress in 2000 toward achieving this goal by attracting world-class brands to partner with us as detailed below. 2000 highlights Building on the Volkswagen New Beetle program, which combined our strengths in product development, brand building and consumer products, we entered into new licensing agreements with MTV: Music Television for the right to use the "MTV: Music Television" trademark and with Pennzoil-Quaker State Company for the right to use the "Pennzoil(R)" trademark - two of the most recognized and valuable brands in the world. The product lines developed under these brands are being designed by RefacDesign and manufactured and marketed by Refac Consumer Products. Refac Licensing was instrumental in procuring the rights necessary to manufacture and sell such products and is managing these licensor relationships. MTV has become an international institution of pop culture and a leading authority on music that reaches 305 million households in 87 territories on five continents. The MTV Cable Network is viewed in over 73 million households in the United States, and its target audience is 12- to 34-year-olds. MTV: Music Television is an incredibly well-recognized cultural icon that has always been connected to its audience through music. We were excited when MTV Consumer Products picked us as its licensee for a line of consumer electronic audio products that is so closely associated with its core strength. After signing the license agreement in June, we worked together to combine MTV: Music Television's physical identity and product personality and Refac's design to develop an electronics music product line consisting of nine items--the Digital Radio, Clock Radio, CD Player, Standard and Neckphones(TM) Headphones, Scooter Radio, FM Scan Radio, Beach Radio and Shower Radio--which Refac Consumer Products introduced at the January 2001 Consumer Electronics Show. Buyer reaction has been very encouraging, and the product line will be available at music retailers, electronic retailers, toy retailers and department stores during the second half of the year. www.refac.com | Page 2 [GRAPHIC OMITTED] Pictured left to right: John Moldauer, Executive Vice President, Refac Consumer Products, Inc.; Raymond A. Cardonne, Jr., Vice President, Chief Financial Officer and Secretary, Refac; Bert D. Heinzelman, Senior Vice President, Refac, and Chief Executive Officer, RefacDesign; Robert L. Tuchman, Chairman and Chief Executive Officer, Refac; David Annunziato, President, RefacDesign; Arlene J. Scanlan, President, Refac Licensing, Inc. www.refac.com | Page 3 In November, we signed a licensing agreement with Pennzoil-Quaker State Company to develop a line of automotive-related consumer products under the Pennzoil(R) brand. The license includes cleaning products such as squeegees, chamois cloths, and auto vacuums; electronic auto ionizers and/or air purifiers; maintenance accessories such as tire gauges and air pumps; tools such as ratchets, sockets and wrenches; and safety items such as mini-flashlights, electronic lock de-icers, anti-theft steering wheel clamps, portable radios and FRS (Family Radio Service) devices. Pennzoil-Quaker State Company is one of the world's leading automotive consumer products companies and holds the leading U.S.A. market share in a number of automotive product categories. As its worldwide licensee for the range of automotive-related products listed above, we have a unique opportunity to help Pennzoil(R) extend the equity of the Pennzoil(R) brand to a category of consumer products closely associated with its core strength. Like the MTV: Music Television program, this product line and the related packaging will be designed by RefacDesign and manufactured and marketed by Refac Consumer Products. We expect that it will be available at automobile specialty outlets, mass-market retailers and department stores by the end of 2002. Of significant importance to us is the fact that Volkswagen, MTV: Music Television and Pennzoil-Quaker State Company have permitted us to co-brand by including our signature "by RefacDesign" trademark on the lower right-hand corner of all packaging and on all advertising materials. During the year, we experienced, and overcame, manufacturing challenges that delayed the market introduction of the products we had exhibited at the 2000 Consumer Electronics Show. Our New Beetle(TM) Clock Radio, Travel Clock and Stereo Sport Radio as well as four Refac(TM) branded products - the Handcranked Radio with Beacon, Sonica(TM) Voice Activated Universal Remote, Digital Radio, and Shower, Bath and Spa Stereo will now be available during the second half of the year. Although we have included a few images of our MTV: Music Television and Refac branded consumer products in this Annual Report, the complete product line is shown on our Web site (www.refac.com). If you do not have Internet access, send us a note, and we will mail you a set of the product sheets. financial results Our consolidated net income for the year ended December 31, 2000 was $2,929,000, or $0.77 per share (on a fully diluted basis), compared to $3,673,000, or $0.97 per share, in 1999. Revenues for 2000 were $17,014,000, up from 1999's $14,452,000. The decrease in net income was due largely to a decline in gains and dividends on licensing-related securities (KeyCorp) and increased costs associated with the launching of our Refac Consumer Products subsidiary. The increase in revenues was principally due to the increase in creative services as a result of the acquisition of David Morris Creative. These results are discussed in more detail under Management's Discussion and Analysis starting on page 13 of this Annual Report. the year ahead Great design is the driver of our business model, and we must continue to build our consulting business so that we can maintain and grow our talented creative team. With RefacDesign's leadership in new product development and brand enhancements and our long-standing licensing expertise, we will continue to aggressively seek new opportunities to invest our creative and business capital. www.refac.com | Page 4 Our investment in Refac Consumer Products is a good example of how we use our integrated creative and business expertise to build enterprise value. We plan to develop 7 to 10 new MTV: Music Television branded products, 2 to 4 Refac branded products and 4 to 6 Pennzoil(R) branded products during 2001 for market introduction in 2002. We expect Refac Consumer Products to contribute significantly to both revenues and operating income in 2001. While the OXO(R) hand tool lines that we developed on a royalty basis in 1999 had a slow introduction in 2000, we expect the line to contribute to earnings this year along with the already successful OXO(R) Good Grips(R) Salad Spinner. While 2000 was a successful year in building opportunities for the future, our market value remained depressed with relatively little trading. In addition, since the realized gains and dividends from KeyCorp are derived from a licensing program completed many years ago, and the unrealized portion has already been accounted for in our stockholders' equity, we believe that the investment community has not really considered these earnings in valuing our Company. The planned liquidation of our KeyCorp stock position will be completed during the second quarter, and we expect licensing-related gains and dividends to account for revenues and net income of approximately $1,778,000 and $1,104,000 in 2001 as compared to $5,054,000 and $3,386,000, respectively, in 2000. With the KeyCorp liquidation being completed and Refac Consumer Products positioned to start making meaningful contributions in 2001, we believe that we now have the opportunity to stimulate more investor awareness of our Company and our prospects. We are excited about our business and look forward to the future. In concluding, I would like to mention that Herb Leonard, who has been a part of the Refac family since 1967 and a member of our Board of Directors since 1968, has decided to retire from the Board when his current term expires. We will miss Herb's support, guidance and contributions, and, in appreciation for his years of valuable service, we are making Herb a `Director Emeritus.' Sincerely, /s/ Robert L. Tuchman Robert L. Tuchman Chairman & Chief Executive Officer www.refac.com | Page 5 MTV: Music Television(TM) Beach Radio [GRAPHIC OMITTED] intellectual venture capital Refac seeks opportunities to invest the creative services of RefacDesign and our intellectual property licensing expertise in new product development ventures that involve brands and/or technologies. Unlike our traditional fee-for-service consulting, in select situations, we share in the cost and risk of brand and product development in return for future royalties or venture equity. We refer to this activity as "Intellectual Venture Capital." An example of a Refac intellectual venture capital investment is our formation of Refac Consumer Products, Inc. and the acquisition of manufacturing and marketing licenses from MTV Consumer Products (electronic music products), Pennzoil(R) (automotive related products) and Volkswagen (New Beetle(TM) Clock Radio, Stereo Sport Radio and Travel Clock). Another example is our development of OXO(R) Good Grips(R) housewares and hand tools on a royalty basis. - --------------- [PENNZOIL LOGO] - --------------- Product Line Coming 2002 - --------------- "We are excited about Refac becoming our licensee for this range of products. The Pennzoil (R) brand is a promise of quality and consistency and has become one of the best-known automotive brands in the world. We are confident that Refac, which is known for its expertise in working with and enhancing brands, will develop and market a line of licensed products that keeps that promise." -- Cindy Araujo, Manager of Marketing Administration for Pennzoil-Quaker State Company www.refac.com | Page 6 [GRAPHIC OMITTED] Sonica(TM) Voice Activated Universal Remote [GRAPHIC OMITTED] MTV: Music Television(TM) Scooter Radio 7 [GRAPHIC OMITTED] Biovision Ophthalmic Keratectomy Cutter product design and visual communications Late this year, our Product Development Group (Refac Human Factors-ID) and Graphic Design Group (Refac David Morris Creative) converged to form RefacDesign, a full-service design consulting firm. For the past 25 years, these organizations have created extraordinary value for their respective clients through their innovations, great physical and print designs, and thoughtful attention to detail. As an integrated creative group, we aim to build upon RefacDesign's multidisciplined talent pool and leverage our creative currency. The vertical integration of our design services allows us to seek deeper relationships with clients and strengthens our ability to partner with our sister divisions in proprietary ventures. By way of example, RefacDesign is currently participating in a medical product design program that not only requires industrial design and product graphic design expertise, but also includes corporate identity development and product packaging in our total scope of work. We are teaming together to provide similarly comprehensive services to Refac Consumer Products in consumer brand expansion programs for MTV: Music Television(TM), Pennzoil(R) and Volkswagen's New Beetle(TM). [GRAPHIC OMITTED] Sharp Electronics - Mobilon Product Launch www.refac.com | Page 8 [GRAPHIC OMITTED] UPT (TM) Uplink (TM) www.refac.com | Page 9 OXO(R) Good Grips(R) Utility Knife [GRAPHIC OMITTED] product design and visual communications (cont) Through Refac's efforts to create and co-brand our signature "by RefacDesign" with the valuable equity of its brand partners, RefacDesign expects to benefit greatly from accelerated exposure and increased awareness of our consulting practice. This strategic advantage has motivated us to embrace our new identity as RefacDesign, and we look ahead with even greater optimism. Refac(TM) Digital Radio [GRAPHIC OMITTED] www.refac.com | Page 10 [GRAPHIC OMITTED] Dodge(R) Industrial Fasteners First Licensed in 1963 licensing Refac has been a leader in intellectual property licensing for almost 50 years. We offer patent, copyright and trademark licensing services through our subsidiaries: Refac International, Ltd. and Refac Licensing, Inc. Refac Licensing is a full-service trademark licensing agency and consultancy for brand and character licensing properties. Whether acting as the agent for the owner of the brand or for the licensee, it works closely with RefacDesign 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. Our integrated services make us uniquely qualified to ensure that the licensed products live up to the brand's promise of value, quality and performance. Refac International is responsible for our technology and patent licensing business, which includes the negotiation and administration of licenses and joint ventures involving patents, know-how and related trademarks. Our interests are focused on consumer and industrial technologies that have distinctively advantageous features, performance or costing and that are protected by patents and confidential know-how. [GRAPHIC OMITTED] Heli Coil(R) Industrial Fasteners First Licensed in 1952 www.refac.com | Page 11 [GRAPHIC OMITTED] our environment With the Manhattan skyline as its backdrop, Refac's corporate headquarters and creative center are located on the Hudson River Pier in Edgewater, New Jersey. This inspiring facility is the home of our core business units, including: RefacDesign RefacLicensing RefacConsumerProducts 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 $17,014,000 in 2000 as compared to $14,452,000 in 1999 and $15,272,000 in 1998. The increase in revenues of $2,562,000 or 18% is principally due to increases in revenues from creative consulting services of $2,923,000, sales of consumer products of $410,000, and $174,000 in dividend and interest income, offset by a decrease of $175,000 in licensing-related activities and a decrease of $770,000 in gains on the sale of licensing-related securities and dividends. The decrease from 1998 to 1999 of $820,000, or 5%, is principally due to decreases in gains on sales of licensing-related securities and dividends of $1,003,000, creative consulting fees of $352,000 and a $135,000 decrease in revenues from licensing-related activities, 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. Revenues are summarized as follows:
2000 1999 1998 ------------------------------ Revenues from licensing-related activities 24% 29% 28% Realized gains on sales and dividends from licensing-related securities 30% 42% 46% Creative consulting services (Product Development and Graphic Design Groups acquired in November 1997 and 1999, respectively) 38% 23% 25% Consumer product sales (acquired in September 1999) 5% 3% -- Dividend, interest and other income 3% 3% 1% ------------------------------ 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. The licensing income component of the 2000 recurring revenue increased by $447,000 and is attributable to the increase in trademark agency fees of $343,000 and patent licensing income of $220,000 offset by a decrease in patent enforcement fees of $116,000. 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 2000, 1999 and 1998, non-recurring licensing revenues amounted to $415,000, $880,000 and $974,000, respectively. The decrease from 1999 to 2000 is principally due to decreases in the Storer Data Compression technology program. Service income from royalty verifications, which the Company first offered in March 1998, decreased by $17,000 from 1999 to 2000. 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, include expenses related to the investigation, marketing, administration, enforcement, maintenance and prosecution of patent, trademark and license rights and related licenses. Licensing-related expenses for 2000 decreased by $727,000 from 1999, and 1999 expenses increased $140,000 over 1998. As a percentage of licensing revenues, these expenses were 35%, 51% and 46% in 2000, 1999 and 1998, respectively. The decrease in 2000 from 1999 is principally due to a decline in client expenses related to the revenue decrease and a decrease in licensing-related salaries and benefits as the Company focused on managing existing relationships. The increase in 1999 over 1998 is principally due to an increase in licensing-related salaries. Licensing-Related Securities INCOME FROM LICENSING-RELATED SECURITIES consists of gains on sales and dividends received on securities acquired by the Company in connection with its licensing activities. As of December 31, 2000, licensing-related securities consisted of 75,000 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 the 75,000 shares during 2001 and, as of December 31, 2000, had bought one put option (at $27.4262 per share) and had sold one call option (at $39.3720 per share), each of which covers 50,000 shares. See Notes to the Consolidated Financial Statements for additional details concerning such securities. 13 CREATIVE CONSULTING SERVICES consist of product development and graphic design services provided by the Product Development Group (which was acquired by the Company in November 1997) and the Graphic Design Group (which was acquired in November 1999). In January 2001, the Company consolidated the operations of these groups and now offers its creative services under the name RefacDesign. Creative consulting income increased by $3,101,000 (91%) in 2000 as compared to 1999. Expenses increased by $1,436,000 (51%) in 2000 as compared to 1999. The increases in both revenues and expenses are principally attributable to the inclusion of the Graphic Design Group for a full year in 2000 compared with two months in 1999. 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 $905,000 during 2000 principally consisted of sales of imported consumer electronic products sourced by RCP for a retailer. During the year, RCP experienced, and overcame, manufacturing challenges that delayed the market introduction of products exhibited at the 2000 Consumer Electronics Show. RCP's product line, which will be manufactured in Asia, has been developed in-house by RefacDesign and includes the MTV: Music Television(TM) branded Digital Radio, Clock Radio, CD Player, Standard and Neckphones(TM) Headphones, Scooter Radio, FM Scan Radio, Beach Radio and Shower Radio; the Volkswagen New Beetle(TM) branded Travel Clock, Clock Radio and Stereo Sport Radio; the Refac(TM) branded Handcranked Radio with Beacon, Sonica(TM) Voice Activated Universal Remote, Digital Radio and Shower, Bath and Spa Stereo. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased by $2,352,000 in 2000 over 1999. The net increase is principally attributable to RCP ($1,651,000) and RefacDesign ($1,626,000), offset by the decrease in licensing-related activity expenses ($1,002,000). The increase in 2000 over 1999 for RCP and RefacDesign are due to operations being in effect for a full year. The increase in 1999 over 1998 of $443,000 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). 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 ($5,375,000) and Graphic Design Group ($1,373,000). Such goodwill is being amortized over 25 and 20 years, respectively, which is the expected period of benefit. Such amortization aggregated $286,000, $219,000 and $204,000 for 2000, 1999 and 1998, respectively, and is included in selling, general and administration expenses. INCOME TAX PROVISION. The Company's federal and state income tax provision of $1,632,000 in 2000 reflected an effective tax rate of 36%, compared with federal rates of 31% and 34% in the two previous years. The increase of 5% from the 1999 effective state and federal income tax rate is due to increased state and local taxes associated with the Company's relocation to New Jersey and decreased dividends, a portion of which are excludable from federal and state taxation. 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 $2,281,000 to $10,770,000 at December 31, 2000 from $8,489,000 at December 31, 1999. The Company believes its liquidity position is adequate to meet all current and projected financial needs. Cash used in operations was $1,791,000 as compared to $1,278,000 in 1999, reflecting an increase of $513,000. The increase is principally attributed to the decrease in net income. Net cash provided by investing activities decreased $1,152,000 to $2,311,000 in 2000 as compared with $3,463,000 in 1999. The decrease is mainly attributable to decreased proceeds from sales of licensing-related securities and increased purchases of investments being held to maturity. The Company has commitments under leases covering its facilities (see Notes to the 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 Consolidated Financial Statements. The Company's investment in long-term marketable securities is subject to interest rate risk, and its investment in KeyCorp common stock is subject to equity security price risk. Historically, the Company has not experienced material gains or losses due to interest rate changes when selling long-term investments. The Company purchased put and wrote call options to substantially hedge against market fluctuations on its KeyCorp common stock holdings. As of December 31, 2000, the Company held 75,000 shares of KeyCorp common stock of which 50,000 shares were hedged by the put and call options. 14 consolidated balance sheets REFAC AND SUBSIDIARIES
DECEMBER 31, ----------------------------------- 2000 1999 ----------------------------------- Assets Current Assets: Cash and cash equivalents $ 5,678,000 $ 5,158,000 Royalties receivable 1,114,000 1,153,000 Accounts receivable 1,070,000 1,425,000 Investments being held to maturity 4,649,000 -- Inventory 91,000 84,000 Prepaid expenses and other current assets 651,000 437,000 ----------------------------------- Total current assets 13,253,000 8,257,000 ----------------------------------- Property and equipment--net 2,819,000 2,232,000 Licensing-related securities 2,096,000 7,145,000 Investments being held to maturity 442,000 3,331,000 Other assets 262,000 583,000 Goodwill, net of accumulated amortization of $738,000 in 2000 and $451,000 in 1999 6,031,000 6,299,000 ----------------------------------- $ 24,903,000 $ 27,847,000 ----------------------------------- Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 289,000 $ 674,000 Accrued expenses 501,000 439,000 Amounts payable under service agreements 435,000 417,000 Income taxes payable -- 716,000 ----------------------------------- Total current liabilities 1,225,000 2,246,000 ----------------------------------- Deferred income taxes 527,000 2,365,000 Other liabilities--deferred compensation 397,000 445,000 ----------------------------------- Commitments and Contingencies Stockholders' Equity: Common stock, $.10 par value; authorized-- 20,000,000 shares; issued 5,450,887 in 2000 and 1999 545,000 545,000 Additional paid-in capital 9,984,000 9,984,000 Retained earnings 25,228,000 22,299,000 Accumulated other comprehensive income 1,246,000 4,212,000 Treasury stock, at cost 1,655,626 shares in 2000 and 1999 (13,874,000) (13,874,000) Receivable from issuance of common stock and warrants (375,000) (375,000) ----------------------------------- Total stockholders' equity 22,754,000 22,791,000 ----------------------------------- $ 24,903,000 $ 27,847,000 -----------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 15 - -------------------------------------------------------------------------------- consolidated statements of operations REFAC AND SUBSIDIARIES - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, ----------------------------------------------- 2000 1999 1998 ----------------------------------------------- Revenues Licensing-related activities $ 3,989,000 $4,156,000 $ 4,291,000 Creative services fees 6,497,000 3,396,000 3,748,000 Consumer product sales 905,000 495,000 -- Realized gains on licensing-related securities 4,844,000 5,614,000 6,435,000 Dividend income from licensing-related securities 210,000 396,000 578,000 Dividend and interest income 569,000 395,000 220,000 ----------------------------------------------- Total revenues $17,014,000 $14,452,000 $15,272,000 ----------------------------------------------- Costs and Expenses Licensing-related activities $ 1,398,000 $ 2,125,000 $ 1,985,000 Creative service expenses 4,255,000 2,819,000 2,561,000 Consumer product sales costs 590,000 320,000 -- Selling, general and administrative expenses 6,210,000 3,858,000 3,415,000 Loss from ceased operations -- -- 121,000 Realized losses on marketable securities -- -- 2,000 ----------------------------------------------- Total costs and expenses 12,453,000 9,122,000 8,084,000 ----------------------------------------------- Income before provision for taxes on income 4,561,000 5,330,000 7,188,000 ----------------------------------------------- Provision for taxes on income 1,632,000 1,657,000 2,453,000 ----------------------------------------------- Net Income $ 2,929,000 $ 3,673,000 $ 4,735,000 ----------------------------------------------- Basic earnings per share $ .77 $ .97 $ 1.25 Diluted earnings per share $ .77 $ .97 $ 1.21 -----------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. - -------------------------------------------------------------------------------- consolidated statements of comprehensive income REFAC AND SUBSIDIARIES - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, ------------------------------------------------- 2000 1999 1998 ------------------------------------------------- Net income $ 2,929,000 $ 3,673,000 $ 4,735,000 Other comprehensive income, net of tax: Unrealized holding gain (losses), net 98,000 (982,000) (361,000) Reclassification adjustment, net (3,064,000) (4,065,000) (4,131,000) Foreign currency translation adjustment -- -- (200,000) ------------------------------------------------- Comprehensive income (loss) ($ 37,000) ($1,374,000) $ 43,000 -------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 16 - -------------------------------------------------------------------------------- consolidated statements of cash flows REFAC AND SUBSIDIARIES - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, ------------------------------------------------- 2000 1999 1998 ------------------------------------------------- Cash Flows from Operating Activities Net income $ 2,929,000 $ 3,673,000 $ 4,735,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 824,000 557,000 320,000 Realized gains on sale of licensing-related securities (4,844,000) (5,614,000) (6,429,000) Decrease (increase) in security deposit (20,000) 100,000 (100,000) Deferred retirement (48,000) -- -- Deferred income taxes (311,000) (191,000) 339,000 Write-down of long-term assets 185,000 -- -- (Increase) decrease in assets, net of effect of purchases: Accounts receivable 394,000 (795,000) (409,000) Prepaid expenses and other current assets 32,000 (325,000) -- Inventory (91,000) -- -- Proceeds from sale of marketable securities -- -- 2,503,000 Other assets 322,000 212,000 (68,000) Increase (decrease) in liabilities, net of effect of purchases: Accounts payable and accrued expenses (304,000) 289,000 (189,000) Amounts payable under service agreements 18,000 176,000 6,000 Income taxes payable (877,000) 640,000 (183,000) ------------------------------------------------- Net cash (used in) provided by operating activities (1,791,000) (1,278,000) 525,000 ------------------------------------------------- Cash Flows from Investing Activities Proceeds from sales of licensing-related securities $ 5,399,000 $ 6,182,000 $ 7,045,000 Proceeds from (purchase of) investments being held to maturity (1,760,000) 762,000 (2,864,000) Payment for purchase of HumanFactors Industrial Design, Inc., net of cash acquired -- (275,000) -- Payment for purchase of assets of David Morris Creative, Inc., net of cash acquired -- (1,357,000) -- Payment for purchase of Funatik Inc., net of cash acquired -- (50,000) -- Additions to property and equipment (1,328,000) (1,799,000) (645,000) ------------------------------------------------- Net cash provided by investing activities $ 2,311,000 $ 3,463,000 $ 3,536,000 ------------------------------------------------- Cash Flows from Financing Activities Repayment of note payable--former HumanFactors-ID shareholders -- -- (4,050,000) Repayment of loan -- -- (53,000) Proceeds from exercise of stock options and purchase of warrants -- -- 147,000 ------------------------------------------------- Net cash used in financing activities -- -- (3,956,000) ------------------------------------------------- Net increase (decrease) in cash and cash equivalents 520,000 2,185,000 105,000 Cash and cash equivalents at beginning of period 5,158,000 2,973,000 2,868,000 ------------------------------------------------- Cash and cash equivalents at end of period $ 5,678,000 $ 5,158,000 $ 2,973,000 ------------------------------------------------- Income taxes paid $ 1,980,000 $ 1,257,000 $ 2,496,000 -------------------------------------------------
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 statement of changes in stockholders' equity REFAC AND SUBSIDIARIES - --------------------------------------------------------------------------------
Receivable from Accumulated Common Stock Treasury Stock Issuance of Additional Other Years ended December 31, -------------------- ----------------------- Common Stock Paid-In Retained Comprehensive 2000, 1999 and 1998 Shares Amount Shares Amount and Warrants Capital Earnings Income ------------------------------------------------------------------------------------------------------ Balance, December 31, 1997 5,413,387 $541,000 1,763,000 ($14,774,000) ($427,000) $9,441,000 $13,891,000 $13,951,000 Net income 4,735,000 Shares issued on exercise of stock options 37,500 4,000 91,000 Issuance of compensatory stock options 3,000 Other comprehensive income (4,692,000) Collection of warrants receivable 52,000 Issuance of stock for HumanFactors-ID acquisition (107,374) 900,000 449,000 ------------------------------------------------------------------------------------------------------ Balance, December 31, 1998 5,450,887 $545,000 1,655,626 ($13,874,000) ($375,000) $9,984,000 $18,626,000 $9,259,000 Net income 3,673,000 Other comprehensive income (5,047,000) ------------------------------------------------------------------------------------------------------ Balance, December 31, 1999 5,450,887 545,000 1,655,626 (13,874,000) (375,000) 9,984,000 22,299,000 4,212,000 Net income 2,929,000 Other comprehensive income (2,966,000) ------------------------------------------------------------------------------------------------------ Balance, December 31, 2000 5,450,887 $545,000 1,655,626 ($13,874,000) ($375,000) $9,984,000 $25,228,000 $1,246,000 ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 18 & 19 - -------------------------------------------------------------------------------- notes to consolidated financial statements REFAC AND SUBSIDIARIES - -------------------------------------------------------------------------------- 1 Business and Summary of Significant Accounting Policies Refac was incorporated in the State of Delaware in 1952. For almost 50 years, the Company has been a recognized international leader in intellectual property management. Today, it is a leading consulting firm with expertise in product development, graphic design and communications, and licensing. In addition to its fee-for-service consulting business, the Company constantly looks for opportunities to invest its creative services and licensing skills in new product development ventures that involve brands and/or technologies and have substantial long-term potential. The Company refers to this activity as "Intellectual Venture Capital." 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 that do not qualify as either held to maturity or trading securities. Unrealized gains and losses are reported as a separate component of stockholders' equity, net of applicable deferred income taxes on such unrealized gains and losses at current income tax rates. The Company's investments in 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.
2000 1999 1998 ----------------------------------------------- Basic shares 3,795,261 3,795,261 3,787,220 Dilution: Stock options and warrants 2,350 9,012 141,742 ----------------------------------------------- Diluted shares 3,797,611 3,804,273 3,928,962 -----------------------------------------------
In 2000, 1999 and 1998, options to purchase 789,250; 859,250; and 69,500 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 stock. 20 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 product and graphic design service revenues are recognized as services are performed. Nonrecurring lump sum payments that represent settlements of patent infringement claims are recognized when the settlements occur and collectibility is reasonably assured. 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. 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 three to seven years. Leasehold improvements are amortized over the lives of the respective leases. K. Reclassifications Certain reclassifications have been made to the prior period 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. M. Inventories Inventories consist of finished goods and are valued at the lower of cost or market on a first-in, first-out (FIFO) basis. N. Fair Value of Financial Instruments The Company's financial instruments principally consist of cash and cash equivalents, marketable equity securities and long-term marketable securities. The carrying amount of cash and cash equivalents approximate fair value due to the short-term maturity of the instruments. Marketable equity securities are recorded at fair value based on quoted market prices. Long-term marketable securities are recorded at amortized cost, which approximates fair value, due to interest rates on these types of securities approximating current market interest rates. 2 Licensing-Related Securities and Securities Held to Maturity SECURITIES HELD TO MATURITY at December 31, 2000 and 1999 consisted of U.S. Treasury Notes and corporate bonds with an amortized cost of $5,091,000 and $3,331,000, respectively. Approximately $4,649,000 of these securities mature in 2001 and the remainder in 2003. 21 Licensing-related securities are as follows:
Fair Carrying Unrealized December 31, 2000 Value Cost Value Gain/(Loss) ------------------------------------------------------------------- KeyCorp (NYSE-KEY) $ 2,100,000 $ 208,000 $ 2,100,000 $ 1,892,000 KeyCorp Put Options (4,000) 156,000 (4,000) (160,000) KeyCorp Call Options -- (156,000) -- 156,000 ------------------------------------------------------------------- $ 2,096,000 $ 208,000 $ 2,096,000 $ 1,888,000 ------------------------------------------------------------------- December 31, 1999 ------------------------------------------------------------------- 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 -------------------------------------------------------------------
At December 31, 2000, the Company held 75,000 shares of KeyCorp. The Company also had bought and sold 50,000 put and call options, respectively (50,000 of each option expiring in the first quarter of 2001). 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 the first, second and fourth quarter of 2000 and the first quarter of 2001). The realized gains for licensing-related securities accounted for on a first-in, first-out basis for the years ended December 31, 2000, 1999 and 1998 are summarized as follows:
2000 1999 1998 --------------------------------------------------------- KeyCorp $4,844,000 $5,614,000 $6,435,000 ---------------------------------------------------------
In order to minimize the Company's exposure against a decline in the value of KeyCorp, on September 12, 1997, the Company entered into 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 give 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 remaining contract expired on January 2, 2001 at which time 50,000 shares were sold for the put strike price. The put option had a strike price per share of $27.4262 and aggregated to $1,372,000. 3 Income Taxes The provision for taxes on income for the years ended December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998 -------------------------------------------------- Federal Current $ 1,781,000 $ 1,910,000 $ 2,482,000 Deferred (310,000) (289,000) (114,000) State and local 116,000 5,000 57,000 Foreign withholding taxes 45,000 31,000 28,000 -------------------------------------------------- $ 1,632,000 $ 1,657,000 $ 2,453,000 --------------------------------------------------
22 The provision for taxes on income for the years ended December 31, 2000, 1999 and 1998 differed from the amount computed by applying the statutory federal income tax rate of 34% as follows:
2000 1999 1998 ----------------------------------------- Statutory rate 34% 34% 34% Dividend received exclusion (1%) (2%) (2%) State and local 2% -- -- Other 1% (1%) 2% Provision for taxes on income 36% 31% 34%
The tax effect of temporary differences that gave rise to deferred tax assets and liabilities are as follows:
DECEMBER 31, ---------------------------------- Assets 2000 1999 ---------------------------------- Deferred rent and compensation/retirement $ 186,000 $ 121,000 Liabilities KeyCorp common stock basis difference $ 713,000 2,429,000 Cash to accrual basis adjustment for the acquisition of HumanFactors Industrial Design, Inc. -- 57,000 ---------------------------------- 713,000 2,486,000 ---------------------------------- Net liability $ 527,000 $ 2,365,000 ----------------------------------
4 Property and Equipment Property and equipment consists of the following:
DECEMBER 31, ---------------------------------- 2000 1999 ---------------------------------- Leasehold improvements $ 1,186,000 $ 1,046,000 Furniture and fixtures 809,000 718,000 Computer software and equipment 1,432,000 1,068,000 Automobile 29,000 29,000 Telephone system 95,000 45,000 Office equipment 80,000 57,000 Tooling 339,000 85,000 Other equipment 121,000 17,000 ---------------------------------- 4,091,000 3,065,0000 Less accumulated depreciation (1,272,000) (833,000) ---------------------------------- $ 2,819,000 $ 2,232,000 ----------------------------------
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") that 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") that 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. As of March 14, 2000, no further grants were allowed under the 1990 Plan. 23 Grants may be made at any time through May 10, 2008 under the 1998 Plan. The term period of the options granted ranges from 5 to 10 years, and the vesting period ranges from 0 to 5 years. 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. These options expired on February 6, 2001. 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 11 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. 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 2000 Price 1999 Price 1998 Price ----------------------------------------------------------------------------------------------- Outstanding at beginning of year 699,750 $ 7.64 711,500 $ 8.67 541,000 $ 9.55 Options granted 93,500 2.94 145,000 4.56 284,000 9.14 Options exercised -- -- -- -- (37,500) 2.53 Options cancelled (146,500) 7.04 (157,250) 9.48 (76,000) 8.00 ----------------------------------------------------------------------------------------------- Outstanding at end of year 646,750 7.09 699,750 7.64 711,500 8.67 ----------------------------------------------------------------------------------------------- Exercisable at end of year 341,925 $ 8.23 317,070 $ 8.28 266,400 $ 8.05 -----------------------------------------------------------------------------------------------
The following table summarizes option data, excluding the warrant sale to Palisade Capital, L.L.C. as of December 31, 2000:
Weighted Weighted Weighted Price Average Average Average Range Outstanding at Contract Exercise Exercisable at Exercise Minimum Maximum December 31, Life Price December 31, Price 2000 (Years) 2000 ------------------------------------------------------------------------------------------------------------------------------ $2.88 $4.32 176,500 9.10 $3.45 22,375 $3.95 $4.33 $6.48 80,000 3.33 $5.66 57,500 $5.76 $6.49 $9.72 340,250 6.38 $8.80 232,050 $8.95 $9.73 $14.58 50,000 7.06 $10.63 30,000 $10.63 ------------------------------------------------------------------------------------------------------------------------------ 646,750 341,925 ------------------------------------------------------------------------------------------------------------------------------
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 2000, 1999 and 1998, respectively: no dividend yields; expected volatility of 48, 54 and 42 percent; risk-free interest rates of 5.7, 6.5 and 5.3 percent; and expected lives of 5, 5 and 10 years. The weighted-average fair value of options granted was $1.44, $2.48 and $3.96 for the years ended December 31, 2000, 1999 and 1998, respectively. The pro forma amounts had options been recorded at fair value, are indicated below:
YEAR ENDED DECEMBER 31, ------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------- Pro forma net income $2,758,000 $3,527,000 $4,098,000 Pro forma earnings per share Basic $.73 $.93 $1.08 Diluted $.73 $.93 $1.04
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. 24 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 $567,750 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 $580,000, $445,000 and $382,000 for the years ended December 31, 2000, 1999 and 1998, respectively. In addition, the Company is liable for escalations as provided in the lease agreements. 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 these 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 13, 1996, the Company granted the officer an additional option to purchase 100,000 shares. The Company's employment agreement with its Senior Vice President extends through December 31, 2002. The agreement provides for minimum annual compensation and an incentive bonus based on performance of the Product Development Group. 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. During the second half of 2000, the Company began making payments, leaving the balance at $397,000 at December 31, 2000. D. Legal Proceedings 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 16, 2001, the Court entered a memorandum decision and order granting the motion of the defendant directors and the Company to dismiss the complaint in its entirety. A judgment to that effect was entered on February 26, 2001. Plaintiff has filed a notice of appeal. E. Contingent Letters of Credit At December 31, 2000, the Company had open letters of credit to purchase goods for $1,056,475. 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. 25 With its November 25, 1997 acquisition of Refac HumanFactors-ID (then known as "HumanFactors Industrial Design, Inc."), the Company began to provide product design and development and consulting services. On November 1, 1999, the Company acquired the graphic design and communication business of David Morris Creative, Inc. Operations of the product design and development business and the graphic design and communication business are reported together as creative consulting services. In January 2001, the Company consolidated the operations of these divisions and now offers its creative services under the name RefacDesign. With the purchase of the assets and assumption of the liabilities of Funatik Inc. on September 10, 1999 and its subsequent merger into Refac Consumer Products, Inc., the Company is now also engaged in the manufacture and marketing of consumer products. The reportable segments are distinct business units operating in different industries and are separately managed. The following information about the business segments is for the year ended December 31, 2000.
Manufacture Licensing of Creative and Marketing Intellectual Consulting of Consumer Property Rights Services Products Total ----------------------------------------------------------------------------------------- Total revenues $9,129,000 $6,905,000 $980,000 $17,014,000 Segment profit (loss) $6,259,000 ($304,000) ($1,394,000) $4,561,000 Segment assets $12,865,000 $9,022,000 $3,016,000 $24,903,000 Expenditure for segment assets $590,000 $317,000 $421,000 $1,328,000 -----------------------------------------------------------------------------------------
The following information about the business segments is for the year ended December 31, 1999.
Manufacture Licensing of Creative and Marketing Intellectual Consulting of Consumer Property Rights Services Products Total ----------------------------------------------------------------------------------------- Total revenues $10,561,000 $3,396,000 $495,000 $14,452,000 Segment profit (loss) 6,329,000 (857,000) (142,000) $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 is for the year ended December 31, 1998.
Licensing of Creative Intellectual Consulting Property Rights Services Total ----------------------------------------------------------------------------------------- Total revenues $11,524,000 $3,748,000 $15,272,000 Segment profit (loss) 7,307,000 (119,000) $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:
2000 1999 1998 ----------------------------------------------------------------------------------------- Europe $678,000 $682,000 $844,000 Asia 307,000 191,000 172,000 ----------------------------------------------------------------------------------------- $985,000 $873,000 $1,016,000 -----------------------------------------------------------------------------------------
8 HumanFactors Industrial Design, Inc. Acquisition On November 25, 1997, the Company completed the purchase of the outstanding stock of HumanFactors Industrial Design, Inc. (now known as RefacDesign's Product Development Group) 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). On December 30, 1998, HumanFactors Industrial Design, Inc. was merged into Refac International, Ltd. The Company may also be required to make a contingent purchase price payment to the former HumanFactors Industrial Design, Inc. 26 shareholders if certain earnings targets, as defined in the purchase agreement, are met. Any contingent purchase price payment is 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, Inc. Acquisition On November 1, 1999, the Company acquired certain assets and assumed certain liabilities of David Morris Creative, Inc. (now known as RefacDesign's Graphic Design Group) 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 the Graphic Design Group have been included in the Company's consolidated financial statements since the date of acquisition. 10 Accrued Expenses Accrued expenses consist of the following: YEAR ENDED DECEMBER 31, ------------------------------------ 2000 1999 ------------------------------------ Deferred rent $200,000 -- Client retainers 132,000 -- Bonus 78,000 67,000 Other 91,000 372,000 ------------------------------------ $501,000 $439,000 ------------------------------------ - -------------------------------------------------------------------------------- report of independent certified public accountants - -------------------------------------------------------------------------------- To the Stockholders and Board of Directors of Refac and Subsidiaries: We have audited the accompanying consolidated balance sheets of Refac and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, comprehensive income (loss), cash flows and stockholders' equity for each of the three years in the period ended December 31, 2000. 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 of America. 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, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Grant Thornton LLP New York, New York February 16, 2001, except for Note 6 D as to which the date is March 23, 2001 27 - -------------------------------------------------------------------------------- unaudited selected quarterly financial data REFAC AND SUBSIDIARIES - --------------------------------------------------------------------------------
First Second Third Fourth 2000 Quarter Quarter Quarter Quarter -------------------------------------------------------------------------- Total revenues $5,063,000 $4,142,000 $3,736,000 $4,073,000 Cost of revenue 2,103,000 1,419,000 1,103,000 1,618,000 Net income 919,000 907,000 819,000 284,000 Net income per diluted common share $.24 $.24 $.22 $.07 -------------------------------------------------------------------------- 1999 -------------------------------------------------------------------------- Total revenues $3,417,000 $3,286,000 $3,362,000 $4,387,000 Cost of revenue 1,187,000 1,094,000 1,076,000 1,907,000 Net income 1,008,000 864,000 882,000 919,000 Net income per diluted common share $.26 $.23 $.23 $.24 --------------------------------------------------------------------------
The 2000 and 1999 unaudited selected quarterly financial data has been reclassified to conform with year-end presentations.
2000 1999 -------------------------------------------------------------------------- Market price of common stock High Low High Low -------------------------------------------------------------------------- First quarter 5 3/8 3 3/4 8 5/8 5 5/8 Second quarter 4 3 7 3/8 6 Third quarter 3 5/8 3 6 5/8 4 1/4 Fourth quarter 3 1/4 2 1/4 4 5/8 3 1/2 --------------------------------------------------------------------------
The Company's common stock is listed on the American Stock Exchange under the symbol REF. selected financial information REFAC AND SUBSIDIARIES
------------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------ Total revenues $17,014,000 $14,452,000 $15,272,000 $11,440,000 $10,301,000 Net income 2,929,000 3,673,000 4,735,000 5,191,000 4,700,000 Earnings per common share - diluted $.77 $.97 $1.21 $1.36 $.88 Total assets 24,903,000 27,847,000 30,565,000 37,142,000 43,295,000 Dividends -- -- -- 2,701,000 -- Shareholders' equity $22,754,000 $22,791,000 $24,165,000 $22,623,000 $32,044,000 ------------------------------------------------------------------------------------------
28 directors and officers Refac and Subsidiaries Refac Directors Neil R. Austrian Chairman iWon, Inc. Robin L. Farkas Private Investor Clark A. Johnson Chairman PSS World Medical, Inc. Mark N. Kaplan Of Counsel Skadden, Arps, Slate, Meagher & Flom LLP Herbert W. Leonard President Hamilton Associates Robert L. Tuchman Chairman, Chief Executive Officer & General Counsel, Refac Bert D. Heinzelman Senior Vice President, Refac & Chief Executive Officer, RefacDesign Ira T. Wender Of Counsel Patterson, Belknap, Webb & Tyler LLP Refac Officers Robert L. Tuchman Chairman, Chief Executive Officer & General Counsel Bert D. Heinzelman Senior Vice President Raymond A. Cardonne, Jr. Vice President, Chief Financial Officer, Treasurer & Secretary Counsel Skadden, Arps, Slate, Meagher & Flom LLP New York, New York Independent Auditors Grant Thornton LLP New York, New York Transfer Agent American Stock Transfer and Trust Company New York, New York 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 the "forward-looking statements" contained herein are subject to the above-mentioned statutory safe harbors. 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. The Company's future performance is affected by factors beyond the Company's control, including worldwide competitive and market conditions, costs of labor, raw materials and marketing, spending patterns and demographic trends, litigation and the availability of financing. In addition, there is no assurance that the Company's plans to manufacture and distribute products through Refac Consumer Products, Inc. ("RCP") will prove profitable, as RCP is a new vendor with a limited manufacturing history at a time when retailers are looking to decrease their vendors. Moreover, the category of consumer electronics is highly competitive, and many of RCP's competitors are much larger, more established and better known to both retailers and consumers. Some of the aforementioned risks are mentioned in reports that the Company files with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended December 31, 2000. OXO and GOOD GRIPS are registered trademarks of General Housewares Corp. MTV: Music Television and all related titles and logos are trademarks of MTV Networks, a division of Viacom International Inc. New Beetle and the New Beetle logo are trademarks of Volkswagen AG. Pennzoil and the Pennzoil logo are registered trademarks of Pennzoil-Quaker State Company. RefacDesign is a service mark and "by RefacDesign" is a trademark of Refac International, Ltd. This Annual Report was designed in-house by RefacDesign. (C)2001 www.refac.com | Page 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 Las Vegas, Nevada Hong Kong www.refac.com EX-21 3 0003.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Jurisdiction Name (l, 2) of Incorporation ------------------------------------ ------------------ Refac International, Ltd. Nevada Refac Biochemics Corporation (3) Delaware Refac Consumer Products, Inc. Delaware Refac (H.K.) Limited Hong Kong Refac Financial Corporation Delaware Refac Licensing, Inc. (4) 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 92% of the outstanding capital stock of Refac Biochemics Corporation as of December 31, 2000. (4) The Company owned approximately 81% of the outstanding capital stock of Refac Licensing, Inc. as of December 31, 2000. EX-23 4 0004.txt CONSENT OF GRANT THORNTON LLP EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated February 16, 2001, except for Note 6 D as to which the date is March 23, 2001, accompanying the consolidated financial statements included in the Annual Report of Refac and Subsidiaries on Form 10-K for the year ended December 31, 2000. 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 March 26, 2001 -----END PRIVACY-ENHANCED MESSAGE-----