10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 -------------------------------------- For the Quarter Ended March 31, 2001 Commission File Number 0-7704 REFAC ----- (Exact name of registrant as specified in its charter) Delaware 13-1681234 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) The Hudson River Pier --------------------- 115 River Road, Edgewater, New Jersey 07020-1099 ------------------------------------------------ (Address of principal executive offices)(Zip Code) Registrant's telephone number, including area code: (201) 943-4400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the Registrant's Common Stock, par value $.10 per share, as of May 11, 2001 was 3,795,261. REFAC INDEX ----- Page ---- Part I. Financial Information Condensed Consolidated Balance Sheets March 31, 2001 (unaudited) and December 31, 2000 3 Condensed Consolidated Statements of Operations Three Months Ended March 31, 2001 and 2000 (unaudited) 4 Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2001 and 2000 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6-8 Management's Discussion and Analysis of Financial Conditions and Results of Operations 9-12 Part II. Other Information 13-14 Page 2 REFAC CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2001 2000 ----------- ----------- (UNAUDITED) ASSETS ------ Current Assets Cash and cash equivalents $6,498,000 $5,678,000 Royalties receivable 880,000 1,114,000 Accounts receivable, net 1,431,000 1,070,000 Investments being held to maturity 4,287,000 4,649,000 Inventory 598,000 91,000 Prepaid expenses 223,000 651,000 ----------- ----------- Total current assets 13,917,000 13,253,000 ----------- ----------- Property and equipment, net 2,778,000 2,819,000 Licensing-related securities 645,000 2,096,000 Investments being held to maturity 442,000 442,000 Other assets 332,000 262,000 Goodwill, net 5,959,000 6,031,000 ----------- ----------- $24,073,000 $24,903,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities Accounts payable $277,000 $289,000 Accrued expenses 513,000 501,000 Amounts payable under service agreements 215,000 435,000 Income taxes payable 269,000 0 ----------- ----------- Total current liabilities 1,274,000 1,225,000 ----------- ----------- Deferred income taxes 34,000 527,000 Other liabilities - deferred compensation 349,000 397,000 Stockholders' Equity Common stock, $.10 par value 545,000 545,000 Additional paid-in capital 9,984,000 9,984,000 Retained earnings 25,756,000 25,228,000 Accumulated other comprehensive income 380,000 1,246,000 Treasury stock, at cost (-13,874,000) (-13,874,000) Receivable from issuance of common stock and warrants (-375,000) (-375,000) ----------- ----------- Total stockholders' equity 22,416,000 22,754,000 ----------- ----------- $24,073,000 $24,903,000 =========== ===========
See accompanying notes to the unaudited condensed consolidated financial statements Page 3 REFAC CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, -------------------------------- 2001 2000 -------------------------------- Revenues Licensing-related activities $741,000 $1,062,000 Creative services fees 1,512,000 1,850,000 Consumer product sales 41,000 707,000 Realized gains on licensing-related securities 1,233,000 1,233,000 Dividend income from licensing-related securities 7,000 77,000 Dividend and interest income 205,000 134,000 -------------------------------- Total Revenues 3,739,000 5,063,000 -------------------------------- Costs and Expenses Licensing-related activities 46,000 433,000 Creative service expenses 969,000 1,196,000 Consumer product sales costs 34,000 474,000 Selling, general and administrative expenses 1,864,000 1,594,000 -------------------------------- Total costs and expenses 2,913,000 3,697,000 -------------------------------- Income before provision for taxes on income 826,000 1,366,000 Provision for taxes on income 298,000 447,000 -------------------------------- Net income $528,000 $919,000 ================================ -------------------------------- Diluted earnings per share $0.14 $0.24 ================================ Basic earnings per share $0.14 $0.24 ================================ -------------------------------- Diluted weighted average shares outstanding 3,800,501 3,804,661 ================================
See accompanying notes to the unaudited condensed consolidated financial statements Page 4 REFAC CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ----------------------------------- 2001 2000 ------------ ------------ Cash Flows from Operating Activities Net income $528,000 $919,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization (247,000) 182,000 Realized gains on sale of licensing-related securities (-1,233,000) (-1,233,000) Deferred retirement (-48,000) 0 Deferred income taxes -47,000 (-130,000) Other 0 3,000 (Increase) decrease in assets: Royalties receivable 234,000 115,000 Accounts receivable (-361,000) (-481,000) Prepaid expenses and other current assets 266,000 (-102,000) Inventory (-507,000) 0 Other assets (-70,000) (-53,000) Increase (decrease) in liabilities: Accounts payable and accrued expenses 0 53,000 Amounts payable under service agreements (-220,000) 206,000 Income taxes payable 430,000 (-18,000) ------------ ------------ Net cash used in operating activities -781,000 (-539,000) ------------ ------------ Cash Flows from Investing Activities Proceeds from sales of licensing-related securities 1,371,000 1,371,000 Proceeds from (purchase of) investments being held to maturity 362,000 (-394,000) Additions to property and equipment (-132,000) (-472,000) ------------ ------------ Net cash provided by investing activities 1,601,000 505,000 ------------ ------------ Net (decrease) increase in cash and cash equivalents 820,000 (-34,000) Cash and cash equivalents at beginning of period 5,678,000 5,158,000 ------------ ------------ Cash and cash equivalents at end of period $6,498,000 $5,124,000 ============ ============
See accompanying notes to the unaudited condensed consolidated financial statements Page 5 REFAC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (all of which were normal recurring adjustments) necessary to present fairly the consolidated financial position of Refac (the "Company") at March 31, 2001, and the results of its operations, its cash flows and comprehensive income for the three month interim periods presented. The accounting policies followed by the Company are set forth in Note l to the Company's consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, which is incorporated herein by reference. 2. The results of operations for the three months ended March 31, 2001 are not indicative of the results to be expected for the full year. 3. The following table reconciles the numerators and denominators of the basic and diluted earnings per share computations pursuant to SFAS No. 128, "Earnings Per Share."
Three Months Ended March 31, -------------------------------------------------- ---------------------------------- Description 2001 2000 -------------------------------------------------- ---------------- ----------------- Basic shares 3,795,261 3,795,261 Dilution: stock options and warrants 5,240 9,400 Diluted shares 3,800,501 3,804,661 Income available to common shareholders $528,000 $919,000 Basic earnings per share $0.14 $0.24 Diluted earnings per share $0.14 $0.24
4. The accounting policies used to develop segment information correspond to those described in the summary of significant accounting policies (See Note 1 of the 2000 Annual Report). Segment profit or loss is based on profit or loss from operations before the provision or benefit for income taxes. The reportable segments are distinct business units operating in different industries and are separately managed. Page 6 REFAC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following information about the business segments is for the three month period ended March 31, 2001.
Licensing of Manufacture Intellectual Creative and Marketing Property Consulting of Consumer Description Rights Services Products Total ------------------------------ ------------------ ----------------- ------------------ --------------- Total revenues $1,995,000 $1,671,000 $73,000 $3,739,000 Segment profit (loss) 1,754,000 (435,000) (493,000) 826,000 Segment assets 13,430,000 8,458,000 2,185,000 24,073,000 Expenditure for segment 6,000 39,000 89,000 134,000 assets
The following information about the business segments is for the three month period ended March 31, 2000.
Licensing of Manufacture Intellectual Creative and Marketing Property Consulting of Consumer Description Rights Services Products Total ------------------------------ ------------------- ----------------- ------------------ --------------- Total revenues $2,506,000 $1,850,000 $707,000 $5,063,000 Segment profit (loss) 1,658,000 (91,000) (201,000) 1,366,000 Segment assets 16,349,000 10,135,000 942,000 27,426,000 Expenditure for segment 250,000 211,000 11,000 472,000 assets
5. Comprehensive income consists of net income or loss for the current period as well as income, expenses, gains, and losses arising during the period that are included in separate components of equity. It includes the unrealized gains and losses on the Company's licensing-related securities, net of taxes and foreign currency translation adjustments. Page 7 REFAC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The components of comprehensive income (loss), net of related tax, for the three month periods ended March 31, 2001 and 2000 are as follows:
Description 2001 2000 ----------------------------------------------------------------- ---------------- ------------------ Net income $528,000 $919,000 Less: Comprehensive losses, net of tax Unrealized holding gains (losses), net (52,000) (143,000) Reclassification adjustment, net (814,000) (814,000) Comprehensive income (loss) ($338,000) ($38,000)
The components of accumulated other comprehensive income, net of related tax, at March 31, 2001 and December 31, 2000 consist of unrealized gains on licensing-related securities. 6. On April 30, 2001, the Company had open letters of credit to purchase goods for $1,441,000. In April 2001, the Company entered into a credit agreement with its banking institution creating a line of credit secured by certificates of deposits. 7. 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. Page 8 REFAC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS --------------------- REVENUES for the three months ended March 31, 2001 were $3,739,000 as compared to $5,063,000 for the comparable period in 2000. Of the $1,324,000 revenue decrease, $666,000 relates to a non-recurring sourcing opportunity to sell an account open-market goods in 2000 that was not available to Refac Consumer Products, Inc. in 2001 and the balance was principally due to decreases in creative consulting fees (8338,000), non-recurring patent license fees ($171,000) and trademark agency fees ($114,000). Revenues are summarized as follows:
Description 2001 2000 ----------- ---- ---- Revenues from licensing-related activities 20% 21% Realized gains on sales and dividends from licensing- 33% 26% related securities Creative consulting services 40% 37% Consumer product sales 1% 14% Dividends and interest 6% 2% Total 100% 100%
Licensing of Intellectual Property Rights ----------------------------------------- Revenues from Licensing-Related Activities consist of recurring royalty payments for the use of licensed patents and trademarks, non-recurring, lump sum license payments, agency fees and service fees. Recurring patent licensing income and trademark agency fees decreased $131,000 for the three months ended March 31, 2001 as compared to the same period of 2000. The decrease of recurring patent licensing income and trademark agency fees for the three months ended March 31, 2001 is attributable to a decrease in trademark agency fees of $114,000 and a decrease in patent enforcement fees of $61,000 offset by an increase in patent licensing income of $44,000. Revenues from non-recurring agreements vary from period to period depending upon the nature of the licensing programs pursued for various technologies in a particular year and the timing of successful completion of licensing agreements. Non-recurring license fees decreased by $171,000 for the three months ended March 31, 2001 as compared to the same period of 2000. Service income from royalty verifications decreased by $19,000 from 2000 to 2001. Page 9 REFAC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Expenses from Licensing-Related Activities consist principally of amounts paid to licensors at contractually stipulated percentages of the Company's specific patent and product revenues and, in addition, includes expenses related to the investigation, marketing, administration, enforcement, maintenance and prosecution of patent, trademarks and license rights and related licenses. Licensing-related expenses decreased by $387,000 for the three months ended March 31, 2001. As a percentage of licensing revenues, these expenses were 6% and 41% in 2001 and 2000, respectively. The decrease in 2001 over 2000 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. Income from Licensing-Related Securities consist of gains on sales and dividends received on securities acquired by the Company in connection with its licensing activities. As of March 31, 2001, licensing-related securities consisted of 25,000 shares of KeyCorp common stock. The Company intends to sell the shares during the second quarter of 2001 depending on the performance of the stock and market conditions. Creative Consulting Services ---------------------------- 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 Graphics 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. Total creative consulting fees decreased by $338,000 for the three months ended March 31, 2001 versus the comparable period in 2000. This decrease consists of a decrease in the Product Development Group's services of $479,000 offset by an increase in the Graphic Design Group's services of $141,000. In addition to its traditional fee-for-service consulting, RefacDesign seeks opportunities, in appropriate situations, to share in the cost and risk of brand and product development in return for future royalties or venture equity. This is the basis upon which it is providing product development and graphic design services to its affiliate, Refac Consumer Products, Inc. ("RCP"). See "Manufacturing and Marketing of Consumer Products" below. Accordingly, while incurring the current expense of providing such services, RefacDesign will not derive any inter-company royalty revenues until RCP has sales from products covered by this arrangement. RIL is the owner of all of the intellectual property rights relating to the RCP product line that are not licensed from third parties. Expenses decreased by $227,000 in the three month period ended March 31, 2001 as compared to 2000, which consist of decreases of $190,000 and $37,000 from the Product Development Group and the Graphic Design Group, respectively. These decreases are principally due to decreases in direct payroll. Page 10 REFAC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Marketing of Consumer Products ------------------------------ In September 1999, the Company acquired Funatik Inc. and merged it into the newly formed RCP. Sales decreased $666,000 to $41,000 during the three months ended March 31, 2001 from $707,000 during the same period of 2000. For the period ended March 31, 2000 sales principally consisted of sales of imported consumer electronics sourced by RCP for a retailer which did not recur during the first quarter of 2001. Sales to the retailer amounted to $703,000 for the three months ended March 31, 2000. As mentioned above under "Creative Consulting Services", all of RCP's industrial design, engineering and graphic design services are provided for by RefacDesign, without current charge, in exchange for future royalties based upon RCP's sales. Accordingly, RCP has no current costs for these services, but will incur future royalty expense based on actual product sales which utilize the creative work of RefacDesign. Selling, General and Administrative Expenses increased by $270,000 in the three month period ended March 31, 2001 as compared to the previous year. The increase consists of increased product design costs ($136,000) mainly attributable to RCP's MTV:MusicTelevision(TM) product line introduced this year and a net increase of $85,000 in RefacDesign. Goodwill relates to the excess of the purchase price paid over the fair market value of the tangible assets acquired in the Company's acquisitions of the Product Development Group, Graphic Design Group and Funatik Inc. Such goodwill is being amortized over 25, 20 and 10 years, respectively, which is the expected period of benefit. Income Tax Provision. The Company's income tax provision of $298,000 for the three months ended March 31, 2001 reflects an effective tax rate of 34% (the Federal statutory corporate income tax rate) increased by 2% related to the amortization of goodwill acquired through the stock purchase of HumanFactors Industrial Design, Inc. (now referred to as RefacDesign's Product Development Group) which is not deductible for tax purposes. The effective tax rate for the three months ended March 31, 2000 was 33% as a result of the Company reversing previously recognized income tax reserves that were no longer required, which reduced the income tax rate by 3% for that period. Inflation. The Company's income from licensing operations has not in the past been materially affected by inflation. Likewise, while currency fluctuations can influence licensing-related revenues, the diversity of foreign income sources tends to offset individual changes in currency valuations. Page 11 REFAC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Cash, cash equivalents, corporate bonds and U.S. Treasury Notes increased $820,000 from $5,678,000 at December 31, 2000 to $6,498,000 at March 31, 2001. The Company believes its liquidity position is adequate to meet all current and projected financial needs. Cash used in operations was $781,000 as compared to $539,000 for the same period of 2000, reflecting an increase of $242,000. Principal sources of net cash flows from operating activities for the three months ended March 31, 2001 and 2000 were net income, depreciation and amortization, and the timing of payments for income taxes. Operating activities which used the most cash during the three months ended March 31, 2001 was the purchase of inventory. Net cash provided by investing activities increased $1,096,000 to $1,601,000 as compared with $505,000. The increase is attributable to the redemption of investments held to maturity and a decrease in additions to property and equipment. On April 30, 2001, the Company had open letters of credit to purchase goods for $1,441,000. The Company has commitments under leases covering its facilities and under a Retirement Agreement with its founder and former Chief Executive Officer (which has been provided for in the financial statements). FORWARD LOOKING STATEMENTS -------------------------- Statements about the Company's future expectations and all other statements in this document other than historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and as that term is defined in the Private Securities Litigation Reform Act of 1995. The Company intends that the "forward-looking statements" contained herein be subject to the above- mentioned statutory safe harbors. Since these statements involve risks and uncertainties and are subject to change at any time, the Company's actual results could differ materially from expected or inferred results. Moreover, there is no assurance that the Company's investment in RCP will prove profitable or that its contract with Griffin International, Inc. will result in increased sales and income for RCP or that RCP will reach its goal for retail storefronts in 2001. Page 12 Part II. Other Information Item 6. Exhibit and Reports on Form 8-K ------------------------------------------- (a) See Exhibit Index attached hereto. (b) Reports on Form 8-K filed during the quarter: None Signatures ---------- Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REFAC May 11, 2001 /s/ Robert L. Tuchman ------------------------------------- Robert L. Tuchman, President and Chief Executive Officer May 11, 2001 /s/ Raymond A. Cardonne, Jr ------------------------------------- Raymond A. Cardonne, Jr, CFO (Principal Financial Officer) Page 13 EXHIBIT INDEX Exhibit Page No. No. ------- ---- 27 Note 1 to the Company's Consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 is incorporated herein by reference. Page 14