-----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, A1jbWq0SwuZWJOEGf6ohWdwJ/LFdRpFDYAaj+KToOZECVkpkcx4jsNVL/HuGzslv y9CF5aFAi5eJB2xXBBtspQ== 0001021408-01-505061.txt : 20010814 0001021408-01-505061.hdr.sgml : 20010814 ACCESSION NUMBER: 0001021408-01-505061 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010813 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12776 FILM NUMBER: 1706285 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 INC DATE OF NAME CHANGE: 19720628 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 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 June 30, 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 August 13, 2001 was 3,795,261. Page 1 REFAC INDEX -----
Page ---- Part I. Financial Information Condensed Consolidated Balance Sheets June 30, 2001 (unaudited) and December 31, 2000 3 Condensed Consolidated Statements of Operations Six and Three Months Ended June 30, 2001 and 2000 (unaudited) 4 Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2001 and 2000 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6-9 Management's Discussion and Analysis of Financial Conditions and Results of Operations 10-15 Part II. Other Information 16-17 Exhibit 10 1-7
Page 2 REFAC CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 2001 2000 ----------------------- ----------------------- (UNAUDITED) ASSETS - ------ Current Assets Cash and cash equivalents $ 5,385,000 $ 5,678,000 Due from broker 645,000 -- Royalties receivable 934,000 1,114,000 Accounts receivable, net 1,406,000 1,070,000 Investments being held to maturity 2,763,000 4,649,000 Inventory 2,826,000 91,000 Prepaid expenses 301,000 651,000 ----------------------- ----------------------- Total current assets 14,260,000 13,253,000 ----------------------- ----------------------- Property and equipment, net 2,615,000 2,819,000 Licensing-related securities -- 2,096,000 Investments being held to maturity 443,000 442,000 Deferred income taxes 163,000 -- Other assets 350,000 262,000 Goodwill, net 5,888,000 6,031,000 ----------------------- ----------------------- $23,719,000 $24,903,000 ======================= ======================= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current Liabilities Accounts payable $ 394,000 $ 289,000 Accrued expenses 436,000 501,000 Amounts payable under service agreements 167,000 435,000 ----------------------- ----------------------- Total current liabilities 997,000 1,225,000 ----------------------- ----------------------- Deferred income taxes -- 527,000 Other liabilities 382,000 397,000 Stockholders' Equity Common stock, $.10 par value 545,000 545,000 Additional paid-in capital 9,984,000 9,984,000 Retained earnings 26,060,000 25,228,000 Accumulated other comprehensive income -- 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 22,340,000 22,754,000 ----------------------- ----------------------- $23,719,000 $24,903,000 ======================= =======================
See accompanying notes to the unaudited condensed consolidated financial statements Page 3 REFAC CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS THREE MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------------------------------------------------------------------ 2001 2000 2001 2000 ------------------------------------------------------------------------------ Revenues Licensing-related activities $ 1,635,000 $ 2,040,000 $ 894,000 $ 978,000 Creative services fees 2,839,000 3,602,000 1,327,000 1,752,000 Consumer product sales 452,000 712,000 411,000 5,000 Realized gains on licensing-related securities 1,813,000 2,466,000 580,000 1,296,000 Dividend income from licensing-related securities 15,000 140,000 8,000 63,000 Dividend and interest income 340,000 245,000 135,000 48,000 ------------------------------------------------------------------------------ Total Revenues 7,094,000 9,205,000 3,355,000 4,142,000 ------------------------------------------------------------------------------ Costs and Expenses Licensing-related activities 324,000 781,000 279,000 348,000 Creative service expenses 1,899,000 2,265,000 931,000 1,069,000 Consumer product sales costs 349,000 476,000 315,000 2,000 Selling, general and administrative expenses 3,265,000 2,959,000 1,399,000 1,365,000 ------------------------------------------------------------------------------ Total costs and expenses 5,837,000 6,481,000 2,924,000 2,784,000 ------------------------------------------------------------------------------ Income before provision for taxes on income 1,257,000 2,724,000 431,000 1,358,000 Provision for taxes on income 424,000 898,000 126,000 451,000 ------------------------------------------------------------------------------ Net income $ 833,000 $ 1,826,000 $ 305,000 $ 907,000 ============================================================================== ------------------------------------------------------------------------------ Basic earnings per share $ 0.22 $ 0.48 $ 0.08 $ 0.24 ============================================================================== ------------------------------------------------------------------------------ Diluted earnings per share $ 0.22 $ 0.48 $ 0.08 $ 0.24 ============================================================================== ------------------------------------------------------------------------------ Diluted weighted average shares outstanding 3,797,881 3,799,961 3,795,261 3,795,261 ==============================================================================
See accompanying notes to the unaudited condensed consolidated financial statements Page 4 REFAC CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------------------------- 2001 2000 ----------- ----------- Cash Flows from Operating Activities Net income $ 833,000 $ 1,826,000 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 457,000 380,000 Realized gains on sale of licensing-related securities (1,813,000) (2,466,000) Deferred income taxes (48,000) (223,000) Other -- 3,000 (Increase) decrease in assets: Due from broker (645,000) -- Royalties receivable 180,000 87,000 Accounts receivable (336,000) (486,000) Prepaid expenses 428,000 (111,000) Prepaid taxes (78,000) (716,000) Inventory (2,735,000) (449,000) Other assets -- (61,000) Increase (decrease) in liabilities: Accounts payable and accrued expenses 40,000 (45,000) Amounts payable under service agreements (268,000) 84,000 ----------- ----------- Net cash used in operating activities (3,985,000) (2,177,000) ----------- ----------- Cash Flows from Investing Activities Proceeds from sales of licensing-related securities 2,020,000 2,742,000 Proceeds from investments being held to maturity 1,893,000 606,000 Additions to property and equipment (221,000) (569,000) ----------- ----------- Net cash provided by investing activities 3,692,000 2,779,000 ----------- ----------- Net (decrease) increase in cash and cash equivalents (293,000) 602,000 Cash and cash equivalents at beginning of period 5,678,000 5,158,000 ----------- ----------- Cash and cash equivalents at end of period $ 5,385,000 $ 5,760,000 =========== ===========
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 June 30, 2001, and the results of its operations, its cash flows and comprehensive income for the six 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 periods presented 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."
Six Months Ended Three Months Ended June 30, June 30, - -------------------------------------------------- --------------------------------- --------------------------------- Description 2001 2000 2001 2000 - -------------------------------------------------- ---------------- ---------------- --------------- ---------------- Basic shares 3,795,261 3,795,261 3,795,261 3,795,261 Dilution: Stock Options and Warrants 2,620 4,700 -- -- Diluted Shares 3,797,881 3,799,961 3,795,261 3,795,261 Income available to common shareholders $ 833,000 $1,826,000 $ 305,000 $ 907,000 Basic earnings per share $ 0.22 $ 0.48 $ 0.08 $ 0.24 Diluted earnings per share $ 0.22 $ 0.48 $ 0.08 $ 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 six month period ended June 30, 2001.
Licensing of Manufacture Intellectual Creative and Marketing Property Consulting of Consumer Description Rights Services Products Total - ------------------------------ ------------------ ----------------- ------------------ --------------- Total revenues $3,484,000 $3,105,000 $505,000 $7,094,000 Segment profit (loss) 2,878,000 (764,000) (857,000) 1,257,000 Segment assets 7,831,000 9,125,000 6,763,000 23,719,000 Expenditure for segment 22,000 40,000 159,000 221,000 assets
The following information about the business segments is for the six month period ended June 30, 2000
Licensing of Manufacture Intellectual Creative and Marketing Property Consulting of Consumer Description Rights Services Products Total - ------------------------------ ------------------- ----------------- ------------------- --------------- Total revenues $4,684,000 $3,777,000 $744,000 $9,205,000 Segment profit (loss) 3,051,000 220,000 (547,000) 2,724,000 Segment assets 14,575,000 10,359,000 1,022,000 25,956,000 Expenditure for segment 281,000 231,000 57,000 569,000 assets
The following information about the business segments are for the three month period ended June 30, 2001.
Manufacture Licensing of Creative and Marketing Intellectual Consulting of Consumer Description Property Rights Services Products Total - ------------------------------ --------------------- ------------------ -------------------- ------------------- Total revenues $1,489,000 $1,434,000 $432,000 $3,355,000 Segment profit (loss) 1,125,000 (329,000) (365,000) 431,000 Expenditure for segment 16,000 1,000 70,000 87,000 assets
Page 7 REFAC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following information about the business segments are for the three month period ended June 30, 2000.
Manufacture Licensing of Creative and Marketing Intellectual Consulting of Consumer Description Property Rights Services Products Total - ------------------------------ --------------------- ------------------ -------------------- ------------------ Total revenues $2,292,000 $1,831,000 $19,000 $4,142,000 Segment profit (loss) 1,502,000 222,000 (366,000) 1,358,000 Expenditure for segment 31,000 20,000 46,000 97,000 assets
5. Comprehensive income (loss) consists of net income or loss for the current period as well as income, expenses, gains, and losses arising during the period that are included in separate components of equity. It includes the unrealized gains and losses on the Company's licensing- related securities, net of taxes and foreign currency translation adjustments. The components of comprehensive income (loss), net of related tax, for the six month periods ended June 30, 2001 and 2000 are as follows:
Description 2001 2000 - ----------------------------------------------------------------- ----------------- ----------------- Net income $833,000 $1,826,000 Less: Comprehensive losses, net of tax Unrealized holding gains (losses), net -- (231,000) Reclassification adjustment, net (1,197,000) (1,627,000) Comprehensive income (loss) ($364,000) ($32,000)
The components of accumulated other comprehensive income, net of related tax, at December 31, 2000 consist of unrealized gains on licensing-related securities. 6. On June 30, 2001 the inventory consisted of finished goods. As of July 27, 2001, the Company had open letters of credit to purchase goods for $112,000. Page 8 REFAC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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. 8. In June 2001, the Financial Accounting Standards Board approved the issuance of SFAS No. 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets" which was issued July 20, 2001. The new standards require that all business combinations initiated after June 30, 2001 must be accounted for under the purchase method. In addition, all intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented or exchanged shall be recognized as an asset apart from goodwill. Goodwill and intangibles with indefinite lives will no longer be subject to amortization, but will be subject to at least an annual assessment for impairment by applying a fair value based test. The Company will continue to amortize goodwill existing at June 30, 2001 under its current method until January 1, 2002. Thereafter, annual and quarterly goodwill amortization of $300,000 and $75,000, respectively, will no longer be recognized. By June 30, 2002, the Company will perform a transitional fair value based impairment test and if the fair value is less than the recorded value at January 1, 2002, the Company will record an impairment loss in the March 31, 2002 quarter, as a cumulative effect of change in accounting principle. Page 9 REFAC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - --------------------- REVENUES for the six months ended June 30, 2001 were $7,094,000 as compared to $9,205,000 for the comparable period in 2000. Of the $2,111,000 revenue decrease, $702,000 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. This amount is offset by an increase in sales to retailers of $442,000. The balance of the revenue decrease is due to decreases in creative consulting fees ($763,000), non-recurring patent license fees ($249,000), trademark agency fees ($198,000) and a decrease in realized gains and dividends on licensing-related securities ($778,000). Revenues for the three months ended June 30, 2001 were $3,355,000 as compared to $4,142,000 for the comparable period in 2000. The decrease of $787,000, is principally due to decreases in revenues from creative consulting services ($425,000), licensing-related activities ($84,000) and realized gains and dividends on licensing-related securities ($771,000) offset by an increase in sales of consumer products of $406,000. Revenues for the six and three months are summarized as follows:
For the Six Months For the Three Months Ended June 30, Ended June 30, Description 2001 2000 2001 2000 Revenues from licensing-related activities 23% 22% 27% 24% Realized gains on sales and dividends from 26% 28% 17% 31% licensing-related securities Creative consulting services 40% 39% 40% 42% Consumer product sales 6% 8% 12% 0% Dividends and interest 5% 3% 4% 3% Total 100% 100% 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 $155,000 for the six months ended June 30, 2001 as compared to the same period of 2000. This decrease is attributable to a decline in trademark agency fees of $198,000 offset by an increase in patent Page 10 REFAC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS licensing income of $43,000. 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 $249,000 for the six months ended June 30, 2001 as compared to the same period of 2000. Recurring patent licensing income and trademark agency fees decreased $5,000 for the three months ended June 30, 2001 as compared to the same period of 2000. This decrease is attributable to a decline in trademark agency fees of $85,000 and an increase in patent licensing income of $80,000. 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 $78,000 for the three months ended June 30, 2001 as compared to the same period of 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, 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 $457,000 for the six months ended June 30, 2001. As a percentage of licensing revenues, these expenses were 20% and 38% 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. Licensing-related expenses decreased $69,000 for the three months ended June 30, 2001, as compared to the same period of 2000. As a percentage of licensing revenues, these expenses were 31% and 35% for the three months ended June 30, 2001 and 2000, respectively. 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. Gains and dividends for the six and three months ended June 30, 2001 decreased by $778,000 and $771,000, respectively. The planned liquidation of the KeyCorp stock position is complete. 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 $763,000 for the six months Page 11 REFAC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ended June 30, 2001 versus the comparable period in 2000. This decrease consists of a decrease in the Product Development Group's services of $1,038,000 offset by an increase in the Graphic Design Group's services of $275,000. Total creative consulting fees decreased by $425,000 for the three months ended June 30, 2001 versus the comparable period in 2000. This decrease consists of a decrease in the Product Development Group's services of $559,000 offset by an increase in the Graphic Design Group's services of $134,000. For the three and six months ended June 30, 2001, the Company continued to confront slowdowns in its consulting services. 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 does 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. For the three and six months ended June 30, 2000, intercompany royalties from RCP sales were $12,000. Expenses decreased by $366,000 in the six month period ended June 30, 2001 as compared to 2000, which consist of decreases of $290,000 and $76,000 from the Product Development Group and the Graphic Design Group, respectively. These decreases are principally due to decreases in direct payroll. As a percentage of creative consulting fees, the cost of providing such services were 67% and 63% for the six months ended June 30, 2001 and 2000, respectively. Expenses decreased by $138,000 for the three month period ended June 30, 2001, as compared to 2000 which consist of decreases of $99,000 and $39,000 from the Product Development Group and the Graphic Design Group, respectively. As a percentage of creative consulting fees, the cost of providing such services were 70% and 61% for the three months ended June 30, 2001 and 2000, respectively. The six and three month percentage increases are due to external revenue declines preceding corresponding staff reductions and an increase in inter-company consulting services. Marketing of Consumer Products - ------------------------------ In September 1999, the Company acquired Funatik Inc. and merged it into the newly formed RCP. Sales decreased $260,000 to $452,000 during the six months ended June 30, 2001 from $712,000 during the same period of 2000. For the six months ended June 30, 2000 sales principally Page 12 REFAC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS consisted of sales of imported consumer electronics sourced by RCP for a retailer which did not recur during the first half of 2001. Sales to this retailer amounted to $702,000 for the six months ended June 30, 2000. Sales of other consumer products increased by $442,000 to $452,000 for the six months ended June 31, 2001 as compared to the same period of 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. RCP has no costs for the services as they are provided, but incur royalty expense based on actual product sales which utilize the creative work of RefacDesign. For the three and six months ended June 30, 2000, intercompany royalty expensed was $12,000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased by $306,000 in the six month period ended June 30, 2001 as compared to the previous year. The increase consists primarily of a net RCP increase of $173,000 which is mainly attributable to the launch of the MTV:MusicTelevision(TM) product line, a net increase of $234,000 in RefacDesign offset by a net reduction of $101,000 in Licensing of Intellectual Property Rights and general corporate expenses, including reduced costs associated with the closing of the Refac Licensing office in Connecticut. Selling, General and Administrative Expenses increased by $34,000 in the three month period ended June 30, 2001 as compared to the previous year. The increase consists primarily of a net RCP increase of $83,000, a net increase of $63,000 in RefacDesign offset by a net reduction of $112,000 in Licensing of Intellectual Property Rights and general corporate expenses. GOODWILL. In June 2001, the Financial Accounting Standards Board approved the issuance of SFAS No. 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets" which was issued July 20, 2001. The new standards require that all business combinations initiated after June 30, 2001 must be accounted for under the purchase method. In addition, all intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented or exchanged shall be recognized as an asset apart from goodwill. Goodwill and intangibles with indefinite lives will no longer be subject to amortization, but will be subject to at least an annual assessment for impairment by applying a fair value based test. The Company will continue to amortize goodwill existing at June 30, 2001 under its current method until January 1, 2002. Thereafter, annual and quarterly goodwill amortization of $300,000 and $75,000, respectively, will no longer be recognized. By June 30, 2002, the Company will perform a transitional fair value based impairment test and if the fair value is less than the recorded value at January 1, 2002, the Company will record an impairment loss in the March 31, 2002 quarter, as a cumulative effect of change in accounting principle. Page 13 REFAC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCOME TAX PROVISION. The Company's income tax provision of $424,000 for the six months ended June 30, 2001 reflects an effective tax rate of 34% (the Federal statutory corporate income tax rate) increased by 1% 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 and decreased by 1% as a result of the deferred tax benefit associated with the sale of KeyCorp having been realized. The effective tax rate for the three and six months ended June 30, 2000 was 33%. INFLATION. The Company's income from licensing operations is not materially affected by inflation. Likewise, while currency fluctuations can influence licensing-related revenues, the diversity of foreign income sources tends to offset individual changes in currency valuations. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Cash, cash equivalents, corporate bonds and U.S. Treasury Notes decreased $293,000 from $5,678,000 at December 31, 2000 to $5,385,000 at June 30, 2001. The Company believes its liquidity position is adequate to meet all current and projected financial needs. Net cash used in operations was $3,985,000 as compared to $2,177,000 for the same period of 2000, reflecting an increase of $1,808,000. Operating activities which used the most cash during the three months ended June 30, 2001 was the purchase of inventory. Net cash provided by investing activities increased $913,000 to $3,692,000 as compared with $2,779,000 for the same period of 2000. The increase is attributable to the redemption of investments held to maturity of $1,287,000 and a decrease in additions to property and equipment of $348,000 offset by a decrease in proceeds from sales of licensing-related securities of $722,000. RCP shipped over $940,000 in merchandise in July and, as of the end of July, there was a backlog of firm purchase orders for goods expected to ship before the end of the year in excess of $2,000,000. On July 27, 2001, the Company had open letters of credit to purchase goods for $112,000. 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). Page 14 REFAC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS - -------------------------- Statements about the Company's future expectations and all other statements in this document other than historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and as that term is defined in the Private Securities Litigation Reform Act of 1995. The Company intends that 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 profitability objectives or G&A cost reductions will materialize or that its investment in RCP will prove profitable. Page 15 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 August 13, 2001 /s/ Robert L. Tuchman ----------------------------------------- Robert L. Tuchman, President and Chief Executive Officer August 13, 2001 /s/ Raymond A. Cardonne, Jr ----------------------------------------- Raymond A. Cardonne, Jr, CFO (Principal Financial Officer) Page 16 EXHIBIT INDEX
Exhibit Page No. No. - ------- ---- 10 Agreement, dated as of June 30, 2001, between the Company, RIL and Bert Heinzelman terminating his employment. 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 17 EX-10 3 dex10.txt AGREEMENT DATED 6/30/2001 EXHIBIT 10 AGREEMENT --------- AGREEMENT made as of the 30th day of June, 2001 by and among: Refac International Ltd., a Nevada corporation having executive offices at The Hudson River Pier, 115 River Road, Edgewater, New Jersey 07020-1099 (hereinafter referred to as "RIL"); Refac, a Delaware corporation having executive offices at The Hudson River Pier, 115 River Road, Edgewater, New Jersey 07020-1099 (formerly known as Refac Technology Development Corporation and referred to herein as "Refac"); and Bert D. Heinzelman, an individual residing at 17 Sherwood Road, Tenafly, New Jersey 07670 (hereinafter referred to as "Heinzelman"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Heinzelman has been employed by RIL and Refac pursuant to the Employment Agreement (as hereinafter defined); and WHEREAS, Heinzelman has a 20% interest in certain contingent payments provided for in Section 6.12 of a Merger Agreement (as hereinafter defined); and WHEREAS, in connection with the Employment Agreement, the Merger Agreement and Heinzelman's employment, Refac has granted him the Stock Options (as hereinafter defined); and WHEREAS, the parties want to provide for (i) the termination of the Employment Agreement, (ii) the termination of the Stock Options, (iii) the sale, transfer and assignment by Heinzelman to Refac of his interest in such contingent payments and (iv) consulting services during the period ending on December 31, 2001: NOW, THEREFORE, in consideration of the premises and the respective agreements of the parties herein contained, the parties hereto, intending to be legally bound, agree as follows: 1. Definition of Terms. -------------------- As used herein, the following terms shall have the following meanings: 1.1 "Agreement" means this agreement. 1.2 "Contingent Payment" means the 20% interest that Heinzelman holds in the contingent payments provided for in Section 6.12 of the Merger Agreement. 1.3 "Employment Agreement" means the Employment Agreement between HFID (as Page 1 defined below) and Heinzelman, dated November 25, 1997. 1.4 "HFID" means the product development business previously conducted by Human Factors Industrial Design, Inc. (which corporation was merged into RIL as of December 31, 1998) and which is currently being conducted by RIL under the name RefacDesign and Refac HumanFactors_ID. 1.5 "Merger Agreement" means the Agreement and Plan of Merger by and among Refac, HFID Acquisition Corporation, Human Factors Industrial Design, Inc., and the principal stockholders of Human Factors Industrial Design, Inc., dated as of November 25, 1997. 1.6 "Stock Options" means the 55,000 stock options granted to Heinzelman pursuant to the Merger Agreement, the Employment Agreement and Heinzelman's employment. 2. Termination of the Employment Agreement. ---------------------------------------- The parties hereby agree that the Employment Agreement shall be deemed terminated as of June 30, 2001 and that, except for outstanding reimbursable expenses in the amount of $1,740.89 and Heinzelman's salary through June 30, 2001, there are no other sums due and owing him under or by reason of the Employment Agreement. 3. Resignation as an Officer and Director of Refac and its Affiliated ------------------------------------------------------------------ Corporations ------------ Simultaneously with the execution of this Agreement, Heinzelman resigns as an officer and director of Refac, RIL, Refac Financial Corporation, Refac Consumer Products, Inc. and Refac (H.K.) Limited. 4. Termination of the Stock Options. --------------------------------- Simultaneously with the execution of this Agreement, the Stock Options shall terminate and be of no further force and effect whatsoever and Heinzelman shall deliver to Refac any original executed copies of the related Stock Option Agreements (including the amendment thereto) in his possession to Refac. 5. Purchase of the Contingent Interest. ------------------------------------ 5.1 Heinzelman hereby represents and warrants to Refac that he has not sold, transferred or assigned all or any part of his interest in the Contingent Payment and has not granted any security interest or encumbered same in any manner whatsoever. 5.2 Heinzelman hereby sells, transfers and assigns all of his right, title and interest in and to the Contingent Payment to Refac in consideration of the sum of One Hundred Thousand Dollars ($100,000.00), payable by Refac simultaneously with the execution of this Agreement, the receipt of which Heinzelman hereby acknowledges. Page 2 6. Consulting Services. -------------------- 6.1 RIL hereby retains Heinzelman as an independent consultant on the following terms and conditions: 6.1.1 Period. Heinzelman shall provide the consulting services ------ provided for in Paragraph 6.1.2 during the period commencing on July 1, 2001 and terminating on December 31, 2001. 6.1.2 Services. Heinzelman has served as the President of HFID -------- since December 1998 and its CEO since May 1999. During the consulting period provided for in Paragraph 6.1.1 above, the management of RIL may seek Heinzelman's advise and/or his opinions regarding operations, projects, client relations, client prospects, staffing and/or any other matter relating to its business. Heinzelman agrees to make himself available by telephone at times mutually convenient to Heinzelman and RIL to provide such consulting services. It is understood and agreed that Heinzelman shall be provided reasonable advanced notification of RIL's need for consulting services, need not prepare any written reports or undertake any studies and is only obligated to give his advice and opinions based upon his knowledge of HFID and its business. Refac expressly agrees that Heinzelman will not have any liability to Refac for any action that Refac or HFID may take based upon and in reliance upon any advice that he gives in good faith hereunder. 6.1.3 Compensation. In consideration of the consulting services, ------------ RIL shall pay Heinzelman the sum of $18,000 payable at the rate of $3,000 per month on the first day of each month. In the event that RIL fails to issue any payment due hereunder within five (5) business days after receipt of notice of default, RIL shall immediately pay Heinzelman the balance of any unpaid portion of the $18,000 compensation and he shall be released from performing any further services hereunder. In addition, RIL shall pay for the cost of Heinzelman's COBRA group insurance premium during the eighteen (18) month period following the termination of the Employment Agreement or such earlier time as he obtains insurance under another employer's group insurance policy. 6.1.4 Computer and Printer. Upon termination of the consulting -------------------- services provided for herein, RIL shall transfer, convey and turn over to Heinzelman all of its rights to the Toshiba Satellite Pro Laptop and port replicator, Dell monitor and the Hewlett Packard LaserJet 6P printer that he is currently using. Page 3 7. Confidentiality, Non-Competition, etc. -------------------------------------- 7.1 As used in this Paragraph 7, "Refac Companies" means Refac and all of its subsidiary companies and "Confidential Information" means any confidential or proprietary information relating to the identity of customers of any of the Refac Companies, the identity of representatives of customers with whom any of the Refac Companies has dealt, the kinds of services provided by the Refac Companies to customers, the manner in which such services are performed or offered to be performed, the service needs of actual or prospective customers, pricing information, information concerning the creation, acquisition or disposition of products, licenses and services, customer maintenance listings, computer software applications, research and development data, knowhow, personnel information, corporate finance information, and other proprietary information and trade secrets. Notwithstanding the above, Confidential Information shall not include any information that: (i) is generally available to the public without conducting a substantial search of published literature; (ii) is generally known to industrial designers and/or to entities in Refac's product development business; or (iii) is part of the professional skills and know-how developed by Heinzelman during the course of his career; or (iv) is subject to disclosure pursuant to any order or regulation of any governmental, regulatory or administrative agency or authority or court of judicial authority. If a particular portion or aspect of Confidential Information becomes subject to either of the foregoing exceptions, all other portions or aspects of such information shall remain subject to this Paragraph 7. 7.2 Heinzelman acknowledges that (i) during the course of his employment he has had access to and knowledge of Confidential Information and may have access to Confidential Information during the six month consulting period provided for herein, (ii) the disclosure of any such Confidential Information to existing or potential competitors of the Refac Companies would place the Refac Companies at a competitive disadvantage and would do damage, monetary or otherwise, to the Refac Companies' business, and (iii) the trade secret status of the Confidential Information and that the Confidential Information constitutes a protectable business interest of the Refac Companies. Accordingly, Heinzelman agrees as follows: (i) During the five (5) year period commencing July 1, 2001, he shall not, directly or indirectly, whether individually, as a director, stockholder, owner, partner, employee, principal or agent of any business, or in any other capacity, make known, disclose, furnish, make available or utilize any of the Confidential Information, other Page 4 than in the proper performance of the duties as a consultant hereunder. (ii) Within fifteen (15) business days after the execution of this Agreement, Heinzelman agrees to return to Refac all Confidential Information, including all photocopies, extracts and summaries thereof, and any such information stored electronically on tapes, computer disks or in any other manner that he does not deem necessary for the rendition of the consulting services provided for herein. Upon the termination of the consulting services, the Confidential Information then in his possession shall be returned to the Refac Companies. 7.3 During the period that Heinzelman provides consulting services provided for herein and for a period of thirty (30) months thereafter, Heinzelman agrees that he will not, directly or indirectly, for his benefit or for the benefit of any other person, firm or entity, solicit the employment or services of, or hire, any person who was known to be employed by or was a known consultant to any of the Refac Companies during the course of his employment by Refac and the period in which he is rendering consulting services hereunder. 7.4 Notwithstanding anything contained herein, in the Employment Agreement and/or in the Merger Agreement, Heinzelman may retain copies of and show non-confidential materials that represent his work product and/or projects which he managed while employed by HFID and Refac to prospective partners, employers or clients, provided however, that such use shall appropriately credit HFID. Moreover, he may freely take credit for awards or patents issued in his name for work perform while at HFID so long as he makes reference to his employee status at such time by HFID. Notwithstanding the foregoing, with the exception of his Curriculum Vitae, resume or biography, Heinzelman agrees that he shall not use or authorize the inclusion of visual or textual descriptions of such work in a brochure, web site, advertising or other collateral materials, by any firm. If at any time or from time to time, Heinzelman requests HFID or Refac to provide him with copies of designated materials for the above purpose, if available. Refac shall cause HFID to provide same to Heinzelman. 7.5 The provisions of this Paragraph 7 are in addition to any other obligations that Heinzelman may have to Refac under or by reason of the Employment Agreement and/or the Merger Agreement for confidentiality or non-competition. However, in the event of a conflict in the terms of Paragraphs 7.3 or 7.4 above and the Employment Agreement and/or Merger Agreement, it is understood and agreed that the provisions of said Paragraphs 7.3 and 7.4 shall control. 8. Arbitration. ------------ Any dispute or controversy arising under or in connection with this Agreement shall be Page 5 settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in New York, New York, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The arbitrators, in their discretion, may direct that the successful party in any such arbitration shall be entitled to be reimbursed by the other party for reasonable attorneys' fees and expenses incurred in connection with such dispute or controversy. 9. Miscellaneous. -------------- 9.1 Section headings. Section headings contained in this Agreement are ---------------- for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 9.2 Governing Law and Jurisdiction. This Agreement shall be governed by ------------------------------ and interpreted in accordance with the internal laws of the State of New Jersey applicable to agreements entered into and to be performed wholly in New Jersey, irrespective of such State's rules pertaining to conflicts of laws. 9.3 Waiver. No failure or delay by either party in exercising any ------ right, power, or remedy under this Agreement shall operate as a waiver of any such right, power, or remedy. No waiver of any provision of this Agreement shall be effective unless in writing and signed by the party against whom such waiver is sought to be enforced. Any waiver by either party of any provision of this Agreement shall not be construed as a waiver of any other provision of this Agreement, nor shall such waiver operate as or be construed as a waiver of such provision respecting any future event or circumstance. 9.4 Modification. No modification of any provision hereof shall be ------------ effective unless in writing and signed by both of the parties to this Agreement. 9.5 Severability. In the event any provision of this Agreement (or ------------ portion thereof) is determined by a court of competent jurisdiction to be invalid or otherwise unenforceable, such provision (or part thereof) shall be enforced to the extent possibly consistent with the stated intention of the parties, or, if incapable of such enforcement, shall be deemed to be deleted from this Agreement, while the remainder of this Agreement shall continue in full force and remain in effect according to its stated terms and conditions. 9.6 Further Action. The parties agree, upon the other party's request, -------------- to execute any and all documents and do all acts necessary to carry out the terms of this Agreement. 9.7 Entire Agreement. This Agreement, including the Exhibits hereto, ---------------- sets forth the entire agreement and understanding between the parties with respect to the subject matter hereof. This Agreement supersedes all prior and contemporaneous agreements, negotiations, and understandings between the parties, both oral and written. Page 6 IN WITNESS WHEREOF, the parties have executed this Agreement on the date written below. Refac By: /s/ Robert L. Tuchman ----------------------------- Robert L. Tuchman, President Date: July 12, 2001 Refac International, Ltd. By: /s/ Robert L. Tuchman ----------------------------- Robert L. Tuchman, President Date: July 12, 2001 By: /s/ Bert D. Heinzelman ----------------------------- Bert D. Heinzelman Date: July 12, 2001 Page 7 -----END PRIVACY-ENHANCED MESSAGE-----