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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, 2002
Commission File Number 0-7704
REFAC
(Exact name of registrant as specified in its charter)
| Delaware (State or other
jurisdiction of incorporation or organization) |
|
13-1681234 (I.R.S.
Employer 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 14, 2002 was 3,796,511
REFAC
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Page
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| Part I. |
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Financial Information |
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3 |
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4 |
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5 |
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6-14 |
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15-22 |
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| Part II. |
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23-24 |
Page 2
REFAC
CONDENSED CONSOLIDATED BALANCE SHEETS
| |
|
June 30, 2002
|
|
|
December 31, 2001
|
|
| |
|
(Unaudited) |
|
|
|
|
| ASSETS |
|
|
|
|
|
|
|
|
| Current Assets |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
3,168,000 |
|
|
$ |
8,690,000 |
|
| Royalties receivable |
|
|
700,000 |
|
|
|
754,000 |
|
| Accounts receivable, net |
|
|
1,464,000 |
|
|
|
2,890,000 |
|
| Investments being held to maturity |
|
|
6,646,000 |
|
|
|
200,000 |
|
| Inventory |
|
|
890,000 |
|
|
|
2,140,000 |
|
| Prepaid expenses |
|
|
208,000 |
|
|
|
419,000 |
|
| |
|
|
|
|
|
|
|
|
| Total current assets |
|
|
13,076,000 |
|
|
|
15,093,000 |
|
| |
|
|
|
|
|
|
|
|
| Property and equipment, net |
|
|
1,553,000 |
|
|
|
1,672,000 |
|
| Investments being held to maturity |
|
|
446,000 |
|
|
|
445,000 |
|
| Deferred income taxes |
|
|
2,601,000 |
|
|
|
114,000 |
|
| Other assets |
|
|
178,000 |
|
|
|
265,000 |
|
| Assets being held for sale—Product Design Group |
|
|
168,000 |
|
|
|
4,870,000 |
|
| Assets being held for sale—Graphic Design Group |
|
|
176,000 |
|
|
|
1,583,000 |
|
| Assets being held for sale—Consumer Products Group |
|
|
439,000 |
|
|
|
375,000 |
|
| |
|
|
|
|
|
|
|
|
| |
|
$ |
18,637,000 |
|
|
$ |
24,417,000 |
|
| |
|
|
|
|
|
|
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|
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| LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
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| Current Liabilities |
|
|
|
|
|
|
|
|
| Accounts payable |
|
$ |
25,000 |
|
|
$ |
293,000 |
|
| Accrued expenses |
|
|
450,000 |
|
|
|
670,000 |
|
| Amounts payable under service agreements |
|
|
66,000 |
|
|
|
253,000 |
|
| Deferred revenue |
|
|
39,000 |
|
|
|
315,000 |
|
| Other liabilities |
|
|
89,000 |
|
|
|
89,000 |
|
| Liabilities being held for sale—Product Group |
|
|
10,000 |
|
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
679,000 |
|
|
|
1,620,000 |
|
| |
|
|
|
|
|
|
|
|
| Other liabilities—deferred compensation |
|
|
101,000 |
|
|
|
205,000 |
|
| |
| Stockholders’ Equity |
|
|
|
|
|
|
|
|
| Common stock, $.10 par value |
|
|
545,000 |
|
|
|
545,000 |
|
| Additional paid-in capital |
|
|
9,987,000 |
|
|
|
9,984,000 |
|
| Retained earnings |
|
|
21,574,000 |
|
|
|
26,312,000 |
|
| Treasury stock, at cost |
|
|
(13,874,000 |
) |
|
|
(13,874,000 |
) |
| Receivable from issuance of common stock |
|
|
(375,000 |
) |
|
|
(375,000 |
) |
| |
|
|
|
|
|
|
|
|
| Total stockholders’ equity |
|
|
17,857,000 |
|
|
|
22,592,000 |
|
| |
|
|
|
|
|
|
|
|
| |
|
$ |
18,637,000 |
|
|
$ |
24,417,000 |
|
| |
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed consolidated financial
statements
Page 3
REFAC
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
| |
|
Six Months Ended June 30,
|
|
|
Three Months Ended June 30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
| Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Licensing-related activities |
|
$ |
1,250,000 |
|
|
$ |
1,635,000 |
|
|
$ |
671,000 |
|
|
|
894,000 |
|
| Realized gains on licensing-related securities |
|
|
— |
|
|
|
1,813,000 |
|
|
|
— |
|
|
|
580,000 |
|
| Dividend income from licensing-related securities |
|
|
— |
|
|
|
15,000 |
|
|
|
— |
|
|
|
8,000 |
|
| Dividend and interest income |
|
|
92,000 |
|
|
|
500,000 |
|
|
|
44,000 |
|
|
|
226,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Revenues |
|
|
1,342,000 |
|
|
|
3,963,000 |
|
|
|
715,000 |
|
|
|
1,708,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Costs and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Licensing-related activities |
|
|
216,000 |
|
|
|
324,000 |
|
|
|
111,000 |
|
|
|
279,000 |
|
| Selling, general and administrative expenses |
|
|
396,000 |
|
|
|
302,000 |
|
|
|
201,000 |
|
|
|
85,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total costs and expenses |
|
|
612,000 |
|
|
|
626,000 |
|
|
|
312,000 |
|
|
|
364,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before provision for taxes on income |
|
|
730,000 |
|
|
|
3,337,000 |
|
|
|
403,000 |
|
|
|
1,344,000 |
|
| Provision for taxes on income |
|
|
248,000 |
|
|
|
1,132,000 |
|
|
|
137,000 |
|
|
|
390,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income from continuing operations |
|
|
482,000 |
|
|
|
2,205,000 |
|
|
|
266,000 |
|
|
|
954,000 |
|
| Loss from discontinued operations—net of taxes |
|
|
(3,137,000 |
) |
|
|
(1,372,000 |
) |
|
|
(2,786,000 |
) |
|
|
(649,000 |
) |
| Cummulative effect of change in accounting principle—net of $1,073,000 tax benefit |
|
|
(2,083,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income (loss) |
|
$ |
(4,738,000 |
) |
|
$ |
833,000 |
|
|
$ |
(2,520,000 |
) |
|
$ |
305,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic and diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| From continuing operations |
|
$ |
0.13 |
|
|
$ |
0.58 |
|
|
$ |
0.07 |
|
|
$ |
0.25 |
|
| From discontinued operations |
|
$ |
(0.83 |
) |
|
$ |
(0.36 |
) |
|
$ |
(0.73 |
) |
|
$ |
(0.17 |
) |
| From cumulative effect of change in accounting principle |
|
$ |
(0.55 |
) |
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
(1.25 |
) |
|
$ |
0.22 |
|
|
$ |
(0.66 |
) |
|
$ |
0.08 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic weighted average shares outstanding |
|
|
3,795,469 |
|
|
|
3,795,261 |
|
|
|
3,795,769 |
|
|
|
3,795,261 |
|
| Diluted weighted average shares outstanding |
|
|
3,804,832 |
|
|
|
3,797,881 |
|
|
|
3,812,127 |
|
|
|
3,795,261 |
|
See accompanying notes to the unaudited condensed consolidated financial
statements
Page 4
REFAC
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
| |
|
Six Months Ended June 30,
|
|
| |
|
2002
|
|
|
2001
|
|
| Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
(4,738,000 |
) |
|
$ |
833,000 |
|
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
102,000 |
|
|
|
457,000 |
|
| Inventory Reserve |
|
|
657,000 |
|
|
|
0 |
|
| Loss on disposal of assets |
|
|
27,000 |
|
|
|
0 |
|
| Cumulative effect of changing method of accounting for goodwill |
|
|
3,156,000 |
|
|
|
0 |
|
| Additional impairment of goodwill |
|
|
2,811,000 |
|
|
|
0 |
|
| Impairment of long-lived assets |
|
|
51,000 |
|
|
|
0 |
|
| Realized gains on sale of licensing-related securities |
|
|
0 |
|
|
|
(1,813,000 |
) |
| Deferred retirement |
|
|
(104,000 |
) |
|
|
(48,000 |
) |
| Deferred income taxes |
|
|
(2,487,000 |
) |
|
|
0 |
|
| (Increase) decrease in assets: |
|
|
|
|
|
|
|
|
| Due from broker |
|
|
0 |
|
|
|
(645,000 |
) |
| Royalties receivable |
|
|
54,000 |
|
|
|
180,000 |
|
| Accounts receivable |
|
|
1,426,000 |
|
|
|
(336,000 |
) |
| Prepaid expenses and other current assets |
|
|
211,000 |
|
|
|
428,000 |
|
| Prepaid taxes |
|
|
0 |
|
|
|
(78,000 |
) |
| Inventory |
|
|
593,000 |
|
|
|
(2,735,000 |
) |
| Other assets |
|
|
87,000 |
|
|
|
0 |
|
| Assets held for sale |
|
|
27,000 |
|
|
|
0 |
|
| Increase (decrease) in liabilities: |
|
|
|
|
|
|
|
|
| Accounts payable and accrued expenses |
|
|
(488,000 |
) |
|
|
40,000 |
|
| Amounts payable under service agreements |
|
|
(187,000 |
) |
|
|
(268,000 |
) |
| Deferred revenue |
|
|
(276,000 |
) |
|
|
0 |
|
| Liabilities held for sale |
|
|
10,000 |
|
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
| Net cash provided by (used in) operating activities |
|
|
932,000 |
|
|
|
(3,985,000 |
) |
| |
|
|
|
|
|
|
|
|
| Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
| Proceeds from sales of licensing-related securities |
|
|
0 |
|
|
|
2,020,000 |
|
| Proceeds from (purchase of) investments being held to maturity |
|
|
(6,447,000 |
) |
|
|
1,893,000 |
|
| Additions to property and equipment |
|
|
(10,000 |
) |
|
|
(221,000 |
) |
| |
|
|
|
|
|
|
|
|
| Net cash (used in) provided by investing activities |
|
|
(6,457,000 |
) |
|
|
3,692,000 |
|
| |
|
|
|
|
|
|
|
|
| Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
| Proceeds from exercise of stock options |
|
|
3,000 |
|
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
| Net decrease in cash and cash equivalents |
|
|
(5,522,000 |
) |
|
|
(293,000 |
) |
| Cash and cash equivalents at beginning of period |
|
|
8,690,000 |
|
|
|
5,678,000 |
|
| |
|
|
|
|
|
|
|
|
| Cash and cash equivalents at end of period |
|
$ |
3,168,000 |
|
|
$ |
5,385,000 |
|
| |
|
|
|
|
|
|
|
|
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 necessary to present fairly the consolidated financial position of Refac (the “Company”) at June 30, 2002, and the results of its operations, its cash flows and
comprehensive losses 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, 2001, which is incorporated herein by reference.
2. The results of operations for the three months ended June 30, 2002 are not indicative of the results to be expected for the
full year.
3. Certain reclassifications have been made to the prior period financial statements to
conform them to the current presentation.
4. 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 June
30,
|
|
Three Months Ended June
30,
|
| Description
|
|
2002
|
|
2001
|
|
2002
|
|
2001
|
| Basic shares |
|
|
3,795,469 |
|
|
3,795,261 |
|
|
3,795,769 |
|
|
3,795,261 |
| Dilution: stock options and warrants |
|
|
9,363 |
|
|
2,620 |
|
|
16,358 |
|
|
0 |
| Diluted shares |
|
|
3,804,832 |
|
|
3,797,881 |
|
|
3,812,127 |
|
|
3,795,261 |
| Income from continuing operations |
|
$ |
482,000 |
|
$ |
2,205,000 |
|
$ |
266,000 |
|
$ |
954,000 |
| Basic earnings |
|
$ |
0.13 |
|
$ |
0.58 |
|
$ |
0.07 |
|
$ |
0.25 |
| Diluted earnings |
|
$ |
0.13 |
|
$ |
0.58 |
|
$ |
0.07 |
|
$ |
0.25 |
5. On March 21, 2002, the Company announced that it was
repositioning itself for sale or liquidation. While no time limit has been set to complete the repositioning of the Company, the Company currently estimates that it can be completed by the end of the second quarter of fiscal 2003. Under SFAS No.144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, assets that are considered to be “held for sale” must be presented as discontinued operations if (i) the operations
Page 6
REFAC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
and cash flows of the “component of the entity” will be eliminated from the ongoing operations of the entity as a result
of a disposal transaction and (ii) there will be no significant continuing involvement in the operations of the component after the disposal transaction.
As a result of the actions taken to accomplish this repositioning, the creative consulting services and manufacture and marketing of consumer products groups are included in the income statement as
discontinued operations, net of taxes, as they have been sold or are expected to be sold.
The Company’s
operations in the licensing of intellectual property rights are not considered held for sale because of the Company’s intent to manage certain outstanding licensing-related agreements through their termination. While the Company’s
licensing operations are still considered a continuing business, it has not undertaken any new technology licensing projects during the current or preceding three fiscal years and, given its decision to position itself for sale or liquidation, it is
highly unlikely that it will undertake any such projects in the future. The income statement reflects the results of the licensing of intellectual property rights in its results of continuing operations.
6. Comprehensive 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 loss, net of related tax, for the six and three month periods ended June 30, 2002 and 2001 are
as follows:
| |
|
Six Months Ended June
30,
|
|
|
Three Months Ended June
30,
|
|
| Description
|
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
| Net income (loss) |
|
$ |
(4,738,000 |
) |
|
$ |
833,000 |
|
|
$ |
(2,520,000 |
) |
|
$ |
305,000 |
|
| Less: Comprehensive losses, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized holdings (losses), net |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
52,000 |
|
| Reclassification adjustment, net |
|
|
0 |
|
|
$ |
(1,197,000 |
) |
|
|
0 |
|
|
|
(383,000 |
) |
| Comprehensive loss |
|
$ |
(4,738,000 |
) |
|
$ |
(364,000 |
) |
|
$ |
(2,520,000 |
) |
|
$ |
(26,000 |
) |
Page 7
REFAC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. As of June 30, 2002, the Company had open letters of
credit to purchase goods for $134,000.
8. Inventories consist primarily of finished goods and are
valued at the lower of cost or market on a first in, first out (FIFO) basis. The Company recorded an inventory reserve of $657,000 in anticipation of liquidating its inventory below cost.
9. Business Combinations and Intangible Assets—Accounting for Goodwill
In June 2001, the Financial Accounting Standards Board approved the issuance of SFAS No. 141, “Business Combinations” and in July 2001, SFAS 142, “Goodwill
and Other Intangible Assets.” 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 are no longer be subject to
amortization, but are now subject to at least an annual assessment for impairment by applying a fair value based test. The Company adopted SFAS 142 as of January 1, 2002 and in compliance with this new standard has discontinued the amortization of
goodwill.
During the quarter ended June 30, 2002 and prior to the issuance of these financial statements, the
Company completed the steps required to value the carrying value of goodwill existing at January 1, 2002. As a result, a non-cash charge of $3,156,000, or ($0.83) per share was recorded as a cumulative effect of change in accounting principle in the
six months ended June 30, 2002 statement of operations. At June 30, 2002, the Company designated the Creative Consulting Services and Manufacture and Marketing of Consumer Products segments as Assets held for Sale under provisions of SFAS 144. Based
on actual terms of the sale of the Graphic Design Group, which took place on August 5, 2002, and terms under discussion with a nonaffiliated potential buyer of the Product Design Group, the Company determined the fair value of the reporting units
were less than the book values and recorded a goodwill impairment charge of $2,811,000. The Company has recorded this impairment charge, net of tax benefits, in losses from discontinued operations. The carrying amount of goodwill at December 31,
2001 and the impairment losses under SFAS 142 as of January 1, 2002 and June 30, 2002, are as follows:
Page 8
REFAC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| |
|
Reporting Units
|
|
| |
|
Graphic Design Group
|
|
|
Product Design Group
|
|
|
Consolidated
|
|
| Balance as of December 31, 2001 |
|
$ |
1,473,000 |
|
|
$ |
4,582,000 |
|
|
$ |
6,055,000 |
|
| Impairment loss under SFAS 142 as of January 1, 2002 |
|
|
(673,000 |
) |
|
|
(2,483,000 |
) |
|
|
(3,156,000 |
) |
| Additional impairment loss under SFAS 142 as of June 30, 2002 |
|
|
(712,000 |
) |
|
|
(2,099,000 |
) |
|
|
(2,811,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance as of June 30, 2002 |
|
$ |
88,000 |
|
|
$ |
0 |
|
|
$ |
88,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The Company engaged an independent valuation consultant to assist
with the transitional goodwill impairment tests.
The fair value of each of the Graphic Design and Product Design
Groups was calculated using two methodologies: (i) Discounted Cash Flow Analysis and (ii) Acquisition Analysis. Discounted Cash Flow Analysis calculates equity value by determining the present value of future after-tax cash flows of each business
unit and the Acquisition Analysis considers multiples determined from information of relevant acquisitions of companies engaged in similar lines of business.
The forecast for the Graphic Design Group was given full weight in the determination of valuation because the Graphic Design Group forecast represented a gradual improvement over time and was therefore
likely to form the basis for a transaction on its own merit. The forecast for the Product Design Group however represented a departure from historical results. Therefore, a 50% weight was given to the Product Design Group because the forecast was
divergent from its historical performance.
In determining the fair value, the Guideline Public Company Analysis
methodology, which considers multiples of the financial results of public companies engaged in similar lines of business, was not used because of the lack of public companies that provide the same services as the Graphic Design and Product Design
Groups. In addition, those public companies found were more diverse than the Graphic Design and Product Design Groups.
The following pro forma table shows the effect of amortization expense and the cumulative effect of change in accounting principle on the Company’s net loss as follows:
Page 9
REFAC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| |
|
Six Months Ended June
30,
|
|
Three Months Ended June
30,
|
| |
|
2002
|
|
|
2001
|
|
2002
|
|
|
2001
|
| Reported Net Income (Loss) |
|
$ |
(4,738,000 |
) |
|
$ |
833,000 |
|
$ |
(2,520,000 |
) |
|
$ |
305,000 |
| Cumulative Effect of Change in accounting principle, net of tax |
|
|
(2,083,000 |
) |
|
|
0 |
|
|
0 |
|
|
|
0 |
| Amortization Expense |
|
|
0 |
|
|
|
143,000 |
|
|
0 |
|
|
|
72,000 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Adjusted Net Income (Loss) |
|
$ |
(2,655,000 |
) |
|
$ |
976,000 |
|
$ |
(2,520,000 |
) |
|
$ |
377,000 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Reported Income (Loss) per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic and Diluted |
|
$ |
(1.25 |
) |
|
$ |
0.22 |
|
$ |
(0.66 |
) |
|
$ |
0.08 |
| Adjustment for Amortization Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic and Diluted |
|
|
0 |
|
|
$ |
0.04 |
|
|
0 |
|
|
$ |
0.02 |
| Adjustment for Cumulative Effect of Change in Accounting Principle: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic and Diluted |
|
$ |
(0.55 |
) |
|
|
0 |
|
|
0 |
|
|
|
0 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Adjusted Net Income (Loss) per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic and Diluted |
|
$ |
(0.70 |
) |
|
$ |
0.26 |
|
$ |
(0.66 |
) |
|
$ |
0.10 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Accounting for the Impairment or Disposal of Long-lived Assets
The Company has historically estimated the recoverability of its long-term assets, including goodwill, by
consideration of the estimated future undiscounted cash flow from the operations of the business segments to which those long-term assets relate. These estimates were based upon historical results adjusted for planned reductions in expenses, which
have been implemented, and reasonable sales goals of the business segments. The Company’s goodwill primarily relates to its Creative Consulting Services segment.
As of January 1, 2002, the Company adopted the provisions of SFAS 144 , “Accounting for the Impairment or Disposal of Long-Lived Assets.”
The Company now evaluates the recoverability of its long-term assets under the provisions of SFAS 144. While such provisions retain the
considerations the Company has previously made in evaluating the recoverability of its long-term assets as discussed above, SFAS 144 provides an
Page 10
REFAC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
additional triggering event to require an impairment test—a current expectation that, more likely than not, a long-term asset
or asset group will be sold or disposed of significantly before the end of its previously estimated useful life. Assets that are considered to be “held for sale” are now measured at the lower of carrying amount or fair value, less the
costs to sell. Once an asset is determined to be “held for sale”, depreciation on such asset ceases. Long-term assets to be disposed of by sale may not be classified as held for sale, however, until the period in which all of the following
criteria are met:
| |
• |
|
management commits to a plan to sell the asset or group |
| |
• |
|
the asset or group is available for immediate sale in its present condition |
| |
• |
|
actions to complete the plan to sell have been initiated |
| |
• |
|
it is probable the sale will be completed within one year |
| |
• |
|
the asset or group is being actively marketed at a reasonable price |
| |
• |
|
it is unlikely that significant change will be made to the plan or that it will be withdrawn |
Based upon the above criteria, the assets of the creative consulting services and the manufacture and marketing of consumer products
groups are considered held for sale and have been evaluated under SFAS 144. In such valuation, the actual terms of the sale of the Graphic Design Group was used (see Note 12 below) and terms under discussion with a nonaffiliated potential purchaser
for the Product Design Group was used.
For financial reporting purposes, the assets and liabilities available for
sale have been classified in the consolidated balance sheet as “Assets being held for sale” and “Liabilities being held for sale” and are included in the Creative Consulting Services and Manufacture of Consumer Products segments.
Such net assets and liabilities consist of the following:
Page 11
REFAC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| June 30, 2002
|
|
Graphic Design Group
|
|
Product Design Group
|
|
Consumer Product Group
|
|
Consolidated Group
|
| Fixed Assets, net |
|
$ |
88,000 |
|
$ |
168,000 |
|
$ |
423,000 |
|
$ |
679,000 |
| Goodwill, net |
|
|
88,000 |
|
|
— |
|
|
16,000 |
|
|
104,000 |
| Total Assets Held for Sale |
|
$ |
176,000 |
|
$ |
168,000 |
|
$ |
439,000 |
|
$ |
783,000 |
| Accrued Retention Pay |
|
|
— |
|
$ |
10,000 |
|
|
— |
|
$ |
10,000 |
| Total Liabilities Held for Sale |
|
|
— |
|
$ |
10,000 |
|
|
— |
|
$ |
10,000 |
| December 31, 2001
|
|
Graphic Design Group
|
|
Product Design Group
|
|
Consumer Products Group
|
|
Consolidated Group
|
| Fixed Assets, net |
|
$ |
110,000 |
|
$ |
288,000 |
|
$ |
359,000 |
|
|
757,000 |
| Goodwill, net |
|
|
1,473,000 |
|
|
4,582,000 |
|
|
16,000 |
|
|
6,071,000 |
| Total Assets Held for Sale |
|
$ |
1,583,000 |
|
$ |
4,870,000 |
|
$ |
375,000 |
|
$ |
6,828,000 |
| Accrued Retention Pay |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
| Total Liabilities Held for Sale |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
In connection with SFAS 144, the following table summarizes the
revenues and pretax loss of the reported discontinued operations of the Assets held for Sale:
| Six Months Ended June 30, 2002
|
|
Graphic Design Group
|
|
|
Product Design Group
|
|
|
Consumer Products Group
|
|
|
Total Discontinued Operations
|
|
| Revenues |
|
$ |
686,000 |
|
|
$ |
1,229,000 |
|
|
$ |
854,000 |
|
|
$ |
2,769,000 |
|
| Pretax Loss |
|
|
(1,009,000 |
) |
|
|
(2,311,000 |
) |
|
|
(1,433,000 |
) |
|
|
(4,753,000 |
) |
| Six Months Ended June 30, 2001
|
|
Graphic Design Group
|
|
Product Design Group
|
|
|
Consumer Products Group
|
|
|
Total Discontinued Operations
|
|
| Revenues |
|
$ |
1,402,000 |
|
$ |
1,437,000 |
|
|
$ |
452,000 |
|
|
$ |
3,291,000 |
|
| Pretax Income (Loss) |
|
|
293,000 |
|
|
(1,066,000 |
) |
|
|
(1,304,000 |
) |
|
|
(2,077,000 |
) |
Page 12
REFAC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Three Months Ended June 30, 2002
|
|
Graphic Design Group
|
|
|
Product Design Group
|
|
|
Consumer Products Group
|
|
|
Total Discontinued Operations
|
|
| Revenues |
|
$ |
261,000 |
|
|
$ |
592,000 |
|
|
$ |
655,000 |
|
|
$ |
1,508,000 |
|
| Pretax Loss |
|
|
(850,000 |
) |
|
|
(2,238,000 |
) |
|
|
(1,130,000 |
) |
|
|
(4,218,000 |
) |
| Three Months Ended June 30, 2001
|
|
Graphic Design Group
|
|
Product Design Group
|
|
|
Consumer Products Group
|
|
|
Total Discontinued Operations
|
|
| Revenues |
|
$ |
650,000 |
|
$ |
677,000 |
|
|
$ |
411,000 |
|
|
$ |
1,738,000 |
|
| Pretax Income (Loss) |
|
|
105,000 |
|
|
(461,000 |
) |
|
|
(565,000 |
) |
|
|
(921,000 |
) |
Included in the pretax loss of discontinued operations at June 30,
2002 is an impairment charge to long-lived assets of approximately $51,000, as the carrying value of fixed assets of the Product Design Group was adjusted to fair value, based upon terms under discussion with a nonaffiliated potential buyer.
11. Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the Financial Accounting Standards Board issued SFAS 146, “Accounting for Exit or Disposal Activities”. SFAS 146
addresses the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including costs related to termination of a contract that is not a capital lease and termination benefits that employees who are
involuntarily terminated received under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 requires liabilities associated with exit and disposal
activities to be expensed as incurred. SFAS 146 is effective for exit or disposal activities of the Company that are initiated after December 31, 2002.
12. Sale of the Graphic Design Group
The Company
determined the value of the goodwill and long-term assets related to its Graphic Design Group at June 30, 2002 based upon the actual terms for the sale of that division, which took place on August 5, 2002. The Graphic Design Group was established
when the Company acquired the assets, subject to the liabilities, of David Morris Creative and its affiliated companies in November 1999. In furtherance of its plan to reposition itself for sale or liquidation,
Page 13
REFAC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the Company sold certain assets, including the customer lists and goodwill, subject to certain liabilities, of the Graphic Design
Group to a company formed by its President and former owner. The transaction was effective as of August 1, 2002 and the purchase price was $371,360 consisting of a lump-sum payment due on or before August 31, 2002 of $54,180 and a 6% promissory note
for $317,180, which is payable in sixty (60) equal consecutive monthly installments of $6,250 commencing January 1, 2003.
As part of this transaction, as of July 31, 2002, the employment agreement with the President of the Graphic Design Group and stock options granted to him to purchase 30,000 shares of the Company’s stock were terminated in
consideration of a lump-sum payment of $96,097. The Company also entered into a sublease with the acquiring company for 3,492 square feet of commercial rentable space. The sublease expires on November 30, 2009 which is co-terminus with the
Company’s master lease. The rent for the entire term of the sublease is $565,809.
13. Refac
Licensing
The Company formed Refac Licensing, Inc. (“RL”) in January 1998, in conjunction with Arlene
Scanlan, to operate as a full service trademark licensing agency and consultant for brand and character licensing properties. In connection with such formation, Ms. Scanlan acquired a 19% interest in RL and entered into an employment agreement with
RL, which had a term expiring on December 31, 2002. Given the Company’s change in direction and lack of operating success in this business, the Company and Ms. Scanlan have agreed to a termination of her employment agreement and stock option
agreements to purchase 55,000 shares of the Company’s stock as of January 31, 2002 and to a conveyance of her 19% interest in RL to the Company. RL will be liquidated or merged into Refac International Ltd (“RIL”), which will assume
responsibility for all of the Company’s licensing activities. Ms. Scanlan is serving as a consultant to the Company for the balance of 2002 under an agreement which requires her to devote up to two days per week to the Company’s licensing
business.
14. Stockholder Rights Plan
On April 26, 2002, the Company’s Board of Directors adopted a Stockholder Rights Plan in which rights will be distributed as a dividend at the rate of one Right for
each share of common stock, par value $0.10 per share, of the Company held by stockholders of record as of the close of business on May 9, 2002. The Company believes that the adoption of the Rights Plan enhances its ability to carry out its plan in
a manner that will be fair to all stockholders.
Each Right initially will entitle stockholders to buy one
ten-thousandth of a share of preferred stock for $5.95. The Rights generally will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company’s common stock or commences a tender or exchange offer upon
consummation of which such person or group would beneficially own 15% or more of the Company’s common stock. Unless previously terminated in accordance with the Plan, the Rights expire on April 26, 2012.
* * * * *
Page 14
REFAC
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
REVENUES from continuing operations for the six months ended June 30, 2002 were $1,342,000 as compared to $3,963,000 for the comparable period in 2001. The $2,621,000 revenue decrease was due to declines in realized gains and
dividends on licensing-related securities ($1,828,000), recurring patent license fees ($303,000), trademark agency fees ($82,000) and interest and dividends ($408,000).
Revenues from continuing operations for the three months ended June 30, 2002 were $715,000 as compared to $1,708,000 for the comparable period in 2001. The $993,000 revenue
decrease was due to declines in realized gains and dividends on licensing-related securities ($588,000), recurring patent license fees ($221,000), trademark agency fees ($2,000) and interest and dividends ($182,000).
As of March 31, 2001, licensing-related securities consisted of 25,000 shares of KeyCorp common stock, all of which was sold during the
second quarter of 2001. Accordingly, as of June 30, 2001, the Company no longer owned any licensing-related securities.
Revenues from continuing operations for the six and three months are summarized as follows:
| |
|
For the Six Months Ended June 30,
|
|
|
For the Three Months Ended June 30,
|
|
| Description
|
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
| Revenues from licensing-related activities |
|
93 |
% |
|
41 |
% |
|
94 |
% |
|
52 |
% |
| Realized gains on sales and dividends from licensing-related securities |
|
0 |
% |
|
46 |
% |
|
0 |
% |
|
35 |
% |
| Dividends and interest |
|
7 |
% |
|
13 |
% |
|
6 |
% |
|
13 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
100 |
% |
|
100 |
% |
|
100 |
% |
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Expenses from the licensing of intellectual property rights 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 administration, enforcement, maintenance
Page 15
REFAC
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
and prosecution of patent, trademarks and license rights and related licenses. These expenses decreased by $108,000 for the six months ended June 30, 2002, due
to a decrease in revenues. As a percentage of licensing revenues, these expenses were 17% and 20% in 2002 and 2001, respectively. Expenses related to the licensing of intellectual property rights decreased $168,000 for the three months ended June
30, 2002. The expense decrease is primarily due to the decrease in revenue related expenses.
Selling, General and
Administrative Expenses increased by $94,000 in the six month period ended June 30, 2002 as compared to the previous year. The increase is primarily due to legal expenses associated with the repositioning of the Company, which totaled approximately
$90,000.
Selling, General and Administrative Expenses increased by $116,000 in the three month period ended June
30, 2002 as compared to the previous year. The increase in primarily due to legal expenses associated with the repositioning of the Company, which totaled approximately $47,000.
Income Tax Provision. The Company’s income tax provision of $248,000 on continuing operations for the six months ended June 30, 2002
reflects an effective tax rate of 34%. The effective tax rate for the same period of 2001 was 34%.
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.
RESULTS OF DISCONTINUED OPERATIONS
The Company has reported the results of operations for the Creative Consulting Services and Refac Consumer Products Groups as
discontinued operations, net of taxes. Also included in discontinued operations is the goodwill impairment loss related to the Groups under SFAS 142 in the amount of $2,811,000 ($1,855,000 net of taxes). The following table summarizes the revenues
and pretax losses of the reported discontinued operations for the six and three month periods ended June 30, 2002 and June 30, 2001:
Page 16
REFAC
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
| Six Months Ended June 30, 2002
|
|
Graphic Design Group
|
|
|
Product Design Group
|
|
|
Consumer Products Group
|
|
|
Total Discontinued Operations
|
|
| Revenues |
|
$ |
686,000 |
|
|
$ |
1,229,000 |
|
|
$ |
854,000 |
|
|
$ |
2,769,000 |
|
| Pretax Loss |
|
|
(1,009,000 |
) |
|
|
(2,311,000 |
) |
|
|
(1,433,000 |
) |
|
|
(4,753,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, 2001
|
|
Graphic Design
Group
|
|
|
Product Design Group
|
|
|
Consumer Products Group
|
|
|
Total Discontinued Operations
|
|
| Revenues |
|
$ |
1,402,000 |
|
|
$ |
1,437,000 |
|
|
$ |
452,000 |
|
|
$ |
3,291,000 |
|
| Pretax Income (Loss) |
|
|
293,000 |
|
|
|
(1,066,000 |
) |
|
|
(1,304,000 |
) |
|
|
(2,077,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, 2002
|
|
Graphic Design
Group
|
|
|
Product Design Group
|
|
|
Consumer Products Group
|
|
|
Total Discontinued Operations
|
|
| Revenues |
|
$ |
261,000 |
|
|
$ |
592,000 |
|
|
$ |
655,000 |
|
|
$ |
1,508,000 |
|
| Pretax Loss |
|
|
(850,000 |
) |
|
|
(2,238,000 |
) |
|
|
(1,130,000 |
) |
|
|
(4,218,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, 2001
|
|
Graphic Design
Group
|
|
|
Product Design
Group
|
|
|
Consumer Products
Group
|
|
|
Total Discontinued Operations
|
|
| Revenues |
|
$ |
650,000 |
|
|
$ |
677,000 |
|
|
$ |
411,000 |
|
|
$ |
1,738,000 |
|
| Pretax Income (Loss) |
|
|
105,000 |
|
|
|
(461,000 |
) |
|
|
(565,000 |
) |
|
|
(921,000 |
) |
Creative Consulting Services consist of product development
and graphic design services provided by the Product Design Group and the Graphic Design Group. Total creative consulting services revenue decreased $924,000 for the six months ended June 30, 2002 versus the comparable period in 2001. The decrease is
a result of a decline in revenues derived by the Product Design and the Graphic Design Groups of $208,000 and $716,000, respectively. The Company attributes the decrease to prevailing economic conditions and client reluctance to commit to new
projects given the Company’s announced plans to reposition itself for sale or liquidation.
Page 17
REFAC
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Expenses for the creative consulting services group decreased by $735,000 for the six month period ended June 30, 2002 versus the
comparable period in 2001. This decline is a result of decreased expenses for the Product Design and Graphic Design Groups of $389,000 and $346,000, respectively, and is primarily attributable to lower direct payroll and related payroll costs.
Total creative consulting services revenue decreased $474,000 for the three months ended June, 30, 2002 compared
to the same period in 2001. The decrease is a result of a decline in revenues derived by the Product Design and Graphic Design Groups of $85,000 and $389,000, respectively.
Expenses for the creative consulting services group decreased $464,000 for the three month period ended June 30, 2002 versus the comparable period in 2001. The decline is a
result of decreased expenses for the Product Design and Graphic Design Groups of $256,000 and $208,000, respectively.
Manufacturing and Marketing of Consumer Products increased sales by $402,000 and $244,000 for the six and three month periods ended June 30, 2002, respectively, versus the comparable periods in 2001. This increase is
attributable to the sale of merchandise below list prices in order to liquidate inventory. Refac Consumer Products, Inc. (“RCP”) had a negative gross margin during the six month period ending June 30, 2002 when cost of sales exceeded sales
by $605,000 as compared to a positive gross margin of 23% during the same period in 2001. Cost of sales in the three month period ended June 30, 2002 exceeded sales resulting in a negative gross profit during the quarter. This decline is
attributable to the sale of merchandise at or below cost, write-off of advertising and markdown allowances to customers for discontinued programs and a $657,000 reserve in the value of the inventory as RCP seeks distribution sources outside its
normal sales channels, including wholesalers and close-out firms.
The Company is continuing to operate RCP while
looking for a buyer. During this period, in order to limit its investment and risk, RCP has changed its marketing approach and is closing out its domestic inventory position, and as soon as this liquidation is completed, it will no longer warehouse
goods in the United States. RCP also terminated its sales management and consulting agreement with Griffin International, Inc. and wrote off $155,000, which represented the balance of the related prepaid consulting fees due thereunder. In the
future, RCP will manufacture goods only against customer orders and will seek to sell such products on a letter of credit basis, FOB Hong Kong or China under which the goods are delivered to the customer in Hong Kong or China.
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. After December 31, 2001, the Company no longer amortizes goodwill. Pursuant to SFAS 142, the Company engaged an independent valuation
Page 18
REFAC
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
consultant to perform a transitional fair value based impairment test and recorded an impairment loss of $2,083,000, net
of expected tax benefit, in the June 30, 2002 quarter as a cumulative effect of change in accounting principle. Pursuant to SFAS 142, the Company evaluated the impairment of the remaining goodwill and recorded an additional impairment loss of
$1,855,000, net of expected tax benefit, in the June 30, 2002 quarter which is reflected in the results of the discontinued operations. The following table reflects the changes in the carrying value of goodwill by operating group where goodwill was
impaired:
| Description
|
|
Graphic Design Group
|
|
|
Product Design Group
|
|
| Balance as of December 31, 2001 |
|
$ |
1,473,000 |
|
|
$ |
4,582,000 |
|
| Impairment loss measured at January 1, 2002 |
|
|
(673,000 |
) |
|
|
(2,483,000 |
) |
| Impairment loss measured at June 30, 2002 |
|
|
(712,000 |
) |
|
|
(2,099,000 |
) |
| Balance as of June 30, 2002 |
|
$ |
88,000 |
|
|
$ |
0 |
|
LIQUIDITY AND CAPITAL RESOURCES
Cash and the current portion of cash equivalents, corporate bonds and U.S. Treasury Notes increased $924,000 from $8,890,000 at December
31, 2001 to $9,814,000 at June 30, 2002. The Company believes its liquidity position is adequate to meet all current and projected financial needs.
Cash provided by operations was $932,000 as compared to cash used in operations of $3,985,000 for the same period of 2001, reflecting an increase of $4,917,000. Principal sources of net cash flows from
operating activities for the six months ended June 30, 2002 were accounts receivable and inventory. Most of the cash used during the three months ended June 30, 2002 were applied to reductions in accounts payable, accrued expenses and amounts
payable under service agreements.
Net cash used in investing activities was $6,457,000; an increase of
$10,149,000 from cash provided by investment activities of $3,692,000 for the same period of 2001. For the period ended
Page 19
REFAC
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
June 30, 2002 there were no proceeds from the sales of licensing-related securities or from investments being held to
maturity.
Net cash provided from financing activities was $3,000 for the exercise of 1,250 stock options in the
quarter ended June 30, 2002. There was no cash provided or used for financing activities for the same period 2001.
As of June 30, 2002, the Company had open letters of credit to purchase goods for $134,000.
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). The following table represents the
Company’s future material, long-term contractual obligations:
| |
|
Payments Due By Period
|
| Contractual Obligations
|
|
Total
|
|
Less than one
year
|
|
1-3 years
|
|
4-5 years
|
|
After 5 years
|
| Operating Lease Obligations |
|
$ |
4,596,000 |
|
$ |
352,000 |
|
$ |
1,929,000 |
|
$ |
1,266,000 |
|
$ |
1,049,000 |
| Other Long-Term Obligations |
|
$ |
165,000 |
|
$ |
54,000 |
|
$ |
111,000 |
|
$ |
0 |
|
$ |
0 |
The Company’s long-term investments being held to maturity
consist of corporate bonds that mature in November 2003. The Company’s investment in long-term marketable securities is subject to interest rate risk. Historically, the Company has not experienced material gains or losses due to interest rate
changes when selling long-term investments.
CRITICAL ACCOUNTING POLICIES
The Company has historically estimated the recoverability of its long-term assets, including goodwill, by consideration of the estimated future undiscounted cash flow
from the operations of the business segments from which those long-term assets relate to, which is principally Creative Consulting Services. These estimates were based upon historical results adjusted for planned reductions in expenses, which have
been implemented, and reasonable sales goals of the business segments.
Page 20
REFAC
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
As of January 1, 2002, the Company adopted the provisions of SFAS 142 “Goodwill and Other
Intangible Assets” and SFAS 144, “ Accounting for the Impairment or Disposal of Long-Lived Assets.”
In June 2001, the Financial Accounting Standards Board approved the issuance of SFAS No. 141, “Business Combinations” and in July 2001, SFAS 142, “Goodwill and Other Intangible Assets.” 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 must be recognized as an asset apart from goodwill. Goodwill and intangibles with indefinite lives are no longer be subject to amortization, but now are subject to at least an annual assessment for
impairment by applying a fair value based test. The Company adopted SFAS 142 as of January 1, 2002 and in compliance with this new standard has discontinued the amortization of goodwill.
The Company now evaluates the recoverability of its long-term assets under the provisions of SFAS 142 and 144. While such provisions retain the considerations the Company
has previously made in evaluating the recoverability of its long-term assets as discussed above, SFAS 144 provides an additional triggering event to require an impairment test - - - - a current expectation that, more likely than not, a long-term
asset or asset group will be sold or disposed of significantly before the end of its previously estimated useful life. Assets that are considered to be held for sale will be measured at the lower of carrying amount or fair value less cost to sell,
and depreciation on these assets will cease. Long-term assets to be disposed of by sale may not be classified as held for sale, however, until the period in which all of the following criteria are met:
| |
• |
|
management commits to a plan to sell the asset or group |
| |
• |
|
the asset or group is available for immediate sale in its present condition |
| |
• |
|
actions to complete the plan to sell have been initiated |
| |
• |
|
it is probable the sale will be completed within one year |
| |
• |
|
the asset or group is being actively marketed at a reasonable price |
Page 21
REFAC
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
| |
• |
|
it is unlikely that significant change will be made to the plan or that it will be withdrawn |
Based upon the above criteria, the assets of the creative consulting services and the manufacture and marketing of consumer products
groups are considered held for sale and have been evaluated under SFAS 144. In such valuation, the actual terms of the sale of the Graphic Design Group was used and terms under discussion with a nonaffiliated potential purchaser of the Product
Design Group was used.
In June 2002, the Financial Accounting Standards Board issued SFAS 146, “Accounting
for Exit or Disposal Activities”. SFAS 146 addresses the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including costs related to termination of a contract that is not a capital lease
and termination benefits that employees who are involuntarily terminated received under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 requires
liabilities associated with exit and disposal activities to be expensed as incurred. SFAS 146 is effective for exit or disposal activities of the Company that are initiated after December 31, 2002.
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 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 expectations, including, but not limited to its expectations in connection with a sale or liquidation
transaction, are 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. Some of the aforementioned risks are further described 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, 2001.
Page 22
PART II.
OTHER INFORMATION
Item 6. Exhibit and Reports on Form 8-K
(a) See Exhibit Index attached hereto.
(b) Current Report on Form 8-K filed on April 26, 2002 announcing the adoption of a Stockholder Rights Plan.
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 |
| |
| By: |
|
/s/ ROBERT L. TUCHMAN
|
| |
|
Robert L. Tuchman, President
and Chief Executive Officer |
August 19, 2002
| |
| By: |
|
/s/ RAYMOND A. CARDONNE, JR
|
| |
|
Raymond A. Cardonne, Jr, CFO (Principal Financial Officer |
August 19, 2002
Page 23
EXHIBIT INDEX
| Exhibit No.
|
|
|
|
|
| 3(i)a |
|
Certificate of Amendment to the Certificate of Incorporation of the Company. |
|
|
| |
| 3(i)b |
|
Corrected Certificate of Amendment to the Restated Certificate of Incorporation of the Company. |
|
|
| |
| 3(ii) |
|
The By-laws of the Company. |
|
|
| |
| 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, 2001 is incorporated herein by reference. |
|
|
| |
| 99 |
|
Certification of CEO and CFO. |
|
|
Page 24