UNITED STATES
SECURITIES AND EXCHANGE COMMISSION ----------------------------
| OMB APPROVAL |
Washington, D.C. 20549 | ---------------------------|
| |
SCHEDULE 14A | OMB Number: 3235-0059 |
Proxy Statement Pursuant to Section 14(a) | Expires: August 31, 2004 |
of the Securities Exchange Act of 1934 | Estimated average burden |
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Amendment No. 1 ---------------------------
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-12
Refac
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[x] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which
transaction applies: Common Stock, par value $0.10
per share
----------------------------------------------------------------------
(2) Aggregate number of securities to which
transaction applies:
3,730,811*
----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
$4.80 per share**
----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$17,907,892.80***
----------------------------------------------------------------------
(5) Total fee paid:
$1,647.53****
----------------------------------------------------------------------
* 3,798,011 shares of common stock issued and outstanding as of November
14, 2002 minus 311,200 shares owned by Palisade Concentrated Equity
Partnership, L.P. plus 244,000 shares of common stock issuable upon the
exercise of outstanding options.
** $3.60 per share cash consideration plus $1.20 (the book value of
one-fifth of one share of surviving corporation stock.)
*** 3,730,811 shares (the aggregate number of shares to which this
transaction applies) multiplied by $4.80 (the per unit price).
**** In accordance with the Exchange Act Rule 0-11, the filing fee is
determined by multiplying the proposed maximum aggregate value of the
transaction by 0.000092.
[ ] Fee paid previously with preliminary materials:
[x] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$1,642.39
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(2) Form, Schedule or Registration Statement No.:
PRE14A (preliminary proxy materials)
-----------------------------------------------------------------------
(3) Filing Party:
REFAC
-----------------------------------------------------------------------
(4) Date Filed:
November 27, 2002
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As filed with the Commission on January 24, 2003
REFAC
The Hudson River Pier - Suite 110
115 River Road
Edgewater, New Jersey 07020
Telephone: (201) 943-4400
January __, 2003
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders
of Refac to be held on Friday, February 28, 2003, at 10:00 a.m., New York City
time, at the Board of Governors' Room of the American Stock Exchange, 86
Trinity Place, New York, New York. At the special meeting, we will ask you to
consider and vote upon a proposal to adopt the merger agreement that we
entered into on August 19, 2002 with Palisade Concentrated Equity Partnership,
L.P., as amended.
If the merger agreement is adopted and the transaction is completed,
you will receive for each share of your Refac common stock:
o a cash payment of $3.60 for each share, and
o 0.2 shares of common stock of the surviving corporation.
As further described in the enclosed proxy statement, you will also
receive the right to sell the shares of surviving corporation stock to Refac
for a price which will depend upon Refac's liquid distributable assets as of
March 31, 2003 and June 30, 2005. This right will be limited to stockholders
who continuously hold their shares of surviving corporation stock received in
the merger until June 30, 2005.
Your Board of Directors has carefully considered the merger agreement
and has determined that the terms of the merger agreement are fair to and in
the best interests of Refac's stockholders. We unanimously recommend that you
vote in favor of the adoption of the merger agreement.
Your vote is very important. We cannot complete the merger unless the
merger agreement is adopted by holders of a majority of Refac's outstanding
shares. Whether or not you plan attend the special meeting, we urge you to
complete, sign, date and return the enclosed proxy card to ensure that your
shares are represented at the special meeting.
This booklet provides you with the detailed information about the
proposed transaction and related matters. We urge you to read these documents
carefully, including the appendices. If you have any questions about the
merger, please call Refac's proxy solicitors, MacKenzie Partners, Inc.,
toll-free at 1-800-322-2885.
On behalf of your Board of Directors, I thank you for your support
and appreciate your consideration of this matter.
Very truly yours,
/s/ Robert L. Tuchman
---------------------
Robert L. Tuchman
Chairman of the Board
This Proxy Statement is dated January __, 2003 and is being first mailed to
Refac stockholders on or about January __, 2003.
REFAC
The Hudson River Pier - Suite 110
115 River Road
Edgewater, New Jersey 07020
Telephone: (201) 943-4400
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Notice is hereby given that a special meeting of stockholders of
Refac, a Delaware corporation, will be held at the Board of Governors' Room of
the American Stock Exchange, 86 Trinity Place, New York, New York on Friday,
February 28, 2003, at 10:00 a.m., New York City time, to:
1. consider and vote on a proposal to adopt the merger agreement,
dated August 19, 2002, as amended, by and among Refac, Palisade
Concentrated Equity Partnership, L.P. and Palisade Merger Corp.
under which, among other things, Palisade Merger Corp. will
merge with and into Refac, as described in the accompanying
proxy statement; and
2. transact any other business that may properly come before the
special meeting of stockholders or any adjournment(s) or
postponement(s) thereof.
Only holders of record of shares of Refac common stock at the close
of business on January 10, 2003, will be entitled to vote at the special
meeting of stockholders or any adjournment or postponement thereof.
By Order of the Board of Directors,
/s/ Robert L. Tuchman
---------------------
Robert L. Tuchman
Chairman of the Board
Table of Contents
Page
----
SUMMARY..................................................................................................1
The Parties...........................................................................................1
The Special Meeting...................................................................................2
Background of the Merger..............................................................................3
The Merger............................................................................................3
Purpose and Effects of the Merger.....................................................................3
Reasons for the Merger................................................................................4
Recommendation of the Board of Directors..............................................................5
Opinion of Fleet Securities...........................................................................5
Federal Income Tax Considerations.....................................................................5
Interests of Certain Persons in the Merger............................................................5
Appraisal Rights......................................................................................6
Conditions to the Merger..............................................................................7
Termination of the Merger Agreement...................................................................7
Fees and Expenses.....................................................................................8
Procedures for Receipt of Merger Consideration........................................................9
Certain Federal Securities Law Consequences...........................................................9
Accounting Treatment..................................................................................9
SUMMARY FINANCIAL INFORMATION............................................................................9
QUESTIONS AND ANSWERS ABOUT THE MERGER..................................................................15
RISK FACTORS............................................................................................18
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS...............................................23
THE PARTIES.............................................................................................24
Refac................................................................................................24
Palisade Concentrated Equity Partnership, L.P........................................................24
Palisade Capital Management, L.L.C...................................................................26
Palisade Merger Corp.................................................................................27
SPECIAL MEETING OF THE COMPANY'S STOCKHOLDERS...........................................................27
Date, Time and Place.................................................................................27
Purpose of the Special Meeting.......................................................................28
Recommendation of the Board of Directors.............................................................28
Record Date; Quorum; Outstanding Shares and Voting...................................................28
Voting Rights; Votes Required........................................................................28
Voting and Revocation of Proxies.....................................................................29
Solicitation of Proxies and Expenses.................................................................30
Independent Auditor..................................................................................30
Other Matters........................................................................................30
PAYMENT OF MERGER CONSIDERATION.........................................................................30
THE MERGER..............................................................................................32
Background of the Merger.............................................................................32
Purposes of the Merger...............................................................................38
Reasons for the Merger; Recommendation of the Board of Directors.....................................39
i
Opinion of Fleet Securities; Information Regarding Fleet Securities..................................44
Interests of Certain Persons in the Merger...........................................................55
Merger Financing; Source of Funds....................................................................59
Certain United States Federal Income Tax Consequences................................................59
Certain Federal Securities Law Consequences..........................................................63
Accounting Treatment.................................................................................64
APPRAISAL RIGHTS OF STOCKHOLDERS........................................................................64
THE MERGER AGREEMENT....................................................................................68
The Merger and the Effective Time....................................................................69
Conversion of Shares; Merger Consideration...........................................................69
Treatment of Company Stock Options...................................................................72
Directors and Officers; Board Observers..............................................................72
Representations and Warranties.......................................................................73
Conduct of the Company Prior to the Merger...........................................................74
No Solicitation......................................................................................76
Indemnification and Insurance........................................................................77
Employee Benefit Plans...............................................................................77
Recommendation of the Board of Directors; Stockholder's Meeting......................................78
Conditions to the Merger.............................................................................78
Termination..........................................................................................79
Fees and Expenses....................................................................................80
Comparison of Rights of Holders of Company Common Stock and Surviving Corporation Stock; Amended
Charter and By-Laws..................................................................................80
Regulatory Approvals.................................................................................85
Rights Agreement.....................................................................................86
Confidentiality Agreement............................................................................86
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................87
SECURITY OWNERSHIP......................................................................................96
Security Ownership of Certain Beneficial Owners......................................................96
Security Ownership of Management.....................................................................97
STOCKHOLDER PROPOSALS...................................................................................98
DESIGNEES TO THE BOARD OF DIRECTORS.....................................................................98
Business Experience..................................................................................98
Other Directorships..................................................................................99
SECURITY OWNERSHIP OF DESIGNEES.........................................................................99
WHERE YOU CAN FIND MORE INFORMATION....................................................................100
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE........................................F-1
Annex A - Agreement and Plan of Merger (incorporated by reference to the
Current Report on Form 8-K filed on August 21, 2002)
Annex A1 - Amendment No.1 to the Agreement and Plan of Merger
(incorporated by reference to the Current Report on Form 8-K
filed on October 24, 2002)
ii
Annex A2 - Amendment No.2 to the Agreement and Plan of Merger
(incorporated by reference to the Current Report on Form 8-K
filed on December 16, 2002)
Annex A3 - Amendment No.3 to the Agreement and Plan of Merger
(incorporated by reference to the Current Report on Form 8-K
filed on January 24, 2003)
Annex B - Fairness Opinion of Fleet Securities, Inc.
Annex C - Proxy Card
Annex D - Section 262 of the General Corporation Law of the State of
Delaware
Annex E1 - Certificate of Incorporation of Surviving Corporation
Annex E2 - Certificate of Amendment of Certificate of Incorporation of
Surviving Corporation
Annex F - By-Laws of Surviving Corporation
Exhibit A - Confidentiality Agreement
Notes: 1. Annexes to be delivered to stockholders with definitive proxy
statement.
2. Except as set forth above, materials not filed herewith were
filed with the preliminary proxy statement on Schedule 14A filed
on November 27, 2002.
iii
SUMMARY
This summary, together with the question and answer section,
highlights important information discussed in greater detail elsewhere in this
proxy statement. This summary may not contain all of the information you
should consider before voting on the merger agreement. All references to the
"merger agreement" in this proxy statement shall collectively refer to the
merger agreement, which is attached to this proxy statement as Annex A, and
its amendments, which are attached to this proxy statement as Annexes A1, A2
and A3. To more fully understand the merger, you should read carefully this
entire proxy statement and all of its annexes before voting on whether to
adopt the merger agreement. You can also refer to "Where You Can Find More
Information" on page 99 for additional information about the Company.
The Parties
Refac
The Hudson River Pier - Suite 110
115 River Road
Edgewater, New Jersey, 07020
For the past 50 years, Refac (the "Company") has been recognized for
its intellectual property licensing activities. In recent years, it has also
engaged in product development and graphic design and communications and has
invested these creative resources, together with its licensing skills, in
certain product development ventures. On March 22, 2002, the Company announced
plans to reposition itself for sale or liquidation. Since that date, the
Company has disposed of all of its operating segments with the exception of
its licensing business and it has limited the operations of that segment to
managing certain existing license agreements and related contracts. Today, the
Company's assets principally consist of cash, government securities, accounts
receivable, notes receivable, contract rights receivable, a claim for a tax
refund, agreements related to its licensing business and its leasehold. See
"The Parties-Refac" on page 24.
Palisade Concentrated Equity Partnership, L.P.
One Bridge Plaza
Fort Lee, New Jersey 07024
Palisade Concentrated Equity Partnership, L.P. ("Palisade") is a
private equity partnership, managed by Palisade Capital Management, L.L.C.
("Palisade Capital"). Palisade specializes in investments of $5 million or
more in special situations, including large ownership positions in public
companies, as well as going-private transactions. Palisade has committed
capital from its limited partners totaling $204 million. Palisade Capital is
an investment advisory firm based in Fort Lee, New Jersey, with over $2
billion in assets under management. The firm's clients include several major
U.S. corporate pension funds, as well as smaller institutions and individuals.
Investment activities include small-capitalization equities, convertible
securities and private equity. In private equity, Palisade Capital is the
investment manager for three limited
1
partnerships, including Palisade. See "The Parties-Palisade Concentrated
Equity Partnership, L.P." on page 24.
Palisade Merger Corp.
c/o Palisade Concentrated Equity Partnership
One Bridge Plaza
Fort Lee, New Jersey 07024
Palisade Merger Corp. (the "Merger Sub") is a Delaware corporation
and is wholly-owned by Palisade. Merger Sub was formed solely for the purpose
of facilitating the merger. If and when the merger takes place, Merger Sub
will be merged with and into the Company and Palisade will own approximately
80% of the Company's outstanding shares. See "The Parties-Palisade Merger
Corp." on page 27.
The Special Meeting
o Date, Time and Place (page 27). The special meeting of Company's
stockholders will be held on Friday, February 28, 2003, at 10:00
a.m., New York City time, at the Board of Governors' Room of the
American Stock Exchange, 86 Trinity Place, New York, New York.
o Vote Required (page 28). In order for the merger agreement to be
adopted, the holders of a majority of our outstanding common
stock, par value $0.10 per share ("Company Common Stock")
entitled to vote at the special meeting must vote "FOR" its
adoption. Each share of Company Common Stock entitles its holder
to one vote.
o Record Date (page 28). The record date for determining the
holders of shares of outstanding Company Common Stock entitled
to vote at the special meeting is January 10, 2003. On the
record date, 3,798,011 shares of Company Common Stock were
outstanding and entitled to vote on the proposal to adopt the
merger agreement.
o Proxies (page 29). Shares of Company Common Stock represented by
properly executed proxies received at or prior to the special
meeting that have not been revoked will be voted at the special
meeting in accordance with the instructions indicated on the
proxies. If you properly execute your proxy but do not give
instructions on how to vote your shares, your shares will be
voted "FOR" the adoption of the merger agreement. Your proxy may
be revoked at any time before it is voted.
o Procedure for Voting (page 29). You may vote in either of two
ways:
o by completing and returning the enclosed proxy card, or
o by appearing at the special meeting.
2
If you complete and return the enclosed proxy card but wish to revoke
it, you must either file with MacKenzie Partners, Inc., our proxy solicitor, a
written, later-dated notice of revocation, send a later-dated proxy card
relating to the same shares to the proxy solicitor at or before the special
meeting or attend the special meeting and vote in person. Your attendance at
the meeting will not, by itself, revoke your proxy. For more detailed
information concerning the special meeting, see "Special Meeting of the
Company's Stockholders" on page 27.
Background of the Merger
For a description of events leading to the adoption of the merger
agreement by the Company's Board of Directors (the "Board of Directors") and
the reasons for such adoption, you should refer to "The Merger--Background of
the Merger" on page 32.
The Merger
Palisade will own approximately 80% of the Company's outstanding
shares upon completion of the merger. For each share of Company Common Stock
owned at the effective time of the merger, stockholders will receive $3.60 and
0.2 shares of common stock, par value $0.001 per share (the "Surviving
Corporation Stock"), of the surviving corporation in the merger (the
"Surviving Corporation"). You will also have the right (the "Payment Right")
to sell the shares of Surviving Corporation Stock to the Company for a price
which will depend upon the Company's liquid distributable assets as of March
31, 2003 and June 30, 2005 (such price, the "Payment Amount"). Following the
merger, the Company will continue with the liquidation of its assets announced
in March 2002. Liquid distributable assets are the proceeds of the liquidation
of the assets of the Company's business as it exists prior to the merger. (See
"The Merger Agreement - Conversion of Shares; Merger Consideration" on page
69). This right to sell the shares to the Company for the Payment Amount will
be limited to stockholders who (i) hold their shares of Surviving Corporation
Stock received in the merger continuously until June 30, 2005 and (ii) tender
those shares in accordance with the instructions sent to them following the
final calculation of liquid distributable assets. See "The Merger" on page 32.
Upon completion of the merger, Merger Sub will be merged with and
into us, and we will continue as the Surviving Corporation. The merger will
occur according to the terms and conditions of the merger agreement and its
amendments, which are attached to this proxy statement as Annexes A, A1, A2
and A3. You should carefully read the merger agreement and the description of
the merger agreement contained in this proxy statement under "The Merger
Agreement" on page 68. If our stockholders vote to adopt the merger agreement,
and the other conditions to the merger are satisfied or waived, we expect to
complete the merger shortly after the special meeting.
Purpose and Effects of the Merger
If the merger agreement is adopted by our stockholders and if the
other conditions to the merger are either satisfied or waived:
3
o For each share of Company Common Stock that you own at the time
of the merger, you will receive a $3.60 in cash and 0.2 shares
of Surviving Corporation Stock.
o You will have the right to sell the shares of Surviving
Corporation Stock received in the merger to the Company for the
Payment Amount. This right to sell the shares will be limited to
stockholders who (i) hold their shares of Surviving Corporation
Stock received in the merger continuously until June 30, 2005
and (ii) tender those shares in accordance with the instructions
sent to them following the final calculation of liquid
distributable assets.
o Palisade will own about 80% of the Company's outstanding shares.
o We will continue to be a public company required to file reports
under the Securities Exchange Act.
o The American Stock Exchange is currently reviewing whether the
Surviving Corporation Stock will be eligible to maintain its
listing on the American Stock Exchange.
o Each option to acquire Company Common Stock that is outstanding
at the time of the merger may be exercised prior to June 30,
2005 for $3.60 in cash and the 0.2 shares of Surviving
Corporation Stock, with the right to sell such shares of
Surviving Corporation Stock to the Company for the Payment
Amount. If you exercise such an option after June 30, 2005, you
will receive $3.60 in cash and 0.2 shares of Surviving
Corporation Stock, but no right to sell the shares of Surviving
Corporation Stock to the Company for the Payment Amount.
o The directors of Merger Sub will be the directors of the
Surviving Corporation. Palisade has indicated that it would like
Robert L. Tuchman, Mark N. Kaplan and Clark A. Johnson, current
directors of the Company, to continue as directors following the
merger. The board of directors of the Surviving Corporation will
have a classified board of directors. The officers of the
Company will be the officers of the Surviving Corporation.
See "The Merger Agreement" on page 68.
Reasons for the Merger
For a description of the reasons behind the Board of Directors'
determination that the merger is in the best interests of our stockholders,
you should refer to "The Merger--Reasons for the Merger; Recommendation of the
Board of Directors" on page 39.
4
Recommendation of the Board of Directors
The Board of Directors has unanimously voted "FOR," and recommends
that the stockholders vote "FOR," the adoption of the merger agreement. See
"Special Meeting of the Company's Stockholders--Recommendation of the Board of
Directors" on page 28 and "The Merger--Reasons for the Merger; Recommendation
of the Board of Directors" on page 39.
Opinion of Fleet Securities
On January 23, 2003, Fleet Securities, Inc. ("Fleet Securities")
delivered its written opinion to the Special Committee of the Board of
Directors (the "Special Committee"). The opinion is to the effect that, as of
January 23, 2003, and based upon the assumptions made and matters considered
in its written opinion, the consideration to be received by the holders of
Company Common Stock pursuant to the merger is fair from a financial point of
view to such holders (other than Palisade, Merger Sub, their affiliates or any
holders who exercise appraisal rights). The full text of Fleet Securities'
opinion, which sets forth assumptions made, matters considered and limitations
on the review undertaken in connection with the opinion, is attached to this
proxy statement as Annex B. We encourage you to read this opinion carefully in
its entirety for a description of the assumptions made, matters considered and
limitations on the review undertaken by Fleet Securities. For a more detailed
discussion of the opinion of Fleet Securities, see "The Merger - Opinion of
Fleet Securities; Information Regarding Fleet Securities" on page 44.
Federal Income Tax Considerations
For United States federal income tax purposes, a stockholder of the
Company who receives the merger consideration should generally be treated as
(i) selling 80% of its Company Common Stock in a taxable transaction in
exchange for the amount of cash received in the merger and (ii) exchanging 20%
of its Company Common Stock in a transaction upon which taxable gain (but not
loss) may be recognized for the Surviving Corporation Stock received in the
merger plus the right, under certain circumstances, to sell the Surviving
Corporation Stock received in the merger back to the Surviving Corporation.
See "The Merger - Certain United States Federal Income Tax Consequences" on
page 59. Determining the actual tax consequences of the merger to you is
complex and will depend on your specific situation. You should consult your
own tax advisor for a full understanding of the merger's tax consequences to
you.
Interests of Certain Persons in the Merger
In considering the recommendation of the Board of Directors, you
should be aware that some of our directors and executive officers may be
deemed to have interests that are different from, or in addition to, those of
our stockholders, including the following:
5
o Employment agreements with Robert L. Tuchman, Chairman,
President, Chief Executive Officer and General Counsel, and
Raymond A. Cardonne, Vice President, Chief Financial Officer,
Treasurer and Secretary, under which, among other things, they
will be entitled to certain cash bonuses in connection with the
merger, including, upon completion of the merger, signing
bonuses of $800,000 for Mr. Tuchman and $313,744 for Mr.
Cardonne. If the merger does not occur, Messrs. Tuchman and
Cardonne would be entitled to cash bonuses based upon the amount
of cash and the fair market value (as determined by the Board of
Directors in its sole discretion) of securities in excess of $10
million distributed to the Company's stockholders. (See "The
Merger - Interests of Certain Persons in the Merger"). Mr.
Tuchman and Mr. Cardonne are expected to continue as employees
of the Surviving Corporation after the merger.
o Robert L. Tuchman, Raymond A. Cardonne and the Company's
non-employee directors each hold certain previously unvested
options to purchase shares of Company Common Stock which became
fully vested on the date of the signing of the merger agreement.
o Palisade has indicated that it would like Robert L. Tuchman,
Mark N. Kaplan and Clark A. Johnson, current directors of the
Company, to continue to serve as members of the Board of
Directors following the merger.
o Clark A. Johnson, a director of the Company, has a 5% preferred,
non-voting equity interest in Palisade Capital. Mr. Johnson is
also a director of OptiCare Health Systems, Inc., a company in
which Palisade is the controlling shareholder and has the right
to designate a majority of the board of directors.
o Mark N. Kaplan, a director of the Company, is Of Counsel to a
law firm which represents the Company in connection with the
merger agreement and merger and other matters. Mr. Kaplan and
such firm also from time to time represent Palisade and certain
of its affiliates.
o Palisade's agreement to cause the Surviving Corporation to
maintain our current officers' and directors' liability
insurance, subject to certain limitations, and the Surviving
Corporation's agreement to indemnify our executive officers and
directors, among others.
For a more detailed discussion of interests of our directors and
officers, see "The Merger - Interests of Certain Persons in the Merger" on
page 54.
Appraisal Rights
If you do not wish to accept the merger consideration, comprised of
(i) $3.60 per share, (ii) 0.2 shares of Surviving Corporation Stock (subject
to cash in lieu of any fractional shares) and (iii) the right, under certain
circumstances, to sell the 0.2 shares of Surviving Corporation Stock to the
Company for the Payment Amount, then, if you:
6
o make a written demand for appraisal of your shares prior to the
vote at the special meeting,
o do not vote in favor of the merger,
o continuously hold your shares of record through the date of the
merger, and
o otherwise comply with the procedures described in "Appraisal
Rights of Stockholders,"
you will have the right under Delaware law to seek a judicial appraisal of
your shares to determine their "fair value." A proxy received by the Company
which is properly executed but does not contain voting instructions will,
unless revoked, be voted in favor of the merger agreement. Therefore, if you
vote by proxy and wish to exercise appraisal rights, you must vote against the
merger agreement or abstain from voting on the merger agreement. For a more
detailed discussion of your appraisal rights, see "Appraisal Rights of
Stockholders" on page 64.
Conditions to the Merger
The obligations of the Company and Palisade to complete the merger
are subject to several conditions, including:
o the merger agreement must be adopted by the holders of a
majority of the outstanding shares of Company Common Stock
entitled to be voted on the adoption of the merger agreement,
o there must not be any legal prohibition against the merger,
o each party's representations and warranties in the merger
agreement must generally be accurate and complete in all
material respects,
o all required governmental consents must have been received, and
o each party must comply with its obligations under the merger
agreement in all material respects.
In addition, Palisade will not be obligated to complete the merger if
stockholders of the Company exercise appraisal rights for more than 10% of the
Company's outstanding shares. See "The Merger Agreement-Conditions to the
Merger" on page 77.
Termination of the Merger Agreement
The Company and Palisade may agree in writing to terminate the merger
agreement at any time without completing the merger, even after our
stockholders have adopted it. The merger agreement may also be terminated at
any time prior to the effective time of the merger:
7
o by either party if the merger is not completed by March 31,
2003, provided that the party seeking to terminate under this
provision did not cause the inability to complete the merger by
that date,
o by either party if our stockholders fail to adopt the merger
agreement at the special meeting,
o by either party if there is a legal prohibition against the
merger,
o by either party if the other party breaches or fails to perform
in any material respect any of its obligations under the merger
agreement, provided that if such breach is curable before March
31, 2003 through the reasonable best efforts of the breaching
party, then the agreement may not be terminated as long as the
breaching party is using such reasonable best efforts,
o by Palisade if:
o the Board of Directors withdraws, modifies or amends its
recommendation of the merger agreement or the merger
in a manner adverse to Palisade,
o the Board of Directors approves, or the Company enters
into an agreement for, an alternative transaction,
o there is a tender or exchange offer for the Company and
the Board of Directors does not recommend against it, or
o by the Company if, prior to obtaining stockholder adoption of
the merger agreement, we enter into an agreement for, or the
Board of Directors recommends, a third party proposal or offer.
See "The Merger Agreement-Termination" on page 79.
Fees and Expenses
On the closing date of the merger, (the "Closing Date"), we will
reimburse Palisade for $125,000 of its legal fees in connection with the
merger agreement.
We have also agreed to pay Palisade a fee of $500,000 if:
o Palisade terminates the merger agreement because:
o the Board of Directors withdraws, or modifies adversely,
its recommendation of the merger,
o the Board of Directors approves or recommends, or the
Company enters into a written agreement for, a superior
third party proposal or
8
offer to acquire all or substantially all of the business
or assets of the Company or 80% or more of the securities,
o there is a third party tender or exchange offer for the
Company Common Stock and the Board of Directors, within
5 days of receiving such offer, does not recommend
against it, or
o we terminate the merger agreement because the Board of Directors
recommends a third party proposal or offer.
We have also agreed to pay Palisade liquidated damages of $300,000 if
either party terminates the merger agreement because our stockholders did not
adopt the merger agreement or Palisade terminates because we materially
breached our representations, warranties or obligations under the merger
agreement. See "The Merger Agreement-Fees and Expenses" on page 79.
Procedures for Receipt of Merger Consideration
You should NOT send your share certificates to us or to the proxy
solicitor now. Shortly after the merger is completed, the exchange agent
appointed by Palisade will send you written instructions explaining how to
exchange your Company Common Stock certificates for cash and shares of
Surviving Corporation Stock. In addition, shortly after the amount of liquid
distributable assets as of June 30, 2005 is calculated, if you remain
eligible, we will send you written instructions about how to sell your shares
of Surviving Corporation Stock to the Company.
Certain Federal Securities Law Consequences
The Surviving Corporation Stock to be issued in the merger will not
be registered under the Securities Act of 1933, in reliance upon the exemption
from registration provided by Section 3(a)(9) of the Securities Act. As a
result, no registration statement concerning the issuance of the Surviving
Corporation Stock in the merger has been or will be filed with the Securities
and Exchange Commission ("SEC"). See "The Merger - Certain Federal Securities
Law Consequences" on page 63.
Accounting Treatment
The merger will be treated as a recapitalization in accordance with
generally accepted accounting principles. The exchange of the merger
consideration and Payment Amount for Company Common Stock will be treated as a
treasury stock transaction. See "The Merger-Accounting Treatment" on page 63.
SUMMARY FINANCIAL INFORMATION
In order to fully understand the nature and consequences of the
merger, holders of Company Common Stock should read this proxy statement in
9
conjunction with the audited financial information for the year ended December
31, 2001 and the unaudited financial information for the nine months ended
September 30, 2002, provided at the end of this proxy statement.
In addition, as of September 30, 2002, the Company's financial
statements reflected a capital loss for tax purposes on the sale of Refac
International, Ltd. ("RIL"), which generated expected tax benefits of
approximately $2,111,000. However, based upon further investigation of the tax
basis of RIL (the "RIL Tax Analysis"), which was completed at the end of
December 2002, the Company now believes that the capital loss for tax purposes
on the sale of RIL is much higher than originally estimated. Accordingly, it
now estimates that it will realize an additional net tax benefit of between
approximately $1,500,000 and $2,900,000. No assurance can be given, however,
as to the extent to which the Company will be able to use this tax benefit
because it is dependent upon the applicability of various provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as Treasury
regulations promulgated thereunder, including possible future Treasury
regulations which may have retroactive effect. In addition, the deductibility
of the capital loss on the sale of RIL and the Company's refund claim are
likely to be reviewed by the Internal Revenue Service. Moreover, even if the
Company receives payment of its refund claim, the Company may be subject to
future audits by the Internal Revenue Service which could result in the
Company having to return all or a portion of the refund received. Accordingly,
the Company is unable to determine the amount and/or the timing of realization
of any tax benefit from the sale of RIL.
The selected financial data set forth below as of December 31, 2001,
2000 and 1999 and for each of three years ended December 31, 2001 was derived
from our consolidated financial statements, which appear elsewhere in this
proxy statement. The selected financial data set forth below as of December
31, 1998 and 1997 and for each of the two years ended December 31, 1998 and
1997 was derived from the Company's audited financial statements, which are
not included in this proxy statement. The selected financial data for the nine
month periods ended September 30, 2002 and September 30, 2001 was derived from
our unaudited interim financial statements. Our selected historical financial
data presented below should be read in conjunction with our financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 87.
10
REFAC AND SUBSIDIARIES
SELECTED FINANCIAL INFORMATION
Twelve months ended December 31,
-----------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------- -------------- --------------- -------------- ---------------
Operating revenues $5,489,000 $9,754,000 $10,619,000 $11,468,000 $11,244,000
Net income from continuing operations $2,764,000 $4,571,000 $4,357,000 $5,049,000 $6,067,000
Loss from discontinued operations - net of
taxes $(1,680,000) $(1,642,000) $(684,000) $(314,000) $(876,000)
Net income $1,084,000 $2,929,000 $3,673,000 $4,735,000 $5,191,000
Earnings per common share from continuing
operations - basic $0.73 $1.20 $1.15 $1.33 $ 1.66
Earnings (loss) per common share from
discontinued operations - basic $(0.44) $(0.43) $(0.18) $(0.08) $(0.24)
Earnings per common share on net income -
basic $0.29 $0.77 $0.97 $1.25 $ 1.42
Earnings per common share from continuing
operations - diluted $0.73 $1.20 $1.15 $1.29 $ 1.58
Earnings (loss) per common share from
discontinued operations - diluted $(0.44) $(0.43) $(0.18) $(0.08) $(0.22)
Earnings per common share on net income -
diluted $0.29 $0.77 $0.97 $1.21 $1.36
Total assets $24,387,000 $24,903,000 $27,847,000 $30,565,000 $37,142,000
Dividends - - - - $2,701,000
Stockholders' Equity $22,592,000 $22,754,000 $22,791,000 $24,165,000 $22,623,000
11
REFAC AND SUBSIDIARIES
SELECTED FINANCIAL INFORMATION
Nine Months Ended
September 30, 2002
---------------------
$6,182,000
Operating revenues
$2,902,000
Net income from continuing operations
$(3,985,000)
Loss from discontinued operations, net of taxes
Cumulative effect of change in accounting principle - net of $(2,083,000)
$1,073,000 tax benefit
$(3,166,000)
Net loss
Earnings per common share from continuing operations - basic and
diluted $0.76
Loss per common share from discontinued operations - basic and
diluted $(1.04)
Loss per common share from cumulative effect of change in
accounting principle - basic and diluted $(0.55)
Net loss per common share - basic and diluted $(0.83)
$22,424,000
Total assets
Dividends -
$19,443,000
Stockholders' equity
The selected quarterly financial data and reconciliation to
previously reported data set forth below for each of eleven quarters ended
September 30, 2002 was derived from our unaudited interim financial
statements.
12
---------------------------------------------------------------------------------------------------------------
Refac and Subsidiaries
Selected Quarterly Financial Data
(in thousands, except per share data)
(unaudited)
------------------------------- --------------- ----------- ----------- ----------- ------------- ------------
Mar. 31, June 30, Sept. 30, Dec, 31, Mar. 31, June 30,
2000 2000 2000 2000 2001 2001
------------------------------- --------------- ----------- ----------- ----------- ------------- ------------
Total revenues $2,526 $2,404 $2,227 $2,597 $2,248 $1,708
------------------------------- --------------- ----------- ----------- ----------- ------------- ------------
Cost of revenues 433 348 246 371 46 279
------------------------------- --------------- ----------- ----------- ----------- ------------- ------------
Net income from continuing 1,085 1,105 1,210 1,171 1,251 954
operations before cumulative
effect of a change in
accounting principle
------------------------------- --------------- ----------- ----------- ----------- ------------- ------------
Net income (loss) $919 $907 $819 $284 $528 $305
------------------------------- --------------- ----------- ----------- ----------- ------------- ------------
Net income from continuing $0.29 $0.29 $0.32 $0.30 $0.34 $0.24
operations before cumulative
effect of a change in
accounting principle per
diluted share
------------------------------- --------------- ----------- ----------- ----------- ------------- ------------
Net income (loss) per diluted $0.24 $0.24 $0.22 $0.07 $0.14 $0.08
share
------------------------------- --------------- ----------- ----------- ----------- ------------- ------------
[TABLE CONTINUED]
--------------------------------------------------------------------------------------------------
------------------------------- ------------- ----------- ----------- -------------- -------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
2001 2001 2002 2002 2002
------------------------------- ------------- ----------- ----------- -------------- -------------
Total revenues $833 $700 $627 $715 $4,840
------------------------------- ------------- ----------- ----------- -------------- -------------
Cost of revenues 170 178 105 111 73
------------------------------- ------------- ----------- ----------- -------------- -------------
Net income from continuing 325 234 216 266 2,420
operations before cumulative
effect of a change in
accounting principle
------------------------------- ------------- ----------- ----------- -------------- -------------
Net income (loss) $42 $209 ($135) ($2,520) $1,572
------------------------------- ------------- ----------- ----------- -------------- -------------
Net income from continuing $0.09 $0.06 $0.06 $0.07 $0.63
operations before cumulative
effect of a change in
accounting principle per
diluted share
------------------------------- ------------- ----------- ----------- -------------- -------------
Net income (loss) per diluted $0.01 $0.06 ($0.04) ($0.66) $0.41
share
------------------------------- ------------- ----------- ----------- -------------- -------------
Note: Pursuant to SFAS 142, the Company recorded as of January 1,
2002 an impairment loss of $2,083,000 ($0.55 per share), net of
expected tax benefit, as a cumulative effect of a change in
accounting principle. This impairment loss is not reflected in the
above quarterly results.
13
<table>
<caption>
-------------------------------------------------------------------------------------------------------
Refac and Subsidiaries
Reconciliation of Selected Quarterly Financial Data
(in thousands, except per share data)
(unaudited)
------------------------------------ -------------- ------------- ------------ ----------- ------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
2000 2000 2000 2000 2001
------------------------------------ -------------- ------------- ------------ ----------- ------------
<s> <c> <c> <c> <c> <c>
Revenues from continuing operations $2,526 $2,404 $2,227 $2,597 $2,248
------------------------------------ -------------- ------------- ------------ ----------- ------------
Revenues from discontinued 2,537 1,738 1,509 1,476 1,491
operations
------------------------------------ -------------- ------------- ------------ ----------- ------------
Revenues previously reported $5,063 $4,142 $3,736 $4,073 $3,739
-------------------------------------------------------------------------------------------------------
------------------------------------ -------------- ------------- ------------ ----------- ------------
Cost of revenues from continuing $433 $348 $246 $371 $46
operations
------------------------------------ -------------- ------------- ------------ ----------- ------------
Cost of revenues from discontinued 1,670 1,071 857 1,247 1,003
operations
------------------------------------ -------------- ------------- ------------ ----------- ------------
Cost of revenues previously $2,103 $1,419 $1,103 $1,618 $1,049
reported
------------------------------------ -------------- ------------- ------------ ----------- ------------
------------------------------------ -------------- ------------- ------------ ----------- ------------
Net income from continuing $1,085 $1,105 $1,210 $1,171 $1,251
operations before cumulative
effect of a change in accounting
principle
------------------------------------ -------------- ------------- ------------ ----------- -----------
Loss from discontinued operations (166) (198) (391) (887) (723)
- net of taxes
------------------------------------ -------------- ------------- ------------ ----------- ------------
Net income (loss) previously $919 $907 $819 $284 $528
reported
------------------------------------ -------------- ------------- ------------ ----------- ------------
[TABLE CONTINUED]
----------------------------------------------------------------------------------------------------------------
------------------------------------ ------------ ----------- ------------ ----------- ------------ -----------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
2001 2001 2001 2002 2002 2002
------------------------------------ ------------ ----------- ------------ ----------- ------------ -----------
Revenues from continuing operations $1,708 $833 $700 $627 $715 $4,840
------------------------------------ ------------ ----------- ------------ ----------- ------------ -----------
Revenues from discontinued 1,647 2,681 2,891 1,334 Note 1 Note 1
operations
------------------------------------ ------------ ----------- ------------ ----------- ------------ -----------
Revenues previously reported $3,355 $3,514 $3,591 $1,961 $715 $4,840
----------------------------------------------------------------------------------------------------------------
------------------------------------ ------------ ----------- ------------ ----------- ------------ -----------
Cost of revenues from continuing $279 $170 $178 $105 $111 $73
operations
------------------------------------ ------------ ----------- ------------ ----------- ------------ -----------
Cost of revenues from discontinued 1,246 1,850 1,818 945 Note 2 Note 2
operations
------------------------------------ ------------ ----------- ------------ ----------- ------------ -----------
Cost of revenues previously $1,525 $2,020 $1,996 $1,050 $111 $73
reported
------------------------------------ ------------ ----------- ------------ ----------- ------------ -----------
------------------------------------ ------------ ----------- ------------ ----------- ------------ -----------
Net income from continuing $954 $325 $234 $216 $266 $2,420
operations before cumulative
effect of a change in accounting
principle
------------------------------------- ------------ ----------- ------------ ----------- ------------ -----------
Loss from discontinued operations (649) (283) (25) (351) (2,786) (848)
- net of taxes
------------------------------------ ------------ ----------- ------------ ----------- ------------ -----------
Net income (loss) previously $305 $42 $209 ($135) ($2,520) $1,572
reported
------------------------------------ ------------ ----------- ------------ ----------- ------------ -----------
Note 1: Revenues from discontinued operations for the fiscal quarters
ended June 30, 2002 and September 30, 2002 are reported in Note 10 and Note 9
of the respective Forms 10-Q, and were not previously reported on the
condensed consolidated statements of operations.
Note 2: Cost of revenues from discontinued operations for the fiscal
quarters ended June 30, 2002 and September 30, 2002 were not separately
reported in the respective Forms 10-Q.
14
QUESTIONS AND ANSWERS ABOUT THE MERGER
What is happening in the proposed transaction?
Merger Sub, a corporation wholly-owned by Palisade, will merge with
and into the Company. As a result of the merger, Palisade will own about 80%
of our shares.
What will I receive for my shares if the merger is completed?
If the merger is completed, and you have not exercised your right to
an appraisal of the value of your shares, for each share of Company Common
Stock you own at the time of the merger, you will receive a cash payment of
$3.60 and 0.2 shares of Surviving Corporation Stock. You will also have the
right to sell the shares of Surviving Corporation Stock to the Company for a
price which will depend upon the liquid distributable assets held by the
Company as of March 31, 2003 and June 30, 2005. This right to sell the shares
will be limited to stockholders who (i) hold their shares of Surviving
Corporation Stock received in the merger continuously until June 30, 2005 and
(ii) tender those shares in accordance with the instructions sent to them
following the final calculation of liquid distributable assets. Each option to
acquire Company Common Stock that is outstanding at the time of the merger may
be exercised prior to June 30, 2005 for the same merger consideration. If you
exercise such an option after June 30, 2005, you will receive a cash payment
of $3.60 and 0.2 shares of Surviving Corporation Stock, but no right to sell
the shares of Surviving Corporation Stock back to the Company.
What specifically am I being asked to vote on?
You are being asked to vote on whether to adopt the merger agreement.
What is the vote required to adopt the Merger Agreement?
Under Delaware law and our certificate of incorporation, the standard
required to adopt the merger agreement is the affirmative vote of a majority
of the outstanding shares of Company Common Stock entitled to be voted on the
merger agreement. This means that the affirmative vote of at least 1,899,006
shares of Company Common Stock is required for adoption of the merger
agreement.
Is the Board of Directors recommending that I vote for the Merger Agreement?
Yes. After considering a number of factors, including the opinion of
Fleet Securities, your Board of Directors unanimously believes that the terms
of the merger agreement are fair and in the best interests of our
stockholders.
15
When and where is the special meeting?
The meeting will be held on February 28, 2003, at 10:00 A.M., New
York City time, at the Board of Governors' Room of the American Stock
Exchange, 86 Trinity Place, New York, New York.
When will the proposed merger occur?
We are working toward completing the merger as quickly as possible.
If our stockholders vote to adopt the merger agreement, and the other
conditions to the merger are satisfied or waived, we expect to complete the
merger prior to the end of the first quarter of 2003.
Will the Company continue with the liquidation it announced in March 2002?
Following the merger, the Company will continue to manage the
remaining license agreements and related contracts, collect its accounts,
notes and contract rights receivables, pursue tax refunds and manage its real
estate lease. The price at which the Company's stockholders may sell the
shares of Surviving Corporation Stock received in the merger back to the
Company will depend upon the liquid distributable assets of the Company as of
March 31, 2003 and June 30, 2005. (See "The Merger Agreement - Conversion of
Shares; Merger Consideration.") The Company believes that its liquid
distributable assets will exceed the required minimum of $14 million as of
March 31, 2003. Based upon and subject to the successful collection of
existing assets, continued positive cash flow from its real estate lease and
the realization of the projected tax benefits, the Company expects that its
liquid distributable assets will exceed $19 million as of June 30, 2005, but
given the uncertainty surrounding these items, the Company can not represent
that this amount will actually be achieved. Palisade has agreed to use its
reasonable best efforts to continue the management and liquidation of such
assets following the merger and to maximize the liquid distributable assets.
What are the United States federal income tax consequences of the merger?
For United States federal income tax purposes, a stockholder of the
Company who receives the merger consideration should generally be treated as
(i) selling 80% of its Company Common Stock in a taxable transaction in
exchange for the amount of cash received in the merger and (ii) exchanging 20%
of its Company Common Stock in a transaction upon which taxable gain (but not
loss) may be recognized for the Surviving Corporation Stock received in the
merger plus the right, under certain circumstances, to sell the Surviving
Corporation Stock received in the merger back to the Surviving Corporation.
See "The Merger - Certain United States Federal Income Tax Consequences."
Determining the actual tax consequences of the merger to you is complex and
will depend on your specific situation. You should consult your own tax
advisor for a full understanding of the merger's tax consequences to you.
16
What do I need to do now?
We urge you to read this proxy statement, including its annexes,
carefully consider how the merger would affect you as a stockholder and vote.
After you read this proxy statement, you should complete, sign and date your
proxy card and mail it in the enclosed return envelope as soon as possible,
even if you plan to attend the special meeting in person, so that your shares
may be represented at the special meeting. If you sign, date and send in your
proxy card without indicating how you want to vote, all of your shares will be
voted "FOR" the adoption of the merger agreement.
If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
Your broker will only be permitted to vote your shares if you provide
instructions to your broker on how to vote. You should follow the procedures
provided by your broker regarding the voting of your shares and be sure to
provide your broker with instructions on how to vote your shares. If you do
not give voting instructions to your broker, you will, in effect, be voting
against the adoption of the merger agreement.
What if I want to change my vote after I have mailed my signed proxy card?
You can change your vote by sending in a later dated signed proxy
card, or a written revocation to the Company's proxy solicitors, MacKenzie
Partners, Inc., who must receive it before your proxy has been voted at the
special meeting, or by attending the special meeting in person and voting.
Your attendance at the special meeting will not, by itself, revoke your proxy.
If you have instructed a broker to vote your shares, you must follow the
directions received from your broker to change those voting instructions.
Do I have appraisal rights?
Yes. If you make a written demand for appraisal of your shares prior
to the vote at the special meeting, do not vote in favor of the adoption of
the merger agreement, continue to hold your shares of record through the date
of the merger and otherwise follow the procedural requirements of the Delaware
General Corporation Law (the "DGCL"), you will be entitled to have your shares
appraised by the Delaware Court of Chancery and receive the fair value of your
shares in cash, as determined by the Court. See "Appraisal Rights of
Stockholders."
What happens if I do not vote my proxy, do not instruct my broker to vote my
shares or abstain from voting?
If you do not vote your proxy, do not instruct your broker to vote
your shares, or abstain from voting, it will have the same effect as a vote
against the adoption of the merger agreement.
17
What if the merger is not completed?
It is possible the merger will not be completed. For example, the
merger may not be completed if our stockholders do not adopt the merger
agreement. Should that occur, neither Palisade nor any third party is under
any obligation to make or consider any alternative proposals regarding the
purchase of the shares of Company Common Stock. If the merger is not
completed, the Company intends to continue with its plans to liquidate the
Company and distribute the net proceeds to stockholders.
Should I send in my stock certificates now?
No. If we complete the merger, you will receive written instructions
for exchanging your Company Common Stock certificates for your cash payment
and shares of Surviving Corporation Stock.
Who can help answer my questions?
If you have more questions about the merger, or if you would like
additional copies of this proxy statement or the proxy card, you should call
the Company's proxy solicitor, MacKenzie Partners, Inc., at 1-800-322-2885 or
(212) 929-5500.
RISK FACTORS
In addition to the other information included in this proxy statement
(including the matters addressed in "Cautionary Statement Regarding
Forward-Looking Statements"), you should carefully consider the matters
described below in determining whether to vote in favor of adopting the merger
agreement.
The Amount of Liquid Distributable Assets, which will Determine the Payment
Amount, Cannot be Determined at this Time.
Stockholders who properly exercise their Payment Right may sell back
to the Company shares of Surviving Corporation Stock received in the merger.
The Merger Agreement provides that the Payment Amount will be decreased if the
Company's liquid distributable assets do not equal at least $14 million as of
March 31, 2003, and will be further adjusted based on the liquid distributable
assets as of June 30, 2005. (See "The Merger Agreement - Conversion of Shares;
Merger Consideration").
Although the Company has substantially completed the liquidation
announced in March 2002, it is unable to determine the future value of the
liquid distributable assets. This value will depend upon the Company's success
in managing its remaining licensing assets, collecting money owed to it,
realizing projected tax refunds and benefits and managing its real estate lease.
With respect to such real estate lease, while the Company's total current cash
rent income from its subtenants exceeds its cash outlay to its landlord, one of
its subleases, which provides for a rental of $270,000 per annum, expires on May
31, 2005. The other two subleases extend to the end of the term of the
18
Company's lease (November 15, 2009) but no assurance can be given as to the
financial ability of such subtenants to meet their obligations under their
respective subleases. The commercial real estate market for offices in the
locale where the Company is situated is presently depressed and the Company
currently has approximately 9,750 square feet that it is trying to rent.
Should the Company be unable to sublease these premises and/or to replace
future vacancies, the amount of liquid distributable assets could be adversely
affected.
The Company's most significant tax attribute included in determining
liquid distributable assets is the expected tax benefit generated from the
capital loss on the sale of RIL. As of September 30, 2002, the Company's
financial statements reflected a capital loss for tax purposes on the sale of
RIL, which generated expected tax benefits of approximately $2,111,000.
However, based upon the RIL Tax Analysis, which was completed at the end of
December 2002, the Company now believes that the capital loss for tax purposes
on the sale of RIL is much higher than originally estimated. Accordingly, it
now estimates that it will realize an additional net tax benefit of between
approximately $1,500,000 and $2,900,000. No assurance can be given, however,
as to the extent to which the Company will be able to utilize this tax benefit
because it is dependent upon the applicability of various provisions of the
Code, as well as Treasury regulations promulgated thereunder, including
possible future Treasury regulations which may have retroactive effect. In
addition, the deductibility of the capital loss on the sale of RIL and the
Company's refund claim are likely to be reviewed by the Internal Revenue
Service. Moreover, even if the Company receives payment of its refund claim,
the Company may be subject to future audits by the Internal Revenue Service
which could result in the Company having to return all or a portion of the
refund received. Accordingly, the Company is unable to determine the amount
and/or the timing of realization of any tax benefit from the sale of RIL.
Subject to these factors, the Company estimates that its liquid
distributable assets will exceed the $14 million requirement as of March 31,
2003 but, given uncertainty as to the collectibility of existing assets, the
future impact of its real estate lease and the ultimate realization of the
projected tax benefits, it cannot determine the amount as of June 30, 2005.
Stockholders May Derive Less Value in the Merger than they Would Receive in a
Liquidation of the Company
Under the merger agreement, the liquid distributable assets will not
be made directly available to stockholders. If the Company were to liquidate
instead of proceeding with the Palisade transaction, the liquidation proceeds,
less any dissolution and liquidation costs, would be distributed directly to
stockholders, subject to the establishment of a contingency reserve to satisfy
claims pursuant to Section 280 of the DGCL, which may include, but are not
limited to, amounts to cover (i) actual or contingent tax liabilities during
the Internal Revenue Service statute of limitations, (ii) the Company's
commitments under a commercial real estate lease (currently in excess of $3.6
million) which expires in November 2009 and (iii) an annuity of $100,000 per
19
annum during the life of its former Chief Executive Officer (age 84) as well
as medical and health benefits for him and his spouse during their lives.
As discussed above, the Company is unable to determine the amount of
liquid distributable assets as of June 30, 2005. We are also unable to predict
the value of the merger consideration, because we cannot predict the value of
the Surviving Corporation Stock or the total value of the merger to
stockholders who exercise their Payment Right. Therefore, we cannot assure
that the merger will provide greater value to stockholders than would a
liquidation and dissolution of the Company.
Assuming the Company is able to realize the entire amount of the tax
benefit in connection with the sale of RIL and does not experience any
material losses on its real estate lease or the collection of its other
assets, the liquidation and dissolution could provide value to stockholders of
approximately $5.46 per share (without taking into account the present value
of such amount). Taking into account the merger and the Payment Right and the
same assumptions, a stockholder who elects to exercise his or her Payment
Right would receive consideration of $5.06 for each share of Refac held as of
the closing date of the merger (without taking into account the present value
of such amount). Accordingly, in such case, a liquidation and dissolution of
the Company could ultimately provide greater value to stockholders than the
merger. However, the Company is unable to predict the value or timing of
payment which would be provided to stockholders in connection with a
liquidation and dissolution (in lieu of the merger), because this value will
depend upon the Company's success in completing the liquidation of its assets,
managing its real estate lease and the realization of the expected tax benefit
associated with the sale of RIL. Under applicable law, in connection with a
liquidation and dissolution, the Company also would be required to use some of
these assets to pay the expenses of the liquidation and dissolution. In
addition, a portion of the Company's assets (including a portion of such tax
benefit) could not be distributed to stockholders until the Company is assured
that there are no claims on such assets (including any claims which may be
made by the Internal Revenue Service). Additionally, if the Company determines
to pursue a liquidation and dissolution instead of the merger, as the Company
continues to dispose of and distribute its assets to stockholders, the Common
Stock will no longer be eligible to be listed on the American Stock Exchange,
and stockholders would have less liquidity with respect to their shares.
Stockholders will Permanently Lose their Payment Right if they Sell or Otherwise
Transfer For Value their Shares of Surviving Corporation Stock Received in the
Merger Before June 30, 2005
Stockholders (or their estates, heirs or other transferees without
value) will be entitled to the Payment Right only if they (i) hold their
shares of Surviving Corporation Stock received in the merger continuously
until June 30, 2005 and (ii) tender those shares in accordance with the
instructions sent to them following the final calculation of liquid
distributable assets. If you sell or otherwise transfer for value your shares
received in the merger you will permanently lose your Payment Right for those
shares and the purchaser of your shares will not have any Payment Right for
those shares.
20
The Company Cannot Assure Stockholders that the Surviving Corporation will
have the Liquidity or Financial Ability to Purchase their Shares in Connection
with the Payment Right
While the merger agreement requires the Surviving Corporation to
maintain a fund to be used for the Payment Right, if future operations or
investments cause the Surviving Corporation to become insolvent or have
insufficient liquid assets, it may not be able to fulfill its obligation
regarding the Payment Right.
The Company Cannot Assure that Surviving Corporation Stock Received in the
Merger will have any Market Value, because Palisade has not Determined its
Specific Plans for the Surviving Corporation
The value of the Surviving Corporation Stock depends largely on the
activities of the Company following the merger, which will be controlled by
Palisade, and the success of the Company's efforts to liquidate its assets,
manage its real estate lease and realize the expected tax attributes
associated with the sale of RIL. Palisade has informed the Company that it
intends to use the Company as a vehicle for making acquisitions following the
merger, but is not under any legal obligation to do so. Furthermore, no
specific plans regarding the nature of these acquisitions have been developed.
The Company cannot assure that Palisade will proceed to use the Company as a
vehicle for making acquisitions following the merger or whether any such
acquisition will result in increased value to the Company's stockholders.
Because Palisade's plans for the Company are undetermined and the remaining
assets of the Company will be liquidated, stockholders who choose not to
exercise their Payment Right and instead retain their shares of Surviving
Corporation Stock will face the risk that such shares will have little or no
value.
The Price of Surviving Corporation Stock is Subject to Change due to Market
Fluctuations
In general, the market price of the Company Common Stock has shown
sensitivity to many factors. These factors include overall economic conditions
and consumer confidence, general market trends, small market capitalization,
legislative or regulatory actions, pricing trends, competition, earnings and
acquisition activity. The Company cannot assure the level or stability of the
price of the Surviving Corporation Stock at any time or the impact of the
foregoing or any other factors on such price.
Stockholders are Likely to have Decreased Liquidity with respect to the
Surviving Corporation Stock Received in the Merger
The merger consideration paid to stockholders will include 0.2
shares of Surviving Corporation Stock for each share of Company Common
Stock held at the effective time of the merger. Following the merger,
Palisade will own approximately 80% of the Surviving Corporation Stock and
the current stockholders of the Company will own only about 20%. Since
fewer shares of Surviving Corporation Stock will be in public hands after
the merger, and stockholders may have an incentive to hold those
21
shares in order to take advantage of the Payment Right, the trading volume of
the Surviving Corporation Stock is likely to be substantially less than the
current trading volume of the Company Common Stock. Accordingly, stockholders
who choose to sell their shares are likely to have decreased liquidity with
respect to their shares.
Following the Merger, Stockholders may Lose Liquidity because the Surviving
Corporation Stock may not be Listed on the American Stock Exchange
The Company Common Stock is currently listed on the American Stock
Exchange. The American Stock Exchange is currently reviewing whether the
Surviving Corporation Stock will continue to meet its listing requirements.
The Company and Palisade intend to use their best efforts to cause the
continued listing of the Surviving Corporation Stock. However, the listing is
beyond the control of the Company and Palisade, and neither the Company nor
Palisade can assure that the Surviving Corporation Stock will continue to be
listed before or after the merger. If the Surviving Corporation Stock is
de-listed from the American Stock Exchange, stockholders who desire to sell
their shares (other than pursuant to the Payment Right) may have decreased
liquidity with respect to their shares.
Failure to Complete the Merger Could Have a Negative Impact on the
Market Price of the Company Common Stock
If the merger is not completed, the market price of the Company
Common Stock may be affected negatively by the following:
o The price of Company Common Stock may decline to the extent that
the current market price reflects a market assumption that the
merger will be completed.
o The Company may be required to pay Palisade a termination fee
of up to $500,000.
22
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This proxy statement includes certain statements of the Company that
may constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and which are made pursuant to the Private
Securities Litigation Reform Act of 1995. These forward-looking statements and
other information relating to the Company are based upon the beliefs of
management and assumptions made by and information currently available to the
Company. Forward-looking statements include statements concerning plans,
objectives, goals, strategies, future events, or performance, as well as
underlying assumptions and statements that are other than statements of
historical fact, including statements regarding completion of the proposed
merger. When used in this document, the words "expects," "anticipates,"
"estimates," "plans," "intends," "projects," "predicts," "believes," "may" or
"should," and similar expressions, are intended to identify forward-looking
statements. These statements reflect the current view of the Company's
management with respect to future events, including the completion of the
proposed merger, and are subject to numerous risks, uncertainties, and
assumptions. Many factors could cause the actual results, performance or
achievements of the Company to be materially different from any future
results, performance, or achievements that may be expressed or implied by such
forward-looking statements, including, among other things:
o the failure of the Company's stockholders to adopt the merger
agreement,
o a material adverse change in the collectibility of amounts
due and to become due under licensing related contracts,
accounts receivable, notes receivable and contract rights
receivable,
o the failure of the Company to find a subtenant for the balance
of its leased space and/or the failure of its existing three
subtenants to meet their obligations to the Company under their
respective subleases,
o failure to realize expected tax benefits from the sale of RIL, and
o the failure of the Company to satisfy conditions to the merger.
Other factors and assumptions not identified above could also cause
the actual results to differ materially from those set forth in the
forward-looking statements. Although the Company believes these assumptions
are reasonable, no assurance can be given that they will prove correct.
Accordingly, you should not rely upon forward-looking statements as a
prediction of actual results. Further, the Company undertakes no obligation to
update forward-looking statements after the date they are made or to conform
the statements to actual results or changes in the Company's expectations.
The forward-looking statements should be read in conjunction with
our Annual Report on Form 10-K for the fiscal year ended December 31, 2001
and our subsequent
23
Quarterly Reports on Form 10-Q. Our Form 10-K and our Forms 10-Q
are on file with the SEC, and copies are available without charge upon written
request to the proxy solicitor at the address listed under "Where You Can Find
More Information."
All information contained in this proxy statement with respect to
Palisade and Merger Sub has been supplied or confirmed by Palisade.
- ------------------------------------------------------------------------------
THE PARTIES
Refac
For the past 50 years, the Company has been recognized for its
intellectual property licensing activities. In recent years, it has also
engaged in product development and graphic design and communications and has
invested these creative resources, together with its licensing skills, in
certain product development ventures. On March 22, 2002, the Company announced
plans to reposition itself for sale or liquidation. Since that date, the
Company has disposed of all of its operating segments with the exception of
its licensing business and it has limited the operations of that segment to
managing certain existing license agreements and related contracts and its
real estate lease. Today, the Company's assets principally consist of cash,
government securities, accounts receivable, notes receivable, contract rights
receivable, a claim for a tax refund, agreements related to its licensing
business and a real estate lease.
The Company was incorporated under the laws of the State of Delaware
in 1952 and became a public company in 1968. The Company's executive offices
are located at The Hudson River Pier - Suite 110, 115 River Road, Edgewater,
New Jersey 07020 and its telephone number is (201) 943-4400.
Palisade Concentrated Equity Partnership, L.P.
Palisade is a private equity partnership which specializes in
investments of $5 million or more in equity and equity-related securities in
special situations, including, among others, large ownership positions in
public companies, as well as going-private transactions. Palisade was formed
in 1999 among Palisade Concentrated Holdings LLC, a separate limited liability
company whose members are also principals of Palisade Capital, as general
partner (the "General Partner"), and several large U.S. corporate pension
funds as limited partners and made its first investment in early 2000. The
General Partner is financially capable of fulfilling its obligations under the
Amended and Restated Agreement of Limited Partnership of Palisade Concentrated
Equity Partnership, L.P., dated April 1, 1999, as amended thereafter. As a
limited partnership, Palisade is structured with an initial ten-year life,
with three additional one-year extensions upon approval of the limited
partners.
24
Palisade has committed capital from its limited partners totaling
$204 million of which Palisade has invested approximately $82 million.
Palisade makes controlling or minority investments in common stock, preferred
stock and debt of publicly-traded and private companies; the level of
Palisade's participation varies from investment to investment with Palisade
holding equity interests ranging from less than 5% to more than 80%. Where
Palisade's level of ownership is relatively low, Palisade either has no board
representation or board observer status. Where Palisade's ownership is more
significant, Palisade may have one or more seats on the board of directors,
including the possibility of designating a majority of a board of directors.
Whether Palisade's ownership interest is relatively low or more significant,
Palisade has not taken an active role in operating or financial management of
any of the companies in which it has invested.
In addition to its investment in Refac, Palisade has investments in
four other companies and as of January 10, 2003 continues to hold positions in
all five. In addition to Refac, Palisade holds investments in:
Privately-held Companies:
o Genmar -- the world's largest manufacturer of motorized
recreational boats. Palisade owns 4% of the outstanding
common stock of Genmar, through a purchase of convertible
preferred stock which was later converted to common stock,
and holds observer rights on the board of directors.
o MicroWarehouse, Inc. -- a direct marketer of personal
computers, computer software, accessories, peripherals and
networking products. Palisade owns 11.5% of the non-voting,
non-convertible preferred stock and 8% of the common stock of
MicroWarehouse, and holds observer rights on the board of
directors.
Publicly-held Companies:
o Kroll Inc. -- a leading global risk management company
specializing in investigative, intelligence and security
services, employee screening, business turnaround consulting
and information security consulting. Palisade owns $20
million principal amount of non-voting 6% Senior Secured
Convertible Notes of Kroll that are currently convertible
into common stock, and would constitute 5% of Kroll's
outstanding shares if converted. Palisade held observer
rights on the board of directors from November 2001 until
September 2002, at which point it waived those rights. The
Notes are convertible at $10.80 per share, and Kroll's
closing price on Nasdaq as of January 10, 2003 was $20.72.
o OptiCare Health Systems, Inc. -- a leading integrated eye
care services company, providing managed care and
professional eye care services, and business services to eye
care practices. Through its ownership of common stock,
convertible preferred stock and warrants, Palisade owns an 84%
25
equity interest in OptiCare. Palisade also owns $15
million principal amount of subordinated non-convertible
notes, and has two seats on OptiCare's board of directors.
The average price of the OptiCare shares and share
equivalents held by Palisade is $0.27 per share, and
OptiCare's closing price on the American Stock Exchange as of
January 10, 2003 was $0.35.
In all of its investment decisions, Palisade uses as its primary
criteria the potential for significant increases in value over the long-term
and an identifiable exit strategy. Given the wide range of possible types of
investment, exit strategies may also vary. Palisade may choose to exit through
registered offerings, sales under Rule 144, private offerings or sale of the
company. Kroll, Inc., OptiCare Health Systems, Inc. and Refac were each
already public companies at the time of Palisade's investment and Genmar and
MicroWarehouse, Inc. were private companies at the time of Palisade's
investment and continue to be private at this time.
Palisade values all of its held investments at cost on its financial
statements. Investments in public companies fluctuate with market prices, and
current valuations for these companies are noted above.
Palisade is a Delaware partnership, its offices are located at One
Bridge Plaza, Fort Lee, New Jersey 07024 and its telephone number is (201)
585-7733.
Palisade Capital Management, L.L.C.
Palisade Capital acts as investment manager to Palisade and to two
other private equity partnerships, Palisade Private Partnership, L.P. (formed
in 1997) and Palisade Private Partnership II, L.P. (formed in 2000), which
both focus on smaller private equity investments. Palisade Capital is a
registered investment adviser based in Fort Lee, New Jersey with over $2
billion of assets under management, specializing in small-capitalization
equities and convertible securities as well as private equity through the
above partnerships. Palisade Capital's clients include several major U.S.
corporate pension funds, as well as smaller institutions and individuals.
In Palisade and each of the two other partnerships managed by
Palisade Capital, all investment decisions are made by the principals of
Palisade Capital, who include:
Martin L. Berman, Chairman and Chief Executive Officer
Mr. Berman joined Burnham and Company in 1970 and was later named a
Managing Director. In 1981, he founded its Broad Street Investment Management
division. From 1990 to 1995, he was a Senior Managing Director at Smith
Barney. Mr. Berman joined Palisade Capital upon its formation in 1995.
Jack Feiler, President and Chief Investment Officer
Mr. Feiler joined Burnham and Company as an Account Executive and
was promoted to Senior Executive Vice President of its Broad Street
Investment Management
26
division in 1981. In 1990, he joined Smith Barney as Senior Vice
President of Investments. Mr. Feiler joined Palisade Capital upon its
formation in 1995.
Steven E. Berman, Chief Operating Officer
Mr. Berman joined Drexel Burnham Lambert, Inc. in 1986 as Executive
Vice President of its Broad Street Investment Management division, after years
of experience as a practicing attorney and CEO for a manufacturing company.
Mr. Berman joined Smith Barney in 1990 as Senior Vice President of Investments
and Palisade Capital upon its formation in 1995.
Richard Meisenberg, Managing Director and Co-Investment Officer
Mr. Meisenberg was First Vice President at Drexel Burnham Lambert,
Inc. from 1985 to 1989. Mr. Meisenberg joined Smith Barney as Senior Vice
President of Investments in 1989 and Palisade Capital upon its formation in
1995.
Mark S. Hoffman, Managing Director
Mr. Hoffman began his career at Lehman Brothers Kuhn Loeb, Inc. in
1983, where he worked as an analyst. In 1987, Mr. Hoffman joined Drexel
Burnham Lambert, Inc. and was named Vice President. In 1990, he joined
Commonwealth Associates and directed its corporate finance activities until
1992. From 1992 to 1995, he was Chief Financial Officer of a medical imaging
equipment manufacturer. Mr. Hoffman joined Palisade Capital upon its formation
in 1995.
Palisade Merger Corp.
Merger Sub is wholly owned by Palisade and was formed solely for the
purpose of merging into the Company. Merger Sub has not engaged in any
business activity other than in connection with the merger and the related
transactions. Merger Sub is a Delaware corporation and was incorporated in
August 2002. The principal executive offices of Merger Sub are located at 1209
Orange Street, Wilmington, Delaware 19801, its mailing address is c/o Palisade
Capital, One Bridge Plaza, Fort Lee, New Jersey 07024 and its telephone number
is (201) 585-7733.
SPECIAL MEETING OF THE COMPANY'S STOCKHOLDERS
Date, Time and Place
This proxy statement is being furnished to the Company's stockholders
as part of the solicitation of proxies by the Board of Directors for use at a
special meeting to be held on Friday, February 28, 2003 at 10:00 a.m., New
York City time, at the Board of Governors' Room of the American Stock
Exchange, 86 Trinity Place, New York, New York.
27
Purpose of the Special Meeting
The purpose of the special meeting is for the Company's stockholders
to consider and vote upon a proposal to adopt the Agreement and Plan of
Merger, dated as of August 19, 2002, by and among Palisade, Merger Sub and the
Company, and the merger pursuant thereto. A copy of the merger agreement is
attached to this proxy statement as Annex A. This proxy statement and the
enclosed form of proxy are first being mailed to the Company's stockholders on
or about January __, 2003.
Recommendation of the Board of Directors
The Board of Directors has unanimously adopted the merger agreement
and recommends that you vote "FOR" the adoption of the merger agreement. See
"The Merger - Reasons for the Merger; Recommendations of the Board of
Directors."
Record Date; Quorum; Outstanding Shares and Voting
Only holders of record of shares of Company Common Stock at the close
of business on January 10, 2003 (the "Record Date"), are entitled to receive
notice of, and to vote at, the special meeting. Each share will be entitled to
one vote. On the Record Date, there were 3,798,011 shares of Company Common
Stock outstanding.
In order to carry on the business of the meeting, we must have a
"quorum," or a majority of the outstanding shares of Company Common Stock
represented at the meeting. The person with the right to vote the shares must
be present at the meeting or represented by proxy. Shares owned by the Company
(treasury shares) are not voted and do not count for this purpose. Once a
share is represented at the special meeting, it will be counted for the
purpose of determining a quorum at the special meeting. If we do not have a
quorum at the meeting, stockholders entitled to vote have the power to adjourn
the meeting without notice, other than an announcement at the meeting, until a
quorum is represented; however, if a new record date is set for an adjourned
meeting, then a new quorum will have to be established.
Voting Rights; Votes Required
Completion of the merger requires the adoption of the merger
agreement by the affirmative vote of the holders of a majority of the
outstanding shares of Company Common Stock, or 1,899,006 shares. Each share
of Company Common Stock outstanding on the Record Date entitles the holder
to one vote at the special meeting. You may vote by signing, dating, and
completing the enclosed proxy card and returning it in the enclosed
self-addressed envelope by mail or by attending the meeting and voting in
person. We recommend you vote by proxy even if you plan to attend the
meeting; you can always change your vote at the meeting if you desire. As
of January 10, 2003, the directors and executive officers of the Company
beneficially owned, in the aggregate, 139,841 shares of Company Common
Stock entitled to be voted at the special meeting, or approximately 3.68%
of the outstanding shares of the Company on that date. The directors and
executive officers of the Company have informed the Company that they
28
intend to vote all of their shares of Company Common Stock "FOR" the
adoption of the merger agreement.
Voting and Revocation of Proxies
All properly executed proxies that are received prior to the special
meeting and not revoked will be voted in the manner specified in the proxy. If
you properly execute and return a proxy and do not specify how the proxy is to
be voted, the shares represented by your proxy will be voted "FOR" the
adoption of the merger proposal.
You may receive more than one proxy or voting card depending on how
you hold your shares. Shares registered in your name are covered by one card.
If you also hold shares through a broker or someone else, you may also get
material from them asking how you want to vote. Please respond to all of these
requests.
You may revoke your proxy at any time before the special meeting. A
proxy may be revoked prior to the vote at the special meeting by:
o submitting a written revocation to the Company's proxy
solicitors, MacKenzie Partners, Inc., at the address set forth
at the end of this proxy statement, dated after the date of the
proxy that is being revoked,
o submitting a new proxy dated after the date of the proxy that
is being revoked, or
o voting in person at the special meeting.
Please note that simply attending the special meeting without voting
will not revoke your proxy.
If you have instructed a broker to vote your shares, you must follow
the directions received from your broker to change those voting instructions.
If you do not give voting instructions to your broker, you will, in effect, be
voting against the adoption of the merger agreement.
If you do not vote your proxy, do not instruct your broker to vote
your shares, or abstain from voting, it will have the same effect as a vote
against the adoption of the merger agreement.
The Board of Directors is not currently aware of any other business
to be brought before the special meeting. If, however, other matters are
properly brought before the special meeting or there is any adjournment or
postponement of the special meeting, the persons appointed as proxies will
have discretionary authority to vote the shares represented by duly executed
proxies in accordance with their discretion and judgment.
29
Solicitation of Proxies and Expenses
The cost of preparing, assembling and mailing this proxy statement,
the notice of special meeting of stockholders and the enclosed proxy will be
borne by the Company.
To assist in the solicitation of proxies, the Company has retained
MacKenzie Partners, Inc. ("MacKenzie"), for a fee of $4,500 plus additional
charges for telephone calls and the reimbursement of reasonable out-of-pocket
expenses. The Company and MacKenzie will also request banks, brokers and other
intermediaries holding shares of Company Common Stock beneficially owned by
others to send this document to, and obtain proxies from, the beneficial
owners and will reimburse holders for their reasonable expenses in so doing.
Solicitation of proxies by mail may be supplemented by telephone, telegram and
other electronic means, advertisements and personal solicitation by MacKenzie
and the directors, officers and employees of the Company. No additional
compensation will be paid to directors, officers or employees for such
solicitation. The extent to which these proxy soliciting efforts will be
necessary depends entirely upon how promptly proxies are submitted. The
Company has also agreed to indemnify MacKenzie against certain liabilities
which may arise in connection with their solicitation of proxies.
Independent Auditor
A representative of the Company's independent auditor, Grant Thornton
LLP, will be present at the special meeting to answer questions by
stockholders concerning the Palisade transaction and will have the opportunity
to make a statement, if such representative desires to do so.
Other Matters
Although it is not expected, the special meeting may be adjourned or
postponed for the purpose of soliciting additional proxies or for other
reasons as determined by the Board of Directors. Any adjournment or
postponement may be made without notice, including by an announcement made at
the special meeting, by approval of the holders of a majority of the voting
power represented by the outstanding shares of Company Common Stock present in
person or represented by proxy at the special meeting. Any signed proxies
received by the Company will be voted in favor of an adjournment or
postponement in these circumstances unless a written note on the proxy by the
stockholder directs otherwise. Any adjournment or postponement of the special
meeting for the purpose of soliciting additional proxies or for other reasons
will allow the Company's stockholders who have already sent in their proxies
to revoke them at any time prior to their use.
PAYMENT OF MERGER CONSIDERATION
The merger will become effective at the date and time when a properly
executed certificate of merger is filed with the Secretary of State of the
State of Delaware. We
30
expect the filing of the certificate of merger and the effective time of
the merger to occur as soon as practicable after the special meeting,
subject to adoption of the merger agreement by our stockholders and the
satisfaction or waiver of the other conditions to completing the
transactions provided in the merger agreement.
We currently expect to complete the merger promptly following the
special meeting, although there can be no assurance of the date by which the
merger will be completed. See "The Merger Agreement - Conditions to the
Merger." Detailed instructions with respect to the surrender of your stock
certificates, together with a transmittal form, will be forwarded to you
promptly following the effective time of the merger by the exchange agent.
YOU SHOULD NOT SEND IN YOUR STOCK CERTIFICATES UNTIL YOU RECEIVE A
TRANSMITTAL FORM. The exchange agent will send transmittal forms and other
related documents to stockholders shortly after the merger is completed. You
should only send your stock certificates pursuant to the instructions that
will be set forth in the transmittal form. Along with the transmittal form,
you will receive an address form, so that the Company can keep track of your
address in order to mail you the documentation in connection with the Payment
Amount. The exchange agent will send the merger consideration to you as
promptly as practicable following receipt of your certificates and other
required documents. No interest will be paid on the merger consideration or
the cash that will be paid in lieu of fractional shares.
We strongly recommend that stock certificates and transmittal forms
be transmitted only by registered U.S. mail, return receipt requested,
appropriately insured for the risk of loss. Title to the certificates will
pass only upon delivery of the certificates to the exchange agent. Prior to
receiving payment for their shares of Company Common Stock, stockholders whose
certificates are lost, wrongfully taken or destroyed will be required to
supply an affidavit or other evidence that the certificate has been lost,
wrongfully taken or destroyed, evidence that the person is the beneficial
owner of the certificate claimed to be lost, wrongfully taken or destroyed and
reasonable indemnity against the claims of any third party.
In addition to the merger consideration you will be entitled to
receive following the effective time of the merger, you will have the right to
sell your shares of Surviving Corporation Stock received in the merger to the
Company at a price to be determined based upon the Company's liquid
distributable assets as of March 31, 2003 and June 30, 2005. This right to
sell the shares will be limited to stockholders (or their estates, heirs or
other transferees without value) who (i) hold their shares of Surviving
Corporation Stock received in the merger continuously until June 30, 2005 and
(ii) tender those shares in accordance with the instructions sent to them
following the final calculation of liquid distributable assets. If you are
eligible to sell your shares of Surviving Corporation Stock to the Company,
the Company will send you instructions on how to do so after the calculation
of the Company's liquid distributable assets as of June 30, 2005.
31
THE MERGER
Background of the Merger
The Company's Business Strategy
Since its formation in 1952, the Company has been recognized for its
intellectual property licensing activities. The Company became a public
company in 1968 and its shares were listed on the American Stock Exchange in
1994.
At December 31, 1997, the Company held 700,000 shares of KeyCorp
(NYSE: KEY) common stock with a market value of $24,784,375. In order to
minimize the Company's exposure to a decline in the value of KeyCorp, the
Company entered into certain derivative contracts with Union Bank of
Switzerland covering 600,000 of these shares. The contracts provided for both
put options and call options. As a result of this planned liquidation, 200,000
shares were sold pursuant to these derivative contracts in each of the
Company's fiscal years ended December 31, 1998, 1999 and 2000. Of the
remaining 100,000 shares not covered by the derivative contracts, 20,000 were
sold in 1998, 5,000 were sold in 1999 and 75,000 were sold in 2001.
The Company had gains and dividends before taxes from the sale of
licensing-related securities during the six year period ending December 31,
2001 as follows:
Gains and Dividends on
Licensing-Related
Year Securities before Taxes
---- -----------------------
1996 $5,402,000
1997 7,564,000
1998 7,013,000
1999 6,010,000
2000 5,054,000
2001 1,828,000
In 1997, we recognized that the income from licensing-related
securities and our other matured licensing programs would assure
profitability for a limited period of time. We were concerned about the
increasing costs and the associated litigation risks in pursuing patent
enforcement licensing projects and did not have the staffing or in-house
expertise to attract or handle emerging technologies. Accordingly, we
broadened our investment interest to include new product development
ventures involving well-known brands. We made strategic acquisitions of
creative firms specializing in industrial design
32
(Human Factors Industrial Design, Inc. ("HFID") in November 1997) and
graphic design and communications (David Morris Creative in November 1999).
We also formed new businesses, including Refac Licensing, Inc. ("RL"), a
trademark licensing agency, in January 1998 and Refac Consumer Products,
Inc. ("RCP"), a manufacturer and marketer of consumer electronics products,
in September 1999.
While the planned liquidation of our licensing-related securities
enabled us to realize income during the past five years, our investments in
creative services, trademark licensing and MTV-branded consumer electronics
products proved to be unprofitable. By the end of June 2001, our liquidation
of licensing-related securities was completed and we could no longer count on
this source of income to subsidize operations in other business segments.
From March 2001 through March 2002, the market value of Company
Common Stock ranged from $1.88 to $3.95.
From time to time during 2001, the Board of Directors expressed
concern about the operating losses in, and the capital requirements of, its
consumer products and creative services business segments, but determined not
to make any decision regarding strategic alternatives pending the Company's
2001 financial results. At its November 12, 2001 meeting, the Board of
Directors scheduled a meeting for January 18, 2002 to review the results of
its RCP subsidiary and the retail sell-through of its consumer electronics
products during the fourth quarter of 2001.
Determination to Liquidate
At the January 18, 2002 meeting, the Board of Directors also reviewed
the Company's preliminary earnings for the fourth quarter of 2001 and,
specifically, the results and prospects of its consumer electronics and
creative services businesses. The Board of Directors determined that, in light
of such results, the prospects for 2002 and the capital that would be required
to continue to operate the current businesses, the Company should consider
pursuing other strategic alternatives. At the meeting, the Board of Directors
also directed the Compensation Committee of the Board of Directors (the
"Compensation Committee") to develop an appropriate incentive arrangement for
the Company's officers in connection with any such strategic alternative.
On March 21, 2002, the Board of Directors met to review the
Company's earnings for the year 2001 and to discuss strategic alternatives.
At the meeting, the Board of Directors considered the Company's financial
results, the market performance of the Company Common Stock and various
other factors, including, but not limited to: the business segments in
which it operates, its market capitalization, the current economic climate,
its level of operating costs and expenses, the substantial expenditures
required to remain competitive, the increasingly competitive nature of the
markets in which the Company operates and the lack of assurance that it
would be able to achieve or sustain revenue growth and profitability or
positive cash flow. Upon review of these factors, the Board of Directors
concluded that the Company's stockholders would likely derive more
33
value if the Company were to be sold or liquidated than they might
if the Company were to continue to operate in its current business segments.
On March 21, 2002, the Company amended its employment agreement with
Robert L. Tuchman, Chairman and Chief Executive Officer, and entered into an
employment agreement with Raymond A. Cardonne, Vice President and Chief
Financial Officer, to provide such executives with additional incentives to
seek buyers for the Company's businesses and assets on terms that would
maximize stockholder value. Among other things, the agreements, as amended,
provide that Messrs. Tuchman and Cardonne would be entitled to 16% and 4%,
respectively, of the excess assets available for distribution to stockholders
over and above $10,000,000. (See "The Merger - Interests of Certain Persons in
the Merger" below.)
On March 22, 2002, the Company issued a press release announcing that
it was repositioning itself for sale or liquidation. At the time of the
announcement, the Company estimated that it could take up to two years to
complete the sale or liquidation. The Company indicated that it viewed all its
business segments as viable and intended to continue to operate all of them
pending the sale.
From and after April 2002, the Board of Directors was kept
continuously informed of management's efforts to consummate the sale or
liquidation of the Company.
Contacts with Palisade
From April 1997 to April 1999, Palisade Capital acted as a financial
advisor to the Company under a written agreement which provided for a monthly
retainer of $5,000 and the sale, for $103,320, of five-year warrants to
purchase 200,000 shares of Company Common Stock at $8.25 per share. The
warrants expired on April 7, 2002 without being exercised. In May 1999, after
the termination of the financial advisor agreement, the Company invited
Palisade Capital to visit and tour its new corporate headquarters and creative
studios and also jointly considered an investment in an early stage technology
company.
During and after the Company's retention of Palisade Capital as its
financial advisor, Mr. Tuchman, the Company's CEO, asked Martin L. Berman, the
Chairman of Palisade Capital, for recommendations as to qualified candidates
that the Company might consider for membership on its Board of Directors. In
February 2000, Mr. Berman helped arrange a meeting between Mr. Tuchman and
Clark A. Johnson at the Company's offices. Mr. Johnson was added to the
Company slate of nominees for its May 2000 Annual Meeting of Stockholders and
has served as a director since that date. Mr. Johnson holds a 5% preferred
non-voting equity interest in Palisade Capital.
After the November 2001 meeting of the Board of Directors, Mr.
Tuchman called Mr. Berman to generally discuss the Company's position and
strategic alternatives. Subsequently, Palisade Capital introduced the
Company to an opportunity to invest in a small private company. At the
January 18, 2002 Board of Directors' meeting, Mr. Berman and Richard
Meisenberg, Managing Director of Palisade Capital, were given the
34
opportunity to address the Board of Directors and to explain the
merits of this investment opportunity. The investment was considered and
declined by the Board of Directors.
At the request of Palisade Capital, the parties met on April 9, 2002.
At this meeting, the Company was informed that, subsequent to the Company's
March 22, 2002 announcement, Palisade Capital and its affiliate, Palisade, had
acquired a stock position in the Company and that they would soon be filing a
Schedule 13D. The Company was informed that Palisade and Palisade Capital
viewed the Company Common Stock as an attractive investment and that such
companies were considering the possibility of acquiring a controlling interest
in the Company.
On April 12, 2002, Palisade Capital, an affiliate of Palisade, filed
a Schedule 13D announcing that it and its affiliates had acquired 217,800
shares of Company Common Stock, or 5.74% of the then outstanding shares. The
Schedule 13D indicated that such companies were exploring the possibility of
acquiring a controlling interest in the Company. Between April 12 and April
29, Palisade acquired an additional 102,600 shares, for a total of 320,400, or
8.45%, of the shares by April 29.
On April 26, 2002, following approval by the Board of Directors, the
Company entered into a stockholder rights agreement and issued stockholder
rights to protect stockholders from coercive or otherwise unfair takeover
tactics.
During the period from April 9, 2002 until June 7, 2002, the Company
and Palisade had various telephone communications and one meeting to generally
discuss a possible transaction. During this period, the Company continued to
explore its other strategic alternatives.
On June 5, 2002, the Company and Palisade Capital entered into a
confidentiality agreement in connection with their negotiations. During the
same week, Palisade began a comprehensive due diligence review of the Company
and its subsidiaries, which continued until the execution of the merger
agreement.
On June 7, 2002, the Board of Directors formed the Special Committee,
comprised of Neil Austrian and Ira T. Wender, to manage the sale or
liquidation transaction process, negotiate with third parties, evaluate
potential transactions and make recommendations to the Board of Directors.
During the period between June 5, 2002 and August 19, 2002, the
Company, Palisade and their advisors had various meetings and conference calls
to discuss the terms of a potential transaction. During these discussions,
Palisade indicated that it intended to use the Company as a vehicle for
acquisition and the Company's officers expressed a desire to allow
stockholders to participate in the liquidation of the Company's assets. On
July 10, 2002, the parties agreed to a non-binding term-sheet setting forth
the basic terms of the proposed transaction.
On July 24, 2002, the Company retained Fleet Securities to render an
opinion regarding the fairness, from a financial point of view, of the
consideration proposed by Palisade to be paid to stockholders of the Company
(other than Palisade and its affiliates).
35
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Between July 10 and August 19, the parties and their advisors
negotiated definitive documentation for the transaction.
A meeting of the Special Committee was held on August 19, 2002, to
consider the terms of Palisade's proposal, including the terms contained in
the proposed merger agreement. On such date, Fleet Securities reviewed with
the Special Committee and the Board of Directors its financial analysis of the
merger consideration and rendered an oral opinion (which opinion was confirmed
by delivery of a written opinion dated August 19, 2002) to the effect that, as
of the date of the opinion and based upon, and subject to certain matters
stated in such opinion, the consideration to be received in the merger by
holders of shares of Company Common Stock (other than Palisade, Merger Sub,
their affiliates and any holders who exercise appraisal rights) was fair, from
a financial point of view, to such holders. The Special Committee then
unanimously adopted, and determined to recommend to the Board of Directors
that the Board of Directors adopt, Palisade's proposal, including the merger
agreement.
The full Board of Directors met immediately following the Special
Committee meeting. Based upon its review of the Palisade proposal and the
merger agreement, the Special Committee's recommendation and Fleet Securities'
presentation and opinion, the Board of Directors unanimously adopted
Palisade's proposal and determined to recommend that the Company's
stockholders adopt the merger agreement at the special meeting.
Following the recommendation and approval of its Compensation
Committee, the Board of Directors also approved certain amendments to the
employment contracts of Messrs. Tuchman and Cardonne required in connection
with the Palisade transaction. Such amendments made certain technical
corrections and also restructured the timing of the payments to Mr. Tuchman.
(See "The Merger - Interests of Certain Persons in the Merger" below)
The Company, Palisade and Merger Sub then executed the merger
agreement, and Messrs. Cardonne and Tuchman and the Company executed the
amendments to their employment agreements.
RIL Tax Analysis; Merger Agreement Amendment
In December 2002, the Company completed the RIL Tax Analysis. As a
result, the Company estimates that it will realize an additional net tax
benefit of between $1,500,000 and $2,900,000. At a meeting of the Board of
Directors on January 15, 2003, the Board of Directors determined that the
Company's liquid distributable assets were likely to exceed $18 million, the
maximum amount which would be included in the calculation of the Payment
Amount as it was calculated in the merger agreement as executed on August 19,
2002. Accordingly, the Board of Directors determined that it would be
desirable for stockholders to participate in such excess. After discussions
with Palisade, the parties determined that the merger agreement should be
amended to provide that the aggregate Payment Amount should be increased by an
amount equal to 60% of
36
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any liquid distributable assets in excess of $18 million (the "Payment Amount
Amendment").
On January 18, 2003, the Company retained Fleet Securities to render
an opinion regarding the fairness, from a financial point of view, of the
consideration proposed by Palisade to be paid to stockholders of the Company
(other than Palisade and its affiliates), pursuant to the merger agreement, as
amended by the Payment Amount Amendment.
The Special Committee held a meeting on January 23, 2003, at which
Fleet Securities reviewed its financial analysis of the merger consideration
to be paid pursuant to the merger agreement, as amended by the Payment Amount
Amendment, and rendered an oral opinion (which opinion was confirmed by
delivery of a written opinion dated January 23, 2003) to the effect that, as
of the date of the opinion and based upon, and subject to certain matters
stated in such opinion, the consideration to be received in the merger by
holders of shares of Company Common Stock (other than Palisade, Merger Sub,
their affiliates and any holders who exercise appraisal rights) was fair, from
a financial point of view, to such holders. The Special Committee then
unanimously adopted, and determined to recommend to the Board of Directors
that the Board of Directors adopt, the Payment Amount Amendment. The Payment
Amount Amendment was then adopted by the full Board of Directors and executed
by the parties. On January 23, 2003, the Compensation Committee and the full
Board of Directors also approved certain changes to the Company's 1998 Stock
Incentive Plan and the employment agreements with Robert Tuchman and Raymond
Cardonne.
Continued Liquidation Efforts
From March 21, 2002 to the present, the Company's management has
continued with its liquidation efforts. The Company has disposed of all of its
operating segments with the exception of its licensing business and it has
limited the operations of that segment to managing certain existing license
agreements and related contracts. Today, the Company's assets principally
consist of cash, government securities, accounts receivable, notes receivable,
contract rights receivable, a claim for a tax refund, agreements related to
its licensing business and its real estate lease, all of which are held by the
Company. It has no subsidiaries. Specifically, it has accomplished the
following:
o On August 5, 2002, RIL sold its graphic design business to a
company formed by its former employee, David Annunziato, for
$272,000, settled our remaining obligations of $604,831 under
his employment agreement for $96,097 and sublet such company
3,492 square feet of its office space with a term commencing
November 1, 2002 and terminating November 15, 2009, the date
that the Company's lease for its premises terminates.
o On August 19, 2002, RIL sold its Gough licensing property and
accounts receivable to Gough Holdings (Engineering), Ltd. for
$450,000, payable in five semi-annual installments, without
interest, commencing September 30, 2002.
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o On August 19, 2002, RIL sold its Heli-Coil and Dodge licensing
rights, related sublicense agreements and payments due
thereunder after June 30, 2002 to Emhart LLC for $4,000,000.
o On September 20, 2002, RIL sold its product design business to
Product Genesis, LLC for a variable purchase price based upon
2.5% of net revenues with a maximum of $300,000 and sublet such
company 8,769 square feet of its office space with a term
commencing November 1, 2002 and terminating November 15, 2009,
the date that the Company's lease for its premises terminates.
On November 25, 2002, the Company and Product Genesis amended
such leasehold to increase the leased premises by 805 square
feet.
o On September 20, 2002, RIL amended its agreement with OXO
International ("OXO"), a division of World Kitchen, Inc. This
amendment, which was approved by the court overseeing OXO's
bankruptcy, provides that the Company will receive $550,000 from
OXO of which $10,000 is for past due royalties; $180,000 for
royalties for the six month period ending December 31, 2002 and
$360,000 for royalties for the year ending December 31, 2003.
The Company is required to perform certain services, the
remainder of which the acquirer of its product design business
has agreed to perform.
o On September 30, 2002, the Company completed the transfer of the
assets and liabilities of its subsidiary, RIL, to Refac,
excluding the capital stock of RCP (which manufactures a line of
consumer electronics products) and certain trademarks, patents
and a patent application relating to RCP's business. After such
transfer, Refac sold RIL to RCP Products, LLC, a limited
liability company established by a former employee, for $50,000
plus a variable purchase price based upon 2 1/2% of the revenues
received in excess of $1 million from the sale of its consumer
electronics products during the eight year period commencing
January 1, 2003, up to a maximum of $150,000 in any given year
and a cumulative total of $575,000.
Palisade has been kept aware of all of these transactions, and, where
required by the merger agreement, Palisade has approved the transactions which
occurred following the signing of the merger agreement.
Purposes of the Merger
The principal purposes of the merger are to (1) enable Palisade to
acquire approximately 80% of the Company's outstanding shares, (2) deliver
value to the Company's stockholders which the Board of Directors believes
represents a significant premium over the market price for our shares
prevailing before the public announcement of the merger and (3) deliver
greater value to stockholders than they are likely to have if the Company
continues with its announced liquidation or continues to operate in its
remaining business segment (the licensing of intellectual property rights).
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Palisade will own approximately 80% of the Company's outstanding
shares as a result of the merger, and will thus be the primary beneficiary of
any future earnings or growth. However, the Company's current stockholders
will continue to own approximately 20% of the Company's outstanding shares
after the merger. To the extent they continue to hold their shares, they will
have continued equity interest in the Company and will continue to benefit
from any post merger earnings or growth. Although the Company Common Stock is
listed on the American Stock Exchange, the American Stock Exchange is
currently reviewing whether the Surviving Corporation Stock will continue to
meet its listing requirements. Although the Company and Palisade intend to use
their best efforts to cause the continued listing of our common stock, we
cannot assure this result. If we are de-listed from the American Stock
Exchange, stockholders who desire to sell their shares (other than pursuant to
the Payment Right) may have decreased liquidity with respect to their shares.
Following the merger, the Company will continue to manage the
remaining license agreements and related contracts, collect its accounts,
notes and contract rights receivables, pursue tax refunds and manage its real
estate lease. In the merger agreement, Palisade has agreed to use its
reasonable best efforts to continue the management and liquidation of such
assets following the merger and to maximize the liquid distributable assets.
Palisade intends to use the Company as a vehicle for making acquisitions.
Reasons for the Merger; Recommendation of the Board of Directors
In reaching its decision on August 19, 2002 to adopt the merger
agreement and to recommend that holders of Company Common Stock vote to adopt
the merger agreement, the Board of Directors considered a number of factors,
including, but not limited to, the following:
1. The Board of Directors' determination in March 2002 that the
Company should reposition itself for sale or liquidation,
because the Company's stockholders would likely derive more
value if the Company were to be sold or liquidated than they
would be likely to derive if the Company were to continue to
operate in its current business segments.
2. The historical market prices, recent trading activity and range
and public trading multiples of the Company Common Stock,
including the fact that the cash portion of the merger
consideration represents a premium of approximately 37.40% over
the $2.62 closing price of the shares on the American Stock
Exchange on August 16, 2002, the last full trading day prior to
the meeting of the Board of Directors to adopt the merger
agreement and that stockholders will continue to hold 20% of the
shares of Surviving Corporation Stock, with a right to require
the Surviving Corporation to repurchase them.
3. The fact that the income and cash from the planned liquidation
of the Company's licensing-related securities had been completed
in the second quarter of 2001 and would no longer be available
to subsidize losses in its
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Creative Consulting and Manufacturing and Marketing of Consumer
Products business segments. Moreover, the income from the
Company's agreement with Patlex Corporation, which accounted for
approximately 13% of the Company's total revenues in 2001, is
based upon two laser patents, the most commercially significant
of which expires in November 2004 and the second of which
expires in May 2005.
4. The Company's continuing losses in its consumer electronics and
creative services segments, the poor retail sell-through of its
consumer electronics products and the capital required to
continue such operations. Reported segment losses for the year
ended December 31, 2001 for the Creative Consulting Services and
the Manufacturing and Marketing of Consumer Products were
$991,000 and $866,000, respectively.
5. The Company's consolidated net income for the year ended
December 31, 2001 was $1,084,000 or $0.29 per share, on a
diluted basis, as compared with $2,929,000 or $0.77 per share
reported for the same period of 2000 and $5,191,000 or $1.36 per
share in 1997. Total revenues as reported declined by
$2,815,000, or 17%, from $17,014,000 in 2000 to $14,199,000 in
2001. The Company recorded a net loss of $135,000 for the first
quarter of 2002, as compared to net income of $528,000 for the
same period in 2001. The Company's revenues declined 47.6%
during the same period, from $3,739,000 to $1,961,000. From
March 2001 through March 2002, the market value of Company
Common Stock ranged from $1.88 to $3.95 with the price being
lower than $3.00 per share during most of that period.
6. The Board of Directors' belief that it was unlikely that any
person other than Palisade would be interested in acquiring all
or substantially all of the securities or assets of the Company,
based upon (a) the Company's disparate operations and revenue
stream assets, (b) the Board of Directors' business experience
and familiarity with the Company, its operations and financial
results and (c) the fact that, following the Company's
announcement in March 2002 that the Company was repositioning
itself for sale or liquidation, the Company continued to explore
its strategic alternatives and speak with third parties, but no
third party other than Palisade made an offer to the Company
regarding a strategic transaction regarding all or substantially
all of the securities or assets of the Company.
7. The nature of the industries in which the Company competed, and
the general industry, economic and market conditions in
industries similar to those in which the Company operated.
8. The Company's strengths, including its reputation, and
weaknesses, including its financial resources and the market
shares of its various businesses.
9. The amount and nature of the consideration per share to be
received by stockholders under the merger agreement, in the form
of (a) $3.60 in cash
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without interest thereon, (b) 0.2 shares of Surviving
Corporation Stock and (c) the right of stockholders who hold
such shares continuously until June 30, 2005, to sell these
shares to the Company for a price which will depend upon the
Company 's liquid distributable assets as of March 31, 2003 and
June 30, 2005.
10. The financial presentation by Fleet Securities on August 19,
2002, including the opinion of Fleet Securities that, based on
and subject to the matters set forth in that opinion, the merger
consideration was fair from a financial point of view to our
stockholders.
11. The negotiations which took place between Palisade, on the one
hand, and the Company and the Special Committee, on the other
hand, with respect to the merger consideration and the belief by
the members of the Special Committee and the Board of Directors
that the merger consideration was the highest price for the
Company that Palisade would agree to pay or that could be
obtained from another source.
12. The terms of the merger agreement, including:
o the fact that Palisade's obligations under the merger
agreement are not conditioned on its obtaining
financing;
o our ability, should we receive a superior third party
proposal, to furnish information to and conduct
negotiations with a third party and enter into an
agreement relating thereto; and
o the representations and warranties, the closing
conditions of the parties to the merger and the
restrictions imposed on the conduct of our business
prior to completion of the merger, which were
extensively negotiated.
13. The aggregate amount of the termination fee and the expense
reimbursement fee, and the circumstances under which such fees
would be payable to Palisade pursuant to the merger agreement,
appear reasonable taking into account that: (a) Palisade was
only willing to make its proposal on the express condition that
the Company agree to such a termination fee and expense
reimbursement fee upon the terms set forth in the merger
agreement; and (b) the belief of the Board of Directors that the
aggregate amount of the termination fee and the expense
reimbursement fee would not be likely to deter potentially
interested third parties from pursuing a strategic transaction
with the Company.
14. The potential stockholder value that might result from
continuing with the liquidation of the Company's assets
announced in March 2002 in lieu of the Palisade transaction, as
well as the risks and uncertainties associated with such plan.
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<page>
15. The uncertainty of the time at which such liquidation could be
completed.
16. The difficulty encountered in finding buyers for its creative
consulting and consumer electronics businesses and the premise
that any sale would include a purchase price payable over
several years, with uncertainty as to whether all of the
payments would be received.
17. The fact that the Company would continue with its announced
liquidation following the merger, and the fact that the amount
of merger consideration is in part based upon the amount of
proceeds realized in the liquidation.
18. The availability of appraisal rights under the DGCL to
stockholders who dissent from the merger, which provides
stockholders who dispute the fairness of the merger
consideration with an opportunity to have a court determine the
fair value of their shares.
19. The high likelihood that the proposed transaction would be
consummated, in light of the fact that there are no unusual
requirements or conditions to the merger, the merger is not
subject to any regulatory approval requirements or financing
contingencies and Palisade has the financial resources to
consummate the merger expeditiously.
The Board of Directors also considered possible negative factors in
its deliberations concerning the merger agreement. Among other factors, the
Board of Directors considered the following:
1. Because Palisade would own approximately 80% of the Company's
shares following the merger and control its operations and
investments, if such operations or investments proved to be
unsuccessful, the Company's stockholders could receive less
value in the merger than if the Company liquidated.
2. Under the terms of the merger agreement, the Company cannot
solicit other acquisition proposals and must pay Palisade a
termination fee if the merger agreement is terminated under
certain circumstances, which might potentially discourage other
parties from proposing an alternative transaction that might be
more advantageous to stockholders.
3. The actual or potential conflicts of interest that certain
Company officers and directors have in connection with the
merger, including the employment agreements with Robert L.
Tuchman and Raymond A. Cardonne and the ownership of 5% of the
preferred, non-voting equity interest of Palisade Capital by
Clark A. Johnson, a director of the Company.
4. The possibility that the merger will not be consummated and the
resulting effects to the stockholders.
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<page>
5. The fact that to exercise their Payment Right, stockholders must
(i) hold their shares of Surviving Corporation Stock received in
the merger continuously until June 30, 2005 and (ii) tender
those shares in accordance with the instructions sent to them
following the final calculation of liquid distributable assets.
6. The likelihood that trading volume and liquidity of the
Company's shares will decrease following the merger because
Palisade will own approximately 80% of the outstanding shares of
Surviving Corporation Stock and only 20% of the shares will
remain in public hands as well as a possible de-listing of the
shares on the American Stock Exchange.
In considering the Payment Amount Amendment approved by the Board of
Directors on January 23, 2003 (see "Background of the Merger - RIL Tax
Analysis; Merger Agreement Amendment"), the Board of Directors considered a
number of factors, including, but not limited to, the following:
1. The likelihood that the stockholders of the Company might
disapprove the merger if a liquidation of the Company could
present a significantly more attractive opportunity.
2. The uncertainties inherent in a liquidation of the Company,
including the timing of possible distributions and the need to
reserve substantial amounts to account for actual and potential
liabilities.
3. The fact that the Company does not have the right to terminate
the merger agreement if it were to determine that a liquidation
is a more attractive opportunity for stockholders.
4. The agreement of Palisade to share with Refac's stockholders 60%
of liquid distributable assets in excess of $18 million will
substantially reduce the difference between the previously
agreed merger consideration and the maximum amount which may be
achievable in a liquidation, with greater certainty of result
and with payments to be made to stockholders on a faster
timetable than in a liquidation.
5. Stockholders who do not exercise their Payment Right will have
the opportunity to participate in the growth of the Company,
under the direction of Palisade after the merger.
6. The financial presentation by Fleet Securities on January 23,
2003, including the opinion of Fleet Securities that, based on
and subject to the matters set forth in that opinion, the merger
consideration was fair from a financial point of view to our
stockholders.
The foregoing discussion addresses the material information and
factors considered by the Board of Directors in its consideration of the
merger agreement. After considering these factors, the Board of Directors
concluded that the positive factors
43
<page>
described above substantially outweigh the negative factors described above.
In view of the variety of factors and the amount of information considered,
the Board of Directors did not assign relative weights to the specific factors
and analyses considered in reaching its determination. The determination to
adopt the merger agreement was made after consideration of all of the factors
and analyses as a whole. In addition, individual members of the Board of
Directors may have given different weights to different factors.
Opinion of Fleet Securities; Information Regarding Fleet Securities
At a meeting of the Board of Directors on August 19, 2002, Fleet
Securities reviewed its financial analysis and delivered its oral and written
opinion that, as of the date of such opinion and based upon and subject to
various considerations therein, the merger consideration payable in the
proposed transaction is fair to the stockholders of the Company (other than
Palisade, Merger Sub, their affiliates and holders who exercise their
appraisal rights) from a financial point of view.
At the meeting of the Board of Directors on January 23, 2003 at which
the Payment Amount Amendment was approved, Fleet Securities reviewed its
financial analysis and delivered its oral and written opinion that, as of the
date of such opinion and based upon and subject to various considerations
therein, the merger consideration payable in the proposed transaction,
including the Payment Amount Amendment, is fair to the stockholders of the
Company (other than Palisade, Merger Sub, their affiliates and holders who
exercise their appraisal rights) from a financial point of view.
The full text of the opinion of Fleet Securities delivered on January
23, 2003, which sets forth the assumptions made, matters considered and
limitations on the review undertaken, is attached to this proxy statement as
Annex B and is incorporated herein by this reference. The summary of the Fleet
Securities opinion set forth herein is qualified in its entirety by reference
to the full text of the Fleet Securities opinion. Stockholders are urged to
and should read the opinion in its entirety.
The opinions of Fleet Securities are directed to the Special
Committee and relate only to the fairness of the merger consideration payable
in the proposed transaction from a financial point of view, do not address any
other aspect of the proposed transaction and do not constitute a
recommendation to any stockholder as to how such stockholder should vote with
respect to matters relating to the merger. The consideration to be received by
stockholders of the Company in the merger was determined on the basis of
negotiations between the Company and Palisade and was approved by the Special
Committee and the Board of Directors.
In connection with the opinion, Fleet Securities, among other things:
(i) reviewed certain publicly available financial statements and
other business and financial information of the Company,
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<page>
(ii) reviewed certain internal financial statements and other
financial and operating data concerning the Company prepared
by the Company's management,
(iii) reviewed certain forecasts and other forward looking financial
information prepared by the Company's management, and tax
analyses performed by and/or on behalf of the Company's
management,
(iv) held discussions with the management of the Company concerning
the business, past and current operations, financial condition
and future prospects of the Company,
(v) reviewed the financial terms and conditions set forth in the
merger agreement,
(vi) reviewed the stock price and trading history of the Company,
(vii) compared the financial performance of the Company and the
prices and trading activity of Company Common Stock with that
of certain other publicly traded companies that Fleet
Securities deemed comparable to the Company,
(viii) compared the financial terms of the proposed transaction with
the financial terms, to the extent publicly available, of
other transactions that Fleet Securities deemed relevant,
(ix) prepared a discounted cash flow analysis of the Company,
(x) participated in discussions with representatives of the
Company,
(xi) reviewed the terms of certain agreements for the disposition
of certain of the Company's assets,
(xii) reviewed the employment and incentive compensation agreements
between the Company and Robert L. Tuchman and Raymond A.
Cardonne, Jr., and
(xiii) reviewed such other materials, made such other studies and
inquiries, and took into account such other matters as Fleet
Securities deemed relevant, including their assessment of
general economic, market and monetary conditions.
In its review and analysis, and in arriving at its opinion, delivered
on January 23, 2003, Fleet Securities assumed and relied upon the accuracy and
completeness of all of the financial and other information provided to it
(including information furnished to it orally or otherwise discussed with it
by the Company's management) or publicly available and neither attempted to
verify, nor assumed responsibility for verifying, any of such information.
Fleet Securities relied upon the assurances of the Company's management that
it is not aware of any facts that would make such information inaccurate
45
<page>
or misleading. Furthermore, Fleet Securities did not obtain or make, or assume
any responsibility for obtaining or making, any independent evaluation or
appraisal of the properties, assets or liabilities (contingent or otherwise)
of the Company, nor was it furnished with any such evaluation or appraisal,
with the exception of analyses prepared by the Company's management with
respect to liquidation values on which Fleet Securities relied in preparing
its analysis without independent verification for purposes of their opinion.
With respect to the financial forecasts and projections (and the assumptions
and bases therefor) for the Company that Fleet Securities reviewed, upon the
advice of the Company's management, Fleet Securities assumed that such
forecasts and projections have been reasonably prepared in good faith on the
basis of reasonable assumptions and reflect the best currently available
estimates and judgments as to the future financial condition and performance
of the Company, and Fleet Securities further assumed that such projections and
forecasts will be realized in the amounts and in the time periods currently
estimated. Fleet Securities assumed that the proposed transaction will be
consummated upon the terms set forth in the merger agreement without material
alteration thereof. In addition, Fleet Securities assumed that the historical
financial statements of the Company reviewed by it have been prepared and
fairly presented in accordance with U.S. generally accepted accounting
principles consistently applied. Fleet Securities relied as to all legal
matters relevant to rendering its opinion on the advice of counsel.
The preparation of a fairness opinion is a complex process that is
not necessarily susceptible to partial analysis or summary description. In
arriving at its opinion, Fleet Securities did not attribute any particular
weight to any analysis or factor considered, but rather made qualitative
judgments as to the significance and relevance of each analysis or factor.
Accordingly, Fleet Securities believes that its analysis must be considered as
a whole and that considering any portion of such analysis and of the factors
considered, without considering all analyses and factors, could create an
incomplete view of the processes underlying its opinion.
Fleet Securities' opinion is necessarily based upon market, economic
and other conditions as in effect on, and information made available to Fleet
Securities as of, the date of the opinion. It should be understood that
subsequent developments may have affected the conclusion expressed in the
opinion and that Fleet Securities disclaims any undertaking or obligation to
advise any person of any change in any matter affecting the opinion which may
come or be brought to its attention after the date of the opinion. Fleet
Securities' opinion is limited to the fairness, from a financial point of view
and as to the date of the opinion, to the stockholders of the Company of the
consideration payable in connection with the proposed transaction. Fleet
Securities does not express any separate opinion as to the fairness of either
the cash payment or the Surviving Corporation Stock consideration, and does
not express any opinion as to the price at which the Surviving Corporation
Stock will trade following the consummation of the proposed transaction. Fleet
Securities does not express any opinion as to the value of any employee
agreement or other arrangement entered into in connection with the proposed
transaction or any tax or other consequences that might result from the
proposed transaction (including consequences to the Company and to holders of
Company Common Stock). Fleet Securities was not asked to and did not
participate in the negotiations between the
46
<page>
Company and Palisade, solicit third party offers to acquire the Company, or
propose any other alternatives available to the Company. Fleet Securities'
opinion and analyses were only one of several factors considered by the Board
of Directors in its evaluation of the proposed transaction and should not be
viewed as determinative of the views of the Board of Directors or management
with respect to the consideration to be received by the Company's stockholders
in the proposed transaction. Fleet Securities' opinion does not address the
relative merits of the proposed transaction or the other business strategies
that the Board of Directors or the Special Committee has considered or may be
considering, nor does it address the decision of the Board of Directors or the
Special Committee to proceed with the proposed transaction. The following is a
summary of the material financial and comparative analyses performed by Fleet
Securities in arriving at its opinion, delivered on January 23, 2003. Some of
the summaries of financial analyses include information presented in tabular
format. In order to more fully understand the financial analyses used by Fleet
Securities, the tables must be read together with the full text of each
summary. The tables alone do not constitute a complete description of Fleet
Securities' financial analyses.
Historical Stock Price Analysis
Fleet Securities analyzed the prices at which the Company's shares
traded over various periods of time. Fleet Securities analyzed such data over
the three-year period beginning August 12, 1999, over the one-year period from
August 2001 to August 2002, for the period from February 2002 to August 2002,
and for the period from March 22, 2002, the date of the Company's announcement
to position itself for sale or liquidation, through August 20, 2002. Fleet
Securities observed that, for the one-year period from August 2001 to August
2002, the average closing price for the common stock was $2.94 per share, and
the high and low closing prices were $3.67 per share and $2.16 per share,
respectively. The average closing prices per share for the periods ending 30,
60, 90 and 180 days prior to August 20, 2002 were $2.70, $2.94, $3.06 and
$2.89, respectively. The closing price per share on August 16, 2002, the
latest date for which trading data exists prior to the announcement of the
Transaction, was $2.62.
Analysis of Expected Transaction Proceeds
Under the terms of the proposed transaction, the Company's
stockholders will receive $3.60 per share in cash and 0.2 of a share of
Surviving Corporation Stock for each share of the Company. Fleet Securities
defined each 0.2 of a share of Surviving Corporation Stock as being a "Stub
Share" representing the equity component of merger consideration attributable
to Refac shares surrendered by stockholders in the merger. Fleet Securities
estimated the value of a Stub Share to be between $0.84 and $1.20 per share,
bringing the total expected transaction proceeds to between $4.44 and $4.80
per share.
In analyzing the value of a Stub Share, Fleet Securities first
estimated a Stub Share's pro rata share of the liquid assets on the Company's
projected unaudited balance sheets as of March 31, 2003, April 30, 2003, May
31, 2003, and June 30, 2003. Adding the balance sheet amounts of between
$1,049,969 and $1,283,129 of cash and cash
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<page>
equivalents, and $13,713,800 of investments, Fleet Securities determined
aggregate liquid asset amounts of between $14,763,769 and $14,996,929.
Dividing these amounts by the expected number of shares of Surviving
Corporation Stock post-transaction, 3,534,062, Fleet Securities calculated
liquid asset values of between $4.18 and $4.24 per share of Surviving
Corporation Stock, or between $0.84 (0.2 x $4.18) and $0.85 (0.2 x $4.24) per
Stub Share.
Fleet Securities then estimated the book value per Stub Share, again
based on the Company's projected unaudited balance sheets as of March 31,
2003, April 30, 2003, May 31, 2003, and June 30, 2003, and two possible
outcomes of a certain tax matter. As more fully described below, the Company
hopes to realize tax benefits in connection with its sale of RIL. The Company
has advised Fleet Securities that the actual amount is dependent upon, among
other things, the applicability of various provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), as well as Treasury regulations
promulgated thereunder, including possible future Treasury regulations which
may have retroactive effect. In addition, the deductibility of the capital
loss on the sale of RIL and the Company's refund claim are likely to be
reviewed by the Internal Revenue Service. Moreover, even if the Company
receives payment of its refund claim, it may be subject to future audits by
the Internal Revenue Service which could result in the Company having to
return all or a portion of the refund received.
According to the Company's management, application of IRS
consolidated return regulations are uncertain and complex, and there is some
uncertainty as to the ability of the Company to fully utilize the tax
benefits. Therefore, Fleet Securities adjusted the Company's projected book
value per share to reflect two possible outcomes: (1) that the Company would
be able to utilize all possible RIL-related tax benefits, including tax
benefits depending on a favorable characterization of certain 2002 income as
capital gains; and (2) that the Company would be unable to utilize any of the
tax benefits with respect to its sale of RIL . According to this methodology,
Fleet Securities estimated the book value per share to be between $4.51 and
$6.01, or between $0.91 (0.2 x $4.51) and $1.20 (0.2 x $6.01) per Stub Share.
The shares of Surviving Corporation Stock issued to the Company's
stockholders give such holders a conditional right to a payment that is
dependent upon the Company's liquid distributable assets as of June 30, 2005.
The Payment Amount is a function of the Company's success in the liquidation
of its assets over a time period ending June 30, 2005, including its degree of
success in realizing tax benefits in connection with its sale of RIL.
Liquidation Analysis
In the ten months since the Company's March 22, 2002 announcement
that it was repositioning itself for sale or liquidation, Palisade had made
the only offer to purchase control of the Company, and management did not
expect to receive any other credible offers. Accordingly, Fleet Securities
analyzed a winding down of the Company's business, assuming a continuation of
the liquidation that was already underway at the time the Company received the
Palisade offer. Relying on information provided by
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<page>
management, Fleet Securities utilized a discounted cash flow analysis assuming
a winding down of the Company's business through a continuation of ongoing
liquidation activities, spanning a time period terminating in 2009.
The liquidation analysis contained many assumptions regarding future
outcomes of the continued liquidation. The two most significant financial
events identified by management were the management of the Company's
continuing lease obligations with respect to its premises in Edgewater, NJ and
the Company's utilization of an anticipated tax benefit of nearly $5 million
which stems from the capital loss on the sale of RIL to a third party. Fleet
Securities relied on the projections of Company's management with respect to
future cash flows relating to its winding-down and lease management
activities. Because there was some uncertainty as to the ability of the
Company to fully utilize the anticipated tax benefit of nearly $5 million,
Fleet Securities considered two separate scenarios to reflect both optimistic
and pessimistic outcomes of the liquidation. Under the Utilization Case, the
Company was assumed to be able to utilize tax benefits of nearly $5 million,
whereas under the Non-Utilization Case, the Company was assumed to be unable
to utilize any of the $5 million of tax benefits. Using discount rates between
20% and 30%, based on long-term rates of return on investments in the smallest
market capitalization public companies, Fleet Securities determined values per
share in liquidation of between $3.67 and $3.78 in the Non-Utilization Case,
and between $4.07 and $4.33 in the Utilization Case.
The Payment Amount is determined formulaically and depends on the
success of the Company in liquidating its assets. The Payment Amount is
payable ten (10) business days after the calculation of the fair market value
of the liquid distributable assets as at June 30, 2005. Accordingly, Fleet
Securities calculated the value of the Payment Right by calculating the
present value of the Payment Amount under both optimistic ("Upside") and
pessimistic ("Downside") post-merger scenarios constructed by the Company's
management, again using discount rates between 20% and 30%. Fleet Securities
calculated the value of the Payment Right to be between $0.95 and $1.15 per
share of Surviving Corporation Stock (or between $0.19 (0.2 x $0.95) and $0.23
(0.2 x $1.15) per Stub Share) under the Downside scenario, and between $3.85
and $4.70 per share of Surviving Corporation Stock (or between $0.77 (0.2 x
$3.85) and $0.94 (0.2 x $4.70) per Stub Share) under the Upside Scenario.
On the basis of this liquidation analysis, Fleet Securities estimated
that the value of the proceeds payable to a Company stockholder who was to
hold Stub Shares until June 30, 2005 and then exercise his or her Payment
Right would be between $3.79 and $4.54 per share, reflecting both the $3.60
cash consideration and the $0.19 to $0.94 value of the Payment Right per Stub
Share.
Comparable Public Company Analysis
Fleet Securities reviewed and compared selected publicly available
financial data, market information and valuation multiples of the Company with
those of other selected publicly-traded companies in the consumer products,
design and intellectual property
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<page>
industries which Fleet Securities deemed comparable to the Company. The
selected publicly-traded companies were the following:
o Applica, Inc.
o Competitive Technologies, Inc.
o Kupper Parker Communications, Inc.
o Salton, Inc.
For the comparable public companies, Fleet Securities compared, among
other things, total capitalization (defined as market value of equity plus
debt less cash and cash equivalents) as a multiple of latest twelve months
("LTM") revenues, LTM EBITDA (earnings before interest, taxes, depreciation
and amortization), and LTM EBIT (earnings before interest and taxes), and
equity value as a multiple of LTM earnings, book value, and tangible net
worth. All multiples were based on closing stock prices as of January 17,
2003. Revenues, EBITDA and EBIT, earnings, book value, and tangible net worth
results for the comparable companies were based on historical financial
information available in public filings of the comparable companies. The
following tables set forth the mean, median, high and low multiples indicated
by this analysis of the comparable companies as of January 17, 2003:
<table>
<caption>
MEAN MEDIAN HIGH LOW
Total Capitalization to: ---- ------ ---- ---
<s>
LTM Revenues 1.4x 0.5x 4.4x 0.2x
LTM EBITDA 8.2 6.8 12.9 5.0
LTM EBIT 12.5 12.5 18.4 6.6
Price to:
LTM Net Income 13.7x 13.7x 23.5x 3.9x
Stockholder Equity 1.3 0.6 3.7 0.4
Tangible Net Worth 2.8 3.0 4.5 0.9
</table>
Fleet Securities compared these valuation ratios with those of the
Company, calculating the Company's valuation ratios on the basis of the
Company being valued at $4.44 per share, which represents the low end of Fleet
Securities' value estimates of the consideration payable under the terms of
the proposed transaction. Accordingly, Fleet Securities calculated the
Company's equity value and total capitalization to be $15,481,000 ($4.44 per
share x 3,486,811 shares of Company Common Stock) and $481,000 ($15,481,000
less cash and cash equivalents of $15,043,000), respectively.
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<page>
Fleet Securities reviewed Refac's draft unaudited financial statements for the
year ended December 31, 2002 and eliminated what it considered to be one-time
gains and losses on the sale of Company assets. Based on Refac's draft
unaudited income statements and these adjustments, the Company had negative
EBITDA and EBIT, and a net loss in 2002. Fleet Securities noted that the only
positive valuation ratios for the Company were:
Total Capitalization to LTM Revenues 0.2x
Price to Stockholders' Equity 0.7
Price to Tangible Net Worth 0.7
Fleet Securities noted that each of the comparable companies was a
going concern on January 17, 2003, whereas the Company was well through the
process of winding down its business through asset liquidations. Fleet
Securities noted that the valuation ratios of the comparable companies were
less meaningful to its analysis, since the comparable companies' ratios all
reflect going-concern value, and are therefore inapplicable to any analysis of
the Company.
Precedent Transactions Analysis
Fleet Securities reviewed and analyzed the consideration paid in 22
selected completed merger and acquisition transactions involving targets
participating in industries defined by SICs 7311, 3634, 7336, 7389, 8742, and
8711 since April 5, 2000. The transactions reviewed were:
<table>
<caption>
DATE
ANNOUNCED TARGET NAME ACQUIROR NAME
- --------- ----------- -------------
<s> <c> <c>
01/06/03 Thompson Associates MapInfo Corporation
12/19/02 Consolidated Engineering Services EMCOR Group Inc.
12/16/02 IBid America Inc. Care Concepts Inc.
11/25/02 General Technology Corporation Crane Co.
10/07/02 GetRelevant Terra Lycos Inc.
09/24/02 Hunter Group Navigant Consulting Inc.
09/12/02 BEN Marketing Group Ogilvy & Mather Worldwide
06/27/02 Boron, LePore & Associates, Inc. Cardinal Health, Inc.
06/20/02 MedGrup Corp Provider HealthNet Services Inc.
05/23/02 Be Free, Inc. Valueclick
11/20/01 Troy Systems PEC Solutions, Inc.
11/12/01 Sylva Engineering Corp. Reynolds, Smith & Hills, Inc.
11/04/01 EA Engineering, Science, Technology, Inc. Investor Group
09/28/01 Unigraphics Solutions, Inc. Electronic Data Systems, Corp.
08/31/01 Peapod. Inc. Koninklijke Ahold N.V.
08/24/01 Lockheed Martin Corp. Affiliated Computer Services Inc.
51
<page>
08/15/01 Autoweb.com, Inc. Autobytel Inc.
08/13/01 NBC Internet, Inc. National Broadcasting Corporation
08/06/01 Interland, Inc. Micron Electronics, Inc.
06/27/01 Circle.com Havas Advertising SA
06/07/01 Mainspring, Inc. International Business Machines
Corporation
03/19/01 Egreetings Network, Inc. AmericanGreetings.com, Inc.
02/22/01 CrediTrust Corp. NCO Portfolio Management, Inc.
12/20/00 Newgen Results Corp. TeleTech Holdings, Inc.
09/11/00 ClickZ Corp internet.com Corp
08/22/00 Canisco Resources, Inc. Kenny Industrial Services, L.L.C.
08/18/00 Key3Media Group, Inc. Shareholders
06/02/00 Harding Lawson Associates MACTEC, Inc.
04/05/00 Precision Response Corp. USA Networks, Inc.
</table>
For the selected transactions, Fleet Securities compared, among other
things, total capitalization as a multiple of LTM revenues, LTM EBITDA, and
LTM EBIT and equity value as a multiple of LTM net income and book value.
Revenues, EBITDA, EBIT, net income and book values were based on historical
financial information available in public filings of the target companies
involved in the selected transactions.
The following table sets forth the mean, median, high and low
multiples indicated by the selected completed merger and acquisition
transactions in the referenced SICs since April 5, 2000:
<table>
<caption>
MEAN MEDIAN HIGH LOW
---- ------ ---- ---
Total Capitalization to:
<s> <c> <c> <c> <c>
LTM Revenues 1.2x 0.9x 4.0x 0.1x
LTM EBITDA 11.3 9.7 17.6 7.4
LTM EBIT 19.8 18.1 26.0 15.0
Equity Value to:
LTM Net Income 21.5x 20.6x 42.4x 6.4x
Book Value 2.7 2.2 5.7 0.9
</table>
Fleet Securities compared these valuation ratios with those of the
Company, calculating the Company's valuation ratios on the basis of the
Company being valued at $4.44 per share, which represents the low end of Fleet
Securities' value estimates of the
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<page>
consideration payable under the terms of the proposed transaction.
Accordingly, Fleet Securities calculated the Company's equity value and total
capitalization to be $15,481,000 ($4.44 per share x 3,486,811 shares of
Company Common Stock) and $438,000 ($15,481,000 less cash and cash equivalents
of $15,043,000), respectively. Fleet Securities eliminated what it considered
to be one-time gains and losses to the Company's results for the year ended
December 31, 2002. After these adjustments, the Company had negative EBITDA
and EBIT, and a net loss in 2002. Fleet Securities noted that the only
positive valuation ratios for the Company were:
Total Capitalization to LTM Revenues 0.2x
Price to Stockholders' Equity 0.7
Fleet Securities noted an absence of detailed financial and other
information on the target companies that, if available, would allow a
determination of their being going concerns on the effective dates of their
acquisitions. The Company was in the process of winding down its business
through asset liquidations. Fleet Securities concluded that the valuation
ratios of the comparable companies were less meaningful to its analysis since,
to the extent that the target companies were going concerns, the target
companies' valuation ratios reflect going-concern value at a minimum and
strategic value at a maximum, and are therefore inapplicable to any analysis
of the Company.
Fleet Securities analyzed the transaction premiums paid in the 29
selected merger and acquisition transactions, based on the target company's
stock price one day, one week, and four weeks prior to public announcement of
the transaction. This analysis indicated the following premiums paid in the
selected transactions:
<table>
<caption>
MEAN MEDIAN HIGH LOW
---- ------ ---- ---
<s> <c> <c> <c> <c>
1-DAY PREMIUM 23.0% 23.0% 25.9% 20.0%
1-WEEK PREMIUM 29.9 29.9 32.2 27.5
4-WEEKS PREMIUM 40.6 41.8 94.3 -9.3
</table>
Fleet Securities compared these premiums with those of the Company,
calculating the Company's premiums on the basis of the Company being valued at
$4.44 per share, which represents the low end of Fleet Securities' value
estimates of the consideration payable under the terms of the proposed
transaction. The corresponding premiums for the Company were:
1-DAY PREMIUM 69.5%
1-WEEK PREMIUM 76.9
4-WEEKS PREMIUM 66.9
Information Regarding Fleet Securities
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The Special Committee selected Fleet Securities to render a fairness
opinion because Fleet Securities is a nationally recognized investment banking
firm with substantial experience in transactions similar to the merger. Fleet
Securities is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, leveraged buyouts,
negotiated underwritings, secondary distributions of listed and unlisted
securities and private placements.
In June 2002, the Company retained Fleet Securities to render
opinions regarding (i) the fair market value of its Product Design and Graphic
Design business reporting units and (ii) the fair market value attributable to
goodwill and other intangible assets of these units as of January 1, 2002. The
sole purpose of these opinions was to assist the Company in adopting the
provisions of Financial Accounting Standards Board Pronouncement No. 142. The
Company paid Fleet Securities a fee of $20,000 for these services.
Pursuant to an engagement letter dated July 24, 2002, the Special
Committee retained Fleet Securities to render an opinion with respect to the
fairness, from a financial point of view, to the Company's stockholders (other
than Palisade and its affiliates) of the consideration payable in connection
with the proposed transaction. Pursuant to the terms of the engagement letter,
the Company paid Fleet Securities a fee of $200,000, half of which was payable
upon Fleet Securities' retention and half of which was payable upon notice
that Fleet Securities was prepared to deliver its opinion. The fees paid to
Fleet Securities were not contingent upon the contents of the opinion
delivered. On August 19, 2002, Fleet Securities delivered its opinion that the
consideration payable in connection with the then-proposed Transaction was
fair, from a financial point of view, to the Company's stockholders (other
than Palisade and its affiliates). Pursuant to an engagement letter dated
January 18, 2003, the Special Committee again retained Fleet Securities to
render a new opinion with respect to the fairness, from a financial point of
view, to the Company's stockholders (other than Palisade and its affiliates)
of the consideration payable in connection with the currently proposed
transaction. Pursuant to the terms of this engagement letter, the Company has
agreed to pay Fleet Securities a fee of $125,000, half of which was payable
upon Fleet Securities' retention and half of which was payable upon notice
that Fleet Securities was prepared to deliver its opinion. The fees paid to
Fleet Securities were not contingent upon the contents of the opinion
delivered. In addition, the Company has agreed to reimburse Fleet Securities
for its reasonable out-of-pocket expenses, subject to certain limitations, and
to indemnify Fleet Securities and certain related persons against certain
liabilities arising out of or in conjunction with its rendering of services
under its engagement, including certain liabilities under the federal
securities laws. In the ordinary course of its business, Fleet Securities and
its affiliates may actively trade in the securities of the Company for its own
account and the accounts of its customers and, accordingly, may at any time
hold a long or short position in such securities.
54
<page>
Interests of Certain Persons in the Merger
In considering the recommendation of the Board of Directors, you
should be aware that some of our directors and executive officers may be
deemed to have interests in the merger that are different from, or in addition
to, those of our stockholders.
Employee Benefits and Employment Agreements
General. Currently, the Company has six (6) employees. Following the
merger, the Surviving Corporation will provide employee benefits to the
Company's employees, including the Company's officers, that are no less
favorable, in the aggregate, than the benefits provided to such employees
prior to the completion of the merger. The Surviving Corporation will also
assume the Company's employment and severance agreements, including employment
agreements with Robert L. Tuchman, Chairman, President, Chief Executive
Officer and General Counsel of the Company, and Raymond A. Cardonne, Vice
President, Chief Financial Officer, Treasurer and Secretary of the Company.
(See "The Merger Agreement - Employee Benefit Plans")
Tuchman Employment Agreement. The Company is party to an employment
contract with Mr. Tuchman which was amended and restated concurrently with the
signing of the merger agreement to make certain technical corrections and
restructure the nature and timing of certain payments under the prior
agreement to provide him with further incentives to continue his efforts to
complete the liquidation following the merger. Mr. Tuchman's amended and
restated employment agreement (the "Tuchman Employment Agreement") will become
effective only upon the completion of the merger.
The Tuchman Employment Agreement has a term beginning at the
completion of the merger and ending on March 31, 2004. During the term, Mr.
Tuchman will be entitled to an annual base salary of $300,000. Upon completion
of the merger, Mr. Tuchman will be entitled to a signing bonus of $800,000.
Mr. Tuchman will also be entitled to retention payments of $200,000 on the
earlier of March 31, 2004 or the first anniversary of the merger, $100,000 on
January 1, 2004 and $200,000 on March 31, 2004, provided that he is employed
by the Company at the time such payments become due.
In addition to these salary and retention payments, the Tuchman
Employment Agreement provides for the payment of incentive compensation based
on Mr. Tuchman's success in repositioning the Company for liquidation. Such
incentive compensation is payable when the Payment Amount is determined. At
the time of such payment, Mr. Tuchman will be entitled to an aggregate of 16%
of the "eligible consideration" over and above $17,843,602. "Eligible
consideration" is defined as the sum of the following:
o the liquid distributable assets of the Company as of June 30,
2005, as calculated under the merger agreement, plus
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o the signing bonus and retention payments paid or payable to Mr.
Tuchman and the incentive compensation paid or payable to Mr.
Cardonne as a result of the merger.
In the event there is a qualifying termination (described below) of
Mr. Tuchman's employment or the term of his agreement expires, he shall
continue to be eligible to receive the incentive compensation.
In addition to the incentive compensation payment, in the event of a
qualifying termination, Mr. Tuchman is entitled to receive a lump sum equal to
his full salary through March 31, 2004, plus any unpaid retention payments.
Mr. Tuchman is also entitled to receive life, health and similar benefits
(other than incentives such as stock options) to which he would otherwise have
been entitled through March 31, 2004, except to the extent that he receives
similar benefits from a subsequent employer. A qualifying termination is a
termination by the Company (or any successor thereto) because of a permanent
disability, death or without cause (as each such term is defined in the
Tuchman Employment Agreement) or by Mr. Tuchman for good reason (as defined in
the Tuchman Employment Agreement).
The Tuchman Employment Agreement provides that Mr. Tuchman will not
engage in any competitive activity (as defined in the Tuchman Employment
Agreement) during the term of his agreement and that, for a period of two
years following the termination of his employment, he will not solicit the
business of any client or prospective client of the Company or the employment
of any present or future employee of the Company.
If the merger does not occur, the amendment in connection with the
merger agreement will have no effect and the Company will continue to employ
Mr. Tuchman pursuant to the employment agreement which is currently effective,
which was described in the Company's proxy statement, dated May 20, 2002, and
was included in its entirety as an exhibit to the Company's 2001 Annual Report
on Form 10-K filed with the SEC. On January 23, 2003, Mr. Tuchman's currently
effective employment agreement was amended to provide that, in the case of a
liquidation and dissolution of the Company, Mr. Tuchman's incentive
compensation would be measured by, and paid at the same time as, any
liquidating distributions made to the Company's stockholders. A copy of such
amendment was attached as an exhibit to the Current Report on Form 8-K filed
with the SEC on January 24, 2003.
Under Mr. Tuchman's prior employment agreement, Mr. Tuchman was
granted options to purchase 100,000 shares of common stock pursuant to the
Company's 1990 Stock Option Plan. In 1996, Mr. Tuchman exercised these
previously granted options to purchase 100,000 shares of common stock. In
connection with such exercise, the Company provided Mr. Tuchman with a loan of
$375,000 (which was reduced to $365,000 after Mr. Tuchman paid back $10,000).
The note, as modified in March 2002, bears interest at the rate of 6% per
annum and is payable in ten (10) equal annual installments commencing on
December 31, 2004.
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<page>
Cardonne Employment Agreement. The Company is also party to an
employment contract with Mr. Cardonne (the "Cardonne Employment Agreement"),
which was amended in connection with the execution of the merger agreement to
make certain technical corrections. The amendment to Mr. Cardonne's employment
agreement will only become effective upon the completion of the merger.
The Cardonne Employment Agreement has a term ending on March 31,
2004. During the term, Mr. Cardonne will be entitled to an annual base salary
of $175,000. Upon completion of the merger, Mr. Cardonne will be entitled to a
signing bonus of $313,744.
In addition, the Cardonne Employment Agreement provides for the
payment of incentive compensation based on Mr. Cardonne's success in
repositioning the Company for liquidation. Such incentive compensation is
payable when the Payment Amount is determined. At the time of such payment,
Mr. Cardonne will be entitled to an aggregate of 4% of the "eligible
consideration" over and above $17,843, 602. "Eligible consideration" is
determined in the same manner as the Tuchman Employment Agreement (described
above).
Mr. Cardonne will remain eligible to receive the incentive
compensation in the event that his employment is terminated due to disability
(as defined in the Cardonne Employment Agreement), death, by the Company
without cause (as defined in the Cardonne Employment Agreement) or the
expiration of the term of his agreement.
In addition to the incentive compensation payments described above,
if the Company terminates Mr. Cardonne's employment for any reason other than
because of a permanent disability, death or for cause, Mr. Cardonne is
entitled to receive a lump sum equal to his full salary through March 31,
2004. Mr. Cardonne is also entitled to receive life, health and similar
benefits (other than incentives such as stock options) to which he would
otherwise have been entitled through March 31, 2004, except to the extent that
he receives similar benefits from a subsequent employer.
The Cardonne Employment Agreement provides that Mr. Cardonne will not
engage in any competitive activity (as defined in the Cardonne Employment
Agreement) during the term of his agreement and that, for a period of two
years following his termination of employment, he will not solicit the
business of any client or prospective client of the Company or the employment
of any present or future employee of the Company.
If the merger does not occur, the amendment in connection with the
merger agreement will have no effect, and the Company will continue to employ
Mr. Cardonne pursuant to the employment agreement which is currently
effective, which was described in the Company's proxy statement, dated May 20,
2002, and was included in its entirety as an exhibit to the Company's 2001
Annual Report on Form 10-K filed with the SEC. On January 23, 2003, Mr.
Cardonne's currently effective employment agreement was amended to provide
that, in the case of a liquidation and dissolution of the Company, Mr.
Cardonne's incentive compensation would be measured by, and paid at the same
time as,
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<page>
any liquidating distributions made to the Company's stockholders. A copy of
such amendment was attached as an exhibit to the Current Report on Form 8-K
filed with the SEC on January 24, 2003.
Stock Options
As of the date hereof, Company management held the following stock
options:
o Mr. Tuchman held stock options to purchase 150,000 shares of
Company Common Stock,
o Mr. Cardonne held stock options to purchase 42,500 shares of
Company Common Stock.
o Each non-employee director of the Company held stock options to
purchase 10,000 shares of Company Common Stock.
All of the options held by Mr. Tuchman, Mr. Cardonne and the
Company's non-employee directors are fully vested and exercisable, due in part
to the accelerated vesting of certain options in connection with the merger.
Pursuant to the terms of the Company's option plans, each unvested option held
by Mr. Tuchman, Mr. Cardonne and the Company's non-employee directors on the
date of the signing of the merger agreement became fully vested and
exercisable as a result thereof.
On January 23, 2003, the Board of Directors adopted an amendment to
the Company's stock option plan to provide that options held by each
non-employee director shall not terminate upon the termination of such
director's service, but will continue in effect for the remainder of the terms
of such options.
Directors
Palisade has indicated that it would like Robert L. Tuchman, Mark N.
Kaplan and Clark A. Johnson, current directors of the Company, to continue as
directors following the merger. In addition, the Surviving Corporation will
have a classified board of directors. For more information on the classified
board, see "The Merger Agreement -Comparison of Rights of Holders of Company
Common Stock and Surviving Corporation Stock; Amended Charter and By-Laws -
Classified Board."
Indemnification of the Directors and Officers
The merger agreement provides that the Surviving Corporation will
indemnify the Company's current directors and officers for acts occurring
before the completion of the merger. The Surviving Corporation must also
maintain for six years following the completion of the merger the Company's
current directors' and officers' liability insurance policies. For a more
detailed discussion on the indemnification of directors and officers, see "The
Merger Agreement - Indemnification and Insurance."
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Company Share Ownership
Certain of our directors and executive officers own shares of, and
options to acquire, Company Common Stock, as set forth under "Security
Ownership of Certain Beneficial Owners and Management." These shares and
options will be exchanged for consideration in the merger, as described under
"The Merger Agreement - Conversion of Shares; Merger Consideration."
Clark A. Johnson
Clark A. Johnson, a director of the Company, owns a 5% preferred,
non-voting equity interest in Palisade Capital. The Board of Directors was
aware of such interest in adopting the merger agreement. Mr. Johnson is also a
director of OptiCare Health Systems, Inc., a company in which Palisade is the
controlling shareholder and has the right to designate a majority of the board
of directors.
Mark N. Kaplan
Mark N. Kaplan is Of Counsel to the law firm of Skadden, Arps, Slate,
Meagher & Flom LLP, which has provided legal services to the Company since
1982 and represents the Company in connection with the merger agreement and
the merger. Mr. Kaplan and Skadden, Arps, Slate, Meagher & Flom LLP have also
from time to time represented, and continue to represent, Palisade and certain
of its affiliates, although Palisade has retained separate legal counsel to
advise it on the merger and the merger agreement.
Merger Financing; Source of Funds
The Company and Palisade estimate that the total amount of funds
required for Palisade to complete the merger, and to pay the related fees and
expenses, will be approximately $13,400,000. The funds for the Payment Amount
will be paid from the Company's liquid distributable assets. The Company will
also reimburse Palisade for $125,000 of its legal expenses incurred in
connection with the merger agreement. The remaining $13,275,000 of financing
will come from Palisade's committed capital, which will be contributed to
Palisade by its limited partners. Palisade has sufficient committed capital
available to complete the merger and pay expenses. Palisade has also
represented in the merger agreement that on the Closing Date it will have
sufficient funds to complete the merger and to pay such related fees.
Certain United States Federal Income Tax Consequences
The following is a summary of certain material U.S. federal income
tax consequences of the merger to holders of Company Common Stock who hold
such Company Common Stock as a capital asset. This summary is based on the
Code, Treasury regulations, administrative rulings and court decisions, all as
in effect as of the date hereof and all of which are subject to change at any
time (possibly with retroactive effect). This summary is not a complete
description of all of the U.S. federal income tax consequences of the merger
and, in particular, may not address U.S. federal income tax
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considerations applicable to holders of Company Common Stock who are subject
to special treatment under U.S. federal income tax law (including, for
example, non-U.S. persons, financial institutions, dealers in securities,
insurance companies, tax-exempt entities, holders who acquired Company Common
Stock in connection with the exercise of an employee stock option or right or
otherwise as compensation, holders who hold Company Common Stock as part of a
hedge, straddle or conversion transaction, and corporations with respect to
the dividends received deduction). In addition, no information is provided
herein with respect to the tax consequences of the merger under applicable
foreign, state, or local laws. YOU ARE URGED TO CONSULT WITH YOUR OWN TAX
ADVISORS REGARDING THE PRECISE FEDERAL INCOME AND OTHER TAX CONSEQUENCES OF
THE MERGER TO YOU, INCLUDING THE EFFECTS OF STATE, LOCAL AND FOREIGN TAX LAWS.
For the purposes of this section, "Refac" shall mean the Company with
respect to periods prior to the effective time of the merger and the Surviving
Corporation from and after such effective time.
Taxation of the Receipt of the Merger Consideration
A Refac stockholder who receives the merger consideration should
generally be treated as (i) selling 80% of its Company Common Stock in a
taxable transaction in exchange for the amount of cash received in the merger
(the "Taxable Sale Transaction") and (ii) exchanging 20% of its Company Common
Stock in a recapitalization exchange ("Recapitalization Exchange") for the
Surviving Corporation Stock received in the merger plus the Payment Right.
Taxable Sale Transaction - A Refac stockholder should generally
recognize gain or loss equal to the difference, if any, between the amount of
cash received by the stockholder in the merger and the holder's adjusted tax
basis in the 80% of the Company Common Stock treated as sold in exchange for
cash in the Taxable Sale Transaction. For this purpose, a Refac stockholder
must calculate gain or loss separately for each identifiable block of Company
Common Stock treated as sold in exchange for cash in the Taxable Sale
Transaction. Any such gain or loss should be treated as long-term capital gain
or loss, provided that the holder's holding period for the Company Common
Stock is greater than one year at the effective time of the merger. The
deductibility of capital losses, if any, realized on the disposition of the
80% of the Company Common Stock treated as sold in exchange for cash in the
Taxable Sale Transaction may be subject to certain limitations.
Recapitalization Exchange - A Refac stockholder should generally
recognize gain (but not loss) equal to the lesser of (i) the amount of gain
realized (i.e., the excess of the sum of the fair market value of the
Surviving Corporation Stock and the Payment Right received in the merger over
the stockholder's adjusted tax basis in the 20% of its Company Common Stock
treated as exchanged in the Recapitalization Exchange) and (ii) the fair
market value of the Payment Right received in the merger. For this purpose, a
Refac stockholder must calculate gain or loss separately for each identifiable
block of Company Common Stock treated as exchanged in the Recapitalization
Exchange, and the
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Refac stockholder cannot utilize a loss realized on one block of its Company
Common Stock to offset a gain realized on another block of its Company Common
Stock. Any gain recognized by a Refac stockholder on the Recapitalization
Exchange should be treated as long-term capital gain, provided that the
holder's holding period for the Company Common Stock treated as exchanged in
the Recapitalization Exchange is greater than one year at the effective time
of the merger. A Refac stockholder should take an aggregate initial tax basis
in the Surviving Corporation Stock received in the merger equal to the
stockholder's adjusted tax basis in the 20% of such holder's Company Common
Stock treated as exchanged in the Recapitalization Exchange, increased by the
amount of any gain recognized by such stockholder in the Recapitalization
Exchange, and decreased by the fair market value of the Payment Right received
in the Recapitalization Exchange. The holding period of the Surviving
Corporation Stock received in the merger will include the holding period of
the Company Common Stock treated as exchanged in the Recapitalization
Exchange. A Refac stockholder should take an aggregate initial tax basis in
the Payment Right received in the merger equal to its fair market value at the
effective time of the merger.
Cash Received in Lieu of a Fractional Share - A Refac stockholder who
receives cash instead of a fractional share of Surviving Corporation Stock
will generally recognize capital gain or loss based on the difference between
the amount of cash received instead of a fractional share and the
stockholder's tax basis allocable to such fractional share.
Exercise or Lapse of the Payment Right
Exercise of the Payment Right - A Refac stockholder who exercises the
Payment Right received in the merger to sell its Surviving Corporation Stock
to Refac will be treated as having such Surviving Corporation Stock redeemed
for the amount of cash paid by Refac as a result of the exercise of the
Payment Right reduced by the stockholder's adjusted tax basis in such Payment
Right ("Net Payment Amount"). Such redemption will generally be treated as a
sale or exchange by the Refac stockholder of the shares of Surviving
Corporation Stock provided such redemption (x) results in a "complete
termination" of the stockholder's stock interest in Refac under Section
302(b)(3) of the Code, (y) results in "substantially disproportionate"
reductions in the stockholder's stock interest in Refac under Section
302(b)(2) of the Code, or (z) is "not essentially equivalent to a dividend"
with respect to the stockholder under Section 302(b)(1) of the Code. If any of
the Section 302(b) tests is satisfied, the stockholder will recognize gain or
loss equal to the difference between the Net Payment Amount and the
stockholder's adjusted tax basis in the Surviving Corporation Stock sold to
Refac. Any such gain or loss will be treated as long-term capital gain or
loss, provided that the holder's holding period for the Surviving Corporation
Stock sold to Refac is greater than one year as of the date of the
stockholder's exercise of the Payment Right. The deductibility of capital
losses, if any, realized on the redemption may be subject to certain
limitations.
A redemption of Surviving Corporation Stock as a consequence of the
stockholder's exercise of the Payment Right generally will result in
"substantially disproportionate" reductions in the stockholder's interest in
Refac under Section
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302(b)(2) of the Code if, following such redemption, (x) the stockholder owns
less than 50 percent of the total combined voting power of Refac and (y) the
stockholder's proportionate ownership of Refac's total combined voting stock
which is outstanding immediately after the stockholder's exercise of the
Payment Right is less than 80 percent of such stockholder's proportionate
ownership of Refac's total combined voting stock which is outstanding
immediately prior to the stockholder's exercise of the Payment Right. A
redemption of Surviving Corporation Stock will be "not essentially equivalent
to a dividend" under Section 302(b)(1) of the Code if it results in a
"meaningful reduction" in the stockholder's proportionate stock interest in
Refac (e.g., a meaningful reduction in liquidation preference, dividend
participation and voting rights).
The ownership attribution rules of Section 318(a) of the Code will
apply for purposes of applying the "complete termination" test of Section
302(b)(3) of the Code, the "substantially disproportionate" test of Section
302(b)(2) of the Code, and the "not essentially equivalent to a dividend test"
of Section 302(b)(1) of the Code. Because the ownership attribution rules are
complex, a Refac stockholder who is considering exercising the Payment Right
should consult such holder's tax advisor with respect to satisfying these
tests. The Internal Revenue Service ("IRS") has ruled that a minority
stockholder in a publicly traded corporation whose relative stock interest is
minimal and that exercises no control with respect to corporate affairs is
considered to have a "meaningful reduction" if such stockholder has a
relatively minor reduction in such stockholder's percentage stock ownership.
If the redemption resulting from the exercise of the Payment Right
does not satisfy any of the Section 302(b) tests described above, the Refac
stockholder will generally be treated as receiving a distribution from Refac
in the amount of the Net Payment Amount. Such distribution will generally be
taxable as a dividend to the extent of the stockholder's allocable share of
current or accumulated earnings and profits. Any excess of the Payment Amount
over the amount that is taxable as a dividend will be treated as a non-taxable
return of capital to the extent of the stockholder's adjusted tax basis in the
redeemed stock, and any remaining portion of the Payment Amount will be
treated as taxable capital gain which will constitute long-term capital gain
if the redeemed stock has been held for more than one year.
Lapse of the Payment Right - If the Payment Right received in the
merger is allowed to expire unexercised, the expiration of the Payment Right
should be treated as a sale or exchange of the Payment Right on the expiration
date. The resultant loss should be treated as a long-term capital loss.
Temporary Regulations with Respect to Reportable Transactions
New temporary Treasury regulations (the "Regulations") dealing with
"reportable transactions" were recently published, which require each taxpayer
that has participated, directly or indirectly, in a reportable transaction to
disclose its participation in its tax returns. Under the Regulations, the
transactions described herein may qualify as reportable transactions. As a
result, Refac stockholders may be required to disclose certain information to
the IRS on IRS Form 8886 (not yet available) along with their tax
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returns and retain information relating to the transactions. Additionally, a
list identifying both the transactions described herein and the Refac
stockholders may be maintained and furnished to the IRS upon request.
Legislative proposals may be enacted that would impose significant penalties
for failure to comply with the Regulations. Stockholders should consult their
own tax advisers concerning any possible disclosure obligations arising from
the transactions described herein and should be aware that the parties to the
transactions (including their advisors) intend to comply with all of the
requirements of the Regulations (including the possibility of registering the
transactions) as they determine may apply.
THE FOREGOING SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES IS INCLUDED HEREIN
FOR GENERAL INFORMATION PURPOSES ONLY. ACCORDINGLY, EACH REFAC STOCKHOLDER IS
URGED TO CONSULT HIS, HER OR ITS OWN TAX ADVISORS REGARDING THE FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE MERGER.
Certain Federal Securities Law Consequences
The Surviving Corporation Stock to be issued to in the merger will
not be registered under the Securities Act of 1933, in reliance upon the
exemption from registration provided by Section 3(a)(9) of the Securities Act.
As a result, no registration statement concerning the issuance of
Surviving Corporation Stock in the merger has been or will be filed with the
SEC. Shares of Surviving Corporation Stock issued to a shareholder of the
Company deemed to be an "affiliate" (as the term is defined in SEC Rule 144 of
the Securities Act and which includes the Company's officers and directors),
will not be freely tradable under the Securities Act. Those affiliates may not
resell the shares of Surviving Corporation Stock that they acquire in the
merger except pursuant to:
o an effective registration statement under the Securities Act
covering such shares,
o the resale provisions of SEC Rule 145, or
o any other applicable exemption from the registration
requirements of the Securities Act.
Shares of Surviving Corporation Stock issued in the merger to persons
that are not affiliates will be freely tradable under the Securities Act.
However, if current holders of Company Common Stock sell or otherwise transfer
for value the shares of Surviving Corporation Stock that they receive in the
merger, they will permanently lose their Payment Right for those shares and
the purchaser of such shares will not have any Payment Right for those shares.
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Accounting Treatment
The Company expects to treat the merger as a recapitalization for
accounting purposes, because the Company will become a subsidiary of Palisade
and, following the merger, minority shareholders will hold approximately 20%
of the Company's outstanding shares. The difference in the par value of the
Company Common Stock and Surviving Corporation Stock will be adjusted from
common stock to additional paid-in capital. At or near the effective time of
the merger (1) a cash payment by Merger Sub and (2) 0.2 shares of Surviving
Corporation Stock, with an associated Payment Right issued by the Company,
will be placed with an exchange agent for each eligible share of Company
Common Stock . The exchange agent will exchange this consideration with
shareholders who properly tender their stock certificates. The substance of
the exchange is that of a treasury stock transaction. Accordingly, the Company
will need to determine, as of the date all conditions to the merger have been
satisfied or waived (the Closing Date), the fair value of the consideration
used to purchase the Company Common Stock ((1) and (2) above) in order to
determine if such consideration exceeds the fair value of the Company Common
Stock. The excess, if any, of the fair value of the consideration over such
fair value, will be charged as an expense.
As the Payment Right represents a right of shareholders to sell to
the Surviving Corporation their shares of Surviving Corporation Stock for
cash, the estimated value of the Payment Right will be reflected on the
balance sheet as temporary equity, which is not a component of liabilities or
shareholders' equity. A similar amount will reduce additional paid-in capital.
The estimated value of the Payment Right will be reduced in the event
shareholders sell their 0.2 shares of Surviving Company Stock received in the
exchange prior to June 30, 2005.
The estimated value will initially be reflected on the date of the
merger closing and will be based upon the computed amount of the liquid
distributable assets, subject to the maximum amount payable to shareholders.
Subsequent changes in the estimated value through June 30, 2005, computed on a
quarterly basis, will increase or decrease the temporary equity amount with an
offsetting increase or decrease in additional paid-in capital.
APPRAISAL RIGHTS OF STOCKHOLDERS
If the merger is consummated, stockholders who do not vote "FOR" the
adoption of the merger agreement, who hold shares of common stock of record on
the date of making a written demand for appraisal as described below, who
continuously hold shares of common stock through the closing of the merger,
and who otherwise comply fully with Section 262 of the DGCL ("Section 262"),
will be entitled to a judicial determination of the fair value of their shares
of common stock exclusive of any element of value arising from the
accomplishment of the merger in accordance with the provisions of Section 262
and to receive from us payment of such fair value in cash together with a fair
rate of interest, if any, as determined by such court. A proxy which
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does not contain voting instructions will, unless revoked, be voted in favor
of the merger agreement. Therefore, a stockholder who votes by proxy and who
wishes to exercise appraisal rights must vote against the merger agreement or
abstain from voting on the merger agreement.
Under Section 262, not less than 20 calendar days prior to the
special meeting, we must notify each of the holders of its stock who was such
on the record date for the meeting that such appraisal rights are available
and include in each such notice, a copy of Section 262. This proxy statement
constitutes such notice to the holders of record of common stock.
The following is a summary of the procedures to be followed under
Section 262, the full text of which is attached as Annex D to this proxy
statement. The following discussion is not a complete statement of the law
relating to appraisal rights and is qualified in its entirety by reference to
Annex D. Stockholders should read carefully the full text of Section 262
because failure to follow any Section 262 procedure may result in the loss of
appraisal rights. Any stockholder who desires to exercise appraisal rights
should carefully review Section 262 before electing or attempting to exercise
appraisal rights.
Holders of record of shares of common stock who desire to exercise
appraisal rights must not vote in favor of the merger or consent to the merger
in writing (including by returning a signed proxy card without indicating any
voting instructions as to the proposal) and must deliver a separate written
demand for appraisal of such shares to us prior to the taking of the vote on
the merger agreement. A holder of shares of common stock wishing to exercise
appraisal rights must hold of record such shares on the date the written
demand for appraisal is made and must continue to hold such shares of record
through the effective time of the merger. The demand for appraisal will be
sufficient if it reasonably informs us of the identity of the stockholder and
that the stockholder intends to demand an appraisal of the fair value of
shares of common stock.
If the shares are owned of record in a fiduciary capacity, such as by
a trustee, guardian or custodian, the demand must be executed by or for the
record owner, and if the shares are owned of record by more than one person,
as in a joint tenancy or tenancy in common, the demand must be made by or for
all owners of record. An authorized agent, including an agent for two or more
joint owners, may execute the demand for appraisal for a holder of record
provided the agent identifies the record owner or owners and expressly
discloses in such demand that the agent is acting as agent for the record
owner or owners of such shares.
A record holder, such as a broker, who holds shares of common stock
as a nominee for beneficial owners, some or all of whom desire to demand
appraisal, must exercise appraisal rights on behalf of such beneficial owners
with respect to the shares held for such beneficial owners. In such case, the
written demand for appraisal should set forth the number of shares covered by
such demand. Unless a demand for appraisal specifies a number of shares, the
demand will be presumed to be applicable to all shares outstanding in the name
of such record owner. If a stockholder holds shares of common
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stock through a broker which in turn holds the shares through a central
securities depository nominee such as Cede & Co., a demand for appraisal of
such shares must be made by or on behalf of the depository nominee and must
identify the depository nominee as record holder. BENEFICIAL OWNERS WHO ARE
NOT RECORD OWNERS AND WHO INTEND TO EXERCISE APPRAISAL RIGHTS SHOULD INSTRUCT
THE RECORD OWNER TO COMPLY STRICTLY WITH THE STATUTORY REQUIREMENTS WITH
RESPECT TO THE DELIVERY OF WRITTEN DEMAND FOR APPRAISAL. A DEMAND FOR
APPRAISAL SUBMITTED BY A BENEFICIAL OWNER WHO IS NOT THE RECORD OWNER WILL NOT
BE HONORED.
A proxy or vote against the adoption of the merger agreement will not
constitute a demand for appraisal. Stockholders should not expect to receive
any additional notice with respect to the deadline for demanding appraisal
rights.
Any holder of record of common stock must deliver the written demand
for appraisal prior to the taking of the vote on the merger agreement. All
demands for appraisal should be addressed to Refac, The Hudson River Pier -
Suite 110, 115 River Road, Edgewater, New Jersey 07020, Attention: Secretary.
If the merger agreement is adopted, then within 10 days after the
effective date of the merger, we will provide notice of the effective date of
the merger to all stockholders who have complied with Section 262 and who have
not voted in favor of or consented to the merger.
A stockholder may withdraw a demand for appraisal in writing within
60 days after the effective time of the merger and accept the terms of the
merger. Thereafter, our approval will be needed for such a withdrawal. In all
events, if a petition for appraisal has been filed in the Delaware Court of
Chancery, a stockholder may not withdraw without the approval of the Court.
Within 120 days after the effective date of the merger, in compliance
with Section 262, any stockholder who has properly demanded an appraisal and
who has not withdrawn his or her demand as provided above and the Company each
has the right to file in the Delaware Court of Chancery a petition, with a
copy served on us in the case of a petition filed by a dissenting stockholder,
demanding a determination of the fair value of the shares held by all
dissenting stockholders. If, within the 120-day period following the effective
time of the merger, no petition shall have been filed as provided above, all
rights to appraisal will cease and all dissenting stockholders who owned
shares of common stock will become entitled to receive the merger
consideration for each share of common stock held, without interest. We are
not obligated, and do not currently intend, to file such a petition.
Any dissenting stockholder is entitled, within the 120-day period
following the effective time of the merger and upon written request to us, to
receive from us a statement setting forth:
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o the aggregate number of shares of common stock which have not
voted to adopt the merger agreement and with respect to which
demands for appraisal have been received, and
o the aggregate number of dissenting stockholders.
Such statement must be mailed within ten days after a written request for such
statement has been received by us, or within ten days after the expiration of
the period for delivery of demands for appraisal, as described above,
whichever is later.
Upon the filing of a petition, the Delaware court is empowered to
determine which dissenting stockholders have complied with the provisions of
Section 262 and are entitled to an appraisal of their shares. The Delaware
court may require that dissenting stockholders submit their share certificates
for notation thereon of the pendency of the appraisal proceedings and the
Delaware court may dismiss the proceedings as to any dissenting stockholder
who does not comply with such requirement.
After determining the stockholders entitled to appraisal, the
Delaware court will appraise shares of common stock owned by the dissenting
stockholders, determining the fair value of such shares exclusive of any
element of value arising from the accomplishment or expectation of the merger.
In determining the fair value, the Delaware court is to take into account all
relevant factors. In Weinberger v. UOP, Inc., the Delaware Supreme Court
discussed the factors that could be considered in determining fair value in an
appraisal proceeding, stating that "proof of value by any techniques or
methods which are generally considered acceptable in the financial community
and otherwise admissible in court" should be considered and that "[f]air"
price obviously requires consideration of all relevant factors involving the
value of a company. The Delaware Supreme Court has stated, that in making this
determination of fair value, the Delaware courts must consider market value,
asset value, dividends, earnings prospects, the nature of the enterprise and
any other factors which could be ascertained as of the date of the merger and
which "throw any light on future prospects of the merged corporation."
The Delaware Supreme Court noted that Section 262 provides that fair
value is to be determined "exclusive of any element of value arising from the
accomplishment or expectation of the merger." In Cede & Co. v. Technicolor,
Inc., the Delaware Supreme Court stated that such exclusion is a "narrow
exclusion [that] does not encompass known elements of value" but which applies
only to the speculative elements of value arising from such accomplishment or
expectation. In Weinberger, the Delaware Supreme Court held that "elements of
future value, including the nature of the enterprise, which are known or
susceptible of proof as of the date of the merger and not the product of
speculation, may be considered."
Stockholders considering seeking appraisal should consider that the
fair value of their shares determined by the Delaware court under Section 262
could be more than, the same as, or less than, the consideration payable
pursuant to the merger agreement. We reserve the right to assert in any
appraisal proceedings that, for purposes of Section 262,
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the "fair value" of a share of common stock is less than the consideration
payable pursuant to the merger agreement.
The Delaware court may also:
o determine a fair rate of interest, if any, to be paid to
dissenting stockholders in addition to the fair value of the
shares,
o determine the costs of the proceeding and assess such costs
against the parties as the Delaware court deems equitable
(however, costs do not include attorneys' and expert witnesses'
fees), and
o upon application of a dissenting stockholder, order all or a
portion of the expenses incurred by any dissenting stockholder
in connection with the appraisal proceeding, including, without
limitation, reasonable attorneys' fees and fees and expenses of
experts, to be charged pro rata against the value of all shares
entitled to appraisal.
No appraisal proceedings in the Delaware court will be dismissed as
to any dissenting stockholder without the approval of the Delaware court, and
this approval may be conditioned upon terms which the Delaware court deems
just.
From and after the effective date of the merger, stockholders who
have demanded appraisal rights in accordance with Section 262 will not be
entitled to vote or consent by written action any shares subject to demand for
appraisal for any purpose and will not be entitled to receive payment of any
dividends or other distributions payable to stockholders except dividends or
distributions payable to stockholders of a record date prior to the effective
date of the merger.
Failure to take any required step in connection with appraisal rights
may result in the loss of such rights. Any stockholder who loses such rights
will only be entitled to receive the consideration offered in the merger
without interest.
THE MERGER AGREEMENT
The following is a summary of the material provisions of the merger
agreement, as amended. This summary is qualified in its entirety by reference
to the full text of the merger agreement, a copy of which is attached as Annex
A to this proxy statement, and to the amendments to the merger agreement,
copies of which are attached as Annexes A1, A2 and A3, each of which is
incorporated herein by reference. We encourage you to read the merger
agreement as amended because it, and not this summary, is the legal document
that governs the merger. Any capitalized terms used and not defined below have
the meanings given to them in the merger agreement.
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The Merger and the Effective Time
The merger agreement provides for the merger of Merger Sub with and
into the Company upon the terms and subject to the conditions of the merger
agreement. Following the merger, the separate corporate existence of Merger
Sub will cease, and all outstanding shares of the Company's capital stock will
be cancelled or converted in the manner described below under "Merger
Consideration." The Company will survive the merger and continue to exist
thereafter, with Palisade owning approximately 80% of the Company's
outstanding shares. Following the merger, the Company will continue to be a
public company required to file reports under the Securities Exchange Act. For
the purposes of this section, "Surviving Corporation" will refer to the
post-merger corporate existence of the Company.
The Closing Date will occur no later than 10:00 a.m. on the third
business day after the satisfaction or waiver of all of the conditions in the
merger agreement. The parties will file a certificate of merger with the
Secretary of State of the State of Delaware on the Closing Date. The merger
will become effective at the time the certificate of merger is filed with the
Secretary of State (the "Effective Time").
We cannot assure you when, or if, all the conditions for the
completion of the merger will be satisfied or waived. See "The Merger
Agreement - Conditions to the Merger." We intend to complete the merger as
promptly as practicable subject to stockholder adoption of the merger
agreement.
Conversion of Shares; Merger Consideration
The merger agreement provides that at the Effective Time, each share
of Company Common Stock issued and outstanding immediately prior to the
Effective Time (other than shares held by stockholders who exercise their
appraisal rights) will be converted at the Effective Time into the right to
receive (1) $3.60 in cash (without interest) and (2) 0.2 shares of Surviving
Corporation Stock (collectively, the "Merger Consideration"). In addition,
each stockholder will also have the right to sell the shares of Surviving
Corporation Stock to the Company for the Payment Amount. Cash will be paid in
lieu of fractional shares of Surviving Corporation Stock.
The Payment Amount is subject to the following adjustments:
(i) If the Liquid Distributable Assets are less than $14 million as
of March 31, 2003, then the price will be equal to (A) $5.50
minus (B) an amount equal to the product of (x) the difference
between $14 million and the amount of Liquid Distributable
Assets and (y) 1.25, divided by (z) the sum of (1) 697,062 and
(2) 20% of the number of Company options exercised between
August 19, 2002 and the Closing Date.
(ii) If the Liquid Distributable Assets are less than $18 million as
of June 30, 2005, then the price will be equal to (A) the lesser
of $5.50 and the number calculated in (i) above, minus (B) an
amount equal to the June 30, 2005
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Deficiency (as discussed below) divided by the sum of (1)
697,062 and (2) 20% of the number of Company options exercised
between August 19, 2002 and the Closing Date.
(iii)If the Liquid Distributable Assets as of June 30, 2005 are in
excess of $18 million, then the price will be equal to the
lesser of $5.50 and the number calculated in (i) above, plus a
number equal to (1) 60% of such excess divided by the sum of (2)
697,062 and 20% of the number of Company options exercised
between August 19, 2002 and the Closing Date.
The June 30, 2005 Deficiency will be the difference between $18
million and the sum of (x) the Liquid Distributable Assets as of June 30, 2005
and (y) the shortfall, if any, between $14 million and the Liquid
Distributable Assets as of March 31, 2003.
The Company estimates that its Liquid Distributable Assets as of
March 31, 2003 will exceed the $14 million requirement but, given uncertainty
as to the collectibility of existing assets and the determination of available
tax benefits, it cannot determine the amount as of June 30, 2005. See "Risk
Factors."
The Payment Right will be limited to stockholders who (i) hold their
shares of Surviving Corporation Stock received in the merger continuously
until June 30, 2005 and (ii) tender those shares in accordance with the
instructions sent to them following the final calculation of the Liquid
Distributable Assets. If you sell or otherwise transfer for value your shares
received in the merger: (i) you will permanently lose your Payment Right with
respect to such shares; and (ii) the purchaser of your shares will not have
Payment Right with respect to such shares.
At the Effective Time, all shares of Company Common Stock will
automatically be cancelled and cease to exist. Therefore, any person holding a
certificate representing shares in Company Common Stock will no longer have
any rights with respect to such shares, except for the right to receive the
Merger Consideration.
Shares of Company Common Stock that are outstanding immediately prior
to the merger and held by any dissenting stockholder who (a) has not voted in
favor of the merger and (b) properly perfects his or her appraisal rights will
not be converted into the right to receive the Merger Consideration, but
rather the dissenting stockholder will be entitled to payment of the fair
value of his or her dissenting shares in accordance with and subject to
Section 262. See "Appraisal Rights of Stockholders."
Liquid Distributable Assets
Following the merger, the Company will continue with the liquidation
of its assets announced in March 2002, and Palisade has agreed to use its
reasonable best efforts to cause the liquidation to continue and to maximize
the amount realized in connection with the liquidation. For the purposes of
determining the price at which stockholders may sell their shares of Surviving
Corporation Stock back to Company, the term "Liquid Distributable Assets"
means an amount of assets generated through:
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o the sale of the Surviving Corporation's business segments and
assets existing as of the Closing Date, Receivables (as defined
below) and tax refunds collected after the Closing Date for
taxes paid prior to the Closing Date ("Tax Refunds") plus the
value of Tax Attributes (as defined below), and interest earned
on any of the above, plus
o the Company's cash and cash equivalents as of the Closing Date
and interest earned thereon.
Liquid Distributable Assets will be calculated net of (1) taxes paid,
(2) actual operating expenses and liabilities incurred through March 31, 2003
or June 30, 2005, as applicable, (3) any incentive payment paid or payable to
Messrs. Tuchman or Cardonne, net of related tax benefits, and (4) any reserve
necessary to cover future costs of completing the sale of business segments
and assets of the Surviving Corporation. In calculating such reserves, future
expectancies of additional Liquid Distributable Assets will be taken into
account, and any possible claim by the Internal Revenue Service that has
neither been asserted nor threatened shall not be taken into account. Asserted
or threatened claims by the Internal Revenue Service will be taken into
account only if asserted in writing or, if oral, reduced to writing within 20
days, and only to the extent of a reasonable estimate of the ultimate
liability, after discussion with the Board Observers. Liquid Distributable
Assets will not include the Company's reimbursement of legal fees to Palisade
in connection with the merger agreement or proceeds from the exercise of stock
options.
To the extent the Surviving Corporation incurs debt, pays interest on
such debt, acquires any assets, incurs any expenses or takes any other action
not directly related to the Company's liquidation efforts or to the operation
of the Company's business as it existed on the Closing Date, these actions
will not be taken into account when determining the amount of Liquid
Distributable Assets and Tax Attributes.
The Surviving Corporation will maintain a separate accounting for the
Liquid Distributable Assets, and the costs of the accounting will be excluded
in determining the amount of Liquid Distributable Assets. The Surviving
Corporation will calculate the Liquid Distributable Assets, but the
calculation must be approved by two representatives designated by the Company
prior to the closing date to represent your interests. (See "- Directors and
Officers; Board Observers" below). If the board observers do not agree with
the Surviving Corporation's calculation, the Liquid Distributable Assets will
be calculated by an independent accounting firm or financial advisor. After
the calculation of Liquid Distributable Assets is final, the Surviving
Corporation will send you instructions about how to sell your shares of
Surviving Corporation Stock back to the Company, including information about
the sale price.
Tax Attributes
For the purpose of determining Liquid Distributable Assets, "Tax
Attributes" as of March 31, 2003 will include any item of loss, deduction,
expense, credit or other tax attribute held by the Surviving Corporation or
its subsidiaries immediately after March
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31, 2003 that is available to offset taxable income of the Company (or, after
the Effective Time, the Surviving Corporation) or its subsidiaries
attributable to any taxable period (whether such taxable period begins before,
on or after the Closing Date), to the extent not already used to obtain a Tax
Refund. The amount of any Tax Attribute held by the Surviving Corporation and
its subsidiaries immediately after March 31, 2003 will be determined as if the
taxable period of the Surviving Corporation and its subsidiaries that includes
March 31, 2003 ended on March 31, 2003.
Tax Attributes as of June 30, 2005 will include any item of loss,
deduction, expense, credit or other tax attribute held by the Surviving
Corporation or its subsidiaries immediately after March 31, 2003 that is
actually used (or can be used, upon filing of a tax return for any taxable
period ending before, on, or which includes June 30, 2005) to offset taxable
income of the Company (or, after the Effective Time, the Surviving
Corporation) or its subsidiaries attributable to any taxable period ending on
or before June 30, 2005, or, in the case of a taxable period that includes
June 30, 2005, the portion of such taxable period that ends on June 30, 2005,
to the extent not already used to obtain a Tax Refund. With respect to any
taxable period that includes but does not end on June 30, 2005, the amount of
taxable income attributable to such taxable period that may be offset by Tax
Attributes will be the amount of taxable income which would be offset if the
relevant taxable period had ended on June 30, 2005.
Receivables
In determining Liquid Distributable Assets, "Receivables" will
include (1) as of March 31, 2003, the collection of revenue streams existing
as of the Closing Date and the collection, maturity or conversion of the
Surviving Corporation's assets existing as of the Closing Date (including, but
not limited to, note payments and accounts receivable), and (2) as of June 30,
2005, the amounts actually collected pursuant to clause (1) by the Surviving
Corporation through such date.
Treatment of Company Stock Options
All of the outstanding options to purchase Company Common Stock are
vested and will continue in accordance with their existing terms following the
merger. Upon the exercise of any option between the Effective Time and June
30, 2005, an option holder will receive the Merger Consideration and the
Payment Right for each share represented by the option. Upon the exercise of
any option after June 30, 2005, an option holder will receive only the Merger
Consideration for each share represented by the option. Incentive stock
options will be adjusted as necessary under applicable law.
Directors and Officers; Board Observers
Directors and Officers. The merger agreement provides that the
directors of Merger Sub and the officers of the Company immediately prior to
the Effective Time of the merger will be the directors and officers of the
Surviving Corporation following the merger. Palisade has informed the Company
that it intends to nominate Mark S. Hoffman, Richard S. Meisenberg, Melvin
Meskin and Jeffrey D. Serkes as new directors.
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Palisade has indicated that it would like Robert L. Tuchman, Mark N. Kaplan
and Clark A. Johnson, current directors of the Company, to continue as
directors following the merger. Messrs. Tuchman, Kaplan and Johnson have been
directors of the Company since 1991, 1967 and 2000, respectively. Mr. Tuchman,
Chairman, President, Chief Executive Officer and General Counsel of the
Company and Raymond A. Cardonne, Vice President, Chief Financial Officer,
Treasurer and Secretary of the Company, have been officers of the Company
since 1991 and 1997, respectively. You can find further information regarding
Palisade's designees in the section entitled "Designees to the Board of
Directors."
In addition, the board of directors of the Surviving Corporation will
be divided into three separate classes. Palisade has advised the Company that
the first class of directors will consist of Clark A. Johnson and Mark N.
Kaplan, the second class of directors will consist of Richard S. Meisenberg
and Robert L. Tuchman and the third class of directors will consist of Mark S.
Hoffman, Melvin Meskin and Jeffrey D. Serkes. For more information on the
classified board, see "The Merger Agreement -Comparison of Rights of Holders
of Company Common Stock and Surviving Corporation Stock; Amended Charter and
By-Laws - Classified Board."
Board Observers. The Company will designate two representatives to
attend and observe (in a non-voting capacity) all meetings of the Surviving
Corporation's board of directors (the "Board Observers"). The Board Observers
will be entitled to receive notices of and to attend meetings of the Surviving
Corporation's board of directors, in the same manner as the members of the
Surviving Corporation's board of directors. The Board Observers will approve
the Surviving Corporation's calculation of Liquid Distributable Assets. Until
such calculation is finalized, there will be two Board Observers. The Board
Observers will be paid $1,000 and reimbursed for their reasonable expenses for
each board meeting attended, and will be indemnified by the Company to the
extent permitted by applicable law and the Company's organizational documents.
Neil R. Austrian and Ira T. Wender, who currently serve as directors of the
Company, are expected to serve as the Board Observers. Messrs. Austrian and
Wender have been directors of the Company since 1980 and 1981, respectively.
Representations and Warranties
The merger agreement contains certain customary representations and
warranties by the Company that cover, among other things:
o organization and qualification,
o capital stock,
o authorization,
o non-contravention, approvals and consents,
o SEC reports and financial statements,
o absence of certain changes or events,
o absence of undisclosed liabilities,
o legal proceedings,
o proxy statements and other filings,
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o compliance with laws and orders,
o compliance with agreements and material contracts,
o taxes,
o employee benefit plans,
o ERISA compliance,
o environmental matters,
o real property,
o intellectual property rights,
o non-competition agreements,
o agreements with regulatory agencies;
o amendment of the rights agreement,
o opinion of the financial advisor,
o voting requirements,
o state takeover statues;
o brokers and finders,
o insurance,
o certain business practices,
o investment company status,
o employees, and
o related party transactions.
The merger agreement also contains certain customary representations
and warranties by the Palisade and Merger Sub that cover, among other things:
o organization and qualification,
o capital stock of Merger Sub,
o authorization,
o non-contravention, approvals and consents,
o proxy statement,
o legal proceedings,
o sufficiency of funds,
o brokers and finders, and
o ownership of Company Common Stock.
No representations or warranties of the Company, Palisade or Merger
Sub will survive beyond the Effective Time.
Conduct of the Company Prior to the Merger
The merger agreement provides that, with certain exceptions, prior to
the Effective Time, the Company and its subsidiaries will continue their
business activities and not take certain actions without the prior written
consent of Palisade. The Company and its subsidiaries are required to carry on
the current business in the ordinary course consistent with past practice and
in compliance in all material respects with applicable law and use their best
efforts to preserve intact the business organization of the Company
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and each of its subsidiaries. The Company has also agreed that, until the
Closing Date, it and its subsidiaries will not without the prior consent of
Palisade:
o amend or propose to amend their organization documents,
o declare, set aside or pay any dividends or make other
distributions on any of their capital stock,
o split, combine, reclassify or take similar action with respect
to any of their capital stock,
o adopt a plan of liquidation or authorize such liquidation,
o redeem, repurchase any shares of its capital stock,
o issue, sell, grant, pledge or otherwise encumber, any shares of
their capital stock or option (other than allowing the exercise
of existing options),
o adopt or amend any plan for the benefit or welfare of any
director, officer or employee,
o increase the compensation of any director, officer or employee
(other than retention bonus arrangements or agreements for less
than $15,000),
o increase the fringe benefits of or pay any benefit to any
director, officer or employee (other than fees and expenses of
the Special Committee),
o enter into or modify any employment or similar agreement with
any director, officer, or employee (other than severance
arrangements for less than $15,000),
o acquire any interest in, make any investment in or make any
capital contribution to any person, business or entity,
o acquire or lease any properties or material assets of any person
or business entity,
o (i) incur or assume any debt or guarantee any debt of another
person or business entity, (other than between the Company and
its subsidiaries), (ii) issue or sell any debt securities, (iii)
make any loans, advances or capital contributions or (iv) enter
into any interest rate cap, interest rate collar, interest rate
swap, currency hedging transaction,
o pay, discharge, settle or satisfy any extraordinary claims,
liabilities or obligations,
o waive any claims or rights,
o make any change in any method of accounting or accounting
practice or policy,
o create or incur any lien on any property or assets,
o amend or materially modify the terms of any indebtedness,
guarantees of indebtedness or any other securities,
o execute any definitive or binding agreement relating to
Heli-Coil and Dodge licensing rights, other than as previously
disclosed to Palisade, or
o take any action that would be reasonably expected to cause the
Company's representations and warranties to be materially untrue
at the Effective Time.
The above covenants provide certain exceptions which enable the
Company to continue with the liquidation of its assets announced in March
2002. Until the Closing
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Date, the Company and its subsidiaries may not directly or indirectly take any
other action (or fail to take any required action) that would be materially
inconsistent with, materially delay or materially adversely affect the
consummation of the merger.
No Solicitation
The merger agreement provides that, until the Closing Date, the
Company and its subsidiaries and affiliates may not directly or indirectly (i)
solicit or consider any proposals or offers relating to, (ii) provide any
information to any third party in response to, (iii) engage in any
negotiations or discussions with any person or business entity relating to, or
(iv) otherwise cooperate in any way with any person in connection with, any
acquisition, merger, recapitalization, dissolution or any similar transaction
involving all or substantially all of the Company, its business or assets
(other than in connection with the liquidation announced on March 27, 2002) or
80% or more of the Company Common Stock (an "Alternative Transaction"), other
than the merger.
However, if a third party proposes an Alternative Transaction to the
Company, the Board of Directors may participate in negotiations or discussions
with, or provide information to, such third party if it determines in good
faith that it has a fiduciary duty to do so, provided that (a) the Board of
Directors determines that such third party is capable of making a Superior
Offer (as defined below) and (b) the Company promptly notifies Palisade of the
terms of any such offer, the status of the Company's consideration of the
offer and of any actions taken by the Company in response to the offer.
A "Superior Offer" is a written offer made by a third party (x) to
purchase the Company or its business or assets or 80% or more of the Company's
capital stock or other equity that the Board of Directors, after consultation
with its outside financial advisor, determines in good faith to be more
favorable economically to the Company and its stockholders than the Palisade
transaction and (y) that the Board of Directors determines in good faith is
likely to result in a transaction that will actually be consummated.
Upon signing the merger agreement, the Company was required to
immediately cease any existing discussions or negotiations with respect to any
Alternative Transaction.
The Board of Directors also may not, except as expressly provided in
the merger agreement,
o withdraw or modify, or propose publicly to withdraw or modify,
in a manner adverse to Palisade or Merger Sub, its approval or
recommendation of the merger or the merger agreement,
o approve or recommend, or propose publicly to approve or
recommend, any Alternative Transaction, or
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o cause the Company to enter into any letter of intent or
agreement related to an Alternative Transaction.
However, upon receipt of a Superior Offer, the Board of Directors may
take any of these actions if the Company first (i) provides written notice to
Palisade of its intent to do so and (ii) if, within five business days of
receipt, Palisade does not make an offer that the Board of Directors
determines in good faith to be at least as favorable to the Company's
stockholders from a financial point of view as the Superior Offer, and (iii)
terminates the merger agreement and pays Palisade a termination fee. See
"-Fees and Expenses" below.
The merger agreement also permits the Company to take or disclose to
its stockholders a position contemplated by Rule 14e-9 or Rule 14e-2(a) of the
Exchange Act or make any disclosure to stockholders which, in the good faith
judgment of the Board of Directors, is necessary under applicable law.
Indemnification and Insurance
The merger agreement provides that the Company's current and former
directors, officers, employees and agents will be indemnified by the Surviving
Corporation for acts occurring before the merger, to the fullest extent
possible under Delaware law, our current charter and by-laws and any existing
indemnification contracts. For six years following the merger, the Surviving
Corporation will maintain the Company's current directors' and officers'
liability insurance policies. If the cost of this insurance exceeds 200% of
the Company's current premium, the Surviving Corporation will provide the
maximum amount of insurance available for such 200%. Any company which merges
with or acquires the Company after the merger will be required to honor the
indemnification obligations under the merger agreement.
Employee Benefit Plans
For two years after the completion of merger, the Company's employees
will be provided with benefits not less favorable taken as a whole than the
benefits provided to employees before the Effective Time, although the
Surviving Corporation is not required to continue any specific Company benefit
plan. The Surviving Corporation will honor all severance plans and employment
and severance agreements of the Company and its subsidiaries and provide
severance pay under the Company's benefit plans to any employee without an
employment or severance agreement who is terminated within the first year
following the merger. In addition, it will honor all obligations under the
change in control provisions of the Company's benefit plans which will be
triggered by the merger. The Company's employees will receive full credit
under the Surviving Corporation's benefit plans for their service with the
Company and for any co-payments or deductibles paid prior to the merger. The
Surviving Corporation will also waive all limitations on preexisting
conditions, exclusions and waiting periods under benefit plans occurring due
to the change in benefit plans in connection with the merger.
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Recommendation of the Board of Directors; Stockholder's Meeting
The merger agreement requires us to call, give notice of, convene and
hold a special meeting of our stockholders for the purpose of voting on the
adoption of the merger agreement. The merger agreement provides that the Board
of Directors will recommend that our stockholders vote in favor of the
adoption of the merger agreement. However, the Board of Directors may withdraw
or modify its recommendation under certain circumstances. (See "-No
Solicitation" above) If Palisade then terminates the merger agreement, it may
be entitled to a termination fee of $500,000. See "-Termination" and "- Fees
and Expenses" below.
Conditions to the Merger
The completion of the merger depends on a number of conditions being
satisfied, including the conditions described below.
Each party's obligation to complete the merger is subject to the
following conditions on the Closing Date, which it may waive in its sole
discretion:
o the Company's stockholders have adopted the merger agreement by
a majority vote at the special meeting, and
o no court or government agency may issue a law or judgment
prohibiting the merger or the other transactions contemplated by
the merger agreement.
Palisade's obligation to complete the merger is also subject to the
following conditions on the Closing Date, which may be waived by Palisade in
its sole discretion:
o the Company's representations and warranties concerning
organization and qualification, capital stock, authorization and
brokers and finders must be true as of the Closing Date,
o all of the Company's other representations and warranties must
be accurate (without regard to any materiality qualifications)
as of the Closing Date, except to the extent such inaccuracies
do not in the aggregate both result in a liability of more than
$100,000 to the Company and have a material adverse effect on
the company and its subsidiaries,
o the Company and its subsidiaries have obtained all consents and
approvals required for the merger,
o the Company has performed all of its obligations under the
merger agreement,
o the Company has delivered to Palisade all certificates and
resolutions required under the merger agreement, and
o appraisal rights are exercised for no more than 10% of the
Company's outstanding shares (excluding Palisade's shares and
treasury shares).
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The Company's obligation to effect the merger is also subject to the
following conditions on the Closing Date, which may be waived by the Company
in its sole discretion:
o the representations and warranties made by Palisade and Merger
Sub concerning organization and qualification, capital stock of
Merger Sub, authorization and sufficient funds must be true as
of the Closing Date,
o all other representations and warranties made by Palisade and
Merger Sub must be accurate (without regard to any materiality
qualifications) as of the Closing Date, except to the extent
such inaccuracies do not in the aggregate have a material
adverse effect on the merger agreement, Palisade or Merger Sub
and their ability to perform their obligations under the merger
agreement,
o Palisade and Merger Sub have performed all of their obligations
under the merger agreement, and
o Palisade and Merger Sub have delivered to the Company all
certificates and resolutions required under the merger
agreement.
Termination
The merger agreement may be terminated:
o by mutual consent of Palisade and the Company, or
o by either Palisade or the Company: if (i) the merger has not
occurred by March 31, 2003, (ii) the merger agreement was not
adopted by a majority of our stockholders at the special
meeting; or (iii) any court or government agency has issued a
law or judgment prohibiting the merger,
by Palisade, if:
o the Board of Directors withdraws, or adversely modifies its
recommendation of, the merger,
o the Board of Directors approves or recommends, or the Company
enters into an agreement for, an Alternative Transaction,
o there is a tender offer for the Company Common Stock and the
Board of Directors within five days does not recommend against
it,
o the Company materially breaches any of its representations,
warranties or obligations under the merger agreement, or
by the Company:
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o if before our stockholders adopt the merger agreement at the
special meeting, the Board of Directors determines to recommend
to stockholders, or the Company enters into an agreement for, a
Superior Offer, or
o Palisade or Merger Sub materially breaches any representations,
warranties or obligations under the merger agreement.
Fees and Expenses
If the merger is consummated, on the Closing Date, the Company must
reimburse Palisade $125,000 for its legal fees and expenses.
The Company must pay Palisade a break-up fee of $500,000 if the
Company terminates the merger agreement because the Board of Directors
recommends a Superior Offer or Palisade terminates the merger agreement
because:
o the Board of Directors withdraws, or modifies adversely its
recommendation of, the merger,
o the Board of Directors approves or recommends to stockholders,
or the Company enters into a written agreement for, an
Alternative Transaction, or
o there is a tender offer or exchange offer for the Company Common
Stock and the Board of Directors within five days does not
recommend against it.
The Company must pay Palisade liquidated damages of $300,000 if
either party terminates the merger agreement because our stockholders did not
adopt the merger agreement at the special meeting or Palisade terminates the
merger agreement because the Company materially breaches any of its
representations, warranties or obligations under the merger agreement.
Comparison of Rights of Holders of Company Common Stock and Surviving
Corporation Stock; Amended Charter and By-Laws
The certificate of incorporation and by-laws of Merger Sub existing
immediately prior to the Effective Time will become the certificate of
incorporation and by-laws of the Surviving Corporation, but the Surviving
Corporation will continue under the name Refac. Consequently, rights of
holders of Surviving Corporation Stock will be governed by the Surviving
Corporation's certificate of incorporation and by-laws. Copies of the
certificate of incorporation, as amended, and by-laws of Merger Sub are
attached to this proxy statement as Annexes E1, E2 and F, respectively.
This section of this proxy statement compares the rights of holders
of Company Common Stock and holders of Surviving Corporation Stock. This
section does not include a complete description of all differences among the
rights of these stockholders, nor does it include a complete description of
the specific rights of these stockholders. In addition, the identification of
some differences in the rights of these stockholders as material is not
intended to indicate that other differences that are equally important or that
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you deem important do not exist. This summary, therefore, is qualified in its
entirety by reference to the DGCL, the Company's current certificate of
incorporation and by-laws and the Surviving Corporation's certificate of
incorporation and by-laws. You should carefully read this entire proxy
statement and any other documents to which we refer for a more complete
understanding of the differences between the rights of holders of Company
Common Stock and holders of Surviving Corporation Stock.
The Company and Merger Sub are both incorporated under the laws of
the State of Delaware. Any differences, therefore, in the rights of holders of
Company Common Stock and Surviving Corporation Stock arise primarily from
differences in their respective certificates of incorporation and by-laws.
Following is a summary of the primary differences between the shares
of Company Common Stock and the shares of Surviving Corporation Stock, which
differences are reflected in the new certificate of incorporation and by-laws:
Authorized Capital Stock
The total authorized stock of the Company consists of 20,000,000
shares of common stock, par value $0.10 per share, 100,000 shares of serial
preferred stock, par value $5.00 per share, and 5,000 shares of 6% preferred
stock, par value $100.00 per share.
The total authorized stock of Merger Sub consists of 20,000,000
shares of common stock, par value $0.001 per share, and 1,000,000 shares of
preferred stock, par value $0.001 per share.
Preferred Stock
The Company's certificate of incorporation states that the preferred
stock of the Company entitles its holders to receive non-cumulative cash
dividends at the rate of 6% per annum per share on the par value thereof, to
be paid before any dividends on the common stock, as and when a dividend is
declared by the Board of Directors. In the event of liquidation, the holders
of preferred stock are entitled to receive $100 per share, plus any declared
and unpaid dividends, before any distribution or payment to the holders of
common stock. The Board of Directors may also elect to redeem preferred stock
(either by total redemption or pro rata) at the price of $105 per share, plus
any declared and unpaid dividends, upon not less than 10 days and not more
than 40 days notice. Holders of preferred stock have no voting rights other
than those provided by law, nor are holders of preferred stock entitled to
pre-emptive rights with regard to new issues of Company securities.
Merger Sub's certificate of incorporation states that the Board of
Directors is authorized to divide and issue shares of preferred stock in
classes or series and to fix voting powers and such other rights as the Board
of Directors may determine. The Board of Directors is also authorized to (i)
increase or decrease the stated number of shares of preferred stock (but not
below the number of shares then outstanding) and (ii) unless stockholder
approval is otherwise required by Delaware law, modify or adjust the voting
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powers, stated value, dividend rate, the cumulative or non-cumulative nature
of the dividends, liquidation preferences and rights, redemption price and
conversion price and form of consideration of such preferred shares.
Meetings of Stockholders
The Company by-laws provide that, unless prescribed by statute,
special meetings of the stockholders may be called at any time by the Board of
Directors or the President. Notice of all stockholders meetings shall be given
to each stockholder of record at least 10 days and not more than 50 days in
advance of the meeting. Meetings shall be chaired by the President, or in the
President's absence, a Vice President, or in a Vice President's absence, any
person elected by a majority of stockholders. Only that business specified by
the notice of meeting or properly brought before the annual meeting by the
Board of Directors or a stockholder of record may be transacted. To properly
bring business before an annual meeting, stockholders must give written notice
to the Secretary not less than 60 days and not more than 90 days prior to the
anniversary date of the immediately preceding annual meeting.
Merger Sub's by-laws state that special meetings of the stockholders,
unless prescribed by statute, (i) may be called by the Board of Directors, the
President or the Secretary and (ii) shall be called by the President or
Secretary at the request of stockholders holding a majority of the outstanding
common stock. Notice of all such meetings shall be given to stockholders at
least 10 days and not more than 60 days in advance of such meeting, except
where the matter to be voted on concerns a merger or consolidation, or a sale,
lease or exchange of all or substantially all of the corporation's assets, in
which case notice shall be given at least 20 days and not more than 60 days in
advance of the meeting. Merger Sub's by-laws do not specify a procedure for
stockholders to bring business before any meeting.
Quorum for Stockholder Meetings
The Company's by-laws state that at all meetings of the stockholders,
the holders of a majority of the votes of the shares of stock issued and
outstanding and entitled to vote shall constitute a quorum, except where
stockholder are required to vote by class, in which case a majority of the
issued and outstanding shares of the appropriate class shall constitute a
quorum.
Merger Sub's by-laws state that the holders of 55% of the shares of
capital stock issued and outstanding and entitled to vote shall constitute a
quorum for all business, except as otherwise provided in the certificate of
incorporation.
Requisite Stockholder Vote
The Company's by-laws state that, except as otherwise provided by
statute or in the certificate of incorporation or the by-laws, any corporate
action taken by vote of the stockholders shall be authorized by a majority of
the votes cast at any meeting at which a quorum is present, except for the
election of directors, which shall be by a plurality.
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Merger Sub's by-laws state that, except as otherwise provided by
statute or the certificate of incorporation, all matters shall be authorized
by a vote of 55% of the votes cast at any meeting at which a quorum is
present, except for the election of directors, which shall be by a plurality.
Stockholder Consents
The Company's by-laws provide that, in order to determine the
stockholders entitled to consent to a corporate action in writing without a
meeting, the Board of Directors may fix a record date which must not precede,
nor be more than 10 days after, the date on which the record date resolution
is adopted. Any stockholder of record who wishes to have stockholders take
action by written consent must request that the Board of Directors fix a
record date, which the Board of Directors must fix promptly and within 10 days
of receiving such request. In either case, if the Board of Directors does not
fix a record date within the required time, and no prior action is legally
required of the Board of Directors, the record date will be the first date on
which a signed, written consent setting out the action to be taken is properly
delivered to the offices of the Company or to the Secretary. If the Board of
Directors does not set a record date within the required time, and prior
action is legally required of the Board of Directors, the record date will be
the close of business on the day that the resolution adopting the prior action
is adopted.
Merger Sub's by-laws provide no procedure for determining the record
date for stockholder consents.
Number of Directors
The certificate of incorporation of the Company states that the
number of directors shall be as provided in the by-laws, so long as the number
of directors is not less than three. The by-laws state that the number of
directors shall not be less than three nor more than 11. Vacancies may be
filled by a majority of the directors then in office (even if less than a
quorum) or by the sole remaining director.
Merger Sub's by-laws state that the number of directors shall be set
by the incorporator of the company and may be increased thereafter by the
stockholders or the Board of Directors, or decreased by the stockholders.
Vacancies may be filled by may be filled by a vote of the majority of the
directors then in office (even if less than a quorum), or by the sole
remaining director or by the stockholders.
Classified Board
The Company's certificate of incorporation does not provide for a
classified board of directors. Currently, all of the Company's directors are
elected each year for a one-year term.
Merger Sub's certificate of incorporation provides for the
classification of its board of directors into three classes, with each class
to be as nearly equal in number as reasonably possible. The initial term of
office of the first class of directors will expire at the 2003 annual meeting
of stockholders, the initial term of office of the second class of
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directors will expire at the 2004 annual meeting and the initial term of
office of the third class of directors will expire at the 2005 annual meeting,
in each case upon the election and qualification of their successors.
Commencing with the 2003 annual meeting of stockholders, directors elected to
succeed the first class of directors shall be elected to a term of office to
expire at the third succeeding annual meeting of stockholders after their
election, and upon the election and qualification of their successors. Each
future election of directors will be for a three year term. If the number of
directors is changed, any increase or decrease shall be apportioned among the
classes so as to maintain or attain the number of directors in each class as
nearly equal as reasonably possible, but in no case will a decrease in the
number of directors shorten the term of any incumbent director.
Palisade and the Company believe that the classified board will
promote continuity and stability in the Company's management and policies,
facilitate long-range planning and have a beneficial effect on employee
loyalty. However, because of the additional time that will be required to
change control of our board of directors, the classified board will make it
more difficult for our stockholders to change the composition of the board of
directors even if our stockholders believe such a change would be desirable.
Pursuant to Section 141 of the DGCL, unless a company's certificate
of incorporation provides otherwise, members of a classified board of
directors may only be removed for cause. Merger Sub's certificate of
incorporation does not provide that directors may be removed without cause.
Special Meetings of Directors
The Company's by-laws provide that special meetings may be called by
two or more directors or by the President on three days notice by mail or 24
hours notice by telephone or facsimile. The chairman of the meeting shall be a
director chosen by a majority of directors present and the secretary shall be
appointed by the chairman to keep the minutes thereof.
Merger Sub's by-laws provide that special meetings may be held by
resolution of the Board of Directors or at the call of the President,
secretary or any director on two days notice by mail or one day notice by
facsimile.
Stockholder Nomination of Directors
The Company's by-laws provide that nominations for election to the
Board of Directors may be made at any annual meeting of stockholders (or any
special meeting called for such purpose) at the direction of the Board of
Directors or by any stockholder of record who gives proper notice. Such
stockholder notice must be properly delivered to the Company, (i) in the case
of an annual meeting, not more than 90 and not less than 60 days prior to the
anniversary of the immediately-preceding annual meeting, or (ii) in the case
of a special meeting, not later than the 10th day following notice of the
special meeting. Stockholder notice must set forth all of the required
information concerning the
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director-nominee and the stockholder making the nomination, and be accompanied
by the written consent of the director-nominee concerning the nomination.
The Merger Sub by-laws do not specify a procedure for stockholders to
nominate directors.
Officers
The Company's by-laws provide that the officers of the Company shall
include the President, one or more Vice Presidents, the Treasurer, the
Controller and the Secretary. Any two or more offices may be held by the same
person. Any officer of the Company may be removed with or without cause by a
vote of the majority of the entire Board of Directors or, if such officer was
not elected or appointed by the Board of Directors, by the President.
The Merger Sub by-laws state that the officers shall include a
President, a Secretary, a Treasurer, and may include one or more Vice
Presidents or assistant officers, or other officers and agents as the Board of
Directors directs or the business of the company requires. Only the Chairman
of the Board must be a director. Any number of offices may be held by the same
person, except that the Secretary may not be the Chairman of the Board or the
President. Any officer can be removed by the Board of Directors with or
without cause, but without prejudice to the rights of such officer under any
employment contract or other agreement with the Company.
Compromise with Creditors
Merger Sub's certificate of incorporation provides that in the event
of a proposed compromise or arrangement between Merger Sub and its creditors
and/or stockholders, any Delaware court of equity may, on the summary
application of Merger Sub or any creditor, stockholder, or receiver of Merger
Sub, order a meeting of such persons. If a 3/4 majority of the creditors
and/or stockholders, as the case may be, agree to the compromise or
arrangement, then, if sanctioned by the court, the compromise or arrangement
will be binding on all such creditors or stockholders, as the case may be, and
on Merger Sub. This is not addressed in the Company's certificate of
incorporation and by-laws.
Section 203 of the Delaware General Corporation Law
Merger Sub's by-laws provide that Merger Sub is not subject to
Section 203 of the DGCL, entitled "Business Combinations with Interested
Stockholders."
Regulatory Approvals
As of the date hereof, neither Palisade nor the Company is aware of
any government or regulatory consents or approvals required to be obtained in
connection with the merger agreement or the consummation of the merger.
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Rights Agreement
The Company is party to a rights agreement, dated as of April 30,
2002, with American Stock Transfer and Trust Company. After our March 2002
announcement that the Company was repositioning itself for sale or
liquidation, the Board of Directors adopted the rights agreement and issued
the rights to protect our stockholders from coercive or otherwise unfair
takeover tactics. In general, the rights plan works by imposing a significant
penalty upon any person or group that acquires 15% or more of any outstanding
shares of Company Common Stock without approval of the Board of Directors.
As required under the merger agreement, we have amended our rights
agreement to ensure that the rights will not become exercisable as a result of
our merger with Palisade.
Additionally, the Board of Directors has taken all action necessary
to render the provisions of the DGCL that restrict business combinations with
interested stockholders, and any other applicable state anti-takeover laws,
inapplicable to the merger, to the extent permitted by law.
Confidentiality Agreement
In connection with its negotiations regarding a potential
transaction, the Company entered into a confidentiality agreement, dated June
5, 2002, with Palisade Capital. A copy of this agreement was filed with the
SEC as Exhibit A to this proxy statement and is incorporated herein by
reference.
In the confidentiality agreement, Palisade Capital agreed that it and
its affiliates and representatives will not (i) disclose any information
provided by the Company in connection with its negotiations or (ii) use such
information for any purpose other than to evaluate the potential transaction
with the Company. Palisade Capital also agreed that it and its affiliates and
representatives will not disclose the fact that any relevant information
exists or has been made available, including the content, existence, terms or
status of the negotiations and the transaction. If Palisade Capital is
required to disclose such information by applicable law, regulation or legal
process, it will (i) promptly notify the Company so that the Company may take
any legal or other action as it deems appropriate, (ii) in advance of the
disclosure and to the extent legally permissible, provide the Company with
copies of the information to be disclosed and (iii) reasonably cooperate with
the Company in the Company's attempt to limit disclosure.
Palisade Capital acknowledged that the Company does not make any
warranty or representation as to the accuracy or completeness of the
information provided to Palisade Capital or its representatives in connection
with their negotiations.
Palisade Capital also agreed to inform the Company if it determined
not to proceed with the transaction, and to destroy or return to the Company
all copies of the information. However, Palisade Capital's duties and
obligations under the confidentiality agreement would continue following such
return or destruction.
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Until June 4, 2004, Palisade Capital agreed that, unless specifically
requested by the Company, it and its affiliates will not directly or
indirectly (by forming a group or otherwise): (i) acquire, offer to acquire,
or agree to acquire any securities or assets of the Company; (ii) solicit
proxies to vote the Company's shares or seek to advise or influence any person
on the voting of Company shares; (iii) submit any stockholder proposal; or
(iv) announce or propose any extraordinary transaction involving the Company
or its securities or assets.
In addition, until June 4, 2003, Palisade Capital agreed not to
solicit or hire any employee of the Company or its subsidiaries, provided that
Palisade may do so if the employee acted wholly on his or her own initiate
without any solicitation or encouragement from Palisade.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Continuing Operations - Year Ended December 31, 2001
Revenues were $5,489,000 in 2001 as compared to $9,754,000 in 2000
and $10,619,000 in 1999. The decrease in the 2001 revenues of $4,265,000 is
due to a decrease of $938,000 in licensing-related activities, $3,226,000 in
gains and dividends from licensing-related securities (KeyCorp) and a decrease
in interest and dividends of $101,000. With respect to the decline in revenues
of gains and dividends related to licensing-related securities, the Company's
planned liquidation of licensing-related securities (KeyCorp) was completed
during the second quarter of 2001. During 2000, such gains and dividends
accounted for revenues and net income of $5,054,000 and $3,386,000,
respectively, as compared to only $1,828,000 and $1,210,000, respectively, in
2001.
The decrease in revenues from 1999 to 2000 of $865,000 is due to
decreases of $178,000 in licensing-related activities and $956,000 in realized
gains on sales and dividends from licensing-related securities, offset by an
increase of $269,000 in dividends and interest income.
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<table>
<caption>
Revenues are summarized as follows:
2001 2000 1999
------------- --------------- ------------
<s> <c> <c> <c>
Revenues from licensing-related activities 55% 40% 39%
Realized gains on sales and dividends from
licensing-related securities 33% 52% 57%
Dividend, interest and other income 12% 8% 4%
------------- --------------- ------------
Total 100% 100% 100%
------------- --------------- ------------
</table>
Licensing-Related Activities
Revenues from licensing-related activities consist of recurring
royalty payments for the use of licensed patents and trademarks;
non-recurring, lump sum license payments; agency fees; and service fees.
Licensing-related income declined in 2001 by $938,000, which was mainly
attributable to decreases in trademark agency fees of $498,000 and patent and
technology licensing income of $441,000. Revenues from licensing-related
activities decreased in 2000 by $178,000. The decline was primarily
attributable to a decrease in patent and technology licensing income of
$519,000, offset by an increase in trademark agency fees of $340,000. The
decline in the patent and technology licensing income was primarily
attributable to the fact that Company did not have any non-recurring licensing
revenues in 2001, as compared to $415,000 in 2000 and $880,000 in 1999.
Expenses from licensing-related activities consist principally of
amounts paid to licensors at contractually stipulated percentages of the
Company's related revenues and, in addition, include expenses related to the
investigation, marketing, administration, enforcement, maintenance and
prosecution of patent, trademark and license rights and related licenses.
Licensing-related expenses for 2001 decreased by $726,000 from 2000, and 2000
expenses decreased by $727,000 from 1999. As a percentage of licensing-related
revenues, these expenses were 22%, 35% and 51% in 2001, 2000 and 1999,
respectively. The decrease in both 2001 and 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 Securities
Income from licensing-related securities consist of gains on sales
and dividends received on securities (KeyCorp) acquired by the Company in
connection with its licensing-related activities. Gains and dividends
decreased by $3,226,000 and $956,000 for the years ended December 31, 2001 and
2000, respectively. As mentioned above, the planned liquidation of the KeyCorp
stock position was completed during the quarter
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ended June 30, 2001. See Notes to the Consolidated Financial Statements for
additional details concerning such securities.
Selling, general and administrative expenses from continuing
operations decreased by $744,000 for the year ended December 31, 2001 over
2000. The decrease is primarily attributable to a reduction in payroll and
payroll related expenses. Selling, general and administrative expenses
decreased $746,000 for the year ended December 31, 2000 versus the comparable
period in 1999.
Income Tax Provision - The Company's federal and state income tax
provision of $1,464,000 in 2001 reflected an effective tax rate of 35%,
compared with effective tax rates of 35% and 32% in the two previous years.
Inflation - The Company's income from licensing-related operations
has not in the past been materially affected by inflation. Likewise, while
currency fluctuations can influence licensing-related revenues, the diversity
of foreign income sources tends to offset individual income changes in
currency valuations.
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. The following table summarizes the revenues and
pretax losses of the reported discontinued operations for the twelve-month
periods ended December 31, 2001, December 31, 2000 and December 31, 1999:
<table>
<caption>
- ---------------------------------------------------------------------------------------------------------
Total
Twelve Months Ended Graphic Design Product Design Consumer Discontinued
December 31, 2001 Group Group Products Group Operations
- ---------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Revenues $2,500,000 $2,679,000 $3,531,000 $8,710,000
- ---------------------------------------------------------------------------------------------------------
Pretax income (loss) 201,000 (1,268,000) (1,369,000) (2,436,000)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Total
Twelve Months Ended Graphic Design Product Design Consumer Discontinued
December 31, 2000 Group Group Products Group Operations
- ---------------------------------------------------------------------------------------------------------
Revenues $2,602,000 $3,834,000 $824,000 $7,260,000
- ---------------------------------------------------------------------------------------------------------
Pretax income (loss) 681,000 (1,090,000) (2,053,000) (2,462,000)
- ---------------------------------------------------------------------------------------------------------
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- ---------------------------------------------------------------------------------------------------------
Total
Twelve Months Ended Graphic Design Product Design Consumer Discontinued
December 31, 1999 Group Group Products Group Operations
- ---------------------------------------------------------------------------------------------------------
Revenues $445,000 $2,899,000 $489,000 $3,833,000
- ---------------------------------------------------------------------------------------------------------
Pretax income (loss) 119,000 (1,056,000) (148,000) (1,085,000)
- ---------------------------------------------------------------------------------------------------------
</table>
Creative consulting services consist of product development and
graphic design services provided by the Product Design Group and the Graphic
Design Group. Creative consulting income decreased by $1,257,000 in 2001 as
compared to 2000 with $1,155,000 of such decline being attributable to the
Product Design Group and the balance of $102,000 being attributable to the
Graphic Design Group. The decrease in the Product Design Group's revenue was
principally due to a sharp drop in new consumer products projects as a result
of the soft economy. Creative consulting revenues increased $3,092,000 in 2000
as compared to 1999 with $935,000 attributable to the Product Design Group and
$2,157,000 attributable to the Graphic Design Group. The sharp increase in the
Graphic Design Group's revenues is due to reporting twelve months of revenue
in 2000 as compared to two months in 1999, the year in which the Graphic
Design Group was acquired.
Expenses decreased by $948,000 in 2001 as compared to 2000 of which
$761,000 related to the Product Design Group and $187,000 related to the
Graphic Design Group. The decrease in expenses is mainly due to reductions in
creative staff to properly align capacity as a result of (i) lower external
client revenue and (ii) less inter-company work under the Company's
Intellectual Venture Capital program. Creative consulting expenses increased
by $1,436,000 in 2000 as compared to 1999 of which $190,000 related to the
Product Design Group and $1,246,000 related to the Graphic Design Group. The
increase in Graphic Design Group's expenses is due to comparing twelve months
of expenses in 2000 to two months in 1999, the year the Graphic Design Group
was acquired.
Manufacturing and Marketing of Consumer Products - In September 1999,
the Company acquired Funatik, Inc. and merged it into the newly formed Refac
Consumer Products, Inc. ("RCP"). Sales and cost of goods sold increased by
$2,707,000 and $2,021,000, respectively, from 2000 to 2001. Gross profit
decreased by 7%, from 35% in 2000 to 28% in 2001. The 2001 increases in sales
and cost of goods sold are mainly attributable to sales of the MTV: Music
Television(TM) product line to major retailers such as Toys "R" Us, Inc. and
Musicland Retail, Inc. The sales in 2000 primarily related to the sourcing of
OEM products for a retailer. Sales and gross profit increased $335,000 and
$270,000 in 2000 over 1999. Gross margin remained constant at 35% for 2000 and
1999.
Results of Continuing Operations - Nine Months Ended September 30, 2002
Revenues from continuing operations for the nine months ended
September 30, 2002 were $6,182,000 as compared to $4,789,000 for the same
period in 2001. The $1,393,000 revenue increase was due primarily to the gains
on the sale of the Heli-Coil
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and Dodge and Gough licensing properties of $4,374,000, offset by declines in
realized gains and dividends on licensing-related securities of $1,828,000,
recurring patent license fees of $650,000, trademark agency fees of $117,000
and interest and dividends of $386,000.
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 nine months are
summarized as follows:
<table>
<caption>
- -------------------------------------------------------------------------- -----------------------------------
For the Nine Months Ended
September 30,
- -------------------------------------------------------------------------- ----------------- -----------------
Description 2002 2001
- -------------------------------------------------------------------------- ----------------- -----------------
<s> <c> <c>
Revenues from licensing-related activities 26% 49%
- -------------------------------------------------------------------------- ----------------- -----------------
Realized gains on sales and dividends from licensing-related securities - 38%
- -------------------------------------------------------------------------- ----------------- -----------------
Gains on sale of licensing rights 71% -
- -------------------------------------------------------------------------- ----------------- -----------------
Dividends and interest 3% 13%
- -------------------------------------------------------------------------- ----------------- -----------------
Total 100% 100%
- -------------------------------------------------------------------------- ----------------- -----------------
</table>
With the sale of the Heli-Coil, Dodge and Gough properties during the
quarter ended September 30, 2002, the Company's significant licensing
properties are its agreements with Patlex Corporation ("Patlex") and OXO
International ("OXO"). The Company's income from its contract with Patlex is
variable and is based upon revenues derived by Patlex from the licensing of
two laser patents, the first of which expires in November, 2004 and the second
of which expires in May, 2005. While the amount of the income is uncertain and
Patlex has not provided the Company with any projections, the Company
currently estimates that it will have quarterly revenues of $270,000 through
2004 and $135,000 in 2005. The OXO Agreement provides for a royalty of $90,000
during the fourth quarter of 2002 and $360,000 during 2003, after which no
further royalties shall be payable. Other license agreements are expected to
provide revenues of approximately $159,000 during the fourth quarter,
$229,000, $213,000 and $211,000 during 2003, 2004 and 2005, respectively,
after which the revenues will decrease significantly.
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 and prosecution of patents, trademarks and license rights and
related licenses. These expenses decreased by $205,000 for the nine
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months ended September 30, 2002, due to a decrease in revenues. As a
percentage of licensing revenues, these expenses were 18% and 21% in 2002 and
2001, respectively.
Selling, general and administrative expenses increased by $769,000 in
the nine month period ended September 30, 2002 as compared to the previous
year. The increase is primarily due to expenses associated with the
repositioning of the Company, which totaled approximately $683,000.
Income Tax Provision - The Company had a claim for a net tax refund
of $1,305,000 as of September 30, 2002, which is based upon the capital loss
that it realized upon the sale of RIL on September 30, 2002. This capital loss
can be carried back against capital gains recognized by the Company during the
preceding three tax years. In addition, the Company expects to use a portion
of the capital loss realized upon the sale of RIL to offset capital gains
realized in 2002. The tax savings from this offset is estimated to be
$805,000. The deductibility of the capital loss on the sale of RIL and the
refund claim are likely to be reviewed by the Internal Revenue Service.
Based upon further investigation of the tax basis of RIL, which was
completed at the end of December 2002, the Company now believes that the
capital loss for tax purposes on the sale of RIL is much higher than
originally estimated. Accordingly, it now estimates that it will realize an
additional net tax benefit of between approximately $1,500,000 and $2,900,000.
No assurance can be given, however, as to the extent to which the Company will
be able to utilize this tax benefit because it is dependent upon the
applicability of various provisions of the Code, as well as Treasury
regulations promulgated thereunder, including possible future Treasury
regulations which may have retroactive effect. In addition, the deductibility
of the capital loss on the sale of RIL and the Company's refund claim are
likely to be reviewed by the Internal Revenue Service. Moreover, even if the
Company receives payment of its refund claim, the Company may be subject to
future audits by the Internal Revenue Service which could result in the
Company having to return all or a portion of the refund received. Accordingly,
the Company is unable to determine the amount and/or the timing of realization
of any tax benefit from the sale of RIL.
In connection with the repositioning of the Company, the Company is
required to pay taxes on the built-in gains of assets transferred to it from
subsidiaries that are no longer members of the Company's consolidated tax
group. In addition, because of the uncertainty of collection of the variable
purchase price relating to the sale of RIL, it has not allocated any cost
basis to this contract right for financial reporting basis but has estimated
the value for tax purposes. Such built-in gains, which are based upon the
excess of the fair market value of the assets transferred over their tax
basis, and the estimated value of the RIL sale contract constitute taxable
income and are in the Company's tax provision and deferred tax assets.
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The effective tax rate on continuing operations for the nine months
ended September 30, 2002 and 2001 was 38% and 34%, respectively.
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
In furtherance of its plan to reposition itself for sale or
liquidation, the Company sold its Creative Consulting Services and Manufacture
and Marketing of Consumer Products groups in the third quarter of 2002.
Liquidity and Capital Resources
Cash and the current portion of cash equivalents, corporate bonds and
U.S. Treasury Notes increased $5,456,000 from $8,887,000 at December 31, 2001
to $14,343,000 at September 30, 2002. The Company believes its liquidity
position is adequate to meet all current and projected financial needs.
Cash provided by operations was $5,429,000 for the nine months ended
September 30, 2002 as compared to cash used in operations of $3,136,000 for
the same period of 2001, reflecting an increase of $8,565,000. Principal
sources of net cash flows from operating activities for the nine months ended
September 30, 2002 were the liquidation of assets such as accounts receivable
and inventory and the sale of the Company's Heli-Coil and Dodge licensing
property. Most of the cash used in operations during the three months ended
September 30, 2002 was applied to reductions in accounts payable, accrued
expenses and amounts payable under service agreements.
Net cash was used to increase investments by $8,906,000 during the
nine months ended September 30, 2002 as compared to the same period in 2001
when investments decreased by $4,995,000.
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:
<table>
<caption>
--------------------------------------------------------------------------------------
Payments Due By Period
- ---------------------------- --------------- ---------------- ---------------- ----------------- ----------------
Contractual Total Less than one 1 - 3 4 - 5 After
obligations year years years 5 years
- ---------------------------- --------------- ---------------- ---------------- ----------------- ----------------
<s>
Operating lease
obligations $4,420,000 $176,000 $1,929,000 $1,266,000 $1,049,000
- ---------------------------- --------------- ---------------- ---------------- ----------------- ----------------
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- ---------------------------- --------------- ---------------- ---------------- ----------------- ----------------
Other long-term
obligations 138,000 27,000 111,000 - -
- ---------------------------- --------------- ---------------- ---------------- ----------------- ----------------
Management incentive $1,600,000 - 1,600,000 - -
compensation
- ---------------------------- --------------- ---------------- ---------------- ----------------- ----------------
</table>
The Company's long-term investment being held to maturity consists of
a corporate bond that matures in November 2003, the market value of which is
affected by changes in interest rates. 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 to which
those long-term assets relate. The Company's prior period goodwill primarily
related 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 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:
o management commits to a plan to sell the asset or group,
o the asset or group is available for immediate sale in its
present condition,
o actions to complete the plan to sell have been initiated,
o it is probable the sale will be completed within one year,
o the asset or group is being actively marketed at a reasonable
price, and
o it is unlikely that significant change will be made to the plan
or that it will be withdrawn.
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Based upon the above criteria, the assets of the Creative Consulting
Services and the Manufacture and Marketing of Consumer Products Groups became
considered held for sale during the second quarter of 2002 and have been
evaluated under SFAS 144. In such valuation, the actual terms of the sale of
the Graphic Design Group were used and terms that were discussed with a
nonaffiliated potential purchaser for the Product Design Group were 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 receive 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
This document includes certain statements of the Company that may constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and which are made pursuant to the Private Securities
Litigation Reform Act of 1995. These forward-looking statements and other
information relating to the Company are based upon the beliefs of management
and assumptions made by and information currently available to the Company.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events, or performance, as well as underlying
assumptions and statements that are other than statements of historical fact,
including statements regarding completion of the proposed merger. When used in
this document, the words "expects," "anticipates," "estimates," "plans,"
"intends," "projects," "predicts," "believes," "may" or "should," and similar
expressions, are intended to identify forward-looking statements. These
statements reflect the current view of the Company's management with respect
to future events, including the completion of the proposed merger with a
subsidiary of Palisade Concentrated Equity Partnership, LP, and are subject to
numerous risks, uncertainties, and assumptions. Many factors could cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance, or achievements that may be
expressed or implied by such forward-looking statements, including, among
other things:
o the failure of the Company's stockholders to adopt the merger
agreement,
o a material adverse change in the collectibility of amounts due
and to become due under licensing related contracts, accounts
receivable, notes receivable and contract rights receivable,
o the failure to realize currently projected income from the
Company's remaining licensing properties.
95
<page>
o the failure of the Company to find a subtenant for the balance
of its leased space and/or the failure of its existing three
subtenants to meet their obligations to the Company under their
respective subleases,
o failure to realize expected tax benefits from the sale of RIL,
and
o the failure of the Company to satisfy conditions to the merger.
Other factors and assumptions not identified above could also cause the actual
results to differ materially from those set forth in the forward-looking
statements. Although the Company believes these assumptions are reasonable, no
assurance can be given that they will prove correct. Accordingly, you should
not rely upon forward-looking statements as a prediction of actual results.
Further, the Company undertakes no obligation to update forward-looking
statements after the date they are made or to conform the statements to actual
results or changes in the Company's expectations.
SECURITY OWNERSHIP
Security Ownership of Certain Beneficial Owners
As of January 10, 2003, to the knowledge of the Company, the persons
listed below were the only beneficial owners of more than five percent of the
outstanding shares of Company Common Stock. The Company has no other class of
voting securities outstanding.
<table>
<caption>
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership Percent of Class
- -------------------------------------------------- --------------------------- ----------------------
<s> <c> <c>
Dimensional Fund Advisors Inc. 313,342 (1) 8.25%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
FMR Corp. 379,500 (2) 9.99%
82 Devonshire Street
Boston, Massachusetts 02109
Hummingbird Management, LLC 305,600(3) 8.05%
(formerly Morningside Value Investors, LLC)
153 East 53rd Street, 55th Floor
New York, New York 10022
Palisade Capital Management, L.L.C. 320,400(4) 8.44%
One Bridge Plaza, Suite 695
Fort Lee, New Jersey 07024
Robert L. Tuchman 255,920 (5) 6.48%
c/o Refac
The Hudson River Pier - Suite 110
115 River Road
Edgewater, New Jersey 07020
___________________________
96
<page>
(1) Dimensional Fund Advisor's share ownership is based upon the Schedule
13G filed on February 12, 2002.
(2) FMR Corp.'s share ownership is based upon the Schedule 13G filed on
February 14, 2002. Such shares are directly held by Fidelity
Management & Research Company, a wholly-owned subsidiary of FMR.
(3) Hummingbird Management's share ownership is based on the Schedule 13D
filed on September 3, 2002.
(4) Palisade Capital's share ownership is based upon the Schedule 13D
filed on April 29, 2002 and amended on October 25, 2002. Of such
shares, 7,900 and 1,300 shares are beneficially owned by Steven
Berman and Mark S. Hoffman, respectively, both principals of Palisade
Capital, and 311,200 shares are directly held by Palisade.
(5) Includes 150,000 shares of Company Common Stock which may be acquired
upon the exercise of stock options which are exercisable immediately.
</table>
Security Ownership of Management
The following table shows: (i) the number of shares of Company Common
Stock that each of the Company's directors, nominees and executive officers
beneficially owned or had the right to acquire beneficial ownership of as of,
or within sixty days of, January 10, 2003; and (ii) the percentage of the
outstanding shares of Company Common Stock that such ownership constitutes.
<table>
<caption>
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership Percent of Class
- ---------------------------------------------------- ------------------------- ----------------------
<s> <c> <c>
Neil R. Austrian 10,579 (1) *
Raymond A. Cardonne 45,416 (2) 1.18%
Robin L. Farkas 26,598 (1) *
Clark A. Johnson 10,000 (1) *
Mark N. Kaplan 22,828 (1) *
Robert L. Tuchman 255,920 (3) 6.48%
Ira T. Wender 11,000 (1) *
- ---------------------------------------------------- ------------------------- ----------------------
Officers and Directors as a Group
(7 persons) 382,341 (4) 9.46%
</table>
___________________________
* Represents less than 1% of the outstanding shares.
(1) Includes 10,000 shares of Company Common Stock which may be acquired
upon the exercise of options which are exercisable immediately.
(2) Includes 42,500 shares of Company Common Stock which may be acquired
upon the exercise of options which are exercisable immediately.
(3) Includes 150,000 shares of Company Common Stock which may be acquired
upon the exercise of options which are exercisable immediately.
(4) Includes an aggregate of 242,500 shares of Company Common Stock which
such persons may acquire upon the exercise of options which are
exercisable immediately.
97
<page>
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented, pursuant to Rule
14a-8 under the Exchange Act, at the 2003 Annual Meeting of Stockholders of
the Company, which is currently scheduled to be held on May 9, 2003, must have
been received by the Company at the Company's principal executive offices by
January 20, 2003 if they are to be included in the Company's proxy statement
and proxy relating to such meeting. The Company's by-laws require that
proposals of stockholders made outside of Rule 14a-8 under the Exchange Act
must be submitted, in accordance with the requirements of the by-laws, not
later than [___________].
DESIGNEES TO THE BOARD OF DIRECTORS
The Merger Agreement provides that from and after the effective time
of the merger, the directors of Merger Sub immediately prior to the effective
time of the merger will be the directors of the Surviving Corporation and the
officers of the Company immediately prior to the effective time of the merger
will be the officers of the Surviving Corporation. The Company must also
procure, prior to the closing date of the merger, the resignation of its
directors as may be necessary to enable Merger Sub's directors to serve as the
directors of the Surviving Corporation. Palisade has informed the Company that
it intends to nominate Mark S. Hoffman, Richard S. Meisenberg, Melvin Meskin
and Jeffrey D. Serkes as new directors (collectively, the "Designees"). In
addition, Palisade has indicated that it would like three of the Company's
current directors, Clark A. Johnson, Mark N. Kaplan and Robert L. Tuchman, to
continue as directors.
No action is required by the Company's stockholders in connection
with the appointment of the Designees to the Board of Directors.
The following table sets forth the full name, age and five (5) year
business experience of each Designee. Palisade has informed the Company that,
to the best of its knowledge, none of the persons listed below has been
convicted in a criminal proceeding (excluding traffic violations or similar
misdemeanors) or has been a party to any judicial or administrative proceeding
(except for matters that were dismissed without sanction or settlement) that
resulted in a judgment, decree or final order enjoining the person from future
violations of, or prohibiting activities subject to, federal or state
securities laws, or a finding of any violation of federal or state securities
laws.
Business Experience
<table>
<caption>
Name Age Principal Occupation or Employment (1)
---------------------------------- ------ ----------------------------------------------------------
<s> <c>
Mark S. Hoffman (2) 41 Managing Director of Palisade Capital Management, LLC
Richard S. Meisenberg (3) 40 Managing Director of Palisade Capital Management, LLC
98
<page>
Melvin Meskin (4) 57 --
Jeffrey D. Serkes (5) 43 President of JDS Opportunities, LLC
</table>
(1) Unless otherwise noted, the principal occupation or employment of
each individual set forth in this table has been such
individual's principal occupation or employment for the past five
years and no such individual holds another position or office
with the Company.
(2) Mark S. Hoffman is a Managing Director of Palisade Capital
Management, LLC, an affiliate of Palisade Concentrated Equity
Partnership, L.P., which he joined upon its formation in 1995.
(3) Richard S. Meisenberg is a Managing Director of Palisade Capital
Management, LLC, an affiliate of Palisade Concentrated Equity
Partnership, L.P., which he joined upon its formation in 1995.
(4) Melvin Meskin was, until his retirement on December 31, 2001,
Vice President-Finance-National Operations for Verizon, the
combined Bell Atlantic/GTE telecommunications company. Mr. Meskin
joined New York Telephone in 1970 and held a variety of line and
staff assignments with the company over a 31-year career. In
1994, he was named Vice President-Finance and Treasurer for NYNEX
Telecommunications. When Bell Atlantic and NYNEX merged, he was
appointed Vice President-Finance and Comptroller of Bell
Atlantic. Mr. Meskin is a director of Opticare Health Systems,
Inc.
(5) Jeffrey D. Serkes is President of JDS Opportunities, LLC, an
investment company specializing in real estate investment and
development. From August 1994 to May 2002, Mr. Serkes held a
variety of financial management positions for IBM, including:
Vice President, Finance, Sales & Distribution from June 1999 to
May 2002, Vice President and Treasurer from January 1995 to May
1999 and Assistant Treasurer from August 1994 to December 1994.
Prior to joining IBM, Mr. Serkes held a variety of treasury
management positions with RJR Nabisco, Inc., including Vice
President and Deputy Treasurer (August 1993 - August 1994), Vice
President and Assistant Treasurer (June 1991 - August 1993),
Director, Capital Markets (July 1989 - June 1991) and Manager,
Foreign Exchange (June 1987 - June 1989).
Other Directorships
Name Other Directorships
------------------------ --------------------------------
Mark S. Hoffman Opticare Health Systems, Inc.
Several privately held companies
Melvin Meskin Opticare Health Systems, Inc.
Additional information with respect to current members of the Board
of Directors is incorporated herein by reference to the Annual Report on Form
10-K for the year ended December 31, 2001.
SECURITY OWNERSHIP OF DESIGNEES
The following table shows: (i) the number of shares of Company Common
Stock that each of the Designees beneficially owned or had the right to
acquire beneficial ownership of as of, or within sixty days of, January 10,
2003, and (ii) the percentage of the outstanding shares of Company Common
Stock that such ownership constitutes.
99
<page>
<table>
<caption>
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership Percent of Class
- ---------------------------------------------------- ------------------------- ----------------------
<s> <c> <c>
Mark S. Hoffman 312,500 (1) 8.23%
Richard S. Meisenberg 311,200 (1) 8.19%
Melvin Meskin -- (2) --
Jeffrey D. Serkes -- (2) --
- ---------------------------------------------------- ------------------------- ----------------------
Designees as a Group
(4 persons) 312,500 8.23%
(1) Includes 311,200 shares directly owned by Palisade Capital, of
which the Designee is a managing director.
(2) The Designee does not beneficially own any shares of Company
Common Stock.
</table>
WHERE YOU CAN FIND MORE INFORMATION
The Company files annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information we file at the SEC's Public Reference
Room, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional
offices located at 233 Broadway, New York, New York 10279; 801 Brickell Ave.,
Suite 1800, Miami, Florida 33131; 175 W. Jackson Boulevard, Suite 900,
Chicago, Illinois 60604; 1801 California Street, Suite 4800, Denver, Colorado
80202-2648 or 5670 Wilshire Boulevard, Suite 1100, Los Angeles, California
90036-3648. Please call the SEC at 1-800-SEC-0330 for further information on
the public reference rooms. Our SEC filings are also available to the public
from commercial document retrieval services and at the website maintained by
the SEC at http://www.sec.gov. You may inspect information that the Company
files with the American Stock Exchange at the offices of the American Stock
Exchange located at 86 Trinity Place, New York, New York 10006. The SEC allows
the Company to "incorporate by reference" information into this proxy
statement, which means that we can disclose important information by referring
you to another document filed separately with the SEC. The following documents
are incorporated by reference into this proxy statement and are deemed to be a
part of this proxy statement, except for any information superseded by
information contained directly in this proxy statement:
<table>
<caption>
REFAC SEC FILINGS PERIOD OR DATE FILED
- ----------------- --------------------
<s> <c>
Annual Report on Form 10-K Year ended December 31, 2001.
Quarterly Reports on Form 10-Q Quarters ended March 31, 2002,
June 30, 2002 and
September 30, 2002.
Current Reports on Form 8-K
Filed on August 21, 2002,
October 24, 2002, November 22,
2002, December 16, 2002 and
January 24, 2003.
</table>
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the
special meeting shall be deemed to be incorporated by reference into this
proxy statement.
100
<page>
Our stockholders may obtain the above-mentioned documents, without
charge, by requesting them in writing or by telephone from the proxy solicitor
at the following address:
MacKenzie Partners, Inc.
105 Madison Avenue
New York, New York 10016
Telephone No.: 1-800-322-2885 and (212) 929-5500
Fax No.: (212) 929-0308
You should rely only on the information contained in this proxy
statement or other documents to which we refer to vote on the merger. We have
not authorized anyone to provide you with information that is different from
what is contained in this proxy statement. You should not assume that the
information contained in this proxy statement is accurate as of any date other
than that date, and the mailing of the proxy statement to stockholders shall
not create any implication to the contrary.
Your vote is important. To vote your shares, please complete, date,
sign and return the enclosed proxy card as soon as possible in the enclosed
postage-prepaid envelope. Please call MacKenzie Partners, Inc. if you have any
questions about this proxy statement or the merger or need assistance with the
voting procedures.
101
<page>
<table>
<caption>
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page
<s> <c>
Independent Auditors' Report ..........................................................................F-2
Restated Consolidated Balance Sheets as of December 31, 2001 and 2000..................................F-3
Restated Consolidated Statements of Operations for the Fiscal Years ended December 31, 2001, 2000
and 1999...............................................................................................F-4
Consolidated Statements of Comprehensive Loss for the Fiscal Years ended December 31, 2001, 2000
and 1999...............................................................................................F-5
Consolidated Statements of Cash Flows for the Fiscal Years ended December 31, 2001, 2000 and 1999......F-6
Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years ended December 31,
2001, 2000 and 1999....................................................................................F-7
Notes to Consolidated Financial Statements.............................................................F-8
Condensed Consolidated Balance Sheet (Unaudited) as of September 30, 2002.............................F-21
Condensed Consolidated Statement of Operations (Unaudited)
for the nine months ended September 30, 2002 and 2001.................................................F-22
Condensed Consolidated Statement of Cash Flows (Unaudited)
for the nine months ended September 30, 2002..........................................................F-23
Notes to Consolidated Financial Statements (Unaudited)................................................F-24
</table>
F-1
<page>
Independent Auditors' Report
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Refac and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Refac and
Subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, comprehensive income (loss), cash flows and
stockholders' equity for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Refac and Subsidiaries at December 31, 2001 and 2000 and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
Grant Thornton LLP
New York, New York
February 15, 2002, except for
Notes 1A, 1J, 6A, 6B, 8, 10
and 12 as to which
the date is August 5, 2002
F-2
Restated Consolidated Balance Sheets as of December 31, 2001 and 2000
Refac and Subsidiaries
Consolidated Balance Sheets
(Restated, see Note 1A)
December 31,
----------------- ---------------
ASSETS 2001 2000
----------------- ---------------
Current Assets
Cash and cash equivalents $8,690,000 $5,678,000
Royalties receivable 754,000 1,114,000
Accounts receivable 2,890,000 1,070,000
Investments being held to maturity 200,000 4,649,000
Inventory 2,140,000 91,000
Prepaid expenses and other current assets 389,000 651,000
----------------- ---------------
Total current assets 15,063,000 13,253,000
----------------- ---------------
Property and equipment - net 1,672,000 1,929,000
Licensing-related securities - 2,096,000
Investments being held to maturity 445,000 442,000
Deferred income taxes 114,000 -
Other assets 265,000 262,000
Assets being held for sale - Product Group 4,870,000 5,149,000
Assets being held for sale - Graphic Group 1,583,000 1,417,000
Assets being held for sale - Consumer Products
Group 375,000 355,000
----------------- ---------------
Total Assets $24,387,000 $24,903,000
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $293,000 $143,000
Accrued expenses 640,000 501,000
Amounts payable under service agreements 253,000 435,000
Deferred revenue 315,000 125,000
Other liabilities 89,000 21,000
----------------- ---------------
Total current liabilities 1,590,000 1,225,000
----------------- ---------------
Deferred income taxes - 527,000
Other liabilities - deferred compensation 205,000 397,000
----------------- ---------------
Stockholders' Equity:
Common stock, $.10 par value; authorized 20,000,000
shares; issued 5,450,887 in 2001 and 2000 545,000 545,000
Additional paid-in capital 9,984,000 9,984,000
Retained earnings 26,312,000 25,228,000
Accumulated other comprehensive income - 1,246,000
Treasury stock, at cost 1,655,626 shares in 2001 and 2000 (13,874,000) (13,874,000)
Receivable from issuance of common stock (375,000) (375,000)
----------------- ---------------
Total stockholders' equity 22,592,000 22,754,000
----------------- ---------------
Total Liabilities & Stockholders' Equity $24,387,000 $24,903,000
================= ===============
The accompanying notes are an integral part of the consolidated financial statements.
F-3
Restated Consolidated Statements of Operations for the Fiscal Years ended December 31, 2001, 2000 and 1999
Refac and Subsidiaries
Consolidated Statements of Operations
(Restated, see Note 1A)
Years Ended December 31,
---------------------------------------------------
2001 2000 1999
----------------- --------------- -----------------
Revenues
Licensing-related activities $3,012,000 $3,950,000 $4,128,000
Realized gains on licensing-related securities 1,813,000 4,844,000 5,614,000
Dividend income from licensing-related securities 15,000 210,000 396,000
Dividend and interest income 649,000 750,000 481,000
----------------- --------------- -----------------
Total revenues 5,489,000 9,754,000 10,619,000
----------------- --------------- -----------------
Costs and Expenses
Licensing-related activities 672,000 1,398,000 2,125,000
Selling, general and administrative expenses 589,000 1,333,000 2,079,000
----------------- --------------- -----------------
Total costs and expenses 1,261,000 2,731,000 4,204,000
----------------- --------------- -----------------
Income before provision for taxes on income 4,228,000 7,023,000 6,415,000
Provision for taxes on income 1,464,000 2,452,000 2,058,000
----------------- --------------- -----------------
Net income from continuing operations 2,764,000 4,571,000 4,357,000
Loss from discontinued operations - net of taxes (1,680,000) (1,642,000) (684,000)
----------------- --------------- -----------------
Net Income $1,084,000 $2,929,000 $3,673,000
================= =============== =================
Basic earnings (loss) per share:
From continuing operations $0.73 $1.20 $1.15
From discontinued operations ($0.44) ($0.43) ($0.18)
----------------- --------------- -----------------
Net income $0.29 $0.77 $0.97
================= =============== =================
Basic weighted average shares outstanding 3,795,261 3,795,261 3,795,261
Diluted earnings (loss) per share:
From continuing operations $0.73 $1.20 $1.15
From discontinued operations ($0.44) ($0.43) ($0.18)
----------------- --------------- -----------------
Net income $0.29 $0.77 $0.97
================= =============== =================
Diluted weighted average shares outstanding 3,802,579 3,797,611 3,804,273
The accompanying notes are an integral part of the consolidated financial statements.
F-4
Consolidated Statements of Comprehensive Loss for the Fiscal Years ended December 31, 2001, 2000 and 1999
Refac and Subsidiaries
Consolidated Statements of Comprehensive Loss
Years Ended December 31,
-------------------- -------------------- ---------------------
2001 2000 1999
-------------------- -------------------- ---------------------
Net income $1,084,000 $2,929,000 $3,673,000
Other comprehensive income, net of tax
Unrealized holding gain (losses), net - 98,000 (982,000)
Reclassification adjustment, net (1,246,000) (3,064,000) (4,065,000)
-------------------- -------------------- ---------------------
Comprehensive loss ($162,000) ($37,000) ($1,374,000)
-------------------- -------------------- ---------------------
The accompanying notes are an integral part of the consolidated financial statements.
F-5
Consolidated Statements of Cash Flows for the Fiscal Years ended December 31, 2001, 2000 and 1999
Refac and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31,
-----------------------------------------------------------
2001 2000 1999
-----------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 1,084,000 $ 2,929,000 $ 3,673,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,014,000 824,000 557,000
Realized gains on sale of licensing-related securities (1,813,000) (4,844,000) (5,614,000)
Deferred retirement (191,000) (48,000) -
Deferred income taxes 1,000 (311,000) (191,000)
Write-down of long-term assets 28,000 185,000 -
(Increase) decrease in assets, net of effect of purchases:
Accounts receivable (1,460,000) 394,000 (795,000)
Prepaid expenses and other current assets 100,000 32,000 (325,000)
Inventory (2,049,000) (91,000) -
Decrease (increase) in security deposit 68,000 (20,000) 100,000
Other assets (3,000) 322,000 212,000
Increase (decrease) in liabilities, net of effect of purchases
Accounts payable and accrued expenses 257,000 (304,000) 289,000
Amounts payable under service agreements (181,000) 18,000 176,000
Incomes taxes payable 131,000 (877,000) 640,000
-----------------------------------------------------------
Net cash used in operating activities (3,014,000) (1,791,000) (1,278,000)
-----------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from sales of licensing-related securities 2,020,000 5,399,000 6,182,000
Proceeds from (purchase of) investments being held to maturity 4,448,000 (1,760,000) 762,000
Payment for purchase of Human Factors Industrial Design, Inc., (275,000)
net of cash acquired (100,000) -
Payment for purchase of assets of David Morris Creative, Inc., (1,357,000)
net of cash acquired - -
Payment for purchase of Funatik, Inc., net of cash acquired - - (50,000)
Proceeds from disposition of fixed assets 18,000 - -
Additions to property and equipment (360,000) (1,328,000) (1,799,000)
-----------------------------------------------------------
Net cash provided by investing activities 6,026,000 2,311,000 3,463,000
-----------------------------------------------------------
Net increase in cash and cash equivalents 3,012,000 520,000 2,185,000
Cash and cash equivalents at beginning of period 5,678,000 5,158,000 2,973,000
-----------------------------------------------------------
Cash and cash equivalents at end of period $8,690,000 $5,678,000 $5,158,000
===========================================================
Income taxes paid $680,000 $1,980,000 $1,257,000
===========================================================
For supplemental disclosure of non-cash investing and financing activities, see Notes to the Consolidated Financial Statements.
The accompanying notes are an integral part of the consolidated financial statements.
F-6
Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years ended December 31, 2001, 2000 and 1999
Refac and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
Receivable
from Additional
Issuance of Paid-In
Common Stock Treasury Stock Common Stock Capital
------------------------- ------------------------------ ------------- -----------------
Years ended December 31, 2001, Shares Amount Shares Amount
2000, and 1999
------------ ------------ ------------ ----------------- ------------- -----------------
Balance, December 31, 1998 5,450,887 $545,000 1,655,626 ($13,874,000) ($375,000) ($9,984,000)
Net income
Other comprehensive loss
------------ ------------ ------------ ----------------- ------------- -----------------
Balance, December 31, 1999 5,450,887 $545,000 1,655,626 ($13,874,000) ($375,000) ($9,984,000)
Net income
Other comprehensive loss
------------ ------------ ------------ ----------------- ------------- -----------------
Balance, December 31, 2000 5,450,887 $545,000 1,655,626 ($13,874,000) ($375,000) ($9,984,000)
Net income
Other comprehensive loss
------------ ------------ ------------ ----------------- ------------- -----------------
Balance, December 31, 2001 5,450,887 $545,000 1,655,626 ($13,874,000) ($375,000) ($9,984,000)
------------ ------------ ------------ ----------------- ------------- -----------------
Table Continued
Accumulated
Other
Retained Comprehensive
Earnings Income
--------------- ------------------
Years ended December 31, 2001,
2000, and 1999
--------------- ------------------
Balance, December 31, 1998 $18,626,000 $9,259,000
Net income 3,673,000
Other comprehensive loss (5,047,000)
--------------- ------------------
Balance, December 31, 1999 $22,299,000 $4,212,000
Net income 2,929,000
Other comprehensive loss (2,966,000)
--------------- ------------------
Balance, December 31, 2000 $25,228,000 $1,246,000
Net income 1,084,000
Other comprehensive loss (1,246,000)
--------------- ------------------
Balance, December 31, 2001 $26,312,000 $0
--------------- ------------------
The accompanying notes are an integral part of the consolidated financial statement.
F-7
Notes to Consolidated Financial Statements
Note 1 - Business and Summary of Significant Accounting Policies
For the past 50 years, Refac (the "Company") has been recognized for
its intellectual property licensing activities. In recent years, it has also
engaged in product development and graphic design and communications and has
invested these creative resources, together with its licensing skills, in
certain product development ventures. The Company principally operates in the
United States.
A. Basis of Presentation
On March 22, 2002, the Company announced plans to reposition itself
for sale or liquidation. Since that date, the Company has disposed or expects
to dispose of all of its operating segments with the exception of its
licensing business and it has limited the operations of that segment to
managing certain existing license agreements and related contracts. The
balance sheets and statements of operations for all periods shown reflect the
restatement for discontinued operations.
B. Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Refac and all of its majority-owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
C. Securities Acquired in Association with Licensing Activities and
Securities Held to Maturity
The Company categorizes and accounts for its investment holdings as
follows:
Held to maturity securities are recorded at amortized cost. This
categorization is used only if the Company has the positive intent
and ability to hold these securities to maturity.
Available for sale securities are securities that do not qualify as
either held to maturity or trading securities. Unrealized gains and
losses are reported as a separate component of stockholders' equity,
net of applicable deferred income taxes on such unrealized gains and
losses at current income tax rates. The Company's investments in
licensing-related securities are included in this category.
D. Derivatives
Prior to 2001, the Company purchased put and wrote call options to
hedge against market fluctuations in its holdings of KeyCorp common stock. The
Company recorded these derivative financial instruments at fair value and
reported them as available for sale securities.
F-8
E. Income Taxes
Deferred income taxes arise from temporary differences in the basis
of assets and liabilities for financial reporting and income tax purposes.
F. Earnings Per Share
The following reconciles basic and diluted shares used in earnings
per share computations.
2001 2000 1999
------------------- --------------------- -------------------
Basic shares 3,795,261 3,795,261 3,795,261
Dilution: Stock options and warrants 7,318 2,350 9,012
------------------- --------------------- -------------------
Diluted shares 3,802,579 3,797,611 3,804,273
------------------- --------------------- -------------------
In 2001, 2000 and 1999, options to purchase 640,750, 789,250 and
859,250 shares of common stock, respectively, were not included in the
computation of diluted net income per share because the exercise prices of
those options were greater than the average market price of the common stock.
G. Consolidated Statement of Cash Flows
The Company considers all highly liquid investments and debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
H. Revenue Recognition
Royalty revenue is recognized when the licensee sells the product.
Nonrecurring lump sum payments that represent settlements of patent
infringement claims are recognized when the settlements occur and
collectibility is reasonably assured. Product and graphic design service
revenues are recognized as services are performed. Consumer product sales
revenues are recognized when title to the goods is transferred.
I. Using Estimates in Financial Statements
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amount of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements as well as revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-9
J. Intangibles
Patents are amortized on a straight-line basis over their statutory
life or expected useful life, whichever is shorter. Goodwill is amortized on a
straight-line basis over periods from 10 years to 25 years. The carrying
values of the long-lived assets (including goodwill) are reviewed if the facts
and circumstances, such as a current period operating loss combined with a
history of such losses, suggest that such assets may be permanently impaired.
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 were 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 amortized goodwill under its current method through
December 31, 2001. Commencing January 1, 2002, it no longer amortized
goodwill. In 2001, the goodwill annual and quarterly amortization amounted to
$348,000 and $87,000, respectively. As of June 30, 2002, the Company performed
a transitional fair value based impairment test and recorded an impairment
loss at January 1, 2002, as a cumulative effect of a change in accounting
principle. In addition, the Company recorded an impairment loss in the fiscal
quarter ending June 30, 2002.
K. Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided for on a straight-line basis with the
estimated useful lives ranging from three to seven years. Leasehold
improvements are amortized over the lives of the respective leases.
L. Reclassifications
Certain reclassifications have been made to the prior period
financial statements to conform them to the current presentation.
M. Comprehensive Loss
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.
F-10
N. Inventories
Inventories consist of finished goods and are valued at the lower of
cost or market on a first-in, first-out (FIFO) basis.
O. Fair Value of Financial Instruments
The Company's financial instruments principally consist of cash and
cash equivalents and long-term marketable securities. The carrying amount of
cash and cash equivalents approximate fair value due to the short-term
maturity of the instruments. Long-term marketable securities are recorded at
amortized cost, which approximates fair value, due to interest rates on these
types of securities approximating current market interest rates.
Note 2 - Licensing-Related Securities and Securities Held to Maturity
Securities held to maturity at December 31, 2001 and 2000 consist of
U.S. Treasury Notes, Certificates of Deposit and corporate bonds with an
amortized cost of $645,000 and $5,091,000, respectively. These securities
mature in 2002 and 2003.
There were no licensing-related securities at December 31, 2001.
Licensing-related securities at December 31, 2000 were as follows:
Unrealized
December 31, 2000 Fair Value Cost Carrying Value Gain/(Loss)
----------------------------------------------------------------------------
KeyCorp (NYSE: KEY) $2,100,000 $208,000 $2,100,000 $1,892,000
KeyCorp Put Options (4,000) 156,000 (4,000) (160,000)
KeyCorp Call Options - (156,000) - 156,000
----------------------------------------------------------------------------
$2,096,000 $208,000 $2,096,000 $1,888,000
----------------------------------------------------------------------------
At December 31, 2000, the Company held 75,000 shares of KeyCorp. The
Company also had bought and sold 50,000 put and call options, respectively
(50,000 of each option expiring in the first quarter of 2001).
The realized gains for licensing-related securities accounted for on
a first-in, first-out basis for the years ended December 31, 2001, 2000 and
1999 are summarized as follows:
2001 2000 1999
------------------------- --------------------- -----------------------
KeyCorp $1,813,000 $4,844,000 $5,614,000
------------------------- --------------------- -----------------------
F-11
Note 3 - Income Taxes
The provision for taxes on income from continuing operations for the
years ended December 31, 2001, 2000 and 1999 were as follows:
2001 2000 1999
---------------------------------------------------------------
Federal $1,564,000 $2,544,000 $2,254,000
Deferred (143,000) (253,000) (232,000)
State and local 21,000 116,000 5,000
Foreign withholding 22,000 45,000 31,000
---------------------------------------------------------------
$1,464,000 $2,452,000 $2,058,000
---------------------------------------------------------------
The provision for taxes on income from continuing operations for the
years ended December 31, 2001, 2000 and 1999 differed from the amount computed
by applying the statutory federal income tax rate of 34% as follows:
2001 2000 1999
------------------- ------------------ -------------------
Statutory Rate 34% 34% 34%
Dividend received exclusion - (1)% (2)%
State and local 1% 2% -
------------------- ------------------ -------------------
Provision for taxes on income 35% 35% 32%
------------------- ------------------ -------------------
The tax effect of temporary differences that gave rise to deferred tax assets and liabilities are as follows:
December 31
------------------------------------------------
2001 2000
------------------------------------------------
Assets
Deferred rent and compensation/retirement $114,000 $186,000
Liabilities
KeyCorp common stock basis difference - (713,000)
------------------------------------------------
Net asset (liability) $114,000 ($527,000)
------------------------------------------------
F-12
Note 4 - Property and Equipment
Property and equipment consists of the following:
December 31
------------------------- --------------------------
2001 2000
------------------------- --------------------------
Leasehold improvements $1,186,000 $1,186,000
Furniture and fixtures 730,000 724,000
Computer software and equipment 298,000 278,000
Automobile - 29,000
Telephone system 95,000 95,000
Office equipment 54,000 53,000
Other equipment 129,000 120,000
------------------------- --------------------------
$2,492,000 $2,485,000
Less accumulated depreciation (820,000) (556,000)
------------------------- --------------------------
$1,672,000 $1,929,000
------------------------- --------------------------
Note 5 - Stockholders' Equity
Stock Option Plans
The Company measures compensation using the intrinsic value approach
under Accounting Principles Board (APB) Opinion No. 25.
In May 1990, shareholders approved the 1990 Stock Option and
Incentive Plan (the "1990 Plan") that authorizes the issuance of up to 300,000
shares of common stock, and, in May 1997, the 1990 Plan was amended to provide
for a 100,000 increase in the authorized shares. In May 1998, the shareholders
approved the 1998 Stock Option and Incentive Plan (the "1998 Plan") that
authorizes the issuance of up to 300,000 shares of common stock. Both Plans
authorize the issuance of various incentives to employees (including officers
and directors who are employees), including stock options, stock appreciation
rights, and restricted performance stock awards. The Plans allow the stock
option committee to determine type, shares and terms of the grants. As of
March 14, 2000, no further grants were allowed under the 1990 Plan. Grants may
be made at any time through May 10, 2008 under the 1998 Plan. The term period
of the options granted ranges from 5 to 10 years, and the vesting period
ranges from 0 to 5 years.
In addition to the 1990 Plan and the 1998 Plan outlined above, on
January 21, 1998, the Company granted an employee options to purchase 50,000
shares of common stock at an exercise price per share of $10.625. In 1996,
stock options to purchase 50,000 shares were granted to directors at an
exercise price per share of $5.8125. These options expired on February 6,
2001. On April 7, 1997, the Company sold a warrant to Palisade Capital
F-13
Management, L.L.C. for a price of $103,320 to purchase 200,000 shares of
common stock at $8.25 per share. The warrant expired on April 7, 2002. On
November 25, 1997, the Company issued non-qualified stock options to 11
employees to purchase 165,000 shares of common stock at an exercise price of
$14 per share; 105,000 of these options have been canceled. On March 18, 1998,
the exercise prices of 190,000 employee options were reduced to $9.50 per
share.
The table below summarizes all option activity, excluding the warrant
sale to Palisade Capital Management, L.L.C.:
Weighted
Weighted Average Weighted
Average Exercise Average
2001 Exercise Price 2000 Price 1999 Exercise Price
-------------- --------------- -------------- -------------- --------------- ----------------
Outstanding at beginning of 646,750 $7.09 699,750 $7.64 711,500 $8.67
year
Options granted 51,500 2.51 93,500 2.94 145,500 4.56
Options exercised - - - - - -
Options canceled (212,500) 6.47 (146,500) 7.04 (157,250) 9.48
-------------- --------------- -------------- -------------- --------------- ----------------
Outstanding at end of year 485,750 6.88 646,750 7.09 699,750 7.64
-------------- --------------- -------------- -------------- --------------- ----------------
Exercisable at 271,500 $8.46 341,925 $8.23 317,070 $8.28
end of year
-------------- --------------- -------------- -------------- --------------- ----------------
The following table summarizes option data, excluding the warrant sale to Palisade Capital
Management, L.L.C. as of December 31, 2001:
Weighted Average Exercisable at Weighted
Price Range Outstanding at Contract Life Weighted Average December 31, Average
Minimum Maximum December 31, 2001 (Years) Exercise Price 2001 Exercise Price
- ------------------ ---------------- -------------------- ------------------- ------------------- ---------------- ---------------
$2.50 $3.75 123,000 8.97 $2.79 12,000 $2.83
$3.76 $5.64 68,500 7.88 $4.05 32,750 $4.04
$5.65 $8.48 40,500 6.96 $6.88 16,200 $6.88
$8.49 $12.73 253,750 5.66 $9.62 210,550 $9.59
- ------------------ ---------------- --------------------- ------------------ ------------------ ----------------- ---------------
485,750 271,500
- ------------------ ---------------- --------------------- ------------------ ------------------ ----------------- ---------------
The exercise prices of all the options granted (qualified and
non-qualified) are at fair value of common stock at date of grant. The fair
value of each option grant is estimated as of the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2001, 2000 and 1999, respectively: no dividend
yields; expected volatility of 60, 48 and 54 percent; risk-free interest rates
F-14
of 4.6, 5.7 and 6.5 percent; and expected lives of 5, 5 and 5 years. The
weighted-average fair value of options granted was $1.39, $1.44 and $2.48 for
the years ended December 31, 2001, 2000 and 1999, respectively.
The pro forma amounts had options been recorded at fair value, are indicated below:
2001 2000 1999
---------------- ------------------- -------------------
Pro forma net income $778,000 $2,758,000 $3,527,000
Pro forma earnings per share
Basic $0.21 $0.73 $0.93
Diluted $0.21 $0.73 $0.93
Preferred Stock
The 6% non-cumulative preferred stock of $100 par value is redeemable
at $105 with 5,000 shares authorized and none issued. The serial preferred
stock of $5 par value has 100,000 shares authorized and none issued.
Note 6 - Commitments and Contingent Liabilities
A. Commitments
The Company has commitments under leases covering its facilities. In
May 1999, the Company relocated its corporate offices and creative studio to
newly constructed facilities in Edgewater, New Jersey. The lease has an
initial term of 10.5 years, which commenced upon the completion of
construction in May 1999. The Company has two successive five-year renewal
options. The total expected annual payments due under the lease are $567,750
during 2002 and thereafter, with a maximum cost of living increase of 2.5% per
annum starting in the fourth lease year. In October 2001, the Company
subleased a portion of its Edgewater facility for an annualized payment of
$270,000 through May 2005. In connection with the sale of the Company's
Graphic Design Group, 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 approximately
$80,830 annually, $565,809 on the aggregate. In connection with the
relocation, the Company terminated its lease for its corporate offices in New
York City and subleased the offices and studio previously occupied by Human
Factors Industrial Design, Inc. for the remainder of the lease term. Rent
expense covering all Company facilities was approximately $476,000 (net of
sublease income of $68,000), $580,000 and $445,000 for the years ended
December 31, 2001, 2000 and 1999, respectively. In addition, the Company is
liable for escalations as provided in the lease agreements.
F-15
B. Employment Agreements
The Company's employment agreement with its President and Chief
Executive Officer extends through March 31, 2004. The agreement provides for
minimum annual compensation and incentive compensation for repositioning the
Company for sale or liquidation. The officer was also granted options to
purchase 100,000 shares of common stock pursuant to the Company's 1990 Stock
Option Plan. In 1996, the officer exercised these previously granted options
to purchase 100,000 shares of common stock. In connection with such exercise,
the Company provided the officer with a loan of $375,000. The note, as
modified in March 2002, bears interest at the rate of 6% per annum and is
payable in ten (10) equal annual installments commencing on December 31, 2004.
On March 21, 2002, the Company entered into an employment agreement
with its Vice President and Chief Financial Officer, which extends through
March 31, 2004. The agreement provides for minimum annual compensation and
incentive compensation for repositioning the Company for sale or liquidation.
The incentive compensation to the two officers for repositioning the
Company for sale or liquidation will be an aggregate 20% of the excess, if
any, of the fair market value of the cash and securities available to be
distributed to the Company's shareholders (or otherwise realized by the
shareholders) over $10 million. In addition, in the event of termination of
employment of the officers prior to March 31, 2004 without cause or due to
other conditions defined in their employment agreements, such officers will be
entitled to a lump-sum payment of the remaining compensation under the
agreements.
C. Deferred Compensation/Post-Retirement Benefits
On December 13, 1996, the Company entered into a retirement agreement
with its then Chairman and Chief Executive Officer. For a period of three
years commencing on July 1, 1997, the former Chairman acted as a
consultant. The retirement agreement also provides for an annuity of $100,000
per annum during his life; medical and health benefits for him and his spouse
during their lives; and office facilities, equipment and personnel support for
two years following his consulting services. In 1996, the Company expensed
$445,000 for such retirement benefits, which represented the present value of
the expected payments, following the consultancy period, based upon his then
estimated life expectancy. During the second half of 2000, the Company began
making payments, leaving the balance of $205,000 and $397,000 at December 31,
2001 and 2000, respectively.
D. Letters of Credit
At December 31, 2001, the Company had open letters of credit to
purchase goods for $76,000.
F-16
Note 7 - Concentrations
The Company has a contract with Patlex Corporation which accounted
for approximately 34%, 18% and 14% of the Company's total revenues for 2001,
2000 and 1999, respectively. The most significant of the two patents licensed
by Patlex Corporation is the Gas Discharge Laser Patent (U.S. Patent No.
4,704,583), which expires in November 2004. The other patent (U.S. Patent No.
4,746,201) expires in May 2005.
Note 8 - 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 will evaluate 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 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:
o management commits to a plan to sell the asset or group,
o the asset or group is available for immediate sale in its present
condition,
o actions to complete the plan to sell have been initiated,
o it is probable the sale will be completed within one year,
o the asset or group is being actively marketed at a reasonable
price, and
o it is unlikely that significant change will be made to the plan or
that it will be withdrawn.
F-17
Based upon the above criteria, commencing in the second quarter of
2002, 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.
For financial reporting purposes, the balance sheet has been restated
and the assets available for sale have been classified in the consolidated
balance sheet as "Assets being held for sale" and are included in the Creative
Consulting Services and Manufacture of Consumer Products segments. Such net
assets consist of the following:
- ---------------------------------------------------------------------------------------------------------
Graphic Design Product Design Consumer
December 31, 2001 Group Group 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
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Graphic Design Product Design Consumer
December 31, 2000 Group Group Products Group Consolidated Group
- ---------------------------------------------------------------------------------------------------------
Fixed assets, net $123,000 $430,000 $337,000 $890,000
- ---------------------------------------------------------------------------------------------------------
Goodwill, net 1,294,000 4,719,000 18,000 6,031,000
- ---------------------------------------------------------------------------------------------------------
Total assets held for sale $1,417,000 $5,149,000 $355,000 $6,921,000
- ---------------------------------------------------------------------------------------------------------
In connection with SFAS 144, the following table summarizes the revenues and pretax income (loss) of the reported
discontinued operations of the Assets Held for Sale:
- --------------------------------------------------------------------------------------------------------------
Total
Twelve Months Ended Graphic Design Product Design Consumer Discontinued
December 31, 2001 Group Group Products Group Operations
- --------------------------------------------------------------------------------------------------------------
Revenues $2,500,000 $2,679,000 $3,531,000 $8,710,000
- --------------------------------------------------------------------------------------------------------------
Pretax income (loss) 201,000 (1,268,000) (1,369,000) (2,436,000)
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Total
Twelve Months Ended Graphic Design Product Design Consumer Discontinued
December 31, 2000 Group Group Products Group Operations
- --------------------------------------------------------------------------------------------------------------
Revenues $2,602,000 $3,834,000 $824,000 $7,260,000
- --------------------------------------------------------------------------------------------------------------
Pretax income (loss) 681,000 (1,090,000) (2,053,000) (2,462,000)
- --------------------------------------------------------------------------------------------------------------
F-18
- --------------------------------------------------------------------------------------------------------------
Total
Twelve Months Ended Graphic Design Product Design Consumer Discontinued
December 31, 1999 Group Group Products Group Operations
- --------------------------------------------------------------------------------------------------------------
Revenues $445,000 $2,899,000 $489,000 $3,833,000
- --------------------------------------------------------------------------------------------------------------
Pretax Income (Loss) 119,000 (1,056,000) (148,000) (1,085,000)
- --------------------------------------------------------------------------------------------------------------
Note 9 - Human Factors Industrial Design, Inc.
On November 25, 1997, the Company completed the purchase of the
outstanding stock of Human Factors Industrial Design, Inc. (now known as
RefacDesign's Product Design Group) for $6,000,000, of which $4,500,000 was
payable in cash and $1,500,000 in Company stock (valued at $12.565 per share).
On December 30, 1998, Human Factors Industrial Design, Inc. was merged into
Refac International, Ltd. ("RIL"). The Company may also be required to make a
contingent purchase price payment to the former Human Factors Industrial
Design, Inc. shareholders if certain earnings targets, as defined in the
purchase agreement, are met. Any contingent purchase price payment is
accounted for as additional purchase price consideration. In 2001 and 1999,
the Company agreed to pay an additional $100,000 and $275,000, respectively,
to certain of the original shareholders who relinquished their rights to an
additional contingent purchase price payment, which has been recorded as
goodwill.
Note 10 - David Morris Creative, Inc.
On November 1, 1999, the Company acquired certain assets and assumed
certain liabilities of David Morris Creative, Inc. (now known as RefacDesign's
Graphic Design Group) for $1,525,000 in cash. The excess of the aggregate
purchase price over the net tangible assets acquired was allocated to
goodwill. Based on achieving certain earnings targets during the two year
period ended December 31, 2001, the Company is required to make a $250,000
contingent purchase price payment to the former shareholder of David Morris
Creative, Inc. This payment is accrued and accounted for as additional
purchase price consideration. The operating results of the Graphic Design
Group have been included in the Company's consolidated financial statements
since the date of acquisition.
On August 5, 2002, the Company sold selected assets, including
certain accounts receivable, the customer lists and goodwill, subject to
certain liabilities, of RefacDesign's Graphic Design Group to a company formed
by its President and former owner. 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
installments of $6,250 commencing January 1, 2003.
F-19
Note 11 - Accrued Expenses
Accrued expenses consist of the following:
December 31
------------------------ -------------------------
2001 2000
------------------------ -------------------------
Deferred rent $176,000 $200,000
Client retainers 44,000 132,000
Contingent payment 250,000 -
Bonus 6,000 78,000
Other 164,000 91,000
------------------------ -------------------------
$640,000 $501,000
------------------------ -------------------------
Note 12 - Subsequent Event
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.
F-20
Condensed Consolidated Balance Sheet (Unaudited) as of September 30, 2002
REFAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 2002
---------------------
ASSETS
Current Assets
Cash and cash equivalents $5,227,000
Investments being held to maturity 9,116,000
Royalties receivable 414,000
Accounts receivable, net 1,275,000
Notes receivable 296,000
Income tax receivable 1,305,000
Prepaid expenses 112,000
---------------------
Total current assets 17,745,000
---------------------
Property and equipment, net 1,321,000
Investments being held to maturity 447,000
Notes receivable 374,000
Deferred incentive compensation 1,600,000
Deferred income taxes 926,000
Other assets 11,000
---------------------
Total Assets $22,424,000
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $443,000
Accrued expenses 681,000
Amounts payable under service agreements 17,000
Deferred revenue 59,000
Other liabilities 103,000
---------------------
Total current liabilities 1,303,000
---------------------
Incentive compensation payable 1,600,000
Other liabilities - deferred compensation 78,000
Stockholders' Equity
Common stock, $.10 par value 545,000
Additional paid-in capital 9,991,000
Retained earnings 23,146,000
Treasury stock, at cost (13,874,000)
Receivable from issuance of common stock (365,000)
---------------------
Total stockholders' equity 19,443,000
---------------------
Total Liabilities & Stockholders' Equity $22,424,000
=====================
See accompanying Notes to the unaudited condensed financial statements.
F-21
Condensed Consolidated Statement of Operations (Unaudited)
for the nine months ended September 30, 2002 and 2001
REFAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
----------------- ----------------
2002 2001
----------------- ----------------
Revenues
Licensing-related activities $1,587,000 $2,354,000
1,813,000
Realized gains on licensing-related securities -
-
Dividend income from licensing-related securities 15,000
Gains on sale of licensing rights and intellectual properties 4,374,000 -
221,000
Dividend and interest income 607,000
----------------- ----------------
Total Revenues 6,182,000 4,789,000
----------------- ----------------
Costs and Expenses
289,000
Licensing-related activities 494,000
1,225,000
Selling, general and administrative expenses 456,000
----------------- ----------------
1,514,000
Total costs and expenses 950,000
----------------- ----------------
Income before provision for taxes on income 4,668,000 3,839,000
Provision for taxes on income 1,766,000 1,309,000
----------------- ----------------
Net income from continuing operations 2,902,000 2,530,000
Loss from discontinued operations - net of taxes (3,985,000) (1,655,000)
Cumulative effect of change in accounting principle - net of (2,083,000) -
$1,073,000 tax benefit
----------------- ----------------
Net Income (loss) ($3,166,000) $875,000
================= ================
Basic and diluted earnings (loss) per share:
From continuing operations $0.76 $0.67
From discontinued operations ($1.04) ($0.44)
From cumulative effect of change in accounting principle ($0.55) -
----------------- ----------------
Net income (loss) ($0.83) $0.23
================= ================
Basic weighted average shares outstanding 3,801,170 3,795,261
Diluted weighted average shares outstanding 3,813,057 3,803,563
See accompanying Notes to the unaudited condensed financial statements.
F-22
Condensed Consolidated Statement of Cash Flows (Unaudited)
for the nine months ended September 30, 2002
REFAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30, 2002
----------------------
Cash Flows from Operating Activities
Net loss ($3,166,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 167,000
Inventory Reserve 657,000
Loss on disposal of assets 945,000
Cumulative effect of changing method of accounting for goodwill 3,156,000
Additional impairment of goodwill 2,811,000
Impairment of long-lived assets 51,000
Deferred retirement (127,000)
Deferred income taxes (812,000)
(Increase) decrease in assets:
Royalties receivable 340,000
Accounts receivable 1,615,000
Notes receivable (670,000)
Income tax receivable (1,305,000)
Prepaid expenses and other current assets 34,000
Inventory 1,435,000
Other assets 254,000
Assets held for sale 361,000
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 161,000
Amounts payable under service agreements (236,000)
Deferred revenue (256,000)
Other liabilities 14,000
----------------------
Net cash provided by operating activities 5,429,000
----------------------
Cash Flows from Investing Activities
Purchase of investments being held to maturity (8,918,000)
Proceeds from disposition of assets 22,000
Additions to property and equipment (10,000)
----------------------
Net cash used in investing activities (8,906,000)
----------------------
Cash Flows from Financing Activities
Proceeds from repayment of officer loan 10,000
Proceeds from exercise of stock options 7,000
----------------------
Net cash provided from financing activities 17,000
----------------------
Net (decrease) in cash and cash equivalents (3,460,000)
Cash and cash equivalents at beginning of period 8,687,000
----------------------
Cash and cash equivalents at end of period $5,227,000
======================
See accompanying Notes to the unaudited condensed financial statements.
F-23
Notes to 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
September 30, 2002, and the results of its operations, its cash flows and
comprehensive losses for the nine-month interim periods presented.
2. The accounting policies followed by the Company are set forth in
Note l to the Company's consolidated financial statements for the year ended
December 31, 2001, which is included herein.
3. The results of operations for the nine months ended September 30,
2002 are not indicative of the results to be expected for the full year.
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."
- ------------------------------------------- -------------------------------------
Nine Months Ended
September 30,
- ------------------------------------------- ------------------ ------------------
Description 2002 2001
- ------------------------------------------- ------------------ ------------------
Basic shares 3,801,170 3,795,261
- ------------------------------------------- ------------------ ------------------
Dilution: stock options and warrants 11,887 8,302
- ------------------------------------------- ------------------ ------------------
Diluted shares 3,813,057 3,803,563
- ------------------------------------------- ------------------ ------------------
Income from continuing operations $2,902,000 $2,530,000
- ------------------------------------------- ------------------ ------------------
Basic earnings $0.76 $0.67
- ------------------------------------------- ------------------ ------------------
Diluted earnings $0.76 $0.67
- ------------------------------------------- ------------------ ------------------
5. On March 22, 2002, the Company announced that it was repositioning
itself for sale or liquidation. Since that date, the Company has disposed of
its operating segments with the exception of its licensing business and it has
limited the operations of that segment to managing certain existing license
agreements and related contracts. Currently, the Company's operating assets
principally consist of cash, government securities, accounts receivable, notes
receivable, contract rights receivable, a claim for a tax refund, agreements
related to its licensing business and its leasehold. The balance sheet and
statement of operations for the period reflect the restatement for
discontinued operations.
In accordance with SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" the Creative Consulting Services and
Manufacture and Marketing of Consumer Products groups are included in the
statement of operations as discontinued operations, net of taxes as they have
been sold pursuant to the Company's repositioning.
F-24
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 statement of
operations reflects the results of the licensing of intellectual property
rights in its results of continuing operations.
6. Comprehensive income (loss) consists of net income or loss for the
current period as well as unrealized gains and losses on the Company's
licensing-related securities, net of taxes.
The components of comprehensive income (loss), net of related tax,
for the nine-month periods ended September 30, 2002 and 2001 are as follows:
- ---------------------------------- ---------------------------------------
Nine Months Ended September 30,
- ---------------------------------- ------------------- -------------------
Description 2002 2001
- ---------------------------------- ------------------- -------------------
Net income (loss) ($3,166,000) $875,000
- ---------------------------------- ------------------- -------------------
Less: Comprehensive losses, net
of tax
- ---------------------------------- ------------------- -------------------
Reclassification adjustment, net - (1,197,000)
- ---------------------------------- ------------------- -------------------
Comprehensive loss ($3,166,000) ($322,000)
- ---------------------------------- ------------------- -------------------
7. 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 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 discontinued the amortization of goodwill. With the
sale of the Company's Creative Consulting Services and Manufacture and
Marketing of Consumer Products groups in the third quarter of 2002, the
Company no longer has goodwill on its balance sheet.
During the quarter ended June 30, 2002, 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
F-25
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 that were
discussed 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 Company subsequently sold the Product Design
Group on September 20, 2002.
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 income (loss) recorded, as follows:
- ---------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Reported net income (loss) ($3,166,000) $875,000
- ---------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting principle, net of tax (2,083,000) -
- ---------------------------------------------------------------------------------------------------------------------
Amortization expense - 225,000
- ---------------------------------------------------------------------------------------------------------------------
Adjusted net income (loss) ($1,083,000) $1,100,000
- ---------------------------------------------------------------------------------------------------------------------
Reported income (loss) per share:
Basic and Diluted ($0.83) $0.23
- ---------------------------------------------------------------------------------------------------------------------
Adjustment for cumulative effect of change in accounting principle:
Basic and Diluted ($0.55) -
- ---------------------------------------------------------------------------------------------------------------------
Adjustment for amortization expense: - $0.06
Basic and Diluted
- ---------------------------------------------------------------------------------------------------------------------
Adjusted income (loss) per share:
Basic and Diluted ($0.28) $0.29
- ---------------------------------------------------------------------------------------------------------------------
8. 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. The Company's prior period goodwill primarily
relates to its Creative Consulting Services segment.
As of January 1, 2002, the Company adopted the provisions of SFAS
144, and 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 additional triggering event to
require an impairment test --- a current expectation that, more likely than
F-26
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 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:
o management commits to a plan to sell the asset or group,
o the asset or group is available for immediate sale in its present
condition,
o actions to complete the plan to sell have been initiated,
o it is probable the sale will be completed within one year,
o the asset or group is being actively marketed at a reasonable
price, and
o 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 became
considered held for sale during the second quarter of 2002 and have been
evaluated under SFAS 144. In such valuation, the actual terms of the sale of
the Graphic Design Group were used (see Note 10 below) and terms that were
discussed with a nonaffiliated potential purchaser for the Product Design
Group were used.
In connection with SFAS 144, the following tables summarize the
revenues and pretax income (loss) of the reported discontinued operations of
the Assets Held for Sale:
- ---------------------------------------------------------------------------------------------------------
Total
Nine Months Ended Graphic Design Product Design Consumer Discontinued
September 30, 2002 Group Group Products Group Operations
- ---------------------------------------------------------------------------------------------------------
Revenues $785,000 $1,469,000 $2,168,000 $4,422,000
- ---------------------------------------------------------------------------------------------------------
Pretax loss (1,821,000) (6,122,000) (1,927,000) (9,870,000)
- ---------------------------------------------------------------------------------------------------------
Total
Nine Months Ended Graphic Design Product Design Consumer Discontinued
September 30, 2001 Group Group Products Group Operations
- ---------------------------------------------------------------------------------------------------------
Revenues $1,968,000 $2,033,000 $1,818,000 $5,819,000
- ---------------------------------------------------------------------------------------------------------
Pretax income (loss) 243,000 (1,244,000) (1,431,000) (2,432,000)
- ---------------------------------------------------------------------------------------------------------
Included in the pretax loss of discontinued operations at September
30, 2002 is an impairment charge to long-lived assets of approximately $51,000
recorded as of June 30, 2002, as the carrying value of fixed assets of the
F-27
Product Design Group was adjusted to fair value, based upon terms then under
discussion with a nonaffiliated potential buyer.
9. 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.
10. Sale of the Graphic Design Group
In furtherance of its plan to reposition itself for sale or
liquidation, the Company sold certain assets, including certain accounts
receivable, furniture and equipment, 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.
11. Sale of Licensing-Related Assets
On August 19, 2002, Refac International, Ltd. ("RIL") sold its Gough
licensing property and royalties receivable to Gough Holdings (Engineering),
Ltd. for $450,000, payable in five semi-annual installments, without interest,
commencing September 30, 2002. This note receivable is reflected on the
Company's financial statements at $418,327, which represents its present value
using a 6% discount rate.
On August 19, 2002, RIL sold its Heli-Coil and Dodge licensing
rights, related sublicense agreements and monies due thereunder after June 30,
2002 to Newfrey LLC (formerly Emhart LLC) for $4,000,000. The proceeds from
this sale were received in August 2002.
F-28
12. OXO International
On September 20, 2002, RIL amended its agreement with OXO
International ("OXO"), a division of World Kitchen, Inc. This amendment, which
was approved by the court overseeing OXO's bankruptcy, provides that the
Company will receive $550,000 from OXO of which $10,000 is for past due
royalties; $180,000 for royalties for the six month period ending December 31,
2002 and $360,000 for royalties for the year ending December 31, 2003. The
Company is required to perform certain services, the remainder of which the
acquirer of its product design business has agreed to perform.
13. Sale of the Product Design Group
On September 20, 2002, RIL sold its Product Design Group to Product
Genesis, LLC for a variable purchase price based upon 2 1/2% of net revenues
up to an aggregate of $300,000. Due to the uncertainties of collection of the
purchase price, the Company has not allocated any cost basis to this contract
right and will record any monies that it may receive from Product Genesis, LLC
with respect thereto as income from such discontinued operations. The Company
also entered into a sublease with Product Genesis, LLC for 8,769 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 $1,667,206.
As a result of the Company's subleases, commencing January 1, 2003,
Company's aggregate monthly cash subleasing income from its three subtenants
will cover its monthly cash rent payment to the landlord. As of September 30,
2002, the Company still had approximately 10,500 square feet of rentable
space, which it is trying to sublease. The Company plans to relocate its
offices to smaller facilities.
14. Sale of Refac International, Ltd.
On September 30, 2002, the Company completed the transfer of the
assets and assumption of the liabilities of its subsidiary, RIL, to the
Company, excluding the capital stock of Refac Consumer Products, Inc. ("RCP"),
a manufacturer of a line of consumer electronics products, and certain
trademarks, patents and a patent application relating to RCP's business. After
such transfer, the Company sold RIL to RCP Products, LLC, a limited liability
company established by a former employee, for $50,000 plus a variable purchase
price based upon 2 1/2% of the revenues received in excess of $1 million from
the sale of its consumer electronics products during the eight year period
commencing January 1, 2003, up to a maximum of $150,000 in any given year and
a cumulative total of $575,000. Due to the uncertainties of collection of the
purchase price, the Company has not allocated any cost basis to this contract
right and will record any monies that it may receive from RCP Products, LLC
with respect thereto as income from such discontinued operations. In
connection with the sale of RIL, the Company recorded a book loss of
approximately $625,000 in the third quarter of 2002.
F-29
15. Merger Agreement
On August 19, 2002, the Company entered into a merger agreement with
Palisade Concentrated Equity Partnership, L.P. which provides for the merger
of a Palisade subsidiary with the Company. As a result of the merger, Palisade
will own approximately 80% of the outstanding stock of the Company. Following
the merger, the Company will continue its liquidation of assets announced in
March 2002. Palisade intends to use the Company as a vehicle for future
acquisitions.
In the merger, the Company's shareholders will receive $3.60 per
share, along with 0.2 shares of new common stock of the Company. In addition,
shareholders will have the right to sell the new shares to the Company for a
price of up to $5.50 per share, depending upon the Company's liquid
distributable assets as of March 31, 2003 and June 30, 2005. This right to
sell the shares will be limited to stockholders who hold their shares until
the amount of liquid distributable assets at June 30, 2005 is determined. The
merger is conditioned, among other things, upon approval by a majority of the
Company's shareholders. The Company will schedule a special meeting of its
shareholders to vote on the merger.
In addition, the Board of Directors approved certain amendments to
the employment contracts of Mr. Tuchman, the Company's President and CEO, and
Mr. Cardonne, the Company's Vice President and CFO, required in connection
with the Palisade transaction. Such amendments made certain technical
corrections and also restructured the timing of the payments to Mr. Tuchman.
Both Mr. Cardonne's amendment and Mr. Tuchman's amended and restated
employment agreement become effective upon the completion of the merger. If
the merger does not occur, the Company will continue to employ Messrs.
Cardonne and Tuchman pursuant to their prior agreements.
16. Management Incentive Compensation
Under their respective employment agreements, if the merger with
Palisade is not consummated and the Company proceeds with its plan to
liquidate, Messrs. Tuchman and Cardonne are entitled to an aggregate of 20% of
the cash and the fair market value (as determined by the Board in its sole
discretion) of securities available for distribution to stockholders in excess
of $10,000,000. As of September 30, 2002, most of the planned actions
necessary to complete the liquidation were met as a result of the sale of
Company businesses and certain assets. Since the merger has not yet happened,
the Company has estimated the incentive compensation payable based upon the
Company's unaudited balance sheet as of such date and expected future revenues
and costs. The Company currently estimates that the incentive compensation to
management will aggregate $1,600,000. Since the employment agreements with
Messrs. Tuchman and Cardonne extend through March 31, 2004, and the
compensation is generally payable based upon employment through that date, the
incentive compensation is being amortized over the eighteen (18) month
remaining term of the agreements. The amount estimated for the incentive
compensation is subject to quarterly review, and the amount accrued may change
F-30
as a result of changes to the expected future revenues and costs, as well as
to the future realization of assets.
If the merger is consummated, the accrued incentive compensation will
be adjusted to a computed amount based upon the following:
Mr. Tuchman will be entitled under his employment agreement to the following payments:
- ---------------------------- ------------------- -------------------------------------------
Payment Amount
Payment Type Payment Date
- ---------------------------- ------------------- -------------------------------------------
Signing Bonus $800,000 At the Closing
- ---------------------------- ------------------- -------------------------------------------
Retention 200,000 First anniversary of the Closing
- ---------------------------- ------------------- -------------------------------------------
Retention 100,000 January 1, 2004
- ---------------------------- ------------------- -------------------------------------------
Retention 155,000 March 31, 2004
- ---------------------------- ------------------- -------------------------------------------
Total $1,255,000
============================ =================== ===========================================
Mr. Cardonne will be entitled under his employment agreement to a
payment of $313,744 upon the Closing.
After the merger, Messrs. Tuchman and Cardonne will continue to
pursue the Company's efforts to convert its assets to cash and securities and
they will become entitled to further incentive compensation if the "eligible
consideration", as defined in their employment agreements, exceeds
$17,843,602.
17. Stockholder Rights Plan
The Company is party to a rights agreement, dated as of April 30,
2002, under which rights were distributed as a dividend to stockholders at the
rate of one right for each share of Company Common Stock held by stockholders
of record as of the close of business on May 9, 2002. The Rights Plan was
adopted to enhance the Company's ability to carry out its plan in a manner
that will be fair to all stockholders.
Each such right initially entitles 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. As required
under the merger agreement, the Company has amended its rights agreement to
ensure that the rights will not become exercisable as a result of the merger
with Palisade.
18. Refac Licensing
The Company formed Refac Licensing, Inc. ("RL") in January 1998, in
conjunction with Arlene Scanlan, to operate as a full service trademark
F-31
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. Although 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, the Company does not foresee, based upon the status of its
repositioning efforts, a need for her services during the fourth quarter and
has written off the remainder of her consulting agreement as of September 30,
2002.
19. Income Taxes
Tax Refund Claim
The Company's claim for a tax refund of $1,305,000 is based upon its
expected capital loss generated from the sale of RIL, which can be carried
back against capital gains recognized by the Company during the preceding
three tax years. This tax benefit is dependent upon the Company's tax basis in
RIL which must be calculated under the IRS consolidated tax return
regulations. These regulations are complex and require an analysis of the
Company's federal consolidated tax returns and related information over the
period of time in which RIL has been a member of the Company's consolidated
tax group. The refund claim is subject to approval and audit by Internal
Revenue Service.
Deferred Taxes
Deferred income taxes arise from temporary differences in the basis
of assets and liabilities for financial reporting and income tax purposes. The
tax effect of temporary differences that gave rise to deferred tax assets are
as follows:
September 30, 2002 December 31, 2001
------------------- -------------------
Tax paid on assets transferred to the
Company from subsidiaries $818,000 $ -
Deferred rent, compensation and other assets 108,000 114,000
------------------- -------------------
Net Assets $926,000 $ 114,000
=================== ===================
F-32
20. Subsequent Events
Employment Agreement with Robert L. Tuchman
On November 20, 2002, Mr. Tuchman's employment agreement was further
amended to increase the retention payment due on March 31, 2004 from $155,000
to $200,000.
Sublease with Product Genesis, LLC
On November 25, 2002, the Company amended its sublease agreement with
Product Genesis, LLC to increase the number of square feet in the sublease
from 8,769 to 9,574 and the rent for the entire term from $1,667,206 to
$1,763,572. As a result, the Company now has approximately 9,750 square feet
of rentable space, which it is trying to sublease.
F-33
<page>
ANNEX B
January 23, 2003
Special Committee of the
Board of Directors
REFAC
The Hudson River Pier
115 River Road
Edgewater, NJ 07020-1099
Gentlemen:
We understand that Refac (the "Company"), Palisade Concentrated Equity
Partnership, L.P., a Delaware limited partnership ("Acquiror") and Palisade
Merger Corp., a Delaware corporation (a wholly owned subsidiary of Acquiror,
"Merger Sub") have entered into an Agreement and Plan of Merger dated August
19, 2002 (the "Original Agreement"), as amended by Amendment No. 1 to the
Agreement and Plan of Merger dated October 21, 2002 ("Amendment 1") and
Amendment No. 2 to the Agreement and Plan of Merger dated December 12, 2002
("Amendment 2"). The Company has advised us that the Original Agreement will
be further amended by Amendment No. 3 to the Agreement and Plan of Merger
among the Company, the Acquiror and Merger Sub, a draft of which was provided
to FSI on January 16, 2003 ("Amendment 3"). We have been advised by the
Company, and we have assumed for purposes of this opinion, that Amendment 3
will be finalized and executed substantially in the form previously provided
to FSI. The Original Agreement, as amended by Amendment 1 and Amendment 2, and
as it shall be further amended pursuant to Amendment 3, is hereinafter
referred to as the "Agreement". The Agreement provides, among other things,
for the merger (the "Merger") of Merger Sub with and into the Company. Upon
consummation of the Merger, the Company will become an 80% owned subsidiary of
Acquiror. Under the terms set forth in the Agreement, at the effective time of
the Merger, each of the outstanding shares of common stock of the Company, par
value $0.10 per share ("Company Common Stock") other than certain shares to be
canceled pursuant to the Agreement and shares held by stockholders who
properly exercise dissenters' rights ("Dissenting Shares") will be converted
into the right to receive $3.60 in cash and 0.2 of a share of new Company
common stock, as may be adjusted in accordance with the Agreement (the "Merger
Consideration"). All outstanding options to purchase Company Common Stock
would become exercisable for the Merger Consideration. After June 30, 2005,
stockholders who receive new Company common stock in the Merger shall have the
right, under specific circumstances, to sell such new shares to the Company
for an open-ended amount that is dependent upon the amount of the Company's
liquid distributable assets as of June 30, 2005. The terms and conditions of
the Merger, including the right to sell such shares to the Company, are set out
more fully in the Agreement.
You have asked us whether, in our opinion, the Merger Consideration is fair
from a financial point of view and as of the date hereof, to the "Holders of
Company Common Stock". The "Holders of Company Common Stock" shall be defined
as all holders of Company Common Stock other than Acquiror, Merger Sub, any
affiliates of Acquiror or Merger Sub or any holders of Dissenting Shares.
For purposes of this opinion we have, among other things:
(i) reviewed certain publicly available financial statements and other
business and financial information of the Company;
Special Committee of the
Board of Directors
Refac
January 23, 2003
Page 2
(ii) reviewed certain internal financial statements and other financial
and operating data concerning the Company prepared by the
Company's management;
(iii) reviewed certain financial forecasts and other forward looking
financial information prepared by the Company's management and tax
analyses performed by and/or on behalf of the Company's
management;
(iv) held discussions with the management of the Company concerning the
business, past and current operations, financial condition and
future prospects of the Company;
(v) reviewed the financial terms and conditions set forth in the
Agreement;
(vi) reviewed the stock price and trading history of the Company;
(vii) compared the financial performance of the Company and the prices
and trading activity of Company Common Stock with that of certain
other publicly traded companies that we deemed comparable to the
Company;
(viii) compared the financial terms of the Merger with the financial
terms, to the extent publicly available, of other transactions
that we deemed relevant;
(ix) prepared a discounted cash flow analysis of the Company;
(x) participated in discussions with representatives of the Company;
(xi) reviewed the terms of certain agreements for the disposition of
certain of the Company's assets;
(xii) reviewed the employment and incentive compensation agreements
between the Company and Robert L. Tuchman and Raymond A. Cardonne,
Jr., and;
(xiii) reviewed such other materials, made such other studies and
inquiries, and took into account such other matters as we deemed
relevant, including our assessment of general economic, market and
monetary conditions.
In our review and analysis, and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and
other information provided to us (including information furnished to us
orally or otherwise discussed with us by the Company's management) or
publicly available and have neither attempted to verify, nor assumed
responsibility for verifying, any of such information. We have relied upon
the assurances of the Company's management that it is not aware of any facts
that would make such information inaccurate or misleading. Furthermore, we
did not obtain or make, or assume any responsibility for obtaining or making,
any independent evaluation or appraisal of the properties, assets or
liabilities (contingent or otherwise) of the Company, nor were we furnished
with any such evaluation or appraisal, with the exception of analyses
prepared by the Company's management with respect to liquidation values on
which we have relied in preparing our analysis without independent
verification for purposes of this opinion. With respect to the financial
forecasts and projections (and the assumptions and bases therefor) for the
Company that we have reviewed, upon the advice of the Company's management,
we have assumed that such forecasts and projections have been reasonably
prepared in good faith on the basis of reasonable assumptions and reflect the
best currently available estimates and judgments as to the future financial
condition and performance of the Company, and we have further assumed that
such projections and forecasts will be realized in the amounts and in
the time periods currently estimated. We have assumed that
Special Committee of the
Board of Directors
Refac
January 23, 2003
Page 3
the Merger will be consummated upon the terms set forth in the Agreement
without material alteration thereof. In addition, we have assumed that the
historical financial statements of the Company reviewed by us have been
prepared and fairly presented in accordance with U.S. generally accepted
accounting principles consistently applied. We have relied as to all legal
matters relevant to rendering our opinion on the advice of counsel.
The preparation of a fairness opinion is a complex process that is not
necessarily susceptible to partial analysis or summary description. In
arriving at our opinion, we did not attribute any particular weight to any
analysis or factor considered, but rather made qualitative judgements as to
the significance and relevance of each analysis or factor. Accordingly, we
believe that our analysis must be considered as a whole and that considering
any portion of such analysis and of the factors considered, without
considering all analyses and factors, could create an incomplete view of the
processes underlying our opinion.
This opinion is necessarily based upon market, economic and other conditions
as in effect on, and information made available to us as of, the date hereof.
It should be understood that subsequent developments may affect the conclusion
expressed in this opinion and that we disclaim any undertaking or obligation
to advise any person of any change in any matter affecting this opinion which
may come or be brought to our attention after the date of this opinion. Our
opinion is limited to the fairness, from a financial point of view, and as of
the date hereof, to the Holders of Company Common Stock of the Merger
Consideration. We do not express any opinion as to (i) the value of any
employee agreement or other arrangement entered into in connection with the
Merger or (ii) any tax or other consequences that might result from the
Merger. We were not asked to and did not participate in the negotiations
between the Company and the Acquiror, solicit third party offers to acquire
the Company Common Stock or propose any other alternatives available to the
Company. Our opinion does not address the relative merits of the Merger or the
other business strategies that the Company's Board of Directors or the Special
Committee has considered or may be considering, nor does it address the
decision of the Company's Board of Directors or the Special Committee to
proceed with the Merger.
In connection with the preparation of our opinion, we were not authorized to
solicit, and did not solicit, third-parties regarding alternatives to the
Merger.
We were engaged by the Special Committee to render our opinion and will
receive a fee for our services, a significant portion of which is contingent
upon the delivery of this opinion, and the Company has agreed to indemnify us
for certain liabilities that may arise out of our engagement. In the ordinary
course of business we or our affiliates may trade in the debt or equity
securities of the Company for our own accounts and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
Our opinion expressed herein is provided for the information of the Board of
Directors of the Company in connection with its evaluation of the Merger. Our
opinion is not intended to be and does not constitute a recommendation to any
stockholder of the Company as to how such stockholder should vote, or take any
other action, with respect to the Merger. This opinion may not be summarized,
described or referred to or furnished to any party except with our express
prior written consent.
Special Committee of the
Board of Directors
Refac
January 23, 2003
Page 4
Based upon and subject to the foregoing considerations, it is our opinion as
investment bankers that, as of the date hereof, the Merger Consideration is
fair to the Holders of Company Common Stock from a financial point of view.
Very truly yours,
FLEET SECURITIES, INC.
/s/ Fleet Securities, Inc.
--------------------------
<page>
ANNEX C
REFAC
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS ON FEBRUARY 28, 2003
The undersigned, revoking all proxies heretofore given, hereby
appoints ROBERT L. TUCHMAN, MARK N. KAPLAN and IRA T. WENDER, or any of them,
with the power of substitution, proxies for the undersigned to vote at the
Special Meeting of Stockholders of Refac (the "Company") to be held on
February 28, 2003 at 10:00 a.m., New York City time, at the Board of
Governors' Room of the American Stock Exchange, 86 Trinity Place, New York,
New York, and at any adjournments thereof, according to the votes the
undersigned might cast with all the powers the undersigned would possess if
personally present, for the following proposal proposed by management of the
Company.
(Please sign and date reverse side)
<page>
REFAC
Please date, sign and mail your proxy card
back as soon as possible!
Special Meeting of Stockholders of Refac
______________
10:00 a.m.
Board of Governors' Room
American Stock Exchange
86 Trinity Place
New York, New York
Please Detach and Mail in the Envelope Provided
[X] Please mark your vote as in this example.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS
THAT YOU VOTE "FOR" PROPOSAL (1) BELOW
FOR AGAINST ABSTAIN
(1) Adoption of the Agreement and Plan of Merger, |_| |_| |_|
dated as of August 19, 2002, by and between
Refac, Palisade Concentrated Equity
Partnership, L.P. and Palisade Merger Corp.
(2) For the transaction of such other business as
may properly come before the Special Meeting
and at any adjournment or adjournments thereafter.
Receipt of the Notice of Special Meeting of Stockholders and Proxy Statement
is hereby acknowledged.
THE PROXIES WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED
STOCKHOLDER AND IN THEIR DISCRETION WITH RESPECT TO ANY MATTERS REFERRED TO IN
PROPOSAL (2) ABOVE. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR"
PROPOSAL (1) ABOVE.
Please fill out, date, sign and mail this proxy card in the accompanying
envelope. No postage is required.
SIGNATURE __________________________ DATED ____________________
SIGNATURE __________________________ DATED ____________________
(if held jointly)
TITLE (see below) _________________________
<page>
NOTE: If stock is registered in the names of two or more joint owners of
trustees, each joint owner or trustee should sign this proxy. When signing as
executor, administrator, trustee, guardian, agent or attorney, please give
your full title as such.
<page>
ANNEX E2
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PALISADE MERGER CORP.
__________________________________________
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
__________________________________________
Palisade Merger Corp., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), hereby
certifies as follows:
1. The Certificate of Incorporation of the Corporation was filed in
the office of the Secretary of State of Delaware on August
15, 2002.
2. That the following resolution was adopted by a unanimous written
consent of the Board of Directors of the Corporation, setting forth a proposed
amendment to the Certificate of Incorporation of the Corporation, declaring
such amendment to be advisable and directing that such amendment be submitted
to the stockholders of the Corporation for their approval. The resolution is
as follows:
"RESOLVED, that the Board of Directors deems it advisable,
and the Board hereby recommends that the Certificate of Incorporation
of the Corporation be amended by replacing the entire Article Sixth
in the Certificate of Incorporation with a new Article Sixth as
follows:
Sixth. The directors of the Corporation shall be
divided into three classes, with each class to be as nearly
equal in number as reasonably possible, and with the initial
term of office of the first class of directors to expire at
the annual meeting of stockholders next ensuing, the initial
term of office of the second class of directors to expire
one year thereafter and the initial term of office of the
third class of directors to expire two years thereafter, in
each case upon the election and qualification of their
successors. Commencing with the 2003 annual meeting of
stockholders, directors elected to succeed those directors
whose terms have thereupon expired shall be elected to a
term of office to expire at the third succeeding annual
meeting of stockholders after their election, and upon the
election and qualification of their successors. If the
number of directors is changed, any increase or decrease
shall be apportioned among the classes so as to maintain or
attain the number of directors in each class as nearly equal
as reasonably possible, but in no case will a decrease in
the number of directors shorten the term of any incumbent
director. Unless and to the extent that the By-Laws of the
Corporation shall so require, the election of directors of
the Corporation need not be by written ballot.
3. The aforesaid amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware and by the written consent of the sole stockholder of the
Corporation, in accordance with the provisions of Section 228 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by its President on January 6, 2002.
PALISADE MERGER CORP.
By: /s/ Steven Berman
----------------------------------
Steven Berman
President