-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mk0IZDdhb0nHQSdIceqCem71ahVYLfJFJebAZaZSQe+TVdtvH3mV35CD4M1u5eQK W1zMkCngAajOtpPyoYxNxQ== 0000950130-02-002310.txt : 20020415 0000950130-02-002310.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950130-02-002310 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REFAC CENTRAL INDEX KEY: 0000082788 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 131681234 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-12776 FILM NUMBER: 02597828 BUSINESS ADDRESS: STREET 1: 115 RIVER ROAD CITY: EDGEWATER STATE: NJ ZIP: 07020-1099 BUSINESS PHONE: 2019434400 MAIL ADDRESS: STREET 2: 122 EAST 42ND ST STE 4000 CITY: NEW YORK STATE: NY ZIP: 10168 FORMER COMPANY: FORMER CONFORMED NAME: REFAC INC DATE OF NAME CHANGE: 19720628 FORMER COMPANY: FORMER CONFORMED NAME: RESOURCES & FACILITIES CORP DATE OF NAME CHANGE: 19740509 FORMER COMPANY: FORMER CONFORMED NAME: REFAC TECHNOLOGY DEVELOPMENT CORP DATE OF NAME CHANGE: 19920703 10-K405 1 d10k405.txt FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ---------------------------------------------------- For the Fiscal Year Ended December 31, 2001 Commission File Number 0-7704 REFAC ----- Delaware 13-1681234 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 115 River Road, Edgewater, New Jersey 07020-1099 ------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (201) 943-4400 -------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share -------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 21, 2002 was $10,247,205. The number of shares outstanding of the registrant's Common Stock, par value $.10 per share, as of March 21, 2002 was 3,795,261. PART I Item 1. Business Plan to Reposition the Company for Sale or Liquidation On March 22, 2002, the Company announced that, after considering the market capitalization of its stock in relation to its book value and net tangible book value, the business segments in which it operates and the current economic climate, the Board of Directors has concluded that Refac's stockholders will derive more value if the Company is sold or liquidated than they are likely to enjoy if the Company continues to operate in its current business segments. Accordingly, the Company will reposition itself for sale or liquidation. Since the sale or liquidating value of the Company is dependent upon the consideration that it can realize from the sale of its existing business segments and assets and the amounts required to satisfy its liabilities and obligations, it is not possible to determine the amount of cash or other assets that it will have after completion of these transactions. It should also be noted that payment of the purchase price under one or more of these transactions might extend over a period of years as might the settlement of some of the Company's obligations, including, but not limited to its leasehold. While no time limit has been set to complete the repositioning of the Company, the Company currently estimates that it can take up to 2 years. The Company views all its business segments as viable and will continue to operate all of them on a going-concern basis pending sale. General Refac was incorporated in the State of Delaware in 1952 and is referred to herein as the "Company" or "Registrant". For 50 years, the Company has been a recognized international leader in intellectual property management. Today, it is a leading consulting firm with expertise in licensing, product development and graphic design and communications. In addition to its fee for service consulting business, in the past, the Company looked for opportunities to invest its creative services and licensing skills in new product development ventures that involved brands and/or technologies and had substantial long-term potential. Given its decision to position itself for sale or liquidation, it will not seek or make any investments in new ventures. Financial Information About Segments The information required by this section is included on pages 30 through 32 in Note 7 of the Notes to the Consolidated Financial Statements. Intellectual Venture Capital Prior to 2002, the Company looked for opportunities to invest the industrial and graphic design services of RefacDesign and the licensing capabilities of Refac Licensing in new product development ventures involving brands and/or technologies. The Company refers to this activity -1- as "Intellectual Venture Capital". In such instances, the Company would share in the cost and risk of brand and product development in return for future royalties or venture equity. An example of such an investment was the formation of Refac Consumer Products, Inc. ("RCP") and its acquisition of manufacturing and marketing licenses from MTV Consumer Products (electronic music products) and Volkswagen (New Beetle(TM) clock radio, sport radio and travel alarm clock). See "Manufacturing and Marketing of Consumer Products" below. Another example was the Company's development for OXO International of some of the OXO(R) Good Grips(R) housewares and, to date, all of the OXO Good Grips hand tools on a royalty basis. Given its decision to position itself for sale or liquidation, it will not seek or make any investments in new ventures, but will continue to invest in and support its existing investment in RCP. Creative Design Consulting Services Through December 2000, the Company provided industrial design and engineering consulting services through Refac HumanFactors-ID (acquired November 1997) and graphic design consulting services through Refac David Morris Creative (acquired November 1999). Both Refac HumanFactors-ID and Refac David Morris Creative operated as divisions of the Company's wholly-owned subsidiary, Refac International, Ltd. ("RIL"). In January 2001, the Company consolidated the operations of these divisions and now offers its creative services under the name RefacDesign. Industrial Design RefacDesign offers a broad range of research, product design and engineering services to help its clients develop new products. It merges the disciplines of applied human factors, industrial design and engineering and is known for its expertise in designing and/or engineering (i) medical-surgical devices, (ii) medical and other industrial equipment and (iii) consumer products. Graphic Design RefacDesign also provides graphic design and communications for a wide variety of clients. Its array of graphic design services include brochures and collateral materials, brand and communications strategy, corporate identity, packaging and multimedia design. The following schedule sets forth the percentage of the Company's total revenues derived from Industrial Design and Graphic Design services: -2- - ------------ ------------------ -------------------- Industrial Graphic Year Design Design - ------------ ------------------ -------------------- 2001 19% 18% - ------------ ------------------ -------------------- 2000 23% 15% - ------------ ------------------ -------------------- 1999 20% 3% - ------------ ------------------ -------------------- Competition. The creative design consulting industry is highly fragmented, with a lack of dominant market leaders. Since the barriers to entry, including capital requirements, are relatively low, there are a large number of small regional firms. RefacDesign faces strong competition from other design firms and its ability to attract clients is dependent upon its reputation and ability to deliver distinctive products, graphics and packaging that meet its clients' requirements in a timely fashion. In addition, the success of the design business is dependent upon its ability to attract and retain talented personnel. Intellectual Property Licensing During 2001, the Company offered patent, technology, copyright, brand and trademark licensing services through RIL and its 81% owned subsidiary, Refac Licensing, Inc. ("RL"). The Company formed RL in January 1998, in conjunction with Arlene Scanlan, an industry veteran with 20 years experience, 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 the 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, effective 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 RIL, which will assume responsibility for all of the Company's licensing activities. Ms. Scanlan will serve as a consultant to the Company for the balance of 2002, devoting up to two days per week to the Company's licensing business. For the past 50 years, the Company has been performing patent and technology licensing, which includes the negotiation and administration of licenses and joint ventures involving patents, know-how and related trademarks. Today, the Company is focused on managing established licensing relationships. It has not undertaken any new technology licensing projects during its last 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 2002. Except for its contracts with Patlex Corporation and Emhart Fastening Teknologies, Inc. which accounted for approximately 13% and 6%, respectively, of the Company's total revenues in -3- 2001, the Company does not believe that the loss or termination of any contract it has with its clients or licensees would have a materially adverse effect on its business. The most commercially significant patent owned by Patlex Corporation is the Gas Discharge Laser Patent (U.S. Patent No. 4,704,583), which expires in November 2004. With respect to any patents or group of related patents that are now the subject of one or more income-producing licenses, the Company does not believe that there is any currently foreseeable circumstance under which the Company would lose its rights to grant licenses. Patents and Trademarks. The Company does not own any patents or trademarks that it deems important to its patent and technology licensing business. Manufacturing and Marketing of Consumer Products In September 1999, the Company formed Refac Consumer Products, Inc. ("RCP") to develop and market a line of proprietary consumer electronics products and also acquired Funatik Inc. which was subsequently merged into RCP. RCP's product line, which is manufactured in Asia, has been developed in-house by RefacDesign and includes MTV: Music Television(TM) branded CD Players, Boomboxes, Headphones and Radios; a Volkswagen New Beetle(TM) branded travel clock, clock radio and sport radio; a Refac(TM) branded Emergency Handcranked Radio with Beacon, Sonica(TM)Universal Voice Activated Remote Control, Digital Radio and Shower, Bath and Spa Stereo. In November 2000, the Company signed a licensing agreement with Pennzoil-Quaker State Company to develop a line of automotive-related consumer products under the Pennzoil(R) brand. In February 2002, this agreement was terminated by mutual agreement. The MTV product line was introduced at the January 2001 Consumer Electronics Show. RCP is now marketing this product line as well as its New Beetle and Refac branded products to music retailers, electronic retailers, toy retailers, discounters, on-line retailers, catalog houses and department stores. During 2001, sales to Toys "R" Us, Inc. accounted for approximately 12% of the Company's total revenues and 45% of RCP's revenues. Sales to Musicland Retail, Inc. accounted for approximately 24% of RCP's revenues. Since RCP's long-term success is dependent upon establishing and maintaining strong relationships with major retailers, the loss of either of these customers would adversely affect its future prospects. Licenses. In June 2000, RCP entered into a multi-year license agreement with MTV Networks, a division of Viacom International Inc. ("MTVN"), for the exclusive use of the MTV: Music Television name, trademark and logo on certain audio products including radios, CD Players, Boomboxes and Headphones throughout the United States. Subsequently, by amendment, RCP's territory was expanded to include Canada and Mexico. This license agreement runs until September 30, 2004 with renewal rights for an additional 27 months based upon attaining certain sales and dependent upon MTVN's determination, in good faith, that RCP has performed -4- satisfactorily during the initial term. RCP's business is materially dependent upon the MTV: Music Television license and should it be terminated, RCP would be materially adversely affected. The license agreement provides that it would constitute an event of default if RCP sells or otherwise disposes of all or substantially all of its businesses or assets to a third party, or control or ownership of RCP is changed or transferred. Thus, any sale, or change in control, of RCP would require MTVN's approval. In the opinion of the Company, it enjoys a good working relationship with MTVN. Competition. The consumer electronics industry is highly competitive. Many of the Company's competitors have longer operating histories, stronger brands, broader product lines and much greater financial resources and advertising budgets than the Company. The Company is new to this industry and there can be no assurance that it will be (i) successful in getting and maintaining retail shelf space, (ii) able to establish the MTV brand in this category and/or (iii) able to compete effectively in this marketplace. Dependence on Contract Manufacturers. The Company conducts substantially all of its manufacturing operations through contract manufacturers which are located in the People's Republic of China (the "PRC"). The Company does not have long-term supply contracts with its manufacturers. Foreign manufacturing is subject to a number of risks, including but not limited to transportation delays and interruptions, political and economic disruptions, the imposition of tariffs and import and export controls and changes in governmental policies. While the Company, to date, has not experienced any material adverse effects due to such risks, there can be no assurance that such events will not occur in the future and possibly result in increases in costs and delays of, or interferences with, product deliveries resulting in losses of sales and goodwill. Inflation and Seasonality. The Company has only recently introduced its product line and has not been significantly affected by inflation. The Company's sales are expected to be seasonal in nature, reflecting peak sales in the second and third quarters and slower sales in the first and fourth quarters. Changing Consumer Preferences and Technology; Reliance on New Product Introduction. As a result of changing consumer preferences and technology, many consumer electronics products are marketable for only a few years. There can be no assurance that RCP's products and product lines will achieve an acceptable degree of market acceptance, or that if such acceptance is achieved, it will be maintained for any significant period of time. Furthermore, sales of RCP's existing products are expected to decline over time and may decline at rates faster than expected. RCP's success is dependent upon its ability to enhance existing product lines and develop new products and product lines. The failure of RCP's new products and product lines to achieve and sustain market acceptance and to produce acceptable margins could have a material adverse effect on the Company's results of operations. Inventory Management. Most of the RCP's larger retail customers utilize an inventory management system to track sales of products and rely on reorders being rapidly filled by RCP and -5- other suppliers rather than maintaining large product inventories. These types of systems put pressure on suppliers like RCP to promptly fill customer orders and also shift some of the inventory risk from the retailer to suppliers. Production of excess products by RCP to meet anticipated retailer demand could result in price markdowns and increased inventory carrying costs for RCP. Similarly, if RCP fails to predict consumer demand for a product, it may not be able to deliver an adequate supply of products on a timely basis and will, as a result, lose sales opportunities. Returns, Markdowns and Purchase Order Cancellations. As is customary in the consumer electronics industry, RCP has, on occasion, (i) permitted certain customers to return slow-moving items for credit, (ii) provided price protection to certain customers by making any price reductions effective as to certain products then held by such customers in inventory and (iii) accepted customer cancellations of purchase orders issued to the Company. RCP expects that it will continue to be required to make such accommodations in the future. Any significant increase in the amount of returns, markdowns or purchase order cancellations could have a material adverse effect on the Company's results of operations. Government Regulations. Pursuant to the Tariff Act of 1930, as amended, the Trade Act of 1974 and regulations promulgated thereunder, the United States government charges tariff duties, excess charges, assessments and penalties on many imports. These regulations are subject to constant change and revision by government agencies and by action by the United States Trade Representative and may have the effect of increasing the cost of goods purchased by RCP or limiting quantities of goods available to RCP from its overseas suppliers. On November 11, 2001 the People's Republic of China accepted the Protocol on the Accession Agreement to the World Trade Organization and was granted official membership into the World Trade Organization on December 11, 2001. If status for China is restricted or revoked in the future, our cost of goods purchased from Chinese vendors and imported into the United States is likely to increase. A resultant change in suppliers would likely have an adverse effect on our operations and, possibly, earnings, although management believes such adversity would be short-term as a result of its ability to find alternative suppliers. Product Safety and Liability, Regulation. Products that have been or may be developed or sold by RCP may expose the Company to potential liability from personal injury or property damage claims by end-users of such products. The Company has never been and is not presently a defendant in any product liability lawsuit; however, there can be no assurance that such a suit will not be brought in the future against the Company. The Company currently maintains product liability insurance coverage in the amount of $1.0 million per occurrence, with a $5.0 million excess umbrella policy. There can be no assurance that the Company will be able to maintain such coverage or obtain additional coverage on acceptable terms, or that such insurance will provide adequate coverage against all potential claims. Moreover, even if the Company maintains adequate insurance, any successful claim could materially and adversely affect the reputation and prospects of the Company, as well as divert management time. The Consumer Product Safety Commission has the authority under certain federal laws and regulations to protect consumers from hazardous goods. The Consumer Product Safety Commission may exclude goods from the market that it -6- determines are hazardous, and may require a manufacturer to repurchase such goods under certain circumstances. Some state, local and foreign governments have similar laws and regulations. In the event that such laws or regulations change or the Company is found in the future to have violated any such law or regulation, the sale of the relevant product could be prohibited and the Company could be required to repurchase such products. Employees As of December 31, 2001, the Company had a total of 37 full time employees and 1 part time employee. Financial Information About Foreign and Domestic Operations and Product Sales The Company's business is principally conducted in the United States. Information concerning the aggregate of the Company's foreign source revenues from domestic operations for the three years ended December 31, 2001 is set forth in Note 7 of the Notes to the Company's Consolidated Financial Statements, included herein. The Company is subject to the usual risks of doing business abroad, particularly currency fluctuations and foreign exchange controls. Item 2. Properties In May 1999, the Company relocated its corporate headquarters and creative studios to a newly constructed leased facility located at The Hudson River Pier, 115 River Road, Edgewater, New Jersey, which encompasses approximately 30,000 square feet. The Company currently occupies approximately 20,000 square feet of such premises as the corporate offices and creative studios for the Company and its domestic subsidiaries, other than Refac Financial Corporation ("RFC"). Pursuant to a Sublease Agreement, dated October 1, 2001, the balance of approximately 10,000 square feet is being leased to a third party for a 44 month term, which terminates in May 2005. The Company's lease for the premises expires in November 2009 but it has two successive five-year renewal options. In connection with the corporate relocation in 1999, the Company subleased to a third party the offices and studio previously occupied by Refac HumanFactors-ID (10,000 square feet located at 575 Eighth Avenue, New York, New York) for the remaining term of the lease, which expires on December 31, 2003. Since 1995, RFC has leased office facilities in Las Vegas, Nevada under a lease which is terminable on thirty (30) days notice. The Company considers the Las Vegas leased premises to be suitable and adequate for RFC's present needs. Item 3. Legal Proceedings None. -7- Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2001. -8- PART II Item 5. Market for the Company's Common Stock and Related Stockholder Matters The Company had 583 stockholders of record as of March 21, 2002. The Company did not pay cash dividends during the three year period ended December 31, 2001. Given the Company's plans to position itself for sale or liquidation, it does not intend to pay any future regular dividends to stockholders. 2001 2000 --------------- --------------- Closing market price of common stock High Low High Low ------ ------ ------ ------ First quarter $3.125 $2.200 $5.375 $3.750 Second quarter $2.650 $2.000 $4.000 $3.000 Third quarter $3.900 $2.550 $3.626 $3.000 Fourth quarter $3.050 $2.160 $3.250 $2.250 ------ ------ ------ ------ The Company's common stock is listed on the American Stock Exchange under the symbol REF. Item 6. Selected Financial Data
2001 2000 1999 1998 1997 ----------- ----------- ----------- ----------- ----------- Total revenues $14,199,000 $17,014,000 $14,452,000 $15,272,000 $11,440,000 Net income $ 1,084,000 $ 2,929,000 $ 3,673,000 $ 4,735,000 $ 5,191,000 Earnings per common share - 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 Shareholders' Equity $22,592,000 $22,754,000 $22,791,000 $24,165,000 $22,623,000 ----------- ----------- ----------- ----------- -----------
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations REVENUES were $14,199,000 in 2001 as compared to $17,014,000 in 2000 and $14,452,000 in 1999. The 17% decrease in the 2001 revenues of $2,815,000 is principally due to -9- decreases of $1,247,000 in creative consulting services, $977,000 in licensing-related activities and $3,226,000 in gains and dividends related to licensing-related securities (KeyCorp), offset by an increase of $2,731,000 in consumer product sales. With respect to the decline in revenues in 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 increase in revenues from 1999 to 2000 of $2,562,000, or 18%, is principally due to increases of $3,101,000 in creative consulting services, $410,000 in consumer product sales and $174,000 in dividend and interest income, offset by decreases of $770,000 in gains on the sale of licensing-related securities, a decrease of $186,000 in dividend income from licensing-related securities and $167,000 in licensing-related activities. Revenues are summarized as follows: 2001 2000 1999 ---- ---- ---- Revenues from licensing-related activities 21% 24% 29% Realized gains on sales and dividends from licensing-related securities 13% 30% 42% Creative consulting services 37% 38% 23% Consumer product sales 26% 5% 3% Dividend, interest and other income 3% 3% 3% --- --- --- Total 100% 100% 100% --- --- --- Licensing-Related Activities REVENUES FROM LICENSING-RELATED ACTIVITIES consist of recurring royalty payments for the use of licensed patents and trademarks; non-recurring, lump sum license payments; agency fees; and service fees. Licensing-related income declined in 2001 by $977,000, which was mainly attributable to decreases in trademark agency fees of $498,000 and patent and technology licensing income of $441,000. 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 -10- 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 revenues, these expenses were 22%, 35% and 51% in 2001, 2000 and 1999, respectively. The decrease in 2001 from 2000 and 1999 is principally due to a decline in client expenses related to the revenue decrease and a decrease in licensing-related salaries and benefits as the Company focused on managing existing relationships. 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 activities. Gains and dividends for the year ended December 31, 2001 decreased by $3,226,000. As mentioned above, the planned liquidation of the KeyCorp stock position was completed during the quarter ended June 30, 2001. See Notes to the Consolidated Financial Statements for additional details concerning such securities. Creative Service Fees CREATIVE CONSULTING SERVICES consist of product development and graphic design services provided by the Product Development Group (which was acquired by the Company in November 1997) and the Graphic Design Group (which was acquired in November 1999). In January 2001, the Company consolidated the operations of these groups and now offers its creative services under the name RefacDesign. Creative consulting income decreased by $1,247,000 (19%) in 2001 as compared to 2000 with $1,142,000 of such decline being attributable to the Product Development Group and the balance $105,000 being attributable to the Graphic Design Group. The decrease in the Product Development Group's revenue was principally due to a sharp drop in new consumer products projects as a result of the soft economy. Expenses decreased by $948,000 (22%) in 2001 as compared to 2000 of which $761,000 related to the Product development 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. Consumer Products 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 $2,731,000 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. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased by $393,000 -11- in 2001 over 2000. The decrease consists of $350,000 associated with licensing-related activities and general corporate expenses and a $49,000 decrease in RCP, offset by a net increase in RefacDesign ($6,000). Of the $350,000 decrease in licensing and general corporate expenses, consulting, legal and public relation services accounted for $227,000 and rent accounted for $92,000. The increase in 2000 over 1999 of $2,352,000 is principally attributable to RCP ($1,651,000) and RefacDesign ($1,626,000), offset by a decrease in licensing-related activity expenses ($1,002,000). GOODWILL relates to the excess of the purchase price paid over the fair market value of the tangible assets acquired in the Company's acquisitions of the Product Development Group ($5,475,000) and Graphic Design Group ($1,623,000). Such amortization aggregated $309,000, $286,000 and $219,000 for 2001, 2000 and 1999, respectively, and is included in selling, general and administration expenses. After December 31, 2001, the Company will no longer amortize goodwill. By June 30, 2002, the Company will perform a transitional fair value based impairment test and if the fair value is less than the recorded value at January 1, 2002, the Company will record an impairment loss in the March 31, 2002 quarter, as a cumulative effect of change in accounting principle. INCOME TAX PROVISION. The Company's federal and state income tax provision of $708,000 in 2001 reflected an effective tax rate of 40%, compared with effective tax rates of 36% and 31% in the two previous years. The increase of 4% from the 2000 effective state and federal income tax rate is due to the goodwill permanent adjustment attributable to the acquisition of the Product Development Group as well as decreased dividends, a portion of which are excludable from federal and state taxation. INFLATION. The Company's income from licensing-related operations has not in the past been materially affected by inflation. Likewise, while currency fluctuations can influence licensing-related revenues, the diversity of foreign income sources tends to offset individual income changes in currency valuations. LIQUIDITY AND CAPITAL RESOURCES. Cash, cash equivalents, corporate bonds and U.S. Treasury Notes decreased by $1,435,000 to $9,335,000 at December 31, 2001 from $10,770,000 at December 31, 2000. The Company believes its liquidity position is adequate to meet all current and projected financial needs. Cash used in operations during 2001 aggregated $3,014,000 as compared to $1,791,000 in 2000, reflecting an increase of $1,223,000. RCP used the most cash during the year ended December 31, 2001 for the purchase of inventory ($2,049,000) and to increase its accounts receivables ($1,460,000). Net cash provided by investing activities increased by $3,715,000 to $6,026,000 in 2001 as compared with $2,311,000 in 2000. The increase is mainly attributable to the proceeds from the redemption of investments being held to maturity. The Company has commitments under leases covering its facilities (see Notes to the Consolidated Financial Statements), and under a Retirement Agreement with its founder and former -12- Chief Executive Officer (which has been provided for in the financial statements). For information on leaseholds and other commitments and contingencies, see Notes to the Consolidated Financial Statements. The Company's investment in long-term marketable securities is subject to interest rate risk. Historically, the Company has not experienced material gains or losses due to interest rate changes when selling long-term investments. The Company's long-term investments being held to maturity consists of corporate bonds maturing in November 2003. CONTRACTUAL OBLIGATIONS. The following table illustrates the Company's future material, long-term contractual obligations:
Payments Due By Period ------------------------------------------------------------------------------------- Less than 1 Contractual Obligations Total year 1-3 years 3-5 years After 5 years - ------------------------------ ---------------- ---------------- ---------------- ----------------- ---------------- Operating Lease Obligation $5,151,000 $707,000 $1,919,000 $1,259,000 $1,266,000 Other Long-Term Obligations(1) $308,000 $188,000 $120,000
(1) Pursuant to a Retirement Agreement with the Company's former chairman and chief executive officer which provides for an annuity of $100,000 per annum during his life and funding the cost of health insurance for him and his spouse during their lives. The agreement also provides for office facilities, equipment and personnel support through June 2002. When the agreement was signed in 1996, the Company accrued an amount necessary to cover this obligation based on his and her then life expectancies. If he or his spouse live beyond their respective life expectancies (as derived in 1996), the Company will have a current expense as payments are due. CRITICAL ACCOUNTING POLICIES. The Company has historically estimated the recoverability of its long-term assets, including goodwill, by consideration of the estimated future undiscounted cash flow from the operations of the business segments from which those long-term assets relate to, which is principally Creative Consulting Services. These estimates are based upon historical results adjusted for planned reductions in expenses, which have been implemented, and reasonable sales goals of the business segments. After considering various factors concerning returning value to the Company's shareholders, the Company's Board of Directors made a decision on March 21, 2002 to reposition the Company for sale or liquidation. While no time limit has been set to complete the repositioning of the Company, the Company currently estimates that it can take up to two years. The Company views all of its business segments as viable and will continue to operate all of them on a going-concern basis pending a sale. The current objective of the repositioning will be for the Company to sell its business segments for an aggregate amount that at least equals the carrying value of its assets. Although there is no assurance as to if and when this objective can be achieved, the -13- Company currently intends to continue operating its businesses while pursuing this goal. As of January 1, 2002, the Company adopted the provisions of SFAS 142, "Goodwill and Other Intangible Assets" and SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." Under SFAS 142, annual and quarterly goodwill amortization of $348,000 and $87,000, respectively, will no longer be recognized. Instead, the Company will perform, by June 30, 2002, a transitional fair value based impairment test of its goodwill as of January 1, 2002. An appraisal will be obtained for each business segment, and if the appraised fair value of the segment is less than the carrying value, an impairment loss will be recorded in the fiscal quarter ending March 31, 2002 as a cumulative effect of a change in accounting principle. After this transitional test is performed, the Company will perform an annual impairment test, commencing with its fiscal year 2002. Any impairment of goodwill recorded under the annual impairment test will be recognized in the operations of the related business segment. 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 would indicate the need to test that asset or asset group for impairment. Assets that are considered to be held for sale will be measured at the lower of carrying amount or fair value less cost to sell, and depreciation on these assets will cease. Long-term assets to be disposed of by sale may not be classified as held for sale, however, until the period in which all of the following criteria are met: . management commits to a plan to sell the asset or group . the asset or group is available for immediate sale in its present condition . actions to complete the plan to sell have been initiated . it is probable the sale will be completed within one year . the asset or group is being actively marketed at a reasonable price . it is unlikely that significant changes will be made to the plan or that it will be withdrawn Although the Company has decided to reposition itself for sale, it does not currently meet all of the criteria for its long-term assets to be classified as held for sale. Although the estimated useful lives of the long-term assets will -14- be reduced to two years, depreciation and amortization will not be increased since the Company expects to recover the carrying value of the assets. Once all of the criteria are met, which the Company expects to happen by September 30, 2002, the Company will obtain appraisals, and any impairment loss will be recorded to the extent the carrying value of its long-term assets exceeds the fair value less costs to sell. In addition, depreciation and amortization of long-term assets, which currently amount to $437,000 and $109,000 on an annual and quarterly basis, respectively, will cease. As the determination of the recoverability of long-term assets, including goodwill, is subject to future events, such as appraisals and negotiations for the sale of the Company's business segments, the determination currently estimated by the Company that the long-term assets are fully recoverable may change. It is possible that when such events occur, the Company's estimates may change whereby an impairment loss could be required. Such impairment loss may materially impact the Company's financial position and results of operations. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. -15- Item 8. Financial Statements Consolidated Balance Sheets Refac and Subsidiaries
YEARS ENDED DECEMBER 31, ---------------------------- 2001 2000 ------------ ------------ ASSETS 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 2,429,000 2,819,000 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 Goodwill, net of accumulated amortization of $1,047,000 in 2001 and $738,000 in 2000 6,071,000 6,031,000 ------------ ------------ 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 and stockholders' equity $ 24,387,000 $ 24,903,000 ------------ ------------
The accompanying notes are an integral part of the consolidated financial statements. -16- Consolidated Statements of Operations Refac and Subsidiaries
YEARS ENDED DECEMBER 31, --------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Revenues Licensing-related activities $ 3,012,000 $ 3,989,000 $ 4,156,000 Creative services fees 5,250,000 6,497,000 3,396,000 Consumer product sales 3,636,000 905,000 495,000 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 Divided and interest income 473,000 569,000 395,000 ----------- ----------- ----------- Total revenues $14,199,000 $17,014,000 $14,452,000 ----------- ----------- ----------- Costs and Expenses Licensing-related activities $ 672,000 $ 1,398,000 $ 2,125,000 Creative service expenses 3,307,000 4,255,000 2,819,000 Consumer product sales cost 2,611,000 590,000 320,000 Selling, general and administrative expenses 5,817,000 6,210,000 3,858,000 ----------- ----------- ----------- Total costs and expenses 12,407,000 12,453,000 9,122,000 ----------- ----------- ----------- Income before provision for taxes on income 1,792,000 4,561,000 5,330,000 ----------- ----------- ----------- Provision for taxes on income 708,000 1,632,000 1,657,000 ----------- ----------- ----------- Net Income $ 1,084,000 $ 2,929,000 $ 3,673,000 ----------- ----------- ----------- Basic earnings per share $0.29 $0.77 $0.97 Diluted earnings per share $0.29 $0.77 $0.97 ----------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial statements. -17- Consolidated Statements of Comprehensive Income (Loss) Refac and Subsidiaries
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. -18- Consolidated Statements of Cash Flows Refac and Subsidiaries
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 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 Income 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 HumanFactors Industrial Design, Inc., net of cash acquired (100,000) -- (275,000) Payment for purchase of assets of David Morris Creative, Inc., net of cash acquired -- -- (1,357,000) Payment for purchase of Funatik, Inc., net of cash acquired -- -- (50,000) Proceeds from disposition of fixed asset 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. -19- Consolidated Statement of Changes in Stockholders' Equity Refac and Subsidiaries
Receivable Common Stock Treasury Stock from Accumulated ---------------------- ----------------------- Issuance Additional Other Years ended December 31, of Common Paid-In Retained Comprehensive 2001, 2000, and 1999 Shares Amount Shares Amount Stock Capital Earnings Income ---------- -------- --------- ------------ --------- ----------- ----------- ---------- Balance, December 31, 1998 5,450,887 $545,000 1,655,626 ($13,874,000) ($375,000) ($9,984,000) $18,626,000 $9,259,000 Net income 3,673,000 Other comprehensive income (5,047,000) ---------- -------- --------- ------------ --------- ----------- ----------- ---------- Balance, December 31, 1999 5,450,887 $545,000 1,655,626 ($13,874,000) ($375,000) ($9,984,000) $22,299,000 $4,212,000 Net income 2,929,000 Other comprehensive income (2,966,000) ---------- -------- --------- ------------ --------- ----------- ----------- ---------- Balance, December 31, 2000 5,450,887 $545,000 1,655,626 ($13,874,000) ($375,000) ($9,984,000) $25,228,000 $1,246,000 Net income 1,084,000 Other comprehensive income (1,246,000) ---------- -------- --------- ------------ --------- ----------- ----------- ---------- Balance, December 31, 2001 5,450,887 $545,000 1,655,626 ($13,874,000) ($375,000) ($9,984,000) $26,312,000 $ 0 ========== ======== ========= ============ ========= =========== =========== ==========
The accompanying notes are an integral part of the consolidated financial statements. -20- Refac and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Business and Summary of Significant Accounting Policies Refac was incorporated in the State of Delaware in 1952. For 50 years, the Company has been a recognized international leader in intellectual property management. Today, it is a leading consulting firm with expertise in licensing, product development, and graphic design and communications. The Company operates principally in the United States. A. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Refac and all of its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. B. 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. C. 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. D. Income Taxes Deferred income taxes arise from temporary differences in the basis of assets and liabilities for financial reporting and income tax purposes. -21- E. 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. F. Consolidated Statement of Cash Flows The Company considers all highly liquid investments and debt instruments purchased with an original maturity of three months or less to be cash equivalents. G. Revenue Recognition Royalty revenue is recognized when the licensee sells the product. 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. H. 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. I. Intangibles Patents are amortized on a straight-line basis over their statutory life or expected useful life, whichever is shorter. Goodwill is amortized on a straight-line basis over periods from 10 years to 25 years. The carrying values of the long-lived assets (including goodwill) are reviewed if the facts and circumstances, such as a current period operating loss combined with a history of such losses, suggest that such assets may be permanently impaired. -22- 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 will no longer amortize goodwill. In 2001, the goodwill annual and quarterly amortization amounted to $348,000 and $87,000, respectively. By June 30, 2002, the Company will perform a transitional fair value based impairment test and if the fair value is less than the recorded value at January 1, 2002, the Company will record an impairment loss in the fiscal quarter ending March 31, 2002, as a cumulative effect of a change in accounting principle. J. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided for on a straight-line basis with the estimated useful lives ranging from three to seven years. Leasehold improvements are amortized over the lives of the respective leases. K. Reclassifications Certain reclassifications have been made to the prior period financial statements to conform them to the current presentation. L. Comprehensive Income (loss) Comprehensive income (loss) consists of net income or loss for the current period as well as income, expenses, gains and losses arising during the period that are included in separate components of equity. It includes the unrealized gains and losses on the Company's licensing-related securities, net of taxes and foreign currency translation adjustments. M. Inventories Inventories consist of finished goods and are valued at the lower of cost or market on a first-in, first-out (FIFO) basis. -23- N. 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:
Carrying Unrealized December 31, 2000 Fair Value Cost Value Gain/(Loss) ----------- ----------- ----------- ----------- KeyCorp (NYSE-KEY) $ 2,100,000 $ 208,000 $ 2,100,000 $ 1,892,000 KeyCorp Put Options (4,000) 156,000 (4,000) (160,000) KeyCorp Call Options -- (156,000) -- 156,000 ----------- ----------- ----------- ----------- $ 2,096,000 $ 208,000 $ 2,096,000 $ 1,888,000 ----------- ----------- ----------- -----------
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 ---------- ---------- ---------- Note 3 - Income Taxes The provision for taxes on income for the years ended December 31, 2001, 2000 and 1999 were as follows: -24- 2001 2000 1999 ----------- ----------- ----------- Federal Current $ 808,000 $ 1,781,000 $ 1,910,000 Deferred (143,000) (310,000) (289,000) State and local 21,000 116,000 5,000 Foreign withholding taxes 22,000 45,000 31,000 ----------- ----------- ----------- $ 708,000 $ 1,632,000 $ 1,657,000 ----------- ----------- ----------- The provision for taxes on income 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 0% (1)% (2)% State and local 2% 2% -- Permanent difference related to goodwill 4% 1% -- Other -- -- (1)% --- --- --- Provision for taxes on income 40% 36% 31% --- --- --- 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) -------- --------- -25- 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 815,000 809,000 Computer software and equipment 1,491,000 1,432,000 Automobile -- 29,000 Telephone system 95,000 95,000 Office equipment 83,000 80,000 Tooling 573,000 339,000 Other equipment 130,000 121,000 ----------- ----------- $ 4,373,000 $ 4,091,000 Less accumulated depreciation (1,944,000) (1,272,000) ----------- ----------- $ 2,429,000 $ 2,819,000 ----------- ----------- 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, -26- 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, L.L.C. for a price of $103,320 to purchase 200,000 shares of common stock at $8.25 per share. On November 25, 1997, the Company issued non-qualified stock options to 11 employees to purchase 165,000 shares of common stock at an exercise price of $14 per share; 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, L.L.C.:
Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise 2001 Price 2000 Price 1999 Price -------- -------- -------- -------- -------- -------- Outstanding at beginning of year 646,750 $7.09 699,750 $7.64 711,500 $8.67 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 end of year 271,500 $8.46 341,925 $8.23 317,070 $8.28 -------- ----- -------- ----- -------- -----
The following table summarizes option data, excluding the warrant sale to Palisade Capital, L.L.C. as of December 31, 2001: -27-
Weighted Average Weighted Weighted Price Outstanding Contract Average Exercisable Average Range at December Life Exercise at December Exercise Minimum Maximum 31, 2001 (Years) Price 31, 2001 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 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 Proforma earnings per share Basic $ 0.21 $ 0.73 $ 0.93 Diluted $ 0.21 $ 0.73 $ 0.93 Preferred Stock The 6% noncumulative preferred stock of $100 par value is redeemable at $105 with 5,000 shares authorized and none issued. The serial preferred stock of $5 par value has 100,000 shares authorized and none issued. -28- 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 relocation, the Company terminated its lease for its corporate offices in New York City and subleased the offices and studio previously occupied by Refac HumanFactors-ID for the remainder of the lease term. Rent expense covering all Company facilities was approximately $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. B. Employment Agreement 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 the employment agreement, such officers will be entitled to a lump-sum payment of the remaining compensation under the agreement. 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, from July 1, 1997 to June 30, 2001, 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 -29- making payments, leaving the balance at $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. Note 7 - Segments and Concentrations For 1996 and through November 25, 1997, the principal industry segment in which the Company operated was the licensing of intellectual property rights. With its November 25, 1997 acquisition of Refac HumanFactors-ID (then known as "HumanFactors Industrial Design, Inc."), the Company began to provide product design and development and consulting services. On November 1, 1999, the Company acquired the graphic design and communication business of David Morris Creative, Inc. Operations of the product design and development business and the graphic design and communication business are reported together as creative consulting services. In January 2001, the Company consolidated the operations of these divisions and now offers its creative services under the name RefacDesign. With the purchase of the assets and assumption of the liabilities of Funatik Inc. on September 10, 1999 and its subsequent merger into Refac Consumer Products, Inc., the Company is now also engaged in the manufacturing and marketing of consumer products. The most commercially significant patent owned by Patlex Corporation is the Gas Discharge Laser Patent (US Patent No. 4,704,583), which expires November 2004. Except for its contracts with Patlex Corporation (licensing-related activities) which accounted for approximately 13% of the Company's total revenues in 2001, the Company does not believe that the loss or termination of any contract it has with its clients or licensees would have a materially adverse effect on its business. During 2001, sales to Toys "R" Us, Inc. accounted for approximately 12% of the Company's total revenues and 45% of RCP's revenues. The Company does not believe that the loss or termination of this customer would have a materially adverse effect on its business. The reportable segments are distinct business units operating in different industries and are separately managed. The accounting policies of the segments are the same as those disclosed in the summary of significant accounting policies. The following information about the business segments is for the year ended December 31, 2001. -30-
Manufacture Licensing of and Intellectual Creative Marketing of Property Consulting Consumer Rights Services Products Total ----------- ----------- ----------- ----------- Total revenues $ 4,888,000 $ 5,604,000 $ 3,707,000 $14,199,000 Segment profit (loss) 3,649,000 (991,000) (866,000) 1,792,000 Segment assets 10,488,000 7,611,000 6,288,000 24,387,000 Expenditure for segment assets 38,000 43,000 279,000 360,000 ----------- ----------- ----------- -----------
The following information about the business segments is for the year ended December 31, 2000.
Manufacture Licensing of and Intellectual Creative Marketing of Property Consulting Consumer Rights Services Products Total ----------- ----------- ----------- ----------- Total revenues $ 9,129,000 $ 6,905,000 $ 980,000 $17,014,000 Segment profit (loss) 6,259,000 (304,000) (1,394,000) 4,561,000 Segment assets 12,865,000 9,022,000 3,016,000 24,903,000 Expenditure for segment assets 590,000 317,000 421,000 1,328,000 ----------- ----------- ----------- -----------
-31- The following information about the business segments is for the year ended December 31, 1999.
Manufacture Licensing of and Intellectual Creative Marketing of Property Consulting Consumer Rights Services Products Total ----------- ----------- --------- ----------- Total revenues $10,561,000 $ 3,396,000 $ 495,000 $14,452,000 Segment profit (loss) 6,329,000 (857,000) (142,000) 5,330,000 Segment assets 17,599,000 9,403,000 845,000 27,847,000 Expenditure for segment assets 548,000 1,230,000 21,000 1,799,000 ----------- ----------- --------- -----------
Foreign source revenues of domestic operations amounted to: 2001 2000 1999 -------- -------- -------- Europe $649,000 $678,000 $682,000 Asia 194,000 307,000 191,000 -------- -------- -------- $843,000 $985,000 $873,000 -------- -------- -------- Note 8 - Human Factors Industrial Design, Inc. Acquisition On November 25, 1997, the Company completed the purchase of the outstanding stock of HumanFactors Industrial Design, Inc. (now known as RefacDesign's Product Development Group) for $6,000,000, of which $4,500,000 was payable in cash and $1,500,000 in Company stock (valued at $12.565 per share). On December 30, 1998, HumanFactors Industrial Design, Inc. was merged into Refac International, Ltd ("RIL"). The Company may also be required to make a contingent purchase price payment to the former HumanFactors 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 9 - David Morris Creative, Inc. Acquisition On November 1, 1999, the Company acquired certain assets and assumed certain liabilities of David Morris Creative, Inc. (now known as RefacDesign's Graphic Design Group) for $1,525,000 -32- 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. Note 10 - 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 11 - Subsequent Events A. Plan to Reposition the Company for Sale or Liquidation After considering various factors concerning returning value to the Company's shareholders, the Company's Board of Directors made a decision on March 21, 2002 to reposition the Company for sale or liquidation. While no time limit has been set to complete the repositioning of the Company, the Company currently estimates that it can take up to two years. The Company views all of its business segments as viable and will continue to operate all of them on a going-concern basis pending a sale. The current objective of the repositioning will be for the Company to sell its business segments for an aggregate amount that at least equals the carrying value of its assets. Although there is no assurance as to if and when this objective can be achieved, the Company currently intends to continue operating its businesses while pursuing this goal. The Company has historically estimated the recoverability of its long-term assets, including goodwill, by consideration of the estimated future undiscounted cash flow from the operations of the business segments from which those long-term assets relate to, which is principally Creative Consulting Services. These estimates are based upon historical results adjusted for planned reductions in expenses, which have been implemented, and reasonable sales goals of the business segments. -33- As of January 1, 2002, the Company adopted the provisions of SFAS 142, "Goodwill and Other Intangible Assets" and SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." Under SFAS 142, annual and quarterly goodwill amortization of $348,000 and $87,000, respectively, will no longer be recognized. Instead, the Company will perform, by June 30, 2002, a transitional fair value based impairment test of its goodwill as of January 1, 2002. An appraisal will be obtained for each business segment, and if the appraised fair value of the segment is less than the carrying value, an impairment loss will be recorded in the fiscal quarter ending March 31, 2002 as a cumulative effect of a change in accounting principle. After this transitional test is performed, the Company will perform an annual impairment test, commencing with its fiscal year 2002. Any impairment of goodwill recorded under the annual impairment test will be recognized in the operations of the related business segment. 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 would indicate the need to test that asset or asset group for impairment. Assets that are considered to be held for sale will be measured at the lower of carrying amount or fair value less cost to sell, and depreciation on these assets will cease. Long-term assets to be disposed of by sale may not be classified as held for sale, however, until the period in which all of the following criteria are met: . management commits to a plan to sell the asset or group . the asset or group is available for immediate sale in its present condition . actions to complete the plan to sell have been initiated . it is probable the sale will be completed within one year . the asset or group is being actively marketed at a reasonable price . it is unlikely that significant changes will be made to the plan or that it will be withdrawn Although the Company has decided to reposition itself for sale, it does not currently meet all of the criteria for its long-term assets to be classified as held for sale. Although the estimated useful lives of the long-term assets will be reduced to two years, depreciation and amortization will not be increased since the Company expects to recover the carrying value of the assets. Once all of the criteria are met, which the Company expects to happen by September 30, 2002, the Company -34- will obtain appraisals, and any impairment loss will be recorded to the extent the carrying value of its long-term assets exceeds the fair value less costs to sell. In addition, depreciation and amortization of long-term assets, which currently amount to $437,000 and $109,000 on an annual and quarterly basis, respectively, will cease. As the determination of the recoverability of long-term assets, including goodwill, is subject to future events, such as appraisals and negotiations for the sale of the Company's business segments, the determination currently estimated by the Company that the long-term assets are fully recoverable may change. It is possible that when such events occur, the Company's estimates may change whereby an impairment loss could be required. Any such impairment loss may materially impact the Company's financial position and results of operations. B. 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 the 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 RIL, which will assume responsibility for all of the Company's licensing activities. Ms. Scanlan will serve as a consultant to the Company for the balance of 2002 devoting up to two days per week to the Company's licensing business. Note 12 - Unaudited Selected Quarterly Financial Data
First Second Third Fourth 2001 Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- Total revenues $3,739,000 $3,355,000 $3,514,000 $3,591,000 Cost of revenue 1,049,000 1,525,000 2,020,000 1,996,000 Net income 528,000 305,000 42,000 209,000 Net income per diluted common Share $ 0.14 $ 0.08 $ 0.01 $ 0.06 ---------- ---------- ---------- ----------
-35-
First Second Third Fourth 2000 Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- Total revenues $5,063,000 $4,142,000 $3,736,000 $4,073,000 Cost of revenue 2,103,000 1,419,000 1,103,000 1,618,000 Net income 919,000 907,000 819,000 284,000 Net income per diluted common share $ 0.24 $ 0.24 $ 0.22 $ 0.07 ---------- ---------- ---------- ----------
-36- - 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 6B and 11 as to which the date is March 21, 2002 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. -37- PART III Item 10. Directors and Executive Officers of the Registrant Directors of the Registrant
Served Continuously as Director Name Age Principal Occupation or Employment (1) Since - ---------------------------------------------------------------------------------------------------------------- Neil R. Austrian (2) 61 Private investor 1980 Robin L. Farkas 68 Private investor 1976 Clark A. Johnson (3) 70 Chairman, PSS World Medical, Inc. 2000 Mark N. Kaplan 72 Of Counsel, Skadden, Arps, Slate, 1967 Meagher & Flom LLP (Attorneys) Robert L. Tuchman (4) 59 Chairman, President, Chief Executive Officer 1991 and General Counsel, Refac Ira T. Wender 75 Of Counsel, Patterson, Belknap, Webb 1981 & Tyler (Attorneys)
(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 Corporation. (2) Neil R. Austrian was the President of the National Football League from April 1991 to December 31, 1999. He served as the Chairman of iWon, Inc. (www.iwon.com.) from October 1999 until July 2001. (3) Clark A. Johnson served as Chairman and Chief Executive Officer of Pier 1 Imports, Inc., a specialty retailer of decorative home furnishings, from March 1985 until June 1998. Since October 2000, he has been the Chairman of PSS World Medical, Inc. (4) Robert L. Tuchman succeeded Eugene M. Lang as the Chief Executive Officer of the Corporation on January 6, 1997 and as Chairman of the Board of Directors on June 30, 1997. From August 1, 1991 to January 6, 1997, he served as the Corporation's President and Chief Operating Officer. He is also the Corporation's General Counsel. From May 1994 to March 1997, he held the position of Treasurer of the Corporation. -38- Other Directorships The directors of the Company additionally serve as directors for the following other companies, which are either registered pursuant to Section 12 or subject to Section 15 (d) of the Exchange Act or are registered investment companies. Name Other Directorships -------------------------- ------------------------------ Neil R. Austrian Office Depot, Inc. Robin L. Farkas Insignia Financial Group Inc. Clark A. Johnson Albertson's Inc. InterTAN, Inc. Metromedia International Group, Inc. Niagara Mohawk Holdings, Inc. PSS World Medical, Inc. Mark N. Kaplan American Biltrite, Inc. Autobytel Inc. Congoleum, Inc. DRS Technologies, Inc. Grey Advertising Inc. Volt Information Sciences, Inc. Executive Officers of the Registrant Information with respect to the executive officers of the Registrant is set forth below. Under the by-laws of the Registrant, each executive officer holds office from his election until the Board of Directors' meeting after the Annual Meeting of Shareholders next following his election or until his successor is elected and qualified, or his earlier death, resignation or removal by the Board.
Served in Such Position or Office Name Age Continually Since Position (1) ---- --- ----------------- -------- --- Robert L. Tuchman 59 1991 Chairman, President, Chief Executive Officer and General Counsel (2) Raymond A. Cardonne, Jr. 35 1997 Vice President, Chief Financial Officer, Treasurer, and Secretary (3)
- --------- NOTES: (1) Each executive officer's term of office is until the next annual meeting of the Board of Directors of the Company (traditionally held immediately after the Annual Meeting of -39- Stockholders of the Company) and until the election and qualification of his successor. However, the Company's Board of Directors has the discretion to replace officers at any time. (2) Mr. Tuchman succeeded Eugene M. Lang as Chief Executive Officer of the Company on January 6, 1997 and as Chairman of the Board of Directors on June 30, 1997. He also serves as General Counsel. From August 1, 1991 until January 6, 1997, Mr. Tuchman served as the Company's President and Chief Operating Officer. From May 1994 to March 1997 he held the position of Treasurer of the Company. (3) Mr. Cardonne became Chief Financial Officer and Treasurer of the Company in August 2000. He has served as Secretary of the Company since November 1998 and as Vice President responsible for the licensing and commercialization of technologies since December 1997. Prior to joining Refac, from December 1994 through November 1997, Mr. Cardonne was a Vice President at Technology Management & Funding, L.P. From August 1993 to December 1994, he worked for NEPA Venture Funds, an early stage venture capital firm, and the Lehigh Small Business Development Center. He previously worked at Ford Electronics & Refrigeration Corporation from January 1990 to July 1993. There are no family relationships between any of the executive officers or directors of the Registrant nor were there any special arrangements or understandings regarding the selection of any officer or director, except for as described in "Employment Contracts" under Item 11. Section 16(a) Beneficial Ownership Reporting Compliance Based solely on its review of Forms 3, 4 and 5 filed under Section 16(a) of the Securities Exchange Act of 1934, as amended, and amendments thereto, the Corporation believes that during fiscal 2001 all Section 16(a) filing requirements applicable to its officers, directors and other principal stockholders of the Corporation were complied with. Item 11. Executive Compensation The following table presents the aggregate compensation for services in all capacities paid by the Corporation and its subsidiaries in respect of the years ended December 31, 2001, 2000 and 1999 to the Chief Executive Officer and each of the executive officers of the Corporation whose aggregate compensation exceeded $100,000 in 2001 (collectively, the "Named Executives"). -40- SUMMARY COMPENSATION TABLE
Annual Compensation Securities ------------------- Underlying Name and Position Year Salary Bonus Options (#) - ----------------- ---- ------ ----- ----------- Robert L. Tuchman, Chairman, 2001 $290,000 $18,938 - President, Chief Executive Officer 2000 $280,000 $71,675 50,000 and General Counsel 1999 $270,050 $72,102 - Raymond A. Cardonne, Jr. 2001 $175,000 - - Vice President, Secretary and 2000 $160,000 - - Chief Financial Officer 1999 $143,500 $14,500 7,500
Option Grants and Exercises in Last Fiscal Year No options were granted to or exercised by the Named Executives during 2001. The Company has not granted stock appreciation rights. The following table reflects that there are no "In-the-Money Options" held by the Named Executives as of December 31, 2001. FISCAL YEAR-END OPTION VALUES
Number of Securities Underlying Value of Unexercised Unexercised Options In-the-Money Options At Fiscal Year-End At Fiscal Year-End -------------------------- -------------------------- Not Not Name Exercisable Exercisable Exercisable Exercisable - ---- ----------- ----------- ----------- ----------- Robert L. Tuchman 100,000 50,000 -- -- Raymond A. Cardonne, Jr. 24,750 17,750 -- --
Directors' Compensation Each director who is not also an employee of or consultant to the Company was paid the sum of $1,000 for each meeting of the Board of Directors attended in 2001. No additional payments were made with respect to service on or attendance at the meetings of any committee established by the Board. 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. Except as otherwise provided in this proxy statement, no director received any other compensation from the Company in 2001. -41- Employment Contracts Robert L. Tuchman The Company is party to an employment contract with Mr. Tuchman (the "Tuchman Employment Agreement"), which, as amended in March 2002, has a term ending on March 31, 2004. In addition to salary payments, the Tuchman Employment Agreement provides for the payment of incentive compensation based on Mr. Tuchman's success in repositioning the Company for sale or liquidation. Such incentive compensation is payable on the occurrence of certain payment events which include a liquidation or change in control of the Company or the expiration of the term of the agreement. Mr. Tuchman is entitled to an aggregate of 16% of the greater of the following two amounts: (i) 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; or (ii) the price per share paid for acquisition of more than 50% of the Company's common stock (applied to the total shares then outstanding) in excess of $10,000,000. Under the Tuchman Employment Agreement, the Company accepted from Mr. Tuchman in payment for the exercise of certain stock options a promissory note in an amount equal to $375,000. The note, as modified in March 2002, bears interest at the rate of 6% per annum and is repayable in ten equal annual installments commencing December 31, 2004. The Tuchman Employment Agreement further provides that Mr. Tuchman will not engage in any "Competitive Activity" (as defined in the Tuchman Employment Agreement) during the term of such Employment Agreement, and for a period of two years following his termination of employment, that 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. In the event that the Company terminates Mr. Tuchman's employment for any reason other than because of a permanent disability, death or for cause (as each such term is defined in the Tuchman Employment Agreement), Mr. Tuchman is entitled to receive a lump sum equal to his full salary through the expiration date of the Tuchman Employment Agreement. In addition, Mr. Tuchman is entitled to receive, except to the extent that he receives similar benefits from a subsequent employer, life, health and similar benefits (other than incentives such as stock options) to which he would otherwise have been entitled through March 31, 2004. In the event that Mr. Tuchman's employment with the Company is terminated by the Company (or any successor thereto) because of a permanent disability, death or without cause or upon the expiration of the term, Mr. Tuchman is entitled to receive incentive compensation based upon (i) the aggregate amount of cash and the fair market value (as determined by the Board in its sole discretion) of securities that are available for distribution to the Company's stockholders (plus the aggregate amount distributed in any prior liquidation distribution paid to stockholders plus any compensation paid to Mr. Tuchman or Mr. Cardonne with respect thereto) plus (ii) the amount (as determined by the Board in its sole discretion) that reasonably may be realized upon the sale of REFAC's remaining assets, minus (iii) the cash and fair market value of assets (as determined by the Board in its sole discretion) needed to be reserved for actual or potential liabilities or claims against or relating to the Company (but excluding Messrs. Tuchman and Cardonne's incentive compensation under their respective employment agreements with the Company), minus (iv) legal and other fees and expenses expected by the Board, in its sole discretion, to be incurred by the Company in connection with the sale of the Company's assets, minus (v) $10 million. Any such payment would be offset by the amount of any incentive compensation payments previously made to Mr. Tuchman in connection with the repositioning. -42- Raymond A. Cardonne The Company is party to an employment contract with Mr. Cardonne (the "Cardonne Employment Agreement"), which has a term ending on March 31, 2004. In addition to salary payments, the Cardonne Employment Agreement provides for the payment of incentive compensation based on Mr. Cardonne's success in repositioning the Company for sale or liquidation. Such incentive compensation is payable on the occurrence of certain payment events which include a liquidation or change in control of the Company or expiration of the term of the agreement. Mr. Cardonne is entitled to an aggregate of 4% of the greater of the following two amounts: (i) the excess of cash and the fair market value (as determined by the Board in its sole discretion) of securities available for distributions to stockholders in excess of $10,000,000; or (ii) the price per share paid for acquisition of more than 50% of the Company's common stock (applied to the total shares then outstanding) in excess of $10,000,000. The Cardonne Employment Agreement further provides that Mr. Cardonne will not engage in any "Competitive Activity" (as defined in the Cardonne Employment Agreement) during the term of such Employment Agreement, and for a period of two years following his termination of employment, that 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. In the event that the Company terminates Mr. Cardonne's employment for any reason other than because of a permanent disability, death or for cause (as each such term is defined in the Cardonne Employment Agreement), Mr. Cardonne is entitled to receive a lump sum equal to his full salary through the expiration date of the Cardonne Employment Agreement. In addition, Mr. Cardonne is entitled to receive, except to the extent that he receives similar benefits from a subsequent employer, life, health and similar benefits (other than incentives such as stock options) to which he would otherwise have been entitled through March 31, 2004. In the event that Mr. Cardonne's employment with the Company is terminated by the Company (or any successor thereto) because of a permanent disability, death or without cause or upon the expiration of the term, Mr. Cardonne is entitled to receive incentive compensation based upon (i) the aggregate amount of cash and the fair market value (as determined by the Board in its sole discretion) of securities that are available for distribution to the Company's stockholders (plus the aggregate amount distributed in any prior liquidation distribution paid to stockholders plus any compensation paid to Mr. Cardonne or Mr. Tuchman with respect thereto) plus (ii) the amount (as determined by the Board in its sole discretion) that reasonably may be realized upon the sale of REFAC's remaining assets, minus (iii) the cash and fair market value of assets (as determined by the Board in its sole discretion) needed to be reserved for actual or potential liabilities or claims against or relating to the Company (but excluding Messrs. Cardonne and Tuchman's incentive compensation under their respective employment agreements with the Company), minus (iv) legal and other fees and expenses expected by the Board, in its sole discretion, to be incurred by the Company in connection with the sale of the Company's assets, minus (v) $10 million. Any such payment would be offset by the amount of any incentive compensation payments previously made to Mr. Cardonne in connection with the repositioning. Compensation Committee Interlocks And Insider Participation The Compensation Committee is comprised of the following three directors: Neil R. Austrian, Mark N. Kaplan and Ira T. Wender. Mr. Kaplan is Of Counsel to Skadden, Arps, Slate, Meagher & Flom LLP which has provided legal services to the Company since 1982. None of the Committee members otherwise received any compensation from the Company other than their fees as directors of the Company. -43- COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors (the "Committee") is comprised of Neil R. Austrian, Mark N. Kaplan and Ira T. Wender. While the Committee administers, and makes recommendations to the Board of Directors with respect to, the executive compensation, stock option and benefit plans and grants under such plans, the Company's overall compensation strategy, including a determination of compensation paid to the Chief Executive Officer of the Company, Robert L. Tuchman, is determined by the entire Board of Directors. Objectives The Committee's primary objective is to retain the most highly qualified executive officers and to ensure that their compensation structure aligns their interests with those of the stockholders of the Company. Mr. Tuchman was the only key executive for whom the Committee was responsible for administering compensation in 2001. In 2002, the Committee also became responsible for administering the compensation of Raymond A. Cardonne, Jr., the Company's Vice President and Chief Financial Officer. In March 2002, the Company announced that it would reposition itself for sale or liquidation. The Committee determined to recommend to the Board that Mr. Tuchman's contract be amended and that the Company enter into a new employment agreement with Mr. Cardonne, whereby such officers would receive incentive bonuses based upon the value of assets available to be distributed to stockholders upon such sale or liquidation. The Committee believes that such incentive compensation will (i) maintain continuity of Refac's management while exploring a sale of the Company's assets and (ii) align management's interests with the other shareholders of the Company by providing them with incentives for completing the sale. Employment Agreements The Company has employment agreements with Mr. Tuchman and Mr. Cardonne. The Committee has considered the advisability of using employment agreements and has determined that their use is in the best interest of the Company because it facilitates the Company's ability to retain the services of highly qualified executive officers. The Committee has observed that the use of employment agreements by the Company has provided stability with respect to the leadership of the Company's executive officers, and the Committee has determined that the practice of using employment agreements to retain the services of its senior executive officers should continue during the period that it is repositioning itself for sale or liquidation. Each executive officer's employment agreement separately reflects the terms that the Committee felt were necessary and appropriate to retain the services of such officer. Components of Executive Compensation The Company's executive compensation program consists of cash and equity compensation components. Cash Compensation Cash compensation is comprised of base salary and annual cash incentive bonuses. Cash compensation levels for Messrs. Tuchman and Cardonne are subject to the provisions of their respective employment agreements with the Company. The terms and conditions of these employment agreements are discussed in detail above under "Employment Agreements". The Company offers the Chief Executive Officer an opportunity to earn additional cash compensation in the form of an annual bonus based on a number of subjective factors, including the earnings of the -44- Company and the efforts of the Chief Executive Officer. In 2001, the subjective factors included the implementation of a General and Administrative Cost Reduction Program and the progress made to better align direct costs with revenues in a challenging economic climate for the Company's businesses. Equity Compensation In 2001, the compensation included equity compensation, comprised of stock options. Stock option grants reflected the Committee's desire to provide a meaningful equity incentive for the executives to have the Company prosper over the long term. Options granted to executive officers in 2001 are set forth in the table above entitled Option Grants in Last Fiscal Year. Chief Executive Officer Compensation Mr. Tuchman has served as Chief Executive Officer of the Company since January 6, 1997. Mr. Tuchman's compensation is governed by the terms of an employment contract between Mr. Tuchman and the Company, entered into at the time he joined the Company in 1991. The contract was amended in each of 1994, 1996, 1999 and March 2002. In addition to salary payments, the Board of Directors may, in its sole discretion, determine that the Company should pay Mr. Tuchman an annual bonus. In its recommendation to the Board of Directors regarding Mr. Tuchman's bonus for fiscal 2001, the Committee considered Mr. Tuchman's active role in connection with the Company's further development of Refac Consumer Products, Inc., including the launching of the MTV product line, the implementation of a General and Administrative Cost Reduction Program and the progress made to better align direct costs with revenues. Bonuses that were paid to Mr. Tuchman in the three most recent completed fiscal years are disclosed above in the bonus column of the Summary Compensation Table. As discussed in detail above, in March 2002, Mr. Tuchman's agreement was amended to provide that he would receive an incentive bonus upon the sale or liquidation of the Company. Deductibility of Compensation Section 162(m) of the Code generally limits to $1,000,000 the Company's federal income tax deduction for compensation paid in any year to each of its Chief Executive Officer and the four other most highest paid executive officers, to the extent such compensation is not "performance-based" within the meaning of Section 162(m). The Committee will, in general, seek to qualify compensation paid to its executive officers for deductibility under Section 162(m), although the Committee believes it is appropriate to retain the flexibility to authorize payments of compensation that may not qualify for deductibility if, in the Committee's judgment, it is in the Company's best interest to do so. The Compensation Committee of the Board of Directors Neil R. Austrian Mark N. Kaplan Ira T. Wender Comparison of Five-year Cumulative Total Shareholder Return The following graph provides information on the cumulative total return, assuming reinvestment of dividends, for the period commencing December 31, 1996 and ending December 31, 2001, of the -45- Company's Common Stock as compared to the American Stock Exchange Index and a published industry index, referred to below as the "Industry Index," which includes companies in Standard Industrial Classification Code 6794 (Patent Owners and Lessors), which is the Company's primary SIC reporting code. [GRAPHIC APPEARS HERE]
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ------- ------- ------- ------- ------- ------- Refac $100.00 $182.98 $122.34 $ 68.09 $ 39.37 $ 43.40 Industry Index (SIC Code 6794) $100.00 $116.89 $136.14 $ 81.91 $ 28.50 $ 72.47 American Stock Exchange Index $100.00 $120.33 $118.69 $147.98 $146.16 $139.43
-46- Item 12. Security Ownership of Certain Beneficial Owners and Management Principal Stockholders On the Record Date, 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 Common Stock. The Company has no other class of voting securities outstanding. The address of Mr. Tuchman is that of the Company.
Name and Address of Amount and Nature Percentage of Beneficial Owner of Beneficial Ownership Outstanding Shares ---------------- ----------------------- ------------------ Dimensional Fund Advisors Inc. 1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401 313,342 (1) 8.26% FMR Corp. 82 Devonshire Street Boston, MA 02109 379,500 (2) 10.00% Robert L. Tuchman 218,420 (3) 5.59%
- ------- (1) Dimensional's share ownership is based upon the Schedule 13G filed on February 12, 2002. (2) FMR's share ownership is based upon the Schedule 13G filed on February14, 2002. Such shares are directly held by Fidelity Management & Research Company, a wholly-owned subsidiary of FMR. (3) Includes 112,500 shares of Common Stock which may be acquired upon the exercise of stock options which are exercisable within sixty days of March 21, 2002. Security Ownership of Management The following table shows: (i) the number of shares of Common Stock that each of the Company's directors and executive officers beneficially owned or had the right to acquire beneficial ownership of as of, or within sixty days of, March 21, 2002; and (ii) the percentage of the Company's outstanding shares that such ownership constitutes. -47- Amount and Nature of Percent of of Beneficial Percent Outstanding Name of Beneficial Owner Ownership Shares - ------------------------ --------------------- ----------- Neil R. Austrian. . . . . . . . . 4,579 (1) * Raymond A. Cardonne . . . . . . . 31,666 (2) * Robin L. Farkas . . . . . . . . . 20,598 (1) * Clark A. Johnson. . . . . . . . . 6,000 (3) * Mark N. Kaplan. . . . . . . . . . 16,828 (1) * Robert L. Tuchman . . . . . . . . 218,420 (4) 5.59% Ira T. Wender . . . . . . . . . . 5,000 * Officers and Directors as a Group (7 persons) . . . . . . . . . 303,091 (5) 7.32% - ---------- * Represents less than 1% of the outstanding shares. (1) Includes 4,000 shares of Common Stock which may be acquired upon the exercise of options which are exercisable immediately or within sixty days. (2) Includes 28,750 shares of Common Stock which may be acquired upon the exercise of options which are exercisable immediately or within sixty days. (3) Includes 6,000 shares of Common Stock which may be acquired upon the exercise of options which are exercisable immediately or within sixty days. (4) Includes 112,500 shares of Common Stock which may be acquired upon the exercise of options which are exercisable immediately or within sixty days. (5) Includes an aggregate of 163,250 shares of Common Stock which such persons may acquire upon the exercise of options which are exercisable immediately or within sixty days. Item 13. Certain Relationships and Related Transactions Certain Business Relationships Mark N. Kaplan is Of Counsel to Skadden, Arps, Slate, Meagher & Flom LLP, which has provided legal services to the Company since 1982. Indebtedness of Management Under the Tuchman Employment Agreement (See Employment Contracts under Item 11), the Company accepted from Mr. Tuchman in payment for the exercise of certain stock options a promissory note with interest only at the rate of 6% per annum through December 31, 2003 and thereafter is repayable in ten -48- equal consecutive annual installments with the first payment being due on December 31, 2004. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) Financial Statements Included within. (a)(2) Exhibits See the Exhibit Index attached hereto for a list of the exhibits filed or incorporated by reference as a part of this report. (b) Reports on Form 8-K None. Signatures Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Refac Dated: April 1, 2002 /s/ Robert L. Tuchman -------------------------------------- Robert L. Tuchman, President, Chief Executive Officer and General Counsel Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. April 1, 2002 /s/ Robert L. Tuchman -------------------------------------- Robert L. Tuchman, President, Chief Executive Officer and General Counsel and Director (Principal Executive Officer) April 1, 2002 /s/ Raymond A. Cardonne, Jr. -------------------------------------- Raymond A. Cardonne, Jr., Chief Financial Officer, Vice President, Treasurer and Secretary (Principal Financial Officer) April 1, 2002 /s/ Neil R. Austrian -------------------------------------- Neil R. Austrian, Director April 1, 2002 /s/ Robin L. Farkas -------------------------------------- Robin L. Farkas, Director April 1, 2002 /s/ Clark A. Johnson -------------------------------------- Clark A. Johnson, Director April 1, 2002 /s/ Mark N. Kaplan -------------------------------------- Mark N. Kaplan, Director -------------------------------------- Ira T. Wender, Director -49- EXHIBIT INDEX ------------- Exhibit No. Exhibit - ----------- ------- 3 (a) Restated Certificate of Incorporation and Certificate of Amendment thereto. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988, SEC file number 0-7704. 3 (b) The By-laws of the Company. Incorporated by reference to Exhibit 3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, SEC file number 0-7704. 10 (a) Second Amended and Restated Employment Agreement dated March 21, 2002 between the Company and Robert L. Tuchman (the "Tuchman Employment Agreement").* 10 (b) Employment Agreement dated March 21, 2002 between the Company and Raymond A. Cardonne, Jr. (the "Cardonne Employment Agreement").* 10 (c) 1998 Stock Incentive Plan. Incorporated by reference to Exhibit A to the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders, SEC file number 0-7704. 10 (d) 1990 Stock Option and Incentive Plan. Incorporated by reference to Exhibit A to the Company's Proxy Statement for its 1990 Annual Meeting of Stockholders, SEC file number 0-7704. 21. List of subsidiaries of the Company.* 23. Consent of Grant Thornton LLP* - ------------- * Filed herewith -50- EX-10.(A) 3 dex10a.txt SECOND AMEND. & RESTATED EMPLOYMENT AGREEMENT Exhibit 10.(a) SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT BETWEEN ROBERT L. TUCHMAN AND REFAC (formerly REFAC TECHNOLOGY DEVELOPMENT CORPORATION) Dated as of March 21, 2002 THIS SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") made as of March 21, 2002 between REFAC, a Delaware corporation ("REFAC"), and Robert L. Tuchman ("TUCHMAN"). TUCHMAN is currently employed by REFAC under an Amended and Restated Employment Agreement dated as of December 13, 1996 and amended by agreement dated as of January 20, 1999. In addition to the duties provided for therein, REFAC desires that TUCHMAN undertake responsibility to reposition REFAC for sale or for liquidation. TUCHMAN is willing to undertake these added duties and, accordingly, the parties hereto desire to continue TUCHMAN's employment upon the terms and conditions hereinafter set forth. The parties hereto desire to modify the contractual arrangements between them and replace them with this Agreement. In consideration of the premises and the respective agreements of the parties herein contained, the parties hereto, intending to be legally bound, agree as follows: 1. Employment. Subject to the provisions hereof, REFAC shall continue to employ TUCHMAN and TUCHMAN shall continue to serve as the Chief Executive Officer, President, and General Counsel of REFAC with full responsibility for the supervision of all corporate affairs. 2. Term. The employment of TUCHMAN by REFAC hereunder will continue until March 31, 2004, unless further extended by agreement of TUCHMAN and REFAC or until sooner terminated as hereinafter provided. 3. Duties. (a) Regular Duties. TUCHMAN will continue to perform such duties and have such powers as are customary for the chief executive officer, president and general counsel of publicly-held corporations of a size and engaging in a business comparable to REFAC. (b) Repositioning of REFAC for Sale or Liquidation. In addition to the services rendered under Section 3(a) above, TUCHMAN shall be responsible for REFAC's efforts to reposition itself so that it may be sold or liquidated. (c) Responsible to the Board. TUCHMAN will report and be directly responsible to the Board of Directors of REFAC (the "Board"). (d) Time Devoted to REFAC's Affairs. TUCHMAN will devote substantially all his working time and efforts to the business and affairs of REFAC and will not, without the express prior authorization of the Board, have any active engagement in or responsibility with respect to any business or commercial enterprise other than REFAC or a subsidiary of REFAC. 2 (e) Post Employment Services. It is contemplated that some of REFAC's assets may be sold in exchange for contract rights that include periodic payments and that some of the royalty agreements might be collected until maturity rather than sold. In such event and with respect to such contracts, TUCHMAN agrees to be responsible for the contract administration, which shall include invoicing (where appropriate), collecting the periodic payments, monitoring performance, and record keeping. TUCHMAN shall be reimbursed for all of his out-of-pocket costs associated therewith and will perform these services on a part-time basis. 4. Board Membership. REFAC will use its best efforts to cause TUCHMAN to be reelected as a member of its Board throughout the term of this Agreement. TUCHMAN will serve as a Director of REFAC and/or its subsidiaries (including committees of such boards) without additional compensation. 5. Place of Performance. In connection with TUCHMAN's employment by REFAC, TUCHMAN will be based in the New York City metropolitan area, except for required travel on REFAC's business to an extent consistent with REFAC's business requirements and his responsibilities hereunder. 6. Base Salary and Incentive Compensation (a) Base Salary. TUCHMAN's salary will be $300,000 per annum. Payment of such salary will be made in accordance with REFAC's customary pay practices for senior officers and will be subject to such payroll deductions as are required by law or by the terms of any applicable benefit plan of REFAC. (b) Incentive Compensation. TUCHMAN shall use reasonable efforts, consistent with prudent and reasonable business judgment, to convert REFAC's assets into cash and securities that can be distributed to REFAC's stockholders. As incentive compensation for this undertaking, upon a Payment Event (as such term is hereinafter defined) TUCHMAN (or in the case of death, TUCHMAN's estate) will be entitled to receive a bonus or bonuses (each, a "Success Bonus") in consideration of his successful performance of the duties described in Section 3(b) hereof equal to 16% of the "Eligible Consideration" (as hereinafter defined) in accordance with the terms of this Section 6. For purposes of this Agreement, "Payment Event" shall mean (i) each Liquidation (as hereinafter defined) during the term of this Agreement, (ii) termination of TUCHMAN's employment with REFAC prior to the expiration of the term of this Agreement due to his death, Disability (as hereinafter defined) or termination by REFAC without Cause (as hereinafter defined), (iii) the expiration of the term of this Agreement, and (iv) the occurrence of a Company Sale. In the event that TUCHMAN receives a Success Bonus in respect of a Liquidation or Company Sale, he will remain eligible for additional Success Bonus payments in the event of a subsequent Liquidation (or Liquidations) or other Payment Event. In the event that TUCHMAN receives a Success Bonus in respect of a Payment Event subsequent to a Liquidation or Company Sale, such amount shall be reduced by the amount of any Success Bonus previously paid to TUCHMAN (hereinafter, the "Offset Adjustment"). In the event that TUCHMAN receives a Success Bonus in respect of Payment Event that is not a Liquidation or Company Sale, 3 TUCHMAN will not be eligible for additional Success Bonus payments upon the occurrence of any subsequent event. (1) Eligible Consideration - Liquidation, Expiration of Term. In the event of each Liquidation or the expiration of the term of this Agreement, "Eligible Consideration" shall mean the amount, if any, by which the Distributable Amount (as hereinafter defined) exceeds $10 million. "Distributable Amount" shall mean the aggregate amount of cash and the fair market value (as determined by the Board in its sole discretion) of securities that are available for distribution to REFAC's stockholders (plus the aggregate amount distributed in any prior Liquidation plus any compensation paid to TUCHMAN or Raymond Cardonne with respect thereto) less the amount of cash and the fair market value of assets (as determined by the Board in its sole discretion) reserved to cover actual or potential liabilities or claims against or relating to REFAC, including unpaid legal and other fees and expenses incurred by REFAC in connection with the Liquidation (but excluding TUCHMAN's incentive compensation hereunder and Raymond Cardonne's incentive compensation under his employment agreement with REFAC). (2) Eligible Consideration - Termination Due to Death or Disability or By REFAC Without Cause. In the event that TUCHMAN's employment is terminated by REFAC without Cause or due to TUCHMAN's Disability or is terminated upon TUCHMAN's death, in any such case prior to the expiration of the term of this Agreement, "Eligible Consideration" shall mean the sum of (i) the aggregate amount of cash and the fair market value (as determined by the Board in its sole discretion) of securities that are available for distribution to REFAC's stockholders (plus the aggregate amount distributed in any prior Liquidation plus any compensation paid to TUCHMAN or Raymond Cardonne with respect thereto) plus (ii) the amount (as determined by the Board in its sole discretion) that reasonably may be realized upon the sale of REFAC's remaining assets, minus (iii) the cash and fair market value of assets (as determined by the Board in its sole discretion) needed to be reserved for actual or potential liabilities or claims against or relating to REFAC (but excluding TUCHMAN's incentive compensation hereunder and Raymond Cardonne's incentive compensation under his employment agreement with REFAC), minus (iv) legal and other fees and expenses expected by the Board, in its sole discretion, to be incurred by REFAC in connection with the sale of REFAC's assets, minus (v) $10 million. (3) Eligible Consideration -- Company Sale. In the event of a Company Sale (as hereinafter defined), the Eligible Consideration shall be the amount, if any, by which the Sale Consideration (as hereinafter defined) and any Distributable Amount previously calculated to be available for distribution to REFAC's stockholders in connection with a Liquidation exceeds $10 million. "Sale Consideration" shall mean (i) in the case of a Company Sale 4 which results in a merger or the sale of 100% of REFAC's then-outstanding voting securities, the aggregate value of the consideration (which may consist of cash, securities, other property or a combination of the foregoing) actually received by REFAC's stockholders in connection with the consummation of a Company Sale or (ii) in the case of a Company Sale which results in the sale of less than 100% of REFAC's then-outstanding voting securities, the aggregate amount of consideration which would have been received by REFAC's stockholders in connection with the consummation of a Company Sale assuming that the price per-share applicable with respect to such Company Sale was applied to all outstanding voting securities, in each case as determined by the Board in its sole discretion. (c) Calculation of Eligible Consideration. The Board in its sole discretion shall make all calculations and determinations necessary to the calculation of the Eligible Consideration. In the case of a Liquidation, the Eligible Consideration shall be calculated immediately prior to each date of an actual distribution to stockholders. In the case of a Payment Event other than a Liquidation, the Eligible Consideration shall be calculated immediately upon the occurrence of such Payment Event. (d) Payment of Success Bonus. (i) In the event of a Liquidation, REFAC shall pay TUCHMAN the Success Bonus at the time of the payment to shareholders in respect of such Liquidation. In the event of a Payment Event other than a Liquidation, REFAC shall pay TUCHMAN the Success Bonus as soon as practicable following the occurrence of such Payment Event. (ii) Notwithstanding the foregoing, in the event that some or all of the Eligible Consideration consists of securities or other property, the Board may, in its sole discretion, pay TUCHMAN a ratable portion of his Success Bonus in such securities or other property, which shall be valued by the Board in its sole discretion. If there are restrictions imposed upon the consideration (including, without limitation, transfer restrictions or forfeiture conditions), the Board may, in its sole discretion, require TUCHMAN to consent to the imposition of similar restrictions upon any share of such consideration conveyed to him. Payment of such incentive compensation shall be made within thirty (30) days after the date of calculation except that the Board may also elect to pay TUCHMAN his share of any consideration that it receives in installment payments within thirty (30) days after receipt. (e) Company Sale Defined. For purposes of this Agreement, a "Company Sale" will be deemed to have occurred if and when the event set forth in any one of the following paragraphs shall have first occurred: (1) there is consummated a merger or consolidation of REFAC or any direct or indirect subsidiary of REFAC with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of REFAC outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent 5 thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of REFAC or any subsidiary of REFAC, at least 60% of the combined voting power of the securities of REFAC or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of REFAC (or similar transaction) in which no Person (as hereinafter defined)is or becomes the Beneficial Owner, directly or indirectly, of securities of REFAC (not including in the securities Beneficially Owned by such Person any securities acquired directly from REFAC or its affiliates other than in connection with the acquisition by REFAC or its affiliates of a business) representing 50% or more of the combined voting power of REFAC's then outstanding securities; (2) any Person is or becomes the Beneficial Owner (as hereinafter defined), directly or indirectly, of securities of REFAC (not including in the securities beneficially owned by such Person any securities acquired directly from REFAC or its affiliates) representing 50% or more of the combined voting power of REFAC's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (f)(1) above; or (3) the Board determines, in its discretion, that a Company Sale has occurred. (f) Liquidation Defined. For purposes of this Agreement, a "Liquidation" shall mean a distribution in cash or securities made to the stockholders of REFAC in connection with a plan of complete liquidation or dissolution of REFAC. (g) Certain Other Definitions. (1) For purposes of this Section 6, "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) REFAC or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of REFAC or any of its affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of REFAC in substantially the same proportions as their ownership of stock of REFAC. (2) For purposes of this Section 6, "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (h) For purposes of this Section 6, "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. 6 7. Fringe Benefits, Expenses and Related Matters. (a) Expenses. During the term of TUCHMAN's employment hereunder, TUCHMAN will be entitled to receive prompt reimbursement for all reasonable expenses incurred by TUCHMAN in performing services hereunder, including all reasonable expenses of travel and living expenses while away from home on business or at the request of and in the service of REFAC, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by REFAC. (a) Automobile. During the term of TUCHMAN's employment hereunder, REFAC will provide TUCHMAN with an automobile with a maximum monthly lease payment of $650. (b) Other Benefits. TUCHMAN will be entitled to participate in or receive benefits under any employee benefit plan or arrangement now or in the future made available by REFAC generally to its executive employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements, including health insurance and life insurance benefits. (c) Vacations. TUCHMAN will be entitled to four weeks of paid vacation per calendar year, prorated for any portion thereof and to all paid holidays given by REFAC in accordance with REFAC's regular paid holidays policy. 8. Facilities and Support Services Furnished. REFAC will furnish TUCHMAN with office space, secretarial assistance and such other facilities and services as shall be suitable to TUCHMAN's position and adequate for the performance of his duties as herein set forth. 9. Termination. TUCHMAN's employment hereunder may be terminated under the following circumstances: (a) Death. TUCHMAN's employment hereunder will terminate immediately upon his death. (b) Disability. REFAC may terminate TUCHMAN's employment hereunder if TUCHMAN should become permanently disabled. For the purposes of this Agreement, permanent disability ("Disability") means TUCHMAN's inability, by virtue of physical or mental illness or injury, to perform his regular duties on a full-time, continuous basis for 120 consecutive days. TUCHMAN's disability will be established if a qualified medical doctor selected by the parties so certifies in writing. If the parties are unable to agree on the selection of such a doctor, each party will designate a qualified medical doctor who together will select a third doctor who will make the determination. TUCHMAN will make himself available for an examination by a doctor selected in accordance with this paragraph (b). (c) Cause. REFAC may terminate TUCHMAN's employment hereunder for Cause at any time during the term hereof as hereinafter set forth. For purposes of this Agreement, REFAC will have "Cause" to terminate TUCHMAN's employment 7 hereunder upon (i) the willful and continued failure, in the reasonable judgment of the Board, by TUCHMAN to perform substantially his duties with REFAC (other than any such failure resulting from his death or Disability) after a written demand for substantial performance is delivered to TUCHMAN by the Board which specifically identifies the manner in which it is believed that TUCHMAN has not substantially performed his duties, (ii) the willful engaging by TUCHMAN in conduct which in the reasonable opinion of the Board is materially and demonstrably injurious to REFAC or (iii) the conviction of TUCHMAN (or the entering by TUCHMAN of a plea of guilty or nolo contendere) for any felony or any lesser crime which involved REFAC or its property. Notwithstanding the foregoing, TUCHMAN will not be deemed to have been terminated for Cause within the meaning of clauses (i) and (ii) without (1) reasonable notice to TUCHMAN setting forth the reasons for REFAC's intention to terminate for Cause, (2) an opportunity for TUCHMAN, together with his counsel, to be heard before the Board, and (3) delivery to TUCHMAN of a Notice of Termination, as defined in paragraph (e) of this Section 9, from the Board finding that, in the good faith opinion of the Board, clause (i) or (ii) hereof may be invoked, and specifying the particulars thereof in detail. (d) Notice of Termination. Any termination of TUCHMAN's employment by REFAC or by TUCHMAN (other than termination pursuant to Section 9(a)) will be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" means a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of TUCHMAN's employment under the provision so indicated. (e) Date of Termination. "Date of Termination" shall mean (i) if TUCHMAN's employment is terminated by his death, the date of his death, (ii) if TUCHMAN's employment is terminated pursuant to paragraph (b) of this Section 9, three weeks after Notice of Termination, (iii) if TUCHMAN's employment is terminated pursuant to paragraph (c) of this Section 9, the date specified in the Notice of Termination, and (iv) if TUCHMAN's employment is terminated for any other reason, the date specified in the Notice of Termination. (f) TUCHMAN Cooperation. From and after the earlier to occur of (i) delivery of a Notice of Termination and (ii) termination of TUCHMAN's employment hereunder (other than termination due to TUCHMAN's death) TUCHMAN will, to the best of his knowledge, disclose or provide for the disclosure to REFAC or any successor thereof, orally or in writing as appropriate, all information of a material nature relating to existing or prospective clients and licensees and as to any other matters in which TUCHMAN shall prior to his Date of Termination have been personally involved or as to which TUCHMAN will have acquired special knowledge, and TUCHMAN will thereafter answer to the best of his knowledge any questions that REFAC may from time to time submit with respect to any such aforesaid matters. 10. Compensation Upon Termination or During Disability. (a) Disability. During any period that TUCHMAN fails or is unable to perform his duties hereunder as a result of Disability, TUCHMAN will continue to 8 receive his full salary at the rate then in effect for such period until his employment is terminated, provided that such payments will be reduced by the amounts, if any, paid to TUCHMAN under any disability benefit plans of REFAC or under the Social Security disability insurance program. Following the termination of his employment, TUCHMAN's benefits will be determined in accordance with REFAC's retirement, insurance, and other applicable programs and plans then in effect, if any. (b) Death. If TUCHMAN's employment should be terminated by his death, REFAC will (i) pay any accrued salary and other compensation and benefits through the date of death to TUCHMAN's spouse, or, if he leaves no spouse, to his estate and (ii) pay or cause the payment to TUCHMAN's beneficiary, or if he specified no beneficiary, to his estate, the death benefits payable pursuant to REFAC's life insurance program in effect at the date of death, if any. (c) Cause. If TUCHMAN's employment should be terminated by REFAC for Cause or by TUCHMAN prior to the expiration date hereof, REFAC will pay TUCHMAN his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which TUCHMAN is entitled as of the Date of Termination under any benefit plan of REFAC at the time such payments are due, and REFAC will have no further obligations to TUCHMAN under this Agreement. (d) Without Cause. TUCHMAN's employment with REFAC may not be terminated prior to March 31, 2004 for reasons other than those described in Section 9(a), 9(b) or 9(c) unless, prior to such termination TUCHMAN has together with his counsel had an opportunity to appear and be heard at a meeting of the Board which was called and held (after reasonable notice to TUCHMAN) for the purpose of considering such a termination. In the event that TUCHMAN's employment is terminated prior to March 31, 2004 for reasons other than those described in Section 9(a), 9(b) or 9(c), REFAC will pay TUCHMAN a lump sum equal to his full salary that would have been payable absent such termination for the period of time commencing on the Date of Termination and ending on March 31, 2004 at the rate in effect at the time Notice of Termination is given and will provide, except to the extent that TUCHMAN shall receive similar benefits from a subsequent employer, the life, health and similar welfare benefits which TUCHMAN would have been entitled to through the expiration date of the Agreement under any such benefit plan of REFAC. (e) Mitigation of Payments. TUCHMAN will not be required to mitigate the amount of any lump sum payment or bonus entitlement provided for in this Section 10 by reducing it by the amount of any compensation earned by TUCHMAN as the result of employment by another employer after the Date of Termination, or otherwise. However, he will be required to mitigate the costs of the other benefits provided for in this Section 11. Noncompetition. TUCHMAN will not, except as hereinafter set forth, engage in any Competitive Activity (as hereinafter defined) during the term of this Agreement. For purposes of this Section, "Competitive Activity" will mean directly or indirectly: owning, managing, controlling, investing in, or otherwise being connected with, in any manner, whether as an officer, director, employee, partner, investor, 9 consultant, lender or otherwise, any business entity or activity which is engaged in, or is in any way related to, the business of establishing, acquiring or administrating manufacturing licenses and joint ventures from or with third parties in the United States; it will also mean the direct or indirect solicitation or representation for any such business purpose of or for any existing or prospective client of REFAC or any of its subsidiaries. Nothing herein contained will prohibit TUCHMAN from (i) investing in securities of a business entity if the securities of such entity are listed for trading on a national securities exchange or traded in the over-the-counter market and TUCHMAN's holdings therein represent less than five (5%) percent of the total number of shares or principal amount of other securities of such entity outstanding or (ii) at any time subsequent to the termination of this Agreement, engaging in the design, development and licensing of children's toys, games, stationery products and characters in or with which REFAC, prior to such termination, shall not have been directly, indirectly or prospectively engaged for REFAC's own account or in the normal course of REFAC's business.. 12. Section 162 (m). In the event that any payment or benefit received or to be received by TUCHMAN in connection with his employment by REFAC would otherwise not be deductible (in whole or part), by REFAC as a result of the operation of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), the delivery of the non-deductible portion of such payment or benefit to TUCHMAN by REFAC shall be deferred until the earliest date on which it may be delivered to TUCHMAN without being subject to the limit on deductibility imposed by Section 162(m) of the Code. 13. Successors; Binding Agreement. (a) Should any entity succeed (whether by purchase, merger, consolidation or similar transaction) to all or substantially all of the business and/or assets of REFAC, TUCHMAN shall continue to perform all of his duties and obligations hereunder. (b) REFAC will require any successor (whether by purchase, merger, consolidation or similar transaction) to all or substantially all of the business and/or assets of REFAC, by agreement in form and substance reasonably satisfactory to TUCHMAN, to expressly assume and agree to perform this Agreement in substantially the same manner and to substantially the same extent that REFAC would be required to perform it if no such succession had taken place. (c) This Agreement and all rights of TUCHMAN hereunder shall inure to the benefit of and be enforceable by TUCHMAN's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If TUCHMAN should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to TUCHMAN's devisee, legatee, or other designee or, if there be no such designee, to TUCHMAN's estate. 14. Notice. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed 10 to have been duly given when delivered or (unless otherwise specified) mailed by United States certified mail, return receipt requested, postage prepaid, addressed as follows: If to TUCHMAN: Robert L. Tuchman 1 Vultee Drive Florham Park, NJ 07932 If to REFAC: REFAC The Hudson River Pier 115 River Road Edgewater, New Jersey 07020 Copy to: Skadden, Arps, Slate, Meagher & Flom LLP 4 Times Square New York, New York 10036 Attention: Stephen Banker, Esq. or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 15. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by TUCHMAN and such other officer of REFAC as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without regard to its conflicts of law principles. All compensation payable to TUCHMAN pursuant to this Agreement shall be subject to all applicable withholding taxes, normal payroll withholding and any other amounts required by law to be withheld. 16. Validity. If any term or provision of this Agreement or the application thereof to any person, entity or circumstance should to any extent be invalid or unenforceable, the remainder of this Agreement or the application of such term or provision to any person, entity or circumstance other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each term and provision of this 11 Agreement (including, to the extent permitted by law, any such term or provision which has been held to be otherwise invalid or unenforceable) shall be deemed valid and enforceable to the fullest extent permitted by law. 17. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 18. Arbitration. Any dispute or controversy arising under or in connection with this Agreement will be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 19. Confidentiality. As an officer and director of REFAC, TUCHMAN is privy to information generally regarded as confidential and often proprietary with respect to REFAC, its business relationships, negotiations and activities. Such information may include details of REFAC's business and client relationships (past, present and prospective) and related REFAC and client plans, products, property rights, technical and market data. By reason of the foregoing: (a) TUCHMAN will not at any time divulge or negligently permit the communication of any of the foregoing types of information in any way that could conflict with the interests of REFAC and its clients and the responsibilities of REFAC to its clients and business associates. (b) For a period of two (2) years after termination, TUCHMAN will not without REFAC's prior written approval by a designated REFAC officer, directly or indirectly, either as a principal, agent, employee or employer or in any other capacity, solicit, serve, engage or assist in the business of any REFAC client or business associate or of any prospective client or business associate with whom REFAC shall have been in contact for business purposes at any time prior to the termination date of TUCHMAN's employment by REFAC, provided that this clause shall not apply following a termination of TUCHMAN's employment upon a Company Sale or a Liquidation unless its continued effectiveness is a condition of such Company Sale or, to the extent required, in connection with any assets sold. (c) For a period of two (2) years after termination, neither TUCHMAN nor any company which TUCHMAN directly or indirectly owns, controls or manages shall employ or solicit the employment of any present or future REFAC employee, provided that this Section 19(c) shall not apply following a termination of TUCHMAN's employment upon a Company Sale or a Liquidation unless its continued effectiveness is a condition of such Company Sale or, to the extent required, in connection with any assets sold. 12 20. Breach of Confidentiality Covenant. Each of the parties hereto acknowledges that in the event of any breach of Section 19 of this Agreement by TUCHMAN, REFAC would be irreparably harmed and could not be made whole by monetary damages. Therefore REFAC, in addition to any other remedy to which it may be entitled at law or in equity, may compel specific performance of such Sections of this Agreement. TUCHMAN hereby acknowledges and agrees that the covenants contained in Section 19 of this Agreement are reasonable and fully necessary for the protection of the legitimate interests of REFAC and are not oppressive to the interest of TUCHMAN. 21. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements (including, without limitation, the Amended and Restated Employment Agreement between TUCHMAN and REFAC dated as of December 13, 1996 and the amendment to such agreement dated as of January 20, 1999), promises, agreements, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto; and any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled. IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year first above written. /s/ Robert L. Tuchman -------------------------------- Robert L. Tuchman REFAC By: /s/ Neil R. Austrian ----------------------------- Title: Director 13 EX-10.(B) 4 dex10b.txt EMPLOYMENT AGREEMENT DATED 03/21/02 Exhibit 10.(b) EMPLOYMENT AGREEMENT BETWEEN RAYMOND A. CARDONNE, JR. AND REFAC (formerly REFAC TECHNOLOGY DEVELOPMENT CORPORATION) Dated as of March 21, 2002 THIS EMPLOYMENT AGREEMENT (the "Agreement") made as of March 21, 2002 between REFAC, a Delaware corporation ("REFAC"), and Raymond A. Cardonne ("CARDONNE"). CARDONNE is currently employed by REFAC and REFAC desires that CARDONNE undertake responsibility to reposition REFAC for sale or for liquidation. CARDONNE is willing to undertake these added duties and, accordingly, the parties hereto desire to continue CARDONNE's employment upon the terms and conditions hereinafter set forth. In consideration of the premises and the respective agreements of the parties herein contained, the parties hereto, intending to be legally bound, agree as follows: 1. Employment. Subject to the provisions hereof, REFAC shall continue to employ CARDONNE and CARDONNE shall continue to serve as the Chief Financial Officer of REFAC. 2. Term. The employment of CARDONNE by REFAC hereunder will continue until March 31, 2004, unless further extended by agreement of CARDONNE and REFAC or until sooner terminated as hereinafter provided. 3. Duties. (a) Regular Duties. CARDONNE will continue to perform such duties and have such powers as are customary for the chief financial officer of a publicly-held corporations of a size and engaging in a business comparable to REFAC. (b) Repositioning of REFAC for Sale or Liquidation. In addition to the services rendered under Section 3(a) above, CARDONNE shall assist in REFAC's efforts to reposition itself so that it may be sold or liquidated. (c) Responsible to the Board. CARDONNE will report and be directly responsible to the Board of Directors of REFAC (the "Board") or the Chief Executive Officer of REFAC. (d) Time devoted to REFAC's Affairs. CARDONNE will devote substantially all his working time and efforts to the business and affairs of REFAC and will not, without the express prior authorization of the Board, have any active engagement in or responsibility with respect to any business or commercial enterprise other than REFAC or a subsidiary of REFAC. (e) Post Employment Services. It is contemplated that some of REFAC's assets may be sold in exchange for contract rights that include periodic payments and that some of the royalty agreements might be collected until maturity rather than sold. In such event and with respect to such contracts, CARDONNE agrees to assist the Chief Executive Officer of REFAC in the contract administration, which shall include invoicing 2 (where appropriate), collecting the periodic payments, monitoring performance, and record keeping. CARDONNE shall be reimbursed for all of his out-of-pocket costs associated therewith and will perform these services on a part-time basis. 4. Place of Performance. In connection with CARDONNE's employment by REFAC, CARDONNE will be based in the New York City metropolitan area, except for required travel on REFAC's business to an extent consistent with REFAC's business requirements and his responsibilities hereunder. 5. Base Salary and Incentive Compensation (a) Base Salary. CARDONNE's salary will be $175,000 per annum. Payment of such salary will be made in accordance with REFAC's customary pay practices for senior officers and will be subject to such payroll deductions as are required by law or by the terms of any applicable benefit plan of REFAC. (b) Incentive Compensation. CARDONNE shall use reasonable efforts, consistent with prudent and reasonable business judgment, to convert REFAC's assets into cash and securities that can be distributed to REFAC's stockholders. As incentive compensation for this undertaking, upon a Payment Event (as such term is hereinafter defined) CARDONNE (or in the case of death, CARDONNE's estate) will be entitled to receive a bonus or bonuses (each, a "Success Bonus") in consideration of his successful performance of the duties described in Section 3(b) hereof equal to 4% of the "Eligible Consideration" (as hereinafter defined) in accordance with the terms of this Section 5. For purposes of this Agreement, "Payment Event" shall mean (i) each Liquidation (as hereinafter defined) during the term of this Agreement, (ii) termination of CARDONNE's employment with REFAC prior to the expiration of the term of this Agreement due to his death, Disability (as hereinafter defined) or termination by REFAC without Cause (as hereinafter defined), (iii) the expiration of the term of this Agreement and (iv) the occurrence of a Company Sale. In the event that CARDONNE receives a Success Bonus in respect of a Liquidation or Company Sale, he will remain eligible for additional Success Bonus payments in the event of a subsequent Liquidation (or Liquidations) or other Payment Event. In the event that CARDONNE receives a Success Bonus in respect of a Payment Event subsequent to a Liquidation or Company Sale, such amount shall be reduced by any Success Bonus previously paid to CARDONNE (hereinafter, the "Offset Adjustment"). In the event that CARDONNE receives a Success Bonus in respect of a Payment Event that is not a Liquidation or Company Sale, CARDONNE will not be eligible for additional Success Bonus payments upon the occurrence of any subsequent event. (1) Eligible Consideration - Liquidation, Expiration of Term. In the event of each Liquidation or the expiration of the term of this Agreement, "Eligible Consideration" shall mean the amount, if any, by which the Distributable Amount (as hereinafter defined) exceeds $10 million. "Distributable Amount" shall mean the aggregate 3 amount of cash and the fair market value (as determined by the Board in its sole discretion) of securities that are available for distribution to REFAC's stockholders (plus the aggregate amount distributed in any prior Liquidation plus any compensation paid to CARDONNE or Robert L. Tuchman with respect thereto) less the amount of (i) cash and the fair market value of assets (as determined by the Board in its sole discretion) reserved to cover actual or potential liabilities or claims against or relating to REFAC, including unpaid legal and other fees and expenses incurred by REFAC in connection with the Liquidation (but excluding CARDONNE's incentive compensation hereunder and Robert L. Tuchman's incentive compensation under his employment agreement with REFAC). (2) Eligible Consideration - Termination Due to Death or Disability or By REFAC Without Cause. In the event that CARDONNE's employment is terminated by REFAC without Cause or due to CARDONNE's Disability or is terminated upon CARDONNE's death, in any such case prior to the expiration of the term of this Agreement, "Eligible Consideration" shall mean the sum of (i) the aggregate amount of cash and the fair market value (as determined by the Board in its sole discretion) of securities that are available for distribution to REFAC's stockholders (plus the aggregate amount distributed in any prior Liquidation plus any compensation paid to CARDONNE or Robert L. Tuchman with respect thereto) plus (ii) the amount (as determined by the Board in its sole discretion) that reasonably may be realized upon the sale of REFAC's remaining assets, minus (iii) the cash and fair market value of assets (as determined by the Board in its sole discretion) needed to be reserved for actual or potential liabilities or claims against or relating to REFAC, minus (iv) legal and other fees and expenses expected by the Board, in its sole discretion, to be incurred by REFAC in connection with the sale of REFAC's assets (but excluding CARDONNE's incentive compensation hereunder and Robert L. Tuchman's incentive compensation under his employment agreement with REFAC), minus (v) $10 million. (3) Eligible Consideration -- Company Sale. In the event of a Company Sale (as hereinafter defined), the Eligible Consideration shall be the amount, if any, by which the Sale Consideration (as hereinafter defined) and any Distributable Amount previously calculated to be available for distribution to REFAC's stockholders in connection with a Liquidation exceeds $10 million. "Sale Consideration" shall mean (i) in the case of a Company Sale which results in a merger or the sale of 100% of REFAC's then-outstanding voting securities, the aggregate value of the consideration (which may consist of cash, securities, other property or a combination of the foregoing) actually received by REFAC's stockholders in connection with the consummation of a Company Sale or (ii) in the case of a Company Sale which results in the sale of less than 100% of REFAC's then-outstanding voting securities, the aggregate amount of consideration which would have been received by REFAC's stockholders in connection with the consummation of a Company Sale assuming that the price per-share applicable with respect to such Company Sale was applied to all outstanding 4 voting securities, in each case as determined by the Board in its sole discretion. (c) Calculation of Eligible Consideration. The Board in its sole discretion shall make all calculations and determinations necessary to the calculation of the Eligible Consideration. In the case of a Liquidation, the Eligible Consideration shall be calculated immediately prior to each date of an actual distribution to stockholders. In the case of a Payment Event other than a Liquidation, the Eligible Consideration shall be calculated immediately upon the occurrence of such Payment Event. (d) Payment of Success Bonus. (i) In the event of a Liquidation, REFAC shall pay CARDONNE the Success Bonus at the time of the payment to shareholders in respect of such Liquidation. In the event of a Payment Event other than a Liquidation, REFAC shall pay CARDONNE the Success Bonus as soon as practicable following the occurrence of such Payment Event. (ii) Notwithstanding the foregoing, in the event that some or all of the Eligible Consideration consists of securities or other property, the Board may, in its sole discretion, pay CARDONNE a ratable portion of his Success Bonus in such securities or other property, which shall be valued by the Board in its sole discretion. If there are restrictions imposed upon the consideration (including, without limitation, transfer restrictions or forfeiture conditions), the Board may, in its sole discretion, require CARDONNE to consent to the imposition of similar restrictions upon any share of such consideration conveyed to him. Payment of such incentive compensation shall be made within thirty (30) days after the date of calculation except that the Board may also elect to pay CARDONNE his share of any consideration that it receives in installment payments within thirty (30) days after receipt. (e) Company Sale Defined. For purposes of this Agreement, a "Company Sale" will be deemed to have occurred if and when the event set forth in any one of the following paragraphs shall have first occurred: (1) there is consummated a merger or consolidation of REFAC or any direct or indirect subsidiary of REFAC with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of REFAC outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of REFAC or any subsidiary of REFAC, at least 60% of the combined voting power of the securities of REFAC or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of REFAC (or similar transaction) in which no Person (as hereinafter defined)is or becomes the Beneficial Owner, directly or indirectly, of securities of REFAC (not including in the securities Beneficially Owned by such Person 5 any securities acquired directly from REFAC or its affiliates other than in connection with the acquisition by REFAC or its affiliates of a business) representing 50% or more of the combined voting power of REFAC's then outstanding securities; (2) any Person is or becomes the Beneficial Owner (as hereinafter defined), directly or indirectly, of securities of REFAC (not including in the securities beneficially owned by such Person any securities acquired directly from REFAC or its affiliates) representing 50% or more of the combined voting power of REFAC's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (f)(1) above; or (3) the Board determines, in its discretion, that a Company Sale has occurred. (f) Liquidation Defined. For purposes of this Agreement, a "Liquidation" shall mean a distribution in cash or securities made to the stockholders of REFAC in connection with a plan of complete liquidation or dissolution of REFAC. (g) Certain Other Definitions. (1) For purposes of this Section 5, "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) REFAC or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of REFAC or any of its affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of REFAC in substantially the same proportions as their ownership of stock of REFAC. (2) For purposes of this Section 5, "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (h) For purposes of this Section 5, "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. 6. Fringe Benefits, Expenses and Related Matters. (a) Expenses. During the term of CARDONNE's employment hereunder, CARDONNE will be entitled to receive prompt reimbursement for all reasonable expenses incurred by CARDONNE in performing services hereunder, including all reasonable expenses of travel and living expenses while away from home on business or at the request of and in the service of REFAC, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by REFAC. 6 (b) Other Benefits. CARDONNE will be entitled to participate in or receive benefits under any employee benefit plan or arrangement now or in the future made available by REFAC generally to its executive employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements, including health insurance and life insurance benefits. (c) Vacations. CARDONNE will be entitled to four weeks of paid vacation per calendar year, prorated for any portion thereof and to all paid holidays given by REFAC in accordance with REFAC's regular paid holidays policy. 7. Facilities and Support Services Furnished. REFAC will furnish CARDONNE with office space, secretarial assistance and such other facilities and services as shall be suitable to CARDONNE's position and adequate for the performance of his duties as herein set forth. 8. Termination. CARDONNE's employment hereunder may be terminated under the following circumstances: (a) Death. CARDONNE's employment hereunder will terminate immediately upon his death. (b) Disability. REFAC may terminate CARDONNE's employment hereunder if CARDONNE should become permanently disabled. For the purposes of this Agreement, permanent disability ("Disability") means CARDONNE's inability, by virtue of physical or mental illness or injury, to perform his regular duties on a full-time, continuous basis for 120 consecutive days. CARDONNE's disability will be established if a qualified medical doctor selected by the parties so certifies in writing. If the parties are unable to agree on the selection of such a doctor, each party will designate a qualified medical doctor who together will select a third doctor who will make the determination. CARDONNE will make himself available for an examination by a doctor selected in accordance with this paragraph (b). (c) Cause. REFAC may terminate CARDONNE's employment hereunder for Cause at any time during the term hereof as hereinafter set forth. For purposes of this Agreement, REFAC will have "Cause" to terminate CARDONNE's employment hereunder upon (i) the willful and continued failure, in the reasonable judgment of the Board, by CARDONNE to perform substantially his duties with REFAC (other than any such failure resulting from his death or Disability) after a written demand for substantial performance is delivered to CARDONNE by the Board which specifically identifies the manner in which it is believed that CARDONNE has not substantially performed his duties, (ii) the willful engaging by CARDONNE in conduct which in the reasonable opinion of the Board is materially and demonstrably injurious to REFAC or (iii) the conviction of CARDONNE (or the entering by CARDONNE of a plea of guilty or nolo contendere) for any felony or any lesser crime which involved REFAC or its property. Notwithstanding the foregoing, CARDONNE will not be deemed to have been terminated for Cause within the meaning of clauses (i) and (ii) without (1) reasonable notice to CARDONNE setting forth the reasons for REFAC's intention to terminate for 7 Cause, (2) an opportunity for CARDONNE, together with his counsel, to be heard before the Board, and (3) delivery to CARDONNE of a Notice of Termination, as defined in paragraph (e) of this Section 9, from the Board finding that, in the good faith opinion of the Board, clause (i) or (ii) hereof may be invoked, and specifying the particulars thereof in detail. (d) Notice of Termination. Any termination of CARDONNE's employment by REFAC or by CARDONNE (other than termination pursuant to Section 9(a)) will be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" means a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of CARDONNE's employment under the provision so indicated. (e) Date of Termination. "Date of Termination" shall mean (i) if CARDONNE's employment is terminated by his death, the date of his death, (ii) if CARDONNE's employment is terminated pursuant to paragraph (b) of this Section 9, three weeks after Notice of Termination, (iii) if CARDONNE's employment is terminated pursuant to paragraph (c) of this Section 9, the date specified in the Notice of Termination, and (iv) if CARDONNE's employment is terminated for any other reason, the date specified in the Notice of Termination. (f) CARDONNE Cooperation. From and after the earlier to occur of (i) delivery of a Notice of Termination and (ii) termination of CARDONNE's employment hereunder (other than termination due to CARDONNE's death) CARDONNE will, to the best of his knowledge, disclose or provide for the disclosure to REFAC or any successor thereof, orally or in writing as appropriate, all information of a material nature relating to existing or prospective clients and licensees and as to any other matters in which CARDONNE shall prior to his Date of Termination have been personally involved or as to which CARDONNE will have acquired special knowledge, and CARDONNE will thereafter answer to the best of his knowledge any questions that REFAC may from time to time submit with respect to any such aforesaid matters. 9. Compensation Upon Termination or During Disability. (a) Disability. During any period that CARDONNE fails or is unable to perform his duties hereunder as a result of Disability, CARDONNE will continue to receive his full salary at the rate then in effect for such period until his employment is terminated, provided that such payments will be reduced by the amounts, if any, paid to CARDONNE under any disability benefit plans of REFAC or under the Social Security disability insurance program. Following the termination of his employment, CARDONNE's benefits will be determined in accordance with REFAC's retirement, insurance, and other applicable programs and plans then in effect, if any. (b) Death. If CARDONNE's employment should be terminated by his death, REFAC will (i) pay any accrued salary and other compensation and benefits through the date of death to CARDONNE's spouse, or, if he leaves no spouse, to his estate and 8 (ii) pay or cause the payment to CARDONNE's beneficiary, or if he specified no beneficiary, to his estate, the death benefits payable pursuant to REFAC's life insurance program in effect at the date of death, if any. (c) Cause. If CARDONNE's employment should be terminated by REFAC for Cause or by CARDONNE prior to the expiration date hereof, REFAC will pay CARDONNE his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which CARDONNE is entitled as of the Date of Termination under any benefit plan of REFAC at the time such payments are due, and REFAC will have no further obligations to CARDONNE under this Agreement. (d) Without Cause. CARDONNE's employment with REFAC may not be terminated prior to March 31, 2004 for reasons other than those described in Section 9(a), 9(b) or 9(c) unless, prior to such termination CARDONNE has together with his counsel had an opportunity to appear and be heard at a meeting of the Board which was called and held (after reasonable notice to CARDONNE) for the purpose of considering such a termination. In the event that CARDONNE's employment is terminated prior to March 31, 2004 for reasons other than those described in Section 8(a), 8(b) or 8(c), REFAC will pay CARDONNE a lump sum equal to his full salary that would have been payable absent such termination for the period of time commencing on the Date of Termination and ending on March 31, 2004 at the rate in effect at the time Notice of Termination is given and will provide, except to the extent that CARDONNE shall receive similar benefits from a subsequent employer, the life, health and similar welfare benefits which CARDONNE would have been entitled to through the expiration date of the Agreement under any such benefit plan of REFAC. (e) Mitigation of Payments. CARDONNE will not be required to mitigate the amount of any lump sum payment or bonus entitlement provided for in this Section 10 by reducing it by the amount of any compensation earned by CARDONNE as the result of employment by another employer after the Date of Termination, or otherwise. However, he will be required to mitigate the costs of the other benefits provided for in this Section 10. Noncompetition. CARDONNE will not, except as hereinafter set forth, engage in any Competitive Activity (as hereinafter defined) during the term of this Agreement. For purposes of this Section, "Competitive Activity" will mean directly or indirectly: owning, managing, controlling, investing in, or otherwise being connected with, in any manner, whether as an officer, director, employee, partner, investor, consultant, lender or otherwise, any business entity or activity which is engaged in, or is in any way related to, the business of establishing, acquiring or administrating manufacturing licenses and joint ventures from or with third parties in the United States; it will also mean the direct or indirect solicitation or representation for any such business purpose of or for any existing or prospective client of REFAC or any of its subsidiaries. Nothing herein contained will prohibit CARDONNE from (i) investing in securities of a business entity if the securities of such entity are listed for trading on a national securities exchange or traded in the over-the-counter market and CARDONNE's holdings therein represent less than five (5%) percent of the total number of shares or principal amount of 9 other securities of such entity outstanding or (ii) at any time subsequent to the termination of this Agreement, engaging in the design, development and licensing of children's toys, games, stationery products and characters in or with which REFAC, prior to such termination, shall not have been directly, indirectly or prospectively engaged for REFAC's own account or in the normal course of REFAC's business. 11. Section 162 (m). In the event that any payment or benefit received or to be received by CARDONNE in connection with his employment by REFAC would otherwise not be deductible (in whole or part), by REFAC as a result of the operation of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), the delivery of the non-deductible portion of such payment or benefit to CARDONNE by REFAC shall be deferred until the earliest date on which it may be delivered to CARDONNE without being subject to the limit on deductibility imposed by Section 162(m) of the Code. 12. Successors; Binding Agreement. (a) Should any entity succeed (whether by purchase, merger, consolidation or similar transaction) to all or substantially all of the business and/or assets of REFAC, CARDONNE shall continue to perform all of his duties and obligations hereunder. (b) REFAC will require any successor (whether by purchase, merger, consolidation or similar transaction) to all or substantially all of the business and/or assets of REFAC, by agreement in form and substance reasonably satisfactory to CARDONNE, to expressly assume and agree to perform this Agreement in substantially the same manner and to substantially the same extent that REFAC would be required to perform it if no such succession had taken place. (c) This Agreement and all rights of CARDONNE hereunder shall inure to the benefit of and be enforceable by CARDONNE's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If CARDONNE should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to CARDONNE's devisee, legatee, or other designee or, if there be no such designee, to CARDONNE's estate. 13. Notice. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States certified mail, return receipt requested, postage prepaid, addressed as follows: If to CARDONNE: Raymond A. Cardonne 81 Katydid Drive Branchburg NJ 08876 10 If to REFAC: REFAC The Hudson River Pier 115 River Road Edgewater, New Jersey 07020 Copy to: Skadden, Arps, Slate, Meagher & Flom LLP 4 Times Square New York, New York 10036 Attention: Stephen Banker, Esq. or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 14. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by CARDONNE and such other officer of REFAC as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without regard to its conflicts of law principles. All compensation payable to CARDONNE pursuant to this Agreement shall be subject to all applicable withholding taxes, normal payroll withholding and any other amounts required by law to be withheld. 15. Validity. If any term or provision of this Agreement or the application thereof to any person, entity or circumstance should to any extent be invalid or unenforceable, the remainder of this Agreement or the application of such term or provision to any person, entity or circumstance other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each term and provision of this Agreement (including, to the extent permitted by law, any such term or provision which has been held to be otherwise invalid or unenforceable) shall be deemed valid and enforceable to the fullest extent permitted by law. 16. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11 17. Arbitration. Any dispute or controversy arising under or in connection with this Agreement will be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 18. Confidentiality. As an officer and director of REFAC, CARDONNE is privy to information generally regarded as confidential and often proprietary with respect to REFAC, its business relationships, negotiations and activities. Such information may include details of REFAC's business and client relationships (past, present and prospective) and related REFAC and client plans, products, property rights, technical and market data. By reason of the foregoing: (a) CARDONNE will not at any time divulge or negligently permit the communication of any of the foregoing types of information in any way that could conflict with the interests of REFAC and its clients and the responsibilities of REFAC to its clients and business associates. (b) For a period of two (2) years after termination, CARDONNE will not without REFAC's prior written approval by a designated REFAC officer, directly or indirectly, either as a principal, agent, employee or employer or in any other capacity, solicit, serve, engage or assist in the business of any REFAC client or business associate or of any prospective client or business associate with whom REFAC shall have been in contact for business purposes at any time prior to the termination date of CARDONNE's employment by REFAC, provided that this clause shall not apply following a termination of CARDONNE's employment upon a Company Sale or a Liquidation unless its continued effectiveness is a condition of such Company Sale or, to the extent required, in connection with any assets sold. (c) For a period of two (2) years after termination, neither CARDONNE nor any company which CARDONNE directly or indirectly owns, controls or manages shall employ or solicit the employment of any present or future REFAC employee, provided that this Section 18(c) shall not apply following a termination of CARDONNE's employment upon a Company Sale or a Liquidation unless its continued effectiveness is a condition of such Company Sale or, to the extent required, in connection with any assets sold. 19. Breach of Confidentiality Covenant. Each of the parties hereto acknowledges that in the event of any breach of Section 18 of this Agreement by CARDONNE, REFAC would be irreparably harmed and could not be made whole by monetary damages. Therefore REFAC, in addition to any other remedy to which it may be entitled at law or in equity, may compel specific performance of such Sections of this Agreement. CARDONNE hereby acknowledges and agrees that the covenants contained in Section 18 of this Agreement are reasonable and fully necessary for the protection of the legitimate interests of REFAC and are not oppressive to the interest of CARDONNE. 12 20. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, agreements, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto; and any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled. IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year first above written. /s/ Raymond A. Cardonne ---------------------------------- Raymond A. Cardonne REFAC By: /s/ Neil R. Austrian ------------------------------ Title: Director 13 EX-21 5 dex21.txt LIST OF SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Jurisdiction Name (l, 2) of Incorporation ----------- ---------------- Refac International, Ltd. Nevada Refac Biochemics Corporation (3) Delaware Refac Consumer Products, Inc. Delaware Refac (H.K.) Limited Hong Kong Refac Financial Corporation Delaware Refac Licensing, Inc. (4) Delaware (1) The Consolidated Financial Statements, incorporated herein, include the accounts of the Registrant and all of the above subsidiaries. (2) Subsidiaries of subsidiaries are indented; unless otherwise indicated below, direct and indirect subsidiaries are 100% owned. (3) The Company owned approximately 92% of the outstanding capital stock of Refac Biochemics Corporation as of December 31, 2001. (4) The Company owned approximately 81% of the outstanding capital stock of Refac Licensing, Inc. as of December 31, 2001 and 100% as of January 31, 2002. General Counsel: Skadden, Arps, Slate, Meagher & Flom LLP New York, New York Independent Auditors: Grant Thornton LLP New York, New York Transfer Agent: American Stock Transfer and Trust Company New York, New York Statements about the Company's future expectations and all other statements in this document other than historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and as that term is defined in the Private Securities Litigation Reform Act of 1995. The Company intends that the "forward-looking statements" contained herein are subject to the above-mentioned statutory safe harbors. Since these statements involve risks and uncertainties and are subject to change at any time, the Company's actual results could differ materially from expected or inferred results. There are no assurances as to the amounts to be realized in connection with the sale of the Company's assets. EX-23 6 dex23.txt CONSENT OF GRANT THORNTON LLP EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated February 15, 2002, except for Notes 6B and 11 as to which the date is March 21, 2002, accompanying the consolidated financial statements included in the Annual Report of Refac and Subsidiaries on Form 10-K for the year ended December 31, 2001. We hereby consent to the incorporation by reference of said report in the Registration Statement (Form S-8 No. 333-76085) pertaining to the Stock Option and Incentive Plan of Refac and Subsidiaries. GRANT THORNTON LLP New York, New York March 29, 2002 -----END PRIVACY-ENHANCED MESSAGE-----