<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[X] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Baker, Fentress & Company
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE>
[Baker Fentress Letterhead]
May 14, 1996
TO OUR SHAREHOLDERS:
The Annual Meeting of Shareholders of Baker, Fentress & Company (the
"Company") will be held June 27, 1996, in Chicago. The meeting date is later
than customary in order to include, as an agenda item for shareholder vote, the
proposed acquisition of John A. Levin & Co., Inc.--referred to as "LEVCO" in
these materials.
The accompanying Proxy Statement includes a detailed discussion of the
agenda items. To give you a better understanding of the proposed LEVCO
acquisition, we have prepared the list of questions and answers which follows.
Q. WHY DOES THE COMPANY WANT TO ACQUIRE JOHN A. LEVIN & CO., INC.?
A. As explained more fully on page 19 of the Proxy Statement, we think LEVCO
is a good investment. Some of the reasons are as follows:
* LEVCO represents an excellent opportunity to grow the Company's
business and long-term shareholder value by expanding its ability to
provide investment management services to third parties.
* LEVCO's large and established investment management business will
allow the Company to achieve its growth goals far more rapidly than by
developing its own advisory business.
* Since more and more "baby boomers" are becoming investors, the
investment management business offers good prospects over the coming
years.
* Growth of Company assets is essential to the Company's ability to
retain and attract highly qualified personnel.
* A special aspect of LEVCO is the continuity of its investment
professionals. In particular, John Levin, Melody Sarnell and Jeffrey
Kigner have worked together as a decision-making team for over a
decade.
Q. WHAT CAN YOU TELL ME ABOUT LEVCO?
A. * LEVCO is a New York-based, privately-owned investment adviser. It
principally advises endowment and pension funds, individuals and their
related trusts, several private investment companies, and all or part
of the portfolios of two mutual funds.
<PAGE>
* LEVCO had approximately $5.4 billion of assets under management at
December 31, 1995, with corresponding gross revenues for the year
ended December 31, 1995 of approximately $27.6 million. Assets under
management at March 31, 1996 were approximately $5.8 billion.
* LEVCO's investment approach emphasizes large capitalization equity
securities selected for long-term performance and capital
appreciation.
* For additional financial information on the Company and LEVCO, see the
insert page.
Q. WHAT IS THE COST OF ACQUIRING LEVCO?
A. * The Company will pay approximately $35 million in cash and issue a
number of Company shares determined pursuant to a calculation
specified in the Merger Agreement, not to exceed 5.06 million shares.
* Based on the assumptions used in the Unaudited Pro Forma Financial
Statements included in the attached Proxy Statement, you would have
incurred dilution in the net asset value of your shares of $0.84 per
share if the acquisition of LEVCO had occurred on December 31, 1995.
The dilution actually incurred won't be known precisely until the
acquisition is completed.
* The acquisition of LEVCO will be carried on the books of the Company
as an investment at a fair value as determined by the Board of
Directors.
Q. WHAT WILL RESULT AFTER THE ACQUISITION OF LEVCO?
A. * LEVCO will become a wholly-owned subsidiary of the Company (referred
to as "New LEVCO" in these materials) and will conduct its business as
"John A. Levin & Co., Inc."
* Subject to shareholder approval of the portfolio management contract,
New LEVCO will manage the Company's portfolio of publicly-traded
securities.
* Steven C. Carhart, currently manager of the Company's public
portfolio, will become an officer and director of New LEVCO.
* John Levin will become President and Chief Executive Officer of the
Company, succeeding David Peterson, who has previously announced his
plans to retire.
Q. DOES THE COMPANY ANTICIPATE A CHANGE IN ITS ANNUAL 8% DISTRIBUTION POLICY?
A. We expect to continue to distribute to shareholders at least 8% of the
Company's average net assets for each 12-month period ended October 31.
2
<PAGE>
Q. WHAT AM I BEING ASKED TO VOTE ON AT THE ANNUAL MEETING?
A. * To approve the Company's acquisition of LEVCO. LEVCO will be merged
into a wholly-owned subsidiary of the Company.
* To elect seven directors (four of whom are new). Three of the new
nominees are now stockholders of LEVCO: John Levin; Melody Sarnell;
and Jeffrey Kigner. The fourth new nominee for director is Eugene
Fife, a limited partner of Goldman, Sachs & Co.
* To approve a portfolio management contract that would authorize New
LEVCO to manage the Company's portfolio of publicly-traded securities.
* To approve a bonus plan for New LEVCO and related entities.
* To ratify the selection of Ernst & Young LLP as the Company's
independent auditors.
* To amend the Company's Certificate of Incorporation to increase the
number of authorized shares of common stock.
Q. HOW DO THE DIRECTORS RECOMMEND THAT I VOTE?
A. The Board of Directors of the Company recommends a vote "FOR" each of the
proposals discussed in the Proxy Statement.
Q. WHAT PERCENTAGE OF "FOR" VOTES IS NEEDED TO APPROVE THE ACQUISITION OF
LEVCO?
A. A majority of outstanding shares of Company common stock.
Q. WHEN IS MY PROXY DUE?
A. We would like to receive your completed, signed and dated proxy as soon as
possible. Because your vote is important to us, you may receive a call from
Corporate Investor Communications, the Company's proxy solicitor, reminding
you to vote.
Q. WHERE DO I SEND IT?
A. A postage-paid envelope is included with the Proxy Statement to mail your
proxy.
3
<PAGE>
Q. WHAT IF I HAVE OTHER QUESTIONS?
A. We welcome them. If you have any questions about the items discussed in the
Proxy Statement, please call:
Corporate Investor Communications or Baker, Fentress & Company
Information Agent and Proxy Solicitor Shareholder Relations
(800) 459-8557 (800) BKF-1891
The enclosed Proxy Statement includes a more detailed description of each
item addressed here. We hope you read it carefully.
We are very excited about the future of the Company and the proposed
acquisition of LEVCO. We welcome any questions or comments you may have, and
look forward to seeing you at the Annual Meeting.
James P. Gorter David D. Peterson
Chairman of the Board President and Chief Executive Officer
4
<PAGE>
SUPPLEMENTAL FINANCIAL INFORMATION
----------------------------------
Adjusted LEVCO Operating Results
--------------------------------
* If the Merger had taken place on January 1, 1995 and LEVCO had
operated as a wholly-owned subsidiary of the Company throughout 1995,
LEVCO's operating results (before interest and taxes), giving effect
to the terms of the Merger (other than the portfolio management
contract to be entered into by the Company), would have been
approximately as shown below:
<TABLE>
<CAPTION>
<S> <C> <C>
Total 1995 revenues (actual) $27,626,000
Partnership income 1,527,000 (a)
-----------
Adjusted total revenues 29,153,000
Operating expenses 15,451,000 (b)
-----------
Adjusted operating income
before interest and taxes $13,702,000
===========
</TABLE>
(a) Partnership income consists of incentive allocations paid by each
of the LEVCO Partnerships (as defined in the Proxy Statement) for the
fiscal year ended December 31, 1995 to one or more of the stockholders
of LEVCO or related entities (other than LEVCO), but which will be paid
to G.P. Subsidiary (as defined in the Proxy Statement) after the
Merger.
(b) Represents 53% of adjusted total revenues which, if the Bonus Plan
had been in place throughout the fiscal year ended December 31, 1995,
on the terms described under "APPROVAL OF BONUS PLAN--Awards for a
Performance Period" in the Proxy Statement, would be available for
operating expenses and for awards under the Bonus Plan.
This information is unaudited, and is intended as an illustration only
and not as an indication of future results of New LEVCO's operations.
For more information, see "LEVCO" in the Proxy Statement and LEVCO's
audited financial statements attached as Appendix F.
<PAGE>
SUPPLEMENTAL FINANCIAL INFORMATION
----------------------------------
Comparative Total Return Information
- ------------------------------------
* The table below sets forth (i) the average annual compounded total
return for the periods ended December 31, 1995 for the Company as a
whole, its public portfolio and the S&P 500 Index; (ii) the average
annual composite rate of return for the periods ended December 31,
1995 for LEVCO; (iii) the total return for the quarter ended March 31,
1996 for the Company as a whole, its public portfolio and the S&P 500
Index; and (iv) the composite rate of return for LEVCO for the quarter
ended March 31, 1996:
<TABLE>
<CAPTION>
LEVCO
Company Company Gross of Net of
As a Whole Public Portfolio Fees Fees S&P 500
---------- ---------------- -------- ------ -------
<S> <C> <C> <C> <C> <C>
1 year 36.2% 38.2% 32.1% 31.3% 37.6%
3 years 14.8 14.1 15.2 14.5 15.3
5 years 15.4 17.1 16.9 16.2 16.6
10 years 10.8 13.1 16.5 15.6 14.9
Quarter ended
March 31, 1996 5.6 6.2 8.1 7.9 5.4
</TABLE>
All LEVCO accounts managed on a fully discretionary basis, including
taxable and tax-exempt accounts (with certain exceptions), are
included in the composite. LEVCO computes the performance rate of
each eligible account on a quarterly basis using the BAI method of
performance calculation. The composite performance for each quarter
is capital weighted and includes the reinvestment of dividends and
capital gains. Gross of fees performance is net of broker commissions
and expenses related to trading. Net of fees performance is reduced
by the investment management fees. Past performance is not indicative
of future results. A report regarding the audited rates of return for
the periods ended December 31, including more information about the
accounts not included in the composite and the method of calculation
of the rates of return presented, is attached as Appendix G to the
Proxy Statement. Rates of return for the quarter ended March 31, 1996
are unaudited. A more complete discussion of the investment
performance of the Company and LEVCO is contained in the Proxy
Statement under "THE COMPANY" and "LEVCO."
<PAGE>
BAKER, FENTRESS & COMPANY
200 WEST MADISON STREET
SUITE 3510
CHICAGO, ILLINOIS 60606
--------------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 27, 1996
--------------------------------------------------------
Notice is hereby given that the Annual Meeting of Stockholders of Baker,
Fentress & Company, a Delaware corporation (the "Company"), will be held at the
Harris Trust and Savings Bank, 8th Floor West, 115 South LaSalle Street,
Chicago, Illinois, 60603, on June 27, 1996, at 10:00 a.m., Chicago time, for the
following purposes:
1. To consider and vote upon a proposal to approve the Amended and
Restated Agreement and Plan of Merger dated as of May 13, 1996 by and
among the Company, JALC Acquisition Corp., a Delaware corporation and
a wholly-owned subsidiary of the Company ("Management Subsidiary"),
John A. Levin & Co., Inc., a Delaware corporation ("LEVCO"), and the
stockholders of LEVCO (the "Merger Agreement") and all transactions
contemplated thereby including the merger of LEVCO with and into
Management Subsidiary, with Management Subsidiary continuing as the
surviving corporation (such transaction hereinafter referred to as the
"Merger");
2. To elect directors (including certain of the stockholders of LEVCO);
3. To approve a portfolio management contract to be entered into by and
between the Company and a wholly-owned subsidiary of Management
Subsidiary upon the consummation of the Merger;
4. To approve and adopt the Key Employee Incentive Bonus Plan for
Management Subsidiary and related entities other than the Company;
5. To amend the Company's Certificate of Incorporation to increase the
Company's authorized common stock, $1.00 par value per share ("Company
Common Stock"), from 40 million to 60 million shares;
6. To ratify the selection of Ernst & Young LLP as the Company's
independent auditors; and
7. To transact such other business as may properly come before the
meeting.
Only shareholders of record at the close of business on May 10, 1996, the
record date with respect to this solicitation, are entitled to notice of and to
vote at the Annual Meeting, or at any postponements or adjournments thereof.
The affirmative vote of the holders of a majority of the outstanding shares of
the Company Common Stock entitled to vote at the Annual Meeting, in person or in
proxy, is required to approve the Merger Agreement and the Merger.
<PAGE>
IMPORTANT
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES THAT YOU OWN.
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT WITHOUT DELAY IN THE
ENCLOSED ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE IF MAILED IN THE UNITED
STATES. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY THEN WITHDRAW YOUR PROXY AND
VOTE IN PERSON.
Chicago, Illinois
May 14, 1996. BY ORDER OF THE BOARD OF DIRECTORS,
JAMES P. KOENEMAN
Secretary
<PAGE>
BAKER, FENTRESS & COMPANY
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
JUNE 27, 1996
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Baker, Fentress & Company (the "Company"), of proxies
for use at the Annual Meeting of Shareholders of the Company (the "Annual
Meeting") to be held at the Harris Trust and Savings Bank, 8th Floor West, 115
South LaSalle Street, Chicago, Illinois, 60603, on June 27, 1996, at 10:00 a.m.,
Chicago time, and at any adjournment thereof.
At the Annual Meeting, shareholders will be asked to consider and vote on
proposals to:
1. approve and adopt the Amended and Restated Agreement and Plan of
Merger dated as of May 13, 1996 by and among the Company, JALC
Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of the Company ("Management Subsidiary"), John A. Levin &
Co., Inc., a Delaware corporation ("LEVCO"), and the LEVCO
Stockholders (as hereinafter defined) (the "Merger Agreement") and all
transactions contemplated thereby, including the merger of LEVCO with
and into Management Subsidiary, with Management Subsidiary continuing
as the surviving corporation (such transaction hereinafter referred to
as the "Merger");
2. elect directors (including certain of the LEVCO Stockholders);
3. approve a portfolio management contract (the "Management Contract") to
be entered into by and between the Company and a wholly-owned
subsidiary of Management Subsidiary ("New LEVCO") upon the
consummation of the Merger;
4. approve and adopt the Key Employee Incentive Bonus Plan for Management
Subsidiary and related entities other than the Company (the "Bonus
Plan");
5. amend the Company's Certificate of Incorporation (the "Amendment") to
increase the Company's authorized common stock, $1.00 par value per
share ("Company Common Stock"), from 40 million to 60 million shares;
6. ratify the selection of Ernst & Young LLP ("Ernst & Young") as the
Company's independent auditors; and
7. transact such other business as may properly come before the meeting.
<PAGE>
Proxies properly executed and returned in a timely manner will be voted at
the Annual Meeting in accordance with the directions specified therein. If no
direction is indicated, proxies will be voted for the proposal to approve and
adopt the Merger Agreement and all transactions contemplated thereby, for the
election of the nominees named herein as directors, for the proposal to approve
the Management Contract, for the proposal to approve and adopt the Bonus Plan,
for the proposal to approve the Amendment, for the ratification of the selection
of Ernst & Young as the Company's independent auditors and, on other matters
properly presented for a vote, in accordance with the judgment of the persons
acting under the proxies. A proxy may be revoked at any time before it is
voted, either in person at the meeting, by written notice to the Company, or by
delivery of a later dated proxy. No appraisal rights exist for any action
proposed to be taken at the Annual Meeting.
Shareholders of record at the close of business on May 10, 1996 (the
"Record Date"), are entitled to participate in the meeting and to cast one vote
for each share held. The Company had 27,543,641 shares of Company Common Stock
outstanding on the Record Date. No other class of stock is outstanding. Proxy
material is first being mailed to shareholders on or about May 14, 1996.
SHAREHOLDERS OF THE COMPANY MAY OBTAIN, WITHOUT CHARGE, COPIES OF THE COMPANY'S
MOST RECENT ANNUAL REPORT AND SEMI-ANNUAL REPORT BY WRITING TO THE COMPANY AT
ITS EXECUTIVE OFFICES LOCATED AT 200 WEST MADISON STREET, SUITE 3510, CHICAGO,
IL 60606, OR BY CALLING (800) BKF-1891.
2
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY.................................................................... 6
The Annual Meeting..................................................... 6
The Merger............................................................. 7
Election of Directors................................................... 13
Approval of Portfolio Management Contract............................... 13
Approval of Bonus Plan.................................................. 14
Amendment of Certificate of Incorporation............................... 14
Selection of Independent Auditors....................................... 14
Vote Required........................................................... 15
THE MEETING................................................................ 16
The Proposals........................................................... 16
Record Date; Voting..................................................... 16
Proxies................................................................. 17
Adjournment............................................................. 17
THE MERGER................................................................. 18
General................................................................. 18
Background of the Merger................................................ 18
Reasons for the Merger--Recommendation of the Board of Directors
of the Company........................................................ 19
Opinion of Company Financial Advisor.................................... 20
Terms of the Merger..................................................... 25
Certain Effects of the Proposed Transactions, including Dilution........ 31
HSR Act Notification.................................................... 31
Accounting Treatment.................................................... 31
Certain Federal Income Tax Consequences................................. 31
THE COMPANY................................................................ 32
General................................................................. 32
Management of the Company's Investment Portfolio........................ 32
Third-Party Investment Management Services.............................. 33
Investment Strategy..................................................... 34
Competition in the Investment Management Business....................... 34
Government Regulation................................................... 34
Employees............................................................... 34
Management Subsidiary................................................... 35
The Effect of the Merger................................................ 35
Structure of the Company After the Merger............................... 36
LEVCO...................................................................... 37
General................................................................. 37
LEVCO Partnership; Broker Subsidiary.................................... 38
Clients................................................................. 39
Investment Strategy..................................................... 39
Regulation.............................................................. 39
Contractual Arrangements................................................ 40
Competition............................................................. 40
Employees............................................................... 41
Properties.............................................................. 41
3
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION................................... 41
Pro Forma Statement of Assets and Liabilities (Unaudited)................ 43
Pro Forma Statement of Operations (Unaudited)............................ 44
Notes to Pro Forma Financial Information (Unaudited)..................... 45
FINANCIAL HIGHLIGHTS - THE COMPANY.......................................... 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - THE COMPANY.................................... 48
Investment Income and Capital Gains...................................... 48
Expenses................................................................. 48
Results of Operations.................................................... 49
SELECTED FINANCIAL DATA - LEVCO............................................. 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - LEVCO.......................................... 51
Results of Operations.................................................... 51
Results of Operations.................................................... 53
Capital Resources and Liquidity.......................................... 54
Effects of Changing Interest Rates and Inflation......................... 54
COMPARATIVE MARKET PRICE AND DIVIDEND DATA.................................. 54
ELECTION OF DIRECTORS....................................................... 56
APPROVAL OF PORTFOLIO MANAGEMENT CONTRACT................................... 58
Board of Directors' Recommendation....................................... 59
Terms of the Management Contract......................................... 59
Management Subsidiary and New LEVCO...................................... 61
The Effect on the Company of Shareholder Approval of the Management
Contract............................................................... 61
Reasons for the Board of Directors' Recommendation....................... 62
APPROVAL OF BONUS PLAN...................................................... 63
Background............................................................... 63
Summary of the Bonus Plan................................................ 63
Purposes................................................................. 63
Administration........................................................... 63
Eligibility for Participation............................................ 63
Form of Awards........................................................... 64
Performance Goals........................................................ 64
Procedure for Determining Awards......................................... 64
Awards for a Performance Period.......................................... 65
Amendment/Termination.................................................... 65
Federal Income Tax Consequences.......................................... 65
AMENDMENT OF CERTIFICATE OF INCORPORATION................................... 66
SELECTION OF INDEPENDENT AUDITORS........................................... 66
OTHER MATTERS............................................................... 67
INTERESTS IN STOCK.......................................................... 68
EXECUTIVE OFFICERS.......................................................... 70
CASH COMPENSATION........................................................... 71
RETIREMENT PLANS............................................................ 72
PROPOSALS OF SHAREHOLDERS................................................... 72
4
<PAGE>
AVAILABLE INFORMATION...................................................... 73
APPENDIX A AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
APPENDIX B FAIRNESS OPINION OF LAZARD FRERES & CO. LLC
APPENDIX C PORTFOLIO MANAGEMENT CONTRACT
APPENDIX D BONUS PLAN
APPENDIX E COMPANY FINANCIAL STATEMENTS
APPENDIX F LEVCO FINANCIAL STATEMENTS
APPENDIX G REPORT ON LEVCO COMPOSITE PERFORMANCE
5
<PAGE>
SUMMARY
Certain significant matters discussed in this Proxy Statement are
summarized below. This Summary is not intended to be complete and is qualified
in all respects by reference to the more detailed information appearing or
incorporated by reference in this Proxy Statement. Shareholders are urged to
review carefully the entire Proxy Statement (including the Appendices and the
documents incorporated herein by reference).
THE ANNUAL MEETING
DATE, TIME AND PLACE OF
THE MEETING............... The Annual Meeting of the Company's shareholders is
to be held at the Harris Trust and Savings Bank, 8th
Floor West, 115 South LaSalle Street, Chicago,
Illinois, 60603, on June 27, 1996, at 10:00 a.m.,
Chicago time.
RECORD DATE................ Only holders of record of shares of the Company's
Common Stock at the close of business on May 10,
1996, are entitled to vote at the Annual Meeting. On
that date, 27,543,641 shares of Company Common Stock
were outstanding.
PURPOSE OF THE MEETING..... At the Annual Meeting, shareholders will consider
and vote on proposals to:
1. approve and adopt the Merger Agreement and all
transactions contemplated thereby;
2. elect directors;
3. approve the Management Contract to be entered
into by and between the Company and New LEVCO
upon the consummation of the Merger;
4. approve and adopt the Bonus Plan;
5. amend the Company's Certificate of Incorporation
to increase the authorized Company Common Stock
from 40 million to 60 million shares;
6. ratify the selection of Ernst & Young as the
Company's independent auditors; and
7. transact such other business as may properly come
before the meeting.
Consummation of the Merger is conditioned upon,
among other things, shareholder approval of (i) the
Merger Agreement and all of the transactions
contemplated thereby, (ii) the election of John A.
Levin, Melody L. Prenner Sarnell and Jeffrey A.
Kigner, each of whom is a LEVCO Stockholder (as
hereinafter defined), to the Company's Board of
Directors and (iii) the Management Contract
(collectively, the "Merger Conditions"). The
Company expects to proceed with the Merger upon
receipt of shareholder approval of the Merger
Conditions regardless of the outcome of the
shareholder vote on the Amendment and Bonus Plan.
See "APPROVAL OF BONUS PLAN." The approval of the
Management Contract will not become effective
unless and until the Merger is consummated. In
addition, Mr. Levin, Ms. Sarnell and Mr. Kigner, if
elected to the Board of Directors of the Company,
will resign if the Merger is not consummated as
contemplated.
6
<PAGE>
THE MERGER
THE COMPANY................ The Company is registered under the Investment
Company Act of 1940, as amended (the "Investment
Company Act") as a non-diversified, closed-end
management investment company. The Company's
principal business is the ownership and management
of its investment portfolio consisting
predominantly of equity securities, both publicly-
traded and privately-held. At March 31, 1996, the
Company had net assets of approximately $632
million. The Company also is registered as an
investment adviser under the Investment Advisers
Act of 1940, as amended (the "Advisers Act"). See
"THE COMPANY."
MANAGEMENT SUBSIDIARY...... Management Subsidiary is a wholly-owned subsidiary
of the Company. The Company formed Management
Subsidiary under the name JALC Acquisition Corp. to
serve as a vehicle for the acquisition of LEVCO.
Prior to the consummation of the Merger, Management
Subsidiary has had and will have (other than for
certain exceptions) no operations other than its
organization. Immediately after the consummation of
the Merger, Management Subsidiary will (i)
contribute to New LEVCO (a) among other things, all
of its investment advisory contracts and (b) all of
the outstanding capital stock of two wholly-owned
subsidiaries (as hereinafter described) and (ii)
change its name to "Levin Management Co., Inc."
Management Subsidiary will provide management and
administrative services to New LEVCO and its
subsidiaries. Management Subsidiary, New LEVCO and
each of Management Subsidiary's other direct and
indirect subsidiaries will hereinafter collectively
be referred to as the "Levin Companies." See "THE
COMPANY--The Effect of the Merger" and "APPROVAL OF
PORTFOLIO MANAGEMENT CONTRACT."
NEW LEVCO.................. Immediately after the consummation of the Merger,
New LEVCO will be a wholly-owned subsidiary of
Management Subsidiary, organized under the laws of
the State of Delaware. New LEVCO will conduct
outside investment management business under the
name "John A. Levin & Co., Inc." substantially in
the same manner as LEVCO's business currently is
conducted. In addition, the Company will
"externalize" the management of its portfolio of
publicly-traded securities to New LEVCO.
7
<PAGE>
LEVCO............... LEVCO is a privately-owned investment adviser registered
under the Advisers Act. LEVCO principally advises
endowment and pension funds, individuals and their related
trusts, and several private entities (including the LEVCO
Partnerships, as hereinafter defined). LEVCO also serves
as a sub-adviser with respect to parts of the portfolios
of two registered investment companies. The aggregate
value of assets under management of LEVCO and the
portfolio assets of the LEVCO Partnerships at March 31,
1996 was approximately $5.8 billion. LEVCO is registered
as a broker-dealer under the Securities Exchange Act of
1934 (the "Exchange Act") and executes brokerage
transactions for certain of its clients, to the extent
authorized to do so by the client. In addition, LEVCO is
registered under the Commodity Exchange Act as a commodity
trading advisor and commodity pool operator.
The audited financial statements of LEVCO for the fiscal
year ended December 31, 1995 are attached as Appendix F to
this Proxy Statement. Those financial statements reflect
the actual results of LEVCO's operations for the year
ended December 31, 1995 as a company taxed under
Subchapter S of the Internal Revenue Code of 1986, as
amended (the "Code"). If the Merger had taken place on
January 1, 1995 and LEVCO had operated as a wholly-owned
subsidiary of the Company throughout 1995, LEVCO's
operating results (before interest and taxes), after
giving effect to the terms of the Merger (other than the
Management Contract), would have been approximately as
shown below:
Total 1995 revenues (actual) $ 27,626,000
Partnership income 1,527,000 (a)
-------------
Adjusted total revenues 29,153,000
Operating expenses 15,451,000 (b)
-------------
Adjusted operating income before
interest and taxes 13,702,000
=============
(a) Partnership income consists of the incentive
allocations paid by each of the LEVCO
Partnerships during the fiscal year ended
December 31, 1995 to one or more of the LEVCO
Stockholders or related entities (other than
LEVCO), but which will be paid to G.P.
Subsidiary (as hereinafter defined) after the
Merger.
(b) Represents 53% of adjusted total revenues which,
if the Bonus Plan had been in place throughout
the fiscal year ended December 31, 1995, on the
terms described under "APPROVAL OF BONUS PLAN--
Awards for a Performance Period", would be
available for operating expenses and for awards
under the Bonus Plan.
This information is unaudited, and is intended as an
illustration only and not as an indication of future
results of the operations of any Levin Company after the
Merger. See "LEVCO" for more information.
LEVCO STOCKHOLDERS... John A. Levin, Melody L. Prenner Sarnell, Jeffrey A.
Kigner, Daniel E. Aron, Frank F. Rango, Barton G. Ice and
Carol L. Novak (each a "LEVCO Stockholder" and
collectively, the "LEVCO Stockholders"), collectively own
all of the outstanding shares of common stock of LEVCO,
$.01 par value per share (the "LEVCO Common Stock"). See
"LEVCO."
8
<PAGE>
PURPOSE OF THE MERGER...... The purpose of the Merger is to enable the Company
to develop its business by expanding its ability to
provide investment management services to third
parties. Because LEVCO has a large, established
investment management business, the Company
believes that the acquisition of LEVCO will allow
the Company to achieve its goals for expansion far
more rapidly than by developing its own advisory
business. The Company expects that after the
Merger, the business of the Levin Companies
(including New LEVCO) will be conducted
substantially in the same manner as LEVCO's
business currently is conducted. See "THE MERGER."
THE MERGER AGREEMENT....... On November 17, 1995, the Company's Board of
Directors unanimously approved and adopted the
original Merger Agreement and the agreements and
transactions contemplated thereby and recommended
that the shareholders of the Company approve the
Merger Conditions. On May 13, 1996, the Company's
Board of Directors unanimously approved and adopted
the Merger Agreement, as amended and restated in
its entirety to reflect certain changes to the
structure of the Company after the Merger. On May
13, 1996, the Company, Management Subsidiary,
LEVCO and the LEVCO Stockholders entered into the
Merger Agreement, a copy of which is attached
hereto as Appendix A, providing for, among other
things, (i) the Merger and (ii) simultaneously with
the consummation of the Merger, the acquisition by
Management Subsidiary of all of the outstanding
capital stock of a wholly-owned corporation to be
formed by Mr. Levin, Ms. Sarnell, Mr. Kigner and
Mr. Rango ("G.P. Subsidiary") to acquire a general
partner interest in each of Meadow Lane Associates,
L.P., Purchase Associates, L.P., L.R.K. Savings,
L.P., SLSB Partners, L.P. and Island Drive
Partners, L.P. (collectively, the "LEVCO
Partnerships") (such acquisition shall hereinafter
be referred to as the "Acquisition") and to serve
as the sole general partner of each LEVCO
Partnership following consummation of the Merger.
The Merger and the Acquisition will sometimes
hereinafter collectively be referred to as the
"Merger." See "THE MERGER."
OPINION OF COMPANY
FINANCIAL ADVISOR.......... The Company has retained Lazard Freres & Co. LLC
("Lazard Freres") to act as its financial advisor
with respect to the Merger and related matters. At
the meeting of the Company's Board of Directors
held on November 17, 1995, Lazard Freres rendered
an oral opinion to the Board of Directors that, as
of such date and based upon and subject to certain
matters, the Merger Consideration (as hereinafter
defined) to be paid pursuant to the Merger
Agreement was fair from a financial point of view
to the Company. Lazard Freres reaffirmed its oral
opinion by delivering its written opinion to the
Company's Board of Directors dated the date of this
Proxy Statement that, as of the date hereof and
based on and subject to certain matters described
therein, the Merger Consideration is fair from a
financial point of view to the Company. See "THE
MERGER--Opinion of Company Financial Advisor."
9
<PAGE>
MERGER CONSIDERATION....... Pursuant to the Merger Agreement, the LEVCO
Stockholders will receive, in consideration for
all of the outstanding LEVCO Common Stock, an
aggregate of no more than $35 million of cash and
a number of shares of Company Common Stock (the
"Stock Consideration") equal to $80 million plus
or minus the dollar amount of certain adjustments
(the "Purchase Price Adjustments") as hereinafter
described, divided by $15.80 (collectively, the
"Merger Consideration"). Assuming no Purchase
Price Adjustments were required to be made,
approximately 5.06 million shares of Company
Common Stock would be issued to the LEVCO
Stockholders pursuant to the Merger Agreement. In
addition, Management Subsidiary will (i) purchase
all of the outstanding common stock of G.P.
Subsidiary from Mr. Levin, Ms. Sarnell, Mr. Kigner
and Mr. Rango for cash in an amount which equals
the aggregate dollar amount of the minimum general
partner capital contributions required to be made
by G.P. Subsidiary, as the general partner of each
of the LEVCO Partnerships, to the LEVCO
Partnerships, which amount is expected to be
approximately $1.7 million, and (ii) pay certain
transaction-related costs of the LEVCO
Stockholders. Each of these transactions will,
however, result in a Purchase Price Adjustment
involving a decrease in the number of shares of
Company Common Stock constituting the Stock
Consideration. See "THE MERGER."
CERTAIN EFFECTS OF THE
PROPOSED TRANSACTIONS,
INCLUDING DILUTION......... As of March 31, 1996, the Company was not aware of
any person who beneficially owned more than 5% of
the outstanding Company Common Stock. Following
the completion of the transactions set forth in
the Merger Agreement and subject to the Purchase
Price Adjustments to be made in determining the
Stock Consideration, the LEVCO Stockholders
collectively will own up to approximately 16% of
the Company Common Stock. Based on the
assumptions used in the Unaudited Pro Forma
Financial Statements included herein, the
Company's shareholders would have incurred
dilution in the net asset value of their shares of
Company Common Stock of $0.84 per share as of
December 31, 1995 as a result of the Merger. See
"THE MERGER--Certain Effects of the Proposed
Transactions, including Dilution." The amount of
dilution actually incurred will not be known until
the Merger is consummated.
FEDERAL INCOME TAX
CONSEQUENCES............... The Merger is intended to qualify as a
reorganization within the meaning of Section 368
of the Code. This treatment (i) will result in a
deferral of a portion of the tax that would
otherwise be payable currently by LEVCO
Stockholders with respect to gain realized upon
the disposition of their LEVCO Common Stock and
(ii) will have consequences to the Company and its
stockholders upon a taxable sale or exchange by
the Company of any of the common stock of
Management Subsidiary. See "THE MERGER--Certain
Federal Income Tax Consequences."
10
<PAGE>
CONDITIONS TO THE MERGER... Consummation of the Merger is subject to the
satisfaction of several conditions, including,
among other things, (i) receipt of certain
consents and approvals including approval of the
Merger Conditions by Company shareholders, (ii)
receipt of certain governmental registrations,
licenses and permits, including New LEVCO's
registration as a commodity trading adviser and
membership in the National Futures Association
(the "NFA"), G.P. Subsidiary's registration as a
commodity pool operator and membership in the NFA,
and the registration of New LEVCO and/or Broker
Subsidiary (as hereinafter defined) as an
investment adviser and broker-dealer, (iii) the
execution of certain agreements related to the
Merger, including an escrow agreement, a
registration rights agreement, the Management
Contract and certain employment agreements, (iv)
receipt of the approval for listing on the New York
Stock Exchange (the "NYSE") of Company Common Stock
to be issued to the LEVCO Stockholders pursuant to
the Merger Agreement, (v) receipt of the required
approval of the limited partners of the LEVCO
Partnerships and (vi) that LEVCO's cash on hand
immediately prior to the closing of the
transactions contemplated by the Merger Agreement
(the "Closing") shall not be less than an amount
calculated pursuant to a formula agreed upon by the
parties, which, depending on the date of the
Closing and assuming the Closing occurs on July 1,
1996, is expected to be in the range of $1.4
million to $1.5 million. See "THE MERGER--Terms of
the Merger."
THE EFFECT OF THE MERGER... Upon consummation of the Merger, New LEVCO will
conduct outside investment advisory business under
the name "John A. Levin & Co., Inc." substantially
in the same manner as LEVCO's business currently
is conducted. See "LEVCO." Subject to receipt of
the approval of LEVCO's advisory clients, New
LEVCO will manage all of LEVCO's accounts existing
at the time of the Merger. In addition, New LEVCO
will manage accounts generated by New LEVCO
personnel thereafter. New LEVCO is expected to
utilize, pursuant to a management contract with
Management Subsidiary, LEVCO's current personnel,
including Mr. Levin, Ms. Sarnell and Mr. Kigner,
who will enter into employment agreements with
Management Subsidiary (and with the Company in the
case of Mr. Levin). Mr. Levin will serve as
President and Chief Executive Officer of the
Company and as President of Management Subsidiary
and New LEVCO and Ms. Sarnell will serve as
Executive Vice President, Mr. Kigner will serve as
Executive Vice President and Steven C. Carhart
(Vice President of the Company and portfolio
manager of the Company's public portfolio) will
serve as Vice President, respectively, of
Management Subsidiary and New LEVCO. See "THE
MERGER--Terms of the Merger--Employment Agreements
and Directors and Officers of Management
Subsidiary and New LEVCO."
Subject to shareholder approval of the Management
Contract and immediately after the consummation of
the Merger, the Company will "externalize" the
management of its portfolio of publicly-traded
securities to New LEVCO. See "APPROVAL OF
PORTFOLIO MANAGEMENT CONTRACT."
11
<PAGE>
COMPARATIVE MARKET PRICE... The Company Common Stock is admitted for trading
on the NYSE under the symbol "BKF." On May 9,
1996 (the last practicable date prior to the
mailing of this Proxy Statement), the reported
closing sales price of the Company Common Stock
was $19.625 per share. On November 17, 1995, the
last full trading day prior to the public
announcement of the signing of the Merger
Agreement, the reported closing price of the
Company Common Stock was $16.375 per share. As of
May 10, 1996, there were 2,321 holders of record
of Company Common Stock. See "COMPARATIVE MARKET
PRICE AND DIVIDEND DATA."
STRUCTURE OF THE COMPANY
AFTER THE MERGER........... Immediately after the consummation of the Merger,
Management Subsidiary will (i) contribute to New
LEVCO (a) among other things, all of its
investment advisory contracts and (b) all of the
outstanding capital stock of each of G.P.
Subsidiary and Broker Subsidiary and (ii) change
its name to "Levin Management Co., Inc.".
Management Subsidiary will provide management and
administrative services to the Levin Companies.
See "THE COMPANY--Structure of the Company After
the Merger." The Company will then have the
following corporate structure (excluding the
Company's other investments):
________________
| The Company |
|________________|
|
|________ 100% stock ownership
|
_______|________
| Management |
| Subsidiary |
|________________|
|
|________ 100% stock ownership
|
_______|________
| New LEVCO |
|________________|
|
|________ 100% stock ownership
|
_____________________ | ____________________
| G. P. Subsidiary |____________|_________| Broker Subsidiary |
|_____________________| |____________________|
|
|____________ general partner, LEVCO Partnerships
|
_____________|__________________________________
| | | | |
__|__ __|__ __|__ __|__ __|__
| LP | | LP | | LP | | LP | | LP |
|_____| |_____| |_____| |_____| |_____|
12
<PAGE>
ELECTION OF DIRECTORS
GENERAL.................... Seven directors are to be elected at the meeting.
The Board of Directors has nominated the following
persons to serve as directors for terms expiring
at the annual meeting of shareholders in 1999:
Eugene V. Fife, J. Barton Goodwin, James P.
Gorter, John A. Levin and Burton G. Malkiel, of
whom Messrs. Goodwin, Gorter and Malkiel currently
are directors. In addition, the Board of
Directors has nominated Ms. Sarnell and Mr. Kigner
to serve as directors for terms expiring at the
annual meeting of shareholders in 1998 and 1997,
respectively. The election of Mr. Levin, Ms.
Sarnell and Mr. Kigner to the Board will not
become effective unless and until the Merger is
consummated. See "ELECTION OF DIRECTORS."
APPROVAL OF PORTFOLIO MANAGEMENT CONTRACT
GENERAL.................... Currently, the Company's investment portfolio is
internally managed by Company officers and
employees under the supervision of the Company's
Board of Directors, without an outside investment
adviser; however, subject to shareholder approval
of the Management Contract and immediately after
the consummation of the Merger, the Company will
transfer the management of a portion of its
investment portfolio to New LEVCO. For New
LEVCO's services as an investment adviser pursuant
to the Management Contract, the Company will pay
New LEVCO a fee at an annual rate of 0.30% of the
value of the assets of the Company managed by New
LEVCO. The Company believes that the fee that
would have been paid by it pursuant to the
Management Contract had it been in effect for the
fiscal year ended December 31, 1995 would have
been approximately the same as the costs incurred
by the Company for the fiscal year ended December
31, 1995 in connection with the management of its
portfolio of publicly-traded securities. See
"APPROVAL OF PORTFOLIO MANAGEMENT CONTRACT."
13
<PAGE>
APPROVAL OF BONUS PLAN
BACKGROUND................. The Bonus Plan is designed to provide incentive-
based compensation to designated key employees of
the Levin Companies that is directly related to the
performance results of New LEVCO (including its
subsidiaries) and such employees. The Bonus Plan is
being submitted to shareholders for approval in
response to Code Section 162(m), which limits the
Company and its subsidiaries' ability to deduct for
federal income tax purposes compensation in excess
of $1 million paid to certain officers of the
Company and its subsidiaries, including the Levin
Companies. However, the Company can preserve the
deductibility of certain compensation in excess of
$1 million, provided that it complies with the
conditions imposed by Section 162(m), including the
payment of "performance-based compensation"
pursuant to a plan approved by shareholders. The
Bonus Plan is intended to comply with Section
162(m) by qualifying all payments to participants
under the Bonus Plan as "performance-based
compensation." The Levin Companies are expected to
have one or more employees who will participate in
the Bonus Plan during the 1996 fiscal year, and
additional employees are expected to become
eligible to participate in future years. See
"APPROVAL OF BONUS PLAN."
AMENDMENT OF CERTIFICATE OF INCORPORATION
GENERAL.................... The Board of Directors unanimously has deemed it
advisable and has recommended that the shareholders
approve an amendment to the Company's Certificate
of Incorporation which would increase the
authorized Company Common Stock from 40 million to
60 million shares. As of the Record Date,
27,543,641 shares of the 40 million shares
currently authorized were outstanding. The Board of
Directors has no present plans concerning the
issuance of the additional shares to be authorized.
See "AMENDMENT OF CERTIFICATE OF INCORPORATION."
SELECTION OF INDEPENDENT AUDITORS
GENERAL.................... The Board of Directors, including a majority of the
directors who are not interested persons of the
Company, has selected Ernst & Young as the
Company's independent auditors to audit the
financial statements of the Company for the year
ending December 31, 1996. Ernst & Young has served
the Company in this capacity since 1987 and has no
direct or indirect financial interest in the
Company except as independent auditors. The
selection of Ernst & Young as independent auditors
of the Company is being submitted to the
shareholders for ratification. See "SELECTION OF
INDEPENDENT AUDITORS."
14
<PAGE>
VOTE REQUIRED
VOTE REQUIRED.............. The following votes are required to approve each
of the proposals:
. approval and adoption of the Merger Agreement
and all transactions contemplated thereby
requires the affirmative vote of a majority of
the outstanding shares of Company Common Stock;
. directors will be elected by a plurality of the
votes of the shares of Company Common Stock
present in person or represented by proxy at
the Annual Meeting;
. approval of the Management Contract requires the
affirmative vote of the lesser of (i) 67% of the
shares represented at the meeting, in person or
by proxy, if the holders of more than 50% of the
outstanding shares are represented or (ii) more
than 50% of the Company's outstanding shares;
. approval of the Bonus Plan requires the
affirmative vote of a majority of the shares of
Company Common Stock present in person or
represented by proxy at the Annual Meeting; and
. approval of the Amendment to increase the number
of authorized shares requires the affirmative
vote of a majority of the outstanding shares of
Company Common Stock.
See "THE MEETING."
15
<PAGE>
THE MEETING
THE PROPOSALS
At the Annual Meeting, shareholders will be asked to consider and vote on
proposals to:
1. approve and adopt the Merger Agreement and all transactions
contemplated thereby;
2. elect directors;
3. approve the Management Contract to be entered into by and between the
Company and New LEVCO upon the consummation of the Merger;
4. approve and adopt the Bonus Plan;
5. amend the Company's Certification of Incorporation to increase the
authorized Company Common Stock from 40 million to 60 million;
6. ratify the selection of Ernst & Young as the Company's independent
auditors; and
7. transact such other business as may properly come before the meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
"FOR" EACH OF THESE PROPOSALS
RECORD DATE; VOTING
Shareholders of record at the close of business on May 10, 1996, are
entitled to participate in the meeting and to cast one vote for each share held.
The Company had 27,543,641 shares of Company Common Stock outstanding on the
Record Date. No other class of stock is outstanding.
Proxies are tabulated by Harris Trust and Savings Bank, the Company's
transfer agent. Under Delaware law (under which the Company is organized) and
the Company's bylaws, a majority of the shares outstanding on the Record Date,
excluding shares held in the Company's treasury, must be present at the meeting
in person or by proxy to constitute a quorum for the transaction of business.
Shares abstaining from voting or present but not voting are counted as "present"
for purposes of determining the existence of a quorum.
The following votes are required to approve each of the proposals:
. approval and adoption of the Merger Agreement and all transactions
contemplated thereby requires the affirmative vote of a majority of
the outstanding shares of Company Common Stock;
. directors will be elected by a plurality of the votes of the shares of
Company Common Stock present in person or represented by proxy at the
Annual Meeting;
. approval of the Management Contract requires the affirmative vote of
the lesser of (i) 67% of the shares represented at the meeting, in
person or by proxy, if the holders of more than 50% of the outstanding
shares are represented or (ii) more than 50% of the Company's
outstanding shares;
. approval of the Bonus Plan requires the affirmative vote of a majority
of the shares of Company Common Stock present in person or represented
by proxy at the Annual Meeting; and
16
<PAGE>
. approval of the Amendment to increase the number of authorized shares
requires the affirmative vote of a majority of the outstanding shares
of Company Common Stock.
Consummation of the Merger is conditioned upon shareholder approval of the
Merger Conditions. The Company expects to proceed with the Merger upon receipt
of shareholder approval of the Merger Conditions regardless of the outcome of
the shareholder vote on the Amendment and the Bonus Plan. The approval of the
Management Contract will not become effective unless and until the Merger is
consummated. In addition, Mr. Levin, Ms. Sarnell and Mr. Kigner, if elected to
the Board of Directors of the Company, will resign if the Merger is not
consummated as contemplated.
PROXIES
This Proxy Statement is being furnished to shareholders in connection with
the solicitation of proxies by and on behalf of the Board of Directors for use
at the Annual Meeting.
Proxies properly executed and returned in a timely manner will be voted at
the Annual Meeting in accordance with the directions specified therein. If no
direction is indicated, proxies will be voted for the proposal to approve and
adopt the Merger Agreement and all transactions contemplated thereby, for the
proposal to approve the Amendment, for the election of the nominees named herein
as directors, for the proposal to approve the Management Contract, for the
proposal to approve and adopt the Bonus Plan, for the ratification of the
selection of Ernst & Young as the Company's independent auditors and, on other
matters properly presented for a vote in accordance with the judgment of the
persons acting under the proxies. A proxy may be revoked at any time before it
is voted, either in person at the meeting, by written notice to the Company, or
delivery of a later dated proxy. No appraisal rights exist for any action
proposed to be taken at the Annual Meeting. Abstentions and "broker non-votes"
(as hereinafter defined) are counted for purposes of determining whether a
quorum is present, but do not represent votes cast with respect to any proposal.
"Broker non-votes" are shares held by a broker or nominee for which an executed
proxy is received by the Company, but which are not voted as to one or more
proposals because instructions have not been received from the beneficial owners
or persons entitled to vote and the broker or nominee does not have
discretionary voting power.
Proxies will be solicited by mail. Proxies may be solicited by directors,
officers, and a small number of regular employees, personally or by telephone,
telegraph or mail, but such persons will not be specially compensated for such
services. In addition, the Company may engage Corporate Investor Communications,
Inc. to render proxy solicitation services at a cost estimated at $12,000. The
Company will inquire of any shareholder of record known to be a broker, dealer,
bank, or other nominee as to whether other persons were the beneficial owners of
shares held of record by such persons. If so, the Company will supply additional
copies of solicitation materials for forwarding to beneficial owners and will
make reimbursement for reasonable out-of-pocket costs. The Company will bear all
costs of solicitation and related actions.
ADJOURNMENT
Any decision to adjourn the meeting would be made by vote of the shares
present at the meeting, in person or by proxy. Proxies would be voted in favor
of adjournment if there were not enough shares present at the meeting to
constitute a quorum. If sufficient shares were present to constitute a quorum,
but insufficient votes had been cast in favor of an item to approve it, proxies
would be voted in favor of adjournment only if the Board of Directors determined
that adjournment and additional solicitation was reasonable and in the best
interest of shareholders, taking into account the nature of the proposal, the
percentage of votes actually cast, the percentage of negative votes, the nature
of any further solicitation that might be made and the information provided to
shareholders about the reasons for additional solicitation.
17
<PAGE>
THE MERGER
GENERAL
Upon approval and adoption of the Merger Agreement and subject to the
fulfillment of certain conditions, LEVCO will be merged with and into Management
Subsidiary, with Management Subsidiary continuing as the surviving corporation.
Under the terms of the Merger Agreement, the LEVCO Stockholders will receive, in
consideration for all of the outstanding LEVCO Common Stock, an aggregate of no
more than $35 million of cash and such number of shares of Company Common Stock
that equal $80 million, plus or minus the Purchase Price Adjustments, divided by
$15.80. Assuming no Purchase Price Adjustments were required to be made,
approximately 5.06 million shares of Company Common Stock would be issued to the
LEVCO Stockholders pursuant to the Merger Agreement. Simultaneously with the
consummation of the Merger, Mr. Levin, Ms. Sarnell, Mr. Kigner and Mr. Rango
will sell to Management Subsidiary on the terms described under "--Terms of the
Merger" all of the issued and outstanding shares of common stock of G.P.
Subsidiary, a wholly-owned corporation to be formed by Mr. Levin, Ms. Sarnell,
Mr. Kigner and Mr. Rango for the purpose of acquiring the general partnership
interest in each of the LEVCO Partnerships. Immediately after the consummation
of the Merger, Management Subsidiary will (i) contribute to New LEVCO (a) among
other things, all of its investment advisory contracts and (b) all of the
outstanding capital stock of G.P. Subsidiary and Broker Subsidiary and (ii)
change its name to "Levin Management Co., Inc." Management Subsidiary will
provide management and administrative services to the Levin Companies. It is
contemplated that after the Merger, the business of the Levin Companies
(including New LEVCO) will be conducted substantially in the same manner as
LEVCO's business currently is conducted. The Merger is intended to qualify as a
reorganization within the meaning of Section 368 of the Code.
Included in the information set forth below is a brief description of the
material provisions of the Merger Agreement. Such description does not purport,
and is not intended, to be complete and is qualified in its entirety by
reference to the Merger Agreement, which is attached as Appendix A. All
information contained in this Proxy Statement regarding LEVCO has been provided
by LEVCO.
BACKGROUND OF THE MERGER
Management of the Company has from time to time considered alternative
methods to increase the Company's assets under management. As early as 1992, and
again in September 1994, the Board of Directors determined that, in its
judgment, it was in the best interests of the Company and its shareholders that
the Company engage in the business of providing investment management services
to third parties. In reaching its decision, the Board considered, among other
factors, (i) the long-term potential for reduced expenses and/or enhanced
returns for existing Company shareholders and (ii) the enhanced ability to
retain and attract highly qualified personnel. In August 1994, the Company
became registered as an investment adviser under the Advisers Act and in March
1995 filed an exemptive application with the Securities and Exchange Commission
(the "Commission") seeking exemptive relief under the Investment Company Act to
allow the Company to establish a wholly-owned subsidiary to engage in the
investment management business.
In early September 1995, James P. Gorter, Chairman of the Board of
Directors, was approached by Goldman, Sachs & Co. ("Goldman"), financial
advisors to LEVCO, concerning whether the Company would be interested in
acquiring LEVCO. No terms concerning a proposed transaction were discussed
during that conversation. Thereafter, Mr. Gorter and Mr. Levin met to discuss
the general structure of a proposed transaction in response to a proposal
prepared by Goldman, including participation by Mr. Levin in management of the
Company and the compensation of New LEVCO's officers and employees. See "THE
BONUS PLAN-Awards for a Performance Period." Although Mr. Gorter and Mr. Levin
did not engage in any discussions regarding a specific purchase price, Mr. Levin
informed Mr. Gorter that he and the other LEVCO Stockholders were interested in
receiving a significant portion of the consideration in Company Common Stock
with the balance in cash.
On September 22, 1995, the Board of Directors held a special meeting to
discuss the status of the proposed transaction. At that meeting, the Board of
Directors resolved to engage Lazad Freres as the Company's financial advisor in
connection with the proposed Merger. The Board indicated its support for the
Merger and authorized Mr.
18
<PAGE>
Gorter to proceed with negotiations. Thereafter, Lazard Freres, Goldman and
outside legal counsel to the Company and LEVCO negotiated terms. During this
time, representatives of the Company also conducted a due diligence review of
LEVCO.
On November 2, 1995, the terms of the proposed transaction were discussed
with the Board of Directors at its regularly scheduled meeting. Mr. Levin, Ms.
Sarnell and Mr. Kigner were present, as were representatives of Lazard Freres,
Bell, Boyd & Lloyd, the Company's outside counsel, and Ernst & Young, the
Company's independent auditors. The parties negotiated the final terms of the
Merger Agreement over the next few weeks. On November 17, 1995, the Board of
Directors held a special meeting to review the terms of the proposed transaction
as negotiated and to approve the Merger Agreement. On November 19, 1995, the
original Merger Agreement was signed. On November 20, 1995, the Company publicly
announced that it had entered into the Merger Agreement. On May 13, 1996, the
Merger Agreement, as amended and restated in its entirety to reflect certain
changes to the structure of the Company after the Merger, was signed.
As part of the negotiations, the parties and their outside counsel
considered whether the Company, in order to consummate the proposed transaction,
would need to file with the Commission an application seeking exemptions from
provisions of the Investment Company Act that would otherwise prohibit the
Merger or adversely impact the operations of the Levin Companies following the
Merger. The parties determined that the Company's pending exemptive application
(seeking relief to allow the Company to establish a wholly-owned advisory
subsidiary) should be amended to provide for the acquisition of LEVCO and
related issues. On December 11, 1995, the amended exemptive application was
filed with the Commission, and a subsequent amendment was filed on April 23,
1996. On May 10, 1996, the Commission issued an exemptive order granting the
requested exemptive relief, subject to the following conditions:
. the Company will not dispose of capital stock of New LEVCO or
Management Subsidiary if, as a result thereof, the Company would own,
directly or indirectly, 50% or less of the outstanding capital stock
of each of New LEVCO and Management Subsidiary, unless the Company
disposes of 100% of its interest in New LEVCO;
. the Board of Directors will maintain Audit, Compensation and
Nominating Committees of the Board, none of the members of which will
be "interested persons" of the Company as defined in the Investment
Company Act and as modified by such order;
. the Board of Directors will review at least annually the investment
management business of the Company and New LEVCO in order to determine
whether the benefits derived by the Company warrant the continuation
of the investment management business and the ownership by the
Company, directly or indirectly, of New LEVCO and, if appropriate,
approve at least annually such continuation; and
. the Bonus Plan will be approved and administered by the Compensation
Committee of the Board of Directors of the Company. See "APPROVAL OF
BONUS PLAN."
The parties are prepared to comply with these conditions, and the Company
does not believe that compliance with these conditions will detract, in any
material respect, from the benefits that the Company expects to realize from the
Merger.
REASONS FOR THE MERGER--RECOMMENDATION OF THE BOARD OF DIRECTORS OF THE COMPANY
On November 17, 1995, the Company's Board of Directors unanimously approved
the original Merger Agreement and the agreements and transactions contemplated
thereby and recommended that the shareholders approve the Merger Conditions. In
connection with this determination, the Board carefully reviewed the financial,
business, tax and legal implications of the Merger.
In reaching the above determination, the Board of Directors considered a
number of factors, including, without limitation, the following:
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. the Merger Consideration to be paid pursuant to the Merger Agreement;
. the effect of the Merger on the ability of the Company to develop its
business by expanding its ability to provide investment management
services to third parties, including the possibility that the Company
could achieve such expansion far more rapidly through LEVCO's large,
established investment management business rather than by attempting
to develop the Company's own advisory business;
. the potential efficiencies to be derived from coordinating the
management of the Company and LEVCO, including those arising from the
Company's administrative and operational strengths;
. the increased ability to attract and retain highly qualified personnel
to manage the Company's assets, as employees of the Company or a
wholly-owned subsidiary of the Company;
. the position of the Company if the Merger was not consummated;
. the financial condition and business operations of LEVCO, both on an
historical basis and after giving effect to the Merger;
. the financial condition and business operations of the Company, both
on an historical basis and after giving effect to the Merger
(including the dilutive effect of the Merger on existing Company
shareholders);
. the analysis presented to the Board of Directors by Lazard Freres with
respect to the Merger Transactions (see "--Opinion of Company
Financial Advisor");
. the opinion of Lazard Freres to the effect that, as of the date of
such opinion and based on and subject to certain matters, the
consideration to be paid pursuant to the Merger Agreement was fair
from a financial point of view to the Company (see "--Opinion of
Company Financial Advisor" and the written opinion of Lazard Freres
as set forth as Appendix B thereto); and
. the terms and conditions of the Merger Agreement and the agreements
and transactions contemplated thereby.
On May 13, 1996, the Company's Board of Directors unanimously approved the
Merger Agreement, as amended and restated in its entirety. Mr. Gorter, at that
time the sole director of Management Subsidiary, also approved the Merger
Agreement and all transactions contemplated thereby.
OPINION OF COMPANY FINANCIAL ADVISOR
The Company has retained Lazard Freres to act as its financial advisor with
respect to the Merger and related matters. At the meeting of the Company's Board
of Directors held on November 17, 1995, Lazard Freres rendered an oral opinion
to the Company's Board of Directors to the effect that, as of such date and
based upon and subject to certain matters, the consideration to be paid pursuant
to the Merger Agreement (the "Merger Consideration") was fair from a financial
point of view to the Company. Lazard Freres has confirmed its November 17, 1995
oral opinion by delivering its written opinion to the Board dated the date of
this Proxy Statement to the effect that, as of the date hereof and based on and
subject to certain matters, the Merger Consideration is fair from a financial
point of view to the Company. No limitations were imposed by the Board upon
Lazard Freres with respect to the investigations made or the procedures followed
by Lazard Freres in rendering its opinions.
THE FULL TEXT OF THE LAZARD FRERES OPINION, DATED THE DATE OF THIS PROXY
STATEMENT, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED
HERETO AS APPENDIX B AND IS INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS OF
THE COMPANY ARE URGED TO READ SUCH OPINION CAREFULLY AND IN ITS ENTIRETY. THE
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LAZARD FRERES OPINION, WHICH IS DIRECTED TO THE COMPANY'S BOARD OF DIRECTORS, IS
DIRECTED ONLY TO THE FAIRNESS OF THE MERGER CONSIDERATION FROM A FINANCIAL POINT
OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR RELATED TRANSACTIONS
AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF THE COMPANY AS TO
HOW SUCH SHAREHOLDER SHOULD VOTE AT THE ANNUAL MEETING. THE SUMMARY OF THE
LAZARD FRERES OPINION SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In connection with rendering its opinions, Lazard Freres, among other
things, (i) reviewed the financial terms and conditions of the Merger Agreement;
(ii) reviewed certain historical business and financial information relating to
the Company and LEVCO; (iii) reviewed various financial forecasts and other data
provided to Lazard Freres by the Company and LEVCO relating to their respective
businesses (the written financial forecasts and other written forward looking
data for LEVCO provided by LEVCO related only to the year 1996, the management
of LEVCO having informed Lazard Freres that no such written data existed for
subsequent periods); (iv) held discussions with members of the senior management
of the Company and LEVCO with respect to past and current business operations
and financial condition, regulatory relationships, strategic objectives and the
future prospects of their respective companies; (v) reviewed public information
with respect to certain other publicly-traded investment management companies;
(vi) reviewed the financial terms of certain business combinations in the
investment management industry; (vii) reviewed the historical stock prices and
trading volumes of the Company Common Stock; and (viii) conducted such other
financial studies, analyses and investigations as Lazard Freres deemed
appropriate. In addition, in connection with rendering its opinion dated the
date of this Proxy Statement, Lazard Freres reviewed this Proxy Statement and
the Application of the Company in SEC Proceeding No. 812-9528 for an order of
exemptive relief from certain provisions of the Investment Company Act.
In conducting its review and arriving at its opinions, Lazard Freres relied
upon the accuracy and completeness of the foregoing information and did not
assume any responsibility for any independent verification of such information.
With respect to financial forecasts provided to it, Lazard Freres assumed that
such financial forecasts were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of the Company
and LEVCO as to the future financial performance of the Company and LEVCO,
respectively, and that such forecasts would be realized in the amounts and at
the times contemplated thereby. Lazard Freres assumed no responsibility for and
expressed no view as to such forecasts or the assumptions on which they were
based. Lazard Freres did not make any independent evaluation or appraisal of the
assets or liabilities of the Company or LEVCO and it was not furnished with any
such evaluation or appraisal. Lazard Freres' opinions were necessarily based on
economic, monetary, market and other conditions as in effect on, and the
information made available to Lazard Freres as of, the dates of such opinions.
Lazard Freres assumed that the Merger would be consummated on the terms
described in the Merger Agreement without any waiver of any material terms or
conditions by the Company and that obtaining the necessary regulatory approvals
for the Merger will not have an adverse effect on the Company.
The following is a summary of the material analyses provided to the Board
of Directors by Lazard Freres in connection with rendering its oral opinion at
the meeting of the Company Board on November 17, 1995. Such summary does not
purport to be a complete description of the analyses performed by Lazard Freres
in connection with rendering its opinions.
Transaction Overview. Lazard Freres summarized the strategic rationale for
the Merger and terms of the proposed Merger, including the aggregate
consideration payable, the closing conditions to the Merger, the impact of the
Merger on the respective managements and operations of the Company and LEVCO and
the percentage ownership of the combined company that would be held by the LEVCO
Stockholders immediately following the Merger. Lazard Freres multiplied the
closing price for the Company Common Stock on November 16, 1995 of $16.25 by
5.06 million (the aggregate number of shares of the Company Common Stock to be
received by LEVCO Stockholders, subject to certain adjustments at Closing) and
added $35 million (the aggregate cash to be paid by the Company to the LEVCO
Stockholders, subject to certain adjustments at Closing), which resulted in
aggregate consideration of $117 million (the "Indicative Valuation"). Lazard
Freres noted that the Indicative Valuation represented a multiple of (i) 9.0x
LEVCO's then-estimated 1995 operating income (assuming an operating margin of
47%), (ii) 4.2x LEVCO's then-estimated 1995 revenues, and (iii) 2.3% of LEVCO's
September 30, 1995 assets
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under management. Lazard Freres also noted a range of comparable multiples
derived from other recent transactions involving acquisitions of investment
management companies. See Comparative Merger and Acquisition Analysis below.
Overview of LEVCO. Lazard Freres reviewed the organizational structure and
ownership of LEVCO, a breakdown of LEVCO's assets under management as of
September 30, 1995 among various types of institutional and individual
investors, a breakdown of LEVCO's assets under management as of September 30,
1995 by investment product, LEVCO's investment philosophy and LEVCO's cumulative
composite investment performance from 1982 through September 30, 1995 as
compared with the performance of the Standard & Poor's 500 Index (the "S&P 500")
over the same period. Lazard Freres noted that LEVCO's investment performance
(assuming reinvestment of income, dividends and other earnings) had resulted in
a thirteen-year cumulative growth rate, as of September 30, 1995, of 839.8% (or
17.8% annually) as compared with 563.0% (or 14.2% annually) for the S&P 500.
Summary Historical Financial Analysis of LEVCO. Lazard Freres reviewed the
compound annual growth rate of LEVCO's assets under management for the years
1990 through 1995 and the compound annual growth rate of LEVCO's revenues for
the years 1991 through 1995 (on a then-estimated basis), which showed that for
the five-year period ended December 31, 1994, the compound annual growth rate of
LEVCO's assets under management was 23.8% and that for the four-year period
ended December 31, 1994, the compound annual growth rate in LEVCO's revenues was
31.1%. This review also showed that, based on the then-estimated results for
1995, the annual growth rate of LEVCO's assets under management and revenues for
the year ended December 31, 1995, would be 33.0% and 25.8%, respectively.
Selected Company Analysis. Lazard Freres reviewed certain actual and
estimated financial, operating and stock market information and financial ratios
for six publicly-traded investment management firms (the "Selected Managers")
based on publicly available information and the November 1995 Median
Institutional Brokers Estimate System ("IBES") projections of earnings per share
for 1995 and 1996. IBES is a data service that monitors and publishes
compilations of earnings estimates produced by selected research analysts
regarding companies of interest to institutional stockholders. The Selected
Managers were: Eaton Vance Corp.; Franklin Resources, Inc.; The Pioneer Group,
Inc.; T. Rowe Price Associates, Inc.; John Nuveen Company, and United Asset
Management Corporation. Such information and ratios included, among other
things: market price per share on November 15, 1995; equity market
capitalization; equity market capitalization plus debt minus cash ("Firm
Value"); dividend yield; earnings per share; compound annual growth rates in
earnings per share; price to earnings ratios; Firm Value as a multiple of
operating income, as a multiple of operating revenues and as a multiple of
assets under management; compound annual growth rates in assets under
management, operating revenues and operating income; operating revenues as a
percentage of average assets under management; operating income as a percentage
of operating revenues and as a percentage of average assets under management;
and operating cash flow margin.
Comparative Merger and Acquisition Analysis. Lazard Freres reviewed certain
information relating to twenty-three acquisitions of investment management
companies since February 1991 (the "Investment Manager Acquisitions"). The
Investment Manager Acquisitions were (acquiror/acquiree): Barclays Bank
plc/Wells Fargo Nikko Investment Advisors and MasterWorks Division of Wells
Fargo Bank; Morgan Stanley & Co., Inc./Miller Anderson & Sherrerd; New England
Investment Companies, L.P./Harris Associates L.P.; Phoenix Home Life Insurance
Company/Duff & Phelps Corp.; Govett & Co. Ltd./Duff & Phelps Corp.; Lincoln
National Corporation/Delaware Management Holdings, Inc.; United Asset
Management/Provident Investment Council; John Hancock Mutual Life Insurance
Co./Transamerica Fund Management; Legg Mason, Inc./Batterymarch Financial
Management; Liberty Financial Cos./Colonial Group Inc.; Van Kamper Merritt
Companies/American Capital Management & Research; Swiss Bank Corporation/Brinson
Partners, Inc.; PNC Bank Corp./BlackRock Financial Management; Pacific Mutual
Life Insurance Company/Thomson Advisory Group L.P.; Mellon Bank Corporation/The
Dreyfus Corporation; First Union Corporation/Lieber & Co. and Evergreen Asset
Management; TA Associates/AIM Management Group; Alliance Capital Management
L.P./Shields Asset Management Inc. and Regent Investor Services, Incorporated;
New England Investment Companies, Inc./Reich & Tang L.P.; Clayton, Dubilier &
Rice, Inc./Van Kampen Merritt Companies, Inc.; Franklin Resources,
Inc./Templeton, Galbraith & Hansberger Ltd.; Management/Chancellor Capital
Management, Inc.; and Union Bank of Switzerland/Chase Investors Management Corp.
Such analysis indicated that in the Investment Manager Acquisitions the purchase
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price as a multiple of latest 12 months profit after taxes (based on the most
recent available financial statement prior to the announcement of the
transaction) ranged from 10.4x to 27.2x with a mean of 16.4x, as a multiple of
latest 12 months earnings before interest and taxes ranged from 6.3x to 16.9x
with a mean of 10.8x, as a multiple of latest 12 months earnings before
interest, taxes, depreciation and amortization ("EBITDA") ranged from 5.1x to
16.4x with a mean of 9.7x, as a multiple of latest 12 months revenues ranged
from 1.7x to 6.7x with a mean of 3.8x and as a multiple of assets under
management ranged from 0.3% to 4.3% with a mean of 2.1%. Such analysis also
indicated that in the Investment Manager Acquisitions the percentage premium
paid over total market capitalization (calculated one month prior to the public
announcement of the transaction) ranged from 13.6% to 52.9% with a mean of
32.4%.
Of the twenty-three Investment Manager Acquisitions reviewed, Lazard
Freres also separately analyzed seven in particular (the "Selected Recent
Transactions") to perform a comparative merger and acquisition valuation of
LEVCO. The Selected Recent Transactions were (acquiror/acquiree): Barclays Bank
plc/Wells Fargo Nikko Investment Advisors and MasterWorks Division of Wells
Fargo Bank; Morgan Stanley & Co., Inc./Miller Anderson & Sherrerd; New England
Investment Companies/Harris Associates L.P.; Phoenix Home Life Insurance
Company/Duff & Phelps Corp.; Lincoln National Corporation/Delaware Management
Holdings, Inc.; Swiss Bank Corporation/Brinson Partners, Inc.; and PNC Bank
Corp./BlackRock Financial Management. For each of the Selected Recent
Transactions, Lazard Freres computed the price paid as a multiple of (i) latest
12 months EBITDA, (ii) latest 12 months revenues and (iii) assets under
management. Based on the foregoing data from the Selected Recent Transactions,
Lazard Freres developed the following ranges of implied valuation multiples for
LEVCO: (i) 9.5x to 10.5x latest 12 months EBITDA; (ii) 3.5x to 4.5x latest 12
months revenues; and (iii) 1.0% to 2.0% of assets under management. On the basis
of such implied valuation multiples for LEVCO, and using LEVCO's then-estimated
1995 results, assuming an operating margin of 47% and based on LEVCO's assets
under management as of September 30, 1995, Lazard Freres developed a comparative
merger and acquisition valuation range for LEVCO of $115.0 million to $135.0
million.
Discounted Cash Flow Analysis. Lazard Freres performed a discounted cash
flow ("DCF") analysis of LEVCO's projected operating results over a seven-year
period to develop a range of values for LEVCO on a stand-alone basis. This
analysis was based upon an extrapolation of LEVCO management's 1996 projections
and assumed, among other things, an operating margin of 47% and a 47% tax rate.
Lazard Freres estimated the terminal value of LEVCO at the end of the seven-year
period by applying projected firm value-to-operating income multiples of 7.5x,
8.0x and 8.5x. The net operating income streams and terminal values were then
discounted to net present value using three different discount rates (14.0%,
15.0% and 16.0%), which Lazard Freres viewed as the appropriate discount rate
range for LEVCO based on the historical cost of capital for selected investment
management companies and required market returns. This analysis indicated total
DCF values ranging from $104.4 million to $126.1 million. Based on the DCF
analysis, Lazard Freres developed a DCF valuation range for LEVCO of $110.0
million to $120.0 million. Lazard Freres noted that DCF analysis is a widely
used valuation methodology but further noted that it relies on numerous
assumptions, including asset and earnings growth rates, free cash flow and
discount rates, which are subject to the difficulties of estimation and
uncertainties inherent in all financial forecasts.
Stock Trading Analysis. Lazard Freres reviewed and analyzed the historical
trading prices and volumes for the Company's Common Stock on a daily basis from
November 9, 1990 to November 10, 1995. This analysis indicated that the
Company's Common Stock traded at a discount to net asset value ("NAV") ranging
from 11.9% to 22.4% with a mean of 17.2% during the five-year period ended
November 10, 1995, and ranging from 16.7% to 21.8% with a mean of 19.5% during
the one-year period ending November 10, 1995. Lazard Freres also noted that the
discount to NAV on November 10, 1995 was 21.6%.
Pro Forma Analysis. Lazard Freres analyzed the pro forma impact of the
Merger on selected projected financial statistics of the Company assuming the
Merger was consummated on December 31, 1995. For purposes of this analysis,
Lazard Freres assumed, among other things, that (i) the Merger Consideration
would consist of 5.06 million newly-issued shares of Company Common Stock and
$35 million in cash, (ii) the payment of the cash portion of the Merger
Consideration would be financed with borrowed funds at an annual interest rate
of 7.9%, amortized over six years with a minimum amortization of 10% in the
first year, (iii) the value of the Company's portfolio of publicly-traded
securities would be $391 million at December 31, 1995, and LEVCO would receive
an
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annual management fee equal to 0.3% of the value of such portfolio, (iv) the
Company would initially carry its equity investment in LEVCO at $80 million and
(v) LEVCO would have an operating margin of 47% and a 47% tax rate. This
analysis showed, among other things, that the pro forma projected NAV of the
combined company at December 31, 1995 would increase by 14.3% compared to the
Company stand-alone, that pro forma total projected shares outstanding for the
combined company at December 31, 1995 would increase by 18.5% compared to the
Company stand-alone and that the pro forma projected NAV per share of the
combined company at December 31, 1995 would decrease by 3.5% compared to the
Company stand-alone. The analysis also showed that the implied distribution
yield on the LEVCO equity investment would be 3.3% resulting in a 10.8% decrease
in the estimated 1996 distribution per share to the combined company
shareholders, assuming no additional cash was distributed from the stand-alone
Company portfolio. In addition, the analysis showed that, assuming LEVCO were to
be valued at 9.0x EBITDA in the future (the implied transaction multiple) and
based on LEVCO projections, the pro forma impact of the Merger on the NAV per
share of the combined company would be an increase of 1.5% and 2.1% at December
31, 1996 and December 31, 1997, respectively, compared to the Company stand-
alone.
Other Considerations. Lazard Freres also considered in its analysis
certain qualitative factors and industry trends. These included, among others:
(i) the strategic rationale for the Merger; (ii) LEVCO'S investment approach,
products, customer base, performance records, and management team; (iii) trends
in valuations of investment management companies, including trends in market
prices and price to earnings multiples of publicly traded investment management
companies over a five-year period; and (iv) trends in acquisitions of investment
management companies, including the level of activity and certain transaction
multiples in such acquisitions.
In connection with its opinion dated the date of this Proxy Statement,
Lazard Freres also confirmed the appropriateness of its reliance on the analysis
used in connection with its November 17, 1995 opinion by performing procedures
to update certain of such analyses and by reviewing the assumptions upon which
such analyses were based and the factors considered in connection therewith.
Lazard Freres believes that its analyses must be considered as a whole and
that selecting portions of such analyses and the factors considered by it,
without considering all of such analyses and factors, could create an incomplete
view of the process underlying its analyses set forth in the opinion. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analysis or summary description. With respect to the
selected company analysis and comparative merger and acquisition analysis
summarized above, Lazard Freres selected companies and transactions on the basis
of various factors; however, no company utilized in such analyses was identical
to LEVCO and no transaction was identical to the Merger. Accordingly, such
analyses were not mathematical; rather they necessarily involved complex
considerations and judgments concerning the differences in financial and
operating characteristics of the selected companies and other factors that could
affect the acquisition or public trading value of the companies to which LEVCO
was compared.
In performing its analyses, Lazard Freres made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of the Company and LEVCO.
The analyses performed by Lazard Freres are not necessarily indicative of actual
values, which may be significantly more or less favorable than suggested by such
analyses. Such analyses were performed solely as a part of Lazard Freres
analysis of the fairness from a financial point of view of the Merger
Consideration to the Company and were presented to the Board in connection with
Lazard Freres' opinion. The analyses do not purport to be appraisals or to
reflect the prices at which a company or its securities might actually be sold,
and such estimates are necessarily subject to uncertainty.
The projections furnished to Lazard Freres by the Company and LEVCO were
prepared by the respective managements of each company. Neither the Company nor
LEVCO publicly discloses internal management projections of the type provided to
Lazard Freres in connection with Lazard Freres' review in connection with its
opinion. Such projections were not prepared for, or with a view toward, public
disclosure. In addition, such projections were based on numerous variables and
assumptions that are inherently uncertain, including, without limitation,
factors related to general economic and competitive conditions, many of which
are beyond the control of managements of the Company and LEVCO. Accordingly,
actual results could vary significantly from those set forth in such
projections. Lazard Freres assumes no responsibility for the accuracy of such
information.
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Lazard Freres is an internationally recognized investment banking firm
that regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions. The Board of Directors selected Lazard
Freres to act as its financial advisor on the basis of Lazard Freres'
international reputation and expertise in investment banking and mergers and
acquisitions.
Certain Managing Directors of Lazard Freres are clients of, and maintain
discretionary accounts with, LEVCO.
Pursuant to a letter agreement dated September 26, 1995 between the Company
and Lazard Freres, Lazard Freres agreed to act as financial advisor to the
Company in connection with the Merger. The Company paid Lazard Freres a retainer
fee equal to $75,000 and agreed to pay Lazard Freres an additional fee equal to
0.75% of the aggregate consideration paid in the Merger, payable upon
consummation of the Merger. The Company also agreed to reimburse Lazard Freres
for out-of-pocket expenses incurred by it in connection with its engagement and
to indemnify Lazard Freres and certain related persons against certain
liabilities, including liabilities under the federal securities laws, relating
to, or arising out of, its engagement.
TERMS OF THE MERGER
Consideration. As a result of the Merger, each share of LEVCO Common Stock
will be converted into the right to receive cash and Company Common Stock. The
shares of LEVCO Common Stock held by persons other than Mr. Levin will be
converted into the right to receive, collectively, (a) an aggregate amount of
cash equal to $17.25 million minus 15% of the Purchase Price Reduction
Adjustments (as hereinafter defined) and (b) an aggregate number of shares of
Company Common Stock equal to the quotient of (i) $17.25 million minus 15% of
the Purchase Price Reduction Adjustments plus any applicable Capital Gains
Adjustment (as hereinafter defined) divided by (ii) $15.80. The shares of LEVCO
Common Stock held by John A. Levin will be converted into the right to receive,
collectively, (x) an aggregate amount of cash equal to $17.75 million plus 15%
of the Purchase Price Reduction Adjustments (as hereinafter defined) and (y) an
aggregate number of shares of Company Common Stock equal to the quotient of (i)
$62.75 million minus 85% of the Purchase Price Reduction Adjustments plus any
applicable Capital Gains Adjustment divided by (ii) $15.80.
Adjustments to the Stock Consideration to be paid in the Merger (the
"Purchase Price Reduction Adjustments") may be made with respect to (i) the
assets under management of LEVCO at the time of the Closing, as described below,
(ii) the amount of certain transaction-related costs of the LEVCO Stockholders
to be paid by the Company and (iii) the amount of the minimum general partner
capital contributions required to be made by G.P. Subsidiary with respect to the
LEVCO Partnerships under applicable Internal Revenue Service guidelines (which
amount constitutes the purchase price in the Acquisition), in each case as
described more fully in the Merger Agreement attached as Appendix A hereto. The
Purchase Price Reduction Adjustments and the Capital Gains Adjustment constitute
the Purchase Price Adjustments.
To the extent that at the Closing, the dollar amount of the LEVCO's Closing
Assets Under Management (as defined in the Merger Agreement) as to which an
agreed consent has been obtained by LEVCO to the assignment of the investment
advisory contract for such assets to Management Subsidiary (all as more fully
set forth in the Merger Agreement) is less than 85% of LEVCO's Base Assets Under
Management (as defined in the Merger Agreement) at November 16, 1995, then the
aggregate Merger Consideration will be reduced by multiplying the percentage by
which the Closing Assets Under Management are less than 85% of LEVCO's Base
Assets Under Management by $115 million. For example, if at Closing the dollar
amount of Closing Assets Under Management as to which LEVCO has received an
agreed consent is 80% of the dollar amount of LEVCO's Base Assets Under
Management at November 16, 1995, the aggregate Merger Consideration would be
reduced by $5.75 million.
The aggregate number of shares of Company Common Stock to be issued in the
Merger is also subject to increase in the event that the Company makes a capital
gains distribution prior to the Closing (the "Capital Gains Adjustment"). In
such event, the Capital Gains Adjustment to be used in each of the share
calculation formulas described above would be equal to the product of (i) number
of shares of Company Common Stock that would have
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been issued under the relevant share calculation formula described above if the
Closing had occurred prior to the record date for such distribution and (ii) the
per share amount of such distribution. Based on its historical practice, the
Company does not expect to make a capital gain distribution to shareholders
prior to the Closing.
Management Subsidiary will purchase all of the outstanding common stock of
G.P. Subsidiary from Mr. Levin, Ms. Sarnell, Mr. Kigner and Mr. Rango for an
amount which equals the aggregate dollar amount of the minimum general partner
capital contributions required to be made by G.P. Subsidiary under the
applicable Internal Revenue Service guidelines, as the general partner of the
LEVCO Partnerships, to the LEVCO Partnerships, which amount is expected to be
approximately $1.7 million.
The Merger Consideration was determined through negotiations between the
parties and their advisors and was approved by the Board of Directors of the
Company and by LEVCO. In connection with the Merger and the Acquisition, the
Company intends to borrow from one or more commercial banks approximately $38
million, which is intended to be loaned by the Company to Management Subsidiary
and used by it to finance the cash portion of the consideration for the Merger
and the Acquisition. In addition, the Company expects to extend credit to
Management Subsidiary in the amount of approximately $22 million to permit
Management Subsidiary to purchase a portion of the Company Common Stock to be
issued to the LEVCO Stockholders in the Merger. Management Subsidiary will be
obligated to repay to the Company amounts loaned by the Company to Management
Subsidiary on commercially reasonable terms.
Structure of LEVCO--the LEVCO Partnerships, G.P. Subsidiary and Broker
Subsidiary. LEVCO, the LEVCO Stockholders, corporations owned by one or more of
the LEVCO Stockholders (or trusts for the benefit of their families), or
partnerships in which corporations owned by one or more LEVCO Stockholders (or
trusts for the benefit of their families) are partners are currently general
partners of the LEVCO Partnerships. In addition, LEVCO, or partnerships in which
LEVCO is a general partner, currently serve as manager for certain of the LEVCO
Partnerships. Pursuant to the Merger Agreement, and immediately prior to the
Merger (in transactions to which the Company will not be a party) and assuming
receipt of approval of the limited partners of each LEVCO Partnership, G.P.
Subsidiary will be admitted as a general partner of each LEVCO Partnership and
will contribute to each partnership the minimum amount required pursuant to
Internal Revenue Service guidelines. The present general partners will then
withdraw (and in connection with such withdrawal, will, to the extent permitted
under applicable law, invest directly or through their equity holders as limited
partners in each of the LEVCO Partnerships) so that, at the time of the Merger,
the sole general partner of the LEVCO Partnerships will be G.P. Subsidiary. In
addition, the partnership agreements of those LEVCO Partnerships currently
serviced by management companies will be amended to provide that the management
fees and incentive allocations currently paid to such management companies will
instead be paid to the general partner, which will be G.P. Subsidiary, or to
Management Subsidiary. Simultaneously with the consummation of the Merger, New
LEVCO will acquire all of the outstanding common stock of G.P. Subsidiary from
Mr. Levin, Ms. Sarnell, Mr. Kigner and Mr. Rango. In addition, prior to the
closing of the transactions contemplated by the Merger Agreement, LEVCO will
cause all of the assets of LEVCO relating to its broker-dealer business to be
contributed to a newly-formed, wholly-owned subsidiary (such subsidiary shall
hereinafter be referred to as "Broker Subsidiary"). See "THE COMPANY--Structure
of the Company After the Merger."
Representations and Warranties of the Company. The Company, with respect to
itself and Management Subsidiary, has made certain representations and
warranties in the Merger Agreement concerning (i) certain customary corporate
and securities law matters, (ii) the absence of a conflict between the Merger
Agreement and applicable law, regulations and certain specified agreements and
other instruments, (iii) the absence of a requirement of certain regulatory or
other approvals in connection with the transactions contemplated by the Merger
Agreement, (iv) the absence of litigation pertaining to the transactions
contemplated by the Merger Agreement, (v) the eligibility of the Company and its
affiliated persons to serve as an investment adviser, (vi) the Company's
financial position, (vii) the Company's capitalization, (viii) the accuracy of
the Company's filings made or to be made with the Commission, (ix) the Company's
compliance with applicable laws and regulations, (x) various aspects of the
Company's business and assets, (xi) the absence of certain events since December
31, 1994 and (xii) the nonengagement of Management Subsidiary in any type of
business activity prior to the consummation of the Merger, except as
contemplated by the Merger Agreement.
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Representations and Warranties of the LEVCO Stockholders as to Themselves.
The LEVCO Stockholders with respect to themselves, have made certain
representations and warranties in the Merger Agreement concerning (i) certain
customary corporate and securities law matters, (ii) the absence of a conflict
between the Merger Agreement and applicable laws and regulations, (iii) their
ownership of LEVCO Common Stock and (iv) the health of Mr. Levin.
Representations and Warranties of the LEVCO Stockholders as to LEVCO and
the LEVCO Partnerships. The LEVCO Stockholders, with respect to LEVCO and the
LEVCO Partnerships, have made certain representations and warranties in the
Merger Agreement concerning (i) certain customary corporate and securities law
matters, (ii) the absence of a conflict between the Merger Agreement and
applicable law, regulations and certain specified agreements and other
instruments, (iii) the absence of a requirement of certain regulatory or other
approvals in connection with the transactions contemplated by the Merger
Agreement (other than the exemptive order), (iv) the absence of litigation
pertaining to the transactions contemplated by the Merger Agreement, (v) the
financial position of LEVCO and the LEVCO Partnerships, (vi) the capitalization
of LEVCO, (vii) the ownership of G.P. Subsidiary and Broker Subsidiary, (viii)
the absence of certain tax liabilities, (ix) the absence of certain conflicts of
interest between the LEVCO Stockholders and LEVCO, the LEVCO Partnerships, G.P.
Subsidiary and Broker Subsidiary (collectively, the "LEVCO Entities"), (x) the
status of title to the assets and personal properties of the LEVCO Entities,
(xi) the existence and enforceability of certain insurance policies and other
contracts, (xii) compliance with applicable laws and regulations by the LEVCO
Entities, (xiii) various aspects of LEVCO's investment advisory business, (xiv)
the terms of the employee benefit plans and employment arrangements of the
LEVCO Entities, (xv) the absence of certain events since December 31, 1994 and
(xvi) the existence of certain governmental registrations, permits, licenses and
approvals relating to the business of the LEVCO Entities.
Conditions to the Merger. The obligations of each party to the Merger
Agreement to consummate the transactions contemplated thereby are conditioned
upon (unless otherwise waived) (i) none of the parties having terminated the
Merger Agreement, (ii) the transactions contemplated by the Merger Agreement
having been approved by the required governmental entities, (iii) no action or
proceeding having been instituted or threatened on or before the Closing, the
result of which would be reasonably likely to have a material adverse effect on
the Levin Companies or the Company, (iv) the Merger Conditions having been
approved by shareholders of the Company, (v) the receipt of certain governmental
registrations, licenses and permits, including New LEVCO's registration as a
commodity trading adviser and membership in the NFA and G.P. Subsidiary's
registration as a commodity pool operator and membership in the NFA, (vi) the
execution of certain agreements and (vii) the listing on the NYSE of shares of
Company Common Stock to be issued to the LEVCO Stockholders as part of the
Merger Consideration.
The obligations of the Company and Management Subsidiary to consummate the
transactions contemplated by the Merger Agreement are conditioned upon (unless
otherwise waived) (i) the representations and warranties of the LEVCO
Stockholders set forth in the Merger Agreement being true and correct in all
material respects as of November 19, 1995 and as of the Closing subject to
certain limitations, (ii) the performance in all material respects by LEVCO and
the LEVCO Stockholders of each of the agreements and covenants as required by
the Merger Agreement, (iii) the delivery by the LEVCO Stockholders of a
certificate dated as of the Closing certifying that each of the foregoing
conditions has been satisfied, (iv) the execution by each of Mr. Levin, Ms.
Sarnell and Mr. Kigner of employment agreements, (v) the receipt by the Company
of certain legal opinions, (vi) the assignment of LEVCO's clearing agreement
with Lehman Brothers, Inc. ("Lehman") to Management Subsidiary, (vii) the
termination of certain stockholders' agreements among LEVCO and each LEVCO
Stockholder, (viii) the receipt of the necessary consents to allow for the
reorganization of the LEVCO Partnerships, (ix) the receipt of a consent under
the lease of LEVCO's office facilities to the change in ownership of LEVCO, (x)
the delivery by LEVCO of a certificate certifying that since November 19, 1995,
there have been no amendments or other modifications to the LEVCO certificate
of incorporation or bylaws, (xi) the delivery by LEVCO of certain financial
statements, (xii) the approval of the Company of all opinions, certificates and
other documents delivered under the Merger Agreement, (xiii) that all of LEVCO's
investment management contracts be in writing, reflect the current fee
arrangement and provide for receipt of compensation by LEVCO, (xiv) that, as of
the Closing, Mr. Levin shall be President and Chief Executive Officer of LEVCO
and shall have no health condition or disability which would be reasonably
likely to prevent him from performing his duties, immediately after the Closing,
under
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his employment agreement with each of the Company and Management Subsidiary,
(xv) that LEVCO have an agreed upon amount of cash on hand as of the Closing,
and (xvi) the receipt by LEVCO of notice of the effectiveness of certain
investment adviser, broker-dealer and agent or representative registrations.
The obligations of LEVCO and the LEVCO Stockholders to consummate the
transactions contemplated by the Merger Agreement are conditioned upon (unless
otherwise waived) (i) the representations and warranties of the Company and
Management Subsidiary set forth in the Merger Agreement being true and correct
in all material respects as of November 19, 1995 and as of the Closing subject
to certain limitations, (ii) the performance in all material respects by the
Company and Management Subsidiary and LEVCO Stockholders of each of the
agreements and covenants as required by the Merger Agreement, (iii) the delivery
by each of the Company and Management Subsidiary of a certificate dated as of
the Closing certifying that each of the foregoing conditions have been
satisfied, (iv) the delivery by the Company of the Merger Consideration, (v) the
receipt by LEVCO of certain legal opinions, (vi) the delivery by the Company and
Management Subsidiary of a certificate dated as of the Closing certifying that
since November 19, 1995, there have been no amendments or other modifications to
the Company's and Management Subsidiary certificate of incorporation or bylaws,
(vii) the approval of LEVCO and the LEVCO Stockholders of all opinions,
certificates and other documents delivered under the Merger Agreement, (viii)
the delivery by the Company of certain financial statements and (ix) that, as of
the Closing, Mr. Gorter shall be Chairman of the Board of the Company and shall
have no health condition or disability which would be reasonably likely to
prevent him from performing his duties, immediately after the Closing in such
capacity.
Indemnification. The Merger Agreement provides that from and after the
Closing, the LEVCO Stockholders will jointly and severally indemnify and hold
harmless the Company, the Levin Companies and their respective directors,
officers and controlling persons (collectively, the "Company Indemnified
Parties") against any and all expenses, losses, claims, damages, fines,
penalties, liabilities and costs, including reasonable attorneys fees and expert
witness fees and any fees received from clients that must be disgorged or losses
or expenses incurred in connection with client or customer claims, including
claims for rescission of securities transactions, but excluding any punitive or
exemplary damages except to the extent payable to third parties and excluding
any consequential damages (other than to the Levin Companies)(all of the
foregoing herein collectively referred to as "Losses") sustained or incurred by
any one or more of the Company Indemnified Parties based upon, arising from or
otherwise in respect of (i) any inaccuracy of any representation or warranty
made by the LEVCO Stockholders as to LEVCO and the LEVCO Partnerships, (ii) any
default by LEVCO or the LEVCO Stockholders under any of their covenants or
agreements contained in the Merger Agreement, (iii) any Loss or obligation based
upon, arising out of or otherwise in respect of Bridge Partners Specialized
Investment Fund, L.P., a limited partnership affiliated with LEVCO which has
commenced dissolution in connection with the Merger, (iv) any Loss based upon,
arising out of or otherwise in respect of the failure of any arrangement with a
paid solicitor to comply with the Advisers Act and (v) any Loss based upon,
arising out of or otherwise in respect of LEVCO having failed to register as an
investment adviser or broker-dealer in any state in which registration was
required prior to the Closing or any employee of LEVCO having failed to register
or qualify under the laws or regulations of any state relating to the activities
of investment advisers and broker-dealers.
In addition, from and after the Closing, each LEVCO Stockholder severally,
but not jointly, agrees to indemnify and hold harmless the Company Indemnified
Parties from and against any Losses sustained or incurred by any one or more of
the Company Indemnified Parties based upon, arising out of or otherwise in
respect of any inaccuracy of any representation or warranty of such LEVCO
Stockholder as to such LEVCO Stockholder.
The Company has agreed, from and after the Closing, to indemnify and hold
harmless the LEVCO Stockholders against any and all Losses at any time
sustained or incurred by any one or more of the LEVCO Stockholders based upon,
arising out of, or otherwise with respect of (i) any inaccuracy of any
representation or warranty of the Company contained in the Merger Agreement and
(ii) any default by the Company or Management Subsidiary under any of their
covenants or agreements contained in the Merger Agreement.
No Company Indemnified Party is entitled to receive any indemnification
payments in respect of inaccuracies of representations or warranties made by the
LEVCO Stockholders as to LEVCO and the LEVCO Partnerships as of November 19,
1995 unless and until the aggregate of all Losses suffered by all Company
Indemnified Parties arising therefrom or relating thereto exceeds, on a
cumulative basis, one percent of the Merger
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Value (as hereinafter defined). No Company Indemnified Party is entitled to
receive any indemnification payments in respect of inaccuracies of
representations or warranties made by the LEVCO Stockholders as to LEVCO and the
LEVCO Partnerships (excluding certain specified representations and warranties)
as of the Closing, which representations and warranties were true and correct as
of November 19, 1995, unless and until the aggregate of all Losses suffered by
all Company Indemnified Parties arising therefrom or relating thereto exceeds
one percent of the Merger Value. In addition, the Company Indemnified Parties
are not entitled to receive any indemnification payments to the extent that the
aggregate of all such payments exceeds 50 percent of the Merger Value, and no
LEVCO Stockholder individually has liability in excess of such LEVCO
Stockholder's pro rata share (based on the percentage allocation of the Merger
Consideration) of such amount. No LEVCO Stockholder is entitled to receive any
indemnification payments to the extent that the aggregate of all such payments,
when added to all other indemnification payments made to the LEVCO Stockholders,
exceeds 50% of the Merger Value.
Depending upon the nature of the Loss, the obligation of the LEVCO
Stockholders to indemnify the Company Indemnified Parties generally remains in
effect up to (i) the period ending on March 31 in the second calendar year
following the Closing or (ii) the third anniversary of the Closing. The
Company's obligation to indemnify the LEVCO Stockholders generally remains in
effect up to the period ending March 31 in the second calendar year following
the Closing. The LEVCO Stockholders are required to deposit Company Common Stock
having a value, at a deemed price of $15.80 per share, equal to 50% of the
Merger Value (as hereinafter defined) into an escrow account for a period of
three years (during which time the LEVCO Stockholders may vote, and will receive
any distributions with respect to, such deposited securities) to be used to
compensate the Company Indemnified Parties for any Losses. Shares held in the
escrow account will be valued at $15.80 per share for the purpose of satisfying
any Loss.
The "Merger Value" is a dollar amount equal to $115 million plus or minus
the aggregate dollar amount of the Purchase Price Adjustments.
Termination of the Merger Agreement. The Merger Agreement may be terminated
prior to the Closing by either the Company or LEVCO (i) in the event of a breach
by the other of its representations under the Merger Agreement where such breach
would be deemed to have a material adverse effect, (ii) in the event of a breach
of any material covenant of the other contained in the Merger Agreement which
breach is not curable or, if curable, has not been cured within 30 days after
notice, (iii) upon the mutual written consent of the parties, (iv) if the
Closing does not occur on or before September 30, 1996, (v) if certain
governmental, board of directors and shareholder approvals (including approval
of the Merger Conditions) are not obtained, (vi) if as of the Closing, consents
appointing Management Subsidiary as investment adviser have not been signed with
respect to at least 75% of the dollar amount of the Base Assets under Management
of LEVCO and the LEVCO Partnerships as of November 16, 1995, (vii) if the Board
of Directors approves any proposal or offer with respect to the purchase by the
Company of a substantial portion of the equity securities or assets of, or a
merger, consolidation or similar transaction involving, an investment adviser
registered under the Advisers Act (other than LEVCO) or (viii) if the Board of
Directors of the Company (a) is unable to recommend approval by shareholders of
(i) the Merger Agreement and all transactions contemplated thereby or (ii) the
election of Mr. Levin, Ms. Sarnell and Mr. Kigner to the Board or (b) at any
time prior to the Closing the Board of Directors shall withdraw, modify or
change such recommendation in a manner adverse to LEVCO or the LEVCO
Stockholders. In the event that the Merger Agreement is terminated as set forth
in (viii) above (other than if an event having a material adverse effect on
LEVCO occurred at the time of the Board's failure to make, withdraw, modify or
change such recommendation) the Company will be required to pay LEVCO a fee of
$1,150,000 plus LEVCO's out-of-pocket expenses up to a maximum amount of
$500,000. In addition, the Merger Agreement may be terminated by LEVCO prior to
the Closing if the Company undertakes certain actions regarding its business or
if certain changes occur with respect to the ownership of the Company.
The Merger Agreement may also be terminated prior to the Closing by LEVCO
(i) if the Company takes certain actions without the consent of Mr. Levin, as
representative of the LEVCO Stockholders, including issuing Company Common
Stock, issuing or selling any debt securities, merging or consolidating with
another entity, acquiring all or substantially all of the assets of, or a
controlling interest in, any entity (other than by means of a private placement
transaction consistent with past practice) or altering its corporate structure
or (ii) if any person or
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group acquires beneficial ownership of more than 25% of the Company Common Stock
or has commenced a tender or exchange offer for such Company Common Stock (and
such tender or exchange offer has not been withdrawn or terminated).
Exemptive Application. In connection with the Merger, the Company filed
with the Commission an application requesting exemptive relief under certain
provisions of the Investment Company Act. Among other things, the application
requested exemptive relief under (i) Section 12(d)(3) of the Investment Company
Act to enable the Company, as a registered investment company, to acquire a
registered investment adviser and (ii) Section 17(d) and Rule 17d-1 thereunder
to permit the Company to establish the Bonus Plan on behalf of the Levin
Companies. The Commission granted all of the relief requested by the Company
pursuant to an order issued May 10, 1996, subject to the conditions described
under "--Background of the Merger." The parties are prepared to comply with
these conditions, and the Company does not believe that compliance with these
conditions will detract, in any material respect, from the benefits that the
Company expects to realize from the Merger.
Employment Agreements. Pursuant to the Merger Agreement, Mr. Levin will
enter into a five-year employment contract with the Company (as President and
Chief Executive Officer) and with Management Subsidiary (as President). In
addition, each of Ms. Sarnell and Mr. Kigner will enter into five-year
employment agreements with Management Subsidiary. Each of the employment
agreements contain confidentiality and noncompetition provisions. Each of the
agreements also contains provisions regarding termination and arbitration of
disputes under the agreement and establishing alternative compensation
arrangements if the Bonus Plan is not approved by shareholders of the Company.
Directors and Officers of Management Subsidiary and New LEVCO. Upon the
consummation of the Merger, Mr. Gorter, Mr. Levin, Ms. Sarnell, Mr. Kigner, Mr.
Carhart and another director or officer of the Company will constitute the board
of directors of New LEVCO and Management Subsidiary. The officers of Management
Subsidiary will be named by the board of Management Subsidiary and are expected
to include current officers and directors of the Company and LEVCO. Pursuant to
the employment agreements to be entered into at the Closing and a management
contract to be entered into between Management Subsidiary and New LEVCO, Mr.
Levin will serve as President and Chief Executive Officer of the Company and as
President of Management Subsidiary and New LEVCO. Ms. Sarnell will serve as
Executive Vice President, Mr. Kigner will serve as Executive Vice President and
Mr. Carhart will serve as Vice President, respectively, of New LEVCO and
Management Subsidiary. Management Subsidiary's Certificate of Incorporation and
Bylaws immediately prior to the consummation of the Merger will be its
Certificate of Incorporation and Bylaws as the surviving corporation in the
Merger.
Registration Rights Agreement. Pursuant to the registration rights
agreement attached as an exhibit to the Merger Agreement (the "Registration
Rights Agreement"), Mr. Levin has the right to demand, on no more than three
occasions, registration of the shares of Company Common Stock received by him
under the Merger Agreement (a "Demand Registration"). Under the Registration
Rights Agreement, Mr. Levin may not request a Demand Registration until 365 days
from the Closing, and the Company need not effect more than one Demand
Registration during any 365 day period. If Mr. Levin requests a Demand
Registration, the other LEVCO Stockholders may request that the Company include
in such registration the shares of Company Common Stock which they received
under the Merger Agreement (such shares, together with Mr. Levin's, shall
hereinafter be referred to as the "Registrable Shares"). Each of the LEVCO
Stockholders may request registration with respect to the first two Demand
Registrations of up to one-third of his or her Registrable Shares and with
respect to the third Demand Registration of all of such shares; however, such
requests are subject to certain "cut-back" limitations, pursuant to which the
number of Registrable Shares to be included in a Demand Registration may be
reduced by an amount to be determined by the managing underwriter or
underwriters, if any, for such registration. The Company will bear the expenses
of registration, other than underwriting discounts and commissions, and the
LEVCO Stockholders' legal and accounting expenses, for the first two Demand
Registrations. With respect to the third Demand Registration, the LEVCO
Stockholders will bear the expenses of registration, other than the Company's
legal and accounting expenses. Each of the LEVCO Stockholders also has the right
to "piggyback" on certain Company-initiated offerings, if any, and to include
such number of Registrable Shares in such offering as he or she may request,
subject to cut-back limitations.
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CERTAIN EFFECTS OF THE PROPOSED TRANSACTIONS, INCLUDING DILUTION
As of February 29, 1996, the Company was not aware of any person who
beneficially owned more than 5% of the Company Common Stock. Following the
completion of the transactions set forth in the Merger Agreement and subject to
the Purchase Price Adjustments, the LEVCO Stockholders collectively will own up
to approximately 16% of the outstanding Company Common Stock. Based on the
assumptions used in the Unaudited Pro Forma Financial Statements included
herein, shareholders would have incurred dilution in the net asset value of
their shares of Company Common Stock of $0.84 per share as of December 31, 1995,
and the voting power of each currently outstanding share of Company Common Stock
will be reduced because the total number of shares of Company Common Stock
outstanding will be increased. The amount of dilution actually incurred will not
be known until the Merger is consummated. See "COMPARATIVE PER SHARE DATA."
Approval of the Merger by the affirmative vote of a majority of the
outstanding shares of Company Common Stock fulfills the conditions under Section
23(b) of the Investment Company Act which otherwise prohibit the sale by a
closed-end investment company of its common stock at a price below its current
net asset value.
HSR ACT NOTIFICATION
Pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the " HSR Act") and the rules promulgated thereunder, on April 26, 1996
the Company and LEVCO furnished the required notification of the Merger to the
Federal Trade Commission and the Antitrust Division of the Department of
Justice. The waiting period under the HSR Act is expected to expire on May 26,
1996.
ACCOUNTING TREATMENT
New LEVCO will be carried on the books of the Company as an investment. The
Company will determine the cost of the acquisition in accordance with generally
accepted accounting principles. The Company's investment will be carried on the
books of the Company at a fair value as determined by the Board of Directors.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Company has been advised by Bell Boyd that the two paragraphs
immediately following set forth the material federal income tax consequences of
the Merger to the Company and Management Subsidiary. No ruling is being sought
from the Internal Revenue Service concerning the tax treatment of the Merger.
The Merger will qualify as a reorganization within the meaning of Section
368 of the Code. Neither the Company nor Management Subsidiary will recognize
gain or loss as a result of the Merger of LEVCO into Management Subsidiary of
the transfer by the Company or Management Subsidiary of cash and shares of
Company Common Stock to the LEVCO Stockholders in exchange for all of the
outstanding LEVCO Common Stock.
The basis of the assets of LEVCO in the hands of Management Subsidiary will
be the same as the basis of such assets in the hands of LEVCO immediately
before the Merger. The holding period of the assets of LEVCO in the hands of
Management Subsidiary will include the period such assets were held by LEVCO.
The basis to the Company of its stock in Management Subsidiary will be the
amount of cash and the adjusted basis of other property contributed by the
Company to Management Subsidiary, increased by the basis of the assets of LEVCO
in the hands of Management Subsidiary and reduced by the liabilities of LEVCO
that are assumed by Management Subsidiary.
The treatment of the Merger as a reorganization for purposes of Section 368
of the Code will cause the Company to have a basis in the common stock in
Management Subsidiary, as described in the preceding paragraph, which is
significantly less than the Merger Consideration. At this time it is estimated
that the basis to the Company of the common stock in Management Subsidiary after
the Merger will not exceed $5 million. The difference between the Company's
basis in its common stock in Management Subsidiary and the fair market value of
such common stock represents unrealized gain for federal income tax purposes,
which may eventually be recognized, in part or in whole, upon a taxable sale or
exchange by the Company of such common stock, and taxed to the
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shareholders of the Company in accordance with the rules applicable to regulated
investment companies. Even if the value of Management Subsidiary decreased, it
is likely that a significant amount of unrealized gain would remain with respect
to the common stock in Management subsidiary held by the Company.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
IT IS BASED ON EXISTING PROVISIONS OF THE CODE, TREASURY REGULATIONS PROMULGATED
THEREUNDER AND ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING
ARE SUBJECT TO CHANGE, WHICH COULD BE RETROACTIVE AND WHICH COULD AFFECT TAX
TREATMENT OF THE MERGER AND THE CONTINUING VALIDITY OF THIS DISCUSSION. NO
INFORMATION IS PROVIDED IN THIS PROXY STATEMENT WITH RESPECT TO THE TAX
CONSEQUENCES, IF ANY, OF THE MERGER UNDER APPLICABLE FOREIGN, STATE AND LOCAL
LAWS.
THE COMPANY
GENERAL
The Company is a non-diversified management investment company of a type
commonly called a closed-end fund. The Company does not attempt to reduce risk
by diversifying its investments. Since its inception, the Company has been
internally managed by its officers under the supervision of the Board of
Directors, without an investment adviser.
The business of the Company was started in 1891. The present Company was
incorporated under the laws of Delaware in 1954. The Company conducted business
as an investment banker and a broker-dealer in securities until 1960, when it
became a private investment company. The Company has been registered since 1970
as an investment company under the Investment Company Act.
MANAGEMENT OF THE COMPANY'S INVESTMENT PORTFOLIO
The Company's principal business is the ownership and management of its
investment portfolio consisting predominantly of equity securities, both
publicly-traded and privately-held. The Company's investment portfolio is
ordinarily substantially fully invested in common stocks and other
equity-related securities such as stock index futures and debt securities
convertible into, or (in the case of private placement investments) accompanied
by options or warrants to purchase, equity securities. For internal management
purposes, the Company divides its investment portfolio into three segments:
publicly-traded securities; securities acquired in private placements, which
sometimes include companies controlled by the Company; and Consolidated-Tomoka
Land Co. ("CTO"), a majority-owned subsidiary of the Company. The Company's
total return for the fiscal year ended December 31, 1995 was 36.2%. The
Company's average annual compounded total return for the 3-, 5- and 10-year
periods ended December 31, 1995 was 14.8%, 15.4% and 10.8%, respectively, and
its total return for the quarter ended March 31, 1996 was 5.6%.
The Company's total return calculation assumes monthly compounding of total
net assets, with purchases and sales of portfolio securities assumed to occur at
mid-month. Dividend income is earned on the ex-date and interest income is
accrued monthly. Calculations reflect adjustments for capital gain
distributions, treasury stock purchases and taxes paid by the Company in years
when a portion of net realized capital gain was retained, but before deduction
of expenses. Past performance is not indicative of future results.
Publicly-Traded Portfolio. The Company's investments in publicly-traded
equity securities emphasize high quality, long-term holdings which are aligned
with secular trends that management of the Company considers favorable. In
selecting publicly-traded equities, management looks for companies with
fundamentals, including sales and earnings growth that exceed market averages,
profitability, balance sheet strength and above average valuation as measured by
price relative to the discounted present value of future earnings and cash flow.
The Company does not invest in publicly-traded debt securities that are not part
of an equity-based investment.
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The average holding period for a publicly-traded investment is intended to
be three to five years, but there is no limitation on the length of time a
particular security is held and actual holding periods vary greatly with
individual holdings. As of March 31, 1996, the Company's publicly-traded
portfolio was comprised of equity securities of 48 issuers, having a total
market value of $462 million and representing 73.4% of the Company's total
investment portfolio. For the fiscal year ended December 31, 1995, the Company's
public portfolio had a total return of 38.2%. The average annual compounded
total return for the Company's public portfolio for the 3-, 5- and 10-year
periods ended December 31, 1995 was 14.1%, 17.1% and 13.1%, respectively, and
its total return for the quarter ended March 31, 1996 is 6.2%
Private Placement Portfolio. The Company acquires private placement
securities directly from issuing companies, under negotiated terms and
conditions. Typically, the Company invests $8 to $10 million per transaction,
although the Company may make larger or smaller investments, in established
companies with strong businesses, proven managements and positive cash flows.
Private placement investments generally consist of a "package" of securities in
a single issuer or in related issuers (for example, in a holding company and in
its operating subsidiary), consisting of an equity component (straight equity
securities, debt securities convertible into equity securities, or options or
warrants to purchase equity securities) and a subordinated debt component,
which the Company considers an equity-related investment.
The average holding period for a private placement investment, like that of
a publicly-traded investment, is intended to be three to five years, but there
is no limitation on the length of time a particular security is held and actual
holding periods vary greatly with individual holdings. As of March 31, 1996, the
Company's private placement portfolio was comprised of equity and equity-related
securities of 10 issuers, having a total market value of $75.7 million and
representing 12.0% of the Company's total investment portfolio. For the fiscal
year ended December 31, 1995, the private portfolio had a total return of 23.9%.
The average annual compounded total return for the 3-, 5- and 10-year periods
ended December 31, 1995 and for the quarter ended March 31, 1996 was 21.2%,
17.1%, 8.6% and 0.8%, respectively.
CTO. The Company owns 79.9% of the outstanding common stock of CTO, which
is listed on the American Stock Exchange. CTO has two primary operating
businesses, citrus production and real estate development. CTO owns
approximately 31,000 acres of land in central Florida and has full and
fractional interests in subsurface mineral rights covering 562,000 acres in
Florida. CTO's remaining operations consist almost entirely of income
properties. With respect to these remaining operations, CTO currently is
implementing exit strategies to dispose of the operations in an orderly manner.
Revenue sources include land development and sales, citrus productions, property
leasing, mineral rights and timber.
As of March 31, 1996, the Company's investment in CTO had a value of $88.1
million and represented 14.0% of the Company's total investment portfolio. For
the fiscal year ended December 31, 1995, the Company's CTO holdings had a total
rate of return of 45.2%. The average annual compounded total return for the
Company's CTO holdings for the 3-, 5- and 10-year periods ended December 31,
1995 was 13.2%, 11.4% and 4.8%, respectively, and for the quarter ended March
31, 1996 was 5.2%.
THIRD-PARTY INVESTMENT MANAGEMENT SERVICES
In August 1994, the Company registered as an investment adviser under the
Advisers Act and in applicable states, and, since registering, has actively
solicited outside investment management business. As of the Record Date, the
Company was not providing investment management services to third-party
accounts and except as set forth below, does not anticipate actively soliciting
such business after the consummation of the Merger.
The Company expects to maintain its registration as an investment adviser,
at least initially, after the consummation of the Merger. As long as the Company
is registered as an investment adviser, the Company may manage certain third-
party advisory accounts but only to the extent that income earned by the Company
does not exceed 10% of the Company's gross income (in order to maintain the
Company's status as a regulated investment company under the Code). New LEVCO
will not be subject to this 10% limitation.
33
<PAGE>
INVESTMENT STRATEGY
The Company's current investment strategy involves the application of
fundamental valuation criteria to analyze the investment potential of companies
with publicly-traded equity securities. These fundamentals include sales and
earnings growth that exceed market averages, profitability, balance sheet
strength and above average valuation as measured by price relative to the
discounted present value of future earnings and cash flow. The Company
emphasizes investment in high quality, long-term holdings which are aligned with
secular trends that management of the Company considers favorable. The Company's
investment philosophy emphasizes investing primarily for capital appreciation,
and secondarily for income consistent with capital appreciation. Consequently, a
substantial portion of assets may be committed to a relatively small number of
equity and equity-related securities.
COMPETITION IN THE INVESTMENT MANAGEMENT BUSINESS
The investment management business is highly competitive. The Company
believes that the most important factors affecting its ability to attract client
assets are the abilities, performance records and reputations of its investment
managers and the ability to hire and retain key investment managers. The
Company's ability to obtain and retain client assets could be adversely affected
if the Company underperforms the market or if key investment managers leave the
Company. The Company's ability to compete with other investment management firms
is also dependent, in part, on the relative attractiveness of its investment
philosophies and methods under prevailing market conditions. The absence of
significant barriers to entry by new investment management firms increases
competitive pressure.
GOVERNMENT REGULATION
Virtually all aspects of the Company's business are subject to various
federal and state laws and regulations. The Company is a registered investment
company and is subject to the provisions of the Investment Company Act and the
rules and regulations thereunder. The Company is also registered as an
investment adviser under the Advisers Act and is registered under applicable
state securities laws. In addition, the Company may be subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and to regulations
promulgated thereunder, insofar as it acts as "fiduciary" under ERISA with
respect to future third-party clients, if any.
The foregoing laws and regulations generally grant supervisory agencies and
bodies broad administrative powers, including the power to limit or restrict the
Company from conducting its business in the event that it fails to comply with
such laws and regulations. Possible sanctions that may be imposed in the event
of such noncompliance include the suspension of individual Company employees,
limitations on the Company's business activities for specific periods of time,
revocation of the Company's registration as an investment adviser, and other
censures and fines. Changes in these laws or regulations could have a material
adverse impact on the profitability and mode of operations of the Company.
As a registered investment company and investment adviser, the Company has
established internal policies with respect to its officers, directors and
employees' ownership of securities which are also held in the Company's
portfolio or in third-party accounts. These policies generally require officers,
directors and employees to report their securities transactions and restrict
certain transactions so as to minimize possible conflicts of interest.
EMPLOYEES
At March 31, 1996, the Company had 13 salaried employees including
executive officers. The Company's 5 investment professionals have more than 60
years of collective experience in investment management, with an average of 12
years in the industry and 7 years at the Company.
Currently, Steven C. Carhart, Vice President of the Company, is principally
responsible for managing the Company's publicly-traded portfolio. Mr. Carhart
joined the Company in September 1991. The Company's private placement portfolio
is managed by Scott E. Smith, Vice President of the Company. For a further
description of the employment history of the Company's investment professionals,
see "EXECUTIVE OFFICERS."
34
<PAGE>
The Company considers its relationships with its employees to be excellent.
MANAGEMENT SUBSIDIARY
Management Subsidiary is a wholly-owned subsidiary of the Company. The
Company formed Management Subsidiary under the name JALC Acquisition Corp. to
serve as a vehicle for the acquisition of LEVCO. Prior to the consummation of
the Merger, Management Subsidiary has had and will have (other than for certain
exceptions contemplated by the Merger Agreement) no operations other than its
organization. See "THE MERGER--Terms of the Merger."
THE EFFECT OF THE MERGER
Upon consummation of the Merger, New LEVCO, as an indirect wholly-owned
subsidiary of the Company, will conduct outside investment management business
under the name "John A. Levin & Co., Inc." substantially in the same manner as
LEVCO's advisory business currently is conducted. For a further discussion of
the structure of the Company (including the Levin Companies) after the Merger,
see "THE MERGER--Structure of the Company After the Merger." Subject to receipt
of the approval of LEVCO's advisory clients, New LEVCO will manage all of
LEVCO's accounts existing at the time of the Merger. In addition, New LEVCO
will manage all accounts generated by New LEVCO personnel thereafter. New
LEVCO is expected to utilize LEVCO's current personnel, including Mr. Levin,
Ms. Sarnell and Mr. Kigner, who will enter into employment agreements with
Management Subsidiary (and with the Company, in the case of Mr. Levin). In
turn, Management Subsidiary will provide the services of its employees to New
LEVCO pursuant to a management contract. Mr. Levin will serve as President and
Chief Executive Officer of the Company and as President of New LEVCO and
Management Subsidiary, Ms. Sarnell will serve as Executive Vice President, Mr.
Kigner will serve as Executive Vice President, Mr. Carhart will serve as Vice
President, respectively, of New LEVCO and Management Subsidiary. See "THE
MERGER--Terms of the Merger--Employment Agreements and Directors and Officers of
Management Subsidiary and New LEVCO."
Subject to shareholder approval of the Management Contract and immediately
after the consummation of the Merger, the Company will "externalize" the
management of its portfolio of publicly-traded securities to New LEVCO. In
connection with the transfer of portfolio management responsibility to New
LEVCO, the Company expects certain of these employees to terminate their
employment with the Company and become employees of the Levin Companies. For a
further discussion of the terms of the Management Contract and the transfer of
responsibility for managing the publicly-traded portfolio of the Company, see
"APPROVAL OF PORTFOLIO MANAGEMENT CONTRACT."
35
<PAGE>
STRUCTURE OF THE COMPANY AFTER THE MERGER
Immediately after the consummation of the Merger, Management Subsidiary
will (i) contribute to New LEVCO (a) among other things, all of its investment
advisory contracts and (b) all of the outstanding capital stock of each of G.P.
Subsidiary and Broker Subsidiary and (ii) change its name to "Levin Management
Co., Inc.". Management Subsidiary will provide management and administrative
services to the Levin Companies. The Company will then have the following
corporate structure (excluding the Company's other investments):
________________
| The Company |
|________________|
|
|________ 100% stock ownership
|
_______|________
| Management |
| Subsidiary |
|________________|
|
|________ 100% stock ownership
|
_______|________
| New LEVCO |
|________________|
|
|________ 100% stock ownership
|
_____________________ | ____________________
| G. P. Subsidiary |____________|_________| Broker Subsidiary |
|_____________________| |____________________|
|
|____________ general partner, LEVCO Partnerships
|
_____________|__________________________________
| | | | |
__|__ __|__ __|__ __|__ __|__
| LP | | LP | | LP | | LP | | LP |
|_____| |_____| |_____| |_____| |_____|
36
<PAGE>
LEVCO
GENERAL
LEVCO was formed as a Delaware corporation in 1982. LEVCO is a New
York-based independent investment management corporation. LEVCO had
approximately $5.8 billion in total assets under management as of March 31,
1996, including the assets of the LEVCO Partnerships. LEVCO specializes in
managing equity portfolios for taxable and tax-exempt institutional and
individual investors primarily within the United States. LEVCO's clients include
individuals and their related trusts and charitable organizations; university
and college endowments and foundations; and corporate and public pension and
profit-sharing funds. LEVCO's composite return for the fiscal year ended
December 31, 1995 was approximately 32.1% (gross of fees) and approximately
31.3% (net of fees). LEVCO's composite average annual return (gross of fees) for
the 3-, 5- and 10-year periods ended December 31, 1995 and for the quarter ended
March 31, 1996 was 15.2%, 16.9%, 16.5% and 8.1%, respectively. LEVCO's composite
average annual return (net of fees) for the 3-, 5- and 10-year periods ended
December 31, 1995 and for the quarter ended March 31, 1996 was 14.5%, 16.2%,
15.6% and 7.9%, respectively.
All LEVCO accounts managed on a fully discretionary basis, including
taxable and tax-exempt accounts (with certain exceptions), are included in the
composite. LEVCO computes the performance rate of each eligible account on a
quarterly basis using the BAI method of performance calculation. The composite
performance for each quarter is capital weighted and includes the reinvestment
of dividends and capital gains. Gross of fees performance is net of broker
commissions and expenses related to trading. Net of fees performance is reduced
by the investment management fees. Past performance is not indicative of future
results. A report regarding the audited rates of return for the periods ended
December 31, 1986 through December 31, 1995 including more information about the
accounts not included in the composite and the method of calculation of the
rates of return presented, is attached as Appendix G. Rates of return for the
quarter ended March 31, 1996 are unaudited.
LEVCO also serves as a sub-adviser with respect to all or part of the
portfolios of two registered open-end investment companies. In addition, LEVCO
and/or its employees and affiliates serve as a general partner to each of the
LEVCO Partnerships, each of which is a limited partnership. LEVCO or its
affiliates also serve as the management company for certain of the LEVCO
Partnerships. LEVCO also executes brokerage transactions for certain of its
clients.
LEVCO's assets under management have experienced strong growth since
LEVCO's inception. This growth has been driven by successfully maintaining a
stable client base and attracting new clients, as well as through appreciation
of assets under management. The table below sets forth the assets under
management of LEVCO at the dates indicated:
<TABLE>
<CAPTION>
Assets Under Management (in millions)
-------------------------------------
At December 31,
----------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Advisory Accounts
Non-Institutional
(individuals, trusts,
IRAs)............................. $ 892 $ 624 $ 551 $ 379 $ 398
Institutional....................... 4,193 2,941 2,810 2,023 1,646
LEVCO Partnerships.................. 302 250 228 207 190
------ ------ ------ ------ ------
TOTAL............................... $5,387 $3,815 $3,589 $2,609 $2,234
====== ====== ====== ====== ======
</TABLE>
37
<PAGE>
The table below sets forth certain account information of LEVCO (excluding
the limited partners in the LEVCO Partnerships) for the periods indicated:
<TABLE>
<CAPTION>
Account Information
-------------------
Year Ended December 31,
----------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Account Data:
Total Accounts......... 522 455 357 273 225
Account Activity Data:
New Accounts........... 95 118 98 57 63
Terminated Accounts.... (28) (20) (14) (9) (7)
---- ---- ---- ---- ----
Net New Accounts..... 67 98 84 48 56
==== ==== ==== ==== ====
</TABLE>
The revenues of LEVCO consist principally of investment advisory fees based
on the value of assets under management from both separately managed accounts
and the LEVCO Partnerships, as well as incentive allocations from the LEVCO
Partnerships and certain managed accounts. The table below sets forth the
investment management and other revenues of LEVCO for the periods indicated:
<TABLE>
<CAPTION>
Management Fees and Other Revenues (in thousands)
-------------------------------------------------
Year Ended December 31,
-------------------------------------------------
1995 1994 1993 1992 1991/(a)/
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Management Fees:
Non-Institutional
(individuals, trusts,
IRAs)................. $ 5,205 $ 3,750 $ 2,832 $ 1,823 $ 1,777
Institutional.......... 16,791 12,625 11,117 8,351 4,874
LEVCO Partnerships..... 1,884 1,619 1,639 1,835 1,635
Incentive Allocations
(including LEVCO
Partnerships)......... 1,877 2,210 1,385 684 475
Commission Income........ 1,566 1,696 1,194 1,222 1,314
Interest and Dividends... 244 113 53 93 105
Other.................... 59 119 82 100 82
------- ------- ------- ------- -------
TOTAL................ $27,626 $22,132 $18,302 $14,108 $10,262
======= ======= ======= ======= =======
</TABLE>
(a) Reclassified to conform with current year.
LEVCO PARTNERSHIPS; BROKER SUBSIDIARY
LEVCO, the LEVCO Stockholders, corporations owned by one or more of the
LEVCO Stockholders (or trusts for the benefit of their families), or
partnerships in which one or more LEVCO Stockholders (or trusts for the benefit
of their families) are partners are currently general partners of the LEVCO
Partnerships. In addition, LEVCO, or partnerships in which LEVCO is a general
partner, currently serve as the management company for certain of the LEVCO
Partnerships. Prior to consummation of the Merger (in transactions to which the
Company will not be a party), G.P. Subsidiary will be admitted as a general
partner of each LEVCO Partnership and will contribute to each partnership the
minimum amount required pursuant to Internal Revenue Service guidelines. The
present general partners will then withdraw (and in connection with such
withdrawal, will, to the extent permitted under applicable law, invest, directly
or indirectly, as limited partners in each of the LEVCO Partnerships) so that,
at
38
<PAGE>
the time of the Merger, the sole general partner of the LEVCO Partnerships will
be G.P. Subsidiary, a newly-organized corporation that will be owned by Mr.
Levin, Ms. Sarnell, Mr. Kigner and Mr. Rango. In addition, the partnership
agreements of those LEVCO Partnerships currently serviced by management
companies will be amended to provide that the management fees currently paid to
such management companies will instead be paid to the general partner, which
will be G.P. Subsidiary. Upon consummation of the Merger, Management Subsidiary
will acquire all of the outstanding common stock of G.P. Subsidiary.
LEVCO provides broker-dealer services to certain accounts. During 1995,
LEVCO's broker-dealer business generated approximately $1.2 million in net
revenue. Prior to the consummation of the transactions contemplated by the
Merger Agreement, LEVCO will cause all of the assets of LEVCO relating to its
broker-dealer business to be contributed to Broker Subsidiary.
CLIENTS
LEVCO's assets under management are segmented into institutional accounts,
individual accounts and sub-advised mutual funds.
Non-Institutional Accounts. With approximately $1,189 billion of managed
assets, including individual assets invested in the LEVCO Partnerships, as of
March 31, 1996, individual accounts currently represent 20.5% of LEVCO's total
assets under management. Individual accounts at LEVCO are structured as pure
equity portfolios that adhere to LEVCO's specialized investment philosophy and
process. LEVCO's current client base represents more than 500 accounts which had
an average value at March 31, 1996 of approximately $2 million.
Institutional Accounts. Institutional accounts (including sub-advised
mutual funds) represented 79.5% of LEVCO's total assets under management at
March 31, 1996 (sub-advised mutual funds represented 6.9% of LEVCO's total
assets under management as of such date). Currently, LEVCO serves as investment
advisor to more than 150 separate institutional accounts from across the United
States. The average institutional account value at March 31, 1996 was
approximately $26 million.
INVESTMENT STRATEGY
LEVCO's investment philosophy and investment process stems from the
following three fundamental investment objectives: (i) the preservation of
capital and the avoidance of major losses; (ii) consistent capital augmentation;
and (iii) achievement of above-average returns. To accomplish these objectives,
LEVCO utilizes a dual approach to equity investment in which its investment
professionals, who are organized into small, flexible groups, (i) identify
unrecognized "investment value" opportunities through fundamental quantitative
research conducted internally and direct contact with the prospective
investment's management and its competitors, suppliers, customers, consultants,
and regulators and (ii) monitor the changing fundamentals and perceptions of
each security to remain fully informed of any material developments. Once
investment values are identified, LEVCO seeks to construct portfolios that
produce above-average returns and reduce volatility and market risk through
diversification, paired holdings and other risk management strategies.
REGULATION
Virtually all aspects of the investment management business of LEVCO are
subject to various federal and state laws and regulations. LEVCO is registered
with the Commission under the Advisers Act and expects to be registered by the
Closing under applicable state securities laws. The Advisers Act imposes
numerous obligations on registered investment advisers including fiduciary,
recordkeeping, operational and disclosure obligations. LEVCO is registered with
the Commodity Futures Trading Commission as a commodity trading advisor and a
commodity pool operator. LEVCO is a member of the National Futures Association.
LEVCO also is registered as a broker-dealer under the Exchange Act and is a
member of the National Association of Securities Dealers, Inc.
LEVCO is subject to ERISA, and to regulations promulgated thereunder,
insofar as it is a "fiduciary" under ERISA with respect to clients.
39
<PAGE>
The foregoing laws and regulations generally grant supervisory agencies and
bodies broad administrative powers, including the power to limit or restrict
LEVCO from conducting its business in the event that it fails to comply with
such laws and regulations. Possible sanctions that may be imposed in the event
of such noncompliance include the suspension of individual LEVCO employees,
limitations on LEVCO's business activities for specified periods of time,
revocation of LEVCO's registration as an investment adviser, and other censures
and fines. Changes in these laws or regulations could have a material adverse
impact on the profitability and mode of operations of LEVCO.
The officers, directors and employees of LEVCO may from time to time own
securities which are also owned by one or more of its clients. LEVCO maintains
internal policies with respect to individual investments by its officers,
directors and employees which require them to report securities transactions and
restrict certain transactions so as to minimize possible conflicts of interest.
CONTRACTUAL ARRANGEMENTS
LEVCO has entered into investment advisory and management agreements with,
or for the benefit of, each of its clients. Fees, other than incentive
allocations from the LEVCO Partnerships and performance-based fees, are based on
a percentage of assets under management and are scaled according to the size of
each account. The contracts generally may be terminated without penalty by
either the client or LEVCO within five business days of the date of acceptance.
Thereafter, either party typically may terminate the agreement at any time upon
written notice. In cases in which LEVCO serves as a sub-adviser for a mutual
fund client, the relevant sub-advisory agreement generally is terminable by the
fund or the investment adviser on relatively short notice.
Investment advisory and management agreements terminate automatically upon
their "assignment" as that term is defined in the Investment Advisers Act and,
for mutual fund clients, the Investment Company Act, but new investment advisory
and management agreements may be approved by the client or, in the case of a
mutual fund client, by the clients' trustees or directors and shareholders. The
term "assignment" is broadly defined and includes direct assignments as well as
assignments that may be deemed to occur upon the transfer, directly or
indirectly, of a controlling interest in the relevant adviser. The Merger
constitutes an "assignment" of LEVCO's investment advisory and management
agreements. Any termination of (or failure to continue) agreements relating to a
material portion of assets under management would have a material adverse effect
on LEVCO.
LEVCO neither receives any fees under a plan of distribution pursuant to
Rule 12b-1 under the Investment Company Act nor serves as a principal
underwriter or distributor for any mutual fund.
In connection with LEVCO's activities as a broker-dealer, LEVCO maintains a
contractual relationship with Lehman for account clearance services. The
agreement is a standard clearing agreement that may be terminated by either
party upon 30 days prior written notice (or immediately for cause) and assigns
account supervisory responsibility to LEVCO and grants Lehman the authority to
execute and report securities transactions for LEVCO's clients.
COMPETITION
The investment management business is highly competitive. LEVCO competes
with a large number of domestic and foreign investment management firms,
commercial banks, insurance companies, broker-dealers and other firms offering
comparable investment services. Some of the financial services companies with
which LEVCO competes have greater resources and assets under management and
administration than LEVCO and offer a broader array of investment products and
services.
LEVCO believes that the most important factors affecting its ability to
attract clients are the abilities, performance records and reputations of its
investment managers, the ability to hire and retain key investment managers, the
attractiveness of investment strategies to potential investors and information
technologies and competitiveness in fees and investor service. LEVCO's ability
to increase and retain client assets could be adversely affected if client
accounts underperform the market or if key investment managers leave LEVCO. The
ability of LEVCO to compete with other investment management firms is also
dependent, in part, on the relative
40
<PAGE>
attractiveness of its investment philosophies and methods under prevailing
market conditions. The absence of significant barriers to entry by new
investment management firms in the institutional managed accounts business
increases competitive pressure.
EMPLOYEES
At March 31, 1996, LEVCO employed 46 persons, including 13 investment
professionals of whom 5 were primarily portfolio managers, 5 were primarily
securities analysts, and 3 were traders or trading associates. The 13 investment
professionals have more than 130 years of collective experience in finance, with
an average of 12 years in the industry, and 6 years at LEVCO. More specifically,
three of the portfolio managers, Mr. Levin, Ms. Sarnell and Mr. Kigner, have
worked as a team for over 11 years, and they have worked as a team for over 9
years with the two other portfolio managers, Mr. Ice and Mr. Rango, and with Mr.
Aron, the head trader, for over 7 years. LEVCO considers its employee relations
to be excellent. See "APPROVAL OF PORTFOLIO MANAGEMENT CONTRACT--LEVCO."
PROPERTIES
LEVCO's executive offices are located at One Rockefeller Plaza, 25th Floor,
New York, New York 10020. LEVCO's offices currently encompass approximately
17,000 square feet and are governed by a 10-year lease, which expires in
September 2004 and has a termination option effective in September 1999. All of
LEVCO's processing and administrative activities are conducted at this location.
LEVCO believes that its facilities are adequate for its current level of
operations, and that it has the ability to expand to additional floors within
the same building if the need arises. LEVCO is currently in discussions with the
landlord under such lease regarding the Merger.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
FOR THE COMPANY
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1995
The following unaudited Pro Forma Statement of Assets and Liabilities and
Statement of Operations (collectively, the "Pro Forma Financial Statements") are
based on historical financial statements of the Company after giving effect to
the following assumptions relating to the Merger: (i) the issuance of
approximately 4.87 million shares of Common Stock and the transfer of $38
million to the LEVCO Stockholders (x) in exchange for 100% of the outstanding
capital stock of LEVCO and (y) to satisfy certain other cash payments required
by the Merger Agreement, and the issuance of notes by Management Subsidiary to
the Company in the aggregate principal amount of $60 million; (ii) a $38 million
bank borrowing by the Company contemplated in connection with the Merger; (iii)
interest income on the aggregate $60 million notes payable from Management
Subsidiary to the Company and interest expense on the Company's $38 million bank
borrowing; (iv) the inclusion of the New LEVCO investment as an additional
holding in portfolio securities; and (v) the management by New LEVCO of the
public portfolio of the Company, all as described in the Notes to the Pro Forma
Financial Information. The number of shares of Company Common Stock to be issued
in the Merger as set forth above is based on the assumptions that (i) such
number of shares will be reduced on account of Purchase Price Adjustments in an
aggregate amount of $3 million for the minimum general partner capital
contribution required to be made by G.P. Subsidiary with respect to the LEVCO
Partnerships under applicable Internal Revenue Service guidelines and for
certain transaction-related expenses of the LEVCO Stockholders and (ii) no other
Purchase Price Adjustments will be required. Also for purposes of the foregoing,
the amount of cash includes the $35 million in cash payable in the Merger plus
the $3 million of general partner capital contributions and transaction-related
expenses to be paid by the Company for which a reduction will be made in the
amount of Company Common Stock being issued. The actual amount of any Purchase
Price Adjustments will not be determined until immediately prior to the Closing.
The Pro Forma Financial Statements were prepared as if the transaction had
occurred as of January 1, 1995 for Statement of Operations purposes and as of
December 31, 1995 for Statement of Assets and Liabilities purposes.
41
<PAGE>
The Pro Forma Financial Statements are not necessarily indicative of the
future financial position or future results of operations of the Company after
the Merger, or of the financial position or results of operations of the Company
had the Merger occurred on the dates indicated above or been in effect for the
period presented.
In accordance with generally accepted accounting principles and Article 6
of Regulation S-X, financial statements of an investment company, like the
Company, may not be consolidated with the financial statements of subsidiaries
which are not also investment companies. Because none of the Levin Companies is
an investment company, consolidation of the Levin Companies in the Company's
financial statements is prohibited. Accordingly, the Company will carry its
investment in the Levin Companies at a fair value as determined by its Board of
Directors. The purchase price of LEVCO (exclusive of transaction costs) for
financial reporting purposes is based on the average of the closing market
prices of the Company's Common Stock from the three days before and through the
three days after the Merger and announcement dates, November 17, 1995 and
November 20, 1995, respectively, of the Merger, plus the cash consideration. The
Pro Forma Financial Statements assume no change in the fair value of the
Company's investment in the Levin Companies from its purchase price because the
Company has no basis for determining fair value as of January 1, 1995, and
believes the fair value as of December 31, 1995 would not differ significantly
from the purchase price.
42
<PAGE>
The Pro Forma Adjustments are based upon available information and upon
certain assumptions the Company believes are reasonable. The Pro Forma Financial
Statements and accompanying notes should be read in conjunction with, and are
qualified in their entirety by, the historical financial statements and other
financial information pertaining to the Company, and related notes thereto,
included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
FOR THE COMPANY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
AS OF DECEMBER 31, 1995
-------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS(a) PRO FORMA
---------- -------------- ---------
<S> <C> <C> <C>
ASSETS
INVESTMENTS, AT VALUE:
Portfolio securities
Unaffiliated issuers (cost $343,020)..................... $497,029 $ -- $497,029
Controlled affiliates (cost $25,714; $145,701)........... 96,333 118,487 214,820
Money market securities (cost $1,790)...................... 1,790 -- 1,790
-------- -------- --------
TOTAL INVESTMENTS (COST $370,525; $491,655).............. 595,152 118,487 713,639
CASH....................................................... 439 -- 439
RECEIVABLE FOR SECURITIES SOLD............................. 3,436 -- 3,436
DIVIDENDS AND INTEREST RECEIVABLE.......................... 1,095 -- 1,095
OTHER ASSETS............................................... 972 (464) 508
-------- -------- --------
TOTAL ASSETS............................................. 601,094 118,023 719,117
-------- -------- --------
LIABILITIES
NOTE PAYABLE TO BANK....................................... -- 38,000 38,000
PAYABLE FOR SECURITIES PURCHASED........................... 1,305 -- 1,305
ACCOUNTS PAYABLE & ACCRUED LIABILITIES..................... 607 1,436 2,043
-------- -------- --------
TOTAL LIABILITIES........................................ 1,912 39,436 41,348
-------- -------- --------
NET ASSETS $599,182 $ 78,587 $677,769
-------- -------- --------
ANALYSIS OF NET ASSETS
COMMON STOCK, $1 PAR VALUE, AUTHORIZED - 40,000 SHARES;
ISSUED AND OUTSTANDING - 27,544 SHARES; 32,417
SHARES.................................................... $ 27,544 $ 4,873 $ 32,417
CAPITAL SURPLUS............................................ 279,579 75,614 355,193
UNDISTRIBUTED NET REALIZED GAIN FROM INVESTMENT
TRANSACTIONS.............................................. 17,944 -- 17,944
OTHER RETAINED EARNINGS.................................... 49,488 -- 49,488
UNREALIZED APPRECIATION OF INVESTMENTS..................... 224,627 (1,900) 222,727
-------- -------- --------
TOTAL NET ASSETS........................................... $599,182 $ 78,587 $677,769
-------- -------- --------
SHARES OUTSTANDING 27,544 32,417
-------- --------
NET ASSET VALUE PER SHARE $21.75 $20.91
-------- --------
</TABLE>
See accompanying notes to Pro Forma Financial Information.
43
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE COMPANY
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995
--------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS(b) PRO FORMA
---------- -------------- ---------
<S> <C> <C> <C>
DIVIDENDS
Unaffiliated issuers.................................. $ 4,468 $ -- $ 4,468
Controlled affiliates................................. 2,250 --(c) 2,250
-------- ------- --------
6,718 -- 6,718
-------- ------- --------
INTEREST
Unaffiliated issuers.................................. 5,982 -- 5,982
Controlled affiliates................................. 840 5,598(d) 6,438
-------- ------- --------
6,822 5,598 12,420
-------- ------- --------
TOTAL INCOME........................................... 13,540 5,598 19,138
-------- ------- --------
EXPENSES
Management fee........................................ -- 1,097(e) 1,097
Interest on note payable to bank...................... -- 2,406(f) 2,406
Investment research................................... 1,894 (1,092)(g) 802
Administration and operations......................... 1,029 (15)(g) 1,014
Rent.................................................. 286 (57)(g) 229
Directors fees and expenses........................... 163 -- 163
Reports to shareholders............................... 185 -- 185
Professional fees..................................... 136 -- 136
Custodian and transfer agent fees..................... 87 -- 87
Taxes other than income............................... 65 -- 65
Other................................................. 276 (18)(g) 258
-------- ------- --------
TOTAL EXPENSES......................................... 4,121 2,321 6,442
-------- ------- --------
NET INVESTMENT INCOME.................................. 9,419 3,277 12,696
-------- ------- --------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS........
Net realized gain on sales of investments in
unaffiliated issuers................................. 41,189 -- 41,189
Net realized gain on financial futures transactions... 1,962 -- 1,962
-------- ------- --------
Net realized gain on sales of investments............. 43,151 -- 43,151
Net change in unrealized appreciation of investments.. 107,071 (1,900)(h) 105,571
-------- ------- --------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS........ 150,222 (1,900) 148,722
-------- ------- --------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS... $159,641 $ 1,777 $161,418
-------- ------- --------
</TABLE>
See Notes to Pro Forma Financial Information
44
<PAGE>
NOTES TO PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
FOR THE COMPANY
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1995
(a) Pro forma adjustments to the Company's Statement of Assets and Liabilities
relating to the Merger have been reflected as if the transaction had been
completed as of December 31, 1995, and are summarized in the following
table and more fully described in the notes thereto:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------------------------------------------------------------
TOTAL
NEW PRO FORMA
FEES(1) DEBT(2) ACQUISITION(3) VALUATION(4) ADJUSTMENTS
-------- ------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
CONTROLLED AFFILIATES....... $ $ $120,387 $(1,900) $118,487
CASH........................ 38,000 (38,000) --
OTHER ASSETS................ 1,436 (1,900) (464)
NOTE PAYABLE TO BANK........ 38,000 38,000
ACCOUNTS PAYABLE &
ACCRUED LIABILITIES..... 1,436 1,436
COMMON STOCK................ 4,873 4,873
CAPITAL SURPLUS............. 75,614 75,614
UNREALIZED APPRECIATION OF
INVESTMENTS............. (1,900) (1,900)
</TABLE>
- --------------
(1) Represents estimated additional transaction costs of $1.44 million to be
incurred by the Company after December 31, 1995 for investment banking,
legal and financial advice and other fees associated with the transaction.
Total fees for such services will be capitalized for financial reporting
purposes and are expected to approximate $1.9 million.
(2) Represents assumed bank borrowing by the Company to finance the cash
portion of the acquisition price. See Pro Forma adjustments to the
Company's Statement of Operations for a discussion of the anticipated
terms of the bank borrowing.
(3) Represents the acquisition of LEVCO by the Company for a total purchase
price of $119.99 million, including transaction costs of approximately
$1.9 million, determined as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 38,000
Value of shares issued 80,487
Fees and expenses incurred in
conjunction with the acquisition 1,900
--------
Total purchase price $120,387
--------
</TABLE>
Shares issued in the transaction were valued at a market price of $16.5156
per share, the average of the closing market prices of the Company's
Common Stock from the three days before and through the three days after
the Merger and announcement dates of the Merger.
(4) For purposes of the Pro Forma Statement of Assets and Liabilities the
assumed transaction date is December 31, 1995. Therefore, at December 31,
1995, for financial reporting purposes, the investment in the Levin
Companies is valued at fair value which approximates its purchase price
for financial reporting purposes before allocation of transaction costs.
(b) The assumed effect of the Merger on the Company's results of operations for
1995 has been reflected in the Pro Forma Statements of Operations as if the
transaction had been completed as of January 1, 1995.
(c) The Pro Forma Statement of Operations assumes no dividend income for 1995
on the Company's investment in the Levin Companies; however, on a
prospective basis, the Company intends to receive dividends on its
investment. Based on LEVCO's audited financial results for 1995, and after
giving effect to certain adjustments relating to the Merger, approximately
$4.2 million would have been available to pay to the Company in 1995 as a
dividend on its investment in the Levin Companies.
(d) Reflects interest income based upon the assumed pro forma aggregate $60
million notes receivable from Management Subsidiary to the Company as of
January 1, 1995. Each note is assumed to carry a variable interest rate
based on LIBOR plus 335 basis points. Pro forma interest income on each
note was calculated on a monthly basis using as a base interest rate
45
<PAGE>
the 30-day LIBOR in effect as of the last day of each month during 1995,
plus 335 basis points. Thirty day LIBOR in effect as of the last day of
each month for the year ended December 31, 1995 ranged from 5.71875% to
6.125%, and was 5.71875% at December 31, 1995. If the December 31, 1995
rate was used as the base interest rate instead of 1995 historical rates,
pro forma interest income for the year would have been $5.4 million. Each
1/8 of 1% change in the base interest rate for the borrowing has a $75,000
effect on annual pro forma interest income.
(e) Represents management fee to be incurred by the Company for New LEVCO to
manage its public portfolio beginning January 1, 1995. Under the assumed
Management Contract with the Company, New LEVCO's management fee will be
.30% of the assets of the Company managed by New LEVCO as of the end of
each month. See Note (g) to the Pro Forma Financial Information for a
discussion of cost savings the Company expects to realize by engaging New
LEVCO to manage its public portfolio.
(f) Reflects interest expense based upon the assumed pro forma $38 million bank
debt of the Company (the "Revolving Credit Facility") as of January 1,
1995. The Revolving Credit Facility is assumed to carry a variable interest
rate based on LIBOR plus 35 basis points. Pro forma interest expense on the
Revolving Credit Facility was calculated on a monthly basis using as a base
interest rate the 30-day LIBOR in effect as of the last day of each month
during 1995, plus 35 basis points. Thirty day LIBOR in effect as of the
last day of each month for the year ended December 31, 1995 ranged from
5.71875% to 6.125%, and was 5.71875% at December 31, 1995. If the December
31, 1995 rate was used as the base interest rate instead of 1995 historical
rates, pro forma interest expense would have been $2.3 million. Each 1/8 of
1% change in the base interest rate for the Revolving Credit Facility has a
$48,000 effect on annual pro forma interest expense.
(g) Represents estimated reduction in operating expenses, including
compensation, professional fees, investment research and price quotation
services, office space and office supplies, the Company expects to realize
as a result of the Merger. See Note (e) to the Pro Forma Financial
Information for a discussion of the assumed management fee the Company
expects to incur by engaging New LEVCO to manage its public portfolio.
(h) The Company will include changes in fair value of the Levin Companies as
Net Change in Unrealized Appreciation of Investments in its Statement of
Operations. However, the Pro Forma Statement of Operations for the year
ended December 31, 1995 is presented giving effect to the Merger as if it
had been consummated on January 1, 1995, and no change in the fair value of
the Company's investment in the Levin Companies is reflected for the year
ended December 31, 1995, i.e., the investment is valued at its purchase
price for financial reporting purposes, before allocation of transaction
costs. However, no acquisition actually took place on January 1, 1995 and,
therefore, no valuation of the investment in the Levin Companies was
available as of January 1, 1995.
(i) In order to better reflect the ongoing results of operations, certain one-
time integration and transition expenses to be incurred in connection with
the Merger relating to personnel of the Company have been excluded. Such
amounts are not expected to be significant.
46
<PAGE>
FINANCIAL HIGHLIGHTS -- THE COMPANY
The following table shows the Company's per share operating performance
data, total investment return, ratios and supplemental data for each year in the
five-year period ended December 31, 1995.
The following information and should be read in conjunction with the
"AUDITED FINANCIAL STATEMENTS--The Company," and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--The Company" which
are included elsewhere in this Proxy Statement.
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................... $ 17.47 $ 20.42 $ 20.82 $ 21.49 $ 18.66
-------- -------- -------- -------- --------
Net investment income............................ .35 0.35 0.48 0.39 0.58
Net realized gain (loss) and change in
unrealized appreciation and
other changes.................................. 5.67 (1.36) 2.51 0.90 4.14
-------- -------- -------- -------- --------
Total from investment operations...................... 6.02 (1.01) 2.99 1.29 4.72
Less distributions:
Dividends from net investment income............. (0.35) (0.35) (0.48) (0.39) (0.58)
Distribution from net realized gain.............. (1.20) (1.46) (1.76) (1.42) (1.15)
-------- -------- -------- -------- --------
Total distributions................................... (1.55) (1.81) (2.24) (1.81) (1.73)
-------- -------- -------- -------- --------
Dilution resulting from:
Reinvestment of capital gain distribution........ (.19) (0.13) (0.16) (0.15) (0.16)
Rights offering (a).............................. -- -- (0.99) -- --
-------- -------- -------- -------- --------
Net asset value, end of year.......................... $ 21.75 $ 17.47 $ 20.42 $ 20.82 $ 21.49
======== ======== ======== ======== ========
Per share market price, end of year................... $ 16.75 $ 13.75 $ 16.75 $ 17.00 $ 17.63
TOTAL INVESTMENT RETURN--
SHAREHOLDER RETURN............................... 33.20% (7.51)% 14.18%(b) 6.51% 34.03%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's)............... $599,182 $461,931 $516,890 $419,814 $417,355
Ratio of expenses to average net assets.......... .78% .75% .83% .76% .84%
Ratio of net investment income to average
net assets..................................... 1.79% 1.38% 1.59% 2.01% 2.53%
Portfolio turnover............................... 35.89% 41.63% 31.63% 28.36% 50.70%
Number of shares outstanding,
end of year (in 000's)......................... 27,544 26,442 25,318 20,165 19,423
</TABLE>
_______________
(a) Effect of the Company's rights offering of shares at a price below net
asset value.
(b) Assumes shareholders exercised all primary rights in rights offering.
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- THE COMPANY
The following information should be read in conjunction with the financial
highlights and the Financial Statements and related notes appearing elsewhere in
this Proxy Statement.
The information and discussion below are based on the historical financial
condition and results of operations for the Company for the years ended December
31, 1995, 1994 and 1993.
INVESTMENT INCOME AND CAPITAL GAINS
The Company's investment portfolio generates investment income and net
realized gains or losses on sales of investments. The Company also records the
net change in unrealized appreciation of its investments. Investment income
represents both dividends and interest from the Company's investments in
affiliated entities (some of which may be controlled by the Company) and
unaffiliated entities. The Company's net gains or losses on the sale of
investments includes gains and losses on sales of investments and financial
futures transactions. The amount of the Company's investment income and gains or
losses on investments depends on the Company's investment portfolios, investment
performance and the changing allocation of assets among the Company's investment
portfolios.
To date, the Company has not provided any investment management services to
third parties.
EXPENSES
Investment research is the Company's largest expense. This expense
primarily includes compensation and benefits of the investment management staff,
quotation services and other research-related services.
Administration and operations includes compensation and benefits of the
administrative and operations staff, corporate insurance and other
administrative expenses.
Rent includes rent payments arising from the Company's office lease.
Reports to shareholders include printing and distribution of annual and
quarterly reports, proxy statements and other shareholder communications.
Directors fees represent fees, including expenses, paid to directors who
were not officers of the Company.
Professional fees primarily include legal and audit fees paid to outside
firms.
Custodian and transfer agent fees include the fees and expenses paid by the
Company to UMB Bank, N.A., which is the custodian of the Company's assets, and
to Harris Bank and Trust Company, the transfer agent for the Company's Common
Stock.
Because the Company has elected to be treated as a regulated investment
company under Subchapter M of the Code, its net income is directly taxable to
its shareholders for federal and state purposes. Consequently, the taxes other
than income provision represents Delaware franchise taxes.
Other operating expenses primarily include distribution charges for
shareholder communications, NYSE listing fees, depreciation and other office
supplies and expenses.
48
<PAGE>
RESULTS OF OPERATIONS
For the Year Ended December 31, 1995 Compared to the Year Ended December
31, 1994.
Investment income for the fiscal year ended December 31, 1995 increased 26%
to $13.54 million from $10.73 million for the fiscal year ended December 31,
1994, primarily from an increase in the average dividend yield of the total
portfolio and an increase in interest income from the private placement
portfolio.
Expenses for the fiscal year ended December 31, 1995 increased 9% to $4.12
million from $3.79 million for the fiscal year ended December 31, 1994,
primarily from increased investment research and administration and operations
expenses resulting from increases in compensation and professional fees.
Overall, expenses as a percentage of average net assets decreased for the fiscal
year ended December 31, 1995 to .69% from .75% for the fiscal year ended
December 31, 1994.
The Company's net investment income for the fiscal year ended December 31,
1995 increased 36% to $9.42 million from $6.93 million for December 31, 1994.
This increase in net investment income was primarily the result of a $2.81
million increase in investment income, offset by a $0.33 million increase in
expenses as noted above.
The Company had net realized gain on investments for the fiscal year ended
December 31, 1995 of $43.15 million compared to $42.73 million for December 31,
1994. The net change in unrealized appreciation on investments represented a
$107.07 million increase for the fiscal year ended December 31, 1995 compared to
a $74.67 million decrease for the fiscal year ended December 31, 1994.
At December 31, 1995, the Company's net assets totaled $599.18 million, a
$137.25 million increase compared to net assets of $461.93 million at December
31, 1994. For 1995, net investment income, realized capital gain and the
increase in unrealized gain totaled $159.64 million compared to a loss of $25.01
million for 1994. The Company's total distributions to shareholders for 1995
were $40.98 million compared to $45.83 million for 1994. Shareholders
reinvesting some or all of their distributions into Company Common Stock
increased the Company's net assets by $18.60 million in 1995.
For the Year Ended December 31, 1994 Compared to the Year Ended December
31, 1993.
Investment income for the fiscal year ended December 31, 1994 decreased 1%
to $10.73 million from $10.83 million for the fiscal year ended December 31,
1993, primarily from increased dividend income from the public portfolio and
CTO, which was approximately offset by decreased interest income from the
private placement portfolio.
Expenses for the fiscal year ended December 31, 1994 increased 2% to $3.79
million from $3.71 million for the fiscal year ended December 31, 1993,
primarily from increased legal expenses and investment research expenses.
Overall, expenses as a percentage of average net assets decreased for the fiscal
year ended December 31, 1994 to .75% from .83% for the fiscal year ended
December 31, 1993.
The Company's net investment income for the fiscal year ended December 31,
1994 decreased 3% to $6.93 million from $7.12 million for December 31, 1993.
The Company had net realized gain on investments for the fiscal year ended
December 31, 1994 of $42.73 million compared to $33.92 million for December 31,
1993. The net change in unrealized appreciation on investments represented a
$74.67 million decrease for the fiscal year ended December 31, 1994 compared to
a $23.01 million increase for the fiscal year ended December 31, 1993.
At December 31, 1994, the Company's net assets totaled $461.93 million
compared to net assets of $516.89 million at December 31, 1993. For 1994 the
Company recorded a net decrease in net assets resulting from operations of
$25.01 million compared to a net increase of $64.05 million for 1993. The
Company's total
49
<PAGE>
distributions to shareholders for 1994 were $45.83 million compared to $53.40
million for 1993. Shareholders reinvesting some or all of their distributions
into Company Common Stock increased the Company's net assets by $15.87 million
in 1994.
SELECTED FINANCIAL DATA -- LEVCO
The following selected historical financial information of LEVCO has been
derived from and should be read in conjunction with the "AUDITED FINANCIAL
STATEMENTS--LEVCO," and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--LEVCO" which are included elsewhere in this
Proxy Statement.
JOHN A. LEVIN & CO., INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................................. $27,626 $22,132 $18,302 $14,108 $10,262
Total expenses................................. 23,460 18,957 18,884 14,023 9,359
Income (loss) before taxes on income........... 4,166 3,175 (582) 84 903
Provision for taxes on income /(a)/............ 461 347 215 193 200
Net income (loss).............................. 3,705 2,828 (797) (109) 703
FINANCIAL POSITION AT END OF YEAR:
Total assets................................... 11,658 13,511 7,787 5,795 5,346
Total liabilities.............................. 1,529 2,887 507 167 885
Total stockholders' equity..................... 10,129 10,624 7,280 5,628 4,461
OTHER STATISTICS:
Assets under management at end of
year (in millions)........................... 5,387 3,815 3,589 2,609 2,234
- -----------------------
</TABLE>
(a) LEVCO has elected to be treated as an S-corporation under the Code and,
therefore, has been subject only to New York state and city taxes for the
years indicated.
LEVCO's audited financial statements for the fiscal year ended December 31,
1995 attached as Appendix F to this Proxy Statement reflect the actual results
of LEVCO's operations during 1995 as a corporation taxed under Subchapter S of
the Code. After the Merger, each of Management Subsidiary and New LEVCO will be
taxed under Subchapter C of the Code. In addition, the compensation and bonus
paid by LEVCO to the LEVCO Stockholders included an element attributable to
their ownership of LEVCO which will not be reflected in their compensation and
bonus from the Levin Companies. The following information illustrates the
estimated impact of the Merger on the results of LEVCO's operations by making
adjustments to LEVCO's actual results for the fiscal year ended December 31,
1995. If the Merger had taken place on January 1, 1995 and LEVCO had operated
as a wholly-owned subsidiary of the Company throughout 1995, LEVCO's operating
results before interest and taxes, after giving effect to the terms of the
Merger (other than the Management Contract), would have been approximately as
shown below:
50
<PAGE>
<TABLE>
<CAPTION>
ACTUAL ADJUSTED
<S> <C> <C>
Total 1995 revenues (actual) $27,626,000 $27,626,000
Partnership income 1,527,000(a)
----------- -----------
Adjusted total revenues 27,626,000 29,153,000
Operating expenses 23,460,000 15,451,000(b)
----------- -----------
Adjusted operating income before
interest and taxes 4,166,000 13,702,000
=========== ===========
</TABLE>
(a) Partnership income consists of incentive allocations paid by each
of the LEVCO Partnerships during the fiscal year ended December 31,
1995 to one or more of the LEVCO Stockholders or related entities
(other than LEVCO), but which will be paid to G.P. Subsidiary after
the Merger.
(b) Represents 53% of adjusted total revenues which, if the Bonus
Plan had been in place throughout the fiscal year ended December 31,
1995, on the terms described under "APPROVAL OF BONUS PLAN--Awards
for a Performance Period", would be available for operating expenses
and for awards under the Bonus Plan.
This information is unaudited and is intended only as an illustration of the
impact of the Merger and the way in which the results of the operations of the
Levin Companies are expected to differ from the results of LEVCO's operations.
This information should not be considered an indication of future results of the
operations of the Levin Companies after the Merger.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- LEVCO
The following information should be read in conjunction with the selected
financial data and the Financial Statements and related notes appearing
elsewhere in this Proxy Statement.
The information and discussion below are based on the financial condition
and results of operations for LEVCO for the years ended December 31, 1995, 1994
and 1993.
RESULTS OF OPERATIONS
For the Year Ended December 31, 1995 Compared to the Year Ended December
31, 1994.
LEVCO derives substantially all of its revenues from fees for providing
investment management services to its individual and institutional clients,
including two registered investment companies for which LEVCO is sub-adviser and
the LEVCO Partnerships. The revenue growth of LEVCO has resulted from increased
assets under management and investment performance (both on a fixed fee
structure and on an incentive basis). These factors are expected to affect the
amount of LEVCO's revenues in the future.
Investment management fees for individual and institutional clients are
calculated primarily as a percentage of assets under management at the quarter-
end and are billed quarterly in arrears. Fees are not payable until services are
rendered. In addition, certain client agreements include performance-base
incentive fees in connection with their investment management fee arrangements.
Performance-based incentive income can cause the revenue of LEVCO to fluctuate
markedly.
Traditionally, only a portion of the incentive reallocation from the LEVCO
Partnerships have been allocated to LEVCO. The incentive reallocation amounts
from the LEVCO Partnerships which were not allocated to LEVCO were allocated to
corporations owned by one or more LEVCO Stockholders (or trusts for the benefit
of their families) or to partnerships in which one or more LEVCO Stockholders
(or trusts for benefit of their families) are partners.
51
<PAGE>
LEVCO's revenues are primarily determined by the amount of assets under
management. In connection with the Merger Agreement, the amount of assets under
management will increase from approximately $5.8 billion to approximately $6.2
billion based on the assets under management as of March 31, 1996 of LEVCO and
the total market value of the Company's publicly traded portfolio as of March
31, 1996. Fluctuations in the amount of assets under management can result from
client decisions to invest or withdraw funds (which, in certain instances, are
due to rebalancing of clients' asset allocations), terminate accounts and from
general market conditions, investment performance and the nature of the
underlying assets under management. For details of LEVCO's assets under
management, see "LEVCO--General."
Revenues for the fiscal year ended December 31, 1995 increased 24.8% to
$27.6 million from $22.1 million. Investment management fees (including
incentive fees/allocations) were responsible for substantially all of the
revenue growth. These fees increased due to an increase in assets under
management (through market appreciation, new accounts and net additional
contributions from existing accounts).
Performance-based incentive fees for the fiscal year ended December 31,
1995 decreased 15.1% to $1.9 million from $2.2 million for the fiscal year ended
December 31, 1994. This decrease in performance-based fee revenue is directly
related to the performance of these accounts not exceeding their benchmarks in
fiscal 1995 as compared to fiscal 1994. These fees represented 6.8% and 10% of
revenues for the fiscal years ended December 31, 1995 and December 31, 1994,
respectively.
In addition to the incentive reallocation income from the LEVCO
Partnerships which was allocated directly to LEVCO, $1.5 million and $.3 million
of incentive reallocation for the fiscal years ended December 31, 1995 and 1994,
respectively, was allocated to corporations owned by one or more LEVCO
Stockholders (or trusts for the benefit of their families) or to partnerships in
which one or more LEVCO Stockholders (or trusts for the benefit of their
families) are partners. These amounts are not reflected in LEVCO's audited
financial statements. Had these amounts been allocated to LEVCO, there would
have been a corresponding increase in LEVCO compensation expense.
Upon consummation of the Merger, it is expected that the total incentive
reallocation from the LEVCO Partnerships, if earned, will be allocated to G.P.
Subsidiary or Management Subsidiary.
LEVCO's largest expense is employee salary and benefits which primarily
include salaries, employee benefits and incentive compensation. Prior to the
consummation of the Merger, incentive compensation consists of profit-sharing
and other incentive awards which are typically based on individual performance
and contribution by employees. Expenses under this informal incentive
compensation plan represented approximately 75% and 70% of total employee salary
and benefits for the fiscal years ended December 31, 1995 and December 31, 1994,
respectively. Incentive compensation increased as a result of the growth in
revenues, related profitability and number of employees.
Commissions and floor brokerage include costs incurred in executing and
clearing securities trades for client accounts at Lehman. The floor brokerage
costs are directly correlated to commission income.
Communications include the costs of telephone, voice-mail, fax, and on-line
computer information services, including Bloomberg, and other trading data
services.
Occupancy and equipment rental primarily includes rent expense arising from
LEVCO's office and equipment leases and the depreciation and amortization of
LEVCO's fixed assets.
Professional fees primarily include legal, consulting and audit fees paid
to outside firms.
Promotional costs include marketing costs, primarily consisting of travel
and entertainment expenses.
Other operating expenses primarily include supplies, portfolio management
system fees, subscriptions and other general administrative expenses.
52
<PAGE>
Operating expenses for the fiscal year ended December 31, 1995 increased
23.7% to $23.5 million from $19 million for the fiscal year ended December 31,
1994, primarily due to increased employee compensation and benefits.
Traditionally, year end bonuses have been based on the firm's profitability and
have been paid pursuant to an informal arrangement. Bonuses for the fiscal year
ended December 31, 1995 increased to $15.2 million from $10.9 million for the
fiscal year ended December 31, 1994. This increase was directly related to the
increase in the Company's income before bonuses and in the number of employees.
The number of employees increased to 44 at December 31, 1995 from 40 at December
31, 1994.
Overall, operating expenses exclusive of bonuses increased 2.7% for the
fiscal year ended December 31, 1995 as compared to the fiscal year ended
December 31, 1994.
Total operating expenses (excluding bonuses) as a percentage of revenues
decreased for the fiscal year ended December 31, 1995 to 30% from 36% for the
fiscal year ended December 31, 1994. The reduction was directly related to the
increase in assets under management without a corresponding increase in
operating overhead expenses. Profits before taxes and bonuses to shareholders
and employees increased to $19.3 million from $14.1 million for the years ended
December 31, 1995 and December 31, 1994, respectively. The 36.9% increase in
this profitability was primarily the result of an increase in revenues from
assets under management without a corresponding increase in operating overhead
expenses.
Because LEVCO has elected to be treated as an S corporation under the Code,
its net income is directly taxable to the LEVCO stockholders for federal and
state purposes. Consequently, the income tax expense represents the current
provision for local (i.e., New York state and city) income taxes. As part of the
Merger, LEVCO will be merged into Management Subsidiary, a C corporation for tax
purposes whose income will be subject to federal and state income taxation which
could potentially reduce New LEVCO net income.
LEVCO's net income for the fiscal year ended December 31, 1995 increased
31% to $3.7 million from $2.8 million for the fiscal year ended December
31,1994. The increase in net income was primarily the result of an increase in
revenues from the increase in assets under management, offset by the
corresponding increase in employee compensation.
RESULTS OF OPERATIONS
For the Year Ended December 31, 1994 Compared to the Year Ended December
31, 1993.
Revenues for the fiscal year ended December 31, 1994 increased 20.9% to
$22.1 million from $18.3 million for the fiscal year ended December 31, 1993.
Investment management fees (including incentive fees/allocations) were
responsible for substantially all of the revenue growth.
Performance-based incentive fees for the fiscal year ended December 31,
1994 increased 59.6% to $2.2 million from $1.4 million. This increase in
incentive fee revenue was due to the performance of certain accounts which
exceeded their benchmarks in fiscal 1994 as compared to fiscal 1993.
Profits before taxes and bonuses to the shareholders and employees
increased to $14.1 million from $11.5 million for the fiscal years ended
December 31, 1994, and December 31, 1993, respectively. The 22.6% increase in
profit before taxes was primarily the result of the increase in assets under
management. Operating expenses for the fiscal year ended December 31, 1994
increased 0.4%. Exclusive of bonuses ($10.9 million and $12.1 million for the
fiscal years ended December 31, 1994 and December 31, 1993, respectively)
operating expenses increased 18.6% during such period. The increase in
operating expenses was due to the increase in the number of employees to 40 at
December 31, 1994 from 32 at December 31, 1993. LEVCO increased its operations
staff to support current and future business growth. In addition, LEVCO
converted its portfolio management system from an external service bureau to an
internally maintained system, incurring non-recurring expenses of $180,000.
Net income for the fiscal year ended December 31, 1994 was approximately
$2.8 million as compared with a loss of $0.8 million for the fiscal year ended
December 31, 1993. Since LEVCO has elected to be treated as an S Corporation
for income tax purposes, income was paid to the shareholder as compensation
rather than as flow
53
<PAGE>
through income from LEVCO. See Note D to the LEVCO Financial Statements attached
as Appendix F. This compensation caused the loss for the fiscal year ended
December 31, 1993.
CAPITAL RESOURCES AND LIQUIDITY
LEVCO's business is not considered to be capital intensive. Historically,
working capital requirements have been satisfied out of operating cash flow, and
such cash flow is expected to continue to serve as the principal source of
LEVCO's working capital for the near future. Excess capital of LEVCO has been
paid as dividends to the LEVCO Stockholders on a periodic basis.
Management anticipates that the factors discussed above will provide LEVCO
with sufficient working capital, based on historical needs and current
operations.
EFFECTS OF CHANGING INTEREST RATES AND INFLATION
LEVCO cannot predict what effect inflation and changing interest rates will
have on the relative attractiveness of its products and assets under management.
However, the general economy, including inflation and interest rates, may have a
significant impact on LEVCO's operations. Although LEVCO does not have a
significant portion of its assets under management in fixed income securities,
fluctuations in inflation resulting in rising interest rates with the attendant
adverse effects on the securities markets may have a significant impact on
future levels of assets under management and, therefore, may adversely effect
LEVCO's financial position and results of operations. Although LEVCO's business
is not capital intensive, fluctuations in inflation and interest rates may have
a significant impact on operating expenses, primarily personnel-related, that
may not be readily recoverable in the pricing of services by LEVCO.
COMPARATIVE MARKET PRICE AND DIVIDEND DATA
Market Price and Net Asset Value Information. Company Common Stock is
admitted for trading on the NYSE under the symbol "BKF." Company Common Stock
generally has traded on the NYSE at a discount to NAV. The following table sets
forth for each quarter indicated the high and low sale prices of Company Common
Stock on the NYSE, the high and low NAV per share and the discounts as a
percentage of the NAVs for such sale price. On May 9, 1996, the last practicable
date prior to the mailing of this Proxy Statement, the reported closing sale
price of Common Stock was $19.625 per share and the percentage discount was
19.47%. On November 17, 1995, the last full trading day prior to the public
announcement of the signing of the Merger Agreement, the reported closing price
of Common Stock was $16.375 per share and the percentage discount was 21.6%. As
of May 10, 1996, there were 2,321 holders of record of Company Common Stock.
The Common Stock does not have any pre-emptive rights.
54
<PAGE>
<TABLE>
<CAPTION>
DISCOUNT AS A
NET ASSET VALUE PERCENTAGE OF NET
QUARTER ENDED PER SHARE/(a)/ MARKET PRICES ASSET VALUE/(b)/
- ------------- --------------- ------------- ----------------
1993 HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
First Quarter....... $21.55 $20.70 $18.50 $17.00 17.3% 14.3%
Second Quarter...... 21.88 21.09 18.50 17.75 17.7 15.0
Third Quarter....... 23.18 21.73 19.88 17.88 17.5 13.0
Fourth Quarter...... 23.26 19.54 19.38 16.38 18.9 12.7
Total............... 23.26 19.54 19.88 16.38 18.9 12.7
1994
First Quarter....... $21.62 $20.49 $17.88 $16.50 19.1% 17.6%
Second Quarter...... 20.49 19.22 17.50 16.25 18.9 13.4
Third Quarter....... 20.51 19.27 17.00 16.13 19.2 14.0
Fourth Quarter...... 20.40 16.83 16.50 13.38 21.3 17.6
Total............... 21.62 16.83 17.88 13.38 21.3 13.4
1995
First Quarter....... $18.88 $17.25 $15.38 $13.75 19.2% 16.7%
Second Quarter...... 19.94 18.94 16.13 15.25 19.8 17.2
Third Quarter....... 21.67 20.20 17.38 15.88 21.8 19.7
Fourth Quarter...... 22.33 20.78 17.63 16.13 23.3 19.4
Total............... 22.33 17.25 17.63 13.75 23.3 16.7
1996
First Quarter....... $23.37 $21.07 $18.63 $16.75 21.4% 17.9%
</TABLE>
(a) Calculated at least weekly.
(b) Reflects the discount of the high or low sales price during the quarter
from the high or low NAV during the quarter. The high sale price and the
high net asset value, or the low sale price and the low NAV, during any
quarter may not have been on the same date. The Company calculates NAV only
on the last business day of each week, month, quarter and year.
Dividends and Distributions. All of the Company's net investment income and
any net realized capital gain are distributed in semi-annual dividends to
shareholders. The following table sets forth for each year in the five-year
period ended December 31, 1995, the distributions made by the Company.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
DISTRIBUTIONS:
Per Share
Dividends from net investment income.. $ 0.35 $ 0.35 $ 0.48 $ 0.39 $ 0.58
Distributions from net realized gain.. 1.20 1.46 1.76 1.42 1.15
----------- ----------- ----------- ----------- -----------
Total................................ 1.55 1.81 2.24 1.81 1.73
Aggregate For Outstanding Shares
Dividends from net investment income.. $ 9,058,533 $ 7,239,654 $ 7,181,382 $ 7,539,179 $10,789,275
Distributions from net realized gain.. 31,926,074 38,586,710 46,215,192 27,450,345 21,578,552
----------- ----------- ----------- ----------- -----------
Total................................ 40,984,607 45,826,364 53,396,574 34,989,524 32,367,827
</TABLE>
Beginning in 1987, the Board of Directors adopted a policy of distributing
to shareholders during each calendar year an amount (in a combination of
ordinary income dividends and capital gain distributions) equal to at least 8%
of the month-end average NAV for the 12 months ended October 31 of that year.
The annual distribution as a percentage of market price will exceed 8% so long
as the market price of Company Common Stock is at a discount from NAV.
55
<PAGE>
ELECTION OF DIRECTORS
Seven directors are to be elected at the meeting. The Board of Directors
has nominated the following persons to serve as directors for terms expiring at
the annual meeting of shareholders in 1999: Messrs. Fife, Goodwin, Gorter, Levin
and Malkiel, of whom Messrs. Goodwin, Gorter and Malkiel currently are
directors. In addition, the Board of Directors has nominated Ms. Sarnell and Mr.
Kigner to serve as directors for terms expiring at the annual meeting of
shareholders in 1998 and 1997, respectively. The election of Mr. Levin, Ms.
Sarnell and Mr. Kigner to the Company's Board will not become effective unless
and until the Merger is consummated. If any nominee should be unable to serve,
the proxies will be voted for such other person as shall be determined by the
persons named as proxies in accordance with their judgment. Shareholders are
entitled to one vote per share in the election of directors, with no right of
cumulation. Directors will be elected by plurality vote of the shares present at
the meeting, in person or by proxy, if a quorum is present.
Additional information concerning the nominees and the directors who are
continuing in office appears below.
<TABLE>
<CAPTION>
DIRECTORS NOMINATED FOR ELECTION
Class and
Name, Age, and Principal Occupation Director Expiration
Since January 1, 1991 Since of Term Other Business Affiliation
- ----------------------------------- -------- ---------- --------------------------------------------------
<S> <C> <C> <C>
Eugene V. Fife--age 55 -- III
Limited partner of Goldman,
Sachs & Co. (investment
bankers) since 1995;
prior thereto, general
partner and member of the
management committee of
Goldman, Sachs & Co.
since 1990
J. Barton Goodwin--age 49 (1) 1987 III 1996
General partner of Bridge
Investors II and Teaneck
Associates, member of
Glenpointe Associates,
LLC and managing director
of BCI Advisors, Inc.
(Private capital
investment group)
James P. Gorter--age 66* (1)(2) 1978 III 1996 Director of Consolidated-Tomoka Land Co. and
Chairman of the board of Caterpillar, Inc. (heavy equipment manufacturer)
the Company since 1987;
limited partner of
Goldman, Sachs & Co.
(investment bankers)
since December 1988;
prior thereto, general
partner and member of the
management committee of
Goldman, Sachs & Co.
John A. Levin--age 57* -- III Director of Morgan Stanley group of investment
President of and funds (4)
Securities Analyst/
Portfolio Manager at LEVCO
since 1982
Burton G. Malkiel--age 63 (3) 1982 III 1996 Director of Prudential Insurance Co. of America,
Chemical Bank Chairman's Amdahl Corp. (computer manufacturer), Southern New
Professor of Economics, England Telecommunications, Inc. and Vanguard
Princeton University; group of investment companies (5)
former member of the
President's Council of
Economic Advisers
Melody L. Prenner Sarnell--age 40* -- II
Securities Analyst/Portfolio
Manager at LEVCO since 1984
Jeffrey A. Kigner--age 35* -- I
Securities Analyst/Portfolio
Manager at LEVCO since 1984
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS CONTINUING IN OFFICE
Class and
Name, Age, and Principal Occupation Director Expiration
Since January 1, 1991 Since of Term Other Business Affiliation
- ----------------------------------- -------- ---------- --------------------------------------------------
<S> <C> <C> <C>
Frederick S. Addy--age 64 (2) 1988 I 1997 Director of Pierpont Fund (a mutual fund) and
Retired; prior thereto, ENSERCH Corporation (an integrated natural gas
executive vice president, company)
chief financial officer
and director of Amoco
Corporation
David D. Grumhaus--age 60 (3) 1988 I 1997 Director of Niche Software Systems, Inc. (computer
President of Casey Travel software company)
Corporation (travel
agency) since 1991; prior
thereto, president of
Chicago Ventures, Inc.
and vice president and
director of Chicago
Capital Fund (venture
capital firms)
Richard M. Jones--age 69 (3) 1988 I 1997 Director of Applied Power Inc. (diversified
Retired; chairman and manufacturer), Guaranty Federal Savings Bank,
chief executive officer Illinois Tool Works Inc. (specialty manufacturer)
of Guaranty Federal and MCI Communications Corporation
Savings Bank 1989 to
1991; prior thereto,
president of Sears,
Roebuck and Co.
Bob D. Allen--age 61* 1992 II 1998 Director of First Union Corporation of Florida and
President, chief executive First Union National Bank of Florida
officer and director of
Consolidated-Tomoka Land
Co. since 1990; prior
thereto, vice chairman of
First Union Corporation
(bank holding company)
David D. Peterson--age 65* (1) 1983 II 1998 Chairman and director of Consolidated-Tomoka Land
President and chief Co.
executive officer of the
Company
William H. Springer--age 66 (2) 1992 II 1998 Director of Walgreen Co. and trustee of the
Retired; vice chairman and Benchmark Funds and the Goldman Sachs group of
director of Ameritech investment funds(6)
Corp. 1991 to 1992; prior
thereto, vice chairman,
chief financial and
administrative officer
and director
</TABLE>
- -------------
Notes to Tables
* These directors are or will be "interested persons" of the Company (as
defined in the Investment Company Act), as follows: Mr. Allen, as president
and chief executive officer of CTO, a controlled affiliate of the Company;
Mr. Peterson, as an officer of the Company; Mr. Gorter, as an officer of the
Company; Mr. Levin, as an officer of the Company, Management Subsidiary and
New LEVCO, and as an affiliate of the Company because of his ownership of
more than 5% of the Company's Common Stock; Ms. Prenner Sarnell, as an
officer of Management Subsidiary and New LEVCO; and Mr. Kigner, as an
officer of Management Subsidiary and New LEVCO.
(1) Member of the executive committee, which has the authority during intervals
between meetings of the board of directors to exercise the power of the
board, with certain exceptions.
57
<PAGE>
(2) Member of the compensation committee, which had 1 meeting during 1995. The
committee makes recommendations to the Board of Directors concerning the
Company's compensation policies. The committee also will administer the
Bonus Plan upon consummation of the Merger and shareholder approval of the
Bonus Plan.
(3) Member of the audit committee, which had 2 meetings during 1995. The
committee makes recommendations regarding the selection of independent
auditors and meets with representatives of the Company's independent
auditors to determine the scope and review the results of each audit.
(4) The Morgan Stanley group of investment funds, of which Mr. Levin is a
director, includes Morgan Stanley Africa Investment Fund, Inc.; Morgan
Stanley Asia - Pacific Fund, Inc.; Morgan Stanley Emerging Markets Fund,
Inc.; Morgan Stanley Emerging Markets Debt Fund, Inc.; Morgan Stanley
Global Opportunity Bond Fund, Inc.; The Morgan Stanley High Yield Fund,
Inc.; and The Morgan Stanley India Investment Fund, Inc.
(5) The Vanguard group of investment companies, of which Mr. Malkiel is a
director, includes Explorer Fund, Gemini Fund, W. L. Morgan Growth Fund,
Primecap Fund, Trustees Commingled Equity Fund, Vanguard Fixed Income
Securities Fund, Vanguard Index Trust, Vanguard Money Market Fund, Vanguard
Municipal Bond Fund, Wellesley Income Fund, Wellington Fund, and Windsor
Fund.
(6) The Goldman Sachs group of investment funds, of which Mr. Springer is a
trustee, includes Goldman Sachs Equity Portfolios, Inc., Goldman Sachs
Trust and Goldman Sachs Money Market Trust.
The Company owns 5 million, or 79.9%, of the outstanding shares of CTO.
During 1995, the Board of Directors conducted 8 meetings, including
regularly scheduled and special meetings. Each director attended at least 75%
of the meetings of the Board of Directors and committees on which he served
during 1995.
Each director and officer of the Company is required to report his or her
transactions in Company Common Stock to the Commission within a specified period
following a transaction. During 1995 the directors and officers filed all such
reports within the specified time period except Mr. Malkiel, for whom one report
covering two transactions for one account was filed late.
APPROVAL OF PORTFOLIO MANAGEMENT CONTRACT
Currently, the Company's investment portfolio is internally managed by
Company officers and employees under the supervision of the Company's Board of
Directors, without an outside investment adviser. Accordingly, Company
shareholders have not previously been asked to approve an investment advisory
contract. For internal management purposes, the Company divides its investment
portfolio into three segments: publicly-traded securities (valued at
approximately $462 million at March 31, 1996); securities acquired in private
placements, which sometimes include companies controlled by the Company (valued
at approximately $75.7 million at March 31, 1996); and the Company's investment
in CTO (valued at approximately $88.1 million at March 31, 1996). See "THE
COMPANY--Management of the Company's Investment Portfolio."
Upon consummation of the Merger, if the Management Contract is approved by
shareholders, the Company will "externalize" the management of its publicly-
traded securities to New LEVCO. At a later time, management of all of the
Company's investment assets may be externalized by contracting with New LEVCO
for such services, although that is not currently contemplated.
The Investment Company Act prohibits any person from serving as an
investment adviser to a registered management investment company except pursuant
to a written contract that has been approved by a majority of a company's
outstanding voting securities. Consequently, New LEVCO cannot act as an
investment adviser to the Company with respect to any portion of the Company's
investment portfolio until Company shareholders have
58
<PAGE>
approved a written contract between the Company and New LEVCO. Therefore, in
anticipation of the consummation of the Merger, the shareholders are being asked
to approve the Management Contract to be entered into by and between the Company
and New LEVCO. The Management Contract will not become effective, and the
Company's portfolio of publicly-traded securities will continue to be managed
internally by the Company, unless and until the Merger is consummated. A copy of
the Management Contract is attached hereto as Appendix C.
BOARD OF DIRECTORS' RECOMMENDATION
The Board of Directors, including all of the directors who are not parties
to the acquisition or interested persons of any such party, has approved the
Management Contract and recommended it to the shareholders for their approval.
For information about the deliberations and reasons for the recommendation by
the Board of Directors, see "--Reasons for the Board of Directors'
Recommendation."
TERMS OF THE MANAGEMENT CONTRACT
General. Pursuant to the terms of the Management Contract, New LEVCO will
furnish continuing investment supervision to the Company with respect to the
Company's publicly-traded securities portfolio. New LEVCO will not be
responsible for the overall management of the Company's business affairs. New
LEVCO is responsible for the cost of all executive and other personnel, office
space, and office facilities necessary to perform its duties and obligations
under the contract.
Through its officers and employees, the Company will continue to manage its
general business affairs. The Company will be responsible for the cost of its
brokerage, custodial, stock transfer, shareholder recordkeeping, dividend
disbursing, bookkeeping, audit and legal services. The Company also will pay
other expenses such as the cost of printing and distributing notices, proxy
solicitation material, prospectuses, and shareholder reports to existing
shareholders, bonds and taxes, insurance premiums, directors' fees, and
maintaining the registrations and qualifications of the Company and its shares
under federal and state laws.
The Management Contract is for an initial term expiring two years from the
Closing. The Management Contract will continue from year to year thereafter only
so long as such continuation is specifically approved at least annually by (1)
either the Board of Directors or the vote of a majority of the Company's
outstanding voting securities, and (2) a majority of the directors who are not
interested persons of the Company or New LEVCO, voting in person at a meeting
called for the purpose of voting on such approval. The Board of Directors
approved the Management Contract on November 17, 1995. The Management Contract
may be terminated at any time, without penalty, by the Company's Board of
Directors or by a vote of a majority of the Company's outstanding shares, upon
thirty days' written notice. The Management Contract automatically terminates in
the event of its "assignment" as defined in the Investment Company Act.
Neither New LEVCO, nor any of its directors, officers, agents, or employees
shall be liable or responsible to the Company or its shareholders for any error
of judgment, mistake of law or any loss arising out of any investment, or for
any act or omission in the performance by New LEVCO or, acting on its behalf, by
any of its directors, officers, agents or employees, of its duties under the
contract, except for liability resulting from New LEVCO's willful misfeasance,
bad faith or gross negligence or from New LEVCO's reckless disregard of its
obligations and duties under the contract.
Advisory Fees. For New LEVCO's services as investment adviser, New LEVCO
will receive from the Company a monthly fee, in arrears, based on the net assets
at the end of the month of the Company's publicly-traded securities portfolio.
The annual rate of fee for the Company will be 0.30% of the value of the assets
of the Company managed by New LEVCO. The Company believes that the fee that
would have been paid by it pursuant to the Management Contract had it been in
effect for the fiscal year ended December 31, 1995 would have been approximately
the same as the costs incurred by the Company for the fiscal year ended December
31, 1995 in connection with the management of its portfolio of publicly-traded
securities.
59
<PAGE>
FEE TABLE
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------- ----------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load (as a percentage of offering price) None None
Dividend Reinvestment and Cash Purchase Plan Fees None None
ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees (1) None 0.18%
Interest Payments on Borrowed Funds (2) None 0.40%
Other Expenses (3) 0.78% 0.48%
---- ----
TOTAL ANNUAL EXPENSES 0.78% 1.06%
---- ----
</TABLE>
________________________
(1) The Company is internally managed and, therefore, pays no management fee.
The investment management, research and administrative costs associated
with management of the Company's investment portfolio are included in
"Other Expenses." In conjunction with the Merger, the Company will enter
into a Management Contract with New LEVCO to manage the publicly-traded
portion of the Company's investment portfolio. Expenses associated with the
Company's management of its other investments will continue to be reflected
in "Other Expenses."
(2) Interest expense associated with the $38 million bank borrowing by the
Company contemplated in connection with the Merger.
(3) Does not include transaction related costs to be incurred by the Company.
Fees for such services will be capitalized for financial reporting purposes
and are expected to approximate $1.9 million.
EXAMPLE:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment,
assuming a 5% annual return:
HISTORICAL $ 8 $25 $43 $ 97
PRO FORMA $11 $34 $58 $129
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that an investor in the Company will bear directly and
indirectly.
The Example assumed reinvestment of all dividends at net asset value and a ratio
of expenses to average net assets of .78% and 1.06% on an historical and pro
forma basis, respectively. The Fee Table and the assumption in the Example of a
5% annual return are required by Commission regulations applicable to all
investment companies. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN. ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE.
Because the Company, through Management Subsidiary, will be the sole owner
of New LEVCO, any profit resulting from the fees paid to New LEVCO will
ultimately benefit the Company and its shareholders. Subject to the terms of the
Management Contract, the Company's control over New LEVCO will enable the
Company to control the level of fees paid by the Company, including whether, or
when, such fees would be increased. Such
60
<PAGE>
control also will enable the Company to prevent New LEVCO from engaging in any
activity that the Board of Directors of the Company considers to be detrimental
to New LEVCO's ability to carry out its duties to the Company or contrary to the
best interests of the Company and its shareholders.
MANAGEMENT SUBSIDIARY AND NEW LEVCO
Immediately after the consummation of the Merger, Management Subsidiary
will (i) contribute to New LEVCO (a) among other things, all of its investment
advisory contracts and (b) all of the outstanding capital stock of G.P.
Subsidiary and Broker Subsidiary and (ii) change its name to "Levin Management
Co., Inc.". Management Subsidiary will provide management and administrative
services to the Levin Companies. The business of the Levin Companies (including
New LEVCO) will be conducted substantially in the same manner as LEVCO's
business currently is conducted.
As provided in the Merger Agreement, LEVCO will merge with and into
Management Subsidiary, with Management Subsidiary being the surviving company.
If the shareholders approve the Merger, the following actions will occur:
LEVCO's business operations will be transferred to Management Subsidiary,
Management Subsidiary will contribute all of its investment advisory contracts
and all of the outstanding capital stock of G.P. Subsidiary and Broker
Subsidiary to New LEVCO; Management Subsidiary's name will be changed to "Levin
Management Co., Inc." and New LEVCO's name will be changed to "John A. Levin &
Co., Inc."; pursuant to the Merger Agreement, Messrs. Gorter, Levin, Kigner and
Carhart, Ms. Sarnell, and another of the Company's directors or officers which
the Company will designate shall be Management Subsidiary and New LEVCO's
directors following the Merger; and Mr. Levin will serve as President and Chief
Executive Officer of the Company and as President of New LEVCO and Management
Subsidiary, Ms. Sarnell will serve as Executive Vice President, Mr. Kigner will
serve as Executive Vice President and Mr. Carhart will serve as Vice President,
respectively, of New LEVCO and Management Subsidiary.
If shareholders approve the Management Contract, the Company expects
certain employees to resign and become employees of the Levin Companies.
THE EFFECT ON THE COMPANY OF SHAREHOLDER APPROVAL OF THE MANAGEMENT CONTRACT
Externalization of the management of the publicly-traded portion of the
Company's investment portfolio will not result in any shift in control from the
Company's Board of Directors to the Levin Companies (including New LEVCO). The
Company currently contemplates that only management of the Company's portfolio
of publicly-traded securities will be externalized. The Company expects to
retain its administrative staff which will, under the supervision of the Board
of Directors, manage the Company's day-to-day business affairs and oversee the
services performed by New LEVCO, as well as services performed by other service
providers to the Company, including its auditors, lawyers, custodian, and
transfer agent. Management of the Board of Directors' calendar and agenda, and
preparation of shareholder meeting materials, including proxy materials, will
continue to be handled by the Company's administrative staff under the
supervision of the Board. Management of the private placement and CTO sectors
of the Company's portfolio will also continue to be handled by the Company's
officers and employees under the supervision of the Board of Directors.
The Company does not believe that New LEVCO will obtain undue value from
the externalization of management of the Company's publicly-traded securities
portfolio. The cost to the Company of the services to be provided to the
Company by New LEVCO is expected in the Company's opinion to approximate the
cost of such services provided internally, although a portion of any element of
profit would ultimately benefit the Company, as New LEVCO's indirect parent, and
the Company's shareholders.
61
<PAGE>
Following the Merger, and assuming approval by Company shareholders, the
Company's directors and officers will have the following relationships with
Management Subsidiary and New LEVCO:
Relationship to Management Subsidiary
Company Directors and Officers and New LEVCO
------------------------------ -------------
James P. Gorter Director
John A. Levin Director and President
Jeffrey A. Kigner Director and Executive Vice President
Melody L. Prenner Sarnell Director and Executive Vice President
Steven C. Carhart Director and Vice President
For a description of Mr. Gorter and Mr. Carhart's current holdings of Company
Common Stock and Mr. Levin's, Ms. Sarnell's and Mr. Kigner's holdings of Company
Common Stock after the consummation of the Merger, see "INTERESTS IN STOCK."
The Company attempts to execute portfolio transactions on the basis of (i)
the most favorable net prices obtainable through brokers and dealers that it
believes are capable of providing the most competent execution of particular
transactions and (ii) the value of research received.
However, following consummation of the acquisition, the Company may direct
portfolio brokerage transactions to Broker Subsidiary. Broker Subsidiary is an
affiliate of the Company because Broker Subsidiary is an indirect wholly-owned
subsidiary of the Company.
REASONS FOR THE BOARD OF DIRECTORS' RECOMMENDATION
In evaluating the Management Contract, the Board of Directors reviewed
materials furnished by LEVCO and the Company. Those materials included
information regarding LEVCO, its affiliates, personnel, operations and financial
condition, the terms of the Merger, and the possible effects of the Merger on
the Company and the Company's shareholders.
On November 2 and November 17, 1995, the Board of Directors met to discuss
the terms of the Merger and other related matters including the Management
Contract. At the November 2, 1995 meeting, the Board of Directors met with Mr.
Levin, Ms. Sarnell, and Mr. Kigner. LEVCO's representatives made a presentation
to the Board of Directors describing LEVCO's organization, personnel,
operations, and investment strategy. Specifically, the LEVCO representatives
discussed the educational and employment backgrounds of LEVCO's portfolio
managers, the long-term working relationship of LEVCO's team of investment
professionals, LEVCO's investment process, including LEVCO's internal investment
research capabilities and LEVCO's portfolio risk management strategies.
During its deliberations at the November 17, 1995 meeting, the Board of
Directors considered the terms of the Merger and also took into account, among
other things, the nature and quality of the services to be provided by New
LEVCO, LEVCO's portfolio management strategy, including the risk management and
diversification aspects of this strategy, LEVCO's investment process, LEVCO's
corporate culture, a comparison of the estimated cost of managing the Company's
publicly-traded portfolio internally with the estimated cost of management of
the portfolio by New LEVCO, advisory and management fees paid by other LEVCO
clients and other institutional investors, anticipated benefits, if any, to New
LEVCO from its relationship with the Company including receipt of research from
brokers furnished in connection with their execution of portfolio transactions
for the Company, the Company's expense ratio as compared to that of other
investment companies and the expected quality of the services to be provided to
the Company.
After consideration of the above, and such other factors and information as
they deemed relevant, the Board of Directors, including all directors who are
not "interested persons" of the Company or New LEVCO (as such term is defined by
the Investment Company Act), unanimously approved the Management Contract and
voted to recommend its approval to the Company's shareholders.
62
<PAGE>
APPROVAL OF BONUS PLAN
BACKGROUND
The Company has adopted, subject to shareholder approval, and is proposing
for shareholder approval the Key Employee Incentive Bonus Plan. The Bonus Plan
is being submitted to shareholders for approval in response to Code Section
162(m), which imposes limits on the Company and its subsidiaries' ability to
deduct for federal income tax purposes compensation in excess of $1 million paid
to certain officers ("covered employees") of the Company and its subsidiaries
that are at least 80%-owned, including Management Subsidiary and New LEVCO. The
deduction limit imposed by Section 162(m) of the Code does not apply to
incentive compensation that is paid pursuant to a bonus plan meeting the
requirements of Section 162(m) and the payment of which is subject to receipt of
shareholder approval. The Board of Directors unanimously recommends a vote for
the proposal to approve the Bonus Plan.
The Company expects to proceed with the Merger regardless of the outcome of
the shareholder vote on the Bonus Plan. In the event the Bonus Plan is not
approved by shareholders, certain employees of the Levin Companies will be
eligible to receive annual discretionary bonus payments to be determined by the
Committee (as hereinafter defined). Any compensation (including bonus payments)
paid to each such employee in excess of $1 million per annum will be
automatically contributed to a deferred compensation plan to be paid out to such
employee on the earlier of the employee's termination of employment with the
Levin Companies for any reason, or December 31, 2001 (subject to a predetermined
payment schedule).
SUMMARY OF THE BONUS PLAN
The Bonus Plan is set forth in Appendix D to this Proxy Statement and
should be referred to for a complete description of its provisions. This
summary of the Bonus Plan is qualified in its entirety by reference to the Bonus
Plan.
PURPOSES
The purpose of the Bonus Plan is to establish a program of incentive
compensation for designated key employees of the Levin Companies that is
directly related to the performance results of the Levin Companies and its
employees. The Bonus Plan provides incentives, contingent upon continued
employment and satisfaction of certain corporate goals, to certain key employees
who make substantial contributions to the Levin Companies. The Bonus Plan has
been designed and will be administered to grant awards constituting "qualified
performance-based compensation" within the meaning of Section 162(m) of the Code
and Treasury Regulations (S)1.162-27(e). The awards are intended to qualify for
Federal tax deductibility under Section 162(m).
ADMINISTRATION
The Bonus Plan provides for administration by the Compensation Committee of
the Board of Directors of the Company (the "Committee") which is composed solely
of individuals who qualify as "outside directors," as defined in Treasury
Regulation 1.162-27(e)(3). No Committee member is eligible to be selected to
participate in the Bonus Plan. Among the powers granted to the Committee are
the authority to interpret, amend, and terminate the Bonus Plan or any award
thereunder, establish rules and regulations for the operation of the Bonus Plan,
select officers or key employees to participate in the Bonus Plan, determine the
amount of the Bonus Pool or the formula pursuant to which the amount of the
Bonus Pool shall be determined and determine the form and amount and other terms
and conditions of an award. The Board may delegate the Committee's authority to
any other committee of the Board composed exclusively of two or more outside
directors.
ELIGIBILITY FOR PARTICIPATION
The Committee selects the participants in the Bonus Plan for each fiscal
year from those officers and key employees of the Levin Companies and its
subsidiaries whose efforts contribute materially to the annual success of
63
<PAGE>
the Levin Companies. The Company expects that the Levin Companies will have
several employees who will come within the definition of covered employee for
this purpose, and that additional employees may, as their duties and
responsibilities evolve, come within that definition.
To be eligible for payment of an award participants generally must be
actively employed by the Levin Companies on the last day of the fiscal year to
which the payment relates. However, the Bonus Plan does permit the payment of
all or a portion of a participant's bonus in the event of a termination prior to
the completion of the fiscal year provided that no bonus will be payable prior
to the attainment of the applicable performance goals.
FORM OF AWARDS
Awards under the Bonus Plan will be paid in cash.
PERFORMANCE GOALS
The performance goals for the Levin Companies and/or each participant and
the amount of the award to be paid to a participant if the applicable
performance goal is achieved (or the formula under which the award shall be
determined, which may be a percentage of the Bonus Pool) will be established by
the Committee within the first 90 days of each fiscal year or with respect to
the partial fiscal year in which the Bonus Plan first becomes effective, prior
to the time when the first 25% of such partial fiscal year shall have elapsed
(either such period, the "Determination Period"), and will be based upon one or
more of the following objective business criteria applicable to the participant,
a business unit of the Levin Companies, or the Levin Companies as a whole: the
excess of (x) a specified percentage of gross revenues of the Levin Companies,
excluding (to the extent determined by the Committee during the Determination
Period) extraordinary or non-recurring items and/or all or a portion of other
specified items of revenues (the "Adjusted Revenues") over (y) operating
expenses and depreciation and amortization expense of the Levin Companies
(excluding all interest expense, income taxes, awards under the Bonus Plan and
to the extent determined by the Committee during the Determination Period,
extraordinary or non-recurring items and/or all or a portion of other specified
items of expense) (the "Adjusted Operating Expenses"); net profits (calculated
by excluding from the determination of the amount of operating expenses used in
determining net profit, all interest expense, income taxes and awards under the
Bonus Plan and which may, as determined by the Committee during the
Determination Period, be adjusted by excluding all or a portion of specified
items of revenue or expense that would normally be included in the computation
of net profit under generally accepted accounting principles); increase in
revenue; return on equity; performance of managed funds; increase in market
share; and reduction in costs. The Committee will determine the specific
performance goals to be met under one or more of the preceding criteria for each
of the participants. In addition, the Committee may provide that bonuses will be
payable if either of one or more performance goals are achieved. In all cases,
the performance goal will be determined so that its achievement is not
substantially certain at the time it is established.
For purposes of the Bonus Plan, "Bonus Pool" means, for any fiscal year,
the total amount available for the payment of Bonus Awards under the Plan. The
Bonus Pool, as determined by the Committee during the Determination Period, may
be either a dollar amount or determinable by a formula, or a combination of the
two, provided that in all cases the Bonus Pool shall be defined in such a manner
that the amount of the Bonus Pool could be calculated by a third party with
knowledge of relevant facts.
In addition to setting the size of the Bonus Pool and the performance goals
for the fiscal year, the Committee will, within the Determination Period, also
designate the participants for each fiscal year; provided, however, that an
employee whom a Levin Company first employs after the beginning of a fiscal year
may be designated as a participant for such fiscal year if such designation is
made, and the participant's award and performance goals are established, prior
to the end of the period that constitutes the first 25% of such employee's
period of employment during such fiscal year.
PROCEDURE FOR DETERMINING AWARDS
Within the Determination Period, the Committee will specify for each
participant the award that will be payable if the participant's performance
goals are met, either in terms of a specified dollar amount payable if the
64
<PAGE>
performance goal is met or a formula under which the amount of the award is
determined by the extent to which the performance goal is met.
AWARDS FOR A PERFORMANCE PERIOD
In accordance with Section 162(m) of the Code, the Bonus Plan provides for
written certification by the Committee as to whether the performance goals for
the fiscal year have been achieved and, if so, the amount awarded to each
participant.
Upon completion of these written certifications, awards, to the extent
approved by the Committee, shall be paid in a lump sum as soon as practicable,
but in any event within 75 days after the close of the fiscal year to which they
relate, unless the participant has elected to defer payment of the award
pursuant to an applicable deferred compensation plan established by the Levin
Companies.
The maximum award payable to any participant for any fiscal year will not
exceed $15 million. However, the maximum need not be awarded to any participant.
The Committee retains negative discretion to reduce or eliminate the amount of
any award for a participant. The amount by which an award is decreased, or the
amount of an award that is not payable because a participant's performance goals
were not satisfied, shall not increase any other award under the Bonus Plan.
It is currently anticipated that, for at least the fiscal year in which the
Bonus Plan first becomes effective and the next two succeeding fiscal years,
subject to final determination by the Committee, the aggregate amount of awards
paid pursuant to the Bonus Plan, if the applicable performance goals are met,
will be equal to a Bonus Pool that will be in the range of the excess of (i) 53%
of the Levin Companies' Adjusted Revenues for that year over (ii) the Levin
Companies' Adjusted Operating Expenses for that year, subject to final
determination by the Committee; provided that the Committee may provide for the
payment of bonuses under the Bonus Plan if alternative performance goals are
met.
If the Bonus Plan had been in effect with respect to LEVCO's fiscal year
ended December 31, 1995 (without giving effect to the Merger Agreement and the
transactions contemplated thereby), and assuming that the Bonus Pool had been
computed based on a formula whereby the Bonus Pool would be equal to the excess
of (i) 53% of LEVCO's actual revenues for such fiscal year (adjusted to include
the $1,527,000 of incentive allocations paid by the LEVCO Partnerships to the
LEVCO Stockholders (or related entities other than LEVCO)) over (ii) LEVCO's
actual operating expenses (before interest, taxes and bonuses actually paid to
the LEVCO Stockholders) for such fiscal year, the aggregate amount of the Bonus
Pool would have been approximately $5.6 million.
AMENDMENT/TERMINATION
The Board of Directors may amend, suspend or terminate the Bonus Plan at
any time provided that no amendment can reduce the amount of a Bonus Award
previously determined by the Committee, or increase the performance criteria
necessary to earn such Bonus Award, and any amendment requiring shareholder
approval in order for Bonus Awards to continue to qualify for deductibility
under Section 162(m) of the Code must be approved by the shareholders. The Bonus
Plan is effective for five fiscal years and thereafter, subject to reapproval by
shareholders.
FEDERAL INCOME TAX CONSEQUENCES
Under current Federal tax law, the following are the Federal income tax
consequences generally arising with respect to awards under the Bonus Plan.
Cash awards will be included in income at the time of receipt and will be
subject to tax at ordinary income tax rates. Any awards that are properly
deferred under an applicable deferred compensation plan of the Company will be
taxable when actually or constructively received under such plan's terms.
65
<PAGE>
Cash awards will generally be deductible by the Company when they are
included in income by the recipient, provided that the awards constitute
"qualified performance-based compensation" for purposes of Section 162(m), as
described above, and also constitute reasonable compensation as determined for
federal income tax purposes.
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Board of Directors has unanimously declared advisable and has
recommended the approval by the shareholders of the following amendment to the
Company's certificate of incorporation, which would increase the authorized
Common Stock from 40 million to 60 million shares:
The Company's certificate of incorporation, as heretofore amended and
restated, is hereby further amended by the deletion of article fourth and
the insertion of the following in lieu thereof:
FOURTH: The total number of shares of all stock which the corporation
shall have authority to issue is 60,000,000 shares of common stock, $1
par value per share.
The additional shares would have the same rights and characteristics as the
shares now outstanding. The proportionate voting power and interests in the
earnings and assets attaching to the shares now outstanding would not be
affected by the proposed amendment. No holder of stock of the Company has any
preemptive right to acquire any stock or other security of the Company.
At the Record Date, there were 27,543,641 shares outstanding of the 40
million shares currently authorized. Issuance of the additional authorized
shares could be authorized by the Board of Directors without further shareholder
action for any proper corporate purpose, including issuance in connection with
the Company's capital gain reinvestment program, a stock dividend, or
acquisitions by the Company. The Board of Directors has no present plans
concerning the issuance of the additional shares to be authorized.
Holders of the Company Common Stock are entitled to dividends when and as
declared by the Board of Directors, to one vote per share in the election of
directors (with no right of cumulation), and to equal rights per share in the
event of liquidation. They have no preemptive rights to purchase treasury shares
or authorized but unissued shares. There are no redemption, conversion, or
sinking fund provisions. The shares are not liable to further calls or to
assessment by the Company. Authorization of the additional shares of Common
Stock will not affect the rights of existing shareholders; however, the
subsequent issuance of the additional shares, if ever, may dilute the net asset
value and voting rights of the existing shares of Common Stock.
The Company's Certificate of Incorporation provides that a favorable vote
of the holders of at least 80% of the Company's shares entitled to be voted on
the matter would be required to approve (i) an amendment to the certificate of
incorporation that would make the Company an open-end company with the result
that its shares would be redeemable by the Company upon demand of shareholders,
(ii) a merger or consolidation of the Company with any other corporation, (iii)
a sale of all or substantially all of the assets of the Company (other than in
the regular course of its investment activities), or (iv) a liquidation or
dissolution of the Company, unless any such action had previously been approved
by the affirmative vote of two-thirds of the total number of directors fixed in
accordance with the bylaws. The Board of Directors is divided into three
classes, each with three-year terms expiring at the times of successive annual
meetings of shareholders.
SELECTION OF INDEPENDENT AUDITORS
The Company's Board of Directors, including a majority of the directors who
are not interested persons of the Company, have selected Ernst & Young,
independent auditors, to audit the financial statements of the Company for the
year ending December 31, 1996. Ernst & Young has served the Company in this
capacity since 1987 and has no direct or indirect financial interest in the
Company except as independent auditors. The selection of Ernst &
66
<PAGE>
Young as independent auditors of the Company is being submitted to the
shareholders for ratification. A representative of Ernst & Young is expected to
be present at the Annual Meeting and will be available to respond to any
appropriate questions raised at the meeting. The representative from Ernst &
Young also will have the opportunity to make a statement if he desires to do so.
OTHER MATTERS
The management of the Company does not intend to bring any other matters
before the meeting, and it does not know of any proposals to be presented to the
meeting by others. If any other matter comes before the meeting, however, the
persons named in the proxy solicited by the Board of Directors will vote thereon
in accordance with their judgment.
67
<PAGE>
INTERESTS IN STOCK
The table below contains information as of March 31, 1996 on the number of
shares of Common Stock of the Company and of its controlled affiliate, CTO, as
to which each director, each nominee, and each named officer of the Company and
all directors, nominees, and officers of the Company as a group, had outright
ownership, or, alone or with others, any power to vote or dispose of the shares,
or to direct the voting or disposition of the shares by others, and the
percentage of the aggregate of such shares to all of the outstanding shares of
the respective companies.
<TABLE>
<CAPTION>
Shares of Baker, Fentress & Company
-------------------------------------------------------------------------
Power Over Voting
or Disposition of
Outright Other Shares (a) Aggregate
Ownership ----------------------- -----------------------
of Shares Alone Shared Shares Percent
----------- ----- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Frederick S. Addy....................... 2,613 -- -- 2,613 --
Bob D. Allen............................ 25,218 -- 31,388 56,606 0.2%
Eugene V. Fife.......................... -- -- -- -- --
J. Barton Goodwin....................... -- -- 692,538 692,538 2.5%
James P. Gorter......................... 86,951 43,419 464,591 594,961 2.2%
David D. Grumhaus....................... 5,374 -- 390,554 395,928 1.4%
Richard M. Jones........................ 14,235 -- -- 14,235 --
Jeffrey A. Kigner....................... -- -- -- -- --
John A. Levin........................... -- -- 13,312 13,312 --
Burton G. Malkiel....................... -- -- 31,601 31,601 0.1%
David D. Peterson....................... 26,926 -- -- 26,926 --
Melody L. Prenner Sarnell............... -- -- -- -- --
William H. Springer..................... 3,500 -- -- 3,500 --
George V. Carracio, Jr.................. -- -- -- -- --
Steven C. Carhart....................... 16,700 -- 625 17,325 --
James P. Koeneman....................... 300 -- 200 500 --
Scott E. Smith.......................... -- -- 2,561 2,561 --
------- ------- --------- ----------- ---
Directors, officers and nominees
as a group (18 persons)............... 181,817 43,419 1,627,370 1,852,606 6.7%
</TABLE>
<TABLE>
<CAPTION>
Shares of Consolidated-Tomoka Land Co.
------------------------------------------------------------------------
Power Over Voting
or Disposition of
Outright Other Shares (a) Aggregate
Ownership ---------------------- -------------------------
of Shares Alone Shared Shares Percent
----------- ----- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Bob D. Allen............................ 96,420/(b)/ -- -- 96,420/(b)/ 1.5%
J. Barton Goodwin....................... -- -- 800 800 --
James P. Gorter......................... 2,400 -- 4,000 6,400 --
John A. Levin........................... -- -- 62,544/(c)/ 62,544/(c)/ 1.0%
David D. Peterson....................... 4,000 -- -- 4,000 --
Melody L. Prenner Sarnell............... 200 -- -- 200 --
------- ------ --------- --------- ---
Directors, officers and nominees
as a group (18 persons)............... 103,020 -- 67,344 170,364 2.5%
- --------------
</TABLE>
(a) Each person disclaims beneficial ownership of such shares.
(b) Includes 76,800 shares subject to options held by Mr. Allen that were
exercisable within 60 days of March 31, 1996.
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<PAGE>
(c) Includes 18,672 shares beneficially owned by Mr. Levin's spouse and
children over which Mr. Levin exercises discretionary power and 43,872
shares over which LEVCO may be deemed to have investment control pursuant
to investment advisory arrangements.
Although the Company, as of March 31, 1996, did not know of any person who
owned more than 5% of the Company's Common Stock, Mr. Levin, Ms. Sarnell, and
Mr. Kigner will (subject to certain adjustments) become the owners of
approximately 12.2%, 1.3%, and 1.1%, respectively, of the Company's Common Stock
if the Merger is consummated. The following table shows the effect of the Merger
on the share ownership of the Company's management assuming all other factors
remain constant. Pursuant to the Merger Agreement, the election of Mr. Levin,
Ms. Sarnell and Mr. Kigner as directors of the Company i s a condition to the
consummation of the Merger.
<TABLE>
<CAPTION>
Pro Forma Share Ownership of Baker, Fentress & Company After Merger
------------------------------------------------------------------------------
Power Over Voting
or Disposition of
Outright Other Shares (a) Aggregate
Ownership ---------------------- --------------------------
of Shares Alone Shared Shares Percent(b)
------------ ----- ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Frederick S. Addy................. 2,613 -- -- 2,613 --
Bob D. Allen...................... 25,218 -- 31,388 56,606 0.2%
Eugene V. Fife.................... -- -- -- -- --
J. Barton Goodwin................. -- -- 692,538 692,538 2.1%
James P. Gorter................... 86,951 43,419 464,591 594,961 1.8%
David D. Grumhaus................. 5,374 -- 390,554 395,928 1.2%
Richard M. Jones.................. 14,235 -- -- 14,235 --
Jeffrey A. Kigner................. 343,544/(c)/ -- -- 343,544 1.1%
John A. Levin..................... 3,971,519/(c)/ -- 13,312 3,984,831 12.2%
Burton G. Malkiel................. -- -- 31,601 31,601 0.1%
David D. Peterson................. 26,926 -- -- 26,926 --
Melody L. Prenner Sarnell......... 429,430/(c)/ -- -- 429,430 1.3%
William H. Springer............... 3,500 -- -- 3,500 --
George V. Carracio, Jr............ -- -- -- -- --
Steven C. Carhart................. 16,700 -- 625 17,325 --
James P. Koeneman................. 300 -- 200 500 --
Scott E. Smith.................... -- -- 2,561 2,561 --
--------- ------ --------- --------- ----
Directors, officers and nominees
a group (18 persons)............ 4,926,310 43,419 1,627,370 6,597,099 20.0%
</TABLE>
____________
(a) Each person disclaims beneficial ownership of such shares.
(b) The estimated number of outstanding shares of Company Common Stock after
the Merger (32,606,931) was determined based on the maximum amount of
Company Common Stock to form part of the Merger Consideration, which
pursuant to the Merger Agreement is subject to certain adjustments.
(c) Based on the maximum amount of Company Common Stock to form part of the
Merger Consideration, which pursuant to the Merger Agreement is subject to
certain adjustments. In addition, the LEVCO Stockholders will, pursuant to
the Merger Agreement, be obligated to deposit all or a portion of such
shares in an escrow account for three years following the Merger during
which time such LEVCO Stockholders will have the right to vote and receive
any distributions with respect to such deposited shares.
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<PAGE>
EXECUTIVE OFFICERS
In addition to Mr. Gorter and Mr. Peterson, the current executive officers
of the Company are:
<TABLE>
<CAPTION>
Name, Age, and Principal Occupation Year First
Since January 1, 1991 Office(a) Elected
- --------------------------------------------------------------- --------- ----------
<S> <C> <C>
Steven C. Carhart--age 47 Vice president 1991
Vice President of the Company (director of public portfolio) since
1991; prior thereto, Vice President of The Northern Trust
Company
George V. Carracio, Jr.--age 51 Vice president 1983
Vice President of the Company (portfolio manager)
James P. Koeneman--age 48 Vice president 1983
Vice President and Secretary of the and secretary
Company (administrative and financial officer)
Scott E. Smith--age 41 Vice president 1989
Vice President of the Company
(portfolio manager--private placement portfolio) since 1989
Janet Sandona Jones--age 39 Treasurer 1986
Treasurer of the Company
</TABLE>
- ------------------------------
(a) Each officer of the Company generally holds office until the first meeting
of the Board of Directors after the annual meeting of shareholders and until his
or her successor is elected and qualified. Mr. Peterson intends to retire as
President and Chief Executive Officer of the Company upon consummation of the
Merger. Thereafter, Mr. Levin will be elected President and Chief Executive
Officer of the Company.
70
<PAGE>
CASH COMPENSATION
The following table sets forth cash compensation paid by the Company during
1995 to (i) each of the directors of the Company and (ii) each of the three
highest-paid executive officers of the Company whose aggregate compensation paid
by the Company exceeded $60,000.
<TABLE>
<CAPTION>
Pension or
Retirement
Aggregate Benefits Accrued
Compensation as Part of the
Name of Person, Position from the Company(a) Company's Expenses
- ------------------------------------ ------------------- ------------------
<S> <C> <C>
Frederick S. Addy
Director $ 17,850 none
Bob D. Allen 17,600 none
Director
J. Barton Goodwin 16,900 none
Director
James P. Gorter 30,850 none
Chairman of the board and director
David D. Grumhaus 18,100 none
Director
Richard M. Jones 18,100 none
Director
Burton G. Malkiel 18,100 none
Director
David D. Peterson 271,500 $40,279
President, Chief Executive Officer and
Director
William H. Springer
Director 17,850 none
Steven C. Carhart
Vice President 260,000 32,308
Scott E. Smith 192,500 30,969
Vice President
</TABLE>
(a) The amounts shown in this column include deferred 1995 compensation for
Company employees, including officers. The Company will defer compensation only
for purposes of the current tax year. The amount of deferred compensation for
1995 to the officers listed above at December 31, 1995 was: Mr. Peterson,
$50,000; and Mr. Smith, $55,000.
The Company is not part of a complex of affiliated investment companies.
However, in addition to the compensation shown in the preceding table, Mr.
Peterson received a fee of $25,000 during 1995 from CTO for his services as
chairman and a director of that company. The Company also has a policy of paying
additional compensation to the estate of any employee who dies while employed by
the Company after one full year of
71
<PAGE>
continuous employment. The amount of additional compensation is equal to (i)
two months' salary for one to five years, or three months' salary for five or
more years of continuous employment, and (ii) a pro rata share of an amount
equal to the employee's annual bonus for the year prior to the year of death.
RETIREMENT PLANS
The Company's officers and employees participate in the Company's
retirement and pension plans. The Company's contributions to both plans are
included in the compensation table on the preceding page.
The Company's retirement plan is a trusteed money purchase pension plan
funded by Company contributions equal to 25% of the compensation paid or accrued
to participating employees, subject to a $30,000 annual contribution limitation
per participant. The benefit received under the retirement plan upon retirement
depends on the aggregate contributions to the plan for the participant and the
investment performance of those assets.
In addition to the retirement plan described in the preceding paragraph,
the Company has a defined benefit pension plan, which is funded by Company
contributions, payable to eligible employees, including officers, based
generally on the participant's compensation and length of service with the
Company, with a maximum annual pension of $15,000. The following table shows the
estimated annual retirement benefits under the defined benefit pension plan at
various compensation levels and years of service:
<TABLE>
<CAPTION>
Final Average Estimated Annual Benefit Based upon Years of Credited Service (1)
Compensation 5 Years 10 Years 20 Years 30 Years
------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
$ 25,000 $ 1,250 $ 2,500 $ 5,000 $ 6,250
50,000 2,500 5,000 10,000 12,500
75,000 3,750 7,500 15,000 15,000
100,000 5,000 10,000 15,000 15,000
125,000 6,250 12,500 15,000 15,000
150,000 7,500 15,000 15,000 15,000
175,000 8,750 15,000 15,000 15,000
200,000 10,000 15,000 15,000 15,000
</TABLE>
An officer's estimated annual pension under the defined benefit pension
plan may be determined by comparing the officer's base salary and years of
credited service under the plan to the benefits shown above for various salary
levels and years of service. Mr. Peterson has 13 years of credited service and a
1995 base salary of $221,500; Mr. Carhart has 4 years of credited service and a
1995 base salary of $187,200; and Mr. Smith has 6 years of credited service and
a 1995 base salary of $137,500. Mr. Peterson has an accrued pension benefit of
$26,056 annually under a prior plan in addition to the pension benefits
described above.
The Board of Directors has approved amendments to both the money purchase
pension plan and the defined pension plan under which Company employees who may
be adversely affected as a result of the Merger will receive additional benefits
including full vesting and (subject to certain conditions) an additional five
years of service under the defined benefit pension plan. The amendments to the
plans will become effective upon the consummation of the Merger.
PROPOSALS OF SHAREHOLDERS
Any shareholder proposal to be considered for inclusion in proxy material
for the Company's annual meeting of shareholders in April 1997 must be received
at the principal executive office of the company (Suite 3510, 200 West Madison
Street, Chicago, Illinois 60606) no later than November 1, 1996. Mere submission
of a proposal does not guarantee inclusion of the proposal in the proxy
statement or its presentation at the meeting since certain rules under the
federal securities laws must be satisfied.
72
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the following Regional Offices of the Commission: Chicago Regional
Office, 500 West Madison Street, Chicago, Illinois 60661; and New York Regional
Office, Seven World Trade Center, New York, New York 10048. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
May 14, 1996
73
<PAGE> APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
Dated as of May 13, 1996
by and among
Baker, Fentress & Company,
JALC Acquisition Corp.,
John A. Levin & Co., Inc.,
John A. Levin,
Melody L. Prenner Sarnell,
Jeffrey A. Kigner,
Daniel E. Aron,
Frank F. Rango,
Barton G. Ice
and
Carol L. Novak
<PAGE>
TABLE OF CONTENTS
ARTICLE I.....................................................................2
THE MERGER AND CONTRIBUTION...................................................2
1.1 The Merger..............................................................2
1.2 Effective Time..........................................................2
1.3 Effect of the Merger....................................................2
1.4 Certificate of Incorporation............................................2
1.5 Bylaws..................................................................2
1.6 Contribution............................................................2
1.7 Directors and Officers..................................................2
ARTICLE II....................................................................3
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES............................3
2.1 Conversion of Shares....................................................3
2.2 Exchange of Shares......................................................9
2.3 Closing of Transfer Books...............................................9
2.4 Acquisition of G.P. Subsidiary..........................................9
ARTICLE III..................................................................10
CLOSING......................................................................10
3.1 Closing................................................................10
3.2 Procedure at the Closing...............................................10
ARTICLE IV..................................................................11
DEFINITIONS.................................................................11
4.1 Assets.................................................................12
4.2 Code...................................................................12
4.3 Commodity Exchange Act.................................................12
4.4 Contract...............................................................12
4.5 ERISA..................................................................12
4.6 Exchange...............................................................12
4.7 Exchange Act...........................................................12
4.8 Form ADV...............................................................12
4.9 GAAP...................................................................12
4.10 Governmental Entity...................................................12
<PAGE>
4.11 Interim Transactions..................................................12
4.12 Investment Advisers Act...............................................12
4.13 Investment Company....................................................12
4.14 Investment Contracts..................................................13
4.15 Investment Company Act................................................13
4.16 Investment Partnerships...............................................13
4.17 Knowledge.............................................................13
4.18 LEVCO Entity..........................................................13
4.19 LEVCO Broker Subsidiary...............................................13
4.20 LEVCO Subsidiaries....................................................13
4.21 Lien..................................................................13
4.22 Material Adverse Effect...............................................13
4.23 Person................................................................13
4.24 Related Agreements....................................................13
4.25 Securities Act........................................................14
4.26 SEC...................................................................14
4.27 Stockholder Representative............................................14
4.28 Taxes.................................................................14
4.29 Tax Returns...........................................................14
4.30 Terminable Contracts..................................................14
4.31 Trading Days..........................................................14
ARTICLE V....................................................................14
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS AS TO THE
STOCKHOLDERS.................................................................14
5.1 Authority.............................................................15
5.2 No Violation..........................................................15
5.3 Ownership of LEVCO Common Stock.......................................15
5.4 Brokers and Finders...................................................15
5.5 Approvals.............................................................16
5.6 Investment Representations............................................16
5.7 Health................................................................16
ARTICLE VI...................................................................16
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS AS TO LEVCO AND THE
INVESTMENT PARTNERSHIPS......................................................16
6.1 Organization and Authority of LEVCO...................................17
6.2 Charter, Bylaws, Agreements of Limited Partnership and Minutes........17
6.3 Authority.............................................................17
6.4 No Violation..........................................................17
6.5 Capitalization........................................................18
6.6 Approvals.............................................................18
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<PAGE>
6.7 Financial Statements...................................................l9
6.8 No Adverse Change......................................................20
6.9 Subsidiaries...........................................................20
6.10 Taxes.................................................................22
6.11 Interests of Insiders.................................................23
6.12 Title to Assets; Property.............................................23
6.13 Insurance.............................................................25
6.14 Other Material Contracts..............................................25
6.15 Bank Accounts and Money Market Funds..................................26
6.16 Litigation............................................................26
6.17 Brokers and Finders...................................................26
6.18 Employee Benefit Plans and Employees..................................26
6.19 Filings, Etc..........................................................29
6.20 Representations and Warranties Regarding the Investment Advisory
Business..............................................................30
6.21 Disclosure............................................................35
6.22 Registration as a Broker-Dealer.......................................35
6.23 Registration under the Commodity Exchange Act.........................36
6.24 Registration as an Insurance Agent....................................36
6.25 Registration as a Transfer Agent......................................36
ARTICLE VII..................................................................36
REPRESENTATIONS AND WARRANTIES OF BKF........................................36
7.1 Organization and Authority.............................................37
7.2 Binding Obligation.....................................................37
7.3 No Violations..........................................................37
7.4 No Authorization or Consents Required..................................38
7.5 No Actions, Suits or Proceedings.......................................38
7.6 Ineligible Persons.....................................................38
7.7 Brokers and Finders....................................................38
7.8 BKF Financial Statements...............................................39
7.9 No Adverse Change......................................................39
7.10 BKF Capital Stock.....................................................39
7.11 BKF Charter Documents.................................................40
7.12 Disclosure............................................................40
7.13 SEC Reports...........................................................40
7.14 Restrictive Covenants.................................................40
7.15 Litigation............................................................40
7.16 Filings; Etc..........................................................41
7.17 Regulatory Compliance.................................................42
7.18 Employee Benefit Plans................................................42
7.19 Merger Subsidiary.....................................................43
7.20 Investment Adviser Subsidiary.........................................43
iii
<PAGE>
ARTICLE VIII.................................................................43
CONDUCT OF BUSINESS PRIOR TO THE CLOSING.....................................43
8.1 Conduct of LEVCO's Business Prior to Closing...........................43
8.2 Conduct of BKF's Business Prior to Closing.............................46
8.3 Consents and Approvals.................................................47
8.4 Benefit Plans and Insurance............................................48
8.5 Formation of Levco Broker Subsidiary...................................48
8.6 Related Agreements.....................................................48
ARTICLE IX...................................................................48
ADDITIONAL AGREEMENTS........................................................48
9.1 Advisory Contract and Other Consents...................................48
9.2 Approval by Holders of BKF Common Stock, Related Indemnities...........49
9.3 Compliance with Securities Laws........................................51
9.4 Current Information....................................................53
9.5 Access; Information....................................................53
9.6 Non-Solicitation.......................................................53
9.7 Notification of Certain Matters........................................54
9.8 Press Releases, Etc....................................................54
9.9 Tax Information........................................................55
9.10 Updated Financial Statements..........................................55
9.11 BKF Portfolio.........................................................55
9.12 Payment of Certain Transaction Expenses...............................55
9.13 LEVCO Closing Balance Sheet...........................................56
9.14 Treatment of Accounts Receivable......................................56
9.15 Bifurcation Event.....................................................56
9.16 Bridge Partners.......................................................57
9.17 LEVCO Stockholder Approval............................................57
ARTICLE X....................................................................58
CONDITIONS...................................................................58
10.1 Conditions to Each Party's Obligations to Consummate..................58
10.2 Conditions Precedent to BKF's and Merger Subsidiary's Obligations.....59
10.3 Conditions Precedent to LEVCO's and the Stockholder's Obligations.....63
ARTICLE XI...................................................................65
TERMINATION..................................................................65
11.1 Termination...........................................................65
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<PAGE>
11.2 Effect of Termination and Abandonment.................................66
ARTICLE XII..................................................................66
INDEMNIFICATION..............................................................66
12.1 General...............................................................66
12.2 Indemnification by the Stockholders...................................67
12.3 Indemnification by BKF ...............................................67
12.4 Indemnification Procedure for Third Party Claims......................67
12.5 Certain Limitations on Indemnification................................69
12.6 Termination of Rights Hereunder.......................................70
12.7 Escrow Fund...........................................................70
12.8 Determination of Losses after Escrow..................................71
ARTICLE XIII.................................................................72
OTHER COVENANTS..............................................................72
13.1 Employment of LEVCO's Employees.......................................72
13.2 Confidentiality.......................................................72
13.3 Tax Matters...........................................................73
ARTICLE XIV..................................................................73
GUARANTEES; STOCKHOLDER REPRESENTATIVE.......................................73
14.1 Guarantees............................................................73
14.2 Stockholder Representative............................................73
ARTICLE XV...................................................................74
GENERAL PROVISIONS...........................................................74
15.1 Survival..............................................................74
15.2 Notices...............................................................74
15.3 Counterparts..........................................................75
15.4 Governing Law.........................................................75
15.5 Expenses..............................................................75
15.6 Waiver; Amendment.....................................................76
15.7 Entire Agreement; No Third-Party Beneficiaries, Etc...................76
15.8 Assignment............................................................76
15.9 Interpretation........................................................76
15.10 Further Assurances...................................................77
15.11 Consistent Accounting................................................77
15.12 Severability.........................................................77
15.13 Exclusive Remedy.....................................................77
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<PAGE>
LIST OF EXHIBITS
Exhibit 10.1(h) Form of Registration Rights
Agreement
Exhibit 10.1(i) Form of Portfolio Management
Agreement
Exhibit 10.2(d)(i) Form of John A. Levin
Employment Agreement
Exhibit 10.2(d)(ii) Form of Melody L. Prenner Sarnell
and Jeffrey A. Kigner Employment
Agreements
Exhibit 10.2(e)(i) Form of Opinion of Paul, Weiss,
Rifkind, Wharton & Garrison
Exhibit 10.2(e)(ii) Form of Opinion of Schulte Roth &
Zabel
Exhibit 10.3(e) Form of Opinion of Bell, Boyd &
Lloyd
Exhibit 12.7 Form of Escrow Agreement
Exhibit 13.1 Form of Other Stockholder
Employment Agreement
vi
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER ("Agreement"),
dated as of May 13, 1996 by and among Baker, Fentress & Company, a Delaware
corporation ("BKF"), JALC Acquisition Corp., a Delaware corporation ("Merger
Subsidiary"), John A. Levin & Co., Inc., a Delaware corporation ("LEVCO"),
and John A. Levin ("Levin"), Melody L. Prenner Sarnell, Jeffrey A. Kigner,
Daniel E. Aron, Frank F. Rango, Barton G. Ice and Carol L. Novak (the
foregoing individuals, individually, a "Stockholder" and collectively, the
"Stockholders"). This Agreement amends and restates in its entirety the
Agreement and Plan of Merger, dated as of November 19, 1995 (the "Signing
Date"), by and among BKF, Merger Subsidiary, LEVCO and the Stockholders.
Recitals
This Agreement provides for the merger of LEVCO, of which the
Stockholders are the holders of all of the outstanding capital stock, with and
into Merger Subsidiary, a wholly-owned subsidiary of BKF (the "Merger"), with
Merger Subsidiary being the surviving corporation in the Merger.
In the Merger, the outstanding shares of common stock of LEVCO will be
converted into the right to receive shares of common stock of BKF and cash as
set forth herein. The Merger is intended to qualify as a reorganization within
the meaning of Section 368(a)(1)(A) and (a)(2)(D) of the Internal Revenue Code
of 1986, as amended.
This Agreement records the representations and warranties made by BKF
and the Stockholders, sets forth certain covenants and agreements of the
parties, provides conditions to the obligations of the parties and sets forth
other provisions relating to the Merger.
The Boards of Directors of BKF, Merger Subsidiary and LEVCO have approved
and adopted this Agreement and have approved the Merger upon the terms and
subject to the conditions set forth in this Agreement.
Covenants
NOW, THEREFORE, BKF, Merger Subsidiary, LEVCO and the Stockholders, in
consideration of the agreements, covenants and conditions contained herein,
hereby make the following representations and warranties, give the following
covenants and agree as follows:
<PAGE>
ARTICLE I
The Merger And Contribution
1.1 The Merger. Upon the terms and subject to the conditions hereof, and
in accordance with the General Corporation Law of the State of Delaware (the
"Corporation Law"), LEVCO shall be merged with and into Merger Subsidiary, at
the Effective Time (as defined in Section 1.2 hereof). Upon and after the
Effective Time, Merger Subsidiary shall continue as the surviving corporation
(the "Surviving Corporation") and the separate existence of LEVCO shall cease.
1.2 Effective Time. The Merger shall become effective at the time of
filing of a certificate of merger (the "Certificate of Merger"), with the
Secretary of State of the State of Delaware in such form as required by, and
executed in accordance with the relevant provisions of, the Corporation Law and
is mutually reasonably acceptable to BKF and LEVCO. The date and time when the
Merger shall become effective is herein referred to as the "Effective Time."
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be in accordance with the applicable provisions of the Corporation Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, except as otherwise provided herein, all the property, rights,
privileges, powers and franchises of LEVCO and Merger Subsidiary shall vest in
the Surviving Corporation, and all debts, liabilities and duties of LEVCO and
Merger Subsidiary shall become the debts, liabilities and duties of the
Surviving Corporation.
1.4 Certificate of Incorporation. The certificate of incorporation of
Merger Subsidiary shall be amended by the Certificate of Merger to change the
name of the Surviving Corporation to Levin Management Co., Inc. and, as so
amended, the certificate of incorporation of Merger Subsidiary shall be the
certificate of incorporation of the Surviving Corporation.
1.5 Bylaws. The bylaws of Merger Subsidiary shall be the bylaws of the
Surviving Corporation.
1.6 Contribution. Immediately after the Effective Time, the Surviving
Corporation will contribute (the "Contribution") the Investment Contracts, the
G.P. Subsidiary Stock (as hereinafter defined), all of the outstanding common
stock of LEVCO Broker Subsidiary and certain related assets of Surviving
Corporation to a wholly-owned subsidiary of the Surviving Corporation
("Investment Adviser Subsidiary"). Immediately after the Contribution, the
certificate of incorporation of Investment Adviser Subsidiary shall be amended
to change the name of Investment Adviser Subsidiary to John A. Levin & Co., Inc.
1.7 Directors and Officers
----------------------
(a) James P. Gorter, Levin, Jeffrey A. Kigner, Melody L. Prenner
Sarnell and two directors or officers of BKF to be designated by BKF shall be
the directors of the Surviving Corporation and each of its subsidiaries and
shall hold office from the Effective Time until their
2
<PAGE>
successors are duly elected or appointed and qualified in the manner provided in
the bylaws of the Surviving Corporation or such subsidiary, as the case may be,
or as otherwise provided by law.
(b) The persons mutually designated by BKF and LEVCO shall be the
officers of the Surviving Corporation and of each of its subsidiaries and shall
hold office from the Effective Time until their successors are duly elected or
appointed and qualified in the manner provided in the bylaws of the Surviving
Corporation or such subsidiary, as the case may be, or as otherwise provided by
law.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
2.1 Conversion of Shares
(a) The shares of the common stock, $.01 par value per share, of
LEVCO (the "LEVCO Common Stock") issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of the holders thereof, be converted, based on the capitalization of LEVCO set
forth in Schedule 5.3(a) to the LEVCO Disclosure Schedule, into the right to
receive the following:
(i) in the case of each share of LEVCO Common Stock owned of
record immediately prior to the Effective Time by a Stockholder other than
Levin, the number of shares of common stock, $1.00 par value per share, of
BKF ("BKF Common Stock") equal to the result (rounded to the nearest
hundredth share) obtained through application of the following formula:
$17,250,000 - ((AUMA + TE + PC) x 0.15) + CG
-------------------------------------------- (the "Fraction") / 3,000
$15.80
where
AUMA = the aggregate dollar amount of the Assets Under Management
Adjustment Amount determined in accordance with Section 2.1(b)(i);
TE = the aggregate dollar amount of the Transaction Expenses determined
in accordance with Section 2.1(b)(ii);
PC = the aggregate dollar amount of the Partnership Capital determined in
accordance with Section 2.1(b)(iii); and
CG = the product of (x) the per share capital gains distributions
("Capital Gains Distributions") on the BKF Common Stock for which
the record date has occurred between the date of this Agreement and
Closing, other than the
3
<PAGE>
aggregate $1.20 capital gains distribution declared by BKF's Board
of Directors in part on September 7, 1995 and in part on November 3,
1995 and (y) the Fraction (assuming CG equals zero);
plus an amount in cash equal to the result (rounded to the nearest penny)
obtained through application of the following formula:
($17,250,000 - ((AUMA + TE + PC) x 0.15)) / 3,000
where AUMA, TE and PC have the same meanings as set forth above.
(ii) in the case of each share of LEVCO Common Stock owned of
record by Levin immediately prior to the Effective Time, the number of
shares of BKF Common Stock equal to the result (rounded to the nearest
hundredth share) obtained through application of the following formula:
$62,750,000 - ((AUMA + TE + PC) x 0.85) + CG
--------------------------------------------
$15.80 (the "Second Fraction") / 7,000
where AUMA, TE and PC have the same meanings as set forth in subparagraph
(i) of this Section 2.1(a) and CG means the product of (x) the Capital
Gains Distributions and (y) the Second Fraction (assuming CG equals zero);
plus, an amount in cash equal to the result (rounded to the nearest penny)
obtained through application of the following formula:
($17,750,000 + ((AUMA + TE + PC) x 0.15)) / 7,000
where AUMA, TE and PC have the same meaning as set forth in subparagraph
(i) above of this Section 2.1(a).
For avoidance of doubt, in no event shall the aggregate number of shares of
LEVCO Common Stock issued and outstanding immediately prior to the Effective
Time be converted in the Merger into the right to receive more than an aggregate
of $35,000,000 in cash and (i) a number of shares of BKF Common Stock having an
aggregate dollar value at a price of $15.80 per share equal to $80,000,000 minus
the aggregate dollar amount of (x) the Assets Under Management Adjustment Amount
(if any), (y) the Transaction Expenses (if any) and (z) the Partnership Capital
(such number of shares, the "Full Shares") plus (ii) such additional number of
shares of BKF Common Stock equal to the result obtained by multiplying the Full
Shares times the Capital Gains Distributions and dividing such result by $15.80.
(b) The dollar amounts to be applied in the formulas set forth in
Section 2.1(a) shall be determined in accordance with this Section 2.1(b):
4
<PAGE>
(i) (A) For purposes of this Agreement, "Assets Under Management"
means (x) the assets under LEVCO's management as investment adviser that are
the subject of an Investment Contract (as hereinafter defined), whether
written or oral, between LEVCO and a Client (as defined in Section 6.20) of
LEVCO, but such assets shall not at any time include any assets under
LEVCO's management wherein the Client is, or that are beneficially owned (as
such term is defined in Rule 13d-3 under the Exchange Act) by, a Stockholder
or a Related Person (as hereinafter defined) of a Stockholder and (y) the
portfolio assets of each Investment Partnership. A "Related Person" of a
Stockholder means (i) any of the descendants or spouses of descendants of a
great-grandfather of such Stockholder or of such Stockholder's spouse (any
person having such a relationship being herein referred to as a "Family
Member") or any trust primarily for the benefit of such Stockholder and/or
any one or more Family Members of such Stockholder (a "Family Trust") or
(ii) any partnership, corporation or other form of business or investment
entity or association (any of the foregoing, an "Enterprise") directly or
indirectly controlled by such Stockholder or any Family Member or Family
Trust of such Stockholder; provided, however, that in no event shall a
Related Person of Levin be deemed a Related Person of any Stockholder. For
purposes of this Agreement, a Person (as hereinafter defined) is "affiliated
with" another Person if it, directly or indirectly, through one or more
intermediaries controls, is controlled by or is under common control with
such other Person; and "control" when used with respect to a specified
Person, means the power to direct or cause the direction of the management
and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, partnership or other ownership interests, by
contract or otherwise; and the terms "controlled" and "controlling" have
meanings correlative with the foregoing.
(B) Set forth on Schedule 2.1(A) of the LEVCO Disclosure
Schedule (as defined in Section 4.30) is (x) a list of each Investment
Contract covering Assets Under Management as of November 16, 1995 (the "Base
Date") and the dollar amount of the Assets Under Management under each such
Investment Contract as of such Base Date and (y) the dollar amount of the
portfolio assets of each Investment Partnership as of the Base Date (the sum
of (x) and (y) is herein called the "Base Assets Under Management"), which
dollar amounts have been determined as hereinafter provided. If at the
Closing, the dollar amount of LEVCO's Closing Assets Under Management (as
hereinafter defined) as to which Agreed Consents (as hereinafter defined)
have been obtained by LEVCO (as certified to BKF as provided in Section
10.2(c)) is less than 85% of the dollar amount of LEVCO's Base Assets Under
Management, the "Assets Under Management Adjustment Amount," as used in the
formulas set forth in Section 2.1(a), shall be equal to the result (rounded
to the nearest penny) obtained by multiplying (x) the percentage by which
such Closing Assets Under Management are less than 85% of LEVCO's Base
Assets Under Management by (y) $115,000,000. For example, if at Closing the
dollar amount of Closing Assets Under Management as to which LEVCO has
received an Agreed Consent are 80%
5
<PAGE>
of the dollar amount of LEVCO's Base Assets Under Management, the Assets
Under Management Adjustment Amount would be $5.75 million. The dollar amount
of the Base Assets Under Management of LEVCO has been determined as of the
close of business on the Base Date on a basis consistent with the manner in
which such Assets Under Management are valued for purposes of providing
valuations to the Client (or in the case of the Investment Partnerships, the
limited partners) with respect to the particular Assets Under Management.
For purposes hereof, "Closing Assets Under Management" shall mean the Base
Assets Under Management plus (i) the aggregate dollar amount of any
investments by a Client (whether or not the Client was a Client on the Base
Date or remains a Client on the Closing Date) or additional capital
contributions of a partner (whether or not the partner was a partner on the
Base Date or remains a partner on the Closing Date) to an Investment
Partnership, which investments are made after the Base Date and prior to the
Closing Date, plus (ii) the aggregate dollar amount of all fees payable to
LEVCO deducted from the accounts of Clients or partners of the Investment
Partnerships, which deductions are made after the Base Date and prior to the
Closing Date, and minus (iii) the aggregate dollar amount of all withdrawals
from the account of any Client (whether or not the Client was a Client on
the Base Date or remains a Client on the Closing Date) and all withdrawals
of capital by partners (whether or not the partner was a partner on the Base
Date or remains a partner on the Closing Date) of the Investment
Partnerships, which withdrawals are made after the Base Date and prior to
the Closing Date; provided, however, that if an L.P. Bifurcation Event (as
defined in Section 9.15(a)) shall have occurred, the dollar amount of the
capital withdrawn from an Investment Partnership by any Person who is
required to withdraw such capital from such Investment Partnership as
required by Section 9.15 shall not be so deducted.
(C) For purposes hereof, an "Agreed Consent" shall be deemed
to have been given with respect to an Investment Contract included in the
Closing Assets Under Management if: (x) in the case of any Investment
Contract in existence at the Base Date with a Client that is an
institutional investor or an individual investor whose Assets Under
Management by LEVCO exceed $500,000 as of the date a consent is first
solicited from such Client or the affirmative consent of whom is required
under the terms of the Investment Contract with such Client, a written
consent to the assignment of such Investment Contract to the Surviving
Corporation, and, upon the Contribution, to the Investment Adviser
Subsidiary has been obtained from the Client or the Client has entered into
a new written Investment Contract with the Investment Adviser Subsidiary, in
either case on terms not less favorable to the Investment Adviser Subsidiary
than the original Investment Contract was to LEVCO (provided that such
Investment Contract will be deemed to be on terms not less favorable to the
Investment Adviser Subsidiary than the original Investment Contract was to
LEVCO if it provides for break points in the fee schedule comparable to the
break points being offered by LEVCO to Clients with comparable Assets Under
6
<PAGE>
Management prior to the date of this Agreement), (y) in the case of any
Investment Contract in existence at the Base Date with a Client who is an
individual investor whose Assets Under Management by LEVCO are $500,000 or
less as of the date a notice of the type referred to below is first given to
such Client and whose affirmative consent is not required under the
applicable terms of the Investment Contract with such Client, the Client has
been given at least twenty Trading Days prior notice of the proposed
assignment of such Client's Investment Contract in accordance with the terms
of this Agreement and has not objected to the assignment of such Investment
Contract or indicated his or her intent to terminate such Investment
Contract, and (z) in the case of any Investment Contract entered into after
the Base Date, such Investment Contract is on terms not materially different
than those of Investment Contracts in existence immediately prior to the
date of this Agreement for accounts of a similar size and with similar
investment objectives (or if such terms are different, contains terms which
LEVCO can reasonably demonstrate are no less favorable to LEVCO than those
being offered to the public by LEVCO's competitors with comparable
performance records and experience in the investment management business to
accounts of a similar size and with similar investment objectives), and such
Investment Contract contains as a specific term thereof a consent to the
assignment of such Investment Contract to the Surviving Corporation, and
upon the Contribution, to the Investment Adviser Subsidiary. An "Agreed
Consent" shall be deemed to have been given with respect to (x) the account
of any partner in any Investment Partnership if such partner shall have
consented to the transactions contemplated by Schedule 9.1(c) with respect
to such Investment Partnership and shall not on the Closing Date have
withdrawn or indicated its intention to withdraw as a partner in the
Investment Partnership except as contemplated by Schedule 9.1(c), and (y)
the account of any partner whose capital is required to be withdrawn from
the Partnership as a result of the occurrence of an L.P. Bifurcation
Event.
(ii) Not later than the second Trading Day prior to the Closing,
the Stockholders shall obtain from their legal counsel, accountants or other
third party consultants to whom or which they are or will be obligated to
pay fees and expenses with respect to the transactions contemplated by this
Agreement (the "Transaction Advisers"), except Goldman, Sachs & co. and any
Persons providing services to Goldman Sachs & Co., including its counsel, a
statement (which shall be final and binding as against BKF and the Surviving
Corporation) of each Transaction Adviser's professional fees and expenses
(including disbursements) for the transactions contemplated by this
Agreement. The aggregate dollar amount of such statements shall be the
"Transaction Expenses."
(iii) As of the close of business on the Trading Day immediately
preceding the Closing Date, LEVCO shall determine the dollar amount of the
minimum general partner capital contributions that are required to have been
made as of such time with respect to each Investment Partnership (as
hereinafter
7
<PAGE>
defined) in order to comply with Revenue Procedure 89-12 of the Internal
Revenue Service (or any successor law, regulation or revenue procedure
thereto), and the Stockholders shall certify such amount to BKF, which
certification shall set forth in reasonable detail the manner of
determining such amount for each Investment Partnership. The aggregate
dollar amount of such minimum general partner capital contributions shall
be the "Partnership Capital" for all purposes of this Agreement.
The total number of shares of BKF Common Stock to be issued in the Merger
determined pursuant to Section 2.1(a) are referred to herein as the "Merger
Shares," the aggregate amount of cash to be paid in the Merger (except
Fractional Share Payments, as hereinafter defined) determined pursuant to
Section 2.1(a) is referred to herein as the "Cash Consideration" and the Merger
Shares and the Cash Consideration payable in the Merger are together referred to
herein as the "Merger Consideration." As used in this Agreement, the Merger
Value means the sum of the Cash Consideration plus the numerator of the Fraction
set forth in Section 2.1(a)(i) and the numerator of the Second Fraction set
forth in Section 2.1(a)(ii). Any shares of LEVCO Common Stock held in the
treasury of LEVCO immediately prior to the Effective Time shall, by virtue of
the Merger and without any action on the part of the holder thereof, be canceled
without consideration and be retired and cease to exist.
(b) At the Effective Time each share of the common stock, par value
$.01 per share, of Merger Subsidiary issued and outstanding immediately prior to
the Effective Time shall be converted into and shall become one share of common
stock of the Surviving Corporation and each certificate heretofore representing
any such shares shall, after the Effective Time and without any action on the
part of the holder thereof, be deemed to represent the same number of shares of
the Surviving Corporation.
(c) No certificates or scrip representing fractional shares of BKF
Common Stock shall be issued upon the surrender for exchange of certificates of
LEVCO Common Stock; no stock split or dividend with respect to shares of BKF
Common Stock shall relate to any fractional share interest, and no such
fractional share interest will entitle the owner thereof to vote as, or to any
other rights of, a stockholder of BKF. In lieu of such fractional shares, any
holder of LEVCO Common Stock who would otherwise be entitled to a fractional
share of BKF Common Stock will, upon surrender of his certificate to BKF in
accordance with Section 2.2, be entitled to receive cash (a "Fractional Share
Payment") in an amount determined by multiplying such fraction by the closing
price of BKF Common Stock on the New York Stock Exchange Composite Tape, as
reported in The Wall Street Journal (Midwest Edition) on the Trading Day
immediately preceding the Closing and rounding the product to the nearest whole
cent. The fractional share interests of each Stockholder shall be aggregated, so
that no Stockholder shall receive a Fractional Share Payment in an amount
greater than the value of one full share of BKF Common Stock (determined as
provided in the preceding sentence). No interest shall accrue or be paid with
respect to fractional share interests with respect to cash payable in lieu of
fractional share interests.
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2.2 Exchange of Shares. At the Closing, Merger Subsidiary shall,
upon receipt from each of the Stockholders of a certificate or certificates
representing the issued and outstanding shares of LEVCO Common Stock owned by
such Stockholder (collectively, the "Certificates" and individually, a
"Certificate"), deliver to such Stockholder a certificate or certificates
representing the Merger Shares such Stockholder is entitled to receive
determined in accordance with Section 2.1(a) hereof, together with any Cash
Consideration and Fractional Share Payment payable in respect of such shares of
LEVCO Common Stock as provided in Section 2.1(a) and 2.1(c), respectively. As of
the Effective Time, each Certificate that prior to the Effective Time
represented shares of LEVCO Common Stock shall be deemed for all corporate
purposes (including voting rights) to evidence the Merger Consideration to be
delivered in exchange therefor under the terms of this Agreement. No transfer
taxes shall be payable by the Stockholders in connection with their receipt of
the Merger Shares, except that if any certificate for the Merger Shares is to be
issued in a name other than that in which the Certificate surrendered for
exchange is registered, it shall be a condition of such exchange that the
Certificate so surrendered shall be properly endorsed and otherwise in proper
form for transfer and that the Stockholder surrendering such Certificate shall
pay to BKF any transfer or other taxes required by reason of the issuance of
such Merger Shares in any name other than that of such Stockholder, or establish
to the satisfaction of BKF that such tax has been paid or is not applicable. If
any Certificate shall have been lost, stolen or destroyed, such Certificate
shall be deemed to have been surrendered properly to BKF for all purposes of
this Section 2.2 if the Stockholder owning such Certificate shall have delivered
to BKF a sworn affidavit as to such claim (and, if required in the sole
discretion of BKF, a bond in such form and amount, and with such surety,
sufficient to indemnify BKF against such claim).
2.3 Closing of Transfer Books. At the Effective Time, the stock transfer
books of LEVCO shall be closed and no transfer of the shares of LEVCO Common
Stock shall thereafter be made.
2.4 Acquisition of G.P. Subsidiary. Subject to the terms and conditions of
this Agreement, simultaneously with consummation of the Merger, Levin, Melody L.
Prenner Sarnell, Jeffrey A. Kigner and Frank F. Rango (collectively, the "G.P.
Stockholders") shall sell, transfer, assign, convey and deliver to Merger
Subsidiary, and Merger Subsidiary shall purchase, acquire and accept from the
G.P. Stockholders, all of the G.P. Stockholders' right, title and interest, free
and clear of all Liens, in and to all of the issued and outstanding shares of
capital stock (the "G.P. Subsidiary Stock") of the wholly-owned corporation
("G.P. Subsidiary") to be formed by the G.P. Stockholders to acquire the general
partner interests in each of the Investment Partnerships as contemplated by
Section 9.1(c) hereof and Schedule 9.1(c). In consideration thereof, at Closing
Merger Subsidiary shall pay to each of the G.P. Subsidiary Stockholders in
accordance with Section 3.2(h) an amount equal to each such individual's share
of the Partnership Capital (the "G.P. Subsidiary Purchase Price").
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ARTICLE III
CLOSING
3.1 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Bell, Boyd & Lloyd,
Three First National Plaza, 70 West Madison Street, Suite 3300, Chicago,
Illinois, or at such other place as the parties may agree, at 10:00 a.m. on the
last Trading Day of the month (or, if such day is a Friday, on the Monday
following the last Trading Day) in which the later of the following two events
shall occur: (i) approval of the Merger by the stockholders of BKF and (ii)
expiration or termination of the waiting period imposed by the HSR Act (as
hereinafter defined); provided that if any of the other conditions which are set
forth in Article X of this Agreement have not been satisfied (or waived by the
party entitled to the benefit of such conditions) by said date, then the Closing
shall take place on a subsequent date as soon as practicable after the
satisfaction or waiver of such conditions, or at such other place, time and date
as BKF and LEVCO may agree. At the Closing, the parties shall cause the
Certificate of Merger to be filed in accordance with the applicable provisions
of the Corporation Law. The date on which the Closing occurs is referred to
herein as the "Closing Date."
3.2 Procedure at the Closing. At the Closing, the parties hereto agree to
take the following steps in the order listed below (provided, however, that upon
their completion all such steps shall be deemed to have occurred
simultaneously):
(a) Each Stockholder and LEVCO shall deliver to BKF the certificates
described in Section 10.2(c) hereof and all other previously undelivered
documents required to be delivered by the Stockholders or LEVCO to BKF at or
prior to the Closing pursuant to the terms of this Agreement.
(b) BKF and Merger Subsidiary shall deliver to the Stockholders the
certificate described in Section 10.3(c) hereof and all other previously
undelivered documents required to be delivered by the BKF or Merger Subsidiary
to the Stockholders at or prior to the Closing pursuant to the terms of this
Agreement.
(c) Merger Subsidiary and LEVCO shall file with the Secretary of
State of the State of Delaware the Certificate of Merger.
(d) Each Stockholder shall deliver Certificates representing all
shares of LEVCO Common Stock owned by such Stockholder to UMB Bank, N.A., BKF's
custodian, and Merger Subsidiary shall deliver by wire transfer of immediately
available funds to an account theretofore designated by such Stockholder in
writing to Merger Subsidiary to each such Stockholder the Cash Consideration to
which such Stockholder is entitled pursuant to Section 2.1, and a certificate or
certificates representing the Merger Shares (other than the Escrow Shares, as
defined in Section 12.7 hereof) to which such Stockholder is entitled pursuant
to Section 2.1, which shall be duly executed and in valid form, registered in
the name of such Stockholder and bearing the following legend:
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THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED
UNDER SAID ACT OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
(e) Merger Subsidiary shall also deliver to any Stockholder entitled
thereto, by wire transfer of immediately available funds to an account
theretofore designated by such Stockholder in writing to Merger Subsidiary, the
amount of any Fractional Share Payment.
(f) Merger Subsidiary shall deliver to the Escrow Agent designated in
Section 12.7 hereof the Escrow Shares for deposit pursuant to the Escrow
Agreement (as defined in Section 12.7).
(g) The G.P. Stockholders shall deliver to Merger Subsidiary
certificates representing all of the shares of G.P. Subsidiary Stock.
(h) Merger Subsidiary shall deliver to each G.P. Stockholder by wire
transfer of immediately available funds to an account theretofore designated by
each G.P. Stockholder in writing to Merger Subsidiary, the G.P. Subsidiary
Purchase Price in the same proportion as the number of shares of G.P. Subsidiary
Stock sold by such G.P. Stockholder bears to the aggregate number of shares of
outstanding G.P. Subsidiary Stock.
(i) BKF, Merger Subsidiary and each of the Stockholders shall execute
and deliver a cross receipt acknowledging receipt from the other, respectively,
of the shares of LEVCO Common Stock and the Merger Consideration and Fractional
Share Payments.
(j) Merger Subsidiary and the G.P. Stockholders shall execute and
deliver a cross-receipt acknowledging receipt from the other, respectively, of
the G.P. Subsidiary Stock and the G.P. Subsidiary Purchase Price.
(k) Merger Subsidiary shall deliver to each Transaction Adviser, by
wire transfer of immediately available funds to an account theretofore
designated by such Transaction Adviser in writing to Merger Subsidiary, the
portion of the Transaction Expenses attributable to such Transaction Adviser.
(l) Immediately after the Effective Time, the Surviving Corporation
shall effect the Contribution in favor of Investment Adviser Subsidiary by
contributing to Investment Adviser Subsidiary the Investment Contracts, the G.P.
Subsidiary Stock, the outstanding common stock of LEVCO Broker Subsidiary and
certain related assets of Surviving Corporation.
ARTICLE IV
DEFINITIONS
For the purposes of this Agreement, the following terms shall have the
meanings set forth below:
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4.1 "Assets" of any Person means all of such Person's business, assets,
properties, security deposits and prepaid items, goodwill and rights of every
kind and description, tangible and intangible, wherever located.
4.2 "Code" means the Internal Revenue Code of 1986, as amended.
4.3 "Commodity Exchange Act" means the Commodity Exchange Act of
1974, as amended.
4.4 "Contract" means any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, concession, franchise, license,
permit, exception, order or approval to or with a Governmental Entity or other
third party.
4.5 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
4.6 "Exchange" means the New York Stock Exchange, Inc.
4.7 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
4.8 "Form ADV" means the filing on Form ADV required to be made under the
Investment Advisers Act with the SEC in connection with the registration of the
filing party as an investment adviser under the Investment Advisers Act.
4.9 "GAAP" means United States generally accepted accounting principles
applied on a consistent basis throughout the periods indicated.
4.10 "Governmental Entity" means any domestic (federal, state or local),
foreign or supranational court, commission, governmental body, or regulatory or
administrative agency, authority or tribunal.
4.11 "Interim Transactions" means (i) the formation of LEVCO Broker
Subsidiary (as hereinafter defined) as a wholly-owned subsidiary of LEVCO and
the contribution to it of the Assets of LEVCO relating to the broker-dealer
business and operations of LEVCO as contemplated by Section 8.5, (ii) the
acquisition by G.P. Subsidiary of the general partner interests in each of the
Investment Partnerships as contemplated by Section 9.1(c) and Schedule 9.1(c)
and (iii) the withdrawal of LEVCO as a general partner of Bridge Partners
Specialized Investment Fund, L.P., a Delaware limited partnership ("Bridge
Partners"), all of which transactions are contemplated by this Agreement to
occur between the date hereof and Closing.
4.12 "Investment Advisers Act" means the Investment Advisers Act of 1940,
as amended.
4.13 "Investment Company" means each investment company registered under
the Investment Company Act for which LEVCO acts as investment adviser or sub-
adviser.
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4.14 "Investment Contracts" means, with respect to any Person that is an
investment adviser, the respective contracts between such Person and the clients
of that Person relating to the provision by that Person for a fee, commission or
other payment, of investment advisory, asset management, consulting or
administrative services.
4.15 "Investment Company Act" means the Investment Company Act of 1940, as
amended.
4.16 "Investment Partnerships" means (i) Meadow Lane Associates, L.P.,
(ii) Purchase Associates, L.P., (iii) L.R.K. Savings, L.P., (iv) SLSB Partners,
L.P. and (v) Island Drive Partners, L.P., each a Delaware limited partnership.
4.17 "Knowledge" means, with respect to any Person, the actual knowledge
of such Person or, if such Person is a corporation, of any member of the board
of directors of such Person or any officer of such Person, in each case after
due inquiry.
4.18 "LEVCO Entity" means each of LEVCO, each LEVCO Subsidiary and each
Investment Partnership.
4.19 "LEVCO Broker Subsidiary" means the Person to be formed by LEVCO to
acquire the Assets of LEVCO relating to the broker-dealer business and
operations of LEVCO as contemplated by Section 8.5.
4.20 "LEVCO Subsidiaries" means LEVCO Broker Subsidiary and G.P.
Subsidiary.
4.21 "Lien" means any agreement, restriction, pledge, lien, option,
security interest, mortgage, claim, charge, restriction on transferability,
preemptive right or other encumbrance of any kind whatsoever.
4.22 "Material Adverse Effect" means with respect to any Person, a
material adverse effect on the business, Assets, financial condition, results of
operations or prospects (in the case of prospects, not taking into account
general economic and securities market conditions or general industry
developments) of such Person.
4.23 "Person" means any individual, partnership, corporation, limited
liability company, association, trust, joint venture, entity, unincorporated
organization, and any government, governmental department or agency or political
subdivision thereof.
4.24 "Related Agreements" means any agreement, instrument or certificate
executed by BKF, Merger Subsidiary, LEVCO or any Stockholder in connection with
this Agreement, including: (i) the employment agreements, the forms of which are
set forth as Exhibits 10.2(d)(i) and 10.2(d)(ii) (the "Employment Agreements"),
(ii) the Registration Rights Agreement, the form of which is set forth as
Exhibit 10.1(h), (iii) the Portfolio Management Agreement, the form of which is
set forth as Exhibit 10.1(i) and (iv) the Escrow Agreement, the form of which
is set forth as Exhibit 12.7.
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4.25 "Securities Act" means the Securities Act of 1933, as amended.
4.26 "SEC" means the Securities and Exchange Commission.
4.27 "Stockholder Representative" means Levin, who has been appointed as
representative of the Stockholders for certain purposes of this Agreement
pursuant to Section 14.2 hereof, or any successor to Levin as provided in
Section 14.2.
4.28 "Taxes" means all federal, state, county, local, foreign and other
taxes (including, without limitation, income, gross income, profits, premium,
estimated, excise, sales, services, use, occupancy, gross receipts, franchise,
license, ad valorem, severance, capital levy, production, stamp, transfer,
withholding, employment, unemployment, social security, payroll and property
taxes, customs duties and other governmental charges and assessments), together
with any interest, additions to tax or penalties.
4.29 "Tax Returns" means all returns, amended returns, declarations,
reports, estimates, information returns and statements required or permitted to
be filed in respect of Taxes.
4.30 "Terminable Contracts" means those contracts of LEVCO or any
Investment Partnership (other than Investment Contracts, the agreements of
limited partnership of the Investment Partnerships, insurance policies set forth
on Schedule 6.13 of the LEVCO Disclosure Schedule and LEVCO Benefit Plans)
which, by their terms or under applicable law, would be breached, or under which
a default would occur, or which would, or would be required to, terminate as a
result of the consummation of the transactions contemplated by this Agreement
unless the parties' consent to the transfer of such contract is obtained, such
Terminable Contracts being listed on Schedule 4.30 of the disclosure schedule
delivered to BKF by the Stockholders concurrently with the execution of this
Agreement (the "LEVCO Disclosure Schedule").
4.31 "Trading Days" means those days on which the Exchange is open
for trading.
References to "the date hereof", "the date of this Agreement" and like
terms shall be deemed to be references to the Signing Date.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE
STOCKHOLDERS AS TO THE STOCKHOLDERS
Each of the Stockholders hereby represents and warrants to BKF that the
statements contained in this Article V with respect to himself or herself are
correct as of the Signing Date and will be correct as of the Closing Date as
though made at the Closing Date (except for statements made as of a specific
date, which are correct as of such date).
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5.1 Authority. The Stockholder has full right, power and authority to
execute, deliver and perform this Agreement and the Related Agreements to which
it is a party. This Agreement has been duly executed and delivered by the
Stockholder and, assuming this Agreement constitutes a valid and binding
obligation of the other parties hereto, constitutes (and the other Related
Agreements to which the Stockholder will be a party, when executed and
delivered, will be duly executed and delivered and will constitute, assuming
such other Related Agreements constitute a valid and binding obligation of the
other parties thereto) valid and legally binding obligations of the Stockholder
enforceable against the Stockholder in accordance with the respective terms of
the Merger Agreement and each such Related Agreement, except as the
enforceability thereof may be subject to or limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting the rights
of creditors generally and general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity).
5.2 No Violation. Neither the execution and delivery by the Stockholder of
this Agreement or of any Related Agreement to which the Stockholder is or at
Closing will be a party, nor consummation of the transactions herein or therein
contemplated, nor compliance with the terms, conditions and provisions hereof or
thereof will conflict with or violate any provision of applicable law, or result
in a violation of or default under any provision of any regulation, order, writ,
injunction or decree of any Governmental Entity applicable to the Stockholder
or, assuming that the agreements of the Stockholder set forth on Schedule 5.3(b)
of the LEVCO Disclosure Schedule are terminated, of any Contract to which the
Stockholder is a party or by which the Stockholder is bound or to which the
Stockholder is subject, or constitute a default thereunder.
5.3 Ownership of LEVCO Common Stock. The Stockholder owns the number of
the issued and outstanding shares of LEVCO Common Stock set forth opposite the
Stockholder's name on Schedule 5.3(a) of the LEVCO Disclosure Schedule. The
Stockholder is the record and beneficial owner of such shares of LEVCO Common
Stock, free and clear of any Liens, except for such Liens arising from Contracts
set forth on Schedule 5.3(b) of the LEVCO Disclosure Schedule. As of the
Effective Time, the Stockholder will be the record and beneficial owner of such
Stockholder's shares of LEVCO Common Stock, free and clear of any Liens. The
Stockholder is not a party to any option, warrant, purchase right or other
Contract which could require the Stockholder to sell, transfer or otherwise
dispose of such Stockholder's shares of LEVCO Common Stock, or to any voting
trust, proxy, agreement or understanding with respect to the voting of such
Stockholders' shares of LEVCO Common Stock, except for those Contracts set forth
on Schedule 5.3(b) of the LEVCO Disclosure Schedule and other Contracts among
Stockholders entered into between the date hereof and Closing (each of which
Contracts will have been terminated on or prior to the Closing).
5.4 Brokers and Finders. Except for the employment of Goldman, Sachs & Co.
by LEVCO, the Stockholder has not employed any broker or finder or incurred any
liability for any financial advisory fees, brokerage fees, commissions or
finder's fees, and no broker or finder has acted, directly or indirectly, for
the Stockholder, in connection with this Agreement or the transactions
contemplated hereby.
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5.5 Approvals. No approval, authorization, order, license, or consent of
or registration, qualification or filing with any Governmental Entity and no
approval or consent by any other Person is required to be obtained or made by
the Stockholder in connection with the execution, delivery or performance of
this Agreement and the Related Agreements by the parties thereto (other than BKF
and Merger Subsidiary), other than as contemplated by Article X.
5.6 Investment Representations.
(a) The Stockholder acknowledges that the BKF Common Stock to be
received by him or her is not registered under the Securities Act and that such
BKF Common Stock may not be sold or otherwise transferred in the absence of
registration under the Securities Act or an exemption therefrom under such Act.
(b) The Stockholder is acquiring the BKF Common Stock to be received
by him or her for his or her own account for investment purposes and not with a
view to, or for sale in connection with, any distribution thereof, nor with any
present intention of distributing or selling the same in violation of the
Securities Act. Except as contemplated by this Agreement, the Stockholder has no
present or contemplated agreement, undertaking, arrangement, obligation, or
commitment providing for the disposition of the BKF Common Stock to be received
by him or her.
(c) The Stockholder has had the opportunity to make a detailed inquiry
concerning BKF and its business and personnel. The officers of BKF have made
available to the Stockholder any and all written information which the
Stockholder has requested and have answered to the Stockholder's satisfaction
all inquiries made by the Stockholder.
(d) The Stockholder is an accredited investor as defined in Regulation
D under the Securities Act.
5.7 Health. In the case of Levin, Melody L. Prenner Sarnell and Jeffrey A.
Kigner only, to the knowledge of such Stockholder, such Stockholder is not
subject on the date hereof to any health condition and disability which would
prevent or materially impair his or her ability to perform his or her
obligations hereunder or under such Stockholder's Employment Agreement.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
AS TO LEVCO AND THE INVESTMENT PARTNERSHIPS
The Stockholders hereby represent and warrant, jointly and severally, to
BKF that the statements contained in this Article VI are correct as of the
Signing Date and will be correct as of the Closing Date as though made at the
Closing Date (except for statements made as of a specific date, which are
correct as of such date):
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6.1 Organization and Authority of LEVCO. LEVCO is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware, with full power and authority to own or lease and use its
properties and assets and to carry on its business as such business is now
conducted. Except as set forth in Schedule 6.20(c)(i)(a) and Schedule 6.22(a) of
the LEVCO Disclosure Schedule, LEVCO possesses all licenses, franchises, permits
and other rights necessary to conduct its business as such business is now
conducted. LEVCO is duly qualified to do business as a foreign corporation under
the laws of the states listed on Schedule 6.1 of the LEVCO Disclosure Schedule
and is not by reason of the nature of its business or the ownership or leasing
of its properties required to be qualified to do business in any other
jurisdiction where the failure to so qualify would reasonably be expected to
have a Material Adverse Effect on LEVCO.
6.2 Charter, Bylaws, Agreements of Limited Partnership and Minutes.
The copies of the certificate of incorporation of LEVCO and of the certificate
of limited partnership of each of the Investment Partnerships as certified by
the Secretary of State of the State of Delaware; the agreement of limited
partnership of each of the Investment Partnerships as certified by a general
partner of each such Investment Partnership; the bylaws of LEVCO as certified by
the Secretary of LEVCO; and the minutes of meetings of the stockholders and
board of directors (or consents or other actions in lieu thereof) of LEVCO and
the minutes of the meetings of the partners of each of the Investment
Partnerships (or consents or other actions in lieu thereof) furnished or made
available to BKF by LEVCO are true, correct and complete and conform to the
originals thereof.
6.3 Authority. LEVCO has full right, power and authority to execute,
deliver and perform this Agreement and the Related Agreements to which it is a
party, and all proper actions of the board of directors of LEVCO authorizing the
execution, delivery and performance hereof and thereof have been taken. At the
Closing, all proper actions of the Stockholders of LEVCO approving and adopting
this Agreement and the Merger shall have been taken (including, without
limitation, the affirmative vote by each Stockholder in favor of, or the written
consent of each Stockholder to, the approval and adoption of this Agreement and
the Merger). This Agreement has been duly executed and delivered by LEVCO and,
assuming this Agreement constitutes a valid and binding obligation of the other
parties hereto, constitutes (and the Related Agreements to which LEVCO will be a
party, when executed and delivered, will be duly executed and delivered and will
constitute, assuming such Related Agreements constitute a valid and binding
obligation of the other parties thereto) valid and legally binding obligations
of LEVCO enforceable against it in accordance with the respective terms of the
Merger Agreement and each such Related Agreement, except as the enforceability
thereof may be subject to or limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting the rights of creditors
generally and general principles of equity (regardless of whether enforcement is
sought in a proceeding at law or in equity).
6.4 No Violation. Neither the execution and delivery by the Stockholders
and LEVCO of this Agreement or of any Related Agreement to which any of the
Stockholders or LEVCO is or at Closing will be a party, nor consummation of the
transactions herein or therein contemplated, nor compliance by the Stockholders
or LEVCO with the terms, conditions and
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provisions hereof or thereof will (i) conflict with or violate any provision of
applicable law, the certificate of incorporation of LEVCO or either of the LEVCO
Subsidiaries or the certificates of limited partnership or the agreements of
limited partnership of any of the Investment Partnerships, or (ii) require the
consent of any partner in the Investment Partnerships, or (iii) result in a
violation of or default under any provision of any regulation, order, writ,
injunction or decree of any Governmental Entity applicable to any LEVCO Entity
or (iv) result in a violation or a default under any Contract (other than
Terminable Contracts) to which any LEVCO Entity is a party or by which any LEVCO
Entity is bound or to which any LEVCO Entity is subject, or constitute a default
thereunder or give rise to a right of termination, cancellation or acceleration
of any obligation thereunder, contractually require any offer to purchase or any
prepayment of any debt, contractually require the payment of (or result in the
vesting of) any severance, golden parachute, change of control or similar type
of payment, or give rise to the loss of any material benefit under or result in
the creation or imposition of any Lien upon the Assets of any LEVCO Entity
pursuant to the terms of any such Contract (except as contemplated by this
Agreement), assuming in the case of clauses (i) through (iv), that all of the
consents contemplated by Sections 10.1, 10.2 and 10.3 are obtained and the
actions contemplated by Section 9.1(c) have occurred and that the consents
contemplated by Section 8.3(b) are obtained and that the provisions of the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"),
shall have been complied with and the waiting period thereunder shall have
expired or terminated, and except in the case of clause (iv) only, for
violations, defaults, terminations, cancellations, accelerations, contractual
requirements, losses or Liens that would not reasonably be expected to involve
the payment by a LEVCO Entity or the Surviving Corporation of greater than
$25,000 individually or $100,000 in the aggregate.
6.5 Capitalization. The authorized capital stock of LEVCO consists of
10,000 shares of LEVCO Common Stock, all of which are issued and outstanding.
LEVCO holds no shares of LEVCO Common Stock in its treasury. All outstanding
shares of LEVCO Common Stock are validly issued, fully paid and nonassessable,
and not subject to preemptive rights, and are held of record by the respective
Stockholders as set forth on Schedule 5.3(a) of the LEVCO Disclosure Schedule.
Except as set forth on Schedule 6.5 of the LEVCO Disclosure Schedule, there are
no other shares of capital stock or other equity securities of LEVCO outstanding
and no outstanding options, warrants, scrip, rights to subscribe to, calls,
commitments or agreements of any character whatsoever relating to, or securities
or rights convertible into or exchangeable for, shares of capital stock of
LEVCO.
6.6 Approvals. Assuming that all of the consents contemplated by Section
8.3(b) are obtained, (i) no approval, authorization, order, license or consent
of or registration, qualification or filing with any Governmental Entity and
(ii) no approval or consent by any other Person is required to be obtained or
made by any LEVCO Entity in connection with the execution, delivery or
performance of this Agreement and the Related Agreements by the parties thereto
(other than BKF or Merger Subsidiary), other than as contemplated by Section 9.3
and Article X and as set forth on Schedule 6.6 of the LEVCO Disclosure Schedule
and except in the case of clause (ii) only, for such approvals, authorizations,
orders, licenses, consents, registrations, qualifications or
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filings the absence of which would not reasonably be expected to involve the
payment by a LEVCO Entity or the Surviving Corporation of greater than $25,000
individually or $100,000 in the aggregate.
6.7 Financial Statements.
(a) LEVCO has delivered to BKF audited balance sheets of LEVCO as at
the close of its fiscal years ended December 31, 1992 through December 31, 1994,
together with the related statements of income, stockholder's equity and cash
flows for the fiscal years ended December 31, 1992 through December 31, 1994,
accompanied by a report of Richard A. Eisner & Company, L.L.P. ("Eisner")
thereon. LEVCO will deliver to BKF, LEVCO Subsequent Financials (as defined in
Section 9.10) with respect to the fiscal year of LEVCO ended December 31, 1995
as required by Section 9.10. Such balance sheets and financial statements
(including the notes thereto) for such periods are collectively called the
"LEVCO Audited Financials" and are, or to the extent delivered as contemplated
by Section 9.10 will be, attached hereto to Schedule 6.7(a) of the LEVCO
Disclosure Schedule.
(b) LEVCO has also delivered to BKF copies of its (i) FOCUS Reports
filed on Form X-17A-5 (the "FOCUS Reports") as of March 31, 1995 and June 30,
1995 and (ii) unaudited balance sheet at September 30, 1995, together with the
related unaudited statements of income, stockholder's equity and cash flows for
the nine-month period then ended, together with the review report of Eisner
thereon (the "September 30, 1995 Financial Statements"). LEVCO will deliver to
BKF, LEVCO Subsequent Financials and FOCUS Reports with respect to the fiscal
quarters ending after the date hereof and prior to the Closing as and to the
extent required by Section 9.10. The September 30, 1995 Financial Statements and
all such quarterly LEVCO Subsequent Financials are referred to collectively as
the "LEVCO Unaudited Financials" and are, or to the extent delivered as
contemplated by Section 9.10, will be attached to Schedule 6.7(b) of the LEVCO
Disclosure Schedule. The LEVCO Audited Financials and the LEVCO Unaudited
Financials are hereinafter sometimes collectively referred to as the "LEVCO
Financial Statements."
(c) The LEVCO Financial Statements fairly present (or will when
delivered, fairly present) the financial position and results of operations of
LEVCO on the dates thereof and for the fiscal periods then ended, in accordance
with GAAP which, except as may otherwise be noted in the footnotes thereto,
shall have been applied on a basis consistent with prior periods except, in the
case of the LEVCO Unaudited Financial Statements, for normal recurring year-end
accruals reflected thereon or omitted therefrom which are not individually or in
the aggregate material and for the absence of complete footnotes. The LEVCO
Financial Statements reflect or provide for claims against and debts and
liabilities of LEVCO, absolute, accrued, contingent or otherwise, as at the
dates thereof in accordance with GAAP, except for normal recurring year-end
accruals reflected on or omitted from the LEVCO Unaudited Financials which are
not individually or in the aggregate material, and the year-end adjustments
described on Schedule 6.7(c). Each FOCUS Report delivered or to be delivered
complied (and with respect to FOCUS Reports filed with the SEC after the date
hereof and prior to Closing, will comply) at the date
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thereof in all material respects with the rules and regulations of the SEC
relating thereto and fairly present the information required to be presented
therein pursuant to Rule 17a-5 under the Exchange Act with respect to LEVCO at
such date.
6.8 No Adverse Change. As of the date hereof, and except as set forth on
Schedule 6.8 of the LEVCO Disclosure Schedule, since December 31, 1994, (a)
there has been no Material Adverse Effect with respect to any LEVCO Entity; (b)
there have been no distributions paid or declared to the Stockholders except as
reflected in the LEVCO Financial Statements; (c) LEVCO has not issued or sold
any interest, option, note or other security of LEVCO; (d) no material physical
property owned or leased by LEVCO has suffered any destruction or damage,
regardless of whether or not the loss suffered was insured; (e) there has been
no write-down or write-off by LEVCO or any Investment Partnership of any of
their respective Assets, including, without limitation, write-offs of accounts
receivable (except for revaluations of portfolio holdings in the ordinary course
of business); (f) no Investment Contracts collectively accounting for more than
5% of the Assets Under Management of LEVCO at December 31, 1994 have been
terminated; (g) neither LEVCO nor any Investment Partnership has sold or
otherwise disposed of any Assets other than in the ordinary course of business;
and (h) neither LEVCO nor any Investment Partnership has incurred any debt or
liability, absolute, accrued, contingent or otherwise, other than debts and
obligations incurred in the ordinary course of business consistent with past
practice or that are otherwise specifically set forth in the LEVCO Disclosure
Schedule.
6.9 Subsidiaries.
(a) Except for the formation of the LEVCO Subsidiaries immediately
prior to Closing as contemplated by Section 8.5 and Schedule 9.1(c), neither
LEVCO nor any Investment Partnership has any subsidiaries and neither LEVCO nor
any Investment Partnership has, at any time since their respective dates of
formation, owned any controlling interest or general partner interest in any
other Person (except, in the case of LEVCO, the Investment Partnerships and
Bridge Partners Specialized Investment Fund, L.P., a Delaware limited
partnership ("Bridge Partners")). No LEVCO Entity owns, directly or indirectly,
except solely for investment purposes in the ordinary course of its business,
any of the capital stock of or any other equity interest in any corporation,
association, trust or similar entity, any interest in the equity of any
partnership (other than, in the case of LEVCO, such general partner interests in
the Investment Partnerships as are described in Schedule 6.9(b) of the LEVCO
Disclosure Schedule) or similar entity, any share in any joint venture, or any
other equity or proprietary interest in any entity or enterprise, however
organized and however such interest may be denominated or evidenced. No LEVCO
Entity has or owns, except solely for investment purposes in the ordinary course
of its business, any rights, options, subscriptions, warrants or other
agreements of any kind to purchase or otherwise to receive or be issued any
shares of such capital stock, or securities or obligations of any kind
convertible into shares of such capital stock, existing in favor of any Person.
Neither any Stockholder nor any affiliate of any Stockholder owns any shares of
or other equity interests in Purchase Offshore, Ltd., a Cayman Islands
corporation ("Purchase Offshore"), or any general partner or other controlling
or managing interest in any Person (other than LEVCO and the general partner
interests held, directly or indirectly, in the Investment Partnerships)
organized to conduct any investment business.
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(b) As of the date hereof, the record and beneficial ownership of the
general partner interests in each Investment Partnership is as set forth on
Schedule 6.9(b) of the LEVCO Disclosure Schedule. As of the Closing, assuming
consents contemplated by 10.2(h) are obtained and the transactions contemplated
by Section 9.1(c) and Schedule 9.1(c) of the LEVCO Disclosure Schedule have
occurred, G.P. Subsidiary will be the sole record and beneficial owner of the
general partner interests in each Investment Partnership, free and clear of any
Liens. Except as set forth on Schedule 6.9(b) of the LEVCO Disclosure Schedule,
each of the Investment Partnerships is a limited partnership duly formed,
validly existing and in good standing under the laws of the State of Delaware
with full power and authority to own or lease and use its properties and assets
and to carry on its business as such business is now conducted. Each of the
Investment Partnerships possesses all licenses, franchises, permits and other
rights necessary to conduct its business as such business is now conducted. None
of the Investment Partnerships is by reason of the nature of its business or its
ownership of properties or otherwise required to be qualified to do business as
a foreign limited partnership in any jurisdiction other than the jurisdictions
listed opposite the name of such Investment Partnership on Schedule 6.9(b) of
the LEVCO Disclosure Schedule and except where the failure to so qualify would
not reasonably be expected to have a Material Adverse Effect on such Investment
Partnership.
(c) As of the Closing, the authorized capital stock of LEVCO Broker
Subsidiary will consist of 1,000 shares of common stock, par value $.01 per
share, all of which will be issued and outstanding and held beneficially and of
record by LEVCO, free and clear of any Liens. As of the Closing, the authorized
capital stock of G.P. Subsidiary will consist of 1,000 shares of common stock,
par value $.01 per share, all of which will be issued and outstanding. As of the
Closing, the shares of G.P. Subsidiary will be held beneficially and of record
by the G.P. Subsidiary Stockholders as set forth on Schedule 6.9(c) of the LEVCO
Disclosure Schedule, free and clear of any Liens. All such shares will as of
Closing have been validly issued, fully paid and nonassessable, and not subject
to preemptive rights. As of the Closing, there will be no other share of capital
stock or other equity securities of a LEVCO Subsidiary outstanding and no
outstanding options, warrants, scrip, rights to subscribe to, calls, commitments
or agreement of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of capital stock of a LEVCO
Subsidiary. As of the Closing and except as contemplated by Section 9.3 in the
case of LEVCO Broker Subsidiary, each LEVCO Subsidiary will be a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware, with full power and authority to own or lease and use its
properties and assets and to carry on its business in the same manner as such
business is now conducted by LEVCO; will possess all licenses, franchises,
permits, and other rights necessary to conduct its business in the same manner
as such business is now conducted by LEVCO; and will be qualified to do business
in each jurisdiction where by reason of the nature of its business or the
ownership of its properties or otherwise, it is required to be so qualified,
except where the failure to so qualify would not reasonably be expected to have
a Material Adverse Effect on such LEVCO Subsidiary.
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6.10 Taxes.
(a) All Tax Returns required by applicable law to be filed by or on
behalf of any LEVCO Entity have been timely filed, or requests for extensions
have been timely filed, granted, and have not yet expired. Each of the Tax
Returns filed by any LEVCO Entity in cases where any such Person is required to
pay a Tax liability directly, correctly and accurately reflects the amount of
its Tax liability and any other material information required to be set forth on
such Tax Return, and, in all other cases, correctly and accurately reflects such
Person's income, gains, losses, deductions and credits for the relevant fiscal
year (or other period) and any other material information required to be set
forth on such Tax Return. LEVCO has previously delivered to BKF accurate and
complete copies of all such returns filed through the date hereof, as well as
any examination reports and statements of adjustments or deficiencies with
respect to each LEVCO Entity from December 31, 1991 through the date hereof (and
for any other periods for which the statute of limitations has not expired), and
will deliver to BKF accurate and complete copies of any such returns, reports or
statements made or received from the date hereof through Closing. All Taxes
payable by each LEVCO Entity that are shown on filed Tax Returns, or to be shown
on Tax Returns that have been extended but not yet filed, have been paid. In the
case of Taxes required to be paid directly by any LEVCO Entity for any period
for which no Tax Return is yet due but with respect to which GAAP would require
that amounts in respect of such Taxes be accrued, all such Taxes have been paid
or adequately reserved for on the books of such LEVCO Entity. Each LEVCO Entity
has withheld or collected all Taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee, independent contractor,
creditor, stockholder or other third party. Except with respect to those matters
set forth on Schedule 6.10 of the LEVCO Disclosure Schedule, no audit
examination of any Tax Return of any LEVCO Entity is in progress and no LEVCO
Entity nor any director, officer or general partner of any of them has been
notified by any Tax authority that any audit examination of any LEVCO Entity is
contemplated. Except with respect to those matters set forth on Schedule 6.10 of
the LEVCO Disclosure Schedule, there is no Tax deficiency or claim for
additional Taxes or interest thereon or penalties or additions to tax in
connection therewith asserted against any LEVCO Entity. Except as set forth on
Schedule 6.10, the Tax Returns filed by LEVCO and each Investment Partnership
have not been audited. Except as set forth on Schedule 6.10 of the LEVCO
Disclosure Schedule, no claim has ever been made by an authority in a
jurisdiction where any LEVCO Entity does not file reports or returns that any
such Person not filing reports or returns in that jurisdiction is or may be, or
its partners are or may be, subject to taxation by that jurisdiction which has
not yet been resolved, or if resolved and any amount was determined to be
payable, in respect of which such amount has not yet been paid. There are no
Liens on any of the equity interests or assets of any LEVCO Entity that arose in
connection with any failure to pay Taxes. Except as set forth on Schedule 6.10,
no LEVCO Entity has ever entered into a closing agreement pursuant to Section
7121 of the Code or any similar provision of state law. No LEVCO Entity has
agreed to, or is required to, make any adjustments under Section 481(a) of the
Code by reason of a change in accounting method or otherwise.
(b) Except as set forth in Schedule 6.10, no LEVCO Entity is party to
an extension or waiver, that is currently in effect, of any statute of
limitations in respect of the assessment or collection of any Tax due or in
respect of any adjustment to any Tax Return.
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(c) Each Investment Partnership is, and at all times since its
formation has been, properly classified for federal and state income tax
purposes as a partnership that is not publicly traded (within the meaning of
Section 7704 of the Code) (and not as a publicly traded partnership, association
or corporation).
(d) LEVCO does not have current or accumulated "earnings and profits"
within the meaning of Section 312 of the Code in excess of $600,000.
(e) LEVCO is, and at all times since July 1, 1988 has been, properly
classified for federal and New York state income tax purposes as an S
corporation within the meaning of Section 1361 of the Code.
(f) No LEVCO Entity has filed a consent under Section 341(f) of the
Code.
(g) No LEVCO Entity is a party to any tax allocation or tax-sharing
agreement or has any liability for the Taxes of any Person (i) under Treas. Reg.
Section 1.1502-6 (or any similar provision of state, local, or foreign law),
(ii) as a transferee or successor, (iii) by contract, or (iv) otherwise.
6.11 Interests of Insiders. Except as set forth on Schedule 6.11 of
the LEVCO Disclosure Schedule and except for normal advances for business
expenses incurred in the ordinary course of business and reimbursement of
business expenses incurred in the ordinary course of business, no current or
former officer, director or stockholder of LEVCO or a LEVCO Subsidiary or any
general partner of any Investment Partnership, nor any affiliate of any of the
foregoing Persons, (i) has any loan (except participant loans under LEVCO
Benefit Plans (as defined in Section 6.18) as permitted by applicable law) or
other obligation for borrowed money outstanding to or from any LEVCO Entity, or
for which any LEVCO Entity is or may be liable under a guaranty or otherwise, or
(ii) has any material interest (other than portfolio holdings or ownership of
less than 5% of the shares of a publicly traded company and other than the G.P.
Subsidiary Stockholders' ownership of G.P. Subsidiary or any entity organized by
or for the Stockholders to receive payments for Assigned Accounts, as defined in
and contemplated by, Section 9.14) hereof in any Person with which any LEVCO
Entity has entered into any Contract, or with which any LEVCO Entity does
business and which would influence that Person in doing business with any LEVCO
Entity.
6.12 Title to Assets; Property.
(a) Each LEVCO Entity has (or in the case of the LEVCO Subsidiaries,
at the Closing will have) good and marketable title to, or valid and subsisting
leasehold interests in, all of their respective Assets, including in the case of
LEVCO, the Assets reflected in the September 30, 1995 Financial Statements,
except such Assets as have been disposed of in the ordinary course of the
business consistent with past practice or as otherwise permitted by this
Agreement, free and clear of any Liens, except for (i) such minor imperfections
of title, or insignificant Liens, as do not, individually or in the aggregate,
materially detract from the values of the Assets subject thereto, or materially
interfere with the present or contemplated uses thereof, (ii) mechanics and
other statutory Liens, Liens of broker-dealers and other financial
counterparties
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on assets of the investment portfolios of the Investment Partnerships incurred
in the ordinary course of business and the Lien of taxes not yet due and
payable, and (iii) the Liens listed on Schedules 6.12(a), 6.12(d) or 6.12(e) of
the LEVCO Disclosure Schedule which collectively would not reasonably be
expected to have a Material Adverse Effect on any LEVCO Entity. The Assets so
owned or leased by each LEVCO Entity constitute all of the Assets used in or
necessary for the conduct of the business of such LEVCO Entity as now conducted.
(b) Each LEVCO Entity's personal property is in good order and repair
and is operable and fit to be used for its intended purposes in all material
respects. No LEVCO Entity owns or has ever owned any real estate. Each LEVCO
Entity holds its leased real and personal properties under valid and binding
leases, each such lease is effective in accordance with its respective terms,
and there is not under any such lease any existing material default (or any
event which with notice or lapse of time or both would become a material
default) pertaining to such LEVCO Entity, or to the knowledge of each of LEVCO
and the Stockholders, pertaining to the lessor thereunder. All such leases of
real property and all such leases of personal property providing for annual
rental payments by a LEVCO Entity of more than $10,000 and in effect on the date
hereof are set forth on Schedule 6.12(b) of the LEVCO Disclosure Schedule, and
LEVCO has delivered to BKF correct and complete copies of all such leases.
(c) Except for portfolio holdings, no Investment Partnership owns, or
has any leasehold interest in, any Asset.
(d) Schedule 6.12(d) of the LEVCO Disclosure Schedule sets forth all
trademarks, trade names, service marks and copyrights (whether or not such
trademarks, trade names, service marks and copyrights are registered), and all
pending applications therefor, owned, licensed or used by a LEVCO Entity at the
date hereof, other than software or publications commercially available on a
retail basis. Each LEVCO Entity has, or has the right to use, and after
consummation of the transactions contemplated hereby, the Surviving Corporation
and its Subsidiaries will have, or have the right to use, free and clear of any
Liens or claims of others, all franchises, permits, licenses, trademarks,
service marks (whether registered or unregistered), trademark applications,
service mark applications, trade names, copyrights, trade secrets, designs and
other intellectual property and proprietary rights ("Proprietary Rights")
necessary to carry on its business as currently conducted. To the knowledge of
each of the Stockholders and LEVCO, no LEVCO Entity has infringed,
misappropriated or violated any valid Proprietary Rights or contractual
relationships of others relating thereto. No LEVCO Entity and no Stockholder has
received any notice, claim or protest respecting any such infringements or
violations and no LEVCO Entity has given any indemnification to any Person for
any such infringements, misappropriations or violations. There is no pending or
threatened claim asserted in writing by or on behalf of any LEVCO Entity for
infringement or misappropriation of any Proprietary Rights owned by a LEVCO
Entity and to the knowledge of each of the Stockholders and LEVCO, there is no
reasonable basis for any such claim.
(e) Schedule 6.12(e) of the LEVCO Disclosure Schedule identifies all
computer software owned or licensed by any LEVCO Entity at the date hereof,
except for any such software commercially available on a retail basis. Each
LEVCO Entity owns or licenses all
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computer software developed or currently used by it and each LEVCO Entity has
the right to use such software as presently used by it without infringing upon
the Proprietary Rights (including trade secrets rights) of a third party. The
computer software owned or licensed by the LEVCO Entities constitutes all of the
computer software necessary to conduct the business of each such LEVCO Entity as
now conducted. Consummation of the transactions contemplated hereby will not
result in a material impairment of the legal rights of an LEVCO Entity to any of
such software.
6.13 Insurance. Each insurance policy that is maintained by any LEVCO
Entity at the date hereof with respect to their respective businesses or Assets
or upon the life of any person employed by any of them is set forth on Schedule
6.13 of the LEVCO Disclosure Schedule showing the amount of coverage under each
such policy, the deductibles therefor and copayments required to be made in
connection therewith, and claims made to date under each such policy. Except as
set forth on Schedule 6.13 of the LEVCO Disclosure Schedule, no LEVCO Entity is
in default with respect to any insurance policy and no LEVCO Entity has received
any notice of cancellation or termination of, or of any material premium
increase with respect to, any insurance policy. All such policies will not be
subject to cancellation or termination as a result of the transactions
contemplated hereby, except as set forth on Schedule 6.13 of the LEVCO
Disclosure Schedule.
6.14 Other Material Contracts.
(a) All Contracts (other than the Investment Contracts) to which any
LEVCO Entity is a party or by which any LEVCO Entity or any Investment
Partnership is bound on the date hereof and that involve future payment
obligations by the Company of in excess of $10,000 or which are not terminable
by such LEVCO Entity that is a party thereto on 30 or fewer days' notice, or
that otherwise are material to the business of such LEVCO Entity, are listed on
Schedule 6.14(a) of the LEVCO Disclosure Schedule, and all of such Contracts are
valid and effective in accordance with their respective terms.
(b) Except as set forth in Schedule 6.14(b) of the LEVCO Disclosure
Schedule, no LEVCO Entity is a party to any loan agreement, bank credit
agreement or other agreement relating to the borrowing of money.
(c) No LEVCO Entity or, to the knowledge of LEVCO or the
Stockholders, any other party thereto is in default under (nor is any LEVCO
Entity or the Stockholders aware of any fact or event which with the lapse of
time or the giving of notice or both would constitute a default under) any
Contracts made or obligation owed by it except as set forth on Schedule 6.14(c)
of the LEVCO Disclosure Schedule. Except for the Terminable Contracts listed on
Schedule 4.30 of the LEVCO Disclosure Schedule, the Investment Contracts, the
LEVCO Benefit Plans and any insurance contracts listed on Schedule 6.13 of the
LEVCO Disclosure Schedule, all Contracts listed on Schedule 6.14(a) of the LEVCO
Disclosure Schedule will continue to be valid, binding and enforceable and in
full force and effect upon the consummation of the transactions contemplated
hereby.
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(d) Except as listed on Schedule 6.14(d) of the LEVCO Disclosure
Schedule, no LEVCO Entity has given a power of attorney to any person which is
presently outstanding or in force for any purpose whatsoever.
6.15 Bank Accounts and Money Market Funds. Set forth on Schedule 6.15
of the LEVCO Disclosure Schedule is the name and location of each bank and money
market fund in which any LEVCO Entity has an account or accounts or safe deposit
boxes, the name and number of each account or box, the names of persons
authorized to draw thereon or having access thereto, and the balance of each
account and the contents of each box as of the date hereof (or such earlier date
as is indicated on Schedule 6.15 of the LEVCO Disclosure Schedule).
6.16 Litigation.
(a) Except as set forth on Schedule 6.16 of the LEVCO Disclosure
Schedule, there are no legal, administrative or arbitration actions, suits,
proceedings or investigations of any kind pending, or, to the best of LEVCO's
and each Stockholder's knowledge, threatened before any Governmental Entity by
or against any LEVCO Entity's respective business or Assets or which affect any
LEVCO Entity's business or Assets and which (if determined adversely to LEVCO)
would be reasonably likely to interfere materially with the marketing of
services or products of any LEVCO Entity or otherwise have a Material Adverse
Effect on any LEVCO Entity, and no LEVCO Entity is the subject of any
injunction, order or decree.
(b) There are no actions, suits or proceedings pending and, to the
knowledge of LEVCO or any of the Stockholders, no investigations are pending and
no actions, suits or proceedings are threatened, before any court, commission,
agency or other administrative authority or Governmental Entity by or against
any LEVCO Entity or any Stockholder which, if adversely determined, would be
reasonably likely to restrain or enjoin or otherwise adversely affect the
consummation of the transactions contemplated by this Agreement or the Related
Agreements or declare unlawful the transactions or events contemplated by this
Agreement or cause such transactions to be rescinded. There are no judgments,
injunctions, orders or other judicial or administrative mandates outstanding
against or affecting any LEVCO Entity or any of the Stockholders which would be
reasonably likely to restrain or enjoin the consummation of the transactions
contemplated by this Agreement.
6.17 Brokers and Finders. Except for Goldman, Sachs & Co., no LEVCO
Entity has employed any broker or finder or incurred any liability for any
financial advisory fees, brokerage fees, commissions or finder's fees, and no
broker or finder has acted, directly or indirectly, for any LEVCO Entity in
connection with this Agreement or the transactions contemplated hereby. Such
fees as any LEVCO Entity or any of the Stockholders may owe to Goldman, Sachs &
Co. shall be the sole obligation of the Stockholders.
6.18 Employee Benefit Plans and Employees.
(a) LEVCO has delivered or made available to BKF, prior to the
execution of this Agreement, true and complete copies (or, with respect to
unwritten plans, written descriptions) of (i) each of each LEVCO Entity's
pension, profit sharing, retirement (including
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supplemental or excess retirement), deferred compensation, savings, or other
similar plans or arrangements, as in effect on the date of this Agreement,
including, without limitation, any "employee pension benefit plan", as that term
is defined in Section 3(2) of ERISA, which benefits or is intended to benefit
any of the present or former employees, officers, directors, stockholders or
partners of any LEVCO Entity or the dependents, spouses, or other beneficiaries
of any of such persons (the "LEVCO Pension Plans"), (ii) each of each LEVCO
Entity's employment or consulting agreements, severance agreements (including,
without limitation, change of control or golden parachute agreements or
arrangements), bonus, profit-sharing, incentive, deferred compensation,
supplemental or excess retirement, life insurance, health, or other plans,
policies, contracts, or arrangements as in effect on the date of this Agreement,
other than a LEVCO Pension Plan or LEVCO Welfare Plan (as hereinafter defined)
that provides benefits or perquisites to or in respect of any of the present or
former employees, officers, directors, stockholders or partners of any LEVCO
Entity or the dependents, spouses, or other beneficiaries of any of such persons
and (iii) each of each LEVCO Entity's severance, bonus, incentive, life
insurance, health, vacation, tuition assistance or reimbursement, legal
services, salary continuation, travel or accident insurance or benefits,
disability insurance or benefits, or unemployment benefits plans, policies,
contracts or arrangements, including, without limitation, each "employee welfare
benefit plan" within the meaning of Section 3(1) of ERISA as in effect on the
date of this Agreement that provides benefits or perquisites to or in respect of
present or former employees, officers, directors, stockholders or partners of
any LEVCO Entity or the dependents, spouses, or other beneficiaries of, any of
such persons (the "LEVCO Welfare Plans") (all the foregoing being collectively
the "LEVCO Benefit Plans"). All LEVCO Benefit Plans are listed on Schedule
6.18(a) of the LEVCO Disclosure Schedule. Except as set forth in Schedule
6.18(a) of the LEVCO Disclosure Schedule, none of the Investment Partnerships
maintains or has ever maintained any plans of the type included in the
definition of LEVCO Benefit Plans. No LEVCO Entity has participated in or been a
member of, or been required to contribute to, and no LEVCO Benefit Plan is or
has been, a "multiemployer plan" within the meaning of Section 3(37) or Section
4001(a)(3) of ERISA that is subject to Title IV of ERISA.
(b) The LEVCO Entities have made or caused to be made all
contributions to and all premiums or payments under the LEVCO Benefit Plans
required to be made through the date hereof under the terms of such LEVCO
Benefit Plans or applicable law, and has properly accrued or otherwise reflected
in its financial statements in accordance with GAAP all other liabilities or
charges with respect to such LEVCO Benefit Plans required so to have been
accrued or reflected. There are no claims or proceedings pending or, to the best
knowledge of LEVCO and the Stockholders, threatened, nor is there any reasonable
basis known to any LEVCO Entity or the Stockholders for any such claim or
proceeding, by or involving the Internal Revenue Service, the U.S. Department of
Labor, the Pension Benefit Guaranty Corporation, or any participant or
beneficiary, with respect to any LEVCO Benefit Plan or any employee benefit plan
formerly maintained by any LEVCO Entity or to which it has contributed, other
than claims for benefits in the normal course including claims pursuant to
domestic relations orders. Except as set forth in Schedule 6.18(b) of the LEVCO
Disclosure Schedule, neither the projected benefit obligations under any LEVCO
Pension Plan, determined in accordance with FASB Statement No. 87, nor the
benefit liabilities of any LEVCO Pension Plan on a termination basis, exceeds
the fair market value of the assets of such LEVCO Pension Plan.
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(c) Each of the LEVCO Benefit Plans in all material respects conforms
to and has been administered in accordance with the applicable provisions of
ERISA and the Code and all other applicable laws, rules, and regulations. To the
best of the Stockholders' and LEVCO's knowledge, no non-exempt prohibited
transaction has occurred with respect to any LEVCO Benefit Plan which is subject
to ERISA. With respect to the LEVCO Benefit Plans, no event has occurred and, to
the best knowledge of the Stockholders and LEVCO, there exists no condition or
set of circumstances, in connection with which any LEVCO Entity would be subject
to any liability, penalty, tax, excise, lien or encumbrance or loss of tax
deduction under ERISA or the Code, including, without limitation, Sections
302(f), 409 or 502, Part 6 of Title I or Title IV of ERISA, or Sections 162(n),
404 or 412(n) or Chapters 43 or 99 of the Code (except liability for benefit
claims and funding obligations payable in the ordinary course). No LEVCO Entity
is, or has been at any time during the five years preceding the date of this
Agreement, a member of a "controlled group" as defined in Section 412 of the
Code, Part B of Title 1 of ERISA, or a group of trades or businesses under
common control as defined in Section 4001(b) of ERISA, that included a Person
that either (i) failed to make any required annual or quarterly contribution to
a plan subject to the minimum funding standards of either Section 412 of the
Code or Part 3 of Title 1 of ERISA, (ii) obtained a waiver of such minimum
funding standards, (iii) terminated a single-employer plan subject to Title IV
of ERISA without fully funding all benefit commitments thereunder, (iv) withdrew
or partially withdrew from a multiemployer pension plan subject to Title IV of
ERISA unless the full amount of any withdrawal liability (whether or not being
contested) has been paid. None of the LEVCO Pension Plans has incurred a
reportable event as defined in Section 4043 of ERISA that has not been properly
reported.
(d) Each LEVCO Pension Plan that is intended to qualify under Section
401(a) of the Code has received a favorable determination letter taking into
account the Tax Reform Act of 1986 and nothing has occurred since the date of
such letter that could reasonably be expected to affect adversely the qualified
status of any such LEVCO Pension Plan. Each trust created under any LEVCO
Pension Plan has been at all times exempt from federal income tax under Section
501(a) of the Code, and each trust created under any LEVCO Welfare Plan intended
to qualify as a voluntary employee benefit association has been at all times
exempt from federal income tax under Section 501(c)(9) of the Code.
(e) Except as disclosed on Schedule 6.18(e) of the LEVCO Disclosure
Schedule, no LEVCO Welfare Plan provides medical or death benefits (whether or
not insured) with respect to current or former employees, officers, directors,
stockholders or partners beyond their date of retirement or other termination of
service (other than continuation of health coverage to the extent required under
Part 6 of Title I of ERISA).
(f) Except as disclosed on Schedule 6.18(f) of the LEVCO Disclosure
Schedule, the consummation of the transactions contemplated by this Agreement
will not obligate LEVCO to provide any current or former officer, director,
stockholder, partner or employee of any LEVCO Entity, including, but not limited
to, Continued Employees (as defined in Section 13.1), with severance pay,
unemployment compensation or any similar payment.
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(g) No LEVCO Entity is bound by any collective bargaining unit
agreement or any other legally binding Contract, whether or not in writing, to
maintain an employee pension plan or employee welfare plan now in force with
respect to any of the employees of LEVCO or any Investment Partnership.
(h) With respect to LEVCO Benefit Plans, the transactions
contemplated by this Agreement shall not result in any action or the
establishment of any relationship prohibited by Section 406 or 407 of ERISA
(determined after taking into account any applicable exemptions).
(i) Schedule 6.18(i) of the LEVCO Disclosure Schedule sets forth a
list of all employees of LEVCO and each Investment Partnership. Except for the
LEVCO Benefit Plans listed on Schedule 6.18(a) no LEVCO Entity has any employee
contract or non-terminable (whether with or without penalty) employment
arrangements with any person. To the knowledge of LEVCO and the Stockholders,
none of the persons listed on Schedule 6.18(i) is subject to a confidentiality,
non-disclosure, non-solicitation or non-competition agreement with any person or
entity other than a LEVCO Entity. To the knowledge of LEVCO and the
Stockholders, none of the Persons listed on Schedule 6.18(i) is in breach of any
such employment arrangement, or any fiduciary duty of such Person to any LEVCO
Entity and no such Person has given notice to LEVCO or a Stockholder of any
intention to terminate such Person's employment with LEVCO, either before or
after the Effective Date. No LEVCO Entity has committed any unfair labor
practices or received notice of a claim of unfair labor practices against it or
any of its directors, officers, employees, agents or partners.
6.19 Filings, Etc.
(a) Except as set forth in Schedule 6.20(c)(i)(a) and Schedule
6.22(a) of the LEVCO Disclosure Schedule, since December 31, 1990 and except for
the matters contemplated by Section 9.3, each LEVCO Entity has had and now has
all permits, licenses, certificates of authority, orders and approvals of, and
have made all filings, applications and registrations with, Governmental
Entities (including by the rules of any self-regulatory body) that are required
in order to permit each of them to carry on its respective business as presently
conducted, and such permits, licenses, certificates of authority, registrations,
orders and approvals are in full force and effect, except where such failures to
have or make or keep in full force and effect any permit, license, certificate
of authority, registration, order, approval, filing, application or registration
referred to above would not reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect on any LEVCO Entity. Except as set
forth in Schedule 6.20(c)(i)(a) and Schedule 6.22(a) of the LEVCO Disclosure
Schedule, the conduct of each LEVCO Entity's business has never, and currently
does not, violate or infringe any applicable federal, state or local law,
statute, ordinance, license, rule or regulation including those of the self-
regulatory bodies which violations or infringements would reasonably be expected
to have, individually or in the aggregate, have a Material Adverse Effect on any
LEVCO Entity.
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(b) Without limiting the foregoing, except as set forth in Schedule
6.20(c)(i)(a) and Schedule 6.22(a) of the LEVCO Disclosure Schedule, each LEVCO
Entity and each of their officers, partners and employees that or who is
required to be registered as an investment adviser, broker-dealer, commodity
trading adviser, commodity pool operator, registered representative or sales
person with the SEC, CFTC, the securities commission or any other commission of
any state or any state or federal securities or futures self-regulatory body is
duly registered as such and such registration is in full force and effect,
except where the failure to be so registered or to have such registration in
full force and effect would not, individually or in the aggregate, be reasonably
expected to have a Material Adverse Effect on such LEVCO Entity.
(c) There are no proceedings pending or, to the knowledge of LEVCO or
any Stockholder, threatened, that are reasonably likely to result in the
revocation, cancellation or suspension, or any adverse modification, of any
permit, license, certificate of authority, order or approval referred to in
Section 6.19(a) and the execution and delivery of this Agreement and the
consummation of any transactions contemplated hereby will not, except as set
forth in Schedule 6.1 9(C) of the LEVCO Disclosure Schedule, result in any such
revocation, cancellation, suspension, or any adverse modification, of any
permit, license, certificate of authority, order or approval referred to in
Section 6.19(a).
(d) Except as listed in LEVCO's Form ADV, no LEVCO Entity nor, to the
knowledge of LEVCO or any Stockholder, any officer, director, partner or
employee thereof, is a party or subject to any order, judgment or decree (other
than exemptive orders) relating to its business with or by any federal, state,
local or foreign regulatory authority.
6.20 Representations and Warranties Regarding the Investment Advisory
Business.
(a) Investment Contracts and Clients.
(i) Each written Investment Contract and any subsequent
renewal thereof (A) has been duly authorized, executed and delivered by
LEVCO; (B) to the knowledge of LEVCO and the Stockholders and except as
would not reasonably be expected to have, individually or in the aggregate,
a Material Adverse Effect on LEVCO or the Surviving Corporation, (x) has
been duly authorized, executed and delivered by each party thereto other
than LEVCO and, (y) in the case of an Investment Company, has been adopted
and continued in compliance with Section 15(a) of the Investment Company
Act (or appropriate exemptive relief therefrom); (C) assuming such
Investment Contracts (and any subsequent renewals thereof) constitute valid
and binding obligations of the other party thereto, is a valid and binding
agreement of LEVCO, enforceable in accordance with its terms (subject to
ERISA or to bankruptcy, insolvency, moratorium, fraudulent transfer and
similar laws affecting creditors' rights generally and to general equity
principles); (D) each of LEVCO and, to the knowledge of LEVCO and the
Stockholders, the Client is in compliance in all material respects with the
terms of each Investment Contract to which it is a party, and no event has
occurred or condition exists that constitutes or with notice or the
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passage of time would constitute a default thereunder. Except as set forth
on Schedule 6.20(a) of the LEVCO Disclosure Schedule, none of the
Investment Contracts, or any other arrangements or understandings relating
to rendering of investment advisory or management services, including
without limitation all subadvisory services or administration services to
any Client or other person, contains any undertaking by LEVCO to collect
flat fees or to waive or reimburse any or all fees thereunder. As of the
date hereof, no Client accounting for more than 1% of the Assets Under
Management as of the Base Date of LEVCO has notified LEVCO or any of the
Stockholders that it intends to discontinue its relationship with LEVCO. As
used in this Agreement, the term "Client" means any client to which LEVCO
provides investment management, investment advisory, administration or
consulting services on the date hereof, and includes each Investment
Company and the Investment Partnerships. Schedule 2.1(A) is a true and
correct list of the Investment Contracts covering Assets Under Management
of LEVCO as of the Base Date and a true and correct determination of the
dollar amount of the Base Assets Under Management valued in accordance with
Section 2.1(b)(i)(B).
(ii) The accounts of each Client that is subject to ERISA have
been managed by LEVCO such that LEVCO, in the exercise of such management,
is in compliance in all material respects with the applicable requirements
of ERISA and all prohibited transaction class exemptions issued pursuant
thereto, including without exemption Prohibited Transaction Class
Exemptions 77-9, 81-6, and 86-128), and consummation of the transactions
contemplated hereby will not result in a violation of such ERISA
requirements.
(iii) The account of each Investment Company that has been
managed by LEVCO has been managed by LEVCO in compliance in all material
respects with the Investment Company's investment objectives, policies and
restrictions as contained from time to time in its registration statement
filed with the SEC and the requirements of the Investment Company Act.
(b) Investment Partnership Financial Statements. LEVCO has delivered
to BKF: (i) audited balance sheets of each Investment Partnership (except Island
Drive Partners, L.P.) as of December 31, 1994 and December 31, 1993, and the
related financial statements for the years ended December 31, 1994 and December
31, 1993, accompanied by reports of Eisner thereon; (ii) an audited balance
sheet of Island Drive Partners, L.P. as of December 31, 1994 and the related
financial statements for the year ended December 31, 1994, accompanied by a
report of Eisner thereon; and (iii) an unaudited balance sheet of each
Investment Partnership as of September 30, 1995 and the related financial
statements for the nine months then ended, accompanied by a report of Eisner
thereon. LEVCO will deliver to BKF LEVCO Subsequent Financials for the
Investment Partnerships as required by Section 9.10. All such financial
statements (the "Investment Partnership Financial Statements") have been or will
be prepared in accordance with GAAP, which has been and will be applied on a
basis consistent with prior periods, except as otherwise disclosed therein, and
present or will present fairly the financial
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position and results of operations of each Investment Partnership at the dates,
and for the periods, stated therein except, in the case of any unaudited
Investment Partnership Financial Statements, for normal recurring year-end
accruals reflected thereon or omitted therefrom which are not individually or in
the aggregate material and for the absence of complete footnotes. The Investment
Partnership Financial Statements reflect or provide for all liabilities, whether
absolute, accrued, contingent or otherwise, of the Investment Partnerships that
are required to be reflected in such financial statements (including the notes
thereto) as at the dates hereof pursuant to the requirements of GAAP, except for
normal recurring year-end accruals reflected on or omitted from unaudited
interim Investment Partnership Financial Statements, which are not individually
or in the aggregate material and the year-end adjustments described on Schedule
6.20(b).
(c) Regulatory Compliance of LEVCO and the Investment Partnerships.
Except as set forth in the following Schedules of the LEVCO Disclosure Schedule:
(i) LEVCO is and has been since 1982 duly registered as an
investment adviser under the Investment Advisers Act. LEVCO is registered
as an investment adviser in the states referenced in item 7, Part I of its
current Form ADV (such states, except as set forth on Schedule
6.20(c)(i)(a) of the LEVCO Disclosure Schedule, constituting all
jurisdictions where such registration is required in order to conduct its
business), and, except as set forth on Schedule 6.20(c)(i)(a) of the LEVCO
Disclosure Schedule, is in compliance in all material respects with all
federal and state laws requiring registration, licensing or qualification
as an investment adviser. Each such federal and state registration is in
full force and effect. LEVCO has made available to BKF a true and complete
copy of its Form ADV, as amended to date, filed with the SEC; copies of all
state registration forms, likewise as amended to date; and copies of all
current reports required to be kept by LEVCO pursuant to the Investment
Advisers Act and rules promulgated thereunder, and required pursuant to
applicable state statutes. The information contained in such forms and
reports was true and complete at the time of filing in all material
respects. LEVCO has filed all amendments required to be filed to its Form
ADV and state registration forms under federal and state law. Schedule
6.20(c)(i)(b) of the LEVCO Disclosure Schedule identifies the examination
and/or certification qualifications of each of LEVCO's adviser
representatives.
(ii) Neither LEVCO nor any of the Investment Partnerships
(considering Meadow Lane Associates, L.P. and Island Drive Partners, L.P.
as a single entity for this purpose) is, nor on the Closing Date will any
of them be, an Investment Company which is required to be registered under
that Act in order to engage in the transactions described in Section 7 of
that Act. None of the Investment Partnerships is a "broker" or "dealer"
within the meaning of the Exchange Act. Copies of all inspection reports or
similar documents furnished to LEVCO by the SEC or any state regulatory
authority or any self-regulatory organization since January 1, 1990 are
listed on Schedule 6.20(c)(ii) of the
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LEVCO Disclosure Schedule and have been provided to BKF. Except as set
forth in Schedule 6.16 of the LEVCO Disclosure Schedule, there is not
pending, or to the knowledge of the Stockholders and LEVCO, threatened any
investigation of LEVCO or any of the Investment Partnerships or any of
their records by the SEC or any state regulatory authority or any self-
regulatory organization, and since December 31, 1990 and except as listed
on Schedule 6.20(c)(ii) of the LEVCO Disclosure Schedule, neither LEVCO nor
any of the Investment Partnerships has been notified by the SEC or any
state regulatory authority or any self-regulatory organization that any
past inspection has revealed any deficiency in any such entity's
recordkeeping or compliance with the Investment Advisers Act, the Exchange
Act, the Securities Act, the Investment Company Act or applicable state
statutes. No such deficiency would reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on any LEVCO
Entity.
(iii) To the knowledge of LEVCO and the Stockholders, no assets
of any Investment Partnership constitute "plan assets" within the meaning
of Department of Labor Regulation (S) 2510.3-101.
(iv) Except as listed on Schedule 6.20(c)(iv) of the LEVCO
Disclosure Schedule, LEVCO does not act as investment adviser or sub-
adviser to any Investment Company.
(v) Except for brokerage commissions on portfolio securities
transactions for an Investment Company in compliance with procedures
adopted under Rule 17e-1 under the Investment Company Act, neither LEVCO
nor any Stockholder nor any other "affiliated person" of LEVCO, as such
term is defined in the Investment Company Act, receives or is entitled to
receive any compensation, directly or indirectly, (i) from any person in
connection with the purchase or sale of securities or other property to,
from or on behalf of any such Investment Company, or (ii) from any such
Investment Company or its security holders for other than bona fide
investment advisory or other services.
(vi) Except as listed on Schedule 6.20(c)(vi) of the LEVCO
Disclosure Schedule, there are no sub-advisers for any Investment
Partnership.
(vii) Except as set forth on Schedule 6.20(c)(vii) of the LEVCO
Disclosure Schedule, during the preceding 12 months neither LEVCO nor any
of the Investment Partnerships has received any material written investor
complaints that have not been resolved, nor has any Investment Partnership
received redemption requests which are outstanding as of the date hereof,
except those that will be satisfied in the ordinary course of business or
pursuant to the terms of such Investment Partnership's partnership
agreement.
(viii) LEVCO has adopted a formal code of ethics that complies
with Section 17(j) of the Investment Company Act and Rule 17(j)-1
thereunder, and a written policy regarding insider trading which complies
with Section 204A of
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the Investment Advisers Act. The policies of LEVCO with respect to avoiding
conflicts of interest have been made available to BKF. To the knowledge of
LEVCO and the Stockholders, except as set forth in Schedule 6.20(c)(viii)
of the LEVCO Disclosure Schedule, there have been no material violations or
allegations of material violations as of the date hereof of such policies
that have occurred or been made.
(ix) Neither LEVCO nor, to the knowledge of LEVCO or any
Stockholder, any person "associated" (as defined under the Investment
Advisers Act) with LEVCO, has for the period beginning not less than five
years prior to the date hereof and ending on the date hereof been convicted
of any crime or is or has been subject to any disqualification that would
be a basis for denial, suspension or revocation of registration of an
investment adviser under Section 203(e) of the Investment Advisers Act or
disclosure under Rule 206(4)-4 thereunder or denial, suspension or
revocation of registration of a broker-dealer under Section 15 of the
Exchange Act, or for disqualification as an investment adviser for any
Investment Company pursuant to Section 9(a) of the Investment Company Act,
or for suspension or revocation of registration as a commodity pool
operator or commodity trading adviser pursuant to Section 8a of the
Commodity Exchange Act, and to LEVCO's or any Stockholder's knowledge there
is no basis for, or proceeding or investigation that is reasonably likely
to become the basis for, any such disqualification, denial, suspension or
revocation.
(x) The offering of the limited partnership interests in each
Investment Partnership and Bridge Partners and the participation by any
LEVCO Entity in the offering of securities of Purchase Offshore and any
other Person was conducted in compliance in all material respects with the
Securities Act, the Commodities Exchange Act and other federal, state or
foreign securities laws, in each case to the extent applicable to such
offering. The offering memorandum used in connection with each such
offering and all supplemental advertising and marketing material relating
thereto complied in all material respects at the time of the use of such
offering memoranda or material with the Securities Act, state and foreign
securities laws and the rules of the National Association of Securities
Dealers ("NASD"), in each case to the extent applicable to such offering.
None of such offering memoranda or supplemental advertising and marketing
materials as of their respective dates of offering, contained an untrue
statement of a material fact or omitted to state a material fact necessary
in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.
(xi) LEVCO is a "qualified professional asset manager" within
the meaning of Prohibited Transaction Class Exemption 84-14 published by
the U.S. Department of Labor.
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(xii) Except as set forth in Schedule 6.20(c)(xii) of the LEVCO
Disclosure Schedule, LEVCO has no arrangements with paid solicitors.
6.21 Disclosure. The representations and warranties made by the
Stockholders in this Agreement (when read together with the LEVCO Disclosure
Schedule) and the Related Agreements do not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make any
such representation or warranty, in the light of the circumstances under which
it was made, not misleading.
6.22 Registration as a Broker-Dealer.
(a) LEVCO is, and at the Closing Date LEVCO or LEVCO Broker
Subsidiary will be, duly registered under the Exchange Act as a broker-dealer
with the SEC and is, and at the Closing Date LEVCO or LEVCO Broker Subsidiary
will be, in compliance in all material respects with the applicable provisions
of the Exchange Act and the applicable rules and regulations thereunder,
including, but not limited to, the net capital requirements thereof. LEVCO is,
and at the Closing Date LEVCO or LEVCO Broker Subsidiary will be, a member in
good standing of the NASD and in compliance in all material respects with all
applicable rules and regulations of the NASD, including without limitation the
NASD's rules of fair practice (the "Rules of Fair Practice"). Except as set
forth on Schedule 6.22(a) of the LEVCO Disclosure Schedule, LEVCO is, and at the
Closing Date LEVCO or LEVCO Broker Subsidiary will be, duly registered as a
broker-dealer under, and in compliance in all material respects with, the
applicable laws of all jurisdictions in which it is required to be so registered
and the rules and regulations thereunder (collectively, the "State Laws").
(b) As of the date hereof, LEVCO has delivered to BKF a true,
correct and complete copy of LEVCO's Uniform Application for Broker-Dealer
Registration on Form BD (the "BD"), reflecting all amendments thereto filed with
the SEC to the date hereof, true, correct and complete copies of the Uniform
Application for Securities Industry Registration or Transfer on Form U-4, as
filed by each current principal and registered representative of LEVCO (each, a
"U-4"), and true, correct and complete copies of each report filed since January
1, 1992 with the SEC, the NASD or any state securities agency, including without
limitation quarterly focus reports and annual statements of financial condition
(each, a "Report"). Schedule 6.22 of the LEVCO Disclosure Schedule sets forth a
complete list of the identities of each principal and registered representative
of LEVCO, their series licenses and each Report. The BD and each U-4 and other
Report of LEVCO are in compliance in all material respects with the applicable
requirements of the Exchange Act and the rules and regulations thereunder, the
applicable requirements of the By-Laws of the NASD and any schedule thereto and
rules thereunder and the State Laws and the rules and regulations thereunder.
The BD and each U-4 and other Report of LEVCO do not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Each registered
representative and principal of LEVCO has, at least the minimum series license
for the activities which such registered representative or principal performs
for LEVCO.
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(c) Except as set forth in Schedule 6.22(c) of the LEVCO Disclosure
Schedule the net capital, as such term is defined in Rule 15c3-1 under the
Exchange Act, of LEVCO satisfies, and since LEVCO's inception has satisfied, the
minimum net capital requirements of the Exchange Act and of the laws of any
jurisdiction in which LEVCO conducts business, and has been sufficient to permit
LEVCO to operate without restriction on its ability to expand its business under
Article III, Section 38 of the NASD Rules of Fair Practice. Except as set forth
in Schedule 6.22(c) of the LEVCO Disclosure Schedule, LEVCO is not, and at the
Closing Date neither LEVCO nor LEVCO Broker Subsidiary will be, party to, or
bound by, the terms of any restriction agreement with the NASD other than a
restriction agreement entered into in the ordinary course of business (and not
as a result of any disciplinary or enforcement action) the terms of which are
not materially more restrictive to LEVCO or LEVCO Broker Subsidiary than the
terms of the restriction agreement set forth in Schedule 6.22(c).
6.23 Registration under the Commodity Exchange Act.
(a) LEVCO and Melody L. Prenner Sarnell are each duly registered
under the Commodity Exchange Act as a commodity pool operator ("CPO") and LEVCO
is duly registered under the Commodity Exchange Act as a commodity trading
adviser ("CTA"), and each of them is in compliance in all material respects with
the Commodity Exchange Act and the rules and regulations thereunder. To the
extent and if required by Part 4 of the regulations under the Commodity Exchange
Act, LEVCO and Melody L. Prenner Sarnell have each delivered all relevant
disclosure documents to their commodity trading advisory clients and to all
pools in respect of which they act as a CPO.
(b) LEVCO and Melody L. Prenner Sarnell are each members in good
standing of the National Futures Association both in their respective capacities
as a CTA and as a CPO.
6.24 Registration as an Insurance Agent. LEVCO is not required to be
registered as an insurance agent, broker, consultant or adviser under the laws
of any state.
6.25 Registration as a Transfer Agent. LEVCO (i) is not registered as a
transfer agent under the Exchange Act and (ii) is not engaged in any conduct or
activity that would require it to be so registered.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF BKF
BKF represents and warrants to LEVCO that the statements contained in
this Article VII are correct as of the Signing Date and will be correct as of
the Closing Date as though made at the Closing Date (except for statements made
as of a specific date, which are correct as of such date):
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7.1 Organization and Authority. Each of BKF and Merger Subsidiary is a
Delaware corporation duly organized, validly existing and in good standing under
the laws of the state of Delaware. Each of BKF and Merger Subsidiary has all
requisite power and authority to enter into this Agreement and the Related
Agreements to which it is a party and to perform its obligations hereunder and
thereunder. The execution and delivery of this Agreement by BKF and Merger
Subsidiary and the consummation by BKF and Merger Subsidiary of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of BKF and Merger Subsidiary (including the unanimous approval of
BKF's Board of Directors) and no other corporate proceedings on the part of BKF
are necessary to authorize (i) this Agreement, (ii) the Merger, (iii) the
issuance of BKF Common Stock pursuant to the Merger and (iv) the election of
Levin, Melody L. Prenner Sarnell and Jeffrey A. Kigner to the Board of Directors
of BKF (collectively, the "Stockholder Approval Matters"), other than the
approval and adoption of the Stockholder Approval Matters by the affirmative
vote of a majority of the outstanding shares of BKF Common Stock and the filing
and recordation of the Certificate of Merger as required by the Corporation Law.
The Board of Directors of BKF has received from Lazard Freres & Co. LLC
("Lazard") its opinion that the consideration to be paid by BKF in the Merger is
fair to BKF from a financial point of view.
7.2 Binding Obligation. This Agreement has been duly executed and
delivered by BKF and Merger Subsidiary and, assuming this Agreement constitutes
a valid and binding obligation of the other parties hereto, constitutes, and the
Related Agreements to which BKF and Merger Subsidiary will be a party, when
executed and delivered, will be duly executed and delivered and will constitute,
the legal, valid and binding obligation of BKF and Merger Subsidiary enforceable
against them in accordance with the respective terms of the Merger Agreement and
each such Related Agreement, except as the enforceability thereof may be limited
by or subject to bankruptcy, insolvency, reorganization, moratorium or similar
laws relating to or affecting the rights of creditors generally and general
principles of equity (regardless of whether enforcement is sought in a
proceeding at law or in equity).
7.3 No Violations. Assuming the approval and adoption of the Stockholder
Approval Matters by the holders of the BKF Common Stock as set forth herein,
neither the execution and delivery by each of BKF and Merger Subsidiary of this
Agreement or of any Related Agreement to which BKF and Merger Subsidiary is or
at Closing will be a party, nor consummation of the transactions herein or
therein contemplated, nor compliance by each of BKF and Merger Subsidiary with
the terms, conditions, and provisions hereof or thereof will (i) conflict with
or violate any provision of applicable law or of the certificates of
incorporation or bylaws of each of BKF and Merger Subsidiary, or (ii) result in
a violation of or default under any provision of any regulation, order, writ,
injunction or decree of any Governmental Entity applicable to BKF or Merger
Subsidiary, or (iii) result in a violation of or default under any Contract to
which BKF or Merger Subsidiary is a party or by which BKF or Merger Subsidiary
is bound or to which BKF or Merger Subsidiary is subject or constitute a default
thereunder or give rise to a right of termination, cancellation or acceleration
of any obligation thereunder, or give rise to the loss of a material benefit
under or result in the creation or imposition of any Lien upon any Assets of BKF
or Merger Subsidiary pursuant to such Contract, except in the case of clauses
(i) through (iv), such conflicts, breaches, defaults, losses or Liens that would
not reasonably be expected,
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individually or in the aggregate, to have a Material Adverse Effect on BKF,
materially impair the ability of BKF and Merger Subsidiary to perform their
respective obligations hereunder or prevent the consummation of the transactions
contemplated hereby and assuming in the case of clauses (i) through (iv) that
all of the consents, approvals and notices contemplated by Sections 9.2, 10.1,
10.2 and 10.3 are obtained and the provisions of the HSR Act have been complied
with and the waiting period thereunder shall have expired or terminated.
7.4 No Authorization or Consents Required. No approval, authorization,
order, license or consent of or registration, qualification or filing with any
Governmental Entity or the Exchange and no approval or consent by any other
Person is required to be obtained or made by BKF or Merger Subsidiary in
connection with the execution, delivery or performance of this Agreement and the
Related Agreements by the parties thereto (other than LEVCO and the
Stockholders), other than in each such case as contemplated by Sections 9.2 and
9.3 and Article X hereof and other than such authorizations, approvals, orders,
licenses, regulations, filings, and consents the failure of which to obtain, and
such notices or filings the failure of which to make, would not reasonably be
expected to have a Material Adverse Effect on BKF, would not materially impair
the ability of BKF and Merger Subsidiary to perform their obligations hereunder
or prevent the consummation of the transactions contemplated hereby.
7.5 No Actions, Suits or Proceedings. There are no actions, suits,
proceedings or investigations pending and, to the knowledge of BKF, no
investigations are pending and no actions, suits or proceedings are threatened,
before any court, commission, agency or other administrative authority or
Governmental Entity by or against BKF or Merger Subsidiary which, if adversely
determined, would be reasonably likely to restrain or enjoin or otherwise
adversely affect the consummation of the transactions contemplated by this
Agreement or the Related Agreements or declare unlawful the transactions or
events contemplated by this Agreement or cause such transactions to be
rescinded. There are no judgments, injunctions, orders or other judicial or
administrative mandates outstanding against or affecting BKF or Merger
Subsidiary which would be reasonably likely to restrain or enjoin the
consummation of the transactions contemplated by this Agreement.
7.6 Ineligible Persons. Neither BKF nor any "affiliated person" thereof,
as defined in the Investment Company Act: (i) is ineligible pursuant to Section
9(a) of the Investment Company Act to serve as an investment adviser (or in any
other capacity contemplated by the Investment Company Act) to a registered
investment company; or (ii) to the knowledge of BKF, as of the date hereof, has
engaged since January 1, 1991 or is currently engaging in any of the conduct
specified in Section 9(b) of the Investment Company Act or Section 203(e) of the
Investment Advisers Act, that would reasonably be expected to result in SEC
action to disqualify BKF or any of its affiliates as an investment adviser.
7.7 Brokers and Finders. Except for Lazard, BKF has not employed any
broker or finder or incurred any liability for any financial advisory fees,
brokerage fees, commissions or finder's fees, and no broker or finder has acted,
directly or indirectly, for BKF in connection with this Agreement or the
transactions contemplated hereof. Such fees as BKF may owe to Lazard shall be
the sole obligation of BKF.
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7.8 BKF Financial Statements.
(a) BKF has delivered to LEVCO audited statements of assets and
liabilities of BKF as of the close of its fiscal years ended December 31, 1994
and December 31, 1993 and statements of operations, changes in net assets and
cash flows for each of the years in the period ended December 31, 1994,
accompanied by a report of Ernst & Young thereon. BKF will deliver to LEVCO, BKF
Subsequent Financials (as defined in Section 9.10) with respect to the fiscal
year ending December 31, 1995 as required by Section 9.10. Such statements of
assets and liabilities and statements of operations, changes in net assets and
cash flows (including the notes thereto) for such periods are collectively
called the "BKF Audited Financials" and are, or to the extent delivered as
contemplated by Section 9.10 will be, attached hereto as Schedule 7.8(a) of the
disclosure schedule delivered to LEVCO by BKF concurrently with the execution of
this Agreement (the "BKF Disclosure Schedule").
(b) BKF has also delivered to LEVCO copies of its Form N-SAR for the
six month period ending June 30, 1995. BKF will deliver to LEVCO, BKF Subsequent
Financials with respect to the interim fiscal periods ending after the date
hereof and prior to the Closing as required by Section 9.10. All such BKF
Subsequent Financials are referred to collectively as the "BKF Unaudited
Financials" and will be attached to Schedule 7.8(b) of the BKF Disclosure
Schedule. The BKF Audited Financials and the BKF Unaudited Financials are
hereinafter sometimes collectively referred to as the "BKF Financial
Statements."
(c) The BKF Financial Statements fairly present (or will, when
delivered, fairly present) the financial position and results of operations of
BKF on the dates thereof and for the fiscal periods then ended, in accordance
with GAAP which, except as may otherwise be noted in the footnotes thereto, has
been applied on a basis consistent with prior periods. The BKF Financial
Statements reflect or provide for claims against and debts and liabilities of
BKF, absolute, accrued, contingent or otherwise, as at the dates thereof in
accordance with GAAP, except for normal year-end accruals reflected on or
omitted from the BKF Unaudited Financial Statements which are not individually
or in the aggregate material.
7.9 No Adverse Change. As of the date hereof, since December 31, 1994,
(a) there has been no Material Adverse Effect with respect to BKF; (b) there
have been no dividends or other distributions declared or paid with respect to
BKF's Common Stock other than a $.20 per share dividend paid on June 7, 1995, a
$.15 per share dividend declared on November 3, 1995 and the $1.20 per share
capital gain distribution declared in part on September 7, 1995 and in part on
November 3, 1995; and (c) the physical properties owned or leased by BKF have
not suffered any destruction or damage, regardless of whether or not the loss
suffered was insured, that would be reasonably expected, individually or in the
aggregate, to have a Material Adverse Effect on BKF.
7.10 BKF Capital Stock. At the Signing Date, the authorized capital stock
of BKF consisted of 40,000,000 shares of Common Stock, par value $1.00 per
share. At the close of business on November 16, 1995, (i) 26,441,682 shares of
BKF Common Stock were issued and outstanding, (ii) no shares of BKF Common Stock
were reserved for issuance under employee
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benefit plans, (iii) 3,591,292 shares of BKF Common Stock were reserved for
issuance under BKF's dividend reinvestment plan, and (iv) no shares of BKF
Common Stock were held by BKF in BKF's treasury. All outstanding shares of BKF
Common Stock are duly authorized, validly issued, fully paid and nonassessable
and not subject to preemptive rights. Except as set forth above, at the Signing
Date, there were no options, warrants, scrips, rights, call, commitments,
agreements, arrangements, arrangements or undertakings of any kind whatsoever
issued by or on behalf of BKF relating to, or securities or rights convertible
into or exchangeable for, shares of capital stock or other voting securities of
BKF. All BKF Common Stock issued by BKF to the Stockholders hereunder, when
issued by BKF in accordance with the terms of this Agreement, will be duly
authorized, validly issued, fully paid and non-assessable and free and clear of
all Liens.
7.11 BKF Charter Documents. The copies of the respective certificates of
incorporation and bylaws of BKF and the Merger Subsidiary (collectively, the
"BKF Charter Documents"), the respective minutes of all meetings of the board of
directors of BKF and Merger Subsidiary (or consents in lieu thereof), and the
BKF Code of Ethics adopted pursuant to Section 17(j) of the Investment Company
Act and Rule 17j-1 thereunder that in each case have been furnished or made
available to LEVCO and the Stockholders by BKF are true, correct and complete
copies thereof.
7.12 Disclosure. The representations and warranties made by BKF in this
Agreement (when read together with the BKF Disclosure Schedule) and the Related
Agreements do not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make any such representation or
warranty, in light of the circumstances under which it was made, not misleading.
7.13 SEC Reports. Except as set forth in Schedule 7.13 of the BKF
Disclosure Schedule, BKF has timely filed all reports required to be filed by it
pursuant to the federal securities laws and the rules and regulations of the SEC
promulgated thereunder (the "BKF SEC Reports"), all of which, at the time such
BKF SEC Reports were filed, complied in all material respects with the
applicable requirements of the Investment Company Act, Securities Act and the
Exchange Act. None of the BKF SEC Reports, at the time filed, contained any
statement which, at the time and in light of the circumstances under which it
was made, was false or misleading with respect to any material fact, or omitted
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
7.14 Restrictive Covenants. BKF is not a party to any contract containing
noncompetition provisions that would limit BKF's ability after the Closing to
engage in business in any area or to compete against any Person.
7.15 Litigation. Except as disclosed in the BKF SEC Reports, (i) there
are no legal, administrative or arbitration actions, suits, proceedings or
investigations of any kind pending, or, to the best of BKF's or Merger
Subsidiary's knowledge, threatened before any Governmental Entity by or against
BKF's or Merger Subsidiary's respective business or Assets or which affect
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BKF's or Merger Subsidiary's business or Assets, and (ii) neither BKF nor Merger
Subsidiary is the subject of any injunction, order or decree, except in either
case (i) or (ii) any such actions, suits, proceedings, investigations,
injunctions, orders or decrees that would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on BKF.
7.16 Filings, Etc.
(a) Other than the SEC Order (as defined in Section 10.1(b)), BKF has
all permits, licenses, certificates of authority, orders and approvals of, and
has made all filings, applications and registrations with, Governmental Entities
(including by the rules of any self-regulatory body) that are required in order
to permit it to carry on its business as presently conducted, and such permits,
licenses, certificates of authority, registrations, orders and approvals are in
full force and effect, except where such failures to have or make or keep in
full force and effect any permit, license, certificate of authority,
registration, order, approval, filing, application or registration referred to
above would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on BKF, materially impact the ability of
BKF and Merger Subsidiary to perform their respective obligations hereunder or
under the Related Agreements or prevent the consummation of the transactions
contemplated hereby or thereby. The conduct of BKF's business has never, and
currently does not, violate or infringe any applicable federal, state or local
law, statute, ordinance, license, rule or regulation including those of the
self-regulatory bodies except any such violations or infringements that would
not reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on BKF, materially impair the ability of BKF and Merger
Subsidiary to perform their respective obligations hereunder or under the
Related Agreements or prevent the consummation of the transactions contemplated
hereby or thereby.
(b) Without limiting the foregoing, BKF and each of its officers and
employees that or who is required to be registered as an investment adviser, or
advisory representative or a sales person with the SEC, the securities
commission or any other commission of any state or any self-regulatory body is
duly registered as such and such registration is in full force and effect,
except any such failures to be so registered or to have such registration in
full force and effect as would not reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect on BKF, materially impair the
ability of BKF and Merger Subsidiary to perform their respective obligations
hereunder or under the Related Agreements or prevent the consummation of the
transactions contemplated hereby or thereby.
(c) Except as disclosed in the BKF SEC Reports, there are no
proceedings pending or, to the knowledge of BKF, threatened, that are reasonably
likely to result in the revocation, cancellation or suspension, or any adverse
modification, of any permit, license, certificate of authority, order or
approval referred to in Section 7.16(a) and the execution and delivery of this
Agreement and the consummation of any transactions contemplated hereby will not
result in any such revocation, cancellation, suspension, or any adverse
modification, of any permit, license, certificate of authority, order or
approval referred to in Section 7.16(a), except in either such case, any such
revocation, cancellation, suspension or adverse modification that would not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse
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Effect on BKF, materially impair the ability of BKF and Merger Subsidiary to
perform their respective obligations hereunder or under the Related Agreements
or prevent the consummation of the transactions contemplated hereby or thereby.
(d) To BKF's knowledge, none of its officers, directors, or employees
is a party or subject to any order, judgment or decree (other than exemptive
orders) relating to BKF's business with or by any federal, state, local or
foreign regulatory authority, except any such order, judgment or decree which
would not reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on BKF, materially impair the ability of BKF and Merger
Subsidiary to perform their respective obligations hereunder or under the
Related Agreements or prevent the consummation of the transactions contemplated
hereby or thereby.
7.17 Regulatory Compliance. BKF is, and at all times since November 19,
1970 has been, duly registered under the Investment Company Act as a non-
diversified closed-end management investment company and is, and at all times
since November 19, 1970 has been, in compliance with the Investment Company Act
and the rules thereunder, except where the failure to so be in compliance would
not reasonably be expected to have a Material Adverse Effect on BKF. BKF is, and
at all times since August 4, 1994 has been duly registered under the Investment
Advisers Act and has been in compliance with the Investment Advisers Act and the
rules thereunder, except where the failure to so be in compliance would not
reasonably be expected to have a Material Adverse Effect on BKF, materially
impair the ability of BKF and Merger Subsidiary to perform their respective
obligations hereunder or under the Related Agreements or prevent the
consummation of the transactions contemplated hereby or thereby.
7.18 Employee Benefit Plans.
(a) BKF's liabilities under all employee benefit plans as defined in
Section 3(1) of ERISA maintained or contributed to by BKF (the "BKF Benefit
Plans") are properly reflected on the BKF Financial Statements in accordance
with GAAP (including without limitation SFAS 87 and 106), and BKF has not
adopted any new BKF Benefit Plan, terminated any BKF Benefit Plan, or made any
material amendment to any BKF Benefit Plan (other than as required to maintain
the tax qualified status thereof) since December 31, 1994, which adoption,
termination or amendment would reasonably be expected to have a Material Adverse
Effect on BKF, materially impair the ability of BKF and Merger Subsidiary to
perform their respective obligations hereunder or under the Related Agreements
or prevent the consummation of the transactions contemplated hereby or thereby.
(b) With respect to the BKF Benefit Plans, the transactions
contemplated by this Agreement shall not result in any action or the
establishment of any relationship prohibited by Section 406 or 407 of ERISA
(determined after taking into account any applicable exemptions).
(c) All BKF employee benefit plans can be terminated without creating
additional obligations or liabilities on BKF, not reflected on the BKF Financial
Statements, which would, in the aggregate, have a Material Adverse Effect on
BKF. The amount of
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unfunded benefit liability on a termination basis of the Baker, Fentress &
Company Defined Benefit Pension Plan is not greater than $200,000.
7.19 Merger Subsidiary. Merger Subsidiary has not, and prior to and at
the Closing will not have, engaged directly or indirectly in any business or
activities of any type or kind whatsoever, has not entered into any Contract
with any Person, and is not, and prior to and at the Closing will not be,
subject to or bound by any obligation or undertaking, except for (a) the
creation of Investment Adviser Subsidiary for the purpose of effecting the
Contribution as contemplated by Section 1.6 hereto, and the taking of the other
actions contemplated by this Agreement to be taken with respect to Investment
Adviser Subsidiary, (b) the acquisition by Merger Subsidiary from BKF of cash
and shares of BKF Common Stock for the purpose of satisfying Merger Subsidiary's
obligations hereunder and, subject to Section 8.2(c), the incurrence by Merger
Subsidiary of indebtedness to finance such acquisition and (c) such other
activities as are expressly contemplated by this Agreement. The Surviving
Corporation, the Investment Adviser Subsidiary, G.P. Subsidiary and LEVCO Broker
Subsidiary are hereinafter collectively referred to as the "LEVCO Companies."
7.20 Investment Adviser Subsidiary. Other than as expressly contemplated by
this Agreement, the Investment Adviser Subsidiary has not, and prior to and at
the Closing will not have, (a) engaged directly or indirectly in any business or
activities of any type or kind whatsoever, (b) entered into any Contract with
any Person, or (c) become subject to or bound by any obligation or undertaking.
ARTICLE VIII
CONDUCT OF BUSINESS PRIOR TO THE CLOSING
8.1 Conduct of LEVCO's Business Prior to Closing. The Stockholders and
LEVCO hereby covenant and agree with BKF that from the Signing Date through the
Closing, each LEVCO entity shall operate, and the Stockholders shall cause them
to operate, their respective businesses only in the ordinary course, recognizing
that in the case of their investment activities, general economic and securities
market conditions or general industry developments may result in new investment
strategies. Each LEVCO Entity shall meet all of its obligations as they become
due, shall pay all valid accounts payable in due course in accordance with its
practice heretofore (unless such payment is being contested in good faith by
appropriate proceedings), shall incur no long-term indebtedness (it being agreed
that the making of any accrual in respect of rent payable under the Lease (as
defined in Section 10.2(i)) shall not be regarded as the incurrence of long-term
indebtedness) and shall use its reasonable efforts to continue to solicit new
clients and to offer investment advisory and related services (as applicable) in
the ordinary course of business, to maintain its corporate records, to keep its
accounts receivable current, to preserve its business organization and assets
and maintain its rights, franchises and business and customer relations
necessary to run the business as currently run in all material respects, to keep
available the services of its employees, and to preserve the goodwill of its
Clients, suppliers, and others with whom business relationships exist. Without
in any way limiting the foregoing, and
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except as contemplated by this Agreement, LEVCO and the Stockholders agree that
no LEVCO Entity will do any of the following prior to the Closing without the
consent of BKF (given as provided in the last paragraph of this Section 8.1),
which shall not be unreasonably withheld:
(a) except as contemplated by the Interim Transactions, issue or sell
any capital stock, option or other equity security of LEVCO or a LEVCO
Subsidiary or any general partner interest in any of the Investment
Partnerships;
(b) other than as described on Schedule 6.14(b) of the LEVCO
Disclosure Schedule, incur any indebtedness for borrowed money or issue or sell
any debt securities;
(c) other than as described on Schedule 6.14(b) of the LEVCO
Disclosure Schedule or as described in clauses (i) or (ii) of Section 6.12(a),
mortgage, pledge or otherwise subject to any Lien, any of its Assets, tangible
or intangible;
(d) amend any base salary of, or grant or amend any guaranteed bonus
arrangement for, any director, officer, employee, sales representative, agent or
consultant (other than any cost of living increase consistent with past
practice) or hire any additional directors, officers, employees, agents or
consultants except in the ordinary course of business;
(e) except as may be required by law, or as otherwise contemplated by
Section 8.4, amend in any material respect any LEVCO Benefit Plan or adopt any
other employment, collective bargaining, bonus, profit-sharing, compensation,
pension, health insurance, welfare, retirement, deferred compensation or other
plan, agreement, trust, fund or arrangement for the benefit of officers,
directors, partners, stockholders, employees, sales representatives, agents or
others except in the ordinary course of business;
(f) amend its certificate of incorporation or bylaws, certificate of
limited partnership, agreement of limited partnership, as the case may be,
except as required by law or as contemplated by this Agreement or the Interim
Transactions;
(g) change in any material respect its accounting (including tax
accounting) methods, practices or principles, except as required by law or GAAP;
(h) enter into any type of business materially different from that
conducted by LEVCO or any Investment Partnership as of the date of this
Agreement (including, in the case of LEVCO and any LEVCO Subsidiary, any
business that could be properly represented by a SIC Code other than 6282 or
6211);
(i) declare or pay any dividend or distribution of its property
(other than cash, cash equivalents or accounts receivable) or directly or
indirectly redeem, purchase or otherwise acquire any shares of LEVCO or a LEVCO
Subsidiary capital stock or any general partner interest in an Investment
Partnership, except as contemplated by this Agreement;
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(j) other than as contemplated by Section 15.8 hereof and the Interim
Transactions, allow any shares of LEVCO Common Stock, any shares of capital
stock of a LEVCO Subsidiary or any general partner interest in any of the
Investment Partnerships to be transferred or otherwise disposed of except as
contemplated by this Agreement;
(k) sell or dispose of any assets of a LEVCO Entity (other than
accounts receivable), any of the proceeds of which sale are paid as a dividend
or distribution to the Stockholders, or sell, lease, abandon or otherwise
dispose of any of its material assets or acquire by merging or consolidating
with, or by purchasing substantial portion of the assets of or equity in, or by
any other means, any business or any corporation, partnership, joint venture,
association or other business organization or division thereof or otherwise
acquire any material assets, except for purchases and sales of portfolio
holdings and other assets in the ordinary course of business consistent with
past practice and except as contemplated by the Interim Transactions and the
disposition of the shares held by LEVCO on the date hereof in Cortech Inc. and
Sugen, Inc.;
(l) other than with respect to the purchase and sale of portfolio
holdings and the entering into Investment Contracts in the ordinary course of
business, make any commitment or enter into any Contract, except for (i) any
commitment or Contract to be fully performed and discharged prior to Closing and
(ii) any commitment or Contract involving aggregate payments to or by a LEVCO
Entity not in excess of $60,000, providing for termination without notice by
LEVCO or the Investment Partnership on 90 days or fewer notice, and made by such
LEVCO Entity in the ordinary course of business consistent with past practice;
(m) alter through merger, liquidation, reorganization, restructuring
or in any other fashion the corporate structure or ownership of LEVCO or any
Investment Partnership, except as contemplated in connection with the Interim
Transactions;
(n) revalue any of its assets, including, without limitation, writing
off notes or accounts receivable, other than revaluations of investment
securities in the ordinary course of business consistent with past practice;
(o) make any tax election or settle or compromise any material tax
liability;
(p) settle or compromise any pending or threatened suit, action or
claim by any third party relating to the transactions contemplated hereby;
(r) take any action which would make any of the representations or
warranties of the Stockholders contained in the Agreement untrue or incorrect in
any material respect (or in the case of representations and warranties which are
qualified by their terms by a reference to materiality, untrue or incorrect in
any respect), or would make it impossible to satisfy any of the conditions
contained in Article X;
(s) change its practice with respect to billing any fees, commissions
or other payments to Clients under Investment Contracts or of management,
incentive or other fees payable with respect to the portfolio holdings of the
Investment Partnerships so as to cause any
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such fees, commissions or payments to be accrued in accordance with GAAP during
any period prior to Closing that would have been accrued in any period
subsequent to Closing;
(t) incur or agree to incur any expense that would be payable in
whole or in part after Closing that is not reflected in the expenses of the
business in the three months prior to Closing, regardless of whether such
expense or the action of incurring it would be otherwise permitted under this
Section 8.1; or
(u) agree or commit to do any of the foregoing;
it being understood, that any and all accounts receivable of LEVCO (including
those which are billed but unpaid and those which have not been billed as of the
Closing) accrued in accordance with GAAP prior to or as of the Closing Date (all
such accounts receivable being herein referred to as "Assigned Accounts") may be
assigned to the Stockholders on or prior to the Closing. If any LEVCO Entity
shall propose to take any action requiring the consent of BKF as provided in
this Section 8.1, it shall notify BKF in writing, which notice shall set forth
all material details of the action it proposes to take. The directors and
officers of LEVCO shall also make themselves reasonably available to answer any
questions of BKF and its representatives concerning the proposed action. Unless
BKF shall have objected in writing within fifteen Trading Days to the taking of
such action by such LEVCO Entity, BKF shall be deemed to have consented to such
action.
8.2 Conduct of BKF's Business Prior to Closing.
(a) BKF hereby covenants and agrees with LEVCO and the Stockholders
that from the Signing Date through the Closing, BKF will not, nor will it permit
Merger Subsidiary to, do any of the following except as provided in Section
8.2(b):
(i) issue any capital stock, option or other equity security
(other than pursuant to its dividend and capital gain reinvestment plan);
(ii) amend its certificate of incorporation (other than to
increase the number of authorized shares of BKF Common Stock) or bylaws, or
amend the BKF Code of Ethics except as required by the Investment Company
Act or the rules thereunder;
(iii) issue or sell any debt securities, other than in
connection with the financing of the transactions contemplated hereby;
(iv) merge or consolidate with any Person or sell all or
substantially all of its Assets to any Person;
(v) acquire all or substantially all of the Assets of, or a
controlling equity interest in, any other Person other than by means of a
private placement investment consistent with BKF's past practice and
Section 9.11 hereof;
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(vi) alter through merger, liquidation, reorganization,
restructuring or other similar transaction its corporate structure; or
(vii) agree or commit to do any of the foregoing.
(b) If BKF intends to take any of the foregoing actions, it shall
provide the Stockholder Representative with all material terms of the proposed
transaction and shall reasonably consult with the Stockholder Representative for
the purpose of obtaining the Stockholder Representative's consent to such
action, which consent shall not be unreasonably withheld. Unless the Stockholder
Representative shall have objected in writing within fifteen Trading Days to the
taking of such action by BKF, the Stockholder Representative shall be deemed to
have consented to such action. In the event the Stockholder Representative shall
not have consented to the taking of any of the actions described in Section
8.2(a) by BKF, and BKF shall take such action, the sole remedy of the
Stockholders and LEVCO shall be to terminate this Agreement as provided in
Section 11.1.
(c) Any credit facility entered into to finance all or any portion of
the Merger Consideration for which any of the LEVCO Companies will be an obligor
or guarantor shall contain terms and conditions mutually satisfactory to BKF and
LEVCO and, in connection therewith, BKF and LEVCO shall cooperate with the other
and, together with their respective representatives, consult thereon.
8.3 Consents and Approvals.
(a) Subject to the terms and conditions herein provided, each of the
parties hereto agrees to cooperate with the others and use all reasonable
efforts (except for those actions with respect to which this Agreement requires
the use of reasonable best efforts) to take, or cause to be taken, all action,
and to do, or cause to be done, all things necessary, proper or advisable to
consummate the transactions contemplated by this Agreement as promptly as
practicable, including, without limitation, under the HSR Act and all other
applicable laws and regulations.
(b) To the extent that the rights of LEVCO or any Investment
Partnership under any contract, including any Investment Contract or Terminable
Contract, may not be assigned without the consent or approval of another party
thereto, LEVCO, as soon as practicable after the SEC shall have issued the SEC
Order (as defined in Section 10.1(b)), shall use all reasonable efforts to
obtain any such consent, and BKF shall cooperate with LEVCO in connection
therewith. Without limiting the foregoing, LEVCO will use all reasonable efforts
to obtain, or cause to be obtained, all consents necessary to be obtained in
order to consummate the transactions contemplated hereby.
(c) Each of the parties hereto agrees to cooperate with the others
and use all reasonable efforts to obtain confirmation from the staff of the SEC
or NASD, as appropriate, that the registration of LEVCO Broker Subsidiary as a
broker-dealer will be treated as a successor registration pursuant to Rule
15b1-3 under the Exchange Act.
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8.4 Benefit Plans and Insurance. Prior to Closing, each of the parties
hereto agrees to use its reasonable efforts and to cooperate with the others in
order to develop the terms of, and to make appropriate arrangements for the
implementation of, employee benefit plans covering employees of both BKF and the
LEVCO Companies on a uniform basis after the Closing; provided, however, that
nothing herein shall be construed as requiring BKF to extend its existing
defined benefit plans to the employees of the LEVCO Companies. Each of the
parties hereto also agrees to use its reasonable efforts and to cooperate with
the others, prior to the Closing, in order to develop and arrange for the
provision of insurance policies intended to cover both BKF and the LEVCO
Companies after the Closing.
8.5 Formation of Levco Broker Subsidiary. Prior to the Closing, LEVCO
shall cause all of the Assets of LEVCO relating to its broker-dealer business to
be contributed to LEVCO Broker Subsidiary. In connection therewith, LEVCO Broker
Subsidiary shall comply with the covenants contained in Section 9.3. At the
Closing, the net capital, as such term is defined in Rule 15c3-1 under the
Exchange Act, will be in excess of 150% of the minimum net capital requirements
of the Exchange Act and the laws of any jurisdiction in which LEVCO has been
conducting broker-dealer business.
8.6 Related Agreements. On or before the Closing, each of the parties
thereto shall have entered into the Related Agreements.
ARTICLE IX
ADDITIONAL AGREEMENTS
9.1 Advisory Contract and Other Consents.
(a) As soon as the SEC shall have issued the SEC Order, LEVCO shall
cause all of the Clients under LEVCO's Investment Contracts to be informed of
the transactions contemplated by this Agreement and shall, in compliance with
the Investment Advisers Act, give each such Client an opportunity to consent to
the assignment of its Investment Contract. LEVCO shall use its reasonable best
efforts to obtain each such Client's actual written consent to assignment of its
Investment Contract to the Surviving Corporation and, upon the Contribution, to
the Investment Adviser Subsidiary on terms at least as favorable to the
Investment Adviser Subsidiary as the terms of such Investment Contract on the
date hereof (each a "Client Consent" and collectively, the "Client Consents").
(b) Notwithstanding Section 9.1(a), as soon as reasonably practicable
after execution of this Agreement, LEVCO shall cause each Investment Company
Client to be informed of the transactions contemplated by this Agreement and
LEVCO and the Stockholders shall use their reasonable best efforts to cause each
such Investment Company, in compliance with the Investment Company Act, to enter
into a new Advisory Contract with the Surviving Corporation, having terms at
least as favorable as the existing Advisory Contract and effective at the
Closing, or consent in writing to assignment of the existing Advisory Contract
to the Surviving Corporation. The Stockholders shall pay all expenses, if any,
incurred by or on behalf of the Investment Company in connection with such new
Advisory Contract or consent to
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assignment, including, without limitation, the costs relating to any proxy
solicitation, to the extent required by the Investment Company. LEVCO agrees to
use its reasonable best efforts to cause BKF to be given an opportunity to
review and comment upon, prior to use, drafts of any materials to be given to
security holders of an Investment Company describing the transactions
contemplated by this Agreement, including proxy materials or materials prepared
pursuant to any SEC exemptive orders.
(c) It is contemplated by the parties that prior to the Closing, the
ownership of the general partner interests in each of the Investment
Partnerships will be restructured as set forth in Schedule 9.1(c). Promptly
following the execution and delivery of this Agreement, LEVCO shall establish,
subject to BKF's approval which shall not be unreasonably withheld or delayed,
appropriate procedures to notify the limited partners in the Investment
Partnerships of the transactions contemplated by Schedule 9.1(c) and to obtain
all necessary consents thereto from such limited partners including but not
limited to any consents necessary to amend, if necessary, the agreement of
limited partnership of each Investment Partnership to permit consummation of the
transactions contemplated by this Agreement. LEVCO shall deliver to BKF drafts
of the consent solicitation materials and amendments to the agreements of
limited partnership of the Investment Partnerships so as to afford BKF an
opportunity to review and comment on such documents. LEVCO shall not send the
consent solicitation materials to the partners in the Investment Partnerships
until LEVCO has received from BKF comments thereon or written notice that it has
no comments, and BKF shall supply such comments or notice reasonably promptly
and in any event within ten Trading Days after receipt of such materials. All
amendments to the agreements of limited partnership of the Investment
Partnerships (i) shall be in form and substance reasonably satisfactory to BKF,
(ii) shall provide for all management fees and performance fees (including,
subject to Section 10.2(h), the Meadow Lane Associates, L.P. Performance Fees
(as defined in Schedule 9.1(c))) to be paid either to the Surviving Corporation
or to G.P. Subsidiary and all incentive allocations to be allocated to G.P.
Subsidiary (iii) if requested by BKF, will eliminate the ability of G.P.
Subsidiary after the Closing to pay any Person, other than G.P. Subsidiary, any
management fee, incentive fee or performance fee described on Schedule 9.1(c),
to allocate to any Person other than G.P. Subsidiary, any incentive allocation
described on such Schedule or to exclude Persons associated with LEVCO or
Surviving Corporation in calculating any such fee or allocation. LEVCO shall
obtain copies of all written responses to such notifications and partner
consents and a written report describing all oral responses to such
notifications, all of which shall be made available to BKF.
9.2 Approval by Holders of BKF Common Stock; Related Indemnities.
(a) The parties hereto shall cooperate with one another as provided
in this Section 9.2 to obtain the approval of the Stockholder Approval Matters,
in each case by the affirmative vote of a majority of the outstanding shares of
BKF Common Stock (such approval being referred to hereinafter as the "BKF
Stockholder Approval"). BKF shall, as soon as practicable after the Notice shall
have been published in the Federal Register, take all action necessary in
accordance with the Corporation Law and its certificate of incorporation and
bylaws to convene a meeting of BKF's stockholders to, among other things, seek
to obtain the BKF Stockholder Approval, and BKF shall consult with LEVCO in
connection therewith.
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(b) In connection with obtaining the BKF Stockholder Approval, the
parties shall cooperate with one another to make full and complete disclosure of
all facts material to the giving of such BKF Stockholder Approval, and BKF shall
use its reasonable best efforts and take prompt steps to prepare, file and clear
with the SEC the Proxy Materials (as defined below) and to disseminate to its
security holders the Proxy Materials, all at the expense of BKF. BKF shall bear
all expenses in connection with the preparation of the Proxy Materials, except
that LEVCO shall bear its expenses (including legal and accounting fees and
expenses) in connection with preparing any information concerning LEVCO required
to be included in the Proxy Materials and in reviewing the Proxy Materials. BKF
shall use its reasonable best efforts to obtain the BKF Shareholder Approval,
which may include, in BKF's sole judgment, the engagement of a proxy
solicitation agent. The Proxy Statement included in the Proxy Materials shall
include the recommendation of the Board of Directors of BKF in favor of the
Stockholder Approval Matters (the "Recommendation") unless (i) BKF shall not
have received for inclusion in the Proxy Materials an opinion from Lazard to the
effect that the consideration to be paid in the Merger is fair to BKF from a
financial point of view or (ii) the Board of Directors of BKF concludes in good
faith upon the written advice of outside counsel that such action is necessary
for the Board of Directors of BKF to comply with its fiduciary obligations to
stockholders under applicable law. The term "Proxy Materials" means the proxy
statement, form of proxy and any additional soliciting materials, including all
amendments and supplements thereto, used or intended for use in connection with
obtaining the BKF Stockholder Approval.
(c) BKF shall deliver drafts of the Proxy Materials to LEVCO a
reasonable time prior to filing such documents with the SEC and prior to mailing
the Proxy Statement to BKF Stockholders so as to afford LEVCO and the
Stockholders an opportunity to review and comment on such documents. BKF shall
not file the Proxy Materials with the SEC until BKF has received from LEVCO
comments regarding the Proxy Materials, or written notice that it has no such
comments and LEVCO shall supply such comments or notice reasonably promptly and
in any event within ten Trading Days after receipt of the Proxy Materials. BKF
shall notify LEVCO promptly of the receipt of any comments of the SEC regarding
the Proxy Materials and of any request by the SEC for amendments or supplements
or for additional information with respect thereto, and will supply LEVCO with
copies of all correspondence between BKF and its representatives, on the one
hand, and the SEC or the members of its staff, on the other hand, with respect
to the Proxy Materials. BKF, LEVCO and the Stockholders each shall use all
reasonable efforts to obtain and furnish the information required to be included
in the Proxy Materials, including preparation of the BKF Subsequent Financials
and LEVCO Subsequent Financials.
(d) BKF represents that the Proxy Materials, on the date such
materials are filed with the SEC, on the date such materials are first mailed to
BKF's stockholders and on the date of the stockholders meeting at which the BKF
Stockholder Approval is sought (and on the dates of any adjourned sessions of
such meeting), shall not include a misstatement of a material fact and shall not
omit to state any material fact required to be stated therein or necessary in
order to make the statements contained therein, in light of the circumstances
under which made, not false or misleading; provided that such representation
shall not apply to the extent that any such misstatement of a material fact or
omission of a material fact was made by BKF in conformity with information
concerning LEVCO or the Stockholders furnished to BKF by LEVCO or the
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Stockholders in writing specifically for inclusion in the Proxy Materials. BKF
agrees to notify LEVCO and the Stockholders of, and to take all reasonable
actions within its power to correct, any such information provided by BKF for
use in the Proxy Materials which shall have become false or misleading in any
material respect prior to the Closing. The Proxy Materials, when filed by BKF
with the SEC, shall comply as to form in all material respects with all
requirements of applicable law.
(e) The Stockholders represent, jointly and severally, that the
information concerning LEVCO and the Stockholders furnished by them in writing
specifically for inclusion in the Proxy Materials, on the date such materials
are filed with the SEC, on the date such materials are first mailed to BKF's
Stockholders and on the date of the stockholders meeting at which the BKF
Stockholder Approval is sought (and on the dates of any adjourned sessions of
such meeting), shall not include a misstatement of a material fact and shall not
omit to state any material fact required to be stated therein or necessary in
order to make the statements contained therein, in light of the circumstances
under which made, not false and misleading. LEVCO and each Stockholder agrees to
notify BKF of, and to take all reasonable actions within their power to correct,
any such information provided by such Person for use in the Proxy Materials
which shall have become false or misleading in any material respect prior to
Closing.
9.3 Compliance with Securities Laws.
(a) Within thirty (30) days after the Closing and at LEVCO's expense
(which expense, to the extent incurred after Closing, will be paid by inclusion
of amounts therefor in the cash on hand of LEVCO at Closing as contemplated by
Schedule 10.2(o)), the Investment Adviser Subsidiary shall prepare and file with
the SEC a Form ADV for the Investment Adviser Subsidiary. Prior to the Closing,
LEVCO shall cooperate fully with BKF in furnishing information needed to prepare
such Form ADV.
(b) At LEVCO's expense (which expense, to the extent incurred after
Closing, will be paid by inclusion of amounts therefor in the cash on hand of
LEVCO as contemplated by Schedule 10.2(o)), BKF, the Surviving Corporation or
Investment Adviser Subsidiary shall file, and (to the extent such filings are
prepared or made prior to Closing) LEVCO shall cooperate fully with BKF in
preparing and filing, all such other forms and other documents required to be
filed or delivered under applicable federal and state laws, and regulations
promulgated thereunder, relating to or regulating the activities of investment
advisers, including without limitation the Investment Advisers Act, the Exchange
Act and the Securities Act, as a result of the consummation of the transactions
contemplated by this Agreement.
(c) Prior to the Closing and at LEVCO's expense, LEVCO shall prepare
and file with the Commodity Futures Trading Commission, and BKF shall cooperate
fully with LEVCO in preparing and filing the appropriate CTA registration forms
on behalf of the Investment Adviser Subsidiary and CPO registration forms on
behalf of G.P. Subsidiary, and such registrations (i) shall have become
effective under the Commodity Exchange Act prior to or upon Closing or (ii)
shall be scheduled to become effective within the period of time that Investment
Adviser Subsidiary and G.P. Subsidiary shall be entitled to rely on the
registrations
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of their respective predecessors pursuant to applicable successor registration
provisions. In addition, and at LEVCO's expense, LEVCO shall prepare and file
with the NFA on behalf of the Investment Adviser Subsidiary and G.P. Subsidiary,
and BKF shall cooperate fully with LEVCO in preparing and filing, all such other
documents required to be filed or delivered in order to qualify each of
Investment Adviser Subsidiary and G.P. Subsidiary as a member of the NFA.
(d) Within thirty (30) days after the Closing Date and at LEVCO's
expense (which expense, to the extent incurred after Closing, will be paid by
inclusion of amounts therefor in the cash on hand of LEVCO at Closing as
contemplated by Schedule 10.2(o)), the Surviving Corporation or the Investment
Adviser Subsidiary shall prepare and file with the Central Registration
Depository a Form BD for LEVCO Broker Subsidiary. In addition, within thirty
(30) days after the Closing Date and at LEVCO's expense (which expense, to the
extent incurred after Closing, will be paid by inclusion of amounts therefor in
the cash on hand of LEVCO at Closing as contemplated by Schedule 10.2(o)), the
Surviving Corporation or the Investment Adviser Subsidiary shall prepare and
file with the NASD all such other documents required to be filed or delivered in
order to qualify LEVCO Broker Subsidiary as a member of the NASD and to transfer
all employee registrations and qualifications of LEVCO employees in connection
therewith. Prior to the Closing, LEVCO shall cooperate fully with BKF in
furnishing information needed to prepare such Form BD and other documents.
(e) At LEVCO's expense (which expense, to the extent incurred after
Closing, will be paid by inclusion of amounts therefor in the cash on hand of
LEVCO at Closing as contemplated by Schedule 10.2(o)), BKF, the Surviving
Corporation, the Investment Adviser Subsidiary or LEVCO Broker Subsidiary shall
file, and (to the extent such filings are prepared or made prior to Closing)
LEVCO shall cooperate fully with such Persons in preparing and filing, all such
other forms and other documents required to be filed or delivered under
applicable federal and state laws, and regulations promulgated thereunder,
relating to or regulating the activities of broker-dealers, including without
limitation the Exchange Act and the Securities Act, as a result of the
consummation of the transactions contemplated by this Agreement.
(f) Prior to the Closing, LEVCO shall, at LEVCO's expense, register
as an investment adviser in each state where LEVCO is required to be so
registered, including those states in which registration is required as set
forth in Schedule 6.20(c)(i)(a) of the LEVCO Disclosure Schedule, and each
employee of LEVCO who is required to be registered or qualified under the laws
and regulations of such state relating to the activities of investment advisers
shall be so registered and qualified.
(g) Prior to the Closing, LEVCO shall, at LEVCO's expense, register
as a broker-dealer in each state where LEVCO is required to be so registered,
including those states in which registration is required as set forth in
Schedule 6.22(a) of the LEVCO Disclosure Schedule, and each employee of LEVCO
required to be so registered or qualified under the laws and regulations of each
such state relating to the activities of broker-dealers shall be so registered
and qualified.
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9.4 Current Information. During the period from the date of this
Agreement to the Closing, each of LEVCO and BKF will cause one or more of its
representatives to confer on a regular and frequent basis with representatives
of the other party with respect to the status of its ongoing operations. Each
party will promptly notify the other parties of any material change in the
normal course of its business or of any complaints from a Governmental Entity or
regulatory authority or a self-regulatory body, investigations or hearings (or
communications indicating that the same may be contemplated), the institution or
the threat of any litigation that comes to their attention which would, in any
manner, challenge, prevent, alter or materially delay any of the transactions
contemplated hereby and each party will keep the other party informed with
respect to such events. LEVCO and BKF will notify each other of the status of
regulatory applications and third party consents related to the actions
contemplated hereby.
9.5 Access: Information.
(a) From and after the date hereof, LEVCO shall afford to BKF and its
representatives, and BKF shall afford to LEVCO and its representatives, such
access during normal business hours and without material business interruption
to the other's books, records (including, without limitation, tax returns and
appropriate work papers of independent auditors under normal professional
courtesy), Assets and such other information as BKF or LEVCO may reasonably
request. After the Closing, BKF shall retain or cause the Surviving Corporation
to retain for tax and regulatory purposes and to otherwise comply with this
Agreement, all related books and records and other information relating to years
1988-1995 for at least seven years after each of the respective taxable years
1988-1995.
(b) All non-public records, books, contracts, instruments, computer
data and other data and information (collectively, the "Information") concerning
the other parties furnished pursuant to this Agreement shall be subject to the
Confidentiality Letter Agreement (as defined in Section 15.1 hereinafter) and
the confidentiality agreements contained in Section 13.2, as applicable. In the
event of the termination of this Agreement, each party shall return or destroy
all Information furnished to such party and its representatives hereunder and
all analyses, compilations, data, studies, other documents prepared by such
party or its representatives containing or based in whole or in part on any such
Information.
9.6 Non-Solicitation.
(a) The Stockholders and LEVCO agree that neither any Stockholder,
LEVCO nor any of LEVCO's directors, officers or employees nor any agent or
representative of any Stockholder or LEVCO (including, without limitation, any
investment banker, attorney or accountant retained by any of them) shall
initiate, solicit, encourage or entertain, directly or indirectly, any inquiries
or the making of any proposal or offer with respect to a merger, consolidation
or similar transaction involving, or any purchase of any substantial portion of
the assets or any substantial portion of the equity securities of LEVCO, or the
assignment of any substantial portion of any investment advisory, subadvisory or
distribution agreement by LEVCO, or the transfer of general partner interests in
any of the Investment Partnerships other than as contemplated by the Interim
Transactions (any of the foregoing, a "LEVCO Competing
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Proposal") or engage in any negotiations concerning, or provide any confidential
information or data with respect to, or have any discussions with any Person
relating to, a LEVCO Competing Proposal. The Stockholders and LEVCO shall
promptly notify BKF of any written or oral communications received by any of
them from any Person with respect to any LEVCO Competing Proposal.
(b) BKF agrees that neither it nor any of its directors, officers or
employees nor any agent or representative of it (including without limitation,
any investment banker, attorney or accountant retained by any of them) shall
initiate or solicit, directly or indirectly, the making of any proposal or offer
with respect to the purchase by BKF of a substantial portion of the equity
securities or assets of, or a merger, consolidation or similar transaction
involving, an entity registered under the Investment Advisers Act (any of the
foregoing a "BKF Acquisition Proposal"), or engage in any negotiations
concerning, or provide any confidential information or data with respect to, or
have any discussions with any Person relating to any BKF Acquisition Proposal,
and shall promptly notify LEVCO of any written or oral communication received by
any of them from any Person proposing that BKF make any BKF Acquisition
Proposal.
9.7 Notification of Certain Matters. Each party shall give prompt notice
to the other parties of: (i) the occurrence or non-occurrence of any event which
would be likely to cause any representation and warranty contained herein to be
untrue or inaccurate in any material respect (or in the case of representations
and warranties contained herein qualified by their terms by a reference to
materiality, to be untrue or inaccurate in any respect), and (ii) any inability
by such party to comply with or satisfy a condition or agreement contained
herein or in any Related Agreement in any material respect.
9.8 Press Releases, Etc. Each of LEVCO, the Stockholders and BKF agree
that, without notification to the other a reasonable time in advance of such
disclosure, it shall not disclose the negotiation or execution of this Agreement
or of any information concerning the transactions contemplated hereunder to BKF
stockholders or clients of LEVCO or BKF or to other Persons (other than Persons
employed by or consultants to any LEVCO Entity or the Stockholders, BKF, any of
BKF's subsidiaries or affiliates and their respective attorneys, investment
bankers and accountants) in advance of the publication by LEVCO and BKF of press
releases (as appropriate) on such matters pursuant to this Section 9.8. LEVCO
and BKF will consult with each other as to the form, substance and timing of any
press release or other public disclosure of the existence of this Agreement,
matters related to this Agreement or any of the transactions contemplated hereby
and no such press release or other public disclosure shall be made without the
consent of the other, which shall not be unreasonably withheld or delayed;
provided, however, that the parties may make such disclosures as are required by
law after making reasonable efforts in the circumstances to consult in advance
with the other parties. The provisions of this Section 9.8 shall apply not only
to the initial public disclosures by each party but also to the form and content
of any and all subsequent press releases or other public disclosure.
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9.9 Tax Information. LEVCO shall cooperate in obtaining from the
appropriate taxing authority for BKF's review tax account information for
federal, state or local taxes of LEVCO and the Investment Partnerships, as
reasonably requested by BKF.
9.10 Updated Financial Statements.
(a) As soon as possible following the completion of the fiscal year
ending December 31, 1995 (and in any event not later than 90 days after the
completion of such fiscal year), LEVCO will deliver to BKF with respect to
itself and each Investment Partnership a balance sheet as at December 31, 1995
together with the related financial statements for the year then ended as to
which financial statements the independent public accountants of LEVCO and the
respective Investment Partnerships shall have issued an unqualified opinion. In
connection with the preparation of Proxy Materials, LEVCO shall also deliver to
BKF with respect to itself and each Investment Partnership such quarterly
balance sheets and related financial statements as are required to be included
in the Proxy Materials by the Exchange Act and the rules of the SEC thereunder.
All of such balance sheets and financial statements (including the notes
thereto, if any) are collectively called the "LEVCO Subsequent Financials."
LEVCO shall also deliver to BKF each FOCUS Report filed by it with the SEC prior
to the Closing, as soon as practicable after the filing of such report with the
SEC.
(b) Prior to the Closing Date and as soon as possible following the
completion of the fiscal year ending December 31, 1995 (and in any event not
later than 90 days after the completion of any such fiscal year), BKF will
deliver to LEVCO with respect to itself a statement of assets and liabilities as
at December 31, 1995 together with the related statements of operations, changes
in net assets and cash flows for the year then ended as to which financial
statements the independent public accountants of BKF shall have issued an
unqualified opinion. In connection with the preparation of Proxy Materials, BKF
shall also deliver to LEVCO such quarterly balance sheets and related financial
statements as are required to be included in the Proxy Materials by the Exchange
Act and the rules of the SEC thereunder. All of such statements of assets and
liabilities and statements of operations, changes in net assets and cash flows
(including the notes thereto, if any) are collectively called the "BKF
Subsequent Financials." BKF shall also deliver to LEVCO each Form N-SAR filed by
it with the SEC prior to Closing, as soon as practicable after the filing of
such report with the SEC.
(c) The LEVCO Subsequent Financials shall be LEVCO Financial
Statements for purposes of Section 6.7 and shall comport with the requirements
of the Exchange Act and Regulation S-X. The BKF Subsequent Financials shall be
BKF Financial Statements for purposes of Section 7.8 and shall comport with the
requirements of the Exchange Act and Regulation S-X.
9.11 BKF Portfolio. After the Signing Date hereof and prior to the Closing
Date, BKF will not acquire assets for its portfolio of private placement
securities if such acquisition will cause BKF's portfolio of private placement
securities to exceed 25% of its total net assets.
9.12 Payment of Certain Transaction Expenses. BKF shall pay or cause to be
paid the Transaction Expenses on or before the Closing Date.
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9.13 LEVCO Closing Balance Sheet. On or immediately prior to the Closing
Date, each LEVCO Entity will discharge and satisfy all liabilities, absolute,
accrued, contingent or otherwise, that would be required to be recorded on a
balance sheet of such LEVCO Entity prepared in accordance with GAAP as of the
Closing, except accrued rental expense under the Lease and any other liability
as to which BKF has consented as set forth in Section 8.1.
9.14 Treatment of Accounts Receivable. BKF shall cause Surviving
Corporation and Investment Adviser Subsidiary to send a notice to each Client of
an Assigned Account (in a form mutually acceptable to BKF and the Stockholder
Representative, the "Payment Instructions") to the effect that payment should be
sent by such Client to an account designated by the Stockholder Representative
(i) to the extent that such Assigned Account was billed, but not paid, prior to
the Closing, in an amount equal to the amount so billed (unless LEVCO shall have
previously sent such Payment Instructions, it being understood that,
notwithstanding Section 8.1 hereof, BKF hereby acknowledges that LEVCO may send
such mutually acceptable instructions prior to Closing), such Payment
Instructions to be sent on or promptly following the Closing, (ii) if not billed
prior to the Closing, such Payment Instructions to be sent in the next quarterly
bill sent to such Client (the timing of which shall be consistent with LEVCO's
past billing practices) (the amount so billed, the "Billed Amount"), (A) to the
extent such Assigned Account reflects fee accruals by LEVCO for a full fiscal
quarter, in an amount equal to such accruals, (B) to the extent such Assigned
Account reflects fee accruals by LEVCO for one month, in an amount equal to one-
third of the Billed Amount, or (C) to the extent such Assigned Account reflects
fee accruals by LEVCO for two months, in an amount equal to two-thirds of the
Billed Amount.
9.15 Bifurcation Event.
(a) If BKF or its representatives are informed by the staff of the
SEC that the SEC Order will not contain exemptive relief allowing the LEVCO
Companies to compensate certain of their key employees ("Key Employees")
pursuant to a "profit-sharing" plan within the meaning of Section 17(d) of the
Investment Company Act and Rule 17d-1 thereunder or that inclusion of such
request for relief will materially delay the processing of BKF's application for
exemptive relief (a "Bifurcation Event"), the parties agree as follows:
(i) Promptly after BKF or its representatives have been so
informed by the staff of the SEC, BKF shall notify the Stockholders of the
happening of such Bifurcation Event;
(ii) Compensation of the Key Employees will be made in
accordance with Section 4(b)(ii) of each such Key Employee's employment
agreement entered into pursuant to Section 10.2(d) hereto and any
compensation contemplated by Section 4(b)(i) of such Key Employee's
employment agreement shall be null and void; and
(iii) BKF, Merger Subsidiary and Investment Adviser Subsidiary
agree, notwithstanding (i) and (ii) above, to continue to use their
reasonable best efforts to obtain from the SEC prior to Closing exemptive
relief
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allowing the LEVCO Companies to compensate Key Employees pursuant to a
"profit-sharing" plan within the meaning of Section 17(d) of the Investment
Company Act and Rule 17d-1 thereunder.
(b) If BKF or its representatives are informed by the staff of the
SEC that the Notice will not contain exemptive relief allowing an affiliated
person of BKF or the LEVCO Companies (as that term is defined in Section 2(a)(3)
of the Investment Company Act as modified by the Order) to own limited partner
interests in the Investment Partnerships or that inclusion of such request for
relief will materially delay the processing of BKF's application for exemptive
relief (an "L.P. Bifurcation Event"), the parties agree as follows:
(i) Promptly after BKF or its representatives have been so
informed by the staff of the SEC, BKF shall notify the Stockholders of the
happening of such L.P. Bifurcation Event;
(ii) To the extent necessary to prevent an L.P. Bifurcation
Event, (x) each Stockholder owning a general partner or limited partner
interest in any Investment Partnership shall, prior to the Closing Date,
redeem such partner interest in accordance with the agreement of limited
partnership of each such Investment Partnership, as applicable, and (y)
LEVCO and all Stockholders shall cause the limited partner interest of any
limited partner owning an interest of 5% or more of the capital of any
Investment Partnership to be redeemed in accordance with the agreement of
limited partnership of such Investment Partnership to the extent necessary
to cause such limited partner's interest to be less than 5% of the capital
of such Investment Partnership, such that at the Closing Date, except as
permitted by the SEC Order, no affiliated person of BKF or the LEVCO
Companies (as that term is defined above) shall own any general or limited
partner interest in any Investment Partnership; and
(iii) BKF, Merger Subsidiary and Investment Adviser Subsidiary
agree, notwithstanding (i) and (ii) above, to continue, until such relief
is either granted or denied, to use their reasonable best efforts to obtain
from the SEC exemptive relief allowing affiliated persons of BKF or the
LEVCO Companies (as that term is defined above) to own limited partner
interests in the Investment Partnerships.
9.16 Bridge Partners. Prior to the Closing, LEVCO will cease to be a
general partner of Bridge Partners.
9.17 LEVCO Stockholder Approval. The Stockholders shall, as promptly as
possible after the execution of this Agreement, execute a unanimous written
consent as holders of all of the outstanding capital stock of LEVCO, approving
and adopting this Agreement and the Merger, and shall promptly deliver a copy of
such consent to BKF.
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ARTICLE X
CONDITIONS
10.1 Conditions to Each Party's Obligations to Consummate. The
respective obligations of each party to consummate the transactions contemplated
by this Agreement shall be subject to the fulfillment or waiver in writing at or
prior to the Closing of the following conditions:
(a) No Termination. None of the parties shall have terminated this
Agreement pursuant to Section 11.1.
(b) SEC Order. The SEC shall have issued the order (the "SEC Order")
requested by BKF in SEC Proceeding No. 812-9528, granting exemptive relief from
provisions of the Investment Company Act and rules thereunder, and the SEC
Order, in the sole judgment of BKF after reasonable consultation with LEVCO,
shall be adequate to permit consummation by BKF of the transactions contemplated
by this Agreement and the Related Agreements, and shall not have imposed any
condition, requirement or commitment in connection therewith which, in the sole
judgment of BKF, is reasonably likely to have a Material Adverse Effect on the
Surviving Corporation, Investment Adviser Subsidiary and the LEVCO Subsidiaries
(collectively, the "LEVCO Companies"), considered as one enterprise, or BKF.
(c) Other Regulatory Requirements. The transactions contemplated by
this Agreement shall have been approved by any Governmental Entity or self-
regulatory body, the approval of which is required to permit consummation
thereof (except such approvals which Section 9.3 contemplates will be obtained
after Closing), without the imposition of any condition, requirement or
commitment which is reasonably likely to have a Material Adverse Effect on the
LEVCO Companies, considered as one enterprise, or BKF; and all waiting periods
arising under the HSR Act or any other applicable law shall have duly lapsed or
been terminated.
(d) Absence of Litigation. No action or proceeding shall have been
instituted or threatened on or before the Closing Date before any Governmental
Entity pertaining to the transactions contemplated by this Agreement, the result
of which is reasonably likely to prevent or make illegal the consummation of
such transactions or which would be reasonably likely to have a Material Adverse
Effect on the LEVCO Companies, considered as one enterprise, or BKF. Neither BKF
nor LEVCO shall be subject to any order, decree or injunction of a court or
agency of competent jurisdiction which either enjoins or prohibits the
consummation of any of the transactions contemplated by this Agreement.
(e) BKF Stockholder Approval. BKF Stockholder Approval shall have
been obtained.
(f) CTA and CPO Registration. The registration of Investment Adviser
Subsidiary as a CTA and the registration of G.P. Subsidiary as a CPO under
federal law and as a member of the NFA shall have been filed and become
effective or be scheduled to become effective as provided in Section 9.3(d).
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(g) Escrow Agreement. BKF, the Stockholders and the Escrow Agent (as
defined in Section 12.7) shall have entered into an Escrow Agreement in
substantially the form of Exhibit 12.7.
(h) Registration Rights Agreement. BKF and the Stockholders shall
have entered into a Registration Rights Agreement in substantially the form of
Exhibit 10.1(h).
(i) Portfolio Management Agreement. BKF and Investment Adviser
Subsidiary shall have entered into an agreement whereby Investment Adviser
Subsidiary will manage certain assets of BKF, such agreement to be substantially
in the form of Exhibit 10.1(i).
(j) NYSE Listing. The shares of BKF Common Stock to be issued
pursuant to the Merger shall have been approved for listing on the Exchange,
subject to notice of issuance.
10.2 Conditions Precedent to BKF's and Merger Subsidiary's Obligations. The
obligation of BKF and Merger Subsidiary to consummate the transactions
contemplated hereby shall be subject to the fulfillment or waiver (in writing)
at or prior to the Closing of the following conditions;
(a) Representations and Warranties. The representations and
warranties of the Stockholders set forth or referred to in this Agreement and in
any schedule or exhibit hereto shall be true and correct in all material
respects (except for such representations and warranties which are qualified by
their terms by a reference to materiality, which representations and warranties
as so qualified shall be true and correct in all respects) (i) as of the Signing
Date and (ii) as of the Closing Date, as though made on and as of each such
date, except (x) for any such representations and warranties made as of a
specified date, which shall be true and correct in all material respects as of
such date, (y) as expressly contemplated or permitted by this Agreement and (z)
for in the case of the representations and warranties made on and as of the
Closing Date, such inaccuracies which, individually or in the aggregate, would
not reasonably be expected to have a Material Adverse Effect on the LEVCO
Companies, considered as one enterprise, or BKF or on the ability of the parties
to consummate the transactions contemplated by this Agreement. Notwithstanding
the foregoing, the parties acknowledge and agree that if Closing Assets Under
Management as to which an Agreed Consent has been duly obtained and is in full
force and effect are less than 100% but greater than 75% of the Base Assets
Under Management (in each case, calculated in accordance with Section 2.1(b)
hereof), then any reduction in the Assets Under Management since the date of
this Agreement shall not constitute a Material Adverse Effect on BKF or the
Surviving Corporation, or on the ability of the parties to consummate the
transactions contemplated by this Agreement.
(b) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of LEVCO and the Stockholders to be performed and
complied with pursuant to this Agreement and the other agreements contemplated
hereby prior to the Closing Date shall have been duly performed and complied
with by them in all material respects.
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(c) Certificates. The Stockholders shall have delivered a
certificate, dated as of the Closing Date and signed by each of them, to the
effect that the conditions set forth in Sections 10.2(a) and (b) of this
Agreement have been satisfied. Notwithstanding the foregoing, if BKF and Merger
Subsidiary shall elect to enter into and complete the Closing despite the fact
that the Stockholders shall have specifically indicated in the certificate
described in the immediately preceding sentence any inaccuracy or inaccuracies
as to any representation or warranty of the Stockholders contained in this
Agreement (when read together with the LEVCO Disclosure Schedule) or any Related
Agreement that the Stockholders reasonably expect, individually or in the
aggregate, will have a Material Adverse Effect on the LEVCO Companies,
considered as one enterprise, or BKF or on the ability of the parties to
consummate the transactions contemplated by this Agreement, the Stockholders
shall not be liable to BKF for any Losses (as defined in Section 12.2) arising
out of or resulting from the specified inaccuracy or inaccuracies. The
Stockholders shall also have caused to be delivered a certificate, dated the
Closing Date and signed by the Stockholders, certifying (i) the dollar amount of
LEVCO's Closing Assets Under Management at the Closing as to which an Agreed
Consent has been duly obtained and is in full force and effect, (ii) the dollar
amount of the Partnership Capital, (iii) that Section 9.12 has been complied
with and (iv) that the condition contained in Section 10.2(o) has been complied
with.
(d) Employment Agreements. Levin shall have entered into an
employment agreement with BKF and the Merger Subsidiary, for itself and as the
Surviving Corporation, substantially in the form of Exhibit 10.2(d)(i), such
agreement to become effective at Closing. Melody L. Prenner Sarnell and Jeffrey
A. Kigner shall each have entered into an employment agreement with Merger
Subsidiary for itself and as the Surviving Corporation, substantially in the
form of Exhibit 10.2(d)(ii), such agreements to become effective at Closing.
(e) Opinion of Counsel. BKF shall have received (i) an opinion from
Paul, Weiss, Rifkind, Wharton & Garrison, substantially as provided in Exhibit
10.2(e)(i) hereto and (ii) an opinion from Schulte Roth & Zabel, substantially
as provided in Exhibit 10.2(e)(ii), in each case addressed to BKF and dated the
Closing Date. Such counsel may specify the jurisdiction or jurisdictions in
which the partners thereof are admitted to practice and that they are not
admitted to practice in any other jurisdiction or experts in the law of any
other jurisdiction. To the extent the foregoing opinion concerns the laws of any
other jurisdiction (or in the case of the opinion of Schulte Roth & Zabel,
relates to state securities laws), such opinion of counsel may be rendered by
other counsel admitted to practice in such other jurisdiction reasonably
satisfactory to BKF (or in the case of any opinion of Schulte Roth & Zabel
relating to state securities laws, may be rendered by other counsel with
specialized expertise in such area, such counsel to be satisfactory to BKF in
its sole discretion), such opinion of counsel to be to the same effect as the
applicable opinion set forth in Exhibit 10.2(e)(i) or Exhibit 10.2(e)(ii), as
the case may be, and otherwise in customary form with customary exceptions.
(f) Consents. LEVCO shall have obtained written consent to the
assignment of the Contracts that are set forth on Schedule 10.2(g) to the LEVCO
Disclosure Schedule.
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(g) LEVCO Stockholders' Agreement. The Stockholders' Agreement
between LEVCO and the Stockholders and each of the agreements related thereto,
each as described on Schedule 5.3(b) of the LEVCO Disclosure Schedule, shall
have been terminated.
(h) Investment Partnerships. The consent of the required percentage
of the limited partners of each Investment Partnership to the transactions
contemplated by Section 9.1(c) and Schedule 9.1(c) shall have been obtained in
accordance with the Delaware Revised Uniform Limited Partnership Act and the
agreement of limited partnership of such Investment Partnership; provided that
this condition shall not be deemed not to have been satisfied by reason of the
failure of the partners of Meadow Lane Associates, L.P. to approve an amendment
to the agreement of limited partnership of Meadow Lane Associates, L.P.
providing that the Meadow Lane Associates, L.P. Performance Fees (as defined in
Schedule 9.1(c) of the LEVCO Disclosure Schedule) be paid to G.P. Subsidiary,
if the amendment has been submitted to such partners for their approval or
disapproval and LEVCO has used its reasonable best efforts to cause that
amendment to be approved.
(i) Lease. LEVCO shall have received a consent, in form and substance
reasonably satisfactory to BKF, from the landlord under its lease (the "Lease"),
for its offices at One Rockefeller Plaza, 25th Floor, New York, New York 10020
to the change of ownership of LEVCO contemplated hereby.
(j) Certificate Regarding Constituent Documents. LEVCO shall have
delivered a certificate, dated as of the Closing Date, and signed on its behalf
by its Secretary or an Assistant Secretary, certifying that since the date
hereof, there have been no amendments or other modifications to the certificate
of incorporation or bylaws of LEVCO, and that the officers of LEVCO are those
persons named in the certificate.
(k) Subsequent Financials. LEVCO shall have delivered to BKF the
LEVCO Subsequent Financials, all as required by Section 9.10.
(l) Approval of Documentation. The form and substance of all
opinions, certificates and other documents delivered hereunder shall be
reasonably satisfactory in all respects to BKF and its counsel.
(m) Written Contracts. All Investment Contracts to which LEVCO is a
party as of the Closing Date shall be in writing, shall reflect the current fee
arrangements between LEVCO and the client, and shall provide for the receipt of
compensation by LEVCO.
(n) John A. Levin. As of the Closing Date, Levin shall be President
and Chief Executive Officer of LEVCO and shall not have any health condition or
disability which would be reasonably likely to prevent him from performing
immediately after the Closing in the capacities contemplated by the employment
agreement to be entered into by him referred to in Section 10.2(d). Any question
as to the existence of any health condition or disability of Levin for purposes
of this Agreement as to which Levin and BKF cannot agree shall be determined in
writing by a qualified independent physician mutually acceptable to Levin and
BKF. If Levin and BKF cannot agree as to a qualified independent physician, each
shall appoint such a
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physician and those two physicians shall select a third who shall make such
determination in writing. The determination of whether or not Levin shall have a
health condition or disability made in writing to BKF and Levin shall be final
and conclusive for all purposes of this Agreement.
(o) Working Capital. LEVCO's cash on hand immediately prior to the
Closing shall not be less than the amount calculated in accordance with Schedule
10.2(o).
(p) Investment Adviser Registration. LEVCO shall have received notice
of the effective registration (i) of LEVCO as an investment adviser and (ii) of
each employee of LEVCO acting as an agent or representative of LEVCO, in each
state in which LEVCO is required to be so registered, including, without
limitation, those states in which registration is required as set forth in
Schedule 6.20(c)(i)(a) of the LEVCO Disclosure Schedule, and each such notice of
registration shall not limit the extent and manner to which LEVCO or any of its
agents or representatives may conduct business, other than as required, in the
ordinary course, by the Investment Advisers Act, or by applicable state law, the
rules and regulations thereunder, or the securities regulatory authority which
administers such state law, rules and regulations. There shall be no actions,
suits or proceedings pending or threatened before any court, commission, agency
or other administrative authority or other Governmental Entity by or against
LEVCO resulting from LEVCO's or any of its agents' or representatives' failure
to be registered as an investment adviser in any state where LEVCO and its
agents or representatives were or are required to be so registered.
(q) Broker-Dealer Registration. LEVCO or LEVCO Broker Subsidiary
shall have received notice of the effective registration (i) of LEVCO or LEVCO
Broker Subsidiary as a broker-dealer and (ii) of each employee of LEVCO or LEVCO
Broker Subsidiary acting as an agent or representative of LEVCO or LEVCO Broker
Subsidiary, in each state in which LEVCO or LEVCO Broker Subsidiary is required
to be so registered, including, without limitation, those states in which
registration is required as set forth in Schedule 6.22(a) of the LEVCO
Disclosure Schedule, and each such notice of registration shall not limit the
extent and manner to which LEVCO or LEVCO Broker Subsidiary or any of its agents
or representatives may conduct business, other than as required, in the ordinary
course, by the Exchange Act, the NASD Rules of Fair Practice, an NASD
restriction agreement the terms of which are not materially more restrictive to
LEVCO or LEVCO Broker Subsidiary than the terms of the NASD restriction
agreement set forth in Schedule 6.22(c), or by applicable state law, the rules
and regulations thereunder, or the securities regulatory authority which
administers such state law, rules and regulations. There shall be no actions,
suits or proceedings pending or threatened before any court, commission, agency
or other administrative authority or Governmental Entity by or against LEVCO or
LEVCO Broker Subsidiary resulting from LEVCO's or LEVCO Broker Subsidiary's or
any of their respective agents' or representatives' failure to be registered as
a broker-dealer in any state where LEVCO or LEVCO Broker Subsidiary and their
respective agents or representatives were or are required to be so registered.
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10.3 Conditions Precedent to LEVCO's and the Stockholder's
Obligations. The obligation of LEVCO and the Stockholders to consummate the
transactions contemplated hereby shall be subject to fulfillment or waiver (in
writing) at or prior to the Closing of the following conditions:
(a) Representations and Warranties. The representations and
warranties of BKF and Merger Subsidiary set forth or referred to in this
Agreement and in any schedule or exhibit hereto shall be true and correct in all
material respects (except for such representations and warranties which are
qualified by their terms by a reference to materiality, which representations
and warranties as so qualified shall be true and correct in all respects) (i) as
of the Signing Date and (ii) as of the Closing Date, as though made on and as of
each such date, except (x) for any such representations and warranties made as
of a specified date, which shall be true and correct in all material respects as
of such date, (y) as expressly contemplated or permitted by this Agreement and
(z) for in the case of the representations and warranties made on and as of the
Closing Date, such inaccuracies which, individually or in the aggregate, would
not reasonably be expected to have a Material Adverse Effect on BKF and the
LEVCO Companies, taken as one entity, or on the ability of the parties to
consummate the transactions contemplated by the Agreement.
(b) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of BKF and Merger Subsidiary to be performed and
complied with pursuant to this Agreement and the other agreements contemplated
hereby prior to the Closing Date shall have been duly performed and complied
with by them in all material respects.
(c) Certificates. Each of BKF and Merger Subsidiary shall have
delivered a certificate, dated as of the Closing Date and signed on its behalf
by its chief executive officer and its chief financial officer, to the effect
that the conditions set forth in Sections 10.3(a) and (b) of this Agreement have
been satisfied. Notwithstanding the foregoing, if LEVCO and the Stockholders
shall elect to enter into and complete the Closing despite the fact that BKF
shall have specifically indicated in the certificate described in the
immediately preceding sentence any inaccuracy or inaccuracies as to any
representation or warranty of BKF contained in this Agreement (when read
together with the BKF Disclosure Schedule) or any Related Agreement that BKF
reasonably expects, individually or in the aggregate, will have a Material
Adverse Effect on BKF or the LEVCO Companies or on the ability of the parties to
consummate the transactions contemplated by this Agreement, BKF shall not be
liable to the Stockholders for any losses arising out of or resulting from the
specified inaccuracy or inaccuracies.
(d) Delivery of Merger Consideration. Merger Subsidiary shall have
delivered to each Stockholder or the Stockholder's designee (i) certificates
representing the Merger Shares deliverable to such Stockholder pursuant to
Section 2.2, (ii) the Cash Consideration and (iii) Fractional Share Payments
deliverable to such Stockholder pursuant to Section 2.
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(e) Opinions of Counsel. LEVCO shall have received from Bell, Boyd &
Lloyd, counsel to BKF, an opinion in substantially as provided in Exhibit
10.3(e) hereto. Such counsel may specify the jurisdiction or jurisdictions in
which the partners thereof are admitted to practice and that they are not
admitted to practice in any other jurisdiction or experts in the law of any
other jurisdiction. To the extent the foregoing opinion concerns the laws of any
other jurisdiction or pertains to matters beyond the scope of such counsel's
engagement, such opinion of counsel may be rendered by other counsel admitted to
practice in such other jurisdiction reasonably satisfactory to LEVCO, such
opinion of counsel to be to the same effect as the applicable opinion contained
in Section 10.3(e), and otherwise in customary form with customary exception.
(f) Secretary's Certificate. BKF and Merger Subsidiary shall have
delivered a certificate, dated as of the Closing Date and signed on its behalf
by its secretary or an assistant secretary, certifying that since the date
hereof, there have been no amendments or other modifications to its certificate
of incorporation or bylaws and that the officers of BKF and Merger Subsidiary
are those persons named in the certificate.
(g) Approval of Documentation. The form and substance of all
opinions, certificates and other documents delivered hereunder shall be
reasonably satisfactory in all respects to LEVCO and the Stockholders and their
counsel.
(h) Subsequent Financials. BKF shall have delivered to LEVCO the BKF
Subsequent Financials, all as required by Section 9.10.
(i) James P. Gorter. James P. Gorter ("Gorter") shall be the Chairman
of the Board of Directors of BKF and shall not have any health condition or
disability which would be reasonably likely to prevent him from continuing to
perform immediately after the Closing in such capacity in the same manner in
which he performed immediately prior to the Closing. Any question as to the
existence of a health condition or disability of Gorter for purposes of this
Agreement as to which Gorter and LEVCO cannot agree shall be determined in
writing by a qualified independent physician mutually acceptable to Gorter and
LEVCO. If Gorter and LEVCO cannot agree as to a qualified independent physician,
each shall appoint such a physician and those two physicians shall select a
third who shall make such determination in writing. The determination of whether
or not Gorter shall have a health condition or disability made in writing to
LEVCO and Gorter shall be final and conclusive for all purposes of this
Agreement.
(j) Tax Opinion. LEVCO shall have received an opinion from Paul,
Weiss, Rifkind, Wharton & Garrison to the effect that the Merger will be treated
for federal income tax purposes as a reorganization qualifying under the
provisions of Section 368(a) of the Code, which opinion shall not have been
withdrawn or modified in any material respect.
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ARTICLE XI
TERMINATION
11.1 Termination. This Agreement may, by written notice, be
terminated at any time prior to the Closing:
(a) by the mutual written consent of LEVCO and BKF; or
(b) by either LEVCO or BKF, at any time after September 30, 1996 if
the Closing shall not theretofore have occurred; or
(c) by either LEVCO or BKF, if any permanent injunction or action by
any Governmental Entity of competent jurisdiction enjoining, denying approval
of, or otherwise prohibiting the consummation of the transactions contemplated
hereby shall have become final and nonappealable; or
(d) by either LEVCO or BKF, if the Stockholder Approval Matters shall
fail to have obtained the required BKF Stockholder Approval at a meeting duly
convened therefor; or
(e) by either LEVCO or BKF, if there shall not be in full force and
effect on the Closing Date, Agreed Consents with respect to Closing Assets Under
Management the dollar amount of which is at least 75% of the dollar amount of
LEVCO's Base Assets Under Management; or
(f) by either LEVCO or BKF, at any time after June 30, 1996, if the
SEC Order shall not theretofore have been issued by the SEC; or
(g) by either LEVCO or BKF, if (i) the Board of Directors of BKF
shall not make the Recommendation in the Proxy Materials or shall at any time
thereafter prior to Closing withdraw, modify or change the Recommendation in a
manner adverse to the Stockholders or LEVCO or shall have resolved to do any of
the foregoing or (ii) the Board of Directors of BKF shall have approved any BKF
Acquisition Proposal; or
(h) by BKF, in the event there has been (i) a breach of any
representation or warranty of any Stockholder or the Stockholders contained in
this Agreement that would reasonably be expected to have a Material Adverse
Effect on LEVCO or on the LEVCO Companies, considered as one enterprise, after
the consummation of the Merger or (ii) a breach of any material covenant or
agreement of LEVCO or the Stockholders contained in this Agreement which breach
is not curable or, if curable, has not been cured within 30 days after written
notice to LEVCO and the Stockholders; or
(i) by LEVCO, in the event there has been (i) a breach of any
representation or warranty of BKF contained in this Agreement that would
reasonably be expected to have a Material Adverse Effect on BKF and the LEVCO
Companies considered as one entity after
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consummation of the Merger or (ii) a breach by BKF or Merger Subsidiary of any
material covenant or agreement contained in this Agreement which breach is not
curable or, if curable, has not been cured within 30 days after written notice
to BKF and Merger Subsidiary; or
(j) by LEVCO, if BKF shall have taken any of the actions set forth in
Section 8.2(a) without the consent of the Stockholder Representative; or
(k) by LEVCO, if any Person (including any partnership, limited
partnership, syndicate or other "group" (as such term is used in Section
13(d)(3) of the Exchange Act) shall, directly or indirectly, (i) have acquired
beneficial ownership of any securities of BKF representing in excess of 25% of
the voting power of all outstanding equity securities of BKF (a "Substantial
Bloc"), or (ii) have commenced a tender or exchange offer for a Substantial Bloc
and such tender or exchange offer shall not have been withdrawn or terminated.
11.2 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the transactions contemplated hereby pursuant
to this Article XI, except as otherwise specifically provided herein, no party
hereto (or any of its partners, shareholders, directors, officers, employees,
agents, consultants or representatives) shall have any liability or further
obligation to any other party to this Agreement, except for any obligations to
reimburse costs and expenses as set forth in Section 15.5 and except that
nothing herein will relieve any party from liability for any material breach of
this Agreement. In the event this Agreement is terminated by LEVCO or BKF
pursuant to Section 11.1(g) (except if at the time of the failure to make the
Recommendation in the Proxy Materials or at the time of the withdrawal of, or
modification or change to the Recommendation (or resolution to do so), there
shall have occurred a Material Adverse Effect since the date hereof or the date
the Recommendation was made, as the case may be, with respect to LEVCO), then
BKF shall pay to LEVCO a fee (the "Termination Fee") of $1,150,000 by wire
transfer of same day funds, within two Trading Days of such termination to an
account designated in writing by the Stockholder Representative. In addition, in
the event of a termination pursuant to which the Termination Fee is payable, BKF
will pay to LEVCO promptly upon demand the amount of all of LEVCO's out-of-
pocket expenses with respect to this Agreement and the transactions contemplated
hereby, including any fees and expenses of LEVCO's investment bankers, attorneys
and accountants, up to a maximum amount of $500,000.
ARTICLE XII
INDEMNIFICATION
12.1 General. From and after the Closing, the parties shall indemnify
each other as provided in this Article XII. For the purpose of this Article XII,
the Stockholders shall be deemed to have made all of their representations and
warranties set forth in this Agreement without any qualification as to
materiality, including without limitation any qualification as to whether the
fact or matter represented would or would not reasonably be expected to have a
Material Adverse Effect on any Person.
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12.2 Indemnification by the Stockholders. (a) From and after the
Closing Date, each of the Stockholders will jointly and severally indemnify and
hold harmless BKF, the LEVCO Companies and their respective directors, officers
and controlling persons within the meaning of the Exchange Act (the "BKF
Indemnified Parties") against any and all expenses, losses, claims, damages,
fines, penalties, liabilities and costs, including reasonable attorneys fees and
expert witness fees and any fees received from clients that must be disgorged or
losses or expenses incurred in connection with client or customer claims,
including claims for rescission of securities transactions, but excluding any
punitive or exemplary damages except to the extent payable to third parties and
excluding any consequential damages to such BKF Indemnified Persons (other than
to LEVCO Companies) (all of the foregoing herein collectively referred to as
"Losses") sustained or incurred by any one or more of the BKF Indemnified
Parties based upon, arising from or otherwise in respect of (i) any inaccuracy
of any representation or warranty made by the Stockholders in Article VI (when
read together with the portions of the LEVCO Disclosure Schedule relating
thereto) or Section 9.2(e) of this Agreement or the certificates delivered
pursuant to Article X of this Agreement, (ii) any default by LEVCO or the
Stockholders under any of their covenants or agreements contained in this
Agreement, (iii) any Loss or obligation based upon, arising out of or otherwise
in respect of Bridge Partners, (iv) any Loss based upon, arising out of or
otherwise in respect of the failure of any arrangement of a LEVCO Entity with a
paid solicitor to comply with Rule 206(4)-3 under the Investment Advisers Act,
and (v) any Loss based upon, arising out of or otherwise in respect of LEVCO
having failed to register as an investment adviser or broker-dealer in any state
in which registration was required prior to the Closing or any employee of LEVCO
having failed to register or qualify under the laws or regulations of any such
state relating to the activities of investment advisers and broker-dealers.
(b) From and after the Closing Date, each Stockholder severally, but
not jointly, agrees to indemnify and hold harmless the BKF Indemnified Parties
from and against any Losses sustained or incurred by any one or more of the BKF
Indemnified Parties based upon, arising out of or otherwise in respect of any
inaccuracy of any representation or warranty contained in Article V of this
Agreement (when read together with the portions of the LEVCO Disclosure Schedule
relating thereto) or the certificates delivered pursuant to Article X of this
Agreement.
12.3 Indemnification by BKF. From and after the Closing Date, BKF will
indemnify and hold harmless the Stockholders against any and all Losses at any
time sustained or incurred by any one or more of the Stockholders based upon,
arising out of, or otherwise with respect of (a) any inaccuracy of any
representation or warranty made by BKF in Article VII of this Agreement (when
read together with the BKF Disclosure Schedule) or Section 9.2(d) of this
Agreement or the certificates delivered pursuant to Article X of this Agreement
and (b) any default by BKF or Merger Subsidiary under any of their covenants or
agreements contained in this Agreement.
12.4 Indemnification Procedure for Third Party Claims. In the event that
subsequent to the Closing Date any person or entity entitled to indemnification
under this Agreement (an "Indemnified Party") receives notice of the assertion
of any claim or of the commencement of
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any action or proceeding by any entity that is not a party to this Agreement
(including, but not limited to, any Governmental Entity) (a "Third Party Claim")
against such Indemnified Party, against which indemnification may be provided
under this Agreement (such party providing indemnification, an "Indemnifying
Party"), the Indemnified Party shall give written notice together with a
statement of any available information regarding such claim to the Indemnifying
Party (or in the case of a claim for which the Stockholders may be jointly and
severally liable, to the Stockholder Representative) within 10 days after
learning of such claim (or within such shorter time as may be necessary to give
the Indemnifying Party a reasonable opportunity to respond to such claim). The
Indemnifying Party shall have the right, upon written notice to the Indemnified
Party (the "Defense Notice") within 15 days after receipt from the Indemnified
Party of notice of such claim, which notice by the Indemnifying Party shall
specify the counsel it will appoint to defend such claim ("Defense Counsel"), to
conduct at its expense the compromise or defense against such claim in its own
name, or if necessary in the name of the Indemnified Party; provided, however,
that the Indemnified Party shall have the right to approve the Defense Counsel,
which approval shall not be unreasonably withheld; and provided further the
Indemnifying Party will not compromise or settle any claim without the prior
written consent of the Indemnified Party, which consent will not be unreasonably
withheld or delayed (it being understood that the failure of the Indemnified
Party to give such consent shall not be considered unreasonable in respect of
any compromise or settlement that does not include an unconditional release of
such Indemnified Party from all liability arising out of, or that may arise out
of, such claim). The Indemnifying Party and the Indemnified Party further agree:
(a) In the event that the Indemnifying Party shall fail to give the
Defense Notice, it shall be deemed to have elected not to conduct the defense of
the subject claim, and in such event the Indemnified Party shall have the right
to conduct such defense in good faith and to compromise and settle the claim,
with the prior consent of the Indemnifying Party, such consent not to be
unreasonably withheld or delayed (provided, however, that it is understood that
the failure of such Indemnifying Party to give such consent shall not be
considered unreasonable in respect of any compromise or settlement that does not
include an unconditional release of such Indemnifying Party from all liability
arising, or that may arise out of, such claim), and the Indemnifying Party will
be liable for all costs, expenses, settlement amounts or other Losses paid or
incurred in connection therewith.
(b) In the event that the Indemnifying Party does deliver a Defense
Notice and thereby elects to conduct and control the defense of the subject
claim, the Indemnified Party will cooperate with and make available to the
Indemnifying Party such assistance and materials as it may reasonably request,
all at the expense of the Indemnifying Party, and the Indemnified Party shall
have the right at its expense to participate in the defense assisted by counsel
of its own choosing, but shall not have the right to compromise or settle such
claim.
(c) A failure by an Indemnified Party to give timely, complete or
accurate notice of a Third Party Claim as provided in this Section 12.4 will not
affect the rights or obligations of any party hereunder except and only to the
extent that, as a result of such failure, any party entitled to receive such
notice was prejudiced thereby.
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12.5 Certain Limitations on Indemnification.
(a) No BKF Indemnified Party shall be entitled to receive any
indemnification payments under Section 12.2 in respect of inaccuracies of
representations or warranties made by the Stockholders in Article VI as of the
Signing Date unless and until the aggregate of all Losses suffered by all BKF
Indemnified Parties arising therefrom or relating thereto exceeds on a
cumulative basis one percent of the Merger Value. No BKF Indemnified Party shall
be entitled to receive any indemnification payments under Section 12.2 in
respect of inaccuracies of representations and warranties made by the
Stockholders in Article VI (except Sections 6.1 through 6.6, 6.9 and 6.17) as
of the Closing Date, which representations and warranties were true and correct
as of the date of this Agreement, unless and until the aggregate of all Losses
suffered by all BKF Indemnified Parties arising therefrom or relating thereto
exceeds one percent of the Merger Value. Each of the foregoing limitations is
herein called an "Indemnification Basket."
(b) No Stockholder shall be entitled to receive any indemnification
payments under Section 12.3 in respect of inaccuracies of representations or
warranties made by BKF in Article VII as of the date of this Agreement unless
and until the aggregate of all Losses suffered by the Stockholders arising
therefrom or relating thereto exceeds on a cumulative basis one percent of the
Merger Value. No Stockholder shall be entitled to receive any indemnification
payments under Section 12.3 in respect of inaccuracies of representations and
warranties made by BKF in Article VII (except Sections 7.1 through 7.4, 7.7,
7.10 and 7.14) as of the Closing Date, which representations and warranties were
true and correct as of the date of this Agreement, unless and until the
aggregate of all Losses suffered by the Stockholders arising therefrom or
relating thereto exceeds one percent of the Merger Value.
(c) The BKF Indemnified Parties shall not be entitled to receive any
indemnification payments under Section 12.2 to the extent that the aggregate of
all such payments, when added to all other indemnification payments previously
made to the BKF Indemnified Parties hereunder, exceeds 50% of the Merger Value
(such amount, the "Maximum Value Amount").
(d) The Stockholders shall not be entitled to receive any
indemnification payments under Section 12.3 to the extent that the aggregate of
all such payments, when added to all other indemnification payments previously
made to the Stockholders hereunder, exceeds the Maximum Value Amount.
(e) Notwithstanding the foregoing, no Stockholder shall have any
liability under Section 12.2 for any Losses in excess of such Stockholder's Pro
Rata Share (being the percentage amount set forth opposite such Stockholder's
name on Schedule 12.2 of the LEVCO Disclosure Schedule) of the Maximum Value
Amount.
(f) All Losses under this Article XII shall be computed net of any
insurance recovery by the Indemnified Party relating thereto (net of the
expenses of such recovery incurred by the Indemnified Party, other than
increases in premiums). The parties hereto agree that any indemnification
payment under this Article XII shall be deemed an adjustment to the purchase
price paid pursuant to this Agreement.
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12.6 Termination of Rights Hereunder.
(a) No claim for breach of a representation or warranty may be made
under the provisions of Section 12.2 (except for Reserved Claims) after March 31
in the second calendar year following the Closing Date ("First Survival Date")
except that (i) any claim based upon or arising out of the breach or inaccuracy
of any representation or warranty contained in Sections 5.1, 5.2, 5.3, 5.5, 5.6,
6.1, 6.2, 6.3 and 6.5 may be made at any time, (ii) any claim based upon or
arising out of the breach or inaccuracy of a representation or warranty
contained in Section 6.10 may be made at any time prior to expiration of the
applicable statute of limitations and (iii) any claim based upon or arising out
of the breach or inaccuracy of a representation or warranty contained in
Sections 6.4, 6.6, 6.16, 6.19, 6.20(c) through (e), 6.22 through 6.25 and 6.21
(insofar as it relates to any of the representations made in the foregoing
Sections) may be made at any time prior to the third anniversary of the Closing
Date (the "Survival Date").
(b) No claim for breach of a representation or warranty may be made
under the provisions of Section 12.3 (except for Reserved Claims) after the
First Survival Date, except that any claim based upon or arising out of the
breach or inaccuracy of any representation or warranty contained in Sections
7.1, 7.2, 7.3 and the last sentence of Section 7.10 may be made at any time.
(c) "Reserved Claims" means any claims as to which any BKF
Indemnified Party has given LEVCO notice or any Stockholder has given BKF
notice, in each case on or prior to the relevant expiration date of the right to
make such claim as provided in Sections 12.6(a) and (b) and, in the case of
claims arising from Third Party Claims, Section 12.4.
12.7 Escrow Fund. (a) As soon as practicable after the Effective Time,
shares of BKF Common Stock having a value at the price of $15.80 per share
equal to 50% of the Merger Value (the "Escrow Shares") shall be registered in
the name of, and be deposited with UMB Bank, N.A. as escrow agent (the "Escrow
Agent"), such deposit to constitute the Escrow Fund (as defined in the Escrow
Agreement referred to below) and to be governed by the terms set forth herein
and in the Escrow Agreement, the form of which is attached hereto as Exhibit
12.7 (the "Escrow Agreement"). The Escrow Fund shall be available to compensate
BKF for any Losses for which BKF is entitled to indemnification under Section
12.2.
(b) During the Escrow Period (as defined in the Escrow Agreement),
BKF shall, with respect to any claim for Losses hereunder, proceed first against
the Escrow Fund in accordance with the terms of the Escrow Agreement and only
after no Escrow Shares remain in the Escrow Fund with respect to the Stockholder
against whom indemnification is claimed which are not subject to any claim
thereunder relating to other alleged Losses, then against such Stockholder
directly, subject to the other terms and provisions of this Article XII
including, without limitation, the limitations on recovery set forth in Sections
12.5(a), 12.5(c) and 12.5(e). To the extent any Stockholder is required to
satisfy any claim for Losses other than out of the Escrow Fund, such Stockholder
may satisfy such Losses by delivery to BKF of shares of BKF Common Stock issued
in the Merger, the value of which will be deemed to be $15.80 per share minus
the per share amount of any capital gains distribution on shares of BKF Common
Stock
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for which the record date occurs from and after the Closing Date through the
date such share of BKF Common Stock is delivered to BKF pursuant to this Article
XII, in each case as adjusted for any stock dividend, stock split or combination
of the BKF Common Stock.
12.8 Determination of Losses after Escrow. If Escrow Shares remaining in
the Escrow Fund (as defined in the Escrow Agreement) are insufficient to satisfy
claims for Joint Losses (as defined below) or if Designated Shares remaining in
a Stockholder's Designated Account (as such terms are defined in the Escrow
Agreement) are insufficient to satisfy claims for Several Losses against such
Stockholder (as defined below) or if the Escrow Fund has been terminated as
provided in the Escrow Agreement, BKF shall only proceed against a Stockholder
with respect to any claim for Losses hereunder, on or before the relevant
expiration date of the right to make such claim as provided in Section 12.6(a),
as set forth below.
(a) BKF shall deliver a certificate signed by any officer of BKF,
other than the Stockholder Representative (the "Officer's Certificate") (i)
stating that Losses exist in an aggregate amount greater than the relevant
Indemnification Basket or that no Indemnification Basket is applicable to such
Losses and (ii) specifying in reasonable detail (A) the individual items of such
Losses included in the amount so stated, (B) in the case of Losses arising out
of any inaccuracy or breach of a representation or warranty contained in Article
V of this Agreement ("Several Losses"), the Stockholder against whom
indemnification therefore is claimed (each such Stockholder the "Indemnifying
Stockholder"), (C) the portion of such Losses constituting Several Losses, if
any, and the portion of such Several Losses to be paid by such Indemnifying
Stockholder for Several Losses, (D) the portion of such Losses not constituting
Several Losses, if any ("Joint Losses"), (E) the day each such item of Loss was
paid, incurred or sustained and (F) the nature of the misrepresentations, breach
of warranty or claim to which such item is related.
(b) For a period of forty-five (45) days after the delivery of the
notice specified above, the Stockholder Representative shall be entitled to
object in a written statement to the claim or claims made in the Officer's
Certificate. If the Stockholder Representative shall so object in writing to any
claim or claims by BKF made in any Officer's Certificate, BKF shall have forty-
five (45) days to respond in a written statement to the objection of the
Stockholder Representative. If after such forty-five (45) day period there
remains a dispute as to any claims, the Stockholder Representative and BKF shall
attempt in good faith for sixty (60) days to agree upon the rights of the
respective parties with respect to each of such claims. If the Stockholder
Representative and BKF fail to reach agreement during such sixty (60) day
period, either BKF or the Stockholder Representative may, by written notice to
the other, demand arbitration of the matter unless the amount of the damage or
loss is at issue in a pending litigation with a third party, in which event
arbitration shall not be commenced until such amount is ascertained or both
parties agree to arbitration; and in either such event the matter shall be
settled by arbitration conducted by an arbitrator to be selected in accordance
with the following sentence. Within fifteen (15) days after such written notice
demanding arbitration is sent, BKF and the Stockholder Representative shall each
select one arbitrator, and the two arbitrators so selected shall select a third
arbitrator which shall be the arbitrator (the "Arbitrator") for all purposes of
this Agreement. The decision of the Arbitrator as to the validity and amount of
any claim in such
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Officer's Certificate shall be binding and conclusive on the parties hereto;
provided, however, that regardless of such decision or award the amount of
indemnification owed to BKF shall be subject to the limitations contained in
Section 12.5.
(c) Judgment upon any award by the Arbitrator may be entered in any
court having jurisdiction. Any such arbitration shall be held (i) in the case of
the first such arbitration, in Chicago, Illinois, (ii) in the case of the second
such arbitration, in New York, New York and (iii) in each subsequent
arbitration, in one of such jurisdictions other than the jurisdiction in which
the immediately preceding arbitration was held, under the commercial rules then
in effect of the American Arbitration Association. Each party to an arbitration
conducted hereunder shall pay its own expenses, including legal fees, and the
fees of the Arbitrator and the administrative fee, if any, of the American
Arbitration Association, shall in each case, be borne 50/50 by BKF, on the one
hand, and the Stockholder or Stockholders, as the case may be, that is the
subject of such arbitration, on the other hand.
(d) Notwithstanding the foregoing, in the event BKF shall have
delivered an Officer's Certificate under the Escrow Agreement with respect to
any Losses, and insufficient Escrow Shares are available in the Escrow Fund to
satisfy the claim relating thereto, the validity and amount of which has been
determined and awarded by the arbitrator selected pursuant to, and as defined in
the Escrow Agreement, then the parties shall not be required to separately
observe the provisions of this Section 12.8 with respect to such Losses, other
than the proviso to Section 12.8(b).
ARTICLE XIII
OTHER COVENANTS
13.1 Employment of LEVCO's Employees. Surviving Corporation shall offer
continued employment on and after the Closing Date to all employees of LEVCO who
were such immediately prior to the Closing Date (the "Continued Employees").
Nothing contained herein shall be construed to modify the "at will" employee
status of those of LEVCO's employees who are immediately prior to the Closing
"at will" employees, and Surviving Corporation shall retain the absolute right
to terminate such Continued Employees at any time and for any reason or no
reason on or after the Closing Date, subject to the arrangements contemplated in
the employment agreements contemplated by Section 10.2(d). Surviving Corporation
and each Stockholder who is not a party to the Employment Agreements
contemplated by Section 10.2(d) will enter into a one-year Employment Agreement
in substantially the form of Exhibit 13.1 hereto, if such Stockholder remains an
employee of LEVCO at the Closing.
13.2 Confidentiality Each of LEVCO and the Stockholders, on behalf of
themselves and in the case of LEVCO, its directors, officers, employees, agents
and advisers, agree to keep confidential any and all information and data of a
proprietary or confidential nature with respect to BKF and its subsidiaries and
affiliates which any of them has received as a result of any investigation made
in connection with this Agreement; provided, however, that the foregoing
covenant shall not apply to any such information or data to the extent
disclosure thereof is required by applicable law, order, rule or regulation.
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13.3 Tax Matters. The Stockholders and BKF agree to report the Merger as a
reorganization within the meaning of Section 368(a) of the Code for federal,
state and local income tax purposes. The Stockholders and BKF agree to file, and
to cause LEVCO to file, all income Tax Returns affected by, or required or
permitted to include, the transactions contemplated by this Agreement in a
manner consistent with the treatment described in the preceding sentence. BKF
shall not take, or permit the LEVCO Companies to take, and the Stockholders
shall not take, any action after Closing that would itself (without regard to
any action taken by LEVCO or the Stockholders prior to the Effective Time)
disqualify the Merger as a reorganization within the meaning of Section 368(a)
of the Code.
ARTICLE XIV
GUARANTEES; STOCKHOLDER REPRESENTATIVE
14.1 Guarantees. BKF hereby guarantees for the benefit of LEVCO and the
Stockholders the performance by Merger Subsidiary of all of its obligations
under this Agreement and each Related Agreement executed and delivered by Merger
Subsidiary. The Stockholders, jointly and severally, hereby guarantee for the
benefit of BKF the performance by LEVCO of all of its obligations under this
Agreement and each Related Agreement executed and delivered by LEVCO, which in
no event shall be deemed to include any obligations of the LEVCO Companies from
and after the consummation of the Merger.
14.2 Stockholder Representative.
(a) The Stockholders hereby appoint Levin as the Stockholder
Representative. In the event Levin shall at any time be unable to, or shall
notify BKF that he is unwilling to, continue to perform the duties of the
Stockholder Representative, the remaining Stockholders shall promptly designate
a successor Stockholder Representative, and in the absence of such an
appointment, Melody L. Prenner Sarnell shall serve as the Stockholder
Representative.
(b) A decision, act, consent or instruction of the Stockholder
Representative shall constitute a decision of all Stockholders and shall be
final, binding and conclusive upon each such Stockholder, and BKF may rely upon
any decision, act, consent or instruction of the Stockholder Representative as
being the decision, act, consent or instruction of each and every Stockholder.
BKF is hereby relieved from any liability to any Person for any acts done by
them in accordance with such decision, act, consent or instruction of the
Stockholder Representative, except for liability arising out of fraud, gross
negligence, bad faith or willful default under this Agreement.
(c) In dealing with this Agreement and any instruments, agreements or
documents relating thereto, and in exercising or failing to exercise all or any
of the powers conferred upon the Stockholder Representative hereunder, (i) the
Stockholder Representative shall not assume any, and shall incur no,
responsibility whatsoever to any Stockholder by reason of any error in judgment
or other act or omission performed or omitted hereunder or in connection with
this Agreement, excepting only responsibility for any act or failure to act
which represents gross negligence or willful misconduct, and (ii) the
Stockholder Representative shall
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be entitled to rely on the advice of counsel, public accountants or other
independent experts experienced in the matter at issue, and any error in
judgment or other act or omission of the Stockholder Representative pursuant to
such advice shall in no event subject the Stockholder Representative to
liability to any Stockholder. The Stockholders shall severally indemnify the
Stockholder Representative and hold him or her harmless against any loss,
liability or expense incurred without gross negligence or bad faith on the part
of the Stockholder Representative and arising out of or in connection with the
acceptance or administration of his or her duties hereunder. All of the
indemnities, immunities and powers granted to the Stockholder Representative
under this Agreement shall survive the termination of this Agreement.
ARTICLE XV
GENERAL PROVISIONS
15.1 Survival. If this Agreement is terminated prior to the Closing
Date, the agreements of the parties in Sections 9.8, 11.2, 13.2 and 15.5, and
the letter agreement dated September 5, 1995 between BKF and LEVCO (the
"Confidentiality Letter Agreement"), shall survive.
15.2 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed to have been duly received (i) on the date given
if delivered personally or by cable, telegram, telex or telecopy or (ii) on the
date received if mailed by registered or certified mail (return receipt
requested), to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
if to BKF: Baker, Fentress & Company
200 West Madison Street, #3510
Chicago, Illinois 60606
Phone: 312/236-9190
Fax: 312/236-6772
Attention: James P. Gorter, Chairman
Copies to: Bell, Boyd & Lloyd
Three First National Plaza
70 West Madison, Suite #3300
Chicago, Illinois 60602
Phone: 312-372-1121
Fax: 312-372-2098
Attention: Janet D. Olsen
and
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if to LEVCO, Levin, the Stockholders Representative, or any other
Stockholder:
John A. Levin & Co., Inc.
One Rockefeller Plaza, 25th Floor
New York, New York 10020
Phone: 212-332-8400
Fax: 212-332-8408
Attention: John A. Levin, President
Copies to: Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Phone: 212-373-3000
Fax: 212-757-3990
Attention: Matthew Nimetz
and copies to Stockholders at their addresses set forth on Schedule
15.2 hereto.
15.3 Counterparts. This Agreement may be executed in counterparts
(including executed counterparts delivered and exchanged by facsimile
transmission) each of which shall be deemed to constitute an original, but all
of which together shall constitute one and the same instrument.
15.4 Governing Law. The validity, interpretation and effect of this
Agreement shall be governed exclusively by the laws of the State of Delaware,
excluding the conflict of laws rules of that state. Each of the parties to this
Agreement hereby irrevocably and unconditionally agrees (i) to be subject to the
jurisdiction of the courts of the State of Delaware and of the federal courts
sitting in the State of Delaware, and (ii) to the extent such party is not
otherwise subject to service of process in the State of Delaware, to appoint and
maintain an agent in the State of Delaware as such party's agent for acceptance
of legal process, and that service made pursuant to (ii) above shall have the
same legal force and effect as if served upon such party personally within the
State of Delaware. For purposes of implementing the parties' agreement to
appoint and maintain an agent for service of process in the State of Delaware,
each such party that has not as of the date hereof already duly appointed such
an agent does hereby appoint RL&F Service Corp., One Rodney Square, 10th Floor,
Wilmington, Delaware 19801, as such agent.
15.5 Expenses.
(a) Except as provided in paragraph (b) of this Section 15.5, each
party will bear its own expenses in connection with this Agreement and any other
expenses which this Agreement specifically states the particular party shall
bear. If the Merger is consummated, the Stockholders agree that, except as is
consistent with the provisions hereof, the LEVCO Companies shall not bear any
expense relating to the transactions contemplated by this Agreement that is not
fully discharged at or prior to Closing.
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(b) If this Agreement is terminated pursuant to Section 11.1 hereof
(other than clause (a) thereof), by reason of the willful failure of a party to
fulfill a condition to the performance of the other party's obligations or to
perform a covenant of this Agreement or by reason of a willful breach by any
party to this Agreement, such party shall be fully liable for any and all costs
and expenses (including, but not limited to, reasonable attorneys' fees and
expenses) in connection with this Agreement and the transactions contemplated
hereby incurred by the other party or parties.
15.6 Waiver; Amendment. Any provision of this Agreement may be (i) amended
or modified at any time (including the structure of the transactions
contemplated hereby, or any part thereof), by an agreement in writing among the
parties hereto and executed in the same manner as this Agreement or (ii) waived
by the party benefited by the provision.
15.7 Entire Agreement; No Third-Party Beneficiaries, Etc. All exhibits and
schedules hereto shall be deemed to be incorporated into and made part of this
Agreement. This Agreement, together with the Related Agreements, the exhibits
and schedules hereto and thereto and the Confidentiality Letter Agreement,
represents the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and supersedes any and all other oral or
written agreements heretofore made. All terms and provisions of the Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective personal representatives, heirs, successors and permitted
assigns. Except as otherwise explicitly stated herein, nothing in this Agreement
is intended to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement.
15.8 Assignment. This Agreement may not be assigned by any party hereto
without the written consent of the parties and any purported assignment in
violation hereof shall be null and void. Notwithstanding the foregoing, in the
event that Frank F. Rango, Barton G. Ice, Daniel E. Aron or Carol L. Novak
ceases to be an employee of LEVCO at any time prior to the Closing, such
Stockholder agrees to assign its rights under this Agreement to Levin in the
event Levin purchases the shares of such Stockholder pursuant to the Stockholder
Agreement dated as of September 18, 1995 among the Stockholders and LEVCO. In
such event, Levin shall succeed to all rights and obligations of such
Stockholder hereunder as if he were such Stockholder, except that the obligation
contained in Section 13.1 will not apply to Levin.
15.9 Interpretation. Unless otherwise expressly provided or unless the
context requires otherwise, (a) all references in this Agreement to Articles,
Sections, Schedules and Exhibits of this Agreement, (b) all references to
statutes and related regulations shall include all amendments of the same and
any successor or replacement statutes and regulations, (c) words of any gender
shall be deemed to include each other gender, (d) words used using the singular
or plural number also shall include the plural and singular number,
respectively, (e) references to "hereof," "herein," "hereby" and similar terms
shall refer to this entire Agreement (including the Schedules and Exhibits
hereto) and (f) references to any Person shall be deemed to mean and include the
successors and permitted assigns of such Person (or in the case of a
Governmental Entity, Persons succeeding to the relevant functions of such
Person).
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15.10 Further Assurances. The parties hereto agree to execute and deliver
any and all papers and documents which may be reasonably necessary to carry out
the terms of this Agreement.
15.11 Consistent Accounting. The parties to this Agreement shall consult
with each other for the purpose of arriving at consistent accounting, tax and
reporting treatment, whether public or private, of the transactions contemplated
hereby.
15.12 Severability. The provisions of this Agreement are severable and the
invalidity of any provision shall not affect this validity of any other
provision.
15.13 Exclusive Remedy. Each of the parties hereto acknowledges and agrees
that from and after the Closing, its sole and exclusive remedy with respect to
any and all claims relating to the subject matter of this Agreement (other than
claims for payment by BKF of Transaction Expenses, the payments contemplated by
Section 11.2 hereof and the payments of expenses contemplated by Sections 9.2
and 9.3) shall be pursuant to the indemnification provisions set forth in
Article XII, except that nothing in this Agreement shall be deemed to constitute
a waiver of any tort claims of, or causes of action arising from, fraud by any
party.
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IN WITNESS WHEREOF, the parties have duly executed, or caused to be
duly executed by their respective officers thereunto duly authorized, this
Agreement, all as of the date first written above.
BAKER, FENTRESS & COMPANY
By:
------------------------------------
Title: Chairman
JOHN A. LEVIN & CO., INC.
By:
------------------------------------
Title: Chairman
JALC ACQUISITION CORP.
By:
------------------------------------
Title:
---------------------------------------
JOHN A. LEVIN
---------------------------------------
MELODY L. PRENNER SARNELL
---------------------------------------
JEFFREY A. KIGNER
---------------------------------------
DANIEL E. ARON
---------------------------------------
FRANK F. RANGO
---------------------------------------
BARTON G. ICE
---------------------------------------
CAROL L. NOVAK
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[LETTERHEAD OF LAZARD FRERES & CO. LLC]
APPENDIX B
The Board of Directors
Baker, Fentress & Company
200 West Madison Street
Chicago, Illinois 60606
Dear Members of the Board:
We understand that Baker, Fentress & Company (the "Company") and John A.
Levin & Co., Inc. (the "Subject Company") have entered into an Amended and
Restated Agreement and Plan of Merger dated as of May 13, 1996 (including the
Exhibits thereto, the "Agreement"), pursuant to which the Company will acquire
the Subject Company (the "Acquisition"). Under the Agreement, the aggregate
consideration payable by the Company (the "Consideration") will be $35,000,000
in cash and 5,060,000 shares of common stock, $1.00 par value per share, of the
Company, subject to certain adjustments at the closing of the Acquisition. You
have requested our opinion as to the fairness, from a financial point of view,
to the Company of the Consideration.
In connection with this opinion, we have:
(i) reviewed the financial terms and conditions of the Agreement;
(ii) reviewed the Application of the Company in SEC Proceeding No. 812-
9528 for an order of exemptive relief from certain provisions of the
Investment Company Act of 1940;
(iii) reviewed the Proxy Statement relating to the Annual Meeting of
Stockholders of the Company to be held on June 27, 1996;
(iv) reviewed certain historical business and financial information
relating to the Company and the Subject Company;
(v) reviewed various financial forecasts and other data provided to us
by the Company and the Subject Company relating to their respective
businesses (we note that the written financial forecasts and other
written forward looking data for the Subject Company provided by the
Subject Company relate only to the year 1996, the management of the
Subject Company having informed us that no such written data exists
for subsequent periods);
<PAGE>
The Board of Directors
May 14, 1996
Page 2
(vi) held discussions with members of the senior managements of the
Company and the Subject Company with respect to past and current
business operations and financial condition, regulatory
relationships, strategic objectives and the future prospects of
their respective companies;
(vii) reviewed public information with respect to certain other publicly-
traded investment management companies;
(viii) reviewed the financial terms of certain business combinations in the
investment management industry;
(ix) reviewed the historical stock prices and trading volumes of the
Company's common stock; and
(x) conducted such other financial studies, analyses and investigations
as we deemed appropriate.
We have relied upon the accuracy and completeness of the foregoing
information, and have not assumed any responsibility for any independent
verification of such information or any independent evaluation or appraisal of
any of the assets or liabilities of the Company or the Subject Company. With
respect to financial forecasts provided to us, we have assumed that they have
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of management of the Company and the Subject Company as
to the future financial performance of the Company and the Subject Company,
respectively, and that such forecasts will be realized in the amounts and at the
times contemplated thereby. We assume no responsibility for and express no view
as to such forecasts or the assumptions on which they are based.
Further, our opinion is necessarily based on economic, monetary, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof. In rendering our opinion, we have assumed that the
Acquisition will be consummated on the terms described in the Agreement, without
any waiver of any material terms or conditions by the Company and that obtaining
the necessary regulatory approvals for the Acquisition will not have an adverse
effect on the Company.
Lazard Freres & Co. LLC is acting as financial advisor to the Company in
connection with the Acquisition and will receive a fee for its services, a
substantial portion of which is contingent upon the consummation of the
Acquisition. Certain Managing Directors of Lazard Freres & Co. LLC are clients
of, and maintain discretionary accounts with, the Subject Company.
<PAGE>
The Board of Directors
May 14, 1996
Page 3
Our opinion is directed to the Board of Directors of the Company, is
directed only to the fairness of the Consideration from a financial point of
view, does not address any other aspect of the Acquisition or related
transactions and does not constitute a recommendation to any shareholder of the
Company as to how such shareholder should vote at any shareholder meeting of the
Company held in connection with the Acquisition.
Based on and subject to the foregoing, we are of the opinion as of the date
hereof that the Consideration is fair to the Company from a financial point of
view.
Very truly yours,
LAZARD FRERES & CO. LLC
By: /S/ KENDRICK R. WILSON III
Managing Director
<PAGE>
APPENDIX C
PORTFOLIO MANAGEMENT AGREEMENT
As of , 1996, Baker, Fentress & Company, a Delaware corporation
registered under the Investment Company Act of 1940, as amended ("1940 Act") as
a closed-end non-diversified management investment company ("BKF"), hereby
appoints John A. Levin & Co., Inc., a Delaware corporation registered under the
Investment Advisers Act of 1940, as amended (the "Advisers Act") as an
investment adviser, of New York, New York, and an indirect wholly-owned
subsidiary of BKF ("Manager"), as a discretionary portfolio manager on the terms
and conditions set forth herein of the portion of assets of BKF currently
invested, and intended to be invested in publicly-traded equity securities
(other than the portion of BKF assets represented by shares of common stock,
$1.00 par value, of Consolidated-Tomoka Land Co.) (the assets to be managed by
Manager hereinafter referred to as the "Account").
1. Management. Manager shall manage the investment and reinvestment of
the Account and advise with respect thereto for the period and on the terms set
forth in this Agreement, subject to the overall control of the Board of
Directors of BKF. Manager shall give due consideration to the investment
policies and restrictions and the other statements concerning BKF in BKF's
certificate of incorporation, as amended, by-laws, registration statement under
the 1940 Act, registration statement under the Securities Act of 1933 ("1933
Act"), if any, to the provisions of the 1933 Act and the 1940 Act and rules and
regulations thereunder, to BKF's overall investment programs and strategies, to
the provisions of the Internal Revenue Code of 1986, as amended, applicable to
BKF as a regulated investment company and to other applicable laws ("Investment
Policies and Restrictions"). Manager shall not, without the prior approval of
the Board of Directors of BKF, effect any transactions which would cause BKF to
be out of compliance with any of such Investment Policies and Restrictions.
Manager shall for all purposes be deemed to be an independent contractor and not
an agent of BKF and shall, unless otherwise expressly provided or authorized,
have no authority to act for or represent BKF in any way.
2. Portfolio Transactions. Manager shall have authority and sole
discretion to select brokers and dealers to execute portfolio transactions
initiated by Manager and to select the markets on or in which transactions will
be executed; provided, however, such selection shall be subject to obtaining the
best combination of net price and execution and in accordance with the portfolio
transaction policies of BKF as set forth from time to time in BKF's registration
statement on Form N-2 under the 1940 Act. Manager shall not execute any
portfolio transactions for the Account with a broker or dealer that is an
"affiliated person" (as defined in the 1940 Act) of BKF or Manager, without the
prior written approval of BKF and provided that BKF is promptly notified in
writing of such transactions (and in no case shall such notification be later
than the end of the quarter in which such transaction occurred).
3. Expenses Borne by BKF. BKF shall pay all expenses incidental to its
organization, operations and business not specifically assumed or agreed to be
paid by Manager pursuant to paragraphs 4 and 6, including, without limitation:
all charges of depositories,
<PAGE>
custodians, sub-custodians and other agencies for the safekeeping and servicing
of its cash, securities, and other property, and of its transfer, shareholder
recordkeeping, dividend disbursing, and redemption agents, if any; all charges
for equipment or services used for obtaining price quotations or for
communication between BKF, Manager and the custodian, transfer agent or any
other agent selected by BKF; all charges for accounting services provided to BKF
by the custodian, BKF, or any other provider of accounting services; all
expenses of portfolio pricing, net asset value computation and reporting of
portfolio information to BKF or Manager; all charges for services to BKF by
independent auditors; all charges for services to BKF by legal counsel; all
expenses of printing and distributing notices, proxy solicitation material and
reports to shareholders of BKF; all expenses related to preparing and
transmitting certificates representing BKF shares, if any; all expenses of bond
and insurance coverage required by law or deemed advisable by the Board of
Directors of BKF; all brokers' commissions and other normal charges incident to
the purchase and sale of portfolio securities; all taxes and corporate fees
payable to Federal, state or other governmental agencies, domestic or foreign;
all stamp or other transfer taxes; all expenses of registering and maintaining
the registration of BKF under the 1940 Act, all expenses of registering its
shares under the 1933 Act, of qualifying and maintaining qualification of BKF
and of BKF shares for sale under securities laws of various states or other
jurisdictions and of registration and qualification of BKF under all other laws
applicable to BKF or its business activities; and all fees, dues and other
expenses incurred by BKF in connection with membership of BKF in any trade
association or other investment company organization.
4. Expenses Borne by Manager. Manager, at its own expense, shall furnish
all executive and other personnel, office space, and office facilities to the
extent necessary in connection with the performance of its duties and
obligations under this Agreement. Manager shall not be required to pay or
provide any credit for services provided by BKF's custodian, transfer agent, or
other agents.
5. Portfolio Management Fee. For the services to provided to the Account
by the Manager, BKF will pay Manager a monthly fee at the annual fee of .30 of
1% of the average net assets of the Account, calculated and paid on the last
business day of each month. The fee shall be pro-rated for any month during
which this Agreement is in effect for only a portion of the month.
6. Non-Exclusivity; Service to other Clients. The services of Manager
to BKF hereunder are not to be deemed exclusive and Manager shall be free to
render the same or similar services to others. It is acknowledged by BKF that
Manager and its directors, officers, employees and affiliates perform investment
advisory services for various clients, including other clients' discretionary
accounts and investment partnerships for which a wholly-owned subsidiary of the
Manager serves as general partners. It is understood that Manager shall not have
any obligation to purchase or sell, or to recommend for purchase or sale, for
the Account any security which Manager (or any affiliated person of Manager) may
purchase or sell for its or their own account or for the account of any other
client.
7. Standard of Care. Neither Manager, nor any of its directors,
officers, agents or employees shall be liable or responsible to BKF or its
shareholders for any error of judgment,
2
<PAGE>
mistake of law or any loss arising out of any investment, or for any other act
or omission in the performance by Manager or, acting on its behalf, by any of
its directors, officers, agents or employees, of its duties under this
Agreement, except for liability resulting from willful misfeasance, bad faith or
gross negligence on Manager's part or from reckless disregard by Manager of its
obligations and duties under this Agreement.
8. Amendment. This Agreement may not be amended without the affirmative
votes (a) of a majority of the Board of Directors of BKF, including a majority
of those directors who are not "interested persons" of BKF, or of Manager,
voting in person at a meeting called for the purpose of voting on such approval,
and (b) of a "majority of the outstanding shares" of BKF. For purposes of this
Agreement, the terms "interested person" and "vote of a majority of the
outstanding shares" shall be construed in accordance with their respective
definitions in Sections 2(a)(19) and 2(a)(42) of the 1940 Act and, with respect
to the first term, as modified by the order issued by the Securities and
Exchange Commission in SEC Proceeding No. 812-9528 (the "SEC Order"), and with
respect to the latter term, in accordance with Rule 18f-2 under the 1940 Act.
9. Termination. This Agreement may be terminated at any time, without
payment of any penalty, by the Board of Directors of BKF, or by a vote of a
majority of the outstanding shares of BKF, upon at least thirty (30) days'
written notice to Manager. This Agreement may be terminated by BKF at any time
upon at least thirty (30) days' written notice to Manager. This Agreement shall
terminate automatically in the event of its assignment (as defined in Section
2(a)(4) of the 1940 Act). Unless terminated as hereinbefore provided, this
Agreement shall continue in effect until , 1998* and thereafter
from year to year only so long as such continuance is specifically approved at
least annually (a) by a majority of those directors who are not interested
persons (as defined in Section 8 above) of BKF or of Manager, voting in person
at a meeting called for the purpose of voting on such approval, and (b) by
either the Board of Directors of BKF or by a vote of a majority of the
outstanding shares (as defined in Section 8 above) of BKF.
10. Confidentiality. Subject to the duty of Manager and BKF to comply
with applicable law, including any demand of any regulatory or taxing authority
having jurisdiction, Manager and BKF shall treat as confidential all information
pertaining to the Account and the actions of Manager and BKF in respect thereof.
11. Administration of Account. In furtherance of administration of BKF,
Manager agrees to the following:
a. It will maintain in good form its registration as an investment
adviser under the Advisers Act and promptly provide, upon request, to BKF copies
of its registration statement in connection therewith and any amendments
thereto.
b. It will maintain, keep current, and preserve on behalf of BKF, in
the manner required or permitted by the 1940 Act and the rules thereunder,
records relating to the portfolio
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* Two years from date of this Agreement.
3
<PAGE>
management of the Account identified by BKF as provided for under Section 31 of
the 1940 Act, from time to time. Manager agrees that such records are the
property of BKF and will be surrendered to BKF promptly upon request.
c. It will maintain a written code of ethics complying with the
requirements of Rule 17j-1 under the 1940 Act and will provide BKF with a copy
of the code of ethics, including any amendments thereto, and evidence of its
adoption. Within 45 days of the end of each year while this Agreement is in
effect, an officer of Manager shall certify to BKF that Manager has complied
with the requirements of Rule 17j-l during the previous year and that there has
been no violation of its code of ethics or, if such a violation has occurred,
that appropriate action was taken in response to such violation. Upon the
written request of BKF, Manager shall permit BKF to examine the reports required
to be made by Manager under Rule 17j-1(c)(1).
d. Upon request, Manager will promptly supply BKF with any information
concerning Manager and its employees and affiliates which BKF may reasonably
require in connection with the preparation of its registration statements, proxy
material, reports and other documents required to be filed under the 1940 Act,
the 1933 Act, and other applicable securities laws.
e. Manager will vote all proxies solicited by or with respect to the
issuers of securities in which assets of the Account may be invested from time
to time.
12. Severability. If any term or condition of this Agreement shall be
invalid or unenforceable to any extent or in any application, then the remainder
of this Agreement, and such term or condition except to such extent or in such
application, shall not be affected thereby, and each and every term and
condition of this Agreement shall be valid and enforced to the fullest extent
and in the broadest application permitted by law.
13. References and Headings. In this Agreement and in any amendment to
it, references to this Agreement and all expressions such as "herein," "hereof,"
and "hereunder" shall be deemed to refer to this Agreement or this Agreement as
amended or affected by any such amendments. Headings are placed herein for
convenience of reference only and shall not be taken as a part hereof or control
or affect the meaning, construction or effect of this Agreement. This Agreement
may be executed in any number of counterparts, each of which shall be deemed
an original.
14. Governing Law. To the extent that state law has not been preempted
by the provisions of any law of the United States heretofore or hereafter
enacted, as the same may be amended from time to time, this Agreement shall be
administered, construed and enforced according to the laws of the State of
Illinois.
4
<PAGE>
Dated:
BAKER, FENTRESS & COMPANY
ATTEST:
By:
--------------------------------
- ----------------------------------
, Secretary
- --------------- JOHN A. LEVIN & CO., INC.
ATTEST:
By:
--------------------------------
- ------------------------------------
, Secretary
- ---------------
5
<PAGE>
APPENDIX D
LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES
KEY EMPLOYEE INCENTIVE BONUS PLAN
I. Purpose
The purpose of the Plan is to establish a program of incentive compensation for
designated key employees of the Company and its subsidiaries that is directly
related to the performance results of the Company and such employees. The Plan
provides incentives, contingent upon continued employment and meeting certain
corporate goals, to certain key employees who make substantial contributions to
the Company.
II. Definitions
"BKF" means Baker Fentress & Company, a publicly traded investment company
registered under the Investment Company Act of 1940, which owns all of the stock
of the Company.
"Board" means the Board of Directors of BKF.
"Bonus Award" means the award, as determined by the Committee, to be granted to
a Participant for a Fiscal Year based on that Participant's level of attainment
of his or her goals.
"Bonus Pool" shall mean, for any Fiscal Year, the total amount available for the
payment of Bonus Awards, as determined by the Committee during the period
described in Article V. The Bonus Pool may, as determined by the Committee, be a
fixed dollar amount, an amount determinable by a formula, or a combination of
the two; provided that in all cases the Bonus Pool shall be defined in such a
manner that the amount of the Bonus Pool could be calculated by a third party
with knowledge of all relevant facts.
"Code" means the Internal Revenue Code of 1986, as in effect from time to time.
"Committee" means the Compensation Committee of the Board, or, if any member of
the Compensation Committee is not an "outside director" as defined in Treasury
Regulations (S) 1.162-27(e)(3), a subcommittee of the Compensation Committee
consisting of all members of the Compensation Committee who are outside
directors as so defined. The Board may delegate the authority of the Committee
to any other committee of the Board composed exclusively of two or more outside
directors as so defined.
"Company" means Levin Management Co., Inc., and any other direct or indirect
subsidiary of Levin Management Co., Inc. The revenues, expenses and income of
the Company (as so defined) shall be determined on a consolidated basis.
"Covered Employee" means a Participant who, for the Fiscal Year, is subject to
the limitation on deductibility of compensation under (S) 162(m) of the Code.
"Designated Beneficiary" means the beneficiary or beneficiaries designated in
accordance with Article XI hereof to receive the amount, if any, payable under
the Plan upon the Participant's death.
"Determination Period" means the first 90 days of a Fiscal Year or with respect
to the first Fiscal Year with respect to which the Plan is effective, the period
preceding the time when the first 25% of such Fiscal Year shall have elapsed.
<PAGE>
"Disability" means disability as defined in a Participant's employment agreement
with the Company. In the case of a Participant who is not covered by an
employment agreement, or who is covered by an employment agreement that does not
define disability, disability means the inability of the Participant to
substantially perform his or her duties to the Company by reason of physical or
mental disability, as determined by the Committee in its reasonable discretion.
"Fiscal Year" shall mean the fiscal year of the Company, which as of the
effective date of this Plan is the same as the calendar year; provided that with
respect to the fiscal year of the Company in which the Plan is approved by the
shareholders of BKF pursuant to Article XVIII, "Fiscal Year" shall mean the
period commencing with the first day of the month immediately following the date
of such approval and ending on the last day of such fiscal year.
"Participant" means any officer or key employee designated by the Committee to
participate in the Plan in accordance with Article III.
"Plan" means the Levin Management Co., Inc. and Subsidiaries Key Employee
Incentive Bonus Plan, as amended from time to time.
III. Eligibility
Participants in the Plan shall be selected by the Committee for each Fiscal Year
from those officers and key employees of the Company and its subsidiaries whose
efforts contribute materially to the annual success of the Company. No employee
shall be a Participant unless he or she is chosen by the Committee, in its sole
discretion, and receives notice of such choice, except that an employee's right
to be a Participant and to be considered for a Bonus Award (but not the amount
of his or her Bonus Award, if any) may be provided for in an employment
agreement. No employee shall at any time have the right to be selected as a
Participant, nor, having been selected as a Participant for one Fiscal Year, to
be selected as a Participant in any other Fiscal Year. The Participants for each
Fiscal Year shall be designated by the Committee within the Determination
Period; provided, however, that an employee who is first employed by the Company
after the beginning of a Fiscal Year may be designated as a Participant for such
Fiscal Year if such designation is made, and the Participant's Bonus Award and
performance goals are established, prior to the end of the period that
constitutes the first 25% of such employee's period of employment during such
Fiscal Year.
IV. Administration
The Committee, in its sole discretion, will on an annual basis determine
eligibility for participation, determine the amount of the Bonus Pool or the
formula pursuant to which the amount of the Bonus Pool shall be determined,
determine the Bonus Award that may be earned by each Participant, establish
performance goals for each Participant (which may be based upon the achievement
of performance goals by the Company as a whole, a business unit thereof or the
Participant individually), determine each Participant's attainment of such
performance goals, and calculate the Bonus Award for each Participant under the
Plan. The Committee also will determine the time at which Bonus Awards will be
paid (subject to Article VI).
Except as otherwise herein expressly provided, full power and authority to
construe, interpret, and administer the Plan shall be vested in the Committee
including the power to amend or terminate the Plan or any Bonus Award hereunder.
The Committee may at any time adopt such rules, regulations, policies, or
practices as, in its sole discretion, it shall determine to be necessary
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<PAGE>
or appropriate for the administration of, or the performance of its
responsibilities under, the Plan. The Committee may at any time amend, modify,
suspend, or terminate such rules, regulations, policies, or practices. All
determinations made by the Committee shall be final and binding on all
Participants and any person claiming through them.
The determination of the Bonus Pool for each Fiscal Year shall, to the extent
applicable, be made on the basis of audited financial statements of the Company
for such Fiscal Year, which financial statements shall be audited by the
Company's regularly employed certified public accountants.
It is intended that all Bonus Awards payable to Covered Employees under the Plan
shall constitute "qualified performance-based compensation" within the meaning
of (S) 162(m) of the Code and Treasury Regulations (S) 1.162-27(e) and, to the
maximum extent possible, the Plan and the terms of all Bonus Awards shall be so
interpreted and construed.
V. Determination of Bonus Awards and Performance Goals
Within the Determination Period (except as otherwise provided in the last
sentence of Article III in the case of a new employee), the Committee shall
determine for such Fiscal Year the amount of the Bonus Pool or the formula
pursuant to which the amount of the Bonus Pool shall be determined, the amount
of the Bonus Award for each Participant (or the formula under which the Bonus
Award shall be determined, which may be a percentage of the Bonus Pool), and the
performance goals that must be met by such Participant in order to receive his
or her Bonus Award. All Bonus Awards and performance goals shall be reflected in
written minutes of the Committee or otherwise set forth in writing. The
Committee shall have the final authority to determine the amount of Bonus Awards
and the performance goals to be met, but may retain, at the Company's expense, a
professional compensation consultant experienced in the investment management
business to advise it with respect to such determinations.
The performance goals for each Participant and the amount of the Bonus Award to
be paid if the performance goal is achieved shall be based upon one or more of
the following objective business criteria applicable to the Participant, a
business unit of the Company, or the Company as a whole:
. The excess of (x) a specified percentage of gross revenues of the
Company, excluding (to the extent determined by the Committee during
the Determination Period) extraordinary or non-recurring items
and/or all or a portion of other specified items of revenues (the
"Adjusted Revenues") over (y) operating expenses and depreciation
and amortization expense of the Company (excluding all interest
expense, income taxes, awards under the Bonus Plan and to the extent
determined by the Committee during the Determination Period,
extraordinary or non-recurring items and/or all or a portion of
other specified items of expense) (the "Adjusted Operating
Expenses");
. Net profit of the Company (calculated by excluding from the
determination of the amount of the Company's operating expenses used
in determining net profit, all interest expense, income taxes and
awards under the Bonus Plan, and which may, as determined by the
Committee during the Determination Period, be adjusted by excluding
extraordinary or non-recurring items and/or all or a portion of
specified items of revenue or expense that would ordinarily be
included in net profit as determined under generally accepted
accounting principles);
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<PAGE>
. Increase in revenue;
. Return on equity (calculated by excluding, to the extent determined
by the Committee during the Determination Period, extraordinary or
non-recurring items and/or all or a portion of other specified items
of revenue or expense);
. Performance of managed funds;
. Increase in market share;
. Reduction in costs (calculated by excluding, to the extent
determined by the Committee during the Determination Period,
extraordinary or non-recurring items and/or all or a portion of
other specified items of revenue or expense).
The Committee shall determine the specific performance goals to be met under one
or more of the preceding criteria (which may be in the alternative) for each of
the Participants, and shall specify the Bonus Award that will be payable if the
performance goals are met, either in terms of a specified dollar amount payable
if the performance goal is met or a formula under which the amount of the Bonus
Award is determined by the extent to which the performance goal is met. In all
cases, the performance goal shall be determined so that its achievement is not
substantially certain at the time it is established, and the performance goal
and Bonus Award shall be defined such that a third party with knowledge of all
relevant facts could determine whether or to what extent the performance goal
has been satisfied, and the amount of Bonus Award payable. For purposes of this
Article, if a Participant's Bonus Award is expressed as a percentage of a Bonus
Pool that is defined by a formula that requires the achievement of performance
goals by the Company or a business unit or other portion thereof, or is
otherwise defined in such a manner that the amount of the Bonus Award is
dependent upon the achievement of performance goals by the Company or a business
unit or other portion thereof, the Committee shall be considered to have
determined a performance goal for such Participant. Continued employment of a
Participant is not, in itself, sufficient to constitute a performance goal.
In no event shall either (i) the aggregate of all Bonus Awards for a Fiscal Year
exceed the amount constituting the Bonus Pool for such Fiscal Year, or (ii) the
maximum Bonus Award payable to any Participant for any Fiscal Year exceed $15
million.
It is currently anticipated that, for at least the first three Fiscal Years
during which the Bonus Plan is in effect, subject to the final determination by
the Committee, the aggregate amount of Bonus Awards paid in respect of each such
Fiscal Year, if the applicable performance goals are met, will be equal to a
Bonus Pool that will be in the range of the excess of (i) 53% of the Company's
Adjusted Revenues for that Fiscal Year over (ii) the Company's Adjusted
Operating Expenses for that Fiscal Year, subject to final determination by the
Committee; provided that the Committee may provide for the payment of Bonus
Awards if alternative performance goals are met.
VI. PAYMENT OF BONUS AWARDS
As soon as practical following the end of each Fiscal Year, the Committee shall
determine whether the performance goal of each Participant was satisfied, and
such determination shall be reflected in the written minutes of a meeting of the
Committee or otherwise certified in writing. The Committee shall have the right
in its discretion to reduce, but not to increase, the Bonus
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<PAGE>
Award payable to a Participant whose performance goals were satisfied if it
determines that other circumstances make such a reduction appropriate. The
amount by which a Bonus Award is so decreased, or the amount of a Bonus Award
that is not payable because a Participant's performance goals were not
satisfied, shall not increase any other Bonus Award under this Plan, and if the
Bonus Award of any other Participant is defined in such a manner that the amount
of the Bonus Award would otherwise be increased as a result of such reduction,
an appropriate adjustment shall be made to prevent such increase.
Bonus Awards that are determined by the Committee to be payable pursuant to the
foregoing paragraph shall be paid in a lump sum as soon as practical, but in any
event within 75 days after the close of the Fiscal Year to which they relate,
unless the Participant has made an election to defer payment of the Bonus Award
pursuant to an applicable deferred compensation plan established by the Company.
Any increase in the amount of a Bonus Award that is deferred under such a
deferred compensation plan shall be based either on a reasonable rate of
interest or the performance of a predetermined investment in accordance with
Treasury Regulation (S) 1.162-27(e)(2)(iii)(B). If any Bonus Award is paid prior
to the time determined when the Bonus Award is established, it shall be reduced
by an appropriate discount factor determined by the Committee.
Except as described in Article VII below, in order to be eligible for payment of
his or her Bonus Award for any year, a Participant must be actively employed by
the Company on the last day of the Fiscal Year to which such payment relates.
VII. Termination of Employment
In the event of termination of a Participant's employment with the Company by
reason of death or Disability before the end of a Fiscal Year, such Participant
shall be eligible for a pro rata portion of the Bonus Award that would have been
paid in respect of such Fiscal Year in which the termination occurred (provided
the Participant's performance goal for the Fiscal Year is achieved). In the
event of a Participant's death (either before the end of the Fiscal Year or
after the end of the Fiscal Year but before the Bonus Award for the Fiscal Year
is paid), such payment shall be made to the Participant's Designated
Beneficiary, of if there is none living, to the estate of the Participant.
A Participant may enter into an employment agreement with the Company that
provides for all or a portion of such Participant's Bonus Award to be paid in
the event of a termination of employment for any other reason during a Fiscal
Year; provided, however, that no such agreement shall provide for payment of any
portion of a Bonus Award to or on behalf of a Participant prior to the time such
Participant's performance goals have been determined by the Committee to have
been met, except in cases of a change in ownership or control of the Company.
Nothing herein shall be construed to provide that a Participant is entitled to
any such payment in the absence of a valid employment agreement.
VIII. Non-Alienation of Benefits
A Participant may not assign, sell, encumber, transfer or otherwise dispose of
any rights or interests under the Plan except by will or the laws of descent and
distribution. Any attempted disposition in contravention of the preceding
sentence shall be null and void.
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<PAGE>
IX. No Claim of Right under the Plan
No employee or other person shall have any claim or right to be selected as a
Participant under the Plan. Neither the Plan nor any action taken pursuant to
the Plan shall be construed as giving any employee any right to be retained in
the employ of the Company.
X. Taxes
The Company shall deduct from all amounts paid under the Plan all federal,
state, local and other taxes required by law to be withheld with respect to such
payments.
XI. Designation and Change of Beneficiary
Each Participant shall indicate upon notice to him or her by the Committee of
his or her right to receive a Bonus Award a designation of one or more persons
as the Designated Beneficiary who shall be entitled to receive the amount, if
any, payable under the Plan upon the death of the Participant. Such designation
shall be in writing to the Committee. A Participant may, from time to time,
revoke or change his or her Designated Beneficiary without the consent of any
prior Designated Beneficiary by filing a written designation with the Committee.
The last such designation received by the Committee (including a designation
made in a prior Fiscal Year, whether or not the Participant has participated
during intervening Fiscal Years) shall be controlling; provided, however, that
no designation, or change or revocation thereof, shall be effective unless
received by the Committee prior to the Participant's death, and in no event
shall it be effective as of a date prior to such receipt. Payment of a Bonus
Award or portion thereof to a person determined in good faith by the Committee
shall fully discharge all obligation of the Company with respect to the amount
so paid.
XII. Payments to Persons Other Than the Participant
If the Committee shall find that any person to whom any amount is payable under
the Plan is unable to care for his or her affairs because of illness or
accident, or is a minor, or has died, then any payment due to such person or his
or her estate (unless a prior claim therefore has been made by a duly appointed
legal representative) may, if the Committee so directs, be paid to his or her
spouse, a child, a relative, an institution maintaining or having custody of
such person, or any other person deemed by the Committee, in its sole
discretion, to be a proper recipient on behalf of such person otherwise entitled
to payment. Any such payment shall be a complete discharge of the liability of
the Company therefor.
XIII. No Liability of Committee Members
No member of the Committee shall be personally liable by reason of any contract
or other instrument related to the Plan executed by such member or on his or her
behalf in his or her capacity as a member of the Committee, nor for any mistake
of judgment made in good faith, and the Company shall indemnify and hold
harmless each employee, officer, or director of the Company to whom any duty or
power relating to the administration or interpretation of the Plan may be
allocated or delegated, against any cost or expense (including legal fees) or
liability (including any sum paid in settlement of a claim with the approval of
the Board of Directors) arising out of any act or omission to act in connection
with the Plan unless arising out of such person's own fraud or bad faith.
-6-
<PAGE>
XIV. Termination or Amendment of the Plan
The Board may amend, suspend or terminate the Plan at any time, subject only to
the following restrictions. No amendment shall reduce the amount of a Bonus
Award previously determined by the Committee, or increase the performance
criteria necessary to earn such Bonus Award without the consent of the affected
Participant, and any amendment that must be approved by the shareholders of the
Company in order for Bonus Awards to continue to qualify for deductibility under
(S) 162(m) of the Code shall be conditioned upon shareholder approval.
XV. Unfunded Plan
Participants shall have no right, title, or interest whatsoever in or to any
investments which the Company may make to aid it in meeting its obligations
under the Plan. Notwithstanding anything contained herein to the contrary, to
the extent that any person acquires a right to receive payments from the Company
under the Plan, such right shall be no greater than the right of an unsecured
general creditor of the Company.
The Plan is not intended to be subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). To the extent the Plan is determined
to be so subject, it is intended to constitute a "plan which is unfunded and is
maintained by the employer primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated employees,"
as such phrase is used in ERISA, and the terms of the Plan shall be interpreted
consistent with such intent.
XVI. Non-Exclusivity
Neither the adoption of the Plan nor the submission of the Plan to the
shareholders of BKF shall be construed as limiting the power of the Committee or
the Board to adopt such other incentive arrangements as it may otherwise be so
authorized.
XVII. Governing Law
The terms of the Plan and all rights thereunder shall be governed by and
construed in accordance with the laws of the state of New York, without
reference to principles of conflict of laws.
XVIII. Effective Date and Term
The Plan shall be effective only upon approval by the shareholders of BKF, and
shall be effective for the Fiscal Year in which such approval occurs and each of
the next four succeeding Fiscal Years unless sooner terminated by the Board in
accordance with Article XIV. For the fifth succeeding Fiscal Year, the Plan
shall remain in effect in accordance with its terms unless amended or terminated
by the Board, and the Committee shall make the determinations required by
Article V for such Fiscal Year, but the Plan shall be submitted for re-approval
by the shareholders of BKF at the annual meeting of shareholders held during
such fifth Fiscal Year, and payment of all Bonus Awards under the Plan shall be
contingent upon such approval. If the Plan is so approved, it shall continue in
effect for such Fiscal Year and the next four succeeding Fiscal Years, at which
time it will again be subject to re-approval by the shareholders of BKF. The
Plan shall continue in effect in the same manner for successive cycles of five
Fiscal Years, subject to re-approval by the shareholders of BKF every five
Fiscal Years in accordance with Treasury Regulations (S) 1.162-27(e)(4), until
amended or terminated by the Board.
-7-
<PAGE>
APPENDIX E
BAKER, FENTRESS & COMPANY
FINANCIAL STATEMENTS
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31, 1995
-----------------
<S> <C>
Assets
Investments, at Value:
Portfolio securities:
Unaffiliated issuers (cost $343,020,028)................... $497,029,128
Controlled affiliates (cost $25,714,454)................... 96,332,827
Money market securities (cost $1,789,753)...................... 1,789,753
------------
Total Investments (cost $370,524,235).................. 595,151,708
Cash........................................................... 438,794
Receivable for Securities Sold................................. 3,436,360
Dividends and Interest Receivable.............................. 1,095,263
Other Assets................................................... 972,145
------------
Total Assets........................................... 601,094,270
------------
Liabilities
Payable for Securities Purchased............................... 1,305,000
Accounts Payable and Accrued Liabilities....................... 606,785
------------
Total Liabilities...................................... 1,911,785
------------
Net Assets................................................................ $599,182,485
============
Analysis of Net Assets
Common stock, $1 par value, authorized -- 40,000,000 shares;
issued and outstanding -- 27,543,641 shares................ $ 27,543,641
Capital surplus................................................ 279,579,036
Undistributed net realized gain from investment transactions... 17,943,842
Other retained earnings (a).................................... 49,488,493
Unrealized appreciation of investments......................... 224,627,473
------------
Net Assets................................................................ $599,182,485
============
Net Asset Value Per Share................................................. $ 21.75
============
</TABLE>
----------
(a) Prior to January 1, 1970, operating and other non-portfolio
activities were included in other retained earnings.
See accompanying Notes to Financial Statements
2
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
-----------------
<S> <C>
Investment Income:
Dividends from:
Unaffiliated issuers......................................................... $ 4,467,654
Controlled affiliate......................................................... 2,250,000
------------
6,717,654
------------
Interest from:
Unaffiliated issuers......................................................... 5,982,162
Controlled affiliate......................................................... 840,000
------------
6,822,162
------------
Total Income............................................................... 13,539,816
------------
Expenses:
Investment research............................................................ 1,893,802
Administration and operations.................................................. 1,029,543
Rent........................................................................... 286,272
Directors fees and expenses.................................................... 162,750
Reports to shareholders........................................................ 184,621
Professional fees.............................................................. 135,810
Custodian and transfer agent fees.............................................. 86,990
Taxes other than income........................................................ 65,020
Other.......................................................................... 276,495
------------
Total Expenses............................................................. 4,121,303
------------
Net Investment Income............................................... 9,418,513
------------
Net Realized and Unrealized Gain on Investments:
Net realized gain on sales of investments in unaffiliated issuers............. 41,188,739
Net realized gain on financial futures transactions........................... 1,962,075
------------
Net realized gain on sales of investments.................................. 43,150,814
Net change in unrealized appreciation of investments.......................... 107,071,485
------------
Net Realized and Unrealized Gain on Investments..................... 150,222,299
------------
Net Increase in Net Assets Resulting from Operations................................... $159,640,812
============
</TABLE>
See accompanying Notes to Financial Statements
3
<PAGE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net increase (decrease) in net assets resulting
from operations.............................................. $ 159,640,812 $ (25,012,819)
Adjustments to reconcile increase (decrease) in
net assets resulting from operations to net cash
provided by (used in) operating activities:
Net realized and unrealized (gain) loss on investments....... (150,222,299) 31,945,596
(Increase) in receivable for securities sold................. (1,633,235) (1,175,625)
(Increase) decrease in dividends and interest receivable..... 471,112 (973,821)
(Increase) decrease in other assets.......................... (538,706) 58,592
(Decrease) in accounts payable and accrued liabilities....... (2,212) (19,749)
Increase (decrease) in payable for securities purchased...... 1,305,000 (9,063,270)
------------- -------------
Net cash provided by (used in) operating activities....... 9,020,472 (4,241,096)
------------- -------------
Cash Flows from Investing Activities:
Purchases of portfolio securities and options.................. (185,107,763) (217,516,097)
Sales of portfolio securities and options...................... 194,374,056 256,774,059
Proceeds from options written.................................. - 16,026,254
Cost of options repurchased.................................... - (27,106,364)
Net realized gain (loss) on financial futures transactions..... 1,962,075 (2,538,000)
Sales/maturities of money market securities, net............... 2,564,206 8,472,306
------------- -------------
Net cash provided by (used in) investing activities....... 13,792,574 34,112,158
------------- -------------
Cash Flows from Financing Activities:
Dividends and capital gain distributions....................... (22,389,049) (29,960,478)
------------- -------------
Net cash (used in) financing activities.................... (22,389,049) (29,960,478)
------------- -------------
Net Increase (Decrease) in Cash........................................... 423,997 (89,416)
Cash at the Beginning of the Year......................................... 14,797 104,213
------------- -------------
Cash at the End of the Year............................................... $ 438,794 $ 14,797
============= =============
Supplemental Disclosure of
Noncash Financing Activities:
Capital gain distribution reinvestments........................ $ 18,595,558 $ 15,865,885
============= =============
</TABLE>
See accompanying Notes to Financial Statements
4
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
------------ ------------
<S> <C> <C>
Operations:
Net investment income........................................... $ 9,418,513 $ 6,932,777
Net realized gain on sales of investments....................... 43,150,814 42,728,705
Net change in unrealized appreciation........................... 107,071,485 (74,674,301)
------------ ------------
Net increase (decrease) in net assets resulting
from operations......................................... 159,640,812 (25,012,819)
------------ ------------
Distributions to Shareholders from:
Net investment income........................................... (9,058,533) (7,239,654)
Net realized gain from investment transactions.................. (31,926,074) (38,586,710)
------------ ------------
Total dividends to shareholders............................. (40,984,607) (45,826,364)
------------ ------------
Net increase (decrease) in net assets from
operations after distributions...................... 118,656,205 (70,839,183)
------------ ------------
Capital Share Transactions--Net increase................................... 18,595,558 15,879,895
------------ ------------
Total Increase (Decrease) in Net Assets.................................... 137,251,763 (54,959,288)
Net Assets at the Beginning of the Year.................................... 461,930,722 516,890,010
------------ ------------
Net Assets at the End of the Year.......................................... $599,182,485 $461,930,722
============ ============
</TABLE>
See accompanying Notes to Financial Statements
5
<PAGE>
STATEMENT OF INVESTMENTS
December 31, 1995
<TABLE>
<CAPTION>
Shares Value
----------- -----------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS--82.95%
Public Portfolio--70.91%
Health Care--6.80%
Foundation Health Corporation (b)............... 200,000 $ 8,650,000
Pediatrix Medical Group, Inc. (b)............... 110,600 3,041,500
Stryker Corporation............................. 180,000 9,450,000
United HealthCare Corporation................... 300,000 19,612,500
-----------
40,754,000
-----------
Consumer Products and Services--6.13%
Newell Co....................................... 400,000 10,350,000
The Walt Disney Company......................... 190,000 11,186,250
Construction Group
Owens-Corning Fiberglas Corporation (b)....... 100,000 4,487,500
Toll Brothers, Inc. (b)....................... 270,000 6,210,000
USG Corporation (b)........................... 150,000 4,500,000
-----------
36,733,750
-----------
Technology--20.27%
Cascade Communications Corp. (b)................ 175,000 14,918,750
Cisco Systems, Inc. (b)......................... 250,000 18,656,250
DSC Communications Corp. (b).................... 230,000 8,481,250
EMC Corporation (b)............................. 500,000 7,687,500
Glenayre Technologies, Inc. (b)................. 150,000 9,337,500
KLA Instruments Corporation (b)................. 280,000 7,297,500
Solectron Corporation (b)....................... 280,000 12,355,000
StrataCom, Inc. (b)............................. 170,000 12,495,000
Sybase, Inc. (b)................................ 235,000 8,460,000
Tellabs, Inc. (b)............................... 235,000 8,695,000
Varian Associates, Inc.......................... 120,000 5,745,000
Xilinx, Inc. (b)................................ 240,000 7,320,000
-----------
121,448,750
-----------
Energy--5.00%
Chesapeake Energy Corp. (b)..................... 375,000 12,468,750
Panhandle Eastern Corporation................... 350,000 9,756,250
Union Texas Petroleum Holdings, Inc............. 400,000 7,750,000
-----------
29,975,000
-----------
Business and Commercial Services--1.95%
Nextel Communications, Class A (b).............. 160,000 2,360,000
Viking Office Products, Inc. (b)................ 200,000 9,300,000
-----------
11,660,000
-----------
</TABLE>
See accompanying Notes to Statement of Investments
6
<PAGE>
STATEMENT OF INVESTMENTS
December 31, 1995
<TABLE>
<CAPTION>
Shares Value
------------ ------------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS (continued)
Finance--12.01%
Aon Corporation................................ 270,000 $ 13,466,250
Barnett Banks, Inc............................. 300,000 17,700,000
Franklin Resources, Inc........................ 150,000 7,556,250
General Re Corporation......................... 60,000 9,300,000
T. Rowe Price Associates, Inc.................. 205,000 10,096,250
Growth Lending Institutions Group
Crestar Financial Corporation................ 80,000 4,730,000
UJB Financial Corp........................... 140,000 4,987,500
Union Planters Corporation................... 130,000 4,143,750
------------
71,980,000
------------
Basic Industries--4.39%
Great Lakes Chemical Corporation............... 150,000 10,800,000
Wausau Paper Mills Company..................... 568,992 15,505,032
------------
26,305,032
------------
Producer Goods--10.71%
Bandag, Incorporated........................... 170,000 9,201,250
The Boeing Company............................. 150,000 11,756,250
Foster Wheeler Corporation..................... 200,000 8,500,000
Harnischfeger Industries, Inc.................. 356,420 11,850,965
York International Corporation................. 250,000 11,750,000
Engineering and Construction Group
Jacobs Engineering Group Inc. (b)............ 200,000 5,000,000
The Manitowoc Company, Inc................... 140,000 4,287,500
Thomas Group, Inc. (b)....................... 137,500 1,856,250
------------
64,202,215
------------
Transportation--1.47%
Growth Transportation Group
Heartland Express, Inc. (b).................. 231,257 4,567,332
RailTex, Inc. (b)............................ 201,200 4,225,200
------------
8,792,532
------------
Utilities--2.18%
MCI Communications Corporation................. 500,000 13,062,500
------------
Total public portfolio (Cost: $278,204,437).. 424,913,779
------------
</TABLE>
See accompanying Notes to Statement of Investments
7
<PAGE>
STATEMENT OF INVESTMENTS
December 31, 1995
<TABLE>
<CAPTION>
Shares or
Principal
Amount Value
----------- ------------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS (continued)
Private Placement Portfolio--12.04%
Champion Healthcare Corporation--hospital management company
Common stock (b)(c)(f)........................................................ 73,223 $ 311,198
Series D Convertible Preferred Stock (b)(c)(d)................................ 111,111 1,999,998
11% Subordinated Note due 12/31/2003 (c)(d)................................... $ 8,000,000 8,000,000
Stock Purchase Warrants Expiring 12/31/2003 (c)(d)............................ 240,000 -
County Seat Holdings, Inc.--specialty retailer
Common stock (b)(c)(d)........................................................ 111,067 740,450
DuroLite International, Inc.--manufacturer and distributor of
specialized lighting products
Convertible Preferred Stock (b)(c)(d)......................................... 2,500 2,627,250
12% Subordinated Note due 11/03/2004 (c)(d)................................... $ 8,000,000 7,872,750
Earth Technology Corporation--environmental engineering
and consulting
12.5% Senior Subordinated Note due 6/30/98 (c)(d)............................. $10,000,000 10,000,000
Stock Purchase Warrants Expiring 7/01/98 (c)(d)............................... 166,500 -
Echlin Inc.--manufacturer of automotive parts and components
Common stock (c)(e)........................................................... 553,162 18,190,556
Home State Holdings, Inc.--property and casualty insurers
11.50% Subordinated Note due 10/03/2004 (c)(d)................................ 10,050,000 9,607,909
Stock Purchase Warrants Expiring 10/03/2004 (c)(d)............................ 150,750 472,941
Security Capital U.S. Realty--real estate investment trust
Common stock (b)(c)(d)(g)..................................................... 100,000 1,000,000
TBN Holdings Inc.--hazardous waste recycler
12% Subordinated Note due 12/31/2002 (c)(d)(h)................................ $ 8,000,000 8,000,000
Series C-3 Convertible Preferred Stock (b)(c)(d).............................. 1,511,628 1,239,000
Stock Purchase Warrants Expiring 12/31/2002 (c)(d)............................ 1,100,000 11,000
Golder, Thoma, Cressey Fund II Limited Partnership (c)(d)....................... $ 387,835 1,936,512
Phillips-Smith Specialty Retail Group Limited Partnership (c)(d)................ $ 59,868 105,785
------------
Total private placement portfolio (Cost: $64,815,591)...................... 72,115,349
------------
Total investments in unaffiliated issuers (Cost: $343,020,028).................. 497,029,128
------------
INVESTMENTS IN CONTROLLED AFFILIATES--16.08%
Publicly-Traded--14.19%
Consolidated-Tomoka Land Co., common stock
(majority-owned)--development of Florida real estate;
production and sale of citrus fruit (Cost: $5,030,627)........................ 5,000,000 85,000,000
------------
Private Placement Portfolio--1.89%
Alliance Northwest Industries, Inc.--commercial and residential
lighting fixtures
Series B Convertible Preferred Stock (b)(c)(d)................................ 2,000,000 -
Series C Convertible Preferred Stock (b)(c)(d)................................ 500 -
Series D Convertible Preferred Stock (b)(c)(d)................................ 1,000 -
Stock Purchase Warrants Expiring 12/20/2000 (b)(c)(d)......................... 1,687,941 -
Citadel Communications Corporation--radio broadcasting
Series A Convertible Preferred Stock (b)(c)(d)................................ 972,000 3,374,865
Series C Convertible Preferred Stock (b)(c)(d)................................ 275,904 957,962
Citadel Broadcasting Corporation--radio broadcasting
12% Class A Subordinated Note due 6/30/2000 (c)(d)............................ $ 7,000,000 7,000,000
------------
Total private placement portfolio (Cost $20,683,827)....................... 11,332,827
------------
Total investments in controlled affiliates (Cost $25,714,454)................... 96,332,827
------------
</TABLE>
See accompanying Notes to Statement of Investments
8
<PAGE>
STATEMENT OF INVESTMENTS
December 31, 1995
<TABLE>
<CAPTION>
Shares or
Principal
Amount Value
---------- ------------
<S> <C> <C>
MONEY MARKET SECURITIES--.30%
American Express Credit Corporation--5.00% to 5.75% due 1/03/96............................. $ 800,000 $ 799,635
U.S. Treasury bills--5.31% due 3/07/96...................................................... $1,000,000 990,118
------------
Total investments in money market securities (Cost: $1,789,753)............................. 1,789,753
------------
Total Investments--99.33% (Cost: $370,524,235).............................................. 595,151,708
Other Assets Less Liabilities--0.67%........................................................ 4,030,777
------------
NET ASSETS--100.00%......................................................................... $599,182,485
============
</TABLE>
NOTES TO STATEMENT OF INVESTMENTS
(a) Based on the cost of investments of $370,524,235, for federal income tax
purposes at December 31, 1995, net unrealized appreciation was
$224,627,473, which consisted of gross unrealized appreciation of
$241,643,436 and gross unrealized depreciation of $17,015,963.
(b) Non-income producing security.
(c) The following securities are subject to legal or contractual
restrictions on sale. Valued at cost on the dates of acquisition and at
a fair value as determined by the board of directors of the Company as
of December 31, 1995. The aggregate value of restricted securities was
$83,448,176 or 13.93% of net assets, at December 31, 1995.
<TABLE>
<CAPTION>
No. of Shares or
Security Description Date(s) of Acquisition Principal Amount Cost
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alliance Northwest Industries, Inc.,
Series B Convertible Preferred Stock........................ January 1995 2,000,000 500,000
Series C Convertible Preferred Stock........................ April 1993-August 1994 500 850,000
Series D Convertible Preferred Stock........................ November 1992 1,000 8,000,000
Stock Purchase Warrants Expiring 12/20/2000................. November 1992 1,687,941 1,000
Champion Healthcare Corporation
Common stock................................................ December 1995 72,223 388,997
Series D Convertible Preferred Stock........................ December 1993-December 1994 111,111 1,999,998
11% Subordinated Note due 12/31/2003........................ December 1993-December 1994 $ 8,000,000 8,000,000
Stock Purchase Warrants Expiring 12/31/2003................. December 1993-December 1994 240,000 -
Citadel Broadcasting Corporation
12% Class A Subordinated Note due 6/30/2000................. July 1992 $ 7,000,000 7,000,000
Citadel Communications Corporation
Series A Convertible Preferred Stock........................ May 1993 972,000 3,374,865
Series C Convertible Preferred Stock........................ May 1993 275,904 957,962
County Seat Holdings, Inc., common stock...................... June 1991 111,067 740,450
DuroLite International, Inc.
Convertible Preferred Stock................................. November 1995 2,500 2,627,250
12% Subordinated Note due 11/03/2004........................ November 1995 $ 8,000,000 7,872,750
Earth Technology Corporation
12.5% Senior Subordinated Note due 6/30/98.................. August 1990 $10,000,000 10,000,000
Stock Purchase Warrants Expiring 7/01/98.................... August 1990 166,500 900
Echlin Inc., common stock..................................... May 1989-March 1992 553,162 10,406,693
Golder, Thoma, Cressey Fund II Limited Partnership............ June 1984-December 1988 $ 387,835 387,835
Home State Holdings, Inc.
11.5% Subordinated Note due 10/03/2004...................... October 1994 $10,050,000 9,607,909
Stock Purchase Warrants Expiring 10/03/2004................. October 1994 150,750 472,941
Phillips-Smith Specialty Retail Group Limited Partnership..... March 1987-September 1987 $ 59,868 59,868
Security Capital U.S. Realty, common stock.................... October 1995 100,000 1,000,000
TBN Holdings Inc.
12% Subordinated Note due 12/31/2002........................ January 1995 $ 8,000,000 8,000,000
Series C-3 Convertible Preferred Stock...................... January 1995 1,511,628 3,239,000
Stock Purchase Warrants Expiring 12/31/2002................. January 1995 1,100,000 11,000
</TABLE>
(d) There were no unrestricted securities of the same issue outstanding on
December 31, 1995 or the dates of acquisition.
(e) Represents 90% of the current market price of unrestricted common stock
of Echlin Inc.
(f) Represents 80% of the current market price of unrestricted common stock
of Champion Healthcare Corporation.
(g) The Company has committed to invest an additional $9,000,000 in Security
Capital U.S. Realty.
(h) Security not current as to payment of interest.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The Company is registered under the Investment Company Act of 1940 as a non-
diversified closed-end management investment company. The Company invests
primarily for capital appreciation.
Investment valuation:
Investments are stated at "value". Securities traded on securities exchanges or
on the Nasdaq National Market are valued at the last reported sales prices on
the day of valuation; listed and Nasdaq securities for which no sales were
reported on that day and other securities traded in the over-the-counter market
are valued at the mean of closing bid and asked prices on that day. Money market
instruments are valued at amortized cost. Financial futures are valued at the
settlement price established each day by the exchange on which they are traded.
Restricted securities and other securities for which prices are not readily
available, or for which market quotations are considered to not reflect fair
value, are valued at a fair value as determined by the board of directors.
Because these investments are expected to have a long-term holding period, their
estimated values may not reflect amounts that could be realized upon immediate
sale, nor amounts that ultimately may be realized.
The Company may be considered to be a "controlling person" of Consolidated-
Tomoka Land Co. within the meaning of the Securities Act of 1933. A public
distribution of such shares would require registration under the Securities
Act. The shares of Consolidated-Tomoka Land Co. are valued by the board of
directors at the closing price as reported by the American Stock Exchange on
the day of valuation.
Investment transactions:
Investment transactions are accounted for on the trade date. Realized gains and
losses on investment transactions are determined on an identified cost basis.
Investment income:
The Company records dividends on the ex-dividend date. Interest income is
recorded on the accrual basis and includes amortization of premium and discount
on securities purchased. Such income is classified based on the affiliation
status of the issuer as of the date of the financial statements.
Federal income taxes, dividends, and distributions to shareholders:
The Company intends to qualify each year as a "regulated investment company"
under the provisions of the Internal Revenue Code so that it will not be liable
for federal income tax on net investment income and capital gain distributed to
shareholders.
In order to qualify as a regulated investment company and avoid being
subject to federal income or excise taxes, the Company intends to distribute
substantially all of its taxable net investment income (including net realized
short-term capital gain, if any) within the time limits prescribed by the
Internal Revenue Code. Accordingly, no provision has been made for federal
income or excise tax on such income.
For the year ended December 31, 1995, the Company distributed $1.20 per
share of net realized long-term capital gain to shareholders.
Long-term capital gain distributions are taxable as long-term capital gain
to shareholders, irrespective of how long the related shares have been held.
Short-term capital gain distributed to shareholders is taxable as ordinary
dividend income.
Dividends and distributions payable to shareholders are recorded by the
Company on the ex-dividend date.
Reclassifications:
For 1995, the Company has reclassified $103,427,516 from "undistributed net
realized gain from investment transactions" to "capital surplus" in the
accompanying Analysis of Net Assets. This reclassification was made to more
appropriately reflect previously taxed net realized gain retained by the Company
in prior years. After reclassification, "undistributed net realized gain from
investment transactions" represents amounts that will be taxable to shareholders
when distributed in 1996.
NOTE 2. CAPITAL STOCK
The Company may purchase shares of its own stock in open market or private
transactions from time to time and at such prices and amounts as management may
deem advisable. Since such purchases are made at prices below net asset value,
they increase the net asset value per share of the remaining shares outstanding.
The Company made no such purchases during 1995 or 1994.
Other transactions in capital stock during 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Shares Amount
-------------------- ------------------------
1995 1994 1995 1994
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Reinvestment of
capital gain
distributions..... 1,101,959 1,123,249 $ 1,101,959 $ 1,123,249
Increase in
capital surplus... 17,493,599 14,756,646
----------- -----------
Net increase...... $18,595,558 $15,879,895
----------- -----------
</TABLE>
10
<PAGE>
NOTE 3. EXPENSES
Aggregate compensation paid or accrued during the year ended December 31, 1995
to officers of the Company amounted to $1,262,415. Fees, excluding expenses, of
$162,750 were incurred during 1995 for directors who were not officers of the
Company.
NOTE 4. FEDERAL INCOME TAX STATUS OF DISTRIBUTIONS
In December of each year, the Company distributes to its shareholders all or a
portion of its net long-term capital gain realized during the year. The capital
gain distribution is paid in additional shares of the Company's stock, or in
cash if so elected by individual shareholders.
In 1995, the Company made a long-term capital gain distribution of $1.20
per share. Approximately 76.8% of the $0.35 per share of ordinary income
dividends paid during 1995 qualifies for the corporate dividends received
deduction, and 1.4% represents income earned on U.S. government obligations.
NOTE 5. INVESTMENT TRANSACTIONS
The cost of securities purchased and proceeds from securities sold during 1995,
excluding money market investments, aggregated $185,107,763 and $194,374,056,
respectively.
The Company paid brokerage commissions totalling $25,300 and $79,457 for
the years ended December 31, 1995 and 1994, respectively, to Goldman, Sachs &
Co., of which James P. Gorter, chairman of the board of the Company, is a
limited partner.
NOTE 6. FUTURES TRANSACTIONS
In order to maintain a substantially fully invested position in the stock
market, the Company may purchase Standard & Poor's 500 Stock Index (S&P 500)
futures contracts. Upon entering into a futures contract, the Company is
required to deposit with its custodian either cash or eligible securities in an
amount set by the relevant futures exchange, known as "initial margin."
Subsequent payments, known as "variation margin," are made on a daily basis as
the market prices of the underlying futures contracts fluctuate. For financial
statement purposes, such variation margin is recognized on a daily basis as gain
or loss.
The Company had no S&P 500 futures contracts open as of December 31, 1995.
NOTE 7. RETIREMENT PLANS AND POST-RETIREMENT HEALTH CARE BENEFITS
The Company maintains a non-contributory defined benefit pension plan covering
all of its employees. Benefits under the plan are based on salary and years of
service. The Company makes annual contributions to the plan in accordance with
federal tax law and ERISA requirements. Total plan contributions for 1995 were
$58,683. Net pension expense for 1995 was $38,160.
In addition, the Company has a non-contributory money purchase pension plan
covering all employees. Company contributions are based on compensation. Total
plan contributions for 1995 were $195,329.
The Company also provides certain healthcare benefits for retired
employees. All of the Company's employees become eligible for these benefits
upon retirement and the coverage is provided on a contributory basis. These
benefits are subject to deductible and co-payment provisions, medicare
supplements and other limitations. The net expense for post-retirement health
care benefits for 1995 was $75,270.
NOTE 8. PENDING ACQUISITION
In November 1995, the Company's board approved an agreement to acquire 100% of
the outstanding common stock of John A. Levin & Co., Inc. (Levco), a privately-
held New York-based investment advisory firm, in exchange for approximately $36
million in cash and five million newly-issued Baker Fentress shares (subject to
adjustments).
Levco will operate as a wholly-owned subsidiary of the Company and be
reflected by the Company as an investment. This new subsidiary will manage all
existing and new advisory accounts of Levco and (if approved by the Company's
shareholders) the publicly-traded sector of the Company's portfolio. The
management of the private placement and Consolidated-Tomoka sectors will
continue as at present.
The acquisition is subject to Securities and Exchange Commission exemptive
relief from certain provisions of the Investment Company Act of 1940 and
shareholder approval. The transaction is expected to close in 1996.
11
<PAGE>
FINANCIAL HIGHLIGHTS
The following table shows per share operating performance data, total investment
return, ratios and supplemental data for each year in the five-year period
ended December 31, 1995.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of year......................... $ 17.47 $ 20.42 $ 20.82 $ 21.49 $ 18.66
-------- -------- -------- -------- --------
Net investment income................................. .35 0.35 0.48 0.39 0.58
Net realized gain (loss) and net change in
unrealized appreciation and other changes.......... 5.67 (1.36) 2.51 0.90 4.14
-------- -------- -------- -------- --------
Total from investment operations........................... 6.02 (1.01) 2.99 1.29 4.72
Less distributions:
Dividends from net investment income.................. (0.35) (0.35) (0.48) (0.39) (0.58)
Distribution from net realized gain................... (1.20) (1.46) (1.76) (1.42) (1.15)
-------- -------- -------- -------- --------
Total distributions........................................ (1.55) (1.81) (2.24) (1.81) (1.73)
-------- -------- -------- -------- --------
Dilution resulting from:
Reinvestment of capital gain distribution............. (.19) (0.13) (0.16) (0.15) (0.16)
Rights offering (a)................................... - - (0.99) - -
-------- -------- -------- -------- --------
Net asset value, end of year............................... $ 21.75 $ 17.47 $ 20.42 $ 20.82 $ 21.49
======== ======== ======== ======== ========
Per share market price, end of year........................ $ 16.75 $ 13.75 $ 16.75 $ 17.00 $ 17.63
Total Investment Return-
Shareholder Return...................................... 33.20% (7.51)% 14.18%(b) 6.51% 34.03%
Ratios/Supplemental Data
Net assets, end of year (in 000's) $599,182 $461,931 $516,890 $419,814 $417,355
Ratio of expenses to average net assets............... .78% .75% .83% .76% .84%
Ratio of net investment income to average
net assets......................................... 1.79% 1.38% 1.59% 2.01% 2.53%
Portfolio turnover.................................... 35.89% 41.63% 31.63% 28.36% 50.70%
Number of shares outstanding, end
of year (in 000's)................................. 27,544 26,442 25,318 20,165 19,423
- --------------
</TABLE>
(a) Effect of the Company's rights offering of shares at a price below net
asset value.
(b) Assumes shareholder exercised all primary rights in rights offering.
12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
BAKER, FENTRESS & COMPANY:
We have audited the accompanying statement of assets and liabilities of
Baker, Fentress & Company, including the statement of investments, as of
December 31, 1995, and the related statements of operations for the year then
ended, and cash flows and changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1995, by correspondence with the custodian and brokers. 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 financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Baker, Fentress & Company at December 31, 1995, the results of its operations
for the year then ended, its cash flows and the changes in its net assets for
each of the two years in the period then ended, and the financial highlights for
each of the five years in the period then ended, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
February 2, 1996
13
<PAGE>
<PAGE>
JOHN A. LEVIN & CO., INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1995
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders
John A. Levin & Co., Inc.
New York, New York
We have audited the accompanying statements of financial condition of John
A. Levin & Co., Inc. as at December 31, 1995 and December 31, 1994 and the
related statements of earnings and changes in retained earnings and cash flows
for each of the years in the three-year period ended December 31, 1995. 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 generally accepted auditing
standards. 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 financial statements enumerated above present fairly,
in all material respects, the financial position of John A. Levin & Co., Inc. at
December 31, 1995 and December 31, 1994 and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
1995 in conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
February 6, 1996
<PAGE>
JOHN A. LEVIN & CO., INC.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
------------------------
A S S E T S 1995 1994
----------- ----------- -----------
<S> <C> <C>
Cash and cash equivalents (Note B[1]).......... $ 2,161,340 $ 3,833,722
U.S. Treasury bill at market value............. 990,790
Receivable from correspondent broker........... 97,078 193,512
Investment advisory fees receivable............ 6,161,130 6,800,434
Furniture, fixtures, office equipment and
leasehold improvements (net of accumulated
depreciation and amortization of
$1,265,090 and $1,019,410 in 1995 and
1994, respectively) (Note B[2])............. 879,246 499,431
Investments in and receivables from
affiliated investment partnerships
(Note B[3])................................. 873,503 889,999
Prepaid taxes.................................. 63,881
Other assets................................... 1,421,310 303,051
----------- -----------
T O T A L............................ $11,657,488 $13,510,939
=========== ===========
L I A B I L I T I E S
---------------------
Accounts payable............................... $ 327,144 $ 356,890
Accrued professional fees...................... 591,068 23,209
Accrued bonuses................................ 138,896 2,317,297
Deferred rent payable.......................... 471,585 94,317
Taxes payable.................................. 95,599
----------- -----------
T o t a l............................ 1,528,693 2,887,312
----------- -----------
STOCKHOLDERS' EQUITY
--------------------
Common stock, $.01 par value; 10,000 shares
authorized, issued and outstanding in
1995 and 1994............................... 100 100
Additional paid-in capital ($515,350
contributed during 1994).................... 4,575,220 4,575,220
Retained earnings.............................. 5,553,475 6,048,307
----------- -----------
T o t a l............................ 10,128,795 10,623,627
----------- -----------
T O T A L............................ $11,657,488 $13,510,939
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
-2-
<PAGE>
JOHN A. LEVIN & CO., INC.
STATEMENTS OF EARNINGS AND CHANGES IN RETAINED EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>
Revenues (Note C):
Investment management fee............. $25,479,673 $20,204,742 $16,973,249
Commission income..................... 1,566,188 1,696,164 1,193,580
Interest and dividends................ 243,705 113,040 52,888
Other income.......................... 336,344 118,493 82,241
----------- ----------- -----------
Total revenues................. 27,625,910 22,132,439 18,301,958
----------- ----------- -----------
Expenses:
Employee compensation and benefits
(Note E)............................ 20,235,212 15,595,321 15,931,484
Commissions and floor brokerage....... 375,329 403,750 361,034
Communications........................ 505,416 430,539 407,700
Occupancy and equipment rental........ 753,160 973,965 993,295
Professional fees..................... 886,767 535,443 492,695
Promotional costs..................... 229,327 150,680 194,691
Other operating expenses.............. 474,531 867,587 503,012
----------- ----------- -----------
Total expenses................. 23,459,742 18,957,285 18,883,911
----------- ----------- -----------
Income (loss) before taxes on income..... 4,166,168 3,175,154 (581,953)
Provision for taxes on income (Note D). 461,000 347,000 215,000
----------- ----------- -----------
NET INCOME (LOSS)........................ 3,705,168 2,828,154 (796,953)
Retained earnings - January 1............ 6,048,307 3,220,153 4,017,106
----------- ----------- -----------
9,753,475 6,048,307 3,220,153
Stockholder distribution................. (4,200,000)
----------- ----------- ----------
RETAINED EARNINGS - DECEMBER 31.......... $ 5,553,475 $ 6,048,307 $ 3,220,153
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
-3-
<PAGE>
JOHN A. LEVIN & CO., INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 3,705,168 $ 2,828,154 $ (796,953)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization........................ 245,680 339,520 338,796
Equity earnings in partnerships...................... (373,650) (163,098) (40,241)
Stockholder compensation paid with note *............ 515,350
Accrued compensation contributed to capital.......... 2,448,835
Changes in assets and liabilities:
Receivable from correspondent broker............... 96,434 (93,872) 1,247
Investment advisory fees receivable................ 639,304 (1,543,714) (1,159,707)
(Investment)/redemption of U.S. Treasury bills..... 990,790 (990,790)
Investments in and receivables from affiliated
investment partnerships.......................... 390,146 (396,259)
Prepaid income taxes............................... (159,480)
Other assets....................................... 61,741 (202,803) 5,947
Income taxes payable............................... 65,413 (7,280)
Accounts payable and accrued expenses.............. (1,803,020) 2,315,351 347,093
----------- ----------- -----------
Net cash provided by operating activities........ 3,793,113 2,673,252 1,137,737
----------- ----------- -----------
Cash flows from investing activities:
Purchase of furniture, fixtures and office equipment..... (625,495) (232,500) (633,445)
Purchases of not readily marketable securities........... (100,003)
Proceeds from sale of not readily marketable securities.. 92,563
Reimbursable advances, net of payables................... (640,000)
----------- ----------- -----------
Net cash (used in) investing activities.......... (1,265,495) (232,500) (640,885)
----------- ----------- -----------
Cash flows from financing activities:
Stockholder distribution................................. (4,200,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (1,672,382) 2,440,752 496,852
Cash and cash equivalents - January 1....................... 3,833,722 1,392,970 896,118
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - DECEMBER 31..................... $ 2,161,340 $ 3,833,722 $ 1,392,970
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes........................................... $ 621,322 $ 281,719 $ 224,746
</TABLE>
* Note payable contributed to capital.
The accompanying notes to financial statements
are an integral part hereof.
-4-
<PAGE>
JOHN A. LEVIN & CO., INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company:
- ----------------------
The Company is a registered broker/dealer that clears all its securities
transactions through a correspondent broker on a fully disclosed basis and acts
as an investment adviser.
The stockholders of the Company have entered into an agreement, dated
November 19, 1995, for a plan of merger to sell the shares of the Company
subject to approval by the stockholders of the acquiring company and regulatory
agencies.
Included in other assets are $1,180,000 of reimbursable advances relating
to the plan of merger which are either to be paid by the purchaser by reducing
sales proceeds or reimbursed by the sellers.
(NOTE B) - Summary of Significant Accounting Policies:
- -----------------------------------------------------
[1] The Company considers money market funds to be cash equivalents.
[2] Furniture, fixtures, office equipment and leasehold improvements are
carried at cost. Depreciation of furniture, fixtures and office equipment is
provided on the accelerated method over the estimated useful lives of the
respective assets, ranging from three to seven years. Leasehold improvements
are amortized over the lives of the leases.
[3] Investments in affiliated investment partnerships are carried at
equity.
[4] The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(NOTE C) - Related Parties:
- --------------------------
Revenues earned from affiliated investment partnerships were approximately
$2,329,000, $2,060,000 and $2,954,000 for the years ended December 31, 1995,
1994 and 1993, respectively. The Company also performs services for affiliates
for which it is reimbursed.
-5-
<PAGE>
JOHN A. LEVIN & CO., INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE D) - Income Taxes:
- -----------------------
The Company has elected to be taxed as an S corporation under the Internal
Revenue Code. Net income is directly taxable to the stockholders of the Company
for federal and state purposes. Accordingly, only local income taxes have been
provided for in the financial statements. For 1993 these local taxes are based
upon a method whereby officers' salaries are added back to taxable income. At
December 31, 1995, the stockholders may withdraw substantially all of their
retained earnings without further tax consequences to them.
Upon consummation of the sale of the shares of the Company (Note A) the S
corporation status will be automatically terminated.
(NOTE E) - Pension Plans:
- ------------------------
The Company maintains a target pension plan covering all employees who have
reached the age of 20.5 and have completed nine months of service.
Contributions are based on current compensation. The Company contributed
$205,000 in 1995, $195,000 in 1994 and $152,000 in 1993 to the plan.
The Company has also adopted a Section 401(k) plan. Eligible participants
may contribute up to 15% of their earnings, subject to statutory limitations.
The Company matches employee contributions and accordingly contributed $135,000
for 1995, $102,000 for 1994 and $99,000 for 1993.
(NOTE F) - Net Capital Requirements:
- -----------------------------------
The Company is subject to the Securities and Exchange Commission uniform
net capital rule (Rule 15c3-1), which requires the maintenance of minimum net
capital and requires that the ratio of aggregate indebtedness to net capital,
both as defined, shall not exceed 15 to 1. At December 31, 1995 the Company had
net capital of approximately $695,000 which was $593,000 in excess of its
required net capital. The Company's net capital ratio was 2.2 to 1.
(NOTE G) - Off-Balance Sheet Risk:
- ---------------------------------
As a nonclearing broker, the Company has its customers' transactions
cleared through another broker/dealer pursuant to a clearance agreement.
Nonperformance by its customers in fulfilling their contractual obligations
pursuant to securities transactions with the clearing broker may expose the
Company to risk and potential loss. The Company utilizes a clearing broker that
is highly capitalized and is a member of a major security exchange.
-6-
<PAGE>
JOHN A. LEVIN & CO., INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE H) - Commitment - Lease:
- -----------------------------
The Company's lease for office space requires monthly payments of $43,834,
plus escalations through September 2004. The Company has the option to
terminate the lease as of September 1999.
At December 31, 1995, minimum annual rental commitments under the operating
lease are as follows:
1996. . . . . . . . . . . . . . $ 440,000
1997. . . . . . . . . . . . . . 526,000
1998. . . . . . . . . . . . . . 526,000
1999. . . . . . . . . . . . . . 543,000
2000. . . . . . . . . . . . . . 594,000
Thereafter. . . . . . . . . . . 2,227,000
-----------
Total minimum payments required $4,856,000
===========
The Company has been granted a free rent period under its lease through
February 1996. For financial reporting purposes rent expense is being
recognized on a straight-line basis over the lease term.
-7-
<PAGE>
APPENDIX G
JOHN A. LEVIN & CO., INC.
REPORT ON EXAMINATION OF RATES OF RETURN FOR
THE COMPOSITE INVESTMENT ACCOUNTS
FOR THE PERIOD JANUARY 1, 1986
THROUGH DECEMBER 31, 1995
<PAGE>
{LETTERHEAD OF RICHARD A. EISNER & COMPANY LLP]
Board of Directors
John A. Levin & Co., Inc.
New York, New York
We have examined the accompanying schedule of Rates of Return for the
composite investment accounts of John A. Levin & Co., Inc. (the "Company") for
the annual and compounded investment periods from January 1, 1986, through
December 31, 1995. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this schedule based
on our examination. Our examination was made in accordance with standards
established by the American Institute of Certified Public Accountants and,
accordingly, included such procedures as we considered necessary in the
circumstances.
As described in Note A to the schedule, the Company adopted the Association
for Investment Management and Research ("AIMR") Performance Presentation
Standards as of January 1, 1993.
In our opinion, the schedule of Rates of Return of John A. Levin & Co.,
Inc., for the annual and compounded investment periods from January 1, 1993
through December 31, 1995, is fairly stated, in all material respects, in
conformity with AIMR Performance Presentation Standards.
The rates of return for the annual and compounded investment periods from
January 1, 1986 through December 31, 1992, were prepared in accordance with the
measurement and disclosure criteria set forth in Note A and are not intended to,
and do not, comply with AIMR Performance Presentation Standards. In our
opinion, however, the schedule of Rates of Return of John A. Levin & Co., Inc.,
for the investment periods ended December 31, 1992 is fairly stated, in all
material respects, in conformity with the basis of the measurement and
disclosure criteria set forth in Note A.
/s/Richard A. Eisner & Company, LLP
New York, New York
April 11, 1996
<PAGE>
JOHN A. LEVIN & CO., INC.
SCHEDULE OF RATES OF RETURN
FOR THE PERIOD JANUARY 1, 1986 THROUGH DECEMBER 31, 1995
QUARTERLY PERFORMANCE RECORD
<TABLE>
<CAPTION>
Total Return Total
-------------------------------------- Assets End Percent
Number of of Period of Firm
Gross of Fees Net of Fees S&P 500 Portfolios ($Millions) Assets
-------------- ------------ -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
1986
- ----
1st quarter.. 12.28% 12.00% 14.09% 22 $ 120 46.89%
2nd quarter.. 6.45% 6.18% 5.92% 24 143 46.08%
3rd quarter.. -3.89% -4.13% -6.97% 25 160 43.56%
4th quarter.. 2.03% 1.77% 5.59% 28 231 60.00%
Year......... 17.20% 16.03% 18.70%
Cumulative... 17.20% 16.03% 18.70%
1987
- ----
1st quarter.. 17.93% 17.64% 21.34% 28 287 69.84%
2nd quarter.. 4.22% 3.96% 5.01% 29 319 74.29%
3rd quarter.. 7.14% 6.87% 6.61% 28 355 75.15%
4th quarter.. -12.77% -12.99% -22.55% 28 311 71.99%
Year......... 14.87% 13.72% 5.22%
Cumulative... 34.63% 31.95% 24.90%
1988
- ----
1st quarter.. 10.74% 10.46% 5.69% 33 388 73.49%
2nd quarter.. 5.71% 5.45% 6.66% 33 437 52.63%
3rd quarter.. 3.07% 2.81% 0.35% 37 483 54.90%
4th quarter.. 1.69% 1.44% 3.05% 39 492 54.90%
Year......... 22.70% 21.48% 16.57%
Cumulative... 65.19% 60.29% 45.59%
1989
- ----
1st quarter.. 9.55% 9.28% 7.07% 43 562 51.81%
2nd quarter.. 9.66% 9.39% 8.83% 48 674 52.05%
3rd quarter.. 7.85% 7.58% 10.71% 61 835 56.76%
4th quarter.. 0.12% -0.13% 2.05% 61 966 61.44%
Year......... 29.72% 28.44% 31.65%
Cumulative... 114.28% 105.87% 91.66%
1990
- ----
1st quarter.. -2.20% -2.37% -3.02% 72 1,067 66.54%
2nd quarter.. 5.00% 4.82% 6.28% 80 1,140 67.85%
3rd quarter.. -10.40% -10.56% -13.75% 82 1,025 66.04%
4th quarter.. 7.00% 6.85% 8.96% 82 1,105 66.14%
Year......... -1.50% -2.20% -3.14%
Cumulative... 111.06% 101.34% 85.65%
(continued)
</TABLE>
-2-
<PAGE>
JOHN A. LEVIN & CO., INC.
SCHEDULE OF RATES OF RETURN
FOR THE PERIOD JANUARY 1, 1986 THROUGH DECEMBER 31, 1995
QUARTERLY PERFORMANCE RECORD
(continued)
<TABLE>
<CAPTION>
Total
Total Return Assets End Percent
-------------------------------------- Number of of Period of Firm
Gross of Fees Net of Fees S&P 500 Portfolios ($Millions) Assets
-------------- ------------ -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
1991
- ----
1st quarter.... 12.20% 12.02% 14.50% 86 $1,262 64.85%
2nd quarter.... 0.10% -0.06% -0.23% 97 1,329 67.64%
3rd quarter.... 4.30% 4.14% 5.36% 97 1,392 68.39%
4th quarter.... 6.90% 6.71% 8.39% 98 1,477 63.57%
Year........... 25.20% 24.41% 30.45%
Cumulative..... 164.25% 150.49% 142.17%
1992
- ----
1st quarter.... 2.80% 2.61% -2.53% 104 1,494 67.40%
2nd quarter.... 0.90% 0.72% 1.90% 109 1,545 70.66%
3rd quarter.... 3.00% 2.82% 3.16% 115 1,582 68.72%
4th quarter.... 6.80% 6.65% 5.04% 122 1,967 70.76%
Year........... 14.10% 13.33% 7.62%
Cumulative..... 201.51% 183.88% 160.62%
1993
- ----
1st quarter.... 4.80% 4.63% 4.35% 121 1,966 70.71%
2nd quarter.... 2.80% 2.63% 0.48% 128 2,063 72.91%
3rd quarter.... 1.50% 1.30% 2.59% 140 2,251 73.90%
4th quarter ... 4.20% 4.03% 2.32% 150 2,294 71.70%
Year........... 13.90% 13.16% 10.06%
Cumulative..... 243.42% 221.24% 186.85%
1994
- ----
1st quarter.... -2.70% -2.87% -3.80% 154 2,548 69.13%
2nd quarter.... 2.10% 1.91% 0.40% 169 2,619 74.13%
3rd quarter.... 5.30% 5.14% 4.90% 194 2,757 75.25%
4th quarter.... -2.80% -2.96% -0.02% 203 2,946 73.54%
Year........... 1.70% 0.99% 1.30%
Cumulative..... 249.26% 224.42% 190.58%
1995
- ----
1st quarter.... 7.50% 7.36% 9.74% 222 2,961 68.58%
2nd quarter.... 7.13% 6.99% 9.58% 226 3,280 69.74%
3rd quarter.... 8.12% 7.98% 7.91% 227 3,538 69.84%
4th quarter.... 6.06% 5.88% 6.02% 240 3,861 71.63%
Year........... 32.06% 31.32% 37.58%
Cumulative..... 361.24% 326.05% 299.77%
</TABLE>
The accompanying notes to schedule of rates of return
are an integral part hereof.
-3-
<PAGE>
JOHN A. LEVIN & CO., INC.
NOTES TO SCHEDULE OF RATES OF RETURN
FOR THE PERIOD JANUARY 1, 1986
THROUGH DECEMBER 31, 1995
(NOTE A) - Basis of Presentation:
- --------------------------------
The investment performance results have been prepared and presented in
compliance with the AIMR Performance Presentation Standards from January 1, 1993
to the present. The full period is not in compliance because, for periods prior
to January 1, 1993, size-weighted composites returns were calculated using end-
of-period market values.
(NOTE B) - Organization:
- -----------------------
John A. Levin & Co., Inc. (the "Company") is a Delaware corporation
registered as an investment adviser under the Investment Advisers Act of 1940
and registered as a broker-dealer with the Securities and Exchange Commission
and the National Association of Securities Dealers. Clients include U.S. and
foreign corporations, a mutua1 fund, limited partnerships, universities, pension
and profit sharing funds, individuals, trusts, not for profit organizations, and
foundations.
(NOTE C) - Managed Accounts:
- ---------------------------
All accounts managed on a fully discretionary basis, including taxable and
tax-exempt accounts, are included in the composite after the account has been
managed for one full calendar quarter with the following exceptions:
Immediate family and related accounts.
Accounts with assets under $1,000,000.
One account for which only the equity portion of the portfolio is
managed.
Certain investment funds with different investment strategies.
A complete list and description of the firm's composites is available upon
request.
(NOTE D) - Calculation of Performance:
- -------------------------------------
The Company computes its rate of return on a "time weighted" basis for each
eligible account. The composite performance for each quarter is time weighted
and includes the reinvestment of dividends
(continued)
-4-
<PAGE>
JOHN A. LEVIN & CO., INC.
NOTES TO SCHEDULE OF RATES OF RETURN
FOR THE PERIOD JANUARY 1, 1986
THROUGH DECEMBER 31, 1995
(NOTE D) - Calculation of Performance: (continued)
- -------------------------------------
and capital gains. Portfolio returns are benchmarked to the S & P 500. Portfolio
structure and security holdings, however, may differ from those of the S & P
500.
Investment results are net of broker commissions and expenses related to
trading; net of fee returns are reduced by the investment management fees. For
the period from 1986 through 1989, the results shown above reflect the deduction
of a 1% investment management fee payable quarterly at the rate of .25% of
ending market value. This is the maximum investment management fee charged by
the firm. These results do not reflect actual fees charged. For the period from
January 1, 1990 through December 31, 1995, the results shown above reflect the
deduction of the actual dollar-weighted fee rate paid by all accounts in the
composite. The dollar-weighted fee rate has been calculated by dividing the
quarterly investment management fees paid by the accounts in the composite by
the total composite asset value. This dollar-weighted fee rate includes the
performance fees paid by certain investment funds. Inclusion of the performance-
based fees does not materially affect the dollar-weighted fee rate. The firm's
asset-based fee schedule is: 1% of asset value of accounts of less than $5
million; .75% of asset value for accounts $5 million to $15 million; for
accounts greater than $15 million, the fee is .75% on the first $15 million and
.50% on the balance up to $100 million. For any account in excess of $100
million, the asset-based fee rate on the balance is negotiable. The firm does
offer performance-based fees. The investment management fees are described in
Part II of Form ADV.
The investment strategy employed focuses on identifying and investing in
those companies:
1) Having strong proprietary products or services where the Company has
uncovered a new factor which should cause greater recognition of their
intrinsic value.
2) Which sell at a discount to their private market value based on asset
value or cash flow especially where some new element should cause
appreciation.
3) With an important new product or new development.
4) With a special situation yield which provides attractive total return
and limited downside risk.
Past performance is not indicative of future results.
-5-
<PAGE>
JOHN A. LEVIN & CO., INC.
NOTES TO SCHEDULE OF RATES OF RETURN
FOR THE PERIOD JANUARY 1, 1986
TTHROUGH DECEMBER 31, 1995
(NOTE E) - Related Party:
- ------------------------
Included in the composite are two limited partnerships whose general
partners are related parties.
One of the limited partnerships is included in the composite from January
1, 1986 through December 31, 1995, and the other limited partnership is included
in the composite from April 1, 1994 through December 31, 1995.
-6-
<PAGE>
[FRONT]
PROXY PROXY
BAKER, FENTRESS & COMPANY
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS--JUNE 27, 1996
Bob D. Allen, David D. Peterson and William H. Springer, or any of them, each
with the power of substitution and revocation, are hereby authorized to
represent the undersigned, with all powers which the undersigned would possesses
if personally present, to vote the Common Stock of the undersigned at the annual
meeting of the shareholders of BAKER, FENTRESS & COMPANY to be held at the
Harris Trust and Savings Bank, 8th Floor West, 115 South LaSalle Street,
Chicago, Illinois, 60603, on June 27, 1996, at 10:00 a.m., Chicago time, and at
any postponements or adjournments of that meeting, as set forth below, and in
their discretion upon any other business that may properly come before the
meeting.
[_] Check here for address change. [_] Check here if you plan to
attend the meeting.
New Address:
-----------------------
-----------------------------------
-----------------------------------
All capitalized terms used in this proxy shall have the same meanings assigned
to them in the Proxy Statement.
(Continued and to be signed on reverse side)
<PAGE>
[BACK]
BAKER, FENTRESS & COMPANY
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. 0
This proxy will be voted as specified or, if no choice is specified, will be
voted FOR the election of the nominees named and FOR the other proposals
specified herein.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1. Election of directors-- FOR WITHHOLD FOR ALL (Except for nominee(s)
Nominees: Eugene V. Fife, J. Barton written below)
Goodwin, James P. Gorter, John A.
Levin, Burton G. Malkiel, Melody L. 0 0 0
Prenner Sarnell and Jeffrey A. Kigner __________________________________________________________
2. Proposal to approve and adopt the FOR AGAINST ABSTAIN
Merger Agreement and all transactions 0 0 0
(including the Merger) contemplated
thereby.
3. To approve the Management Contract FOR AGAINST ABSTAIN
to be entered into upon the 0 0 0
consummation of the Merger.
4. To approve and adopt the Key FOR AGAINST ABSTAIN
Employee Incentive Bonus Plan. 0 0 0
5. To amend the Company's Certificate FOR AGAINST ABSTAIN
of Incorporation to increase the 0 0 0
Company's authorized common stock,
$1.00 par value per share from 40
million to 60 million shares.
6. To ratify the selection of Ernst & Young FOR AGAINST ABSTAIN
LLP as the Company's independent auditors. 0 0 0
</TABLE>
Please sign exactly as your name appears.
If acting as attorney, executor, trustee,
or in representative capacity, sign name
and indicate title.
Date:________________________ , 1996.
Signature(s)________________________________
____________________________________________
PLEASE VOTE, SIGN, DATE AND PROMPTLY RETURN
THIS CARD USING THE ENCLOSED ENVELOPE.
- -------------------------------------------------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 370,524,235
<INVESTMENTS-AT-VALUE> 595,151,708
<RECEIVABLES> 4,531,623
<ASSETS-OTHER> 972,145
<OTHER-ITEMS-ASSETS> 438,794
<TOTAL-ASSETS> 601,094,270
<PAYABLE-FOR-SECURITIES> 1,305,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 606,785
<TOTAL-LIABILITIES> 1,911,785
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 279,579,036
<SHARES-COMMON-STOCK> 27,543,641
<SHARES-COMMON-PRIOR> 26,441,682
<ACCUMULATED-NII-CURRENT> 49,488,493
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 17,943,842
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 224,627,473
<NET-ASSETS> 599,182,485
<DIVIDEND-INCOME> 6,717,654
<INTEREST-INCOME> 6,822,162
<OTHER-INCOME> 0
<EXPENSES-NET> 4,121,303
<NET-INVESTMENT-INCOME> 9,418,513
<REALIZED-GAINS-CURRENT> 43,150,814
<APPREC-INCREASE-CURRENT> 107,071,485
<NET-CHANGE-FROM-OPS> 159,640,812
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 9,058,533
<DISTRIBUTIONS-OF-GAINS> 31,926,074
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 1,101,959
<NET-CHANGE-IN-ASSETS> 137,251,763
<ACCUMULATED-NII-PRIOR> 49,128,513
<ACCUMULATED-GAINS-PRIOR> 9,482,142
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,121,303
<AVERAGE-NET-ASSETS> 526,804,442
<PER-SHARE-NAV-BEGIN> 17.47
<PER-SHARE-NII> .35
<PER-SHARE-GAIN-APPREC> 5.67
<PER-SHARE-DIVIDEND> .35
<PER-SHARE-DISTRIBUTIONS> 1.20
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<PER-SHARE-NAV-END> 21.75
<EXPENSE-RATIO> .78
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
