DEF 14A 1 file001.txt DEFINITIVE PROXY STATEMENT SCHEDULE 14A (RULE 14A-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 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 [X] Definitive Proxy Statement Commission Only (as permitted [ ] Definitive Additional Materials by Rule 14a-6(e)(2)) [ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12 CARLYLE INDUSTRIES, INC. -------------------------------------------------------------------------------- (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): [X] No fee required. [ ] 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: [ ] 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: (4) Date Filed: CARLYLE INDUSTRIES, INC. 1 PALMER TERRACE CARLSTADT, NEW JERSEY 07072 December 5, 2002 Dear Stockholder of Carlyle Industries, Inc.: Your board of directors has unanimously approved a merger which will result in your company, Carlyle Industries, Inc., being acquired by Levcor International, Inc., an apparel fabric processor, and unanimously recommends that you vote to approve and adopt the merger agreement. If the merger is consummated, Levcor will issue one share of Levcor common stock for each five shares of Carlyle common stock and one share of a new class of Levcor preferred stock, designated as Series A preferred stock, for each share of Carlyle Series B preferred stock, the certificate of incorporation of Levcor will be amended and restated and six persons will be elected to serve as directors of Levcor. Levcor expects to issue approximately 2,786,972 shares of Levcor common stock and 4,555,007 shares of Levcor Series A preferred stock to the Carlyle stockholders. Each outstanding option to purchase shares of Carlyle common stock will be assumed by Levcor, with the number of options and exercise price to be appropriately adjusted. Levcor common stock is traded on the OTC Bulletin Board under the symbol "LEVC.OB". Carlyle common stock is traded on the OTC Bulletin Board under the symbol "CRLH.OB". There is no existing public market for Carlyle's Series B preferred stock and Levcor does not expect to list its Series A preferred stock on any securities exchange. The merger is more fully described in this joint proxy statement/prospectus. The board of directors has determined that the merger is fair and in the best interests of Carlyle and its stockholders. To complete the merger, you are asked to vote at a special meeting of stockholders to be held on December 31, 2002, beginning at 11:00 a.m. At the Carlyle special meeting, your board of directors is asking you to approve and adopt the merger agreement, which provides for Carlyle to be merged with Levcor continuing as the surviving corporation. Only stockholders of record at the close of business on November 21, 2002 will be entitled to vote at the Carlyle special meeting. Whether or not you plan to attend the special meeting, Carlyle urges you to complete, sign and promptly return the enclosed proxy card to assure that your shares will be voted at the special meeting. FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD AND/OR TO VOTE AT THE SPECIAL MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE PROPOSAL. Your vote is very important regardless of the number of shares you own. I urge you to vote in favor of the approval and adoption of the merger agreement. This joint proxy statement/prospectus provides you with detailed information concerning Levcor, Carlyle and the merger. Please read these materials carefully. In particular you should carefully consider the discussion in the section entitled "Risk Factors" beginning on page 40. Very truly yours, Edward F. Cooke Chief Financial Officer and Vice President NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THE MERGER DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS OR THE SHARES OF LEVCOR COMMON STOCK AND LEVCOR SERIES A PREFERRED STOCK TO BE ISSUED IN CONNECTION WITH THE MERGER. FURTHERMORE, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL AND IT IS NOT SOLICITING AN OFFER TO BUY SECURITIES IN ANY JURISDICTION WHERE OFFERS OR SALES ARE NOT PERMITTED. CARLYLE INDUSTRIES, INC. 1 PALMER TERRACE CARLSTADT, NEW JERSEY 07072 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON DECEMBER 31, 2002 To the Stockholders of Carlyle Industries, Inc.: Carlyle Industries, Inc. will hold a special meeting of its stockholders on December 31, 2002, at 11:00 a.m., at the offices of Katten Muchin Zavis Rosenman, 575 Madison Avenue, New York, New York 10022, for the following purposes: 1. To consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger dated May 24, 2002 between Carlyle and Levcor International, Inc. The merger agreement provides for, among other things: (a) the merger of Carlyle with and into Levcor, (b) the issuance of one share of Levcor common stock in exchange for each five shares of common stock of Carlyle, (c) the issuance of one share of a new class of Levcor preferred stock, designated as Series A preferred stock, in exchange for each share of Series B preferred stock of Carlyle, (d) the amendment and restatement of the certificate of incorporation of Levcor, and (e) the election of six persons to serve on the Levcor board of directors. The merger agreement is more fully described in this joint proxy statement/prospectus; and 2. To permit Carlyle's board of directors, in its discretion, to adjourn or postpone the special meeting if necessary for further solicitation of proxies if there are not sufficient votes at the originally scheduled time of the annual meeting to approve each proposal. 3. To transact any other business as may properly come before the special meeting or any adjournments or postponements thereof. Only holders of record of Carlyle common and Series B preferred stock at the close of business on November 21, 2002, the record date for the Carlyle special meeting, are entitled to notice of, and to vote at, the Carlyle special meeting and any adjournments or postponements of the special meeting. Carlyle's stockholders are entitled to assert dissenters' rights of appraisal pursuant to Section 262 of the Delaware General Corporation Law. Carlyle stockholders who comply with the provisions of Delaware law relating to dissenters' rights will be entitled to object to the merger and make written demand that Levcor pay them in cash the fair value of their shares. A copy of the dissenters' rights statute is attached to the enclosed joint proxy statement/prospectus as Appendix B. Your vote is very important. Carlyle can complete the merger with Levcor only if holders of a majority of the shares of Carlyle common stock and Carlyle Series B preferred stock, voting together as a class, vote at the special meeting in favor of the approval and adoption of the merger agreement. Whether or not you plan to attend the special meeting, we urge you to complete, sign and date the enclosed proxy card and return it promptly in the enclosed postage paid envelope to ensure that your shares will be voted at the special meeting. Failure to return a properly executed proxy card and/or to vote at the special meeting will have the same effect as a vote against the proposal. You may revoke your proxy in the manner described in the accompanying joint proxy statement/prospectus at any time before it has been voted at the special meeting. If you attend the special meeting you may vote in person even if you returned a proxy. Please do not send your stock certificates at this time. If the merger is completed, you will be sent instructions regarding the surrender of your stock certificates. By Order of the Board of Directors Edward F. Cooke Chief Financial Officer and Vice President Carlstadt, New Jersey December 5, 2002 This Proxy Statement is dated December 5, 2002, and was first mailed to Carlyle Stockholders on or about December 9, 2002. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY THEM BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. TABLE OF CONTENTS QUESTIONS AND ANSWERS ABOUT THE MERGER.........................................8 SUMMARY.......................................................................11 The Parties To The Merger................................................11 Purpose And Structure Of The Merger......................................11 Amendment And Restatement Of Levcor's Certificate Of Incorporation.......12 Election Of Levcor Directors.............................................13 Levcor 2002 Stock Option Plan............................................14 Appointment Of Independent Auditors......................................14 Election Of Levcor Directors If The Merger Is Not Consummated............14 Levcor Grant Of Authority To Adjourn Or Postpone The Annual Meeting......15 Carlyle Grant Of Authority To Adjourn Or Postpone The Special Meeting....15 Levcor Stockholder Approval..............................................16 Carlyle Stockholder Approval.............................................16 Voting Shares Held By Your Broker In Street Name.........................16 Changing Your Vote.......................................................16 Completion Of The Merger.................................................16 Exchanging Your Stock Certificates.......................................17 Levcor's Reasons For The Merger; Recommendation Of Levcor's Board........17 Carlyle's Reasons For The Merger; Recommendation Of Carlyle's Board......17 Comparative Per Share Common Stock Data..................................18 Comparative Market Data..................................................20 Security Ownership Of Certain Beneficial Owners Of Levcor Upon The Effective Time Of The Merger.......................................21 Opinion Of Levcor's Financial Advisor....................................22 Opinion Of Carlyle's Financial Advisor...................................22 Interests Of Certain Persons In The Merger...............................23 Rights Of Dissenting Stockholders........................................24 Federal Income Tax Consequences..........................................24 Anticipated Accounting Treatment.........................................24 The Merger Agreement; Generally..........................................25 Effective Time...........................................................25 Conditions To The Merger.................................................25 No Solicitation..........................................................26 Termination Of The Merger Agreement......................................27 Fee, Expenses And Other Payments.........................................28 Forward-Looking Statements May Prove Inaccurate..........................29 Who Can Help Answer Your Questions.......................................29 SELECTED HISTORICAL AND UNAUDITED PRO FORMA SUMMARY FINANCIAL INFORMATION....................................................30 Levcor Selected Historical Financial Data................................30 Carlyle Selected Historical Consolidated Financial Data..................31 3 Levcor Unaudited Pro Forma Consolidated Financial Data...................32 Unaudited Pro Forma Consolidated Balance Sheet...........................33 Unaudited Pro Forma Consolidated Statements of Income....................34 Notes To Unaudited Pro Forma Consolidated Financial Statements...........36 RISK FACTORS..................................................................40 Risks Related To The Merger..............................................40 Risks Specific To Levcor.................................................44 Risks Specific To Carlyle................................................45 Risk Related To Levcor And Carlyle As A Combined Company.................46 Investment Risks.........................................................46 INFORMATION REGARDING FORWARD-LOOKING STATEMENTS..............................49 THE LEVCOR ANNUAL MEETING.....................................................51 Date, Time And Place Of Annual Meeting...................................51 Matters To Be Considered At Annual Meeting...............................51 Record Date For Voting To Approve And Adopt The Merger;1 Stockholders Entitled To Vote .........................................51 Voting And Revocation Of Proxies.........................................52 Stockholder Vote Is Required To Approve And Adopt The Merger Agreement And The Additional Proposals.................................52 Board Recommendation.....................................................53 Solicitation Of Proxies; Expenses........................................54 THE CARLYLE SPECIAL MEETING...................................................55 Date, Time And Place Of Special Meeting..................................55 Matters To Be Considered At Special Meeting..............................55 Record Date For Voting; Stockholders Entitled To Vote....................55 Voting And Revocation Of Proxies.........................................55 Stockholder Vote Is Required To Approve And Adopt The Merger Agreement And The Additional Proposals.................................56 Board Recommendation.....................................................56 Solicitation Of Proxies; Expenses........................................57 THE MERGER....................................................................58 Completion Of The Merger.................................................58 Exchanging Your Stock Certificates.......................................58 Background Of The Merger.................................................58 Levcor's Reasons For The Merger..........................................62 Recommendation Of Levcor's Board Of Directors............................65 Carlyle's Reasons For The Merger.........................................65 Recommendation Of Carlyle's Board Of Directors...........................68 Opinion Of Levcor's Financial Advisor....................................68 Opinion Of Carlyle's Financial Advisor...................................74 Internal Financial Projections...........................................85 4 Other Conflicts..........................................................87 Appraisal Rights Of Dissenting Carlyle Stockholders......................87 Federal Income Tax Considerations........................................92 Completion And Effectiveness Of The Merger...............................94 Anticipated Accounting Treatment.........................................94 Deregistration Of Carlyle Common Stock...................................94 Restriction On Resales Of Levcor Common Stock and Levcor Series A Preferred Stock .......................................................94 Operations After The Merger..............................................94 THE MERGER AGREEMENT..........................................................95 The Merger...............................................................95 The Effective Time.......................................................95 Conversion Of Shares In The Merger.......................................95 The Exchange Agent.......................................................95 Procedures For Exchanging Stock Certificates.............................95 Holders Of Carlyle Stock Should Not Surrender Their Carlyle Stock Certificates Until They Receive The Letter Of Transmittal From The Exchange Agreement ................................................95 Distributions With Respect To Unexchanged Shares.........................96 No Fractional Shares.....................................................96 Dissenting Shares........................................................96 Representations And Warranties...........................................96 Concept Of Material Adverse Effect.......................................97 Covenants Of Carlyle.....................................................98 Conditions To The Merger................................................100 No Solicitation.........................................................102 Termination Of The Merger Agreement.....................................102 Fee, Expenses And Other Payments........................................103 Amendment Or Waiver Of The Merger Agreement.............................104 ADDITIONAL PROPOSALS.........................................................105 Amendment And Restatement Of The Levcor Certificate Of Incorporation .....................................................105 Election Of Levcor Directors............................................113 Approval Of 2002 Stock Option Plan......................................115 Election Of Directors If The Merger Is Not Consummated..................120 Ratification Of Appointment Of Independent Auditors.....................122 Levcor Grant Of Authority To Adjourn Or Postpone The Annual Meeting ...................................................123 Carlyle Grant Of Authority To Adjourn Or Postpone The Special Meeting ..................................................123 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF LEVCOR ..............................................124 General.................................................................124 Critical Accounting Policies ...........................................124 Results Of Operations...................................................125 Liquidity And Capital Resources.........................................127 Current Accounting Issues...............................................129 5 BUSINESS OF LEVCOR...........................................................129 MANAGEMENT OF LEVCOR.........................................................131 Directors And Executive Officers........................................131 Director Compensation...................................................131 Executive Compensation..................................................131 Board Of Directors Interlocks And Insider Participation.................133 The Board Of Directors And Its Committees...............................133 OTHER LEVCOR MATTERS.........................................................133 Security Ownership Of Certain Beneficial Owners Of Levcor...............133 Related Party Transactions..............................................134 Levcor Market Price and Dividend Data...................................135 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CARLYLE .......................................136 General.................................................................136 Critical Accounting Policies ...........................................136 Results Of Operations...................................................138 Liquidity And Capital Resources.........................................142 Current Accounting Issues...............................................145 BUSINESS OF CARLYLE..........................................................145 MANAGEMENT OF CARLYLE........................................................147 Directors And Executive Officers........................................147 Directors Compensation..................................................148 Executive Compensation..................................................148 Option Grants During The Fiscal Year 2001 ..............................148 Aggregate Option Exercises and Fiscal Year-End Option Values ...........149 Employment/Separation/Consulting Agreements ............................149 Board Of Directors Interlocks And Insider Participation.................150 The Board Of Directors And Its Committees...............................150 OTHER CARLYLE MATTERS........................................................152 Security Ownership Of Certain Beneficial Owners Of Carlyle..............152 Carlyle Market Price And Dividend Data..................................154 Stockholders............................................................154 Legal Proceedings.......................................................155 Environmental Matters...................................................155 6 FUTURE STOCKHOLDER PROPOSALS.................................................157 OTHER MATTERS................................................................157 LEGAL MATTERS................................................................157 INDEPENDENT ACCOUNTANTS......................................................157 WHERE YOU CAN FIND MORE INFORMATION..........................................158 FINANCIAL STATEMENTS OF LEVCOR............................................F1 - 1 FINANCIAL STATEMENTS OF CARLYLE...........................................F2 - 1 APPENDIX A: AGREEMENT AND PLAN OF MERGER...................................A - 1 APPENDIX B: SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW............B - 1 APPENDIX C: FAIRNESS OPINION OF WILLAMETTE MANAGEMENT ASSOCIATES...........C - 1 APPENDIX D: FAIRNESS OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN..............D - 1 APPENDIX E: LEVCOR 2002 STOCK OPTION PLAN..................................E - 1 7 QUESTIONS AND ANSWERS ABOUT THE MERGER The following questions and answers are intended to address briefly some commonly asked questions regarding the merger. These questions and answers may not address all questions that may be important to you. Please refer to the more detailed information contained elsewhere in this joint proxy statement/prospectus, and the appendices to this joint proxy statement/prospectus. Q: WHERE AND WHEN ARE THE STOCKHOLDER MEETINGS? A: The Levcor annual meeting and the Carlyle special meeting will each take place on December 31, 2002, at 10:00 a.m. and 11:00 a.m., respectively. Both meetings will take place at the offices of Katten Muchin Zavis Rosenman, 575 Madison Avenue, New York, New York 10022. Q: WHAT WILL I RECEIVE IN THE MERGER? A: LEVCOR STOCKHOLDERS: The Levcor common stock will not be changed or converted in the merger and will remain outstanding after the merger. CARLYLE STOCKHOLDERS: You will receive one share of Levcor common stock for each five shares of Carlyle common stock you hold and one share of a new class of Levcor preferred stock, designated as Series A preferred stock, for each share of Carlyle Series B preferred stock that you hold. For example, if you own 100 shares of Carlyle common stock, you will receive 20 shares of Levcor common stock in exchange for your shares. Each outstanding option to purchase shares of Carlyle common stock will be assumed by Levcor on the same ratio, and the exercise price will be increased by five times its current price. Levcor will not issue fractional shares of common stock. Instead, Carlyle stockholders who would otherwise be entitled to receive a fractional share of Levcor common or Series A preferred stock will have their fractional share interest rounded up to the nearest whole share. The number of shares of Levcor common stock and Levcor Series A preferred stock to be issued in the merger will not be adjusted based upon changes in the value of Levcor common stock or Carlyle common stock or Carlyle Series B preferred stock. As a result, the value of Levcor stock that you receive in the merger will not be determined at the time you vote on the merger and its value will go up or down as the market price of Levcor common stock goes up or down. The following table reflects the values of Levcor common stock that you, the Carlyle stockholder, will receive per share of Carlyle common stock for various market prices of Levcor common stock and based on the exchange ratio of one share of Levcor common stock for each five shares of Carlyle common stock you hold. Levcor's common stock price is volatile and is traded thinly. The values shown are purely hypothetical, and the 8 actual market price and the corresponding value of Levcor common stock that you may receive in the merger may be more or less than the range of values shown in the tables. MARKET PRICE PER SHARE OF MERGER VALUE PER SHARE OF LEVCOR COMMON STOCK CARLYLE COMMON STOCK ------------------------- ------------------------- $.80 $.16 $1.00 $.20 $1.20 $.24 $1.40 $.28 $1.60 $.32 $1.80 $.36 $2.00 $.40 $2.30 $.46 $2.60 $.52 $2.90 $.58 $3.20 $.64 On December 4, 2002, the closing price of Levcor common stock was $1.55 per share and the closing price of Carlyle was $.49 per share. Neither party is permitted to terminate the merger agreement based solely on changes in the value of either Levcor common stock or Carlyle common stock prior to the closing of the merger. There is no existing public market for Carlyle's Series B preferred stock and Levcor does not expect to list its Series A preferred stock on any securities exchange. Q: HOW DOES MY BOARD OF DIRECTORS RECOMMEND THAT I VOTE? A: Both Levcor's and Carlyle's boards of directors unanimously recommend that their stockholders vote to approve and adopt the merger agreement. Q: WHAT RISKS SHOULD I CONSIDER IN DECIDING WHETHER TO APPROVE AND ADOPT THE MERGER AGREEMENT? A: In evaluating the merger, you should carefully read this joint proxy statement/prospectus and especially consider the factors discussed in the section entitled "Risk Factors" beginning on page 40. Q: IF LEVCOR IS NOT ITSELF MERGING, WHY ARE LEVCOR'S STOCKHOLDERS BEING ASKED TO VOTE? A: Pursuant to the Delaware General Corporation Law, the vote of the Levcor stockholders is necessary to approve and adopt the merger agreement. The approval and adoption of the merger agreement will result in the election of six persons proposed to serve as directors of Levcor and will also result in amending and restating Levcor's certificate of incorporation to provide for the creation and issuance of a new class of Levcor preferred stock, designated as Series A preferred stock, to be given to the Carlyle Series B preferred stockholders in exchange for their shares of Carlyle Series B preferred stock. In any event, the Levcor meeting is an annual meeting, and at such meeting you will also 9 be asked to vote on the approval of the Levcor 2002 Stock Option Plan, and to vote on whether to ratify the appointment of Friedman Alpren & Green LLP as independent auditors of Levcor for fiscal year 2002. You will also be asked to elect three persons to serve as directors of Levcor, if the merger is not consummated. 10 SUMMARY THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION THAT IS PROVIDED IN GREATER DETAIL ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS. EVEN THOUGH WE HAVE HIGHLIGHTED FOR YOU WHAT WE BELIEVE IS THE MOST IMPORTANT INFORMATION, LEVCOR AND CARLYLE ENCOURAGE YOU TO CAREFULLY READ THE ENTIRE JOINT PROXY STATEMENT/PROSPECTUS FOR A COMPLETE UNDERSTANDING OF THE PROPOSED MERGER. THE PARTIES TO THE MERGER Levcor International, Inc. 462 Seventh Avenue New York, New York 10018 (212) 354-8500 In 1995, Levcor acquired a woven fabric converting business that converts cotton, synthetics and blend fabrics for sale to domestic apparel manufacturers. This acquisition formed the basis of Levcor's current business. In 1999, Levcor purchased a knit fabric and processing business that produces knit fabrics used in the production of apparel, and during 2000, Levcor started a new woven division selling to the dress market. Levcor is engaged in converting woven textile fabrics and processing knit textile fabrics which are sold for production principally to manufacturers of women's apparel. Carlyle Industries, Inc. 1 Palmer Terrace Carlstadt, New Jersey 07072 (201) 935-6220 Carlyle and its subsidiaries manufacture, package and distribute buttons, embellishments, and gift and craft products. Carlyle's business is conducted principally through three subsidiaries: Blumenthal Lansing Company, Inc., Westwater Industries, Inc. and Button Fashion B.V. Carlyle's products are sold to mass merchandisers, specialty chains and independent retailers and wholesalers. Carlyle's button products are sold primarily for use in the home sewing market where buttons are used for garment construction, replacement and the upgrading and restyling of ready-to-wear clothing. Carlyle also produces and distributes a private-label button line for one of the nations best known retailers, and markets complementary product lines, including trimmings, appliques, craft kits and fashion and jewelry accessories, to its home sewing and craft customers. PURPOSE AND STRUCTURE OF THE MERGER Levcor and Carlyle have entered into an Agreement and Plan of Merger that sets forth the terms of the proposed merger of Levcor and Carlyle. If the merger agreement is approved and adopted, Carlyle will merge with and into Levcor. Carlyle stockholders will become stockholders of Levcor following the merger. Each five shares of Carlyle common stock will be 11 exchanged for one share of Levcor common stock and each share of Carlyle Series B preferred stock will be exchanged for one share of a new class of Levcor preferred stock, designated as Series A preferred stock, and the certificate of incorporation of Levcor will be amended and restated. Also, if the merger is completed, six persons will be elected to serve as directors of Levcor until the next Levcor annual meeting or until their successors are duly elected and qualified. Upon completion of the merger, the vesting of 1,100,000 outstanding options to purchase shares of Carlyle common stock granted to Carlyle's employees, officers and directors will accelerate and become immediately exercisable, and each outstanding option to purchase shares of Carlyle common stock will be assumed by Levcor appropriately adjusted by the merger exchange ratio. Because Carlyle will be treated as the acquirer for accounting purposes, upon the consummation of the merger Carlyle will assume approximately $4.935 million of Levcor's debt consisting of accounts payable and accrued expenses of $1.158 million, long-term debt of $3 million and a loan payable to Robert A. Levinson, a stockholder, officer and director of Levcor, in the amount of approximately $777,000 (notwithstanding the fact that as a legal matter, Carlyle is merging into Levcor and, upon the consummation of the merger Levcor will assume approximately $18.3 million of Carlyle's revolving credit and long-term debt and an obligation commencing June 15, 2007 to redeem the Carlyle Series B preferred stock, which approximated $4.6 million at September 30, 2002). The affirmative vote of at least a majority of the outstanding Levcor common stock entitled to vote at the Levcor annual meeting, as well as the affirmative vote of at least a majority of the outstanding Carlyle common stock and Carlyle Series B preferred stock, voting together as a class, must approve and adopt the merger agreement. The following table identifies the relative voting rights of Levcor and Carlyle stockholders in the combined entity after the effective time of the merger: Combined Entity % --------- ----- Levcor common stockholders 2,338,194 35.9 Levcor options 262,400 4.0 --------- ----- 2,600,594 39.9 Carlyle common stockholders 2,786,972 42.8 Carlyle preferred stockholders 911,001 14.0 Carlyle options 220,000 3.3 --------- ----- 3,917,973 60.1 6,518,567 100.0 ========= ===== AMENDMENT AND RESTATEMENT OF LEVCOR'S CERTIFICATE OF INCORPORATION In connection with the proposal to approve and adopt the merger agreement, the holders of Levcor common stock will also be asked to approve a proposal to amend and restate Levcor's certificate of incorporation. The merger agreement provides that each share of Carlyle Series B preferred stock will be exchanged for one share of a new class of Levcor preferred stock, which has been designated as Series A preferred stock. The Levcor common stockholders will be asked to amend and restate the Levcor certificate of incorporation in order to provide for the creation and issuance of the Levcor Series A preferred stock to be issued in exchange for the Carlyle Series B preferred stock. Following completion of the merger and amendment and restatement of the Levcor certificate of incorporation, 8,000,000 shares of preferred stock, par value $0.01 per share will be authorized, of which 4,555,007 shares shall be designated as Series A preferred stock. In addition to the creation of the Series A preferred stock, the amendment and restatement of the Levcor certificate of incorporation will also result in the par value of the Levcor common stock being changed from $.056 per share to $.01 share. Pursuant to the merger, Levcor is issuing additional capital stock. Lowering the par value of the stock will reduce the fee that Levcor must pay when it authorizes the increase in the common stock. The reduction in par value, however, will have no effect on the value of your shares, and will also have no effect on Levcor's total capital. The Levcor common stock and the Levcor Series A preferred stock shall vote together as a single class. Each holder of the common stock will have one vote for each share of common stock held, and each holder of Series A preferred stock will have a 1/5 vote for each share of Series A preferred stock held. In connection with the creation of the Levcor Series A preferred stock, certain powers, preferences and rights will be afforded to such shares similar to the powers, preferences and rights currently afforded to the Carlyle Series B preferred stock. Holders of Levcor Series A preferred stock will be entitled to receive dividends at a rate of $.06 per annum per share, if any, as may be declared by the Levcor board of directors out of legally available funds. Such dividends shall be payable quarterly on March 15, June 15, September 15 and December 15 of each year. Quarterly dividends which are not paid in full in cash on any dividend payment date will acccumulate without interest. If Levcor liquidates, dissolves or winds up, the holders of Levcor Series A preferred stock will be entitled to receive payment of $1 per share held by them, 12 plus an amount in cash equal to all accrued and unpaid dividends thereon. The Levcor Series A preferred stock shall be subject to mandatory redemption, to the extent Levcor may lawfully do so, in three equal annual installments on June 15, 2007, June 15, 2008 and June 15, 2009, in each case, from funds legally available therefor, at a price per share of Series A preferred stock equal to $1 per share, together with an amount representing accrued and unpaid dividends, whether or not declared, to the date of redemption. The affirmative vote of at least a majority of the outstanding Levcor common stock entitled to vote at the Levcor annual meeting is required to approve the amended and restated certificate of incorporation, and the approval by the Levcor common stockholders of this proposal is required for the consummation of the merger. ELECTION OF LEVCOR DIRECTORS In connection with the proposal to approve and adopt the merger agreement, the holders of Levcor common stock will also be asked to elect six persons to serve as directors of Levcor until the next annual meeting or until their successors have been elected and qualified. Set forth below is each person who will serve as a director of Levcor upon election by the Levcor common stockholders, along with the office title, if any, that each director shall hold upon the effective time of the merger. NAME AGE TITLE ---- --- ----- Robert A. Levinson 76 Chairman of the Board of Directors, President and Chief Executive Officer Edward F. Cooke 48 Chief Financial Officer, Vice President, Secretary, Treasurer and Director Joseph S. DiMartino 58 Director Giandomenico Picco 53 Director John McConnaughy 72 Director Edward H. Cohen 63 Director The election of the Levcor directors requires the affirmative vote of a plurality of the votes of the shares of Levcor common stock present in person or represented by proxy at the meeting, and the approval by the Levcor common stockholders of each of the above listed candidates to serve as a director of Levcor is required for the consummation of the merger. For additional information regarding each person who will serve as a director of Levcor upon approval by the Levcor common stockholders, including information furnished by each of the 13 candidates as to principal occupations and certain other directorships held by them, please refer to the section entitled "Election of Levcor Directors" on Page 113. LEVCOR 2002 STOCK OPTION PLAN In connection with the proposal to approve and adopt the merger agreement, the holders of Levcor common stock will also be asked to approve the Levcor 2002 Stock Option Plan. The 2002 Stock Option Plan will provide Levcor with sufficient shares to enable Levcor to assume the outstanding Carlyle stock options and to grant stock options to Levcor employees, officers, directors and independent contractors after the merger. The 2002 Stock Option Plan authorizes the grant of options to purchase up to an aggregate of 550,000 shares of common stock to employees and officers of Levcor, as well as directors of Levcor who are not employees. As contemplated by the merger agreement, Levcor will assume each of the outstanding Carlyle options, with the number of such options and their corresponding exercise price to be appropriately adjusted, on substantially the same terms and conditions as the outstanding Carlyle options. Levcor will be assuming 1,100,000 outstanding Carlyle stock options resulting in Levcor issuing 220,000 options under the 2002 Stock Option Plan in connection with such assumption. The Levcor board of directors has adopted the 2002 Stock Option Plan, but the adoption of the Plan is subject to approval by the affirmative vote of the majority of shares present in person or represented by proxy at the meeting, and the approval by the Levcor common stockholders of the 2002 Stock Option Plan is required for the consummation of the merger. For additional information regarding the Levcor 2002 Stock Option Plan, please refer to the section entitled "Approval of 2002 Stock Option Plan" on Page 115. APPOINTMENT OF INDEPENDENT AUDITORS Whether or not the merger agreement is adopted and approved, the Levcor stockholders will be asked to ratify the appointment of Friedman Alpren & Green LLP as Levcor's independent auditors for fiscal year 2002. Friedman Alpren & Green first served as Levcor's independent auditors during the fiscal year 2001. The board of directors of Levcor has selected Friedman Alpren & Green, and is submitting this matter to the Levcor stockholders for their ratification. The appointment by the board of directors of Friedman Alpren & Green can only be ratified by the affirmative vote of the majority of shares present in person or represented by proxy at the meeting. For additional information regarding the selection of Friedman Alpren & Green, please refer to the section entitled "Ratification of Appointment of Independent Auditors" on Page 122. ELECTION OF LEVCOR DIRECTORS IF THE MERGER IS NOT CONSUMMATED In the event that the merger agreement is not adopted and approved, or the merger is not subsequently consummated for any other reason, the Levcor common stockholders will be asked to vote on whether to elect three persons to serve as directors of Levcor, for a term of one year expiring at the next Levcor annual meeting of stockholders and until their respective successors shall have been duly elected and qualified. Each of the nominees have previously been elected as a director of Levcor. Set forth below is each person who will serve as a director of Levcor upon election by the Levcor common stockholders in the event that the merger is not 14 consummated and such election is held, along with his title as an officer, if any, that each director shall hold upon the effective time of the merger. NAME AGE TITLE ---- --- ----- Robert A. Levinson 76 Chairman of the Board of Directors, President, Secretary and Principal Financial Officer Edward H. Cohen 63 Director John McConnaughy 72 Director In the event that the merger is not consummated and the election for the above three nominees is held, the election of the three Levcor directors requires the affirmative vote of a plurality of the votes of the shares of Levcor common stock present in person or represented by proxy at the meeting. For additional information regarding each person who will serve as a director of Levcor upon approval by the Levcor common stockholders in the event that the merger is not consummated and such alternative election is held, including information furnished by each of the candidates as to principal occupations and certain other directorships held by them, please refer to the section entitled "Election of Directors if the Merger is not Consummated" on Page 120. LEVCOR GRANT OF AUTHORITY TO ADJOURN OR POSTPONE THE ANNUAL MEETING If there are not sufficient votes at the originally scheduled time of the Levcor annual meeting to approve each proposal, the Levcor stockholders will be asked to vote on whether to grant to the Levcor board of directors the discretionary authority to adjourn or postpone the annual meeting, in order to permit Levcor to solicit additional proxies for adoption and approval of the merger agreement, as well as for approval of each of the other proposals. The grant to the Levcor board of directors of discretionary authority to adjourn or postpone the Levcor annual meeting can only be approved by the affirmative vote of the majority of shares present in person or represented by proxy at the meeting. CARLYLE GRANT OF AUTHORITY TO ADJOURN OR POSTPONE THE SPECIAL MEETING If there are not sufficient votes at the originally scheduled time of the Carlyle special meeting to approve and adopt the merger agreement, the Carlyle stockholders will be asked to vote on whether to grant to the Carlyle board of directors the discretionary authority to adjourn or postpone the special meeting, in order to permit Carlyle to solicit additional proxies for adoption and approval of the merger agreement. The grant to the Carlyle board of directors of discretionary authority to adjourn or postpone the Carlyle special meeting can be approved by the affirmative vote of the majority of shares present in person or represented by proxy at the Carlyle special meeting. 15 LEVCOR STOCKHOLDER APPROVAL A failure to vote on either (i) the approval and adoption of the agreement and plan of merger, (ii) the approval of the amendment and restatement of the certificate of incorporation, (iii) the approval of the Levcor 2002 Stock Option Plan, or (iv) the election of the six named persons to serve as directors of Levcor will have the same effect as voting against all such proposals. Levcor stockholders may cast one vote for each share of Levcor common stock held at the close of business on November 21, 2002. On that date, Levcor's directors and executive officers and their affiliates beneficially owned approximately 893,691 shares of Levcor common stock entitling them to exercise about 35% of the voting power of the Levcor common stock entitled to vote at the annual meeting. All such persons have indicated they will vote all their shares in favor of the merger. CARLYLE STOCKHOLDER APPROVAL A failure to vote will have the same effect as voting against the approval and adoption of the merger agreement. Carlyle stockholders may cast one vote for each share of Carlyle common stock and one vote for each share of Carlyle Series B preferred stock held at the close of business on November 21, 2002. On that date, Carlyle's directors and executive officers and their affiliates beneficially owned approximately 3,221,273 shares of Carlyle common stock and approximately 4,479,485 shares of Carlyle Series B preferred stock entitling them to exercise about 39.2% of the voting power entitled to vote at the special meeting. All such persons have indicated they will vote all their shares in favor of the merger. VOTING SHARES HELD BY YOUR BROKER IN STREET NAME Your broker will vote your shares only if you provide instructions on how to vote. If you do not instruct your broker on how to vote, your shares will not be voted at the meetings and it will have the same effect as voting against approval and adoption of the merger agreement. CHANGING YOUR VOTE If you want to change your vote, send a later-dated, signed proxy card to the secretary of Levcor or Carlyle, as applicable, before the respective meetings or attend the respective meetings in person and vote. You may also revoke your proxy by sending written notice to the secretary of Levcor or Carlyle, as applicable, before the respective meetings of Levcor or Carlyle. COMPLETION OF THE MERGER Assuming approval and adoption of the merger agreement and the satisfaction or waiver of all other conditions of the merger agreement, we anticipate that the merger will occur on the date of the meetings or within a few days following the meetings. 16 EXCHANGING YOUR STOCK CERTIFICATES If you are a Carlyle stockholder, do not send in your stock certificates now. After the merger is completed, we will send you written instructions for exchanging your Carlyle stock certificates for Levcor stock certificates. LEVCOR'S REASONS FOR THE MERGER; RECOMMENDATION OF LEVCOR'S BOARD After careful consideration, Levcor's board of directors has determined that the terms of the merger are fair to, and in the best interests of, Levcor and its stockholders. In reaching its decision, Levcor's board of directors identified several potential benefits of the merger, the most important of which included: o Levcor's stockholders will have the opportunity to participate in the potential growth of the combined company after the merger; o Carlyle's expertise may provide Levcor the opportunity to expand its product offerings, business and customer base to retail markets; o Levcor will have the opportunity to expand its access to distribution channels; o Levcor will save on certain administrative costs as a result of the merger; o Because the merger will not result in an ownership change of greater than 50% it is possible that Levcor's substantial history of net operating losses might be utilized by the combined company to offset the earnings of Carlyle; o As a result of the merger, Levcor's common stock may have a higher degree of liquidity and marketability principally as a result of the combined company having: (i) a larger number of shares outstanding, (ii) a greater "float", (iii) a larger number of stockholders, (iv) a larger size as measured by size of assets, revenues, and cash flow, and (v) increased diversification of products and markets; and o Being part of a combined company will reduce the risks of continuing as a relatively small company in an industry that is rapidly consolidating and increasingly competitive. LEVCOR'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. CARLYLE'S REASONS FOR THE MERGER; RECOMMENDATION OF CARLYLE'S BOARD After careful consideration, Carlyle's board of directors has determined that the terms of the merger are fair to, and in the best interests of, Carlyle and its stockholders. In reaching its decision, Carlyle's board of directors identified several potential benefits of the merger, the most important of which included: 17 o As a result of the merger, the Levcor common stock that the holders of Carlyle common stock will receive in the merger may have a higher degree of liquidity and marketability principally as a result of the combined company having: (i) a larger number of shares outstanding, (ii) a greater "float", (iii) a larger number of stockholders, (iv) a larger size as measured by size of assets, revenues, and cash flow, and (v) increased diversification of products and markets; o The anticipated exchange ratio in the merger represented a premium of approximately 71% over the average closing price for Carlyle common stock over the 20-day trading period ending on May 15, 2002, the last trading day before the agreement in principle between Levcor and Carlyle was publicly announced; o Combining with Levcor will increase the financial resources, business and customer relationships and opportunities available to Carlyle; o Levcor's expertise may provide Carlyle the opportunity to expand its product offerings, business and customer base to wholesale markets; o The combined larger company should provide better access to credit markets which is necessary to facilitate growth; and o Carlyle's stockholders will have the opportunity to participate in the growth of the combined company after the merger. CARLYLE'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. COMPARATIVE PER SHARE COMMON STOCK DATA The following tables present certain historical per share data and combined per share data on an unaudited pro forma basis after giving effect to the merger using the purchase method of accounting and assuming one share of Levcor common stock is issued in exchange for each five shares of Carlyle common stock and one share of Levcor Series A preferred stock is issued in exchange for each share of Carlyle Series B preferred stock. This data should be read along with the selected historical consolidated financial data of Levcor and Carlyle and the historical consolidated financial statements of Levcor and Carlyle and the notes thereto included in this joint proxy statement/prospectus. The unaudited pro forma information is presented for illustrative purposes only. You should not rely on the unaudited pro forma financial information as an indication of the combined financial position or results of operations of future periods or the results that actually would have been realized had the entities been a single entity during the periods presented. The historical book value per share of common stock information presented is computed by dividing total common stockholders' equity for each of Levcor or Carlyle by the number of shares of Levcor or Carlyle common stock, respectively, outstanding as of the balance sheet date. 18 The pro forma book value per share of common stock information presented is computed by dividing pro forma common stockholders' equity by the pro forma number of shares of common stock outstanding. The pro forma combined net income per share information is computed by dividing the pro forma combined net income by the pro forma weighted average shares of common shares outstanding during each period. 19
---------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2001 ---------------------------------------------------------------------------------------- LEVCOR CARLYLE ------------------------------------------ --------------------------------------------- PRO FORMA EQUIVALENT HISTORICAL COMBINED DIFFERENCE HISTORICAL (1) PRO FORMA DIFFERENCE -------------- ------------- ------------- ------------- ---------------- -------------- Net income from continuing operations per share of common stock Basic .................... $.08 $.31 $.23 $.05 $.06 $.01 Diluted .................. .08 .30 .22 .05 .06 .01 ------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2002 ------------------------------------------------------------------------------------- LEVCOR CARLYLE --------------------------------------- --------------------------------------------- PRO FORMA EQUIVALENT HISTORICAL COMBINED DIFFERENCE HISTORICAL (1) PRO FORMA DIFFERENCE ----------- ------------- ------------- ------------- ---------------- -------------- Net income from continuing operations per share of common stock Basic............................ $(.19) $.13 $.32 $.05 $.03 $(.02) Diluted.......................... (.18) .13 .31 .05 .03 (.02) Book value per share of Common stock............. (1.08) .63 1.71 (.24) .13 .37
Book value per share is obtained by dividing each company's net worth/stockholders ' deficiency by the actual number of shares outstanding, and net income applicable to common shares by the weighted average number of shares outstanding, respectively. Equivalent pro forma amounts are Carlyle's pro forma values adjusted for a one-for-five reverse split. (1) On the historical financial statements for the year ended December 31, 2001 and the nine months ended September 30, 2002, Carlyle reported earnings per share of five cents for both basic and diluted earnings per share from continuing operations for each period based on actual weighted average shares outstanding. COMPARATIVE MARKET DATA The following table sets forth the closing sales prices per share of Levcor common stock on the OTC Bulletin Board and the closing sales prices per share of the Carlyle common stock on the OTC Bulletin Board on (1) May 15, 2002, the last full trading date prior to the public announcement of the merger, and (2) December 4, 2002, the latest practicable trading day before the printing of this joint proxy statement/prospectus. The table presents the value of the equivalent Carlyle per share price as of the dates indicated, and is determined by multiplying the price of one share of Levcor common stock as of such date by 0.2, the exchange ratio set forth in the merger agreement, and represents what the market value of one share of Carlyle's common stock would have been if the merger had been consummated on or prior to such day. Implied Per Share Date Levcor Carlyle Value of Carlyle ---- Common Stock Common Stock Common Stock May 15, 2002 $3.10 $.21 $.62 December 4, 2002 $1.55 $.49 $.31 No assurance can be given as to the market prices of Levcor or Carlyle stock at any time before the closing of the merger or as to the market price of Levcor common stock at any time thereafter. The exchange ratio will not be adjusted to compensate Carlyle stockholders for decreases in the market price of Levcor common stock which could occur before the merger 20 becomes effective. If the market price of Levcor common stock decreases or increases prior to the effective time of the merger, the market value of Levcor common stock to be received in the merger in exchange for Carlyle common stock will correspondingly decrease or increase. Stockholders of Carlyle and Levcor are urged to obtain current market quotations of Carlyle common stock and Levcor common stock. There is no existing public market for Carlyle's Series B preferred stock and Levcor does not expect to list its Series A preferred stock on any securities exchange. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF LEVCOR UPON THE EFFECTIVE TIME OF THE MERGER The following table sets forth information with respect to the anticipated beneficial ownership of Levcor's capital stock upon the effective time of the merger, by (a) each person anticipated by Levcor to be the beneficial owner of more than 5% of Levcor's outstanding voting securities, (b) each person expected to serve as a director of Levcor, (c) each person expected to be an executive officer of Levcor, and (d) all such executive officers and directors as a group (6 persons).
COMMON STOCK SERIES A PREFERRED STOCK ------------------------- ------------------------- PERCENT OF AMOUNT OF AMOUNT OF AGGREGATE SHARES SHARES VOTING POWER NAME AND ADDRESS OF BENEFICIALLY PERCENT BENEFICIALLY PERCENT OF CAPITAL BENEFICIAL OWNER OWNED OF CLASS OWNED OF CLASS STOCK ------------------- ------------ ------- ------------ ------- ------------ Robert A. Levinson(1) (2)......... 1,338,860 25.6% 4,479,485 98.3% 35.3% 462 Seventh Ave New York, NY 10018 GAMCO Investors, Inc (3).......... 401,906 7.8% -- -- 6.7% Corporate Center Rye, NY 10580 Edward H. Cohen, Esq. (4) (5) (6). 111,691 2.2% -- -- 1.8% c/o KMZ Rosenman 575 Madison Avenue New York, NY 10022 John McConnaughy (7).............. 32,825 * -- -- * 1011 High Ridge Road Stamford, CT 06905 Edward F. Cooke (8)............... 69,600 1.1% -- -- * c/o Carlyle Industries, Inc. 1 Palmer Terrace Carlstadt, NJ 07072 Joseph S. DiMartino (9)........... 3,200 * -- -- * c/o Dreyfus Corporation 200 Park Avenue, 10th Floor New York, NY 10166 Giandomenico Picco................ -- -- -- -- -- c/o GDP Associates 950 Third Avenue - Suite 1800 New York, NY 10022 All directors and................. 1,556,176 29.2% 4,479,485 98.3% 37.4% executive officers as a group (6 persons) (10)
21 ---------- *Less than 1% of the aggregate votes entitled to be cast. (1) Includes: (i) 498,693 shares of common stock held of record by Mr. Levinson; (ii) 419,746 shares of common stock held by Swenvest Corporation, as to which Mr. Levinson has sole voting and investment power; (iii) 15,000 shares of common stock held by three trusts for the benefit of Mr. Levinson's children, as to all of which trusts Mr. Levinson serves as co-trustee; and (iv) 105,200 shares of common stock which Mr. Levinson could acquire on or within 60 days after November 21, 2002 upon the exercise of stock options. (2) Includes 4,479,485 shares of preferred stock held by Swenvest Corporation, as to which Mr. Levinson has sole voting and investment power. (3) Represents shares held by GAMCO Investors, Inc. and various other entities which are directly or indirectly controlled by Mario J. Gabelli and for which he acts as chief investment officer, including registered investment companies and pension plans. This information is based solely upon the contents of a filing on Schedule 13D dated February 15, 2000, made by Mario J. Gabelli and related entities with the Securities and Exchange Commission. (4) Includes 2,050 shares subject to currently exercisable options which are held by Mr. Cohen for the benefit of his law firm, Katten Muchin Zavis Rosenman. (5) Includes 101,741 shares owned by Katten Muchin Zavis Rosenman, of which Mr. Cohen is counsel. (6) Mr. Cohen disclaims beneficial ownership of all shares of Levcor common stock and options to purchase shares of Levcor common stock he holds for the benefit of Katten Muchin Zavis Rosenman. (7) Includes 22,850 shares subject to currently exercisable options. (8) Includes 4,220 shares held of record by Mr. Cooke and 60,400 shares subject to currently exercisable options. (9) Includes 3,200 shares subject to currently exercisable options. (10) Includes 193,700 shares of common stock subject to currently exercisable options. OPINION OF LEVCOR'S FINANCIAL ADVISOR In deciding to approve the merger, Levcor's board of directors considered the opinion of Willamette Management Associates, its financial advisor, that, as of the date of the merger agreement, the exchange ratio and the consideration to be paid was fair, from a financial point of view, to the holders of Levcor common stock. The opinion was provided for the information and assistance of Levcor's board of directors in connection with the merger and does not constitute a recommendation as to how any stockholder of Levcor should vote with respect to the approval and adoption of the merger agreement. The full text of the written opinion of Willamette, which sets forth assumptions made, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Appendix C. You are urged to read the Willamette opinion in its entirety. OPINION OF CARLYLE'S FINANCIAL ADVISOR In deciding to approve the merger, Carlyle's board of directors considered the opinion of Houlihan Lokey Howard & Zukin, its financial advisor, that, as of the date of the merger agreement, the consideration to be received in the merger by Carlyle's holders of common stock 22 was fair to them from a financial point of view. The opinion was provided for the information and assistance of Carlyle's board of directors in connection with the merger and does not constitute a recommendation as to how any stockholder of Carlyle should vote with respect to the approval and adoption of the merger agreement. The full text of the written opinion of Houlihan Lokey, which sets forth assumptions made, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Appendix D. You are urged to read the Houlihan Lokey opinion in its entirety. INTERESTS OF CERTAIN PERSONS IN THE MERGER In considering the boards of directors' recommendation that you vote to approve and adopt the merger agreement, you should note that certain officers and directors of Levcor and Carlyle have interests in the merger that are different from, or in addition to, your interests. As a result, directors and officers may be more likely to vote to approve and adopt the merger agreement than stockholders generally. Robert A. Levinson serves as the Chairman of the board of directors, President, Secretary and Principal Financial Officer of Levcor while also serving as the Chairman of the board of directors, President and Chief Executive Officer of Carlyle. Mr. Levinson is a significant holder of Carlyle's Series B preferred stock, owning approximately 98.3% of the outstanding Carlyle Series B preferred. Furthermore, Mr. Levinson is entitled to exercise approximately 29.9% of the voting power of the Levcor common and approximately 38.7% of the voting power of the Carlyle capital stock entitled to vote at the respective meetings. Robert Levinson will continue to be an executive officer of Levcor after the merger, serving as both President and Chief Executive Officer. Additionally, all three of the current members of Levcor's board of directors will continue to serve as directors after the merger. Upon completion of the merger, Edward F. Cooke, Joseph S. DiMartino and Giandomenico Picco, all of whom are currently directors of Carlyle, will become directors of Levcor. Additionally, upon completion of the merger, Edward F. Cooke, who currently is the Chief Financial Officer and Vice President of Carlyle, will serve as the Vice President, Chief Financial Officer, Treasurer and Secretary of Levcor. The merger agreement provides that upon the completion of the merger, Levcor will indemnify and hold harmless, and pay all applicable expenses to, all past and present directors and officers of Carlyle in all of their capacities, for acts or omissions occurring at or prior to the completion of the merger to the same extent they were indemnified pursuant to Carlyle's certificate of incorporation and by-laws, and to the fullest extent permitted by law. Upon completion of the merger, the vesting of 1,100,000 outstanding options to purchase shares of Carlyle common stock granted to Carlyle's employees, officers and directors will accelerate and become immediately exercisable. As of November 21, 2002, such acceleration will cause options held by Messrs. Levinson and Cooke to purchase an aggregate of 478,000 shares of Carlyle common stock at a weighted average price of $.55 per share, to vest. Upon the effective time of the merger, as a result of the assumption and appropriate adjustment by Levcor 23 of the outstanding Carlyle options, Messrs. Levinson and Cooke will hold options to purchase an aggregate of 95,600 shares of Levcor common stock at a weighted average price of $2.75 per share. Pursuant to the terms of Mr. Levinson's employment agreement with Carlyle, in the event of a change in control of Carlyle, Mr. Levinson would be entitled to a lump sum severance payment generally equal to 2.99 times his average annual compensation for the five calendar years preceding the calendar year during which a change in control occurred or for such shorter period during which he was employed. Mr. Levinson has agreed to waive such provision. Pursuant to the terms of Mr. Cooke's employment agreement with Carlyle, if within one year after a change in control of Carlyle, Mr. Cooke's employment is terminated for any reason, Carlyle shall pay Mr. Cooke an amount equal to one year of his base salary then in effect. RIGHTS OF DISSENTING STOCKHOLDERS Holders of Carlyle common stock on November 21, 2002 are entitled to exercise dissenters' rights of appraisal pursuant to Section 262 of the Delaware General Corporation Law. A holder of Carlyle common stock or Carlyle Series B preferred stock who complies with the provisions of applicable law relating to dissenters' rights will be entitled to object to the merger and make written demand that Levcor pay in cash the fair value of the shares of Carlyle stock held by such holder as determined in accordance with statutory provisions. Carlyle stockholders wishing to exercise dissenters' rights of appraisal must follow exactly all requirements for the exercise of those rights as set forth in Section 262 of the Delaware General Corporation Law, a copy of which is attached as Appendix B to this joint proxy statement/prospectus. FEDERAL INCOME TAX CONSEQUENCES In the opinion of KMZR, counsel to Levcor, and Stroock & Stroock & Lavan LLP, counsel to Carlyle, respectively, the merger will qualify as a tax-free reorganization for federal income tax purposes, and Carlyle stockholders, other than stockholders that exercise dissenters' rights of appraisel, will not recognize any gain or loss for federal income tax purposes upon the exchange of their Carlyle stock for Levcor stock. ANTICIPATED ACCOUNTING TREATMENT The merger will be treated as a "purchase" for accounting purposes with Carlyle as the acquirer for accounting purposes (notwithstanding the fact that as a legal matter, Carlyle is merging into Levcor). Therefore, the purchase price will be allocated to Levcor's assets and liabilities based on their estimated fair market values at the completion of the merger. Any excess of the purchase price over these fair market values will be accounted for as goodwill. 24 THE MERGER AGREEMENT; GENERALLY The merger agreement provides for Carlyle to merge with and into Levcor. Following the approval and adoption of the merger agreement, at the effective time of the merger Levcor will continue as the surviving corporation. EFFECTIVE TIME As soon as practicable on or after the closing of the merger, the parties will cause the merger to become effective by filing a certificate of merger with the Delaware Secretary of State. The parties anticipate that this will occur immediately after the stockholders meetings on December 31, 2002. CONDITIONS TO THE MERGER The respective obligations of Levcor and Carlyle to complete the merger are subject to the prior satisfaction or waiver of each of the following conditions: o the Carlyle stockholders and Levcor stockholders approve and adopt the merger agreement; o there are no restraining orders, injunctions or administrative actions or proceedings preventing completion of the merger; o the SEC has declared effective the registration statement of which this prospectus is a part; and o all other authorizations, consents and approvals legally required to be obtained to consummate the merger must have been obtained from all governmental entities. Levcor's obligations to complete the merger are subject to the prior satisfaction or waiver of each of the following conditions: o the representations and warranties of Carlyle made in the merger agreement must be true and correct in all material respects; o Carlyle must have performed and complied in all material respects with all obligations required by the merger agreement; o Carlyle must have obtained the consent or approval of all other persons whose consent or approval is required in order to permit the succession by Levcor to any obligation, right or interest of Carlyle under any agreement, except for those consents or approvals for which the failure to obtain could not reasonably be expected to have a material adverse effect on Carlyle; o No action shall have been taken, and no statute, rule, regulation or order shall have been enacted, entered, enforced or deemed applicable to the merger by any 25 governmental entity which would so materially adversely impact the economic or business benefits of the transactions contemplated by the merger agreement as to render uneconomic the consummation of the merger, or which would require Levcor to dispose of any material asset prior to the consummation of the merger; o After the date of the merger agreement, there shall not have occurred a material adverse effect with respect to Carlyle, and no facts or circumstances arising after the date of the merger agreement shall have occurred which could reasonably be expected to have a material adverse effect on Carlyle; o All proceedings to be taken and all documents incident to the transaction on the part of Carlyle shall be reasonably satisfactory to Levcor, and Levcor must have received all copies of such documents and other evidence as Levcor may reasonably request; and o The holders of no more than 20% of the Carlyle stock shall have exercised their statutory right to appraisal. Carlyle's obligations to complete the merger are subject to the prior satisfaction or waiver of each of the following conditions: o the representations and warranties of Levcor made in the merger agreement must be true and correct in all material respects; o Levcor must have performed and complied in all material respects with all obligations required by the merger agreement; o After the date of the merger agreement, there shall not have occurred a material adverse effect with respect to Levcor, and no facts or circumstances arising after the date of the merger agreement shall have occurred which could reasonably be expected to have a material adverse effect on Levcor; and o All proceedings to be taken and all documents incident to the transaction on the part of Levcor shall be reasonably satisfactory to Carlyle, and Carlyle must have received all copies of such documents and other evidence as Carlyle may reasonably request. NO SOLICITATION Carlyle has agreed not to initiate or, subject to certain limited exceptions, engage in discussions with another party regarding any competing transaction while the proposed merger with Levcor is pending. Nothing contained in the merger agreement shall prohibit Carlyle from, prior to the effective time of the merger, doing any of the following: o furnishing information to or entering into discussions or negotiations with any person that makes an unsolicited written proposal to Carlyle with respect to a competing transaction if the board of directors determines that there is a reasonable probability that the failure to take such action would be inconsistent 26 with the Carlyle board of directors' fiduciary duties to the Carlyle stockholders. Carlyle must provide notice to Levcor that they are furnishing information or negotiating with such person, and must have received from such person a fully executed confidentiality agreement; o complying with Rule 14d-9 or Rule 14e-2 under the Securities Exchange Act of 1934 (the "Exchange Act") with regard to a tender offer or exchange offer; or o failing to make or withdrawing or modifying its recommendation to the Carlyle stockholders or recommending an unsolicited, bona fide proposal to acquire Carlyle pursuant to a merger, consolidation, share exchange, business combination, tender or exchange offer or other similar transaction, following the receipt of such a proposal, if Carlyle's board of directors determines in good faith that there is a reasonable probability that the failure to take such action would be inconsistent with the board of directors' fiduciary duties to the Carlyle stockholders. TERMINATION OF THE MERGER AGREEMENT Either Levcor or Carlyle may terminate the merger agreement at any time prior to the effective time, whether before or after approval of the matters presented to the stockholders in connection with the merger, if: o consented to by both parties in writing; o a governmental entity issues a non-appealable permanent injunction or action that prevents consummation of the merger; o the merger does not occur on or prior to December 31, 2002 and the terminating party has not caused the failure of the merger to occur by such date; or o any approval of either the stockholders of Carlyle or the stockholders of Levcor required for the consummation of the merger is not obtained by reason of the failure to obtain the required vote at either of the meetings, and the inability to get such stockholder approval is not the result of the action or failure to act of Levcor or Carlyle where such action or failure to act would constitute a material breach of the merger agreement. Levcor may terminate the merger agreement if: o there is a material breach by Carlyle of any of its covenants or agreements set forth in the merger agreement, or any of its representations or warranties set forth in the merger agreement shall have become untrue, such that Carlyle would be incapable of satisfying Levcor's conditions precedent to the merger agreement by December 31, 2002; or 27 o Carlyle's board of directors shall have (a) withdrawn, modified or changed its approval or recommendation of the merger agreement, the merger or any of the other transactions contemplated in the merger agreement in any manner which is adverse to Levcor; or (b) approved or recommended to the Carlyle stockholders a competing transaction or a superior proposal or entered into an agreement with respect thereto or have resolved to do so. Carlyle may terminate the merger agreement if: o there is a material breach by Levcor of any of its covenants or agreements set forth in the merger agreement, or any of its representations or warranties set forth in the merger agreement shall have become untrue, such that Levcor would be incapable of satisfying Carlyle's conditions precedent to the merger agreement by December 31, 2002. o it has entered into a competing transaction. FEE, EXPENSES AND OTHER PAYMENTS Whether or not the merger is consummated, all costs and expenses incurred in connection with the merger agreement are to be borne by the party which incurs those costs and expenses. However, Carlyle has agreed to pay Levcor an amount equal to $300,000, plus all of Levcor's expenses not to exceed $200,000, if the merger agreement is terminated: o by Levcor as a result of a material breach of any of Carlyle's covenants or agreements, or if any of Carlyle's representations or warranties shall have become untrue such that Carlyle would be incapable of satisfying conditions precedent of Levcor under the merger agreement by December 31, 2002 and at any time within 12 months after the date of termination Carlyle enters into a competing transaction, which values, in the reasonable determination of the Carlyle board of directors, the Carlyle common stock at more than $.56 per share; o because the Carlyle stockholders do not approve and adopt the merger agreement at the Carlyle stockholders' meeting and at the time of the stockholders' meeting there exists a proposal with respect to a competing transaction which either (1) Carlyle's board of directors has not publicly opposed or (2) is consummated or a definitive agreement providing for such competing transaction is entered into at any time during the period commencing on the date of execution of the merger agreement and ending 12 months after the termination of the merger agreement; o by Levcor, if the board of directors of Carlyle has withdrawn, modified or adversely changed its approval or recommendation of the merger agreement in any manner which is adverse to Levcor or recommended or approved a competing transaction or shall have resolved to do any of the foregoing; 28 o by Levcor, if Carlyle furnishes information to, or enters into discussions or negotiations with any person that makes an unsolicited proposal and Carlyle enters into a competing transaction; o by Levcor, if Carlyle fails to reject a tender offer or exchange offer proposal by a third party within ten days of its commencement or the date such proposal is first publicly disclosed; or o by Levcor, upon Carlyle's board of directors' authorization to enter into a written agreement with respect to a competing transaction that the Carlyle board of directors have determined to be a superior proposal. In addition, Levcor has agreed to pay Carlyle all of Carlyle's expenses not to exceed $200,000, if the merger agreement is terminated as a result of a material breach of any of Levcor's covenants or agreements, or if any of Levcor's representations or warranties shall have become untrue such that Levcor would be incapable of satisfying conditions precedent of Carlyle under the merger agreement by December 31, 2002. FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE Each of Levcor and Carlyle has made forward-looking statements in this joint proxy statement/prospectus that are subject to risks and uncertainties. Forward-looking statements include expectations concerning matters that are not historical facts and actual results may differ materially from these forward-looking statements. Words such as "believes," "expects," "anticipates" or similar expressions indicate forward-looking statements. For more information regarding factors that could cause actual results to differ from these expectations, you should refer to "Risk Factors" beginning on page 40. WHO CAN HELP ANSWER YOUR QUESTIONS IF YOU HAVE QUESTIONS ABOUT THE MERGER, YOU SHOULD CONTACT: LEVCOR STOCKHOLDERS: CARLYLE STOCKHOLDERS: LEVCOR INTERNATIONAL, INC. CARLYLE INDUSTRIES, INC. 462 Seventh Avenue 1 Palmer Terrace New York, New York 10018 Carlstadt, New Jersey 07072 Attention: Robert A. Levinson, Attention: Edward F. Cooke, President Chief Financial Officer and (212) 354-8500 Vice President (201) 935-6220 29 SELECTED HISTORICAL AND UNAUDITED PRO FORMA SUMMARY FINANCIAL INFORMATION LEVCOR SELECTED HISTORICAL FINANCIAL DATA The following selected historical financial data should be read in conjunction with Levcor's financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Levcor" which are included elsewhere in this joint proxy statement/prospectus. LEVCOR INTERNATIONAL, INC. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, (UNAUDITED) -------------------------------------------------------- ------------------- 1997 1998 1999 2000 2001 2001 2002 -------- -------- -------- -------- -------- -------- -------- STATEMENT OF INCOME DATA: Net sales ..................................... $ 3,349 $ 10,105 $ 13,954 $ 17,258 $ 20,108 $ 16,879 $ 8,499 Cost of goods sold ............................ 2,974 8,974 11,741 14,349 16,252 13,694 6,681 Selling, general and administrative expenses .. 570 1,517 2,417 2,923 3,236 2,473 2,152 Interest expense .............................. 156 273 277 418 427 357 162 -------- -------- -------- -------- -------- -------- -------- Net income (loss) ............................. $ (351) $ (659) $ (481) $ (432) $ 192 $ 372 $ (442) ======== ======== ======== ======== ======== ======== ======== Earnings (loss) per share Basic ......................................... $ (.20) $ (.38) $ (.25) $ (.19) $ .08 $ .16 $ (0.19) Diluted ....................................... (.20) (.38) (.25) (.19) .08 .15 (.18) Weighted average common shares outstanding: Basic ......................................... 1,733 1,754 1,949 2,317 2,321 2,376 2,336 Diluted ....................................... 1,733 1,754 1,949 2,317 2,395 2,450 2,431 AT SEPTEMBER 30, AT DECEMBER 31, (UNAUDITED) -------------------------------------------------------- --------------------- 1997 1998 1999 2000 2001 2001 2002 -------- -------- -------- -------- -------- -------- -------- BALANCE SHEET DATA: Cash and cash equivalents.............. $42 $60 $3 $7 $3 $5 $2 Total assets........................... 2,665 1,588 2,934 4,590 2,663 3,316 2,401 Total debt............................. 3,944 3,514 4,836 6,906 4,770 5,260 4,935 Stockholders' equity (deficiency)...... (1,279) (1,926) (1,902) (2,316) (2,107) (1,944) (2,533)
30 CARLYLE SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following selected historical financial data should be read in conjunction with Carlyle's consolidated financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Carlyle" which are included elsewhere in this joint proxy statement/prospectus. CARLYLE INDUSTRIES, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, (UNAUDITED) -------- -------- -------- -------- -------- -------------------- 1997 1998 1999 2000 2001 2001 2002 -------- -------- -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Net sales ................................... $ 19,641 $ 23,801 $ 28,889 $ 27,076 $ 24,925 $ 18,672 $ 17,514 -------- -------- -------- -------- -------- -------- -------- Income from continuing operations............. 3,727 3,160 2,538 1,145 990 653 857 Extraordinary loss on debt prepayment, net of tax benefit ........................ -- -- -- -- (90) -- -- ======== ======== ======== ======== ======== ======== ======== Net income.................................... 3,727 3,160 2,538 1,145 900 653 857 Preferred stock dividends .................... (1,445) (1,139) (611) (274) (273) (205) (204) Loss from discontinued operations, net of income taxes ........................... (316) -- -- -- -- -- -- Income (loss) on disposal of discontinued operations, net of income taxes ........... (9,801) -- 1,544 -- -- -- -- Gain on preferred stock redemption ........... -- -- 3,011 -- -- -- -- Income (loss) applicable to common stock ..... $ (7,835) $ 2,021 $ 6,482 $ 871 $ 627 $ 448 $ 653 ======== ======== ======== ======== ======== ======== ======== Weighted average common shares outstanding ... 7,386 7,383 9,896 13,935 13,935 13,935 13,935 ======== ======== ======== ======== ======== ======== ======== PER COMMON SHARE DATA (BASIC AND DILUTED): Continuing operations ........................ $ .31 $ .27 $ .20 $ .06 $ .05 $ .03 $ .05 Discontinued operations ...................... (1.37) -- .16 -- -- -- -- Extraordinary item ........................... -- -- -- -- (.01) -- -- Gain on preferred stock redemption ........... -- -- .30 -- -- -- -- Net income (loss) per share .................. $ (1.06) $ .27 $ .66 $ .06 $ .04 $ .03 $ .05 ======== ======== ======== ======== ======== ======== ======== Cash dividend per common share ............... None None None None None None None ======== ======== ======== ======== ======== ======== ========
31
AT SEPTEMBER 30, AT DECEMBER 31 (UNAUDITED) -------------------------------------------------------- -------------------- 1997 1998 1999 2000 2001 2001 2002 -------- -------- -------- -------- -------- -------- -------- BALANCE SHEET DATA: Working capital .............................. $ 10,646 $ 9,188 $ 8,564 $ 6,789 $ 1,131 $ 1,983 $ 3,363 Total assets ................................. $ 25,062 $ 17,824 $ 18,512 $ 17,102 $ 16,286 $ 16,857 $ 16,753 Long-term debt, capital lease obligations and redeemable preferred stock ......................... $ 25,067 $ 21,108 $ 11,767 $ 10,892 $ 4,568 $ 4,568 $ 6,336 Stockholders' deficiency ..................... $(19,306) $(17,285) $ (4,251) $ (3,463) $ (4,115) $ (3,008) $ (3,360)
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The following unaudited pro forma consolidated financial data gives effect to the proposed merger of Levcor and Carlyle. Although Levcor is the legal acquirer and will survive as the legal post merger entity, for accounting purposes, Carlyle is the acquirer. The merger is being accounted for under the purchase method of accounting, as required by Statement of Financial Accounting Standards No. 141, "Business Combinations." Under this method of accounting, the purchase price has been allocated to the fair value of the net assets acquired, including identified intangible assets and goodwill. The purchase price allocation is preliminary and subject to revision when Carlyle obtains additional information regarding asset valuation. The unaudited pro forma consolidated financial data is based on the historical financial statements and accompanying notes of Carlyle and Levcor which are included elsewhere in this joint proxy statement/prospectus. The Unaudited Pro Forma Consolidated Balance Sheet assumes the merger was consummated on September 30, 2002 and combines the unaudited September 30, 2002 balance sheet of Carlyle with the unaudited September 30, 2002 balance sheet of Levcor. The 2002 Unaudited Pro Forma Consolidated Statement of Income combines the nine months ended September 30, 2002 unaudited Statement of Operations for Carlyle with the nine months ended September 30, 2002 unaudited Statement of Operations for Levcor. The 2001 Unaudited Pro Forma Consolidated Statement of Income combines the year ended December 31, 2001 audited Statement of Operations for Carlyle with the year ended December 31, 2001 audited Statement of Income for Levcor. The unaudited pro forma consolidated statements of income assume the merger took place on January 1, 2001. The unaudited pro forma consolidated financial data is not necessarily indicative of the actual operating results that would have occurred or the future operating results that will occur as a consequence of such transactions. The results of operations for the nine months ended September 30, 2002 are not necessarily indicative of results of operations to be expected for the full year. 32 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2002 (IN THOUSANDS)
ASSETS ------ Pro Forma Pro Forma Carlyle Levcor Adjustments Combined ------- ------ ----------- -------- Current assets Cash and cash equivalents......................... $ 14 $ 2 $ - $ 16 Accounts receivable - trade, net.................. 2,583 448 - 3,031 Inventories....................................... 5,568 1,573 - 7,141 Deferred income taxes............................. 536 - - 536 Other current assets.............................. 376 58 (227) (4) 207 ---------- ---------- ----------- ---------- Total current assets...................... 9,077 2,081 (227) 10,931 Property, plant and equipment, net................... 2,243 66 - 2,309 Goodwill............................................. 2,543 - 7,190 (1) 9,733 Trademarks........................................... - - 250 (2) 250 Assets held for sale................................. - 219 - 219 Deferred income taxes................................ 1,951 - 2,100 (3) 4,051 Other assets......................................... 939 35 - 974 ---------- ---------- ---------- ---------- Total assets.............................. $ 16,753 $ 2,401 $ 9,313 $ 28,467 ========== ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) ------------------------------------------------- Accounts payable and accrued expenses............. $ 638 $ 1,158 $ 196 (4) $ 1,992 Revolving credit debt............................. 3,865 - - 3,865 Income taxes payable.............................. 100 - - 100 Dividends payable................................. 13 - - 13 Other current liabilities......................... 1,111 - - 1,111 ---------- ---------- ---------- ---------- Total current liabilities................. 5,727 1,158 196 7,081 Long-term debt....................................... 1,768 3,000 - 4,768 Other liabilities.................................... 8,063 - - 8,063 Loans payable - officer/stockholder.................. - 777 - 777 ---------- ---------- ---------- ---------- Total liabilities......................... 15,558 4,935 196 20,689 ---------- ---------- ---------- ---------- Redeemable preferred stock .......................... 4,555 - - 4,555 ---------- ---------- --------- ---------- Stockholders' equity (deficiency) Common stock....................................... 139 1,342 (139) (6) 52 (1,290) (5) Capital in excess of par........................... 26,345 5,276 7,276 (5) 33,208 (5,276) (6) 713 (7) (1,126) (6) Accumulated deficit................................ (28,584) (9,075) 9,075 (6) (28,584) Unearned compensation.............................. - - (116) (1) (116) Accumulated other comprehensive loss............... (1,260) - - (1,260) ---------- ---------- ---------- ---------- (3,360) (2,457) 9,117 3,300 Less - Treasury stock............................. - 77 - 77 ---------- ---------- ---------- ---------- Total stockholders' equity (deficiency) (3,360) (2,534) 9,117 3,223 ---------- ---------- ---------- ---------- Total liabilities and stockholders' equity (deficiency).............................. $ 16,753 $ 2,401 $ 9,313 $ 28,467 ========== ========== ========== ==========
See accompanying notes to pro forma financial information. 33 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 2002 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Pro Forma Pro Forma Carlyle Levcor Adjustments Combined ------- ------ ----------- -------- Net sales ................................................. $ 17,514 $ 8,499 $ -- $ 26,013 ---------- ---------- ---------- ---------- Cost of goods sold ........................................ 10,928 6,681 -- 17,609 ---------- ---------- ---------- ---------- Gross profit ................................... 6,586 1,818 -- 8,404 Selling, general and administrative expenses .............. 4,929 2,152 12(1) 7,093 ---------- ---------- ---------- ---------- Income (loss) before other income (expenses) and income taxes ................. 1,657 (334) (12) 1,311 ---------- ---------- ---------- ---------- Other income (expenses) Interest expense ....................................... (315) (161) -- (476) Other income, net ...................................... -- 53 -- 53 ---------- ---------- ---------- ---------- (315) (108) -- (423) ---------- ---------- ---------- ---------- Income (loss) before income taxes .............. 1,342 (442) (12) 888 Income taxes .............................................. 485 -- 485(3) -- ---------- ---------- ---------- ---------- Net income (loss) .............................. 857 (442) 473 888 Less - Dividends on preferred stock ....................... 204 -- -- 204 ---------- ---------- ---------- ---------- Net income (loss) applicable to common shares .............................. $ 653 $ (442) $ 473 $ 684 ========== ========== ========== ========== Basic earnings per share .................................. $ .23(8) $ (.19) $ -- $ .13 ========== ========== ========== ========== Diluted earnings per share ................................ $ .23(8) $ (.18) $ -- $ .13 ========== ========== ========== ========== Weighted average number of shares, basic................... 2,786,972(8) 2,335,572(8) 2,622(8) 5,125,166(8) ========== ========== ========== ========== Weighted average number of shares, diluted................. 2,786,972(8) 2,430,997(8) 23,576(8) 5,241,545(8) ========== ========== ========== ==========
See accompanying notes to pro forma financial information. 34 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 2001 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Pro Forma Pro Forma Carlyle Levcor Adjustments Combined ------- ------ ----------- -------- Net sales .............................................. $ 24,925 $ 20,108 $ -- $ 45,033 Cost of goods sold ..................................... 15,456 16,252 -- 31,708 ----------- ----------- ----------- ----------- Gross profit ................................ 9,469 3,856 -- 13,325 Selling, general and administrative expenses ........... 7,242 3,237 16 10,495 ----------- ----------- ----------- ----------- Income (loss) before other income (expenses) and income taxes .............. 2,227 619 (16) 2,830 ----------- ----------- ----------- ----------- Other income (expenses) Interest expense .................................... (565) (427) -- (992) Loss on impairment of assets held for sale .......... -- (20) -- (20) Other income, net ................................... -- 20 -- 20 ----------- ----------- ----------- ----------- (565) (427) -- (992) ----------- ----------- ----------- ----------- Income before income taxes .................. 1,662 192 (16) 1,838 Income taxes ........................................... 672 -- 672(3) -- ----------- ----------- ----------- ----------- Income from continuing operations (9) ....... 990 192 656 1,838 Less - Dividends on preferred stock .................... 273 -- -- 273 ----------- ----------- ----------- ----------- Income from continuing operations applicable to common shares (9)........... $ 717 $ 192 $ 656 $ 1,565 =========== =========== =========== =========== Basic earnings per share (9) ........................... $ .26(8) $ .08 $ -- $ .31 =========== =========== =========== =========== Diluted earnings per share (9) ......................... $ .26(8) $ .08 $ -- $ .30 =========== =========== =========== =========== Weighted average number of shares, basic ............... 2,786,972(8) 2,321,337(8) 16,857(8) 5,125,166(8) =========== =========== =========== =========== Weighted average number of shares, diluted ............. 2,786,972(8) 2,395,194(8) 37,811(8) 5,219,977(8) =========== =========== =========== ===========
See accompanying notes to pro forma financial information. 35 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) 1. The pro forma financial statements have been prepared reflecting a reverse acquisition with Carlyle as the accounting acquiror of Levcor using the purchase method of accounting. Under the purchase method of accounting, the total purchase price, plus the fair value of assumed liabilities, is allocated to the net tangible and identifiable intangible assets acquired, based on their respective fair values. A final determination of these fair values cannot be made prior to the completion of the merger. Accordingly, the allocations reflected in the unaudited pro forma consolidated financial statements are preliminary and subject to change. The total pro forma estimated purchase price consists of the following:
Fair value of shares of Carlyle common stock deemed to be issued (2,338,194 @ $2.56 per share) - See Note 5 $ 5,986 Fair value of outstanding vested and unvested options, net of unearned compensation of $116 597 Direct acquisition costs to be incurred by Carlyle 423 ----------- 7,006 Fair value of Levcor's liabilities to be assumed by Carlyle 4,935 ----------- Total purchase price to be paid by Carlyle 11,941 Fair value of Levcor assets acquired by Carlyle 4,751 ----------- Goodwill $ 7,190 ===========
The $2.56 per share used above, is the average of the reported Levcor common share price for the five days preceding and following the announcement of the proposed merger. Both Levcor's and Carlyle's respective boards of directors determined that operating as a combined entity would increase the overall growth of their companies and reduce the risks of continuing as relatively small companies in an industry that is rapidly consolidating and increasingly competitive. In addition, both boards determined that the merger may result in increased liquidity in trading the combined entity's securities, which is in the best interests of the companies' respective stockholders. Also identified, as benefits of the proposed merger are expansion of access to distribution channels and customers, savings on certain administrative costs, and realization of all or part of Levcor's operating tax loss carryforward. In completing the merger, for accounting purposes Carlyle is treated as if it declared a 1-for-5 reverse stock split of its common stock and subsequently exchanged its common stock for Levcor common stock on a one-to-one ratio and its stock options for Levcor's stock options on a one-to-one ratio. The aggregate estimated purchase price is $11,941 and reflects the fair value of Levcor's common stock and options deemed acquired for similar Carlyle instruments. The purchase price reflects Carlyle's deemed acquisition of Levcor's net assets, 36 which are total assets less the deemed assumption of $4,935 of Levcor's debt and liabilities. The merger agreement did not require any contingent consideration to be issued. The equity section of the accompanying pro forma balance sheet as of September 30, 2002 adjusts common stock to the actual number of shares Levcor (the legally surviving post-merger entity) will have outstanding at its restated par value of $.01. However, since Carlyle is the accounting acquirer, the accumulated deficit of Levcor is eliminated against additional paid in capital. Carlyle, which is treated as the accounting acquirer, is paying a substantial premium over the fair value of Levcor's tangible and identifiable intangible assets. The portion of the purchase price that Carlyle is paying in excess of the fair value of Levcor's identifiable tangible and intangible assets is goodwill. When it contemplated and approved the proposed merger, Carlyle's board of directors did not consider this premium deemed to be paid by Carlyle as a result of it being treated as the accounting acquirer, because Levcor is the legal acquirer of Carlyle in the proposed merger, and Levcor, from a legal point of view, was paying a substantial premium over the market value of Carlyle. However, Carlyle, as a result of it being treated as the accounting acquirer, is willing to pay this premium for the following reasons: o Levcor's experience and expertise with respect to offering products to wholesale markets should provide Carlyle the opportunity to expand its product offerings, business and customer base to wholesale markets. o Combining with Levcor will increase the financial resources and should also allow the combined company to to utilize Levcor's net operating tax loss carryforward of $5.6 million; o The combined larger company should provide Carlyle with better access to credit markets which is necessary to facilitate growth; and o The potential growth of the combined company after the merger. The fair value of the 184,900 Levcor vested options was estimated as of May 15, 2002 using the Black-Scholes option pricing model with the following weighted-average assumptions, risk-free interest rates of 4.58 to 5.26 percent, expected dividend yields of zero percent; expected lives of 5 to 10 years; expected volatility of 120.49 to 232.02 percent. The fair value of these vested options totaled approximately $553. The fair value of the Levcor unvested options was approximately $160. Of this amount, $116 is included in the equity section of the balance sheet as unearned compensation. The remaining vesting period, the period that the future earnings will be impacted, is seven years and three months as at September 30, 2002. The remaining amount will be expensed at $16 per year. 37
Estimated purchase price allocation: Purchase Purchase Historical Price Price Costs Adjustments Allocation ----- ----------- ---------- Current assets $ 2,081 $ - $ 2,081 Property, plant and equipment - net 66 - 66 Deferred tax asset - 2,100 2,100 Other assets 254 - 254 Current liabilities (1,158) - (1,158) Non-current liabilities (3,777) - (3,777) ---------- ---------- ----------- Net tangible assets (2,534) 2,100 (434) Trademarks - 250 250 Goodwill - 7,190 7,190 ---------- ---------- ---------- $ (2,534) $ 9,540 $ 7,006 =========== ========== ==========
This adjustment represents the recognition of the excess of the purchase price, plus liabilities assumed, over the fair values of Levcor assets acquired. The preliminary allocation results in classifying as goodwill the excess of the purchase price over the fair value of the net assets acquired. 2. This adjustment represents the recognition of the fair value of two of Levcor's trademarks as an identifiable intangible asset. Both trademarks are determined to have indefinite useful lives. Levcor had no other identifiable intangible assets, such as long-term operating leases, employment agreements and or customer contracts that management believes should be assigned as part of the purchase price allocation. 3. Also being recognized is a deferred tax asset for Levcor's net operating loss carryforward. The pro forma adjustment shows the tax benefit of $485 and $672 for the nine months ended September 30, 2002 and year ended December 31, 2001 respectively. 4. This adjustment represents the direct costs and estimated costs to be incurred in completing the merger. Deferred acquisition costs of $227 incurred by Carlyle were included in its September 30, 2002 financial statements and have been included in the calculation of the estimated purchase price. 5. This adjustment represents Carlyle's deemed issuance of 2,338,194 shares of common stock in exchange for Levcor common stock in connection with the merger and the adjustment of the par value from $0.56 to $0.01. 6. This adjustment represents the restatement of the equity section to reflect the elimination of Carlyle's common stock and capital in excess of par, and Levcor's accumulated deficit, as the accounting acquiree. 38 7. This adjustment represents the fair value of vested and nonvested Levcor options outstanding, which are deemed to be issued by Carlyle, the accounting acquiror. 8. The reconciliation between the weighted average number of shares used in determining basic earnings per share and that used in determining diluted earnings per share of the combined entity is as follows:
September 30, December 31, 2002 2001 -------------- -------------- Equivalent number of Carlyle shares outstanding 2,786,972 2,786,972 Shares deemed issued in merger to Levcor shareholders 2,338,194 2,338,194 --------- --------- Weighted number of shares - basic 5,125,166 5,125,166 Incremental number of shares relative to options deemed issued to Levcor employees 95,425 73,857 Incremental number of shares relative to options issued to Carlyle employees as a result of the merger 20,954 20,954 --------- --------- Weighted number of shares - diluted 5,241,545 5,219,977 ========= =========
After giving effect to the exchange ratio of five Carlyle shares for each Levcor share, Carlyle effectively had 2,786,972 shares outstanding at September 30, 2002. The earnings per share of Carlyle is based on such equivalent number of shares. The adjustments for 2,622, 23,576, 16,857 and 37,811 to the weighted average shares outstanding at September 30, 2002 and December 31, 2001 are to adjust the weighted average number of shares outstanding to the equivalent shares outstanding to effect the merger. This adjustment is shown effective for purposes of the pro-forma statement of income as of January 1, 2001. 9. Carlyle adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142") as of January 1, 2002. Under SFAS 142, Carlyle no longer amortizes goodwill, but is required to review goodwill for impairment annually, or more frequently if impairment indicators arise. The pro forma statement of income for the year ended December 31, 2001 was not adjusted to give retroactive effect to the adoption of SFAS 142. 39 RISK FACTORS YOU SHOULD CONSIDER THESE RISK FACTORS IN EVALUATING WHETHER TO APPROVE AND ADOPT THE MERGER AGREEMENT. THESE FACTORS SHOULD BE CONSIDERED IN CONJUNCTION WITH THE OTHER INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE APPENDICES HERETO. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, THE BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS OF EITHER OR BOTH OF LEVCOR AND CARLYLE MAY BE SERIOUSLY HARMED. IN THAT CASE, THE TRADING PRICE OF LEVCOR COMMON STOCK MAY DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. RISKS RELATED TO THE MERGER Expected Benefits of the Merger May Not Be Realized. Levcor and Carlyle will operate as a combined company in a market environment that cannot be predicted and that involves significant risks, many of which will be beyond its control. Although Levcor and Carlyle expect that the merger will result in benefits to the combined company, the combined company may not realize those benefits because of integration and other challenges. The failure of the combined company to realize any of the anticipated benefits of the merger, including anticipated cost savings described in this joint proxy statement/ prospectus, could seriously harm the results of operations of the combined company. The challenges involved include the following: o demonstrating to the customers of Levcor and the customers of Carlyle that the merger will not result in adverse changes in customer service standards or business focus and helping customers conduct business easily with the combined company; o preserving distribution, marketing or other important relationships of both Levcor and Carlyle and resolving potential conflicts that may arise; o minimizing the diversion of management attention from ongoing business concerns; and o persuading employees that the business culture of Levcor and Carlyle are compatible, maintaining employee morale and retaining key employees. The Merger Could Negatively Impact the Combined Financial Results of the Companies. If the benefits of the merger do not exceed the costs associated with the merger, including transaction costs and the dilution to Levcor's stockholders resulting from the issuance of shares in connection with the merger, Levcor's financial results, including earnings per share, could be decreased. Carlyle estimates that it will incur direct transaction costs of approximately $423,000 in connection with the proposed merger, which will be considered as part of the purchase costs and will be allocated to the net assets of Carlyle. These amounts are preliminary 40 estimates and could change. Levcor may incur additional charges in subsequent quarters to reflect costs associated with the proposed merger. Carlyle Stockholders Will Receive One Share Of Levcor Common Stock For Each Five Shares Of Carlyle Common Stock And One Share Of Levcor Series A Preferred Stock For Each Share Of Carlyle Series B Preferred They Hold, Despite Changes In The Market Value Of Either Or Both Of Carlyle Common Stock And Levcor Common Stock. The specific dollar value of Levcor stock to be received by Carlyle stockholders depends on the market value of Levcor at the time of completion of the merger. The value of Levcor common stock may decrease from the date that any Carlyle stockholder submits a proxy. Each five shares of Carlyle common stock will be exchanged for one share of Levcor common stock and each share of Carlyle Series B preferred stock will be exchanged for one share of Levcor Series A preferred stock upon completion of the merger. This exchange ratio will not be adjusted for changes in the market price of either Carlyle common stock or Levcor common stock. Neither party is permitted to terminate the merger agreement solely because of changes in the market price of Levcor common stock or Carlyle common stock. Stockholders are urged to obtain recent market quotations for Levcor common stock and Carlyle common stock. We cannot predict or give any assurances as to the market price of Levcor common stock at any time before or after the merger. The Market Price of Levcor Common Stock May Decline As A Result Of The Merger. The market price of Levcor common stock may decline as a result of the merger, if: o the integration of Levcor and Carlyle is unsuccessful; o we do not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial analysts or investors; or o the effect of the merger on our financial results is not consistent with the expectations of financial analysts or investors. The Issuance Of Levcor Series A Preferred Stock as well as the issuance of Levcor Common Stock In Exchange For Carlyle Common Stock Will Have A Dilutive Effect On The Current Holders Of Levcor Common Stock. After the consummation of the merger, there will be a substantial number of additional shares of Levcor common stock and options to purchase shares of Levcor common stock outstanding. Levcor will also issue shares of a new class of preferred stock designated as Levcor Series A preferred stock. The additional number of shares of Levcor stock issued, and to the extent that the additional Levcor options are exercised in the future, will decrease the existing stockholders' percentage equity ownership. Levcor expects to issue approximately 2,786,972 shares of Levcor common stock and 4,555,007 shares of Levcor Series A preferred stock to the Carlyle stockholders. Currently, there are 2,338,194 shares of Levcor common stock outstanding. Accordingly, as a result of the merger, the shares of common stock to be issued to the Carlyle common stockholders will exceed the 2,338,194 shares of Levcor common stock outstanding, and the merger will give the former Carlyle common stockholders approximately 54% of the combined entity's projected outstanding 5,125,166 shares of common stock. Additionally, each outstanding option to purchase shares of Carlyle common stock will be assumed by Levcor, with the number of options and exercise price to be appropriately adjusted. The amount of outstanding Levcor common stock owned by the current Levcor stockholders will decrease further to the extent that such options issued to the former Carlyle stockholders pursuant to the merger are exercised. Upon completion of the merger, the vesting of 1,100,000 outstanding options to purchase shares of Carlyle common stock granted to Carlyle's employees, officers and directors will accelerate and become immediately exercisable, and each outstanding option to purchase shares of Carlyle common stock will be assumed by Levcor appropriately adjusted by the merger exchange ratio, which will result in the Carlyle stockholders being given approximately 220,000 options to purchase shares of Levcor common stock, all of which shall be immediately exercisable. After the merger, if the Carlyle stockholders exercise all of the options to purchase Levcor common stock given to them pursuant to the merger, the total amount of Levcor stock owned by the Carlyle stockholders will rise to 3,006,972. Similarly, as a result of the issuance of the Series A preferred stock, as well as the issuance of additional shares of Levcor common stock, any increased number of outstanding shares would also have the effect of diluting the earnings per share and book value per share of current outstanding shares of Levcor common stock. With respect to the issuance of the Series A preferred stock, holders of the Series A preferred stock are entitled to vote, together with the holders of the common stock (voting as a single class), on all matters presented to the holders of the common stock. Each share of the Series A preferred stock entitles the holder to 1/5th of a vote for each share of Series A preferred stock held. As of the date of the merger, the holders of the Series A preferred stock are entitled to an aggregate of approximately 911,001 votes, representing approximately 15% of the voting power of our outstanding securities. Under the amended certificate of incorporation, the holders of the capital stock of Levcor, irrespective of class or series, shall vote together as a single class for the election or removal of directors of Levcor and on all other matters to which stockholders are entitled to vote. As stated above, the merger will result in 2,786,926 shares of Levcor common stock entitled to vote, as well as the issuance of 4,555,007 shares of Levcor Series A preferred stock, which will represent an aggregate of approximately 911,001 votes. Accordingly, as a result of the merger, the former Carlyle stockholders will receive Levcor common stock and Levcor Series A preferred stock representing a total of 3,697,927 votes, which will subsequently represent approximately 61% of the combined voting power of the Levcor common stock and Levcor Series A preferred stock. After the merger, if the Carlyle stockholders exercise all of the options to purchase Levcor common stock given to them pursuant to the merger, the total amount of stock representing votes will rise to 3,917,927, which will subsequently represent approximately 64% of the combined voting power of the Levcor common stock and Levcor Series A preferred stock. Carlyle May Lose An Opportunity To Enter Into A Merger Or Business Combination With Another Party On More Favorable Terms Because Of Provisions In The Merger Agreement. 41 While the merger agreement is in effect, Carlyle is, with limited exceptions, prohibited from entering into or soliciting, initiating or encouraging any inquiries or proposals that may lead to a proposal or offer for a merger, with any person other than Levcor. As a result of this prohibition, Carlyle may lose an opportunity to enter into a transaction with another potential partner on more favorable terms. Some Of Carlyle's and Levcor's Directors And Officers Have Interests That Differ In Several Respects From Carlyle and Levcor Stockholders. In considering the recommendation of the Carlyle and Levcor boards of directors to approve and adopt the merger agreement, you should consider that Carlyle's and Levcor's respective directors and officers may have interests that differ from, or are in addition to, their respective interests as Carlyle and Levcor stockholders generally. As a result of such interests, such directors and officers could be more likely to vote and approve the merger than if they did not have these interests. These interests include: o Robert A. Levinson serves as the Chairman of the board of directors, President, Secretary and Principal Financial Officer of Levcor while also serving as the Chairman of the board of directors, President and Chief Executive Officer of Carlyle. As of the record date, Mr. Levinson beneficially owned 749,175 shares of Levcor common stock, which represents approximately 31.4% of Levcor's outstanding common stock. This 31.4% consists of 699,175 shares of Levcor common stock and 50,000 currently exercisable options to purchase shares of Levcor common stock pursuant to Levcor's Stock Option Plan. As of the record date, Mr. Levinson beneficially owned 2,878,423 shares of Carlyle common stock, which represents approximately 20.4% of Carlyle's outstanding common stock, and 4,479,485 shares of Carlyle Series B preferred stock, which represents approximately 98.3% of Carlyle's outstanding Series B preferred stock. o If the merger is consummated, six persons will also be elected to serve as directors of Levcor until the next annual meeting or until their successors are duly elected and qualified. Such persons include the three current directors of Levcor, Robert A. Levinson, Edward H. Cohen and John McConnaughy, as well as three current Carlyle directors, Joseph S. DiMartino, Giandomenico Picco and Edward F. Cooke. o If the merger is consummated, Robert A. Levinson will continue to be an executive officer of Levcor after the merger serving as President and Chief Executive Officer and Edward F. Cooke, who is currently the Chief Financial Officer and Vice President of Carlyle, will become Levcor's Vice President, Chief Financial Officer, Treasurer and Secretary. o If the merger is completed, all unvested Carlyle stock options held by Carlyle's current directors Robert A. Levinson, Joseph S. DiMartino, Edward F. Cooke and 42 Ralph Langer will become fully vested and will be assumed by Levcor, with the number of options and exercise prices to be appropriately adjusted. o Mr. Levinson and Mr. Cooke have employment agreements that provide for the receipt of benefits and payments upon involuntary termination or termination of employment for permitted reasons. o Levcor has agreed not to amend, repeal or otherwise modify the provisions with respect to indemnification contained in its certificate of incorporation for a period of six years from the effective time of the merger in any manner that would have a negative effect on the rights thereunder of individuals who at the effective time were directors or officers of Carlyle. The Levcor Series A Preferred Stock Will Have Rights And Preferences Not Afforded To The Levcor Common Stock. In connection with the creation of the Levcor Series A preferred stock, certain preferences and rights will be afforded to such shares that are not afforded to the Levcor common stock. These preferences and rights include: o Holders of Levcor Series A preferred stock will be entitled to receive dividends at a rate of $.06 per annum per share, if any, as may be declared by the Levcor board of directors out of legally available funds. Such dividends shall be payable quarterly on March 15, June 15, September 15 and December 15 of each year. Quarterly dividends which are not paid in full in cash on any dividend payment date will acccumulate without interest. o In the event that any Series A preferred stock dividends accrue and are unpaid, such unpaid dividends must be paid prior to any distribution in cash, shares of capital stock or other property to the Levcor common stockholders. Similarly, if dividends on the Series A preferred go unpaid, in the event that Levcor should liquidate or dissolve, no payment may be made to the Levcor common stockholders without first satisfying the accrued cash dividends owed to the Series A preferred stockholders. o Upon any liquidation, dissolution or winding up of Levcor, the holders of Levcor Series A preferred stock will be entitled to receive payment of $1 per share held by them, plus an amount in cash equal to all accrued and unpaid dividends thereon, before any distribution is made to the holders of common stock of Levcor. o The Levcor Series A preferred stock shall be subject to mandatory redemption, to the extent Levcor may lawfully do so, in three equal annual installments on June 15, 2007, June 15, 2008 and June 15, 2009, in each case, from funds legally 43 available therefor, at a price per share of Series A preferred stock equal to $1 per share, together with an amount representing accrued and unpaid dividends, whether or not declared, to the date of redemption. In the event that Levcor fails to redeem the Series A preferred stock on any of the redemption dates, then the Series A preferred stockholders will be entitled to cumulative cash dividends, and no distribution or dividend in cash, shares of capital stock or other property will be paid or declared on the Levcor common stock until the Series A preferred stockholders' have been satisfied. Also, if the redemption on the Series A preferred is not met and Levcor liquidates or dissolves, no payment of any kind may be made to the common stockholders without first satisfying the accrued cash dividends owed to the Series A preferred stockholders. In Addition To The Creation Of The Levcor Series A Preferred Stock, The Amendment And Restatement Of The Levcor Certificate Of Incorporation Will Authorize The Issuance Of Additional Shares Of Levcor Preferred Stock. Levcor's proposed amended and restated certificate of incorporation provides that the Levcor board of directors will be authorized to issue from time to time, without further stockholder approval, up to an additional 3,444,993 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each series, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of any series. Such shares of preferred stock could have preferences over Levcor's common stock with respect to dividends and liquidation rights. Levcor may issue additional Levcor preferred stock in ways which may delay, defer or prevent a change in control of Levcor without further action by Levcor stockholders. Such shares of Levcor preferred stock may be issued with voting rights that may adversely affect the voting power of the holders of Levcor common stock and Levcor Series A preferred stock by increasing the number of outstanding shares having voting rights, and by the creation of class or series voting rights. RISKS SPECIFIC TO LEVCOR Levcor Has A Stockholders' Deficiency And May Be Dependent Upon Its Principal Stockholder To Fund Its Future Operations. Levcor has sustained losses in prior years that have adversely affected Levcor's liquidity. At December 31, 2001 current liabilities exceeded current assets by approximately $188,000, and at December 31, 2001 and September 30, 2002, Levcor had a stockholders' deficiency of approximately $2,107,000 and $2,533,000, respectively. Robert A. Levinson has agreed to continue to personally support its cash requirements to enable Levcor to meet its current obligations through January 2, 2004. Levcor has successfully implemented several actions to reduce losses and improve cash flow. There can be no assurance that Mr. Levinson will continue to personally support Levcor's cash requirements, or that these measures will otherwise continue to be successful. The Textile Conversion Business Is Extremely Competitive. In the event we are unable to continue to be competitive in our product offerings and services, our business, results of operations and financial condition may suffer. Within the domestic textile converting business, competition is based on price, uniqueness in styling of fabrics and the ability to quickly respond to customers' orders. However, we cannot assure you that our domestic or foreign competitors will not be able to offer services that are more attractive to our customers or potential customers than 44 what we are able to provide. A large number of domestic and foreign manufacturers supply apparel into the United States market, many of which have a much more significant market presence than does Levcor. Some of Levcor's competitors also have substantially greater financial, marketing, personnel and other resources than does Levcor. This may enable Levcor's competitors to compete more aggressively than can Levcor in pricing, marketing and other respects, to react more quickly to market trends and to better weather market downturns. Increased competition by existing and future competitors could result in reductions in sales or reductions in prices of Levcor's products. There is no assurance that Levcor will be able to compete successfully against present or future competitors or that competitive pressures faced by Levcor will not have a material adverse effect. Levcor Depends On Third Parties For Crucial Raw Materials And Services. Levcor's principal raw materials are cotton, rayon and polyester. Cotton is available from a large number of suppliers. The quantity of plantings, crop and weather conditions, agricultural policies, domestic uses, exports and market conditions can significantly affect the cost and availability of cotton. The price of polyester varies and is determined by supply and demand as well as the price of petroleum used to produce polyester. Levcor depends on third party knitters, finishers and transporters in the production and delivery of the finished fabrics it sells and markets to apparel manufacturers. If any of its third party knitters, finishers and transporters fail to timely produce quality products and in sufficient qualities or fail to timely deliver finished products, Levcor's results would suffer. Levcor's Business Is Subject To The Seasonal Nature Of The Fashion Industry. The business of Levcor is seasonal and we typically realize higher revenues and operating income in the second and fourth calendar quarters. Such seasonality takes into account the standard lead-time required by the fashion industry to manufacture apparel, which corresponds to the respective retail selling seasons. Standard lead-time is the period of time commencing with when Levcor receives an order from a customer and ending with when Levcor ships the order to the customer. In response to this seasonality, Levcor generally increases its inventory levels, and thereby has higher working capital needs, during the third and fourth quarters of its fiscal year to meet customer demands for the peak first and fourth fiscal quarter seasons. Levcor and the U.S. apparel industry are sensitive to the business cycle of the national economy. Moreover, the popularity, supply and demand for particular apparel products can change significantly from year to year based on prevailing fashion trends and other factors. Reflecting the cyclical nature of the apparel industry, many apparel producers tend to increase capacity during years in which sales are strong. These increases in capacity tend to accelerate a general economic downturn in the apparel markets when demand weakens. These factors have contributed historically to fluctuations in Levcor's results of operations and these fluctuations are expected to occur in the future. Levcor may be unable to compete successfully in any industry downturn. Levcor's seasonality, along with other factors that are beyond Levcor's control, including general economic conditions, changes in consumer behavior, weather conditions, availability of import quotas and currency exchange rate fluctuations, could adversely affect Levcor and cause its results of operations to fluctuate. Results of operations in any period should not be considered indicative of the results to be expected for any future period. The sale of Levcor's products is subject to substantial cyclical fluctuation. Sales tend to decline in periods of recession or uncertainty regarding future economic prospects that affect consumer spending, particularly on discretionary items. This cyclicality and any related fluctuation in consumer demand could have a material adverse effect on Levcor's results of operations and financial condition. RISKS SPECIFIC TO CARLYLE Carlyle Operates In An Industry That Is Subject To Significant Fluctuations In Operating Results That May Result In Unexpected Reductions In Revenue And Stock Price Volatility. Carlyle operates in an industry that is subject to significant fluctuations in operating results, which may lead to unexpected reductions in revenues and stock price volatility. Factors that may influence Carlyle's operating results include: o The volume and timing of customer orders received during the quarter; o The timing and magnitude of customers' marketing campaigns; o The loss or addition of a major customer; o The availability and pricing of materials for our products; o The increased expenses incurred in connection with the introduction of new products; 45 o Currency fluctuations; o Delays caused by third parties; and o Changes in our product mix. Due to these factors, it is possible that Carlyle's operating results may be below expectations. If this occurs, the price of our common stock would likely decrease. Because Carlyle Generally Does Not Enter Into Long-Term Sales Contracts With All Of Its Customers, Its Sales May Decline If Its Existing Customers Choose Not To Buy Its Products Or Services. None of Carlyle's customers are required to purchase its products on a long-term basis. Carlyle documents sales by a purchase order or similar documentation limited to the specific sale. As a result, a customer from whom Carlyle generates substantial revenue in one period may not be a substantial source of revenue in a future period. In addition, its customers generally have the right to terminate its relationships with Carlyle without penalty and with little or no notice. Without long-term contracts with the majority of its customers, Carlyle cannot be certain that its customers will continue to purchase its products or that it will be able to maintain a consistent level of sales. The Loss Of Key Management, Design And Sales Personnel Could Affect Carlyle's Business, And May Prevent Carlyle From Obtaining And Securing Accounts And Generating Sales. Carlyle's success has and will continue to depend to a significant extent upon key management, particularly Edward F. Cooke, the Chief Financial Officer and Vice President, as well as its design and sales personnel, many of whom would be difficult to replace. The loss of the services of key employees could result in the declination of Carlyle's ability to establish and maintain customer relationships, which would inhibit Carlyle from obtaining and securing customer accounts and generating future sales. Carlyle Is Impacted By Environmental Laws And Regulations. Carlyle is subject to a number of federal, state and local environmental laws and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980 and comparable state statutes that impose joint and several liability on present and former owners and operators, transporters and generators for remediation of contaminated properties regardless of fault. In addition, Carlyle is subject to laws concerning treatment, storage and disposal of waste, the discharge of effluents into waterways, the emissions of substances into the air and various health and safety matters. Carlyle's operations must meet extensive federal, state and local regulatory standards in the areas of safety, health and environmental pollution controls. Although Carlyle believes that its business is operating in compliance in all material respects with such laws, statutes and regulations, many of which provide for substantial penalties for violations, there can be no assurance that future changes in federal, state, or local regulations, interpretations of existing regulations or the discovery of currently unknown problems or conditions will not require substantial additional expenditures. 46 There May Be Risks Related To Carlyle's Prior Use Of Arthur Andersen LLP As Its Independent Public Accountant. The consolidated financial statements of Carlyle for the years ended December 31, 2001 and December 31, 2000, included in this joint proxy statement/prospectus, have been audited by Arthur Andersen LLP, independent public accountants. Arthur Andersen LLP has not consented to the inclusion of their report in this joint proxy statement/prospectus, and we have dispensed with the requirement to file their consent in reliance upon Rule 437a of the Securities Act of 1933. Because Arthur Andersen LLP has not consented to the inclusion of their report in this prospectus, you will not be able to recover against Arthur Andersen LLP under Section 11 of the Securities Act for any untrue statements of a material fact contained in the financial statements audited by Arthur Andersen LLP or any omissions to state a material fact required to be stated therein. RISK RELATED TO LEVCOR AND CARLYLE AS A COMBINED COMPANY The following risk factors assume that the merger is successfully completed and describe the risks of the ongoing operations relating to the combined company. The Combined Company Will Depend On Key Personnel That It May Not Be Able To Retain. o If the combined company does not succeed in retaining and motivating existing personnel, its business will be affected, and the loss of such personnel might result in the combined company not being able to retain customer accounts, generate new business or maintain sales. Levcor depends on the continued services of its key personnel particularly its employees comprising its marketing and sales department as well as Robert A. Levinson. Carlyle also depends upon the continued services of its key personnel particularly its distribution group and its sales agents as well as Edward F. Cooke. o Each of these individuals has acquired specialized knowledge and skills with respect to Levcor and Carlyle, and their respective operations. As a result, if any of these individuals were to leave Levcor or Carlyle following the merger, the combined company could face substantial difficulty in hiring qualified successors and could experience a loss in productivity while any such successor obtains the necessary training and experience. INVESTMENT RISKS Levcor's Stock Price Has Historically Been Volatile, Which May Make It More Difficult For You To Resell Shares When You Want At Prices You Find Attractive. 47 The trading price of Levcor common stock has been, and may continue to be, subject to wide fluctuations. For the period from January 1, 2000 through March 14, 2002, the closing sale prices of Levcor common stock on the OTC Bulletin Board ranged from $.63 to $5.00. The stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, announcements of new products and services by Levcor or its competitors, changes in financial estimates and recommendations by financial analysts, the operating and stock price performance of other companies that investors may deem comparable, and news reports relating to trends in its markets. Levcor has experienced limited liquidity, lack of volume and lack of coverage by analysts and market makers, which may or may not affect the future performance of the stock. In addition, the stock market in general has experienced extreme volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may result in the declination of the price of Levcor's stock, regardless of its operating performance. After The Merger, Management Will Beneficially Own Approximately 29.2% Of Levcor's Common Stock And 98.3% Of Levcor's Series A Preferred Stock, Representing Approximately 39.2% Of The Voting Power And Their Interests Could Conflict With Yours. Following the merger, Levcor's directors and executive officers will beneficially own approximately 29.2% of Levcor's outstanding common stock and 98.3% of Levcor's Series A preferred stock, representing approximately 39.2% of the voting power. As a result of their ownership, the directors and executive officers of Levcor collectively are able to influence all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying or preventing a change in control of Levcor. Future Sales Of Common Stock By Our Existing Stockholders Could Result in a Decline of Levcor's Stock Price. The market price of Levcor's common stock could decline as a result of sales of a large number of shares of its common stock in the market after the merger is completed, or the perception that these sales could occur. These sales also might make it more difficult for Levcor to sell equity securities in the future at a time and at a price that it deems appropriate. As of November 21, 2002, Levcor had outstanding 2,338,194 shares of common stock. There Is No Established Public Trading Market For The Levcor Series A Preferred Stock And No Guarantee That A Market Will Develop Or That You Will Be Able To Sell Your Shares Of Levcor Series A Preferred Stock. There is no existing public market for Carlyle's Series B preferred stock and the Levcor Series A preferred stock will constitute a new issue of securities for which there is currently no existing public market. Levcor does not expect to list its Series A preferred stock on any securities exchange. The lack of a public trading market of the Levcor 48 Series A preferred stock will limit the ability of the holders of the Levcor Series A preferred stock to sell such shares. Levcor May Not Have The Funds Necessary To Finance A Required Mandatory Redemption Of The Series A Preferred Stock. The Levcor Series A preferred stock shall be subject to mandatory redemption, in three equal annual installments on June 15, 2007, June 15, 2008 and June 15, 2009, at a price per share of Series A preferred stock equal to $1 per share, together with an amount representing accrued and unpaid dividends, whether or not declared, to the date of redemption. This represents a significant future liability of Levcor. There can be no assurance that Levcor's business will generate sufficient cash flow from operations or that future borrowings will be available in sufficient amounts to enable Levcor to redeem the Levcor Series A preferred stock when required to do so. In the event that Levcor fails to redeem the Series A preferred stock on any of the mandatory redemption dates, then the Series A preferred stockholders will be entitled to receive cumulative cash dividends, and no distribution or dividend in cash, shares of capital stock or other property will be paid or declared on the common stock. Similarly, if the redemption on the Series A preferred is not met, and should Levcor liquidate or dissolve, no payment of any kind may be made to the common stockholders without first satisfying the accrued cash dividends owed to the Series A preferred stockholders. INFORMATION REGARDING FORWARD-LOOKING STATEMENTS Levcor and Carlyle have each made forward-looking statements in this joint proxy statement/prospectus, all of which are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future business success or financial results. The forward-looking statements include, but are not limited to, statements as to expectations regarding: o future revenue opportunities; o the integration of Carlyle; o the development of the combined businesses and the future growth of our customer base; o future expense levels, including research and development, selling, general and administrative expenses, and amortization of goodwill and other tangibles; o strategic relationships and distribution relationships; o future capital needs; o the emergence of new products; o expansion of marketing and sales forces; o expansion into new markets; o new distribution and customer acquisition models; o acquisition of complementary products and businesses; and 49 o future financial pronouncements. When Levcor or Carlyle use words like "believe," "expect," "anticipate," "should" or similar words or terms, they are making forward-looking statements. You should note that an investment in Levcor stock involves risks and uncertainties that could affect our future business success or financial results. Levcor actual results could differ materially from those anticipated expressly or implicitly in these forward-looking statements as a result of many factors, including those set forth in "Risk Factors" and elsewhere in this joint proxy statement/prospectus. Levcor believes that it is important to communicate its expectations to its investors. However, there may be events in the future that Levcor is not able to predict accurately or over which Levcor has no control. You should be aware that the occurrence of the events described in the risk factors and elsewhere in this joint proxy statement/prospectus could materially and adversely affect the business, financial condition and operating results of Levcor. Levcor undertakes no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. 50 THE LEVCOR ANNUAL MEETING DATE, TIME AND PLACE OF ANNUAL MEETING The annual meeting will be held on December 31, 2002, at 10:00 a.m., at the offices of Katten Muchin Zavis Rosenman, 575 Madison Avenue, New York, New York 10022. This joint proxy statement/prospectus is being furnished in connection with the solicitation by the Levcor board of directors of proxies to be used at the annual meeting and at all adjournments and postponements of the special meeting. MATTERS TO BE CONSIDERED AT ANNUAL MEETING At the annual meeting, stockholders of Levcor will be asked to: 1. approve and adopt the merger agreement; 2. approve a proposal to amend and restate Levcor's certificate of incorporation; 3. elect six persons to serve as directors of Levcor; 4. approve the adoption of Levcor's 2002 Stock Option Plan; 5. elect three persons to serve as directors of Levcor if the merger is not consummated; 6. ratify the appointment of Friedman Alpren & Green LLP as independent auditors for fiscal year 2002; 7. permit Levcor's board of directors, in its discretion, to adjourn or postpone the annual meeting if necessary for further solicitation of proxies; and 8. transact such other business as may properly come before the annual meeting or any adjournments or postponement thereof. RECORD DATE FOR VOTING TO APPROVE AND ADOPT THE MERGER; STOCKHOLDERS ENTITLED TO VOTE Only stockholders of record of Levcor common stock at the close of business on November 21, 2002 are entitled to notice of and to vote at the annual meeting. As of the close of business on that date, there were 2,338,194 shares of Levcor common stock outstanding and entitled to vote, held of record by 6,389 stockholders. A majority of those shares, present in person or represented by proxy, will constitute a quorum for the transaction of business. If a quorum is not present, it is expected that the annual meeting will be adjourned or postponed to solicit additional proxies. Each Levcor stockholder is entitled to one vote for each share of Levcor common stock held as of the record date. 51 VOTING AND REVOCATION OF PROXIES The proxy accompanying this joint proxy statement/prospectus is solicited on behalf of Levcor's board of directors. Stockholders are requested to complete, date and sign the accompanying proxy and promptly return it in the accompanying envelope or otherwise mail it to Levcor. If your shares are held in "street name" by your broker, your broker will vote your shares for you only if you provide instructions on how to vote. Your broker will provide directions regarding how to instruct your broker to vote your shares. All properly executed proxies received by Levcor prior to the annual meeting that are not revoked will be voted at the annual meeting in accordance with the instructions indicated on the proxies or, if no direction is indicated, to approve and adopt the merger agreement, to approve the amendment and restatement of the Levcor certificate of incorporation, to elect the six named persons to serve as directors of Levcor, to approve the adoption of Levcor's 2002 Stock Option Plan, to ratify the appointment of Friedman Alpren & Green LLP as independent auditors for fiscal year 2002, to elect three persons to serve as directors of Levcor for the fiscal year 2002 in the event the merger is not consummated, to approve the grant of discretionary authority to the Levcor board of directors to adjourn or postpone the annual meeting and to transact such other business as may come before the annual meeting or any adjournment thereof. Levcor's board of directors does not presently intend to bring any other business before the annual meeting and, so far as is known as of the date of this joint proxy statement/prospectus, no other matters are to be brought before the annual meeting. Any other business that properly comes before the annual meeting, will be voted in accordance with the judgment of the persons voting such proxies. A Levcor stockholder who has given a proxy may revoke it at any time before it is exercised at the annual meeting by (1) delivering a written notice, dated later than the date of the proxy, stating that the proxy is revoked, (2) signing and delivering a proxy relating to the same shares with a later date than the date of the previous proxy or (3) attending the annual meeting and voting in person. Attendance at the annual meeting does not in itself constitute the revocation of a proxy. Any written notice of revocation or subsequent proxy should be sent to 462 Seventh Avenue, New York, New York 10018, or hand delivered to the Secretary of Levcor at or before the taking of the vote at the annual meeting. Stockholders that have instructed a broker to vote their shares must follow directions received from that broker in order to change their vote or to vote at the annual meeting. STOCKHOLDER VOTE IS REQUIRED TO APPROVE AND ADOPT THE MERGER AGREEMENT AND THE ADDITIONAL PROPOSALS Approval and adoption of the merger agreement and approval of the amended and restated certificate of incorporation by Levcor's common stockholders is required by the Delaware General Corporation Law. Approval of the 2002 Stock Option Plan, ratification of the appointment of Friedman Alpren Green as Levcor's independent auditors, and approval of the grant of discretionary authority to the Levcor board of directors to adjourn or postpone the annual meeting require the 52 affirmative vote of a majority of the shares of Levcor common stock present in person or by proxy at the annual meeting. Election of the six named persons to serve as directors of Levcor until the next annual meeting, as well as election of the three named persons to serve as directors until the next annual meeting in the event that the merger is not consummated require the affirmative vote of a plurality of the votes of the shares of Levcor common stock present in person or represented by proxy at the meeting. Approval and adoption of the merger agreement and approval of the amended and restated certificate of incorporation requires the affirmative vote of the holders of a majority of the outstanding shares of Levcor common stock. Abstentions and broker non-votes are not affirmative votes and will have the same effect as votes against approval and adoption of the merger agreement and approval of the amended and restated certificate of incorporation. THE REQUIRED VOTE OF THE STOCKHOLDERS OF LEVCOR WITH RESPECT TO THE MERGER AGREEMENT AND THE CERTIFICATE OF INCORPORATION IS BASED UPON THE NUMBER OF OUTSTANDING SHARES OF LEVCOR COMMON STOCK RATHER THAN UPON THE SHARES ACTUALLY VOTED IN PERSON OR BY PROXY AT THE ANNUAL MEETING. THEREFORE, IF THE HOLDERS OF ANY SUCH SHARES FAIL TO EITHER SUBMIT A PROXY OR VOTE IN PERSON AT THE ANNUAL MEETING, SUCH FAILURE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. THE APPROVAL OF THE MERGER AGREEMENT APPROVAL OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND APPROVAL OF THE 2002 STOCK OPTION PLAN CANNOT BE VOTED ON BY BROKERS HOLDING SHARES FOR BENEFICIAL OWNERS WITHOUT THE OWNERS' SPECIFIC INSTRUCTIONS. ACCORDINGLY, YOU ARE URGED INSTRUCT YOUR BROKER TO VOTE YOUR SHARES. As of November 21, 2002, directors, executive officers and affiliates of Levcor as a group beneficially owned approximately 37% of the outstanding shares of Levcor common stock. BOARD RECOMMENDATION LEVCOR'S BOARD OF DIRECTORS HAS APPROVED THE MERGER AND BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND THAT THE MERGER IS IN THE BEST INTERESTS OF, LEVCOR AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE LEVCOR STOCKHOLDERS VOTE FOR (A) THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT; (B) THE APPROVAL OF THE AMENDMENT AND RESTATEMENT OF THE CERTIFICATE OF INCORPORATION; (C) THE ELECTION OF THE SIX PERSONS NAMED IN THIS JOINT PROXY STATEMENT/PROSPECTUS AS DIRECTORS; (D) THE APPROVAL OF THE ADOPTION OF LEVCOR'S 2002 STOCK OPTION PLAN; (E) THE ELECTION OF THE THREE NOMINEES NAMED IN THIS JOINT PROXY STATEMENT/PROSPECTUS AS DIRECTORS IF THE MERGER IS NOT CONSUMMATED; (F) FOR THE RATIFICATION OF FRIEDMAN ALPREN & GREEN LLP AS INDEPENDENT AUDITORS; AND (G) FOR THE GRANT OF DISCRETIONARY AUTHORITY TO THE LEVCOR BOARD OF DIRECTORS TO ADJOURN OR POSTPONE THE ANNUAL MEETING IF NECESSARY. 53 UNDER THE TERMS OF THE MERGER AGREEMENT, LEVCOR IS OBLIGATED TO AMEND AND RESTATE ITS CERTIFICATE OF INCORPORATION TO PROVIDE FOR THE CREATION AND ISSUANCE OF A NEW CLASS OF PREFERRED STOCK TO BE ISSUED IN EXCHANGE FOR THE CARLYLE SERIES B PREFERRED STOCK, ELECT THE SIX PERSONS DESIGNATED TO SERVE AS DIRECTORS OF LEVCOR UPON THE EFFECTIVE TIME OF THE MERGER, AND ASSUME THE OUTSTANDING CARLYLE STOCK OPTIONS. IN THE EVENT THAT THE LEVCOR STOCKHOLDERS VOTE TO APPROVE AND ADOPT THE MERGER AGREEMENT, BUT THE LEVCOR STOCKHOLDERS DO NOT APPROVE EITHER THE AMENDMENT AND RESTATEMENT OF LEVCOR'S CERTIFICATE OF INCORPORATION, THE ELECTION OF SIX PERSONS TO SERVE AS DIRECTORS OF LEVCOR, OR THE ADOPTION OF LEVCOR'S 2002 STOCK OPTION PLAN, THE MERGER WILL NOT BE CONSUMMATED. THE VOTE WITH RESPECT TO THE MERGER AGREEMENT AND THE ADDITIONAL PROPOSALS ARE OF GREAT IMPORTANCE TO THE STOCKHOLDERS OF LEVCOR. ACCORDINGLY, LEVCOR'S STOCKHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. SOLICITATION OF PROXIES; EXPENSES All expenses of Levcor's solicitation of proxies will be borne by Levcor. The cost of preparing and mailing this joint proxy statement/prospectus to Levcor stockholders will be shared equally by Carlyle and Levcor. In addition to solicitation by the use of the mails, proxies may be solicited from Levcor stockholders by directors, officers and employees of Levcor in person or by telephone, facsimile or other means of communication. These directors, officers and employees will not be additionally compensated, but may be reimbursed for reasonable out-of-pocket expenses in connection with this solicitation. Arrangements will also be made with brokerage houses, custodians, nominees and fiduciaries for forwarding of proxy solicitation materials to beneficial owners of shares held of record by such brokerage houses, custodians, nominees and fiduciaries. Levcor will reimburse these brokerage houses, custodians, nominees and fiduciaries for their reasonable expenses incurred in forwarding such materials. 54 THE CARLYLE SPECIAL MEETING DATE, TIME AND PLACE OF SPECIAL MEETING The special meeting will be held on December 31, 2002, at 11:00 a.m., at the offices of Katten Muchin Zavis Rosenman, 575 Madison Avenue, New York, New York 10022. This joint proxy statement/prospectus is being furnished in connection with the solicitation by the Carlyle board of directors of proxies to be used at the special meeting and at all adjournments and postponements of the special meeting. MATTERS TO BE CONSIDERED AT SPECIAL MEETING At the special meeting, stockholders of Carlyle will be asked to approve and adopt the merger agreement and to permit Carlyle's board of directors, in its discretion, to adjourn or postpone the special meeting if necessary for further solicitation of proxies. RECORD DATE FOR VOTING; STOCKHOLDERS ENTITLED TO VOTE Only stockholders of record of Carlyle common stock and Carlyle Series B preferred stock at the close of business on November 21, 2002 are entitled to notice of and to vote at the special meeting. As of the close of business on that date, there were 13,934,858 shares of Carlyle common stock outstanding and entitled to vote, held of record by approximately 1,227 stockholders, and 4,555,007 shares of Carlyle Series B preferred stock outstanding and entitled to vote, held of record by three stockholders. A majority of those shares, voting together as a class, present in person or represented by proxy, will constitute a quorum for the transaction of business. If a quorum is not present, it is expected that the special meeting will be adjourned or postponed to solicit additional proxies. Each Carlyle stockholder is entitled to one vote for each share of Carlyle common stock and each share of Carlyle Series B preferred stock held as of the record date. VOTING AND REVOCATION OF PROXIES The proxy accompanying this joint proxy statement/prospectus is solicited on behalf of Carlyle's board of directors. Stockholders are requested to complete, date and sign the accompanying proxy and promptly return it in the accompanying envelope or otherwise mail it to Carlyle. If your shares are held in "street name" by your broker, your broker will vote your shares for you only if you provide instructions on how to vote. Your broker will provide directions regarding how to instruct your broker to vote your shares. All properly executed proxies received by Carlyle prior to the special meeting that are not revoked will be voted at the special meeting in accordance with the instructions indicated on the proxies or, if no direction is indicated, to approve and adopt the merger agreement. Carlyle's board of directors does not currently intend to bring any other business before the special meeting of stockholders and Carlyle's board of directors currently is not aware of any other matters to be brought before the special meeting. If other business that Carlyle's board of directors did not know, a reasonable time before the solicitation, properly comes before the special meeting, the proxies will be voted in accordance with the judgment of the proxyholders. A Carlyle stockholder who has given a proxy may revoke it at any time before it is exercised at the special meeting by (1) delivering a written notice, dated later than the date of the proxy, stating that the proxy is revoked, (2) signing and delivering a proxy relating to the same shares with a later date than the date of the previous proxy or (3) attending the special meeting and voting in person. Attendance at the special meeting does not in itself constitute the 55 revocation of a proxy. Any written notice of revocation or subsequent proxy should be sent to 1 Palmer Terrace, Carlstadt, New Jersey 07072, Attention: Edward F. Cooke, or hand delivered to the Secretary of Carlyle at or before the taking of the vote at the special meeting. Stockholders that have instructed a broker to vote their shares must follow directions received from that broker in order to change their vote or to vote at the special meeting. STOCKHOLDER VOTE IS REQUIRED TO APPROVE AND ADOPT THE MERGER AGREEMENT AND THE ADDITIONAL PROPOSAL Approval and adoption of the merger agreement by Carlyle's stockholders is required by the Delaware General Corporation Law. Approval of the grant of discretionary authority to the Levcor board of directors to adjourn or postpone the annual meeting requires the affirmative vote of a majority of the shares of Levcor common stock present in person or by proxy at the annual meeting. Approval and adoption of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of Carlyle stock. Abstentions and broker non-votes are not affirmative votes and will have the same effect as votes against approval and adoption of the merger agreement. WITH RESPECT TO THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT, THE REQUIRED VOTE OF THE STOCKHOLDERS OF CARLYLE IS BASED UPON THE NUMBER OF OUTSTANDING SHARES OF CARLYLE COMMON STOCK AND CARLYLE SERIES B PREFERRED STOCK RATHER THAN UPON THE SHARES ACTUALLY VOTED IN PERSON OR BY PROXY AT THE SPECIAL MEETING. THEREFORE, IF THE HOLDERS OF ANY SUCH SHARES FAIL TO EITHER SUBMIT A PROXY OR VOTE IN PERSON AT THE SPECIAL MEETING, SUCH FAILURE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. THE APPROVAL OF THE MERGER AGREEMENT CANNOT BE VOTED ON BY BROKERS HOLDING SHARES FOR BENEFICIAL OWNERS WITHOUT THE OWNERS' SPECIFIC INSTRUCTIONS. ACCORDINGLY, YOU ARE URGED TO INSTRUCT YOUR BROKER TO VOTE YOUR SHARES. As of November 21, 2002, directors, executive officers and affiliates of Carlyle as a group beneficially owned approximately 22.4% of the outstanding shares of Carlyle common stock and 98.3% of the outstanding shares of Carlyle Series B preferred stock, representing approximately 39.2% of the voting power. BOARD RECOMMENDATION CARLYLE'S BOARD OF DIRECTORS HAS APPROVED THE MERGER AND BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND THAT THE MERGER IS IN THE BEST INTERESTS OF, CARLYLE AND ITS STOCKHOLDERS AND THEREFORE RECOMMENDS THAT CARLYLE STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND FOR THE GRANT OF DISCRETIONARY AUTHORITY TO THE CARLYLE BOARD OF DIRECTORS TO ADJOURN OR POSTPONE THE SPECIAL MEETING IF NECESSARY. THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE TO THE STOCKHOLDERS OF CARLYLE. ACCORDINGLY, CARLYLE'S STOCKHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND 56 TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. SOLICITATION OF PROXIES; EXPENSES All expenses of Carlyle's solicitation of proxies will be borne by Carlyle. The cost of preparing and mailing this joint proxy statement/prospectus to Carlyle stockholders will be shared equally by Carlyle and Levcor. In addition to solicitation by the use of the mails, proxies may be solicited from Carlyle stockholders by directors, officers and employees of Carlyle in person or by telephone, facsimile or other means of communication. These directors, officers and employees will not be additionally compensated, but may be reimbursed for reasonable out-of-pocket expenses in connection with this solicitation. Arrangements will also be made with brokerage houses, custodians, nominees and fiduciaries for forwarding of proxy solicitation materials to beneficial owners of shares held of record by such brokerage houses, custodians, nominees and fiduciaries. Carlyle will reimburse these brokerage houses, custodians, nominees and fiduciaries for their reasonable expenses incurred in forwarding such materials. YOU SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH YOUR PROXY CARD. A transmittal form with instructions for the surrender of your Carlyle stock certificates will be mailed to you as soon as practicable after completion of the merger. For more information regarding the procedures for exchanging your Carlyle stock certificates for Levcor stock certificates, please see the section entitled "The Merger Agreement--Procedures for Exchanging Stock Certificates" on page 95 of this joint proxy statement/prospectus. 57 THE MERGER THIS SECTION OF THE JOINT PROXY STATEMENT/PROSPECTUS DESCRIBES CERTAIN ASPECTS OF THE PROPOSED MERGER THAT WE CONSIDER IMPORTANT. THE DISCUSSION OF THE MERGER IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE DESCRIPTION OF THE PRINCIPAL TERMS OF THE MERGER AGREEMENT ARE ONLY SUMMARIES OF THE MATERIAL TERMS OF THE PROPOSED MERGER. YOU CAN OBTAIN A MORE COMPLETE UNDERSTANDING OF THE MERGER BY READING THIS ENTIRE JOINT PROXY STATEMENT/PROSPECTUS, INCLUDING THE MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS APPENDIX A AND CERTAIN PROVISIONS OF DELAWARE LAW RELATING TO THE RIGHTS OF DISSENTING STOCKHOLDERS, A COPY OF WHICH IS ATTACHED HERETO AS APPENDIX B. YOU ARE ENCOURAGED TO READ THE MERGER AGREEMENT AND THE OTHER APPENDICES TO THIS JOINT PROXY STATEMENT/PROSPECTUS IN THEIR ENTIRETY. COMPLETION OF THE MERGER Assuming approval and adoption of the merger agreement and the satisfaction or waiver of all other conditions of the merger agreement, we anticipate that the merger will occur on the date of the meetings or within a few days following the meetings. EXCHANGING YOUR STOCK CERTIFICATES If you are a Carlyle stockholder, do not send in your stock certificates now. After the merger is completed, we will send you written instructions for exchanging your Carlyle stock certificates for Levcor stock certificates. BACKGROUND OF THE MERGER In late 2001, the potential business and synergistic benefits from a business combination of Carlyle and Levcor became apparent to Robert Levinson, Chairman and President of Levcor and Chairman, President and Chief Executive Officer of Carlyle. Because Levcor's customer base consists of manufacturers and Carlyle's customer base consists of retailers, the merger would have the potential to open new channels of distribution for each of the companies that would not otherwise exist. Levcor should enjoy increased access to credit markets by virtue of the larger revenue base of the combined companies. In addition, the merger of the two companies would permit the combined company to save on certain administrative costs and allow the stockholders of the combined company to participate in the potential growth of the combined company after the merger. It is also possible that the merger of the two companies may permit the consolidated income of the combined companies to be offset against the net operating loss carried forward by the combined company, and may result in increased trading liquidity to the stockholders of the combined companies. In early December 2001, Mr. Levinson had preliminary discussions with Houlihan Lokey Howard & Zukin whereby Mr. Levinson described in general terms a transaction that would result in the merger of Carlyle and Levcor. Also discussed were the processes Houlihan Lokey would need to go through and the information it would require to determine whether it would be able to provide a single opinion, addressed to both Carlyle's and Levcor's boards, which opined as to the fairness of the exchange ratio of the proposed transaction or a separate opinion to Carlyle's board addressing whether or not the consideration to be received by Carlyle's stockholders was fair from a financial point of view. Mr. Levinson contacted Houlihan Lokey because of Houlihan's previous experience representing Carlyle in prior transactions. During the next few months, until the time Carlyle officialy executed an engagement letter whereby Houlihan Lokey Howard & Zukin would serve as financial advisors to Carlyle, Mr. Levinson had several discussions with Houlihan Lokey regarding the terms of a possible engagement whereby Houlihan Lokey would give a dual opinion to the stockholders of both companies, as well as the impact of potential operating synergies between Carlyle and Levcor including the value Levcor's net operating losses. On December 13, 2001, at a regularly scheduled board meeting, Carlyle's board of directors discussed the possibility of Levcor acquiring Carlyle in exchange for Levcor stock and the advantages to Carlyle to doing such a deal. The discussions focused on the many business and synergistic benefits from such a combination of the two companies such as the potential to increase the business and customer relationships available to Carlyle and to expand its product 58 offerings, channels of distribution, business and customer base to wholesale markets, increased access to credit markets by virtue of the larger revenue base of the combined companies, and increased trading liquidity to the stockholders of Carlyle. The board also discussed that although Levcor is now profitable, it has a net operating loss, which, subject to applicable tax principles could potentially save the combined company the taxes on its income for some years in the future. Mr. Levinson also advised the Board that Houlihan Lokey Howard & Zukin had discussed with him the issuance of a fairness opinion including the necessary valuations for a fee of $75,000. A decision was made by the board to continue to proceed exploring the benefits and the structure of the proposed transaction. On February 12, 2002, Mr. Levinson on behalf of Levcor, met with representatives of Katten Muchin Zavis Rosenman, Levcor's legal counsel, to discuss the relative values of the companies and the potential tax benefits of the merger that could be achieved by structuring the transaction in a way to preserve the net operating loss of Levcor and allow the surviving company to offset its taxable income. Also discussed was the principal terms and conditions by which Levcor would acquire Carlyle, including the contemplated capitalization of the combined company. On February 14, 2002, at a regularly scheduled board meeting, Carlyle's board of directors discussed the status of the proposed acquisition of Carlyle by Levcor. The discussion focused on the possible structure of the transaction, which would result in the stockholders of Carlyle owning a majority of the surviving company upon consummation of the proposed merger, permit the stockholders of the combined company to have an opportunity to participate in the growth of the combined company after the merger and provide Carlyle with an opportunity to expand its business and product offerings to wholesale markets. The board agreed that due to the lack of liquidity and trading volume on the Company's common stock and the ability to acquire other targets because of the limitations in Carlyle's bank agreements, the potential merger should be explored. The board also discussed what steps should be taken in light of the fact that Mr. Levinson is a stockholder, officer and director of both Carlyle and Levcor and whether or not a special committee should be formed comprised of the board's independent members. In connection with this discussion, Edward H. Cohen, Esq., of Katten Muchin Zavis Rosenman advised the board that it had two duties under Delaware law: a duty of loyalty and a duty of care and discussed the steps the board should take to ensure such duties are not breached. Prior to Mr. Cohen addressing the board concerning its duties under Delaware law, Mr. Cohen disclosed to the board that although Katten Muchin Zavis Rosenman has served as general counsel to Carlyle since the spring of 2000, it also serves as general counel to Levcor and will be representing Levcor in connection with the merger. After a discussion, the board agreed that because Katten Muchin Zavis Rosenman will continue to provide services to Carlyle unrelated to the merger, it would be appropriate to receive general legal advice regarding the board's duties and obligations under Delaware law, however, the board concluded it must seek the advise of other counsel in connection with the proposed merger. At this meeting, the independent members of the board, Joseph S. DiMartino, Giandomenico Picco and Ralph Langer requested that Mr. Levinson, as result of his interests as a stockholder, officer and director of Levcor, excuse himself from the meeting so the remaining members of the board could freely discuss Levcor's proposed acquisition of Carlyle by Levcor and any steps that should be taken to preserve the board's duties of loyalty and care. During Mr. Levinson's absence the remaining board members concluded that it would act as it ordinarily does without any special committee, however Mr. Levinson, as the only director with a conflict of interest, would be required to abstain from all votes concerning the proposed merger. The remaining board members further concluded that special counsel will be retained on behalf of Carlyle in connection with the proposed merger and in order to assist the board in carefully evaluating the proposed merger to ascertain what is in the best interest of the stockholders of Carlyle, it would seek the receipt of a fairness opinion. The full Carlyle board agreed with the independent directors conclusion that it was unnecessary to form a special committee comprised of the independent directors because Mr. Levinson, as the only director with a conflict of interest, would be required to abstain from all votes concerning the merger, special counsel would be retained to represent Carlyle in connection with the negotiation of the defintive merger agreement and the merger, and the board would seek receipt of a fairness opinion to assist in determining whether the proposed merger was in the best interest of the stockholders of Carlyle. The meeting was concluded with the board agreeing to continue to proceed exploring the benefits and the structure of the proposed transaction. 59 Subsequent to the February 14, 2002 meeting of Carlyle's board directors, Mr. DiMartino, on behalf of the independent directors of Carlyle, contacted Stroock & Stroock & Lavan LLP, to discuss the possible engagement of Stroock to serve as special counsel to Carlyle in connection with the proposed merger. During the next few months, until the time Carlyle officialy executed an engagement letter whereby Stroock & Stroock & Lavan LLP would serve as special legal counsel to Carlyle, Mr. DiMartino had several telephone discussions with Stroock regarding the terms of the proposed engagement, as well as the status of the proposed acquisition by Levcor of Carlyle. At no time prior to the official engagement by Carlyle of Stroock & Stroock & Lavan LLP, did Mr. Levinson engage in any negotiations on behalf of Carlyle in connection with the merger. On February 15, 2002, at a special board meeting by means of a conference call facility, Levcor's board of directors discussed the status of the proposed acquisition by Levcor of Carlyle as well as the business, financial and operational issues involved in combining the companies. The discussion focused on the possible structure of the transaction, which would result in the stockholders of Carlyle owning a majority of the surviving company. At the conclusion of the discussion the board agreed that although the structure would result in the current stockholders of Levcor owning less than a majority of the surviving company, such a factor did not outweigh the potential business and synergistic benefits from a business combination of Carlyle and Levcor particularly the potential opportunity to save on administrative costs and the opportunity to expand Levcor's product offerings and business to retail markets. The board also concluded that in light of the fact that Mr. Levinson is a stockholder, officer and director of both Carlyle and Levcor as well as Mr. Cohen's firm's representation of Levcor and Carlyle, Mr. Levinson and Mr. Cohen, as the only directors with a conflict of interest, would be required to abstain from all votes concerning the proposed merger and in order to assist the board in carefully evaluating the proposed merger to ascertain what is in the best interest of the stockholders of Levcor, the board would seek the receipt of a fairness opinion. The Levcor board further concluded that it was unnecessary to form a special committee because Mr. Levinson, as the only director with a conflict of interest, would be required to abstain from all votes concerning the merger, and the board would seek receipt of a fairness opinion to assist in determining whether the proposed merger was in the best interest of the stockholders of Levcor. At this meeting, the Levcor board of directors deliberated as to what the merger consideration to be offered to Carlyle should be, and concluded that the consideration to be offered, as ultimately reflected in the merger agreement, was reasonably fair to the Levcor stockholders and believed to be sufficient enough to cause the Carlyle stockholders to approve the merger. The Levcor board believed that the merger consideration of one share of Levcor common stock in exchange for five shares of Carlyle common stock and one share of Levcor preferred stock in exchange for each share of Carlyle Series B preferred was reasonable in light of what it believed were the intrinsic values of the respective company's assets and business and fell within an acceptable range that would likely result in the approval of the merger by both the Levcor and Carlyle stockholders. Such belief was confirmed by two fairness opinions concluding that the consideration to be paid to the Carlyle stockholders fell within an acceptable range that was fair from a financial point of view to the Carlyle and Levcor stockholders. Although the consideration represents a premium over the average closing price of each stock for the 20 business days prior to the date the merger was publicly announced, Levcor's board concluded that such a market price analysis is not a reliable indication of fair value, particularly because such market price analysis is based on infrequent transactions and does not account for the lack of trading liquidity of both stocks. Carlyle's common stock traded only four days during the 20 business days prior to the date the merger was publicly announced; resulting in an aggregate of only 4,500 shares being traded, having an aggregate market value of only $945 and an average daily trading value of $47.25. Levcor's common stock traded only 12 days during the 20 business days prior to the date the merger was publicly announced; resulting in an aggregate of 58,400 shares being traded, having an aggregate total market value of $179,255 and an average daily trading value of $8,962.75. On March 19, 2002, Mr. Levinson met with representatives of Houlihan Lokey Howard & Zukin, financial advisors to Carlyle and representatives of Katten Muchin Zavis Rosenman to discuss issues related to a proposed acquisition of Carlyle by Levcor. At this meeting, the proposed structure and terms of the business combination of Carlyle and Levcor was discussed as well as the business, financial and operational issues involved in combining the companies. Mr. Levinson advised Houlihan Lokey that the boards of both companies had determined that separate fairness opinions, addressing the fairness of the consideration to be offered from the financial points of view of the respective stockholders, would be required. Houlihan Lokey advised Mr. Levinson that in light of its prior representation of Carlyle, it felt that it would be more appropriate that Houlihan Lokey represents Carlyle rather than Levcor. After several discussions among the independent directors of Carlyle in April 2002, Mr. DiMartino, on behalf of the independent directors of Carlyle, officially contacted Houlihan Lokey Howard & Zukin to discuss the terms under which it would render a fairness opinion to the Carlyle board of directors. On April 26, 2002, Edward Cooke executed the engagement letter officially retaining Houlihan Lokey. In April 2002, Mr. DiMartino, on behalf of the independent directors of Carlyle, officially retained Stroock & Stroock & Lavan LLP, to act as special counsel to Carlyle in connection with the proposed merger. On April 23, 2002, at a special meeting by means of a conference call facility, Levcor's board of directors discussed the status of the proposed acquisition by Levcor of Carlyle. At this meeting the board of directors authorized Levcor to engage Willamette Management Associates to render a fairness opinion, and asked that Willamette determine whether the consideration amount, as determined by the Levcor board of directors, was fair to the Levcor stockholders from a financial point of view. On May 7, 2002, representatives of Katten Muchin Zavis Rosenman circulated a draft of the merger agreement to Carlyle and its advisors. During the next three weeks representatives of Katten Muchin Zavis Rosenman and Stroock & Stroock & Lavan LLP, special legal counsel to Carlyle, negotiated the merger agreement and circulated new drafts of the merger agreement among the parties and their representatives. 60 On May 16, 2002, at a special board meeting of Levcor at the offices of Katten Muchin Zavis Rosenman in New York City, representatives of Willamette Management Associates outlined and discussed the financial terms of the proposed transaction and presented to the Levcor board of directors a preliminary financial analysis of the proposed acquisition of Carlyle by Levcor. The terms of the proposed acquisition provided that Carlyle would merge with and into Levcor, with Levcor continuing as the surviving corporation, and the stockholders of Carlyle will receive one share of Levcor common stock for every five shares of Carlyle's common stock and one share of a new class of Levcor preferred stock, designated as Series A preferred stock, for each share of Carlyle's Series B preferred stock. Willamette provided the board with an oral opinion that the consideration to be paid to the Carlyle stockholders, as given to Willamette by the Levcor board of directors, fell within an acceptable range of values that Willamette had determined, and consequently that the consideration to be offered would be fair from a financial point of view to the stockholders of Levcor. At this meeting, the Levcor board of directors (with Mr. Levinson abstaining) authorized Mr. Levinson to present to Carlyle's board of directors a non-binding proposal for Levcor to acquire Carlyle. Shortly thereafter, Mr. Levinson presented the Carlyle board of directors a non-binding proposal for Levcor to acquire Carlyle, which included the original consideration amount determined by the Levcor board of directors, which the Levcor board of directors felt fell within an acceptable range that Carlyle would be willing to accept. On May 16, 2002, at a special board meeting of Carlyle at the offices of Katten Muchin Zavis Rosenman in New York City, Carlyle's board of directors discussed the non-binding proposal received from Levcor pursuant to which Levcor would acquire Carlyle. Present at the meeting were representatives of Katten Muchin Zavis Rosenman, representatives of Houlihan Lokey Howard & Zukin, financial advisors to Carlyle, and Martin H. Neidell, Esq., of Stroock & Stroock & Lavan LLP, special legal counsel to Carlyle. Houlihan outlined and discussed the financial terms of the proposed transaction and presented to the Carlyle board of directors a preliminary financial analysis of the proposed acquisition of Carlyle by Levcor. Houlihan provided the board with an oral opinion to the effect that the consideration to be paid to the Carlyle stockholders would be fair from a financial point of view to the stockholders of Carlyle. Houlihan Lokey began discussions with Carlyle's management regarding a possible combination with Levcor sometime in the fourth quarter of 2001. While Houlihan Lokey did not learn the specific terms of the consideration being offered by Levcor to the Carlyle holders of common stock and preferred stock until May 16, 2002, it had performed sufficient analyses to conclude that the Levcor proposal fell within a range where it could render its opinion. Prior to May 16, 2002, Houlihan Lokey had completed its: (i) analysis of the historic trading prices and volume for Carlyle's and Levcor's publicly traded common stock, (ii) independent valuation of Carlyle and Levcor, (iii) calculation of a range of exchange ratios utilizing its independent valuations, (iv) comparison of the exchange ratio indicated by the trading value of Carlyle's and Levcor's publicly traded securities to the exchange ratio implied by the independent valuation of Carlyle and Levcor, and (v) considered the impact of potential operating synergies between Carlyle and Levcor including the value Levcor's net operating losses. Mr. Levinson, as a result of his interests as a stockholder, officer and director of Levcor, excused himself from the meeting so the remaining members of the board could freely discuss Levcor's acquisition proposal. At this meeting, the Carlyle board of directors (with Mr. Levinson abstaining) authorized Carlyle to accept the non-binding proposal received from Levcor pursuant to which Levcor would acquire Carlyle, subject to approval at a subsequent board meeting. All of the directors of Carlyle were present at this meeting except for Ralph Langer, who was subsequently briefed by Robert A. Levinson and confirmed his agreement with the actions taken at the meeting by the board. On May 16, 2002, the parties publicly announced that they had reached an agreement in principle for a merger of the two companies. 61 On May 24, 2002, Carlyle's board of directors met to consider the merger agreement. All of the directors were present at the meeting except for Mr. Ralph Langer who participated by telephone. Also present were representatives of Katten Muchin Zavis Rosenman, and representatives of Houlihan Lokey Howard & Zukin, financial advisors to Carlyle, and Martin H. Neidell of Stroock & Stroock & Lavan LLP, special legal counsel to Carlyle. Mr. Cooke advised the board that since the May 16, 2002 announcement, Carlyle had not received any other acquisition proposals or any indication of interest from any other bidders. Houlihan delivered to Carlyle's board of directors its financial analysis and its updated oral opinion, which was confirmed by the delivery of a written opinion dated May 24, 2002, to the effect that the consideration to be paid to the holders of Carlyle common stock would be fair from a financial point of view to the stockholders of Carlyle. After further discussion and deliberation, the Carlyle board of directors (with Mr. Levinson abstaining) unanimously approved the merger agreement and resolved to recommend that Carlyle's stockholders approve and adopt the merger agreement. On May 24, 2002, Levcor's board of directors met to consider the merger agreement. All of the directors were present at the meeting except for Mr. John McConnaughy who participated by telephone. Also present were representatives of Katten Muchin Zavis Rosenman, and representatives of Willamette Management Associates, financial advisors to Levcor. Willamette delivered to Levcor's board of directors its updated oral opinion, which was confirmed by the delivery of a written opinion dated May 24, 2002, to the effect that the consideration to be paid to the Carlyle stockholders would be fair from a financial point of view to the stockholders of Levcor. After further discussion and deliberation, the Levcor board of directors unanimously (with Mr. Levinson abstaining) approved the merger agreement and resolved to recommend that Levcor's stockholders approve and adopt the merger agreement. On, May 24, 2002, Carlyle and Levcor executed a definitive merger agreement. The merger agreement provides for the merger of Carlyle with and into Levcor, and the issuance of one share of Levcor common stock in exchange for each five shares of common stock of Carlyle and the issuance of one share of a new class of Levcor preferred stock, designated as Series A preferred stock, in exchange for each share of Carlyle Series B preferred stock. On May 28, 2002, the parties issued a joint press release announcing the signing of the merger agreement. LEVCOR'S REASONS FOR THE MERGER Levcor's board of directors has determined that the terms of the merger and the merger agreement are fair to, and in the best interests of, Levcor and its stockholders. In making this determination, Levcor's board of directors gave substantial consideration to any potential conflict of interest in this transaction as a result of Mr. Levinson being a stockholder, officer and director of both Carlyle and Levcor, and his involvement in negotiating the transaction on behalf of both companies. After the board's receipt of a fairness opinion to the effect that the consideration to be paid to the Carlyle stockholders would be fair from a financial point of view to the stockholders of Levcor, the board determined that Mr. Levinson's conflict did not diminish such finding. Accordingly, Levcor's board of directors has approved the merger agreement and 62 the consummation of the merger and recommends that you vote FOR approval and adoption of the merger agreement. In reaching its decision, Levcor's board of directors identified several potential benefits of the merger, the most important of which included: o Levcor's stockholders will have the opportunity to participate in the potential growth of the combined company after the merger; o Combining with Carlyle will give Levcor the opportunity to expand the channels of distribution for its products into retail markets; o Being part of a combined company will reduce the risks of continuing as a relatively small independent company in an industry that is increasingly competitive; o Levcor should enjoy increased access to credit markets by virtue of the larger revenue base of the combined companies; o Levcor should save on certain administrative costs as a result of the merger; o Because the merger will not result in an ownership change of greater than 50% it is possible that Levcor's substantial history of net operating losses might be utilized by the combined company to offset the earnings of Carlyle; and o As a result of the merger, Levcor's common stock may have a higher degree of liquidity and marketability principally as a result of the combined company having: (i) a larger number of shares outstanding, (ii) a greater "float", (iii) a larger number of stockholders, (iv) a larger size as measured by size of assets, revenues, and cash flow, and (v) increased diversification of products and markets. Being part of a combined company will reduce the risks of continuing as a relatively small company in an industry that is rapidly consolidating and increasingly competitive. Levcor's board considered a number of potentially negative factors in its deliberation of the merger, including: o The risk that Levcor would not be successful in expanding its business and products to retail markets, not save on administrative costs as a result of the merger, or not enjoy increased access to credit markets by virtue of the larger revenue base of the combined companies; o The risk that the merger will not be completed and the potential adverse effects of the public announcement of the merger on Levcor's sales and operating results, Levcor's ability to attract and retain key employees and Levcor's overall competitive position; o The risk that key technical, sales and management personnel of Carlyle might not remain employees of Levcor after the merger closes; 63 o The transaction costs associated with the merger, such as legal, accounting and printing expenses, exceed estimates or such costs exceed the benefits of the merger; and o The other risks described under "Risk Factors--Risks Related to the Merger" beginning on page 40. Levcor's board of directors consulted with Levcor's senior management, as well as its legal counsel and financial advisers in reaching its decision to approve the merger. Among the factors considered by Levcor's board in its deliberations, which supported the board's recommendation to approve the merger, were the following: o Historical information concerning Levcor's and Carlyle's respective financial performance, results of operations, assets, liabilities, operations, technology, brand development, management and competitive position, including public reports covering the most recent fiscal year and fiscal quarter for each company filed with the SEC; o Levcor's management's view of the financial condition, results of operations, assets, liabilities, businesses and prospects of Levcor and Carlyle after giving effect to the merger; o Current stock market conditions and historical trading information with respect to Levcor and Carlyle stock; o Comparable announced and completed merger transactions within industry segments similar to Levcor's such as the apparel manufacturing, textile products, diversified fabrics manufacturing and knit products manufacturing. Target companies had SIC codes of 2299, 2221, 2258 or 2261 and included the following targets/acquirers: Fruit of The Loom, Ltd/Berkshire Hathaway Inc., Springs Industries, Inc./Heartland Industrial Partners, L.P., Johnston Industries, Inc./JI Acquisition Corp., and Alba Waldensian Inc./Tefron Ltd.; o The possibility of other potential acquisitions Levcor might pursue as an alternative to the merger with Carlyle, which Levcor ultimately felt were not as immediately attractive as the Carlyle transaction in terms of enhancing stockholder value; o Current industry, market and economic conditions; o The impact the merger might be expected to have on customers, suppliers and employees; and o The opinion of Willamette Management Associates, dated May 24, 2002, including their related financial analyses, to the effect that, as of the date of the merger agreement and based upon and subject to the facts and assumptions set forth in their opinion (as described more fully in the text of the entire opinion attached as Appendix 64 C to this joint proxy statement/prospectus), the consideration to be paid in the merger by Levcor was fair from a financial point of view. After due consideration, Levcor's board of directors concluded that the risks associated with the proposed merger were outweighed by the potential benefits of the merger. Levcor's board of directors does not intend the foregoing discussion of information and factors to be exhaustive but believes the discussion includes all of the material factors that it considered. In view of the complexity and wide variety of information and factors, both positive and negative, that it considered, Levcor's board of directors did not find it practical to quantify or otherwise assign relative or specific weights to the specific factors it considered in making its determination. The determination was made after taking into consideration all of the factors as a whole. In addition, individual members of the Levcor board may have given different weights to the different factors. RECOMMENDATION OF LEVCOR'S BOARD OF DIRECTORS LEVCOR'S BOARD OF DIRECTORS HAS APPROVED THE MERGER AND BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND THAT THE MERGER IS IN THE BEST INTERESTS OF, LEVCOR AND ITS STOCKHOLDERS AND THEREFORE RECOMMENDS THAT LEVCOR'S STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. CARLYLE'S REASONS FOR THE MERGER Carlyle's board of directors has determined that the terms of the merger and the merger agreement are fair to, and in the best interests of, Carlyle and its stockholders. In making this determination, Carlyle's board of directors gave substantial consideration to any potential conflict of interest in this transaction as a result of Mr. Levinson being a stockholder, officer and director of both Carlyle and Levcor, and his involvement in negotiating the transaction on behalf of both companies. After the board's receipt of a fairness opinion to the effect that the consideration to be paid to the holders of Carlyle common stock would be fair from a financial point of view to the stockholders of Carlyle, the board determined that Mr. Levinson's conflict did not diminish such finding. Accordingly, Carlyle's board of directors has approved the merger agreement and the consummation of the merger and recommends that you vote FOR approval and adoption of the merger agreement. In reaching its decision, Carlyle's board of directors identified several potential benefits of the merger, the most important of which included: o Carlyle's stockholders will have the opportunity to participate in the potential growth of the combined company after the merger; o The anticipated exchange ratio in the merger represented a premium of approximately 71% over the closing price for Carlyle common stock over the market trading price of Carlyle on May 15, 2002, the day prior to the announcement of the merger; 65 o Levcor's experience and expertise with respect to offering products to wholesale markets may provide Carlyle the opportunity to expand its product offerings, business and customer base to wholesale markets; and o As a result of the merger, the Levcor common stock that the holders of Carlyle common stock will receive in the merger may have a higher degree of liquidity and marketability principally as a result of the combined company having: (i) a larger number of shares outstanding, (ii) a greater "float", (iii) a larger number of stockholders, (iv) a larger size as measured by size of assets, revenues, and cash flow, and (v) increased diversification of products and markets; and o Carlyle should enjoy increased access to credit markets by virtue of the larger revenue base of the combined companies. Carlyle's board of directors considered a number of potentially negative factors in its deliberation of the merger, including: o The risk that, due to the exchange ratio by which the Carlyle common stock will be exchanged for Levcor common stock is fixed and will not be adjusted for changes in the market price of either Carlyle common stock or Levcor common stock, the value to be received by Carlyle's stockholders in the merger could decline significantly prior to the completion of the merger o The risk that Carlyle would not be successful in expanding its business and products to wholesale markets or not enjoy increased access to credit markets by virtue of the larger revenue base of the combined companies; o The risk that the merger will not be completed, including the circumstances under which Levcor could terminate the merger agreement and the circumstances under which Carlyle could be required to pay a termination fee to Levcor; o Levcor's decline in sales in the first quarter of 2002 and its history of operating losses will continue, resulting in a decline in the value to be received by the Carlyle stockholders in the merger; o Levcor's ability to attract and retain key employees with experience offering products to wholesale markets; o Levcor's overall lack of a competitive position in an industry with companies having a larger size and financial resources than Levcor; o The risk that key sales and management personnel might not remain employees of Levcor after the merger closes; o The loss of control over the future operations of Carlyle following the merger; 66 o The transaction costs associated with the merger, such as legal and accounting expenses, exceed estimates or such costs exceed the benefits of the merger; and o The other risks described under "Risk Factors--Risks Related to the Merger" beginning on page 40. Carlyle's board of directors consulted with Carlyle's senior management, as well as its special legal counsel and financial advisers, in reaching its decision to approve the merger. Among the factors considered by Carlyle's board of directors in its deliberations, which supported the board's recommendation to approve the merger, were the following: o Historical information concerning Levcor's and Carlyle's respective financial performance, results of operations, assets, liabilities, operations, technology, brand development, management and competitive position, including public reports covering the most recent fiscal year and fiscal quarter for each company filed with the SEC; o Carlyle's management's view of the financial condition, results of operations, assets, liabilities, businesses and prospects of Levcor and Carlyle after giving effect to the merger; o Current market conditions and historical trading information with respect to Levcor and Carlyle stock; o Comparable announced and completed merger transactions within industry segments similar to Levcor's such as the apparel manufacturing, textile products, diversified fabrics manufacturing and knit products manufacturing. Target companies had SIC codes of 2299, 2221, 2258 or 2261 and included the following targets/acquirers: Fruit of The Loom, Ltd/Berkshire Hathaway Inc., Springs Industries, Inc./Heartland Industrial Partners, L.P., Johnston Industries, Inc./JI Acquisition Corp., and Alba Waldensian Inc./Tefron Ltd.; o Strategic alternatives to the transaction proposed by Levcor available to Carlyle, such as sale of the company or maintaining status quo which Carlyle ultimately felt were not as immediately attractive as the Levcor transaction in terms of enhancing stockholder value; o The opinion of Houlihan Lokey Howard & Zukin, dated May 24, 2002, including their related financial analyses, to the effect that, as of the date of the merger agreement and based upon and subject to the facts and assumptions set forth in their opinion (as described more fully in the text of the entire opinion attached as Appendix D to this joint proxy statement/prospectus) the consideration to be received in the merger by the holders of Carlyle's common stock was fair to them from a financial point of view; o The difficulties Carlyle experienced in recent years in attracting needed capital; 67 o The tax-free treatment to Carlyle's stockholders; o The ability of Carlyle's board of directors to enter into discussions with another party in response to an unsolicited superior offer to the merger if Carlyle's board of directors believed in good faith that such action was required in order to comply with its fiduciary obligations; o Current industry, market and economic conditions; o The impact the merger might be expected to have on customers, suppliers and employees; and o The principal terms of the merger agreement, which included: (i) the anticipated exchange ratio to be received in the merger which represented a premium of approximately 71% over the average closing price for Carlyle common stock over the 20-day trading period ending on May 15, 2002, the last trading day before the agreement in principle between Levcor and Carlyle was publicly announced; (ii) the assumption by Levcor of the outstanding Carlyle stock options; and (iii) Edward F. Cooke, Joseph S. DiMartino and Giandomenico Picco, all of whom are currently directors of Carlyle, becoming directors of Levcor upon completion of the merger. After due consideration, Carlyle's board of directors concluded that the risks associated with the proposed merger were outweighed by the potential benefits of the merger. Carlyle's board of directors does not intend the foregoing discussion of information and factors to be exhaustive but believes the discussion to include all of the material factors that it considered. In view of the complexity and wide variety of information and factors, both positive and negative, that it considered, Carlyle's board of directors did not find it practical to quantify or otherwise assign relative or specific weights to the specific factors it considered in making its determination. The determination was made after taking into consideration all of the factors as a whole. In addition, individual members of Carlyle's board of directors may have given different weights to the different factors. RECOMMENDATION OF CARLYLE'S BOARD OF DIRECTORS CARLYLE'S BOARD OF DIRECTORS HAS APPROVED THE MERGER AND BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND THAT THE MERGER IS IN THE BEST INTERESTS OF, CARLYLE AND ITS STOCKHOLDERS AND THEREFORE RECOMMENDS THAT CARLYLE STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. OPINION OF LEVCOR'S FINANCIAL ADVISOR Willamette Management Associates has acted as financial advisor to the Levcor board of directors in connection with the proposed merger. Willamette delivered its oral opinion, which was subsequently confirmed in writing, effective as of May 24, 2002, to the board of directors that, as of the date of the opinion and based on and subject to the limitations and qualifications 68 set forth in the written opinion, the consideration to be received by the stockholders of Carlyle in the merger was fair from a financial point of view to the Levcor stockholders. The full text of the written opinion of Willamette, dated as of May 24, 2002, which sets forth matters relied upon and considered, along with limitations on the review undertaken in connection with that opinion, is attached to this joint proxy statement/prospectus as Appendix C. Levcor stockholders are urged to, and should, read the Willamette opinion in its entirety. The Willamette opinion was provided for the information of the Levcor board of directors in connection with their evaluation of the merger, and the Willamette opinion is not intended to be, nor does it constitute a recommendation as to how any holder of Levcor stock should vote with respect to the merger. In arriving at its opinion, among other things, Willamette: o reviewed Carlyle's annual report on form 10-K for the fiscal year ended December 31, 2001 and quarterly report on form 10-Q for the period ended March 31, 2002; o reviewed Levcor's annual report on Form 10-KSB for the fiscal year ended December 31, 2001 and quarterly report on Form 10-QSB for the period ended March 31, 2002; o reviewed certain internal financial analyses and forecasts for Levcor and Carlyle prepared by their respective management; o reviewed certain publicly available documents as well as the historical stock price activity and trading volume from April 2001 through April 2002 for both Levcor and Carlyle; o reviewed internal budgets and projections, marketing materials and press releases provided by Levcor; o reviewed a draft copy of the agreement and plan of merger in the form provided by Levcor; o subsequent to the review of the draft copy of the merger agreement, reviewed the final copy of the merger agreement, and found there to be no material differences; o held discussions with members of the senior management of Levcor and Carlyle regarding the strategic rationale for, and potential benefits of, the transaction contemplated by the agreement and plan of merger, and the past and current business operations, financial condition and future prospects of their respective companies and of the combined operations of Levcor and Carlyle; 69 o reviewed available research reports and publicly available data and information for companies that it determined to be comparable to Levcor and Carlyle1; o reviewed the financial terms of other recent business combinations in SIC's 3965, 5131 and 5199, which were chosen due to the similarity in industry to that of Levcor and Carlyle based on the SIC codes included in the filing representing such combinations, although found none sufficiently comparable and with enough information for useful valuation guidance; and o conducted such other financial analysis as Willamette deemed appropriate. Willamette employed several methodologies in rendering its opinion. The methodologies Willamette employed included a market approach using the above described comparable companies, and an income approach using a discounted net cash flow analysis. The market approach consisted of identifying those companies similar to Levcor and Carlyle, performing a comparative analysis between the comparable companies and Levcor and Carlyle, and, based on that comparative analysis, applying multiples to measures of Levcor' and Carlyle's historical performance such as earnings, cash flows and revenues. The income approach consisted of using projections provided by Levcor and Carlyle to project future net cash flows, and to then discount those cash flows to present value using present value discount rates that reflected the risks inherent in each projection and company. Certain of these methodologies employed forward looking financial information prepared by management. Willamette relied upon this information without independent verification of the accuracy and completeness thereof and has relied on management assurances that this information reflected the best available estimates as of the date of their preparation. The information specifically provided to Willamette by Carlyle and Levcor was not reviewed by the respective boards of Levcor and Carlyle, but was reviewed by the respective management of Levcor and Carlyle. The management of Carlyle and Levcor, respectively, found Willamette's reliance on such information reasonable. Willamette's opinion is based on the economic, industry and market conditions as they existed as of the date of the opinion. The analyses are not predictive of future results or performance, which may vary from the estimates as they existed as of the date of the opinion. The following table shows the range of market multiples for the comparable companies used for Levcor, the multiples applied to Levcor, and the resultant indication of value: ---------- 1 For Levcor, Willamette reviewed Burlington Industries, Inc., Culp Inc., Dan River Inc., UNFI Inc., Galey & Lord Inc. and Hallwood Group, Inc. For Carlyle, Willamette reviewed Boyds Collection Ltd., Department 56 Inc., Enesco Group Inc., Media Arts Group Inc., Security Capital and Tag-it Pacific Inc. All of the above mentioned companies were selected because they are involved in the manufacture and distribution of apparel, apparel accessories, crafts and other apparel related goods. 70
Market Pricing -------------------------------------------------------------------- Fundamental Levcor Low High Mean Median Selected Indicated $000 Value $000 LATEST 12 EBIT 619 (64.1) 465.7 92.7 21.2 9.0 5,568 EBITDA 650 3.0 9.9 8.1 9.0 8.0 5,197 Revenues 20,108 0.39 0.92 0.64 0.63 0.4 8,043 Indicated 6,300 Less: Interest Bearing (2,430) ------ INDICATED VALUE OF EQUITY 3,870 ======
The discounted cash flow analysis for Levcor was prepared based upon projections provided by Levcor's management. The net cash flows for the discrete projection years were discounted to present value using a present value discount rate commensurate with the risks inherent in the projections, and added to a terminal year value that represented the value of Levcor after the initial projection period. The equity value indicated by this analysis was $4,870,000. In order to derive a range of values, Willamette applied weights to these indications of value as well as the value indicated by the market capitalization of Levcor prior to the announcement of the proposed merger. The application of those weights and the resultant indications of value are shown on the following tables:
Indicated Method Weights Value $000 ----------------------------------------------------------------------------------- ----------------- ---------------- Freely Traded Value 20.0% 6,978 Discounted Cash Flow Method 40.0% 4,870 Guideline Publicly Traded Company Method 40.0% 3,870 ----- INDICATED VALUE OF COMMON EQUITY - ROUNDED 4,900
Indicated Method Weights Value $000 ----------------------------------------------------------------------------------- ----------------- ---------------- Freely Traded Value 33.3% 6,978 Discounted Cash Flow Method 33.3% 4,870 Guideline Publicly Traded Company Method 33.3% 3,870 ----- INDICATED VALUE OF COMMON EQUITY - ROUNDED 5,200
Based upon these analyses, we concluded that Levcor's equity had a value in the range of $4.9 million to $5.2 million. The following table shows the range of market multiples for the comparable companies used for Carlyle, the multiples applied to Carlyle, and the resultant indication of value: 71
Market Pricing Multiples Fundamental Carlyle Low High Mean Median Selected Indicated $000 Value $000 ----------------------- ------------ ------------- ------------- ------------ ------------- ------------- ------------ LATEST 12 MONTHS: EBIT 2,227 (3.8) 70.3 22.7 9.4 5.5 12,249 EBITDA 2,944 (5.6) 19.7 8.2 8.6 4.8 13,984 DFNI 1,327 (5.3) 117.72 38.0 15.7 9.2 12,204 DFCF 2,044 (9.7) 24.3 10.5 12.4 6.8 13,896 Revenues 24,925 0.38 3.92 1.52 1.24 0.7 17,448 THREE-YEAR AVERAGE: EBIT 3,198 6.1 26.3 12.2 9.8 5.1 16,312 EBITDA 3,950 5.3 17.5 8.5 6.4 3.5 13,824 DFNI 1,982 10.2 43.9 21.1 18.5 9.6 19,028 DFCF 2,733 7.5 23.8 12.0 9.7 5.3 14,487 Revenues 26,963 0.31 3.29 1.49 1.37 0.7 18,874 Indicated MVIC 15,200 Less: Interest Bearing Debt (5,700) ------ INDICATED VALUE OF EQUITY, ROUNDED 9,500 ======
The discounted cash flow analysis for Carlyle was prepared based upon projections provided by Carlyle's management. The net cash flows for the discrete projection years were discounted to present value using a present value discount rate commensurate with the risks inherent in the projections, and added to a terminal year value that represented the value of Carlyle after the initial projection period. The equity value indicated by this analysis was $11,200,000. In order to derive a range of values for Carlyle's common equity, the redemption value of its preferred shares had to be deducted, as shown on the following table:
Indicated Value Method $000 -------------------------------------------------------------- ------------------ ----------------- ------------------ Discounted Cash Flow Method 11,200 Guideline Publicly Traded Company Method 9,500 Low High ------------------ -------------- 9,500 11,200 Less: Redemption Preference of Preferred Shares: ------------------------------------------------------------- Preferred Series B (4,568) (4,568) ------------------ -------------- Indicated Value of Common Equity 4,932 6,632 INDICATED VALUE OF COMMON EQUITY 4,900 6,600
Based upon the above analyses, we concluded a value for Carlyle's common equity in the range of $4.9 million to $6.6 million. We did not incorporate Carlyle's market capitalization in this analysis because we felt that it's trading price was not a reliable indication the value of its equity. 72 A summary of the values concluded for Levcor and Carlyle and the implied exchange ratios is shown below: EQUITY VALUATION:
LEVCOR RANGE CARLYLE: RANGE Low High Low High ------------ --------- ----------- --------- Value of Levcor Equity $4,900 $5,200 Value of Carlyle Equity $4,900 $6,600 Fully Diluted Shares 2,326 2,326 Fully Diluted Shares 13,935 13,935 ------------ --------- ----------- --------- Value of Levcor Equity per Share $2.11 $2.24 Value of Carlyle per Share $0.35 $0.47 ============ ========= =========== ========= Rounded $2.10 $2.25 $0.35 $0.45 ============ ========= =========== =========
EXCHANGE RATIO IMPLIED BY MARKET VALUATION:
CARLYLE INDUSTRIES, INC. $ 0.35 $ 0.40 $ 0.45 LEVCOR $ 2.10 0.167 0.190 0.214 INTERNATIONAL, INC. $ 2.15 0.163 0.186 0.209 $ 2.20 0.159 0.182 0.205 $ 2.25 0.156 0.178 0.200
Based upon the foregoing analysis, we concluded that the exchange ratio of one share of Levcor stock to five shares of Carlyle stock is reasonable. Willamette's assessment and analysis was prepared solely as part of Willamette's recommendation as to the fairness to the Levcor stockholders of the consideration to be received by the Carlyle stockholders in the merger, and were provided to the Levcor board of directors in that connection. Based on the foregoing, Willamette concluded and recommended to the Levcor board of directors that the value of the consideration to be received by the stockholders of Carlyle, pursuant to the merger, was fair from a financial point of view to the stockholders of Levcor. The Willamette opinion was only one of the factors taken into consideration by the Levcor board of directors in making its determination to recommend that the Levcor board of directors approve the merger. The board of directors retained Willamette based on its experience and expertise, and selected Willamette to be their financial advisor after reviewing their experience and qualifications. Willamette is a valuation consulting, economic analysis and financial advisory firm based in New York. Willamette offers a broad range of financial advisory services to clients that range from substantial closely held businesses to multi-national corporations. Willamette, as part of its valuation consulting business, routinely provides financial advisory services in connection with mergers and acquisitions, leveraged buyouts, business valuations for a variety of regulatory and planning purposes, recapitalizations, financial restructurings, and private placements of debt and equity securities. Pursuant to the Willamette engagement letter, Levcor has agreed to pay Willamette a fee of $50,000 for its preparation and delivery of the fairness opinion. No portion of Willamette's fee is contingent upon the successful completion of the merger. Levcor retained Willamette 73 solely to deliver its fairness opinion. Levcor agreed to indemnify Willamette against certain liabilities, including liabilities under federal securities laws that arise out of the engagement of Willamette. Levcor's board of directors did not limit Willamette in any way in the investigations it made or the procedures it followed in rendering its opinion. The full text of Willamette's opinion, which sets forth the assumptions made, general procedures followed, factors considered and limitations on the review undertaken by Willamette in rendering its opinion is attached as Appendix C and is incorporated herein by reference. We urge you to read the opinion in its entirety. OPINION OF CARLYLE'S FINANCIAL ADVISOR Houlihan Lokey Howard & Zukin Financial Advisors, Inc. ("Houlihan Lokey") has acted as financial advisor to the Carlyle board of directors in connection with the proposed merger. Houlihan Lokey delivered its oral opinion, which was subsequently confirmed in writing, effective as of May 24, 2002, to the board of directors that, as of the date of the opinion and based on and subject to the limitations and qualifications set forth in the written opinion, the consideration to be received by the holders of Carlyle common stock in the merger was fair from a financial point of view to the Carlyle stockholders. The full text of the written opinion of Houlihan Lokey, dated as of May 24, 2002, which sets forth matters relied upon and considered, along with limitations on the review undertaken in connection with that opinion, is attached to this joint proxy statement/prospectus as Appendix D. Carlyle stockholders are urged to, and should, read the Houlihan Lokey opinion in its entirety. The Houlihan Lokey opinion was provided for the information of the Carlyle board of directors in connection with their evaluation of the merger, and the Houlihan Lokey opinion is not intended to be, nor does it constitute a recommendation as to how any holder of Carlyle stock should vote with respect to the merger. Houlihan Lokey believes, and so advised the board of directors of Carlyle that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it, without considering all factors and analyses, could create an incomplete view of the process underlying its analyses and opinions. Houlihan Lokey understands that Carlyle and Levcor are considering entering into a merger whereby Levcor will issue one share of Levcor common stock in exchange for five shares of Carlyle common stock and Levcor will issue one share of Series A preferred stock in exchange for each share of Series B preferred stock of Carlyle. The board of directors retained Houlihan Lokey to render an opinion as to the fairness, from a financial point of view, to the holders of Carlyle common stock of the consideration to be received by them in connection with the merger. Houlihan Lokey has not been engaged to initiate any discussions with third parties with respect to a possible acquisition of Carlyle. In connection with the preparation of the opinion, Houlihan Lokey made such reviews, analyses and inquiries as it deemed necessary and appropriate under the circumstances. Among other things, Houlihan Lokey: 74 1. reviewed the following financial data regarding Carlyle's operations: o audited consolidated financial statements for the fiscal years ended December 31, 1998 through 2001; o unaudited consolidated publicly available financial statements for the period ending March 31, 2002; o projected quarterly balance sheet, income statement and cash flow for the fiscal years ended December 31, 2002 through 2004; 2. reviewed the following financial data regarding Levcor's operations: o audited consolidated financial statements for the fiscal year ended December 31, 1998 through 2001; o unaudited consolidated publicly available financial statements for the period ended March 31, 2002; o projected quarterly balance sheet and income statement for the fiscal year ended December 31, 2002; 3. reviewed copies of the following documents and agreements: o Agreement and Plan of Merger between Levcor International, Inc. and Carlyle Industries, Inc., dated May 24, 2002; o Proposed Amended and Restated Certificate of Incorporation of Levcor International, Inc., which is an exhibit to the Agreement and Plan of Merger; dated May 24, 2002; o Proposed By-Laws of Levcor International, Inc., which is an exhibit to the Agreement and Plan of Merger; 4. visited Levcor's offices and met with members of management of Carlyle and Levcor to discuss the terms of the merger, and the operations, financial condition, future prospects and projected operations and performance of Levcor and Carlyle; 5. reviewed publicly available financial data for certain companies that it deems comparable to Carlyle and Levcor; and 6. considered other data and factors deemed appropriate under the circumstances. In assessing the financial fairness of the consideration to be received in the merger by the holders of Common Stock, Houlihan Lokey: (i) analyzed the historic trading prices and volume of Carlyle's and Levcor's publicly-traded common shares; (ii) independently valued Carlyle and Levcor; (iii) calculated a range of exchange ratios utilizing the independent valuations; (iv) 75 compared the exchange ratio indicated by the trading values of Carlyle and Levcor to the range of exchange ratios implied by the independent valuations of Carlyle and Levcor; (v) reviewed the terms of the merger; and (vi) considered the impact of potential operating synergies between Carlyle and Levcor, including the value of Levcor's net operating loss carryforwards ("NOLs"). Historical Trading Price and Volume As of May 14, 2002 the 52-week high and low trading prices for Carlyle common stock were $0.40 and $0.19 respectively. The thirty-day average price as of May 14, 2002 was $0.23, and the closing price on May 14, 2002 was $0.21. Over the 90-day period ended May 14, 2002, the average daily trading volume for Carlyle was 1,814 shares per day, which is approximately 0.01% of Carlyle's primary shares outstanding and its estimated public float. Additionally, over the same 90-day period, Carlyle's shares only traded on 32 days, or 35.6% of the possible trading days. Valuation of Carlyle Industries, Inc. Houlihan Lokey relied upon the Market Multiple Approach and the Discounted Cash Flow Approach in conducting its independent valuation of Carlyle. Market Multiple Approach. The market multiple approach involves the multiplication of various earnings and cash flow measures by appropriate risk-adjusted enterprise value(1) multiples. Multiples were determined through an analysis of certain publicly traded companies, which were selected on the basis of operational and economic similarity with the principal business operations of Carlyle. Earnings and cash flow multiples were calculated for the comparable companies based upon daily trading prices. In analyzing the comparable companies' earnings and cash flow multiples, Houlihan Lokey used the closing stock prices for the day of May 14, 2002. The earnings and cash flow multiples for the comparable companies were calculated as summarized in the following chart. ---------- (1) The enterprise value of a company is calculated as the aggregate public trading value of its common stock plus preferred stock plus debt, less cash on the balance sheet. 76
(figures in thousands) EV / REVENUE EV/EBITDA --------------- -------------------- EV FYE LTM EV FYE LTM --- --- --- --- --- --- Innovo Group, Inc. $32,259 3.47x 2.84x Innovo Group, Inc. $32,259 NMF NMF Jaclyn, Inc. $12,483 0.16x 0.17x Jaclyn, Inc. $12,483 19.1x 25.3x Nitches, Inc. $6,085 0.18x 0.19x Nitches, Inc. $6,085 3.4x 7.8x Tag-It Pacific, Inc. $57,169 1.31x 1.34x Tag-It Pacific, Inc. $57,169 20.5x 21.1x Tandy Brands Accessories, $98,634 0.50x 0.47x Tandy Brands $98,634 5.9x 5.6x Inc. Accessories, Inc. Low 0.16x 0.17x Low 3.4x 5.6x High 3.47x 2.84x High 20.5x 25.3x Median 0.50x 0.47x Median 12.5x 14.4x Mean 1.12x 1.00x Mean 12.2x 14.9x EV / EBIT -------------- EV FYE LTM -- --- --- Innovo Group, Inc. $32,259 NMF NMF Jaclyn, Inc. $12,483 NMF NMF Nitches, Inc. $6,085 3.5x 8.1x Tag-It Pacific, Inc. $57,169 NMF NMF Tandy Brands Accessories, $98,634 8.6x 8.1x Inc. Low 3.5x 8.1x High 8.6x 8.1x Median 6.0x 8.1x Mean 6.0x 8.1x
A comparative risk analysis between Carlyle and the public companies formed the basis for the selection of appropriate risk adjusted multiples. The risk analysis incorporates both quantitative and qualitative risk factors, which relate to, among other things, the nature of the industry in which Carlyle and other comparable companies are engaged. The risk-adjusted enterprise value multiples are included in the following chart, which summarizes the Market Multiple Analysis utilized by Houlihan Lokey in valuing Carlyle:
(figures in thousands) REPRESENTATIVE SELECTED INDICATED LEVEL MULTIPLE RANGE ENTERPRISE VALUE RANGE -------------- -------------- ---------------------- LTM 3/31/02 ------------------ Revenues $23,488 0.50 x - 0.60 x $11,744 - $14,093 EBITDA $2,988 4.5 x - 5.0 x $13,446 - $14,940 EBIT $2,294 5.0 x - 5.5 x $11,470 - $12,617 PROJECTED FYE 2002 ------------------ Revenues $24,668 0.45 x - 0.55 x $11,101 - $13,567 EBITDA $3,251 4.0 x - 4.5 x $13,004 - $14,630 EBIT $2,736 5.0 x - 5.5 x $13,680 - $15,048 PROJECTED FYE 2003 ------------------ Revenues $26,047 0.40 x - 0.50 x $10,419 - $13,024 EBITDA $3,842 3.5 x - 4.0 x $13,447 - $15,368 EBIT $3,416 4.0 x - 4.5 x $13,664 - $15,372 SELECTED ENTERPRISE VALUE RANGE, ON A MINORITY INTEREST BASIS $13,200 - $14,800
77 For the Carlyle valuation, Houlihan searched for companies that: (i) are distributors; (ii) sell apparel-related goods; (iii) sell to retailers; (iv) are of similar size in revenue to Carlyle (under $100 million); and (v) are of similar size in market capitalization (under $75 million) to Carlyle. The following chart summarizes the characteristics of the selected comparable companies to illustrate the rationale for their selection.
------------------------------------ --------------- --------------- ----------------- ----------------- ---------------- LTM REVENUE MARKET CAP COMPANY (UNDER $100 (UNDER $75 DISTRIBUTOR APPAREL RELATED SELL TO MILLION) MILLION) RETAILERS ------------------------------------ --------------- --------------- ----------------- ----------------- ---------------- CARLYLE INDUSTRIES, INC. X X X X X ------------------------------------ --------------- --------------- ----------------- ----------------- ---------------- Innovo Group, Inc. X X X X X ------------------------------------ --------------- --------------- ----------------- ----------------- ---------------- Jaclyn, Inc. X X X X X ------------------------------------ --------------- --------------- ----------------- ----------------- ---------------- Nitches, Inc. X X X X X ------------------------------------ --------------- --------------- ----------------- ----------------- ---------------- Tag-It Pacific, Inc. X X X X ------------------------------------ --------------- --------------- ----------------- ----------------- ---------------- Tandy Brands Accessories, Inc. X X X X ------------------------------------ --------------- --------------- ----------------- ----------------- ----------------
The companies with similar risk characteristics to Carlyle are those comparable companies summarized and detailed in the above chart summary. As described, these companies are publicly traded, domestic companies involved in the distribution of apparel, accessories, crafts and other apparel related goods. Therefore, Carlyle and these comparable companies share similar risk characteristics. Discounted Cash Flow Approach In the discounted cash flow approach, financial projections prepared by management were used. The present value of interim cash flows and the terminal value were determined using a risk-adjusted rate of return or "discount rate." The discount rate was developed through an analysis of rates of return on alternative investment opportunities on investments in companies with similar risk characteristics to Carlyle. It estimated Carlyle's terminal value by using a multiple of EBITDA in the final year of the projections. The following are the primary assumptions utilized in the discounted cash flow approach to the valuation of Carlyle: present value of interim cash flows of $5.4 million; terminal value of $16.0 million; discount rate of 14.0%; and terminal EBITDA multiple of 4.5x. Comparable Transactions Approach The comparable transactions approach was not utilized in the Carlyle valuation due to a lack of relevant transactions. Result of Valuation of Carlyle Common Stock Houlihan Lokey valued the Carlyle common stock at a per share value in the range of $0.28 to $0.42, with a mean value of $0.35. Such valuation was based on the Market Multiple Approach and the Discounted Cash Flow Approach, both summarized in the charts listed above. To determine the reasonableness of the value of the Levcor common stock to be received by the 78 stockholders of Carlyle pursuant to the merger, Houlihan Lokey (i) reviewed trading prices and volume for Levcor's publicly traded securities and (ii) independently valued Levcor. Historical Trading Price and Volume As of May 14, 2002 the 52-week high and low trading prices for Levcor common stock were $5.00 and $1.25 respectively. The thirty-day average price as of May 14, 2002 was $2.89, and the closing price on May 14, 2002 was $3.10. Over the 90-day period ended May 14, 2002, the average daily trading volume for Levcor was 1,276 shares per day, which is approximately 0.05% of Levcor's primary shares outstanding and 0.06% of its estimated public float. Additionally, over the same 90-day period, Levcor's shares only traded on 37 days, or 41.1% of the possible trading days. Valuation of Levcor International, Inc. In its independent valuation of Levcor, Houlihan Lokey used a Market Multiple Approach, Discounted Cashflow Approach and Comparable Transaction Approach. Houlihan Lokey also performed a valuation analysis of Levcor's NOLs, which were included in the total value of the company. Market Multiple Approach Houlihan Lokey analyzed the multiples of certain publicly traded companies as compared to Levcor. The comparable companies were selected on the basis of operational and economic similarity with the principal business operations of Levcor. Earnings and cash flow multiples were calculated for the comparative companies based upon daily trading prices. In analyzing the earnings and cash flow multiples for the comparable companies, Houlihan Lokey used the closing stock prices for the day of May 14, 2002. For purposes of this analysis, Houlihan Lokey selected five publicly traded, domestic textile companies that were at least partly involved in textile converting. For the Levcor valuation, Houlihan searched for companies that: (i) are involved in textile conversion; (ii) sell greige fabrics; (iii) sell to apparel manufacturers; (iv) are of similar size in revenue to Levcor (under $200 million); and (v) are of similar size in market capitalization to Levcor (under $75 million). The following chart summarizes the characteristics of the selected comparable companies to illustrate the rationale for their selection. 79
----------------------------------- --------------- -------------- ------------------ ---------------- -------------------- LTM REVENUE MARKET CAP COMPANY (UNDER $200 (UNDER $75 TEXTILE SELL GREIGE SELL TO APPAREL MILLION) MILLION) CONVERSION FABRICS MANUFACTURERS ----------------------------------- --------------- -------------- ------------------ ---------------- -------------------- LEVCOR INTERNATIONAL INC. X X X X X ----------------------------------- --------------- -------------- ------------------ ---------------- -------------------- Cone Mills Corp. X X X X ----------------------------------- --------------- -------------- ------------------ ---------------- -------------------- Delta Woodside Industries X X X X X ----------------------------------- --------------- -------------- ------------------ ---------------- -------------------- Galey & Lord, Inc. X X X X ----------------------------------- --------------- -------------- ------------------ ---------------- -------------------- Hallwood Group, Inc. X X X X X ----------------------------------- --------------- -------------- ------------------ ---------------- -------------------- Unifi, Inc. X X ----------------------------------- --------------- -------------- ------------------ ---------------- --------------------
The companies with similar risk characteristics to Levcor are the same comparable companies utilized and disclosed in the market multiple approach summary included in the chart summary above. As described, these companies are publicly traded, domestic textile companies that were at least partly involved in textile converting. Therefore, Levcor and its comparable companies share similar risk characteristics. Due to the distressed nature of the textile industry, several of the above companies had debt securities that were trading at a significant discount to book value. Consequently, Houlihan Lokey utilized market value of debt instead of book value in its enterprise value calculations of Levcor's comparable companies. Utilizing the book value of debt in the calculation of the enterprise value of these companies would result in an overstatement of the enterprise value and earnings and cash flow multiples. The earnings and cash flow multiples, as well as the results of the enterprise value calculation of the comparable companies are summarized in the following charts. 80
Comparable Public Company Multiples ---------------------------------------------------------------------------------------------------------------- (figures in thousands) EV / REVENUE EV/EBITDA --------------- --------------- EV (1) FYE LTM EV (1) FYE LTM ------ --- --- ------ --- --- Cone Mills Corp. $314,627 0.70x 0.74x Cone Mills Corp. $314,627 12.4x 11.1x Delta Woodside Industries $51,424 0.24x 0.32x Delta Woodside Industries $51,424 2.8x 10.9x Galey & Lord, Inc. $373,420 0.44x 0.53x Galey & Lord, Inc. $373,420 4.1x 5.4x Hallwood Group, Inc. $34,058 0.44x 0.43x Hallwood Group, Inc. $34,058 6.2x 6.5x Unifi, Inc. $814,971 0.72x 0.89x Unifi, Inc. $814,971 6.5x 8.1x Low 0.24x 0.32x Low 2.8x 5.4x High 0.72x 0.89x High 12.4x 11.1x Median 0.44x 0.53x Median 6.2x 8.1x Mean 0.51x 0.89x Mean 6.4x 8.4x EV/ EBIT EV (1) FYE LTM ------ --- --- Cone Mills Corp. $314,627 NMF 38.4x Delta Woodside Industries $51,424 7.4x NMF Galey & Lord, Inc. $373,420 6.9x 10.9x Hallwood Group, Inc. $34,058 18.6x 20.3x Unifi, Inc. $814,971 23.7x NMF Low 6.9x 10.9x High 23.7x 38.4x Median 13.0x 20.3x Mean 14.2x 23.2x ----------------------------------------------------------------------------------------------------------------
---------- (1) Enterprise Value ("EV") = Market Value of Equity + Market Value of Debt + Preferred Stock + Minority Interests - Cash Discounted Cash Flow Approach In the discounted cash flow approach, financial projections for Levcor beyond fiscal year 2003 were developed by Houlihan Lokey, based on Levcor's 2002 budget and discussions with Levcor management. The present value of the interim cash flows and the terminal value were determined using a risk-adjusted rate of return or "discount rate." The discount rate, in turn, was developed through an analysis of rates of return on alternative investment opportunities on investments in companies with similar risk characteristics to Levcor. Comparable Transactions Approach Like the market multiple approach, the comparable transactions approach also involves multiples of earnings and cash flow and other financial measures. Multiples used in this approach are determined through an analysis of announced and completed transactions involving 81 controlling interests in companies with operations similar to the principal business operations of Levcor. The target companies involved in this transaction study were selected because they operate in similar industry segments as Levcor. Using sources such as Securities Data Company and Mergerstat, Houlihan Lokey conducted a comprehensive search of all transactions from January 1, 1999 to May 1, 2002 involving targets with either the same SIC code as Levcor or SIC codes of similar apparel-related industry segments. The multiples of earnings and cash flow and other financial measures used in Houlihan Lokey's Comparable Transaction Approach for the valuation of Levcor are as follows.
(figures in thousands) REPRESENTATIVE SELECTED INDICATED LEVEL MULTIPLE RANGE ENTERPRISE VALUE RANGE ------------------- -------------------------------- --------------------------------- PROJECTED FYE 2002 ----------------------- Revenues $16,000 0.30x - 0.35x $4,800 - $5,600 EBITDA $828 5.0x - 6.0x $4,142 - $4,970 EBIT $800 5.0x - 6.0x $4,000 - $4,800 SELECTED ENTERPRISE VALUE RANGE, ON A CONTROLLING INTEREST BASIS $4,300 - $5,100
The announced and completed transactions used in the Comparable Transaction Approach were based on announced and completed controlling interest acquisitions between $82.1 million and $1.17 billion. Transactions with announcement dates between 11/9/99 and 11/1/01 for which purchase price multiples were available were considered. Target companies were required to have SIC codes comparable to the Levcor industry, and included SIC code numbers 2299, 2221, 2258, 2211 and 2261. Sources utilized included Securities Data Company, Mergerstat and public filings. The announced and completed transactions used in the Comparable Transactions Approach are summarized as follows.
(figures in millions) LTM ENTERPRISE VALUE MULTIPLE ----------------------------- ANNOUNCED EFFECTIVE TARGET TARGET INDUSTRY ACQUIROR EV REVENUE EBITDA EBIT --------- ---------------- ---------------- -------- -- ------- ------ ---- SEGMENT ------- 11/1/01 4/30/02 Fruit of The Loom, Apparel Berkshire Hathaway $930.0 0.67x 4.5x 24.3x Ltd. Manufacturing Inc. 4/24/01 9/5/01 Springs Textile Products Heartland Industrial $1,165.6 0.52x 4.7x 8.7x Industries, Inc. Partners, L.P. 3/31/00 5/8/00 Johnston Diversified Fabrics JI Acquisition Corp. $144.1 0.55x 7.5x NMF Industries, Inc. Manufacturing 11/9/99 12/15/99 Alba Waldensian Knitted Products Tefron Ltd. $82.1 1.03x 6.3x 8.0 Inc. Manufacturing ------------------------------------------------------------------------------------------------------------------------- Low $82.1 0.52x 4.5x 8.0 High $1,165.6 1.03x 7.5x 24.3x Median $537.1 0.61x 5.5x 8.7 x Mean $580.5 0.69x 5.8x 13.7x -------------------------------------------------------------------------------------------------------------------------
82 Result of Valuation of Levcor Common Stock The above valuation techniques indicated a per share value of Levcor's common stock in the range of $1.63 to $1.95, with a mean value of $1.79. Implied Exchange Ratio Based on Houlihan Lokey's independent valuations of Carlyle and Levcor, the implied exchange ratio ranged from 0.14 to 0.26, or a mean ratio of 0.19. The proposed exchange of 1 share of Levcor's common stock for every 5 shares of Carlyle common stock, or a 0.20 exchange ratio, represents a premium to the implied exchange ratio based on Houlihan Lokey's valuations. Houlihan Lokey calculated the implied exchange ratio of 0.14 to 0.26 by dividing the high range of Houlihan Lokey's valuation of Levcor by the low range of Houlihan Lokey's valuation of Carlyle and the high range of Houlihan Lokey's valuation of Levcor by the low range of Houlihan Lokey's valuation of Carlyle. The calculations are demonstrated in the table below. LEVCOR SHARE PRICE --------------------------------------- LOW MEAN HIGH ------------- ----------- ------------- $1.63 $1.79 $1.95 ------------- ----------- ------------- CARLYLE LOW $0.28 0.17 0.15 0.14 SHARE ----------- PRICE MEAN $0.35 0.21 0.19 0.18 ------------- ----------- HIGH $0.26 0.26 0.23 0.22 ------------- ----------- ------------- Implied Premium to Carlyle Trading Price Prior to the announcement of the proposed merger on May 16, 2002, shares of Carlyle's common stock were priced at $0.21. Based on Levcor's $3.10 per share price prior to the announcement of the proposed merger, the proposed 0.20 exchange ratio results in a $0.62 per share price for Carlyle common stock. This implies a premium of 195% over the market trading price of Carlyle prior to the announcement of the proposed merger. Based on Levcor's $2.10 per share price prior to the delivery of Houlihan Lokey's opinion on May 24, 2002, the proposed 0.20 exchange ratio results in a $0.42 per share price for Carlyle common stock. This implies a premium of 100% over the market trading price of Carlyle prior to the announcement of the proposed merger. 83 Based on Houlihan Lokey's $1.79 per share valuation of Levcor's common stock, the proposed 0.20 exchange ratio results in a $0.36 per share price for Carlyle common stock. This implies a premium of 71% over the market trading price of Carlyle prior to the announcement of the proposed merger. Houlihan Lokey has relied upon and assumed, without independent verification, that the financial information provided to it has been reasonably prepared and accurately and completely reflects the historical financial performance and current financial condition of Carlyle and Levcor, and represents the best currently available estimates of the future financial results and condition of Carlyle and Levcor, and that there has been no material change in the assets, financial condition, business or prospects of Carlyle and Levcor since the date of the most recent financial statements made available to it. Houlihan Lokey has not independently verified the accuracy and completeness of the information supplied to them with respect to Carlyle and Levcor and does not assume any responsibility with respect to it. The information specifically provided to Houlihan Lokey by Carlyle and Levcor was not reviewed by the respective boards of Levcor and Carlyle, but was reviewed by the respective management of Levcor and Carlyle. The management of Carlyle and Levcor, respectively, found Houlihan Lokey's reliance on such information reasonable. Houlihan Lokey's analysis is necessarily based on business, economic, market and other conditions as they exist and can be evaluated by it at the date of its presentation. Houlihan Lokey's assessment and analysis was prepared solely as part of Houlihan Lokey's recommendation as to the fairness to the holders of Carlyle common stock of the consideration to be received by the holders of Carlyle common stock in the merger, and were provided to the Carlyle board of directors in that connection. Based on the foregoing, Houlihan Lokey concluded and recommended to the Carlyle board of directors that the value of the consideration to be received by the holders of Carlyle common stock, pursuant to the merger, was fair from a financial point of view to such holders. The Houlihan Lokey opinion was only one of the factors taken into consideration by the board of directors in making its determination to recommend that the Carlyle board of directors approve the merger. Houlihan Lokey's fairness opinion is limited to opining that the consideration offered by Levcor to the holders of Carlyle common stock, is fair to such holders. Houlihan Lokey did not address the fairness of the consideration to be received by the holders of Carlyle's Series B preferred stock because: (i) there are only three such holders; (ii) all of the holders of the Carlyle Series B preferred stock are believed to be "accredited investors," as such term is defined in Regulation D promulgated under the Securities Act of 1933; and (iii) Mr. Robert A. Levinson, the Chairman, President and Chief Executive Officer of Carlyle, is the beneficial owner of 98.3% of the outstanding shares of Carlyle Series B preferred stock. The Carlyle board of directors retained Houlihan Lokey based on its prior experience representing Carlyle and its expertise, and selected Houlihan Lokey to be its financial advisor after reviewing their experience and qualifications. Houlihan Lokey is a nationally recognized investment banking firm based in New York. Houlihan Lokey offers special expertise in, among other things, valuing businesses and securities and rendering fairness opinions. Houlihan Lokey is continually engaged in the valuation of businesses and securities in connection with mergers and acquisitions, leveraged buyouts, private placements of debt and equity, corporate reorganizations, employee stock ownership plans, corporate and other purposes. 84 Fees and Expenses Pursuant to a retainer agreement entered into on April 24, 2002, Carlyle Industries, Inc. retained Houlihan Lokey on behalf of the board of directors to render an opinion as to the fairness, from a financial point of view, to the public stockholders of the Company of the consideration to be received by them in connection with the merger. Carlyle will pay Houlihan Lokey a fee of $75,000 for its services in connection with the retainer agreement, plus reasonable out-of-pocket expenses that may be incurred by Houlihan Lokey in connection herewith. Payment to Houlihan Lokey was made in the amount of $37,500 upon signing of the retainer agreement, and the remainder upon delivery of the opinion. No portion of the fee is contingent upon the consummation of the merger or the conclusions reached in the opinion. The full text of Houlihan Lokey's opinion, which sets forth the assumptions made, general procedures followed, factors considered and limitations on the review undertaken by Houlihan Lokey in rendering its opinion is attached as Appendix D and is incorporated by reference. The Carlyle stockholders are urged to read the opinion in its entirety. INTERNAL FINANCIAL PROJECTIONS Set forth below is a summary of the material internal financial projections that Levcor and Carlyle provided to each of Houlihan Lokey and Willamette. Both sets of projections were prepared by the respective management of Levcor and Carlyle solely for the benefit of the financial advisors in connection with the financial advisors' analysis of the fairness of the merger consideration from a financial point of view. During the third quarter of this year, Levcor experienced a shortfall in sales of almost $3 million. Levcor's projections set forth below had been based on the past performance of a major customer who during the third quarter of this year purchased its fabrics from overseas suppliers, rather than from Levcor. Consequently, Levcor does not expect to meet its projected net sales for 2002 as set forth below. Levcor and Carlyle Financial Projections (Dollars in thousands)
--------------------------------------------------------------------------------------- OPERATIONS Net Sales Net Income --------------------------------------------------------------------------------------- 2002 2003 2004 2002 2003 2004 --------------------------------------------------------------------------------------- Levcor $18,000 * * $ 810 * * --------------------------------------------------------------------------------------- Carlyle $24,668 $26,047 $26,017 $1,110 $1,593 $1,568 --------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------ BALANCE SHEET Assets Liabilities Equity ------------------------------------------------------------------------------------------------------------------------ 2002 2003 2004 2002 2003 2004 2002 2003 2004 ------------------------------------------------------------------------------------------------------------------------ Levcor $2,740 * * $4,033 * * $(1,293) * * ------------------------------------------------------------------------------------------------------------------------ Carlyle $15,760 $15,286 $15,398 $12,976 $10,922 $9,478 $2,784 $4,364 $5,920 ------------------------------------------------------------------------------------------------------------------------
* Projections for this period were neither prepared by Levcor's management nor provided to either Houlihan Lokey or Willamette. 85 INTERESTS OF CERTAIN PERSONS IN THE MERGER In considering the recommendation of the boards of directors of Levcor and Carlyle regarding the approval and adoption of the merger agreement, you should be aware that certain persons have interests in the merger that are different from, or in addition to their interest as stockholders generally, and which present actual, apparent or potential conflicts of interest in connection with the approval and adoption of the merger agreement. The boards of directors of Levcor and Carlyle were aware of these interests and took these interests into account in approving the merger and the transactions contemplated by the merger documents. Robert Levinson will continue to be an executive officer of Levcor after the merger serving as President and Chief Executive Officer and all three of the current members of Levcor's board of directors will continue to serve as directors after the merger. Upon completion of the merger, Edward F. Cooke, Joseph S. DiMartino and Giandomenico Picco, each of whom is currently a director of Carlyle, will become directors of Levcor. Additionally, upon completion of the merger, Edward F. Cooke, who is currently the Chief Financial Officer and Vice President of Carlyle, will become Levcor's Vice President, Chief Financial Officer, Treasurer and Secretary. Pursuant to the terms of Mr. Cooke's employment agreement with Carlyle, if within one year after a change in control of Carlyle, Mr. Cooke's employment is terminated for any reason, Carlyle shall pay Mr. Cooke an amount equal to one year of his base salary then in effect. The merger agreement provides that upon the completion of the merger, Levcor will indemnify and hold harmless, and pay all applicable expenses to, all past and present directors and officers of Carlyle in all of their capacities for acts or omissions occurring at or prior to the completion of the merger to the same extent they were indemnified pursuant to Carlyle's certificate of incorporation and by-laws and to the fullest extent permitted by law. Upon completion of the merger, the vesting of all options granted to Carlyle's employees and officers will accelerate. As of October 1, 2002, such acceleration will cause options held by Messrs. Levinson and Cooke to purchase an aggregate of 478,000 shares of Carlyle common stock at a weighted average price of $.55 to vest. Upon the effective time of the merger, as a result of the assumption and appropriate adjustment by Levcor of the outstanding Carlyle options, Messrs. Levinson and Cooke will hold options to purchase an aggregate of 95,600 shares of Levcor common stock at a weighted average price of $2.75 per share. Robert A. Levinson Robert A. Levinson serves as the Chairman of the board of directors, President, Secretary and Principal Financial Officer of Levcor while also serving as the Chairman of the board of directors, President and Chief Executive Officer of Carlyle. Furthermore, Mr. Levinson is entitled to exercise approximately 32% of the voting power of the Levcor common and approximately 39.9% of the voting power of the Carlyle capital stock entitled to vote at the respective meetings. Pursuant to the terms of Mr. Levinson's employment agreement with Carlyle, in the event of a change in control of Carlyle, Mr. Levinson would be entitled to a lump sum severance payment generally equal to 2.99 times his average annual compensation for the five calendar years preceding the calendar year during which a change in control occurred or for such shorter period during which he was employed. Mr. Levinson has agreed to waive such provision. As of the record date, Mr. Levinson beneficially owned 749,175 shares of Levcor common stock, which represents approximately 31.4% of Levcor's outstanding common stock. This 31.4% consists of 699,175 shares of Levcor common stock and 50,000 currently exercisable options to purchase shares of Levcor common stock pursuant to Levcor's 1992 Stock Option Plan. As of the record date, Mr. Levinson beneficially owned 2,878,423 shares of Carlyle common stock, which represents approximately 20.4% of Carlyle's outstanding common stock, and 4,479,485 shares of Carlyle Series B preferred stock, which represents approximately 98.3% of Carlyle's outstanding Series B preferred stock. The 20.4% of outstanding common stock consists of 2,098,730 shares of Carlyle common stock owned by Swenvest Corporation, of which Mr. Levinson has sole voting and investment power; 498,693 shares owned directly by Mr. Levinson; 75,000 shares held by three trusts for the benefit of Mr. Levinson's children, as to all of which trusts Mr. Levinson serves as co-trustee, as well as 206,000 shares which Mr. Levinson could acquire upon the exercise of stock options. The 98.3% of outstanding preferred stock consists of 4,479,485 shares held by Swenvest Corporation, as to which Mr. Levinson has sole voting and investment power. Mr. Levinson has also provided $720,000 of loans to Levcor, bearing interest at 6% per annum. In connection with Levcor's financing arrangement with The CIT Group/Commercial Services, Inc. ("CIT"), Mr. Levinson had agreed to defer the payment of interest during 2002 and not to require payment of these loans and $267,000 of the related accrued interest at December 31, 2001, prior to January 2, 2004. On June 5, 2002, the Levcor board of directors determined that in light of the fact that the financing arrangement with CIT was paid off in May of 2002, Levcor currently has sufficient funds available, and Levcor's other sources of financing are at 86 lower interests rates, it was in Levcor's best interest to prepay a portion of the outstanding principal amount owed to Mr. Levinson in order to save interest expenses. On June 5, 2002, Levcor prepaid $220,000 of the outstanding principal amount owed to Mr. Levinson. Additionally, Mr. Levinson has also provided certain collateral guaranteeing Levcor's obligations under the $3,000,000 loan from JPMorgan Chase Bank pursuant to a promissory note due May 3, 2004. Furthermore, Mr. Levinson serves as a limited guarantor with respect to the obligations of Carlyle and its subsidiaries under a financing arrangement with CIT, pursuant to which CIT has agreed to make an aggregate of $7,500,000 available to Carlyle and its subsidiaries. OTHER CONFLICTS Legal Counsel to Levcor and Carlyle Levcor and Carlyle have each been represented by separate legal counsel in connection with the merger. However, Katten Muchin Zavis Rosenman, legal counsel to Levcor in connection with the merger, is general counsel for Carlyle and is currently performing services for Levcor and Carlyle. In addition to being a director of Levcor, Edward H. Cohen serves as counsel to Katten Muchin Zavis Rosenman. Mr. Cohen holds for the benefit of his law firm, Katten Muchin Zavis Rosenman, 101,741 shares of Levcor common stock and 2,050 options to purchase shares of Levcor common stock, representing approximately 4.8% of voting power of the Levcor common stock. Mr. Cohen disclaims beneficial ownership of all shares of Levcor common stock and options to purchase shares of Levcor common stock he holds for the benefit of Katten Muchin Zavis Rosenman. As of November 21, 2002, such options and shares had an approximate market value of $208,000. APPRAISAL RIGHTS OF DISSENTING CARLYLE STOCKHOLDERS Pursuant to Delaware law, if (1) you properly file a demand for appraisal of your Carlyle common stock or Carlyle Series B preferred stock in writing prior to the vote taken at the special meeting and (2) your shares of Carlyle common stock or Series B preferred stock are not voted in favor of the merger, you will be entitled to appraisal rights under Section 262 of the General Corporation Law of the State of Delaware. Section 262 is reprinted in its entirety as Appendix B to this joint proxy statement/propsectus. The following discussion is not a complete statement of the law relating to appraisal rights and is qualified in its entirety by reference to Appendix B. This discussion and Appendix B should be reviewed carefully by you if you wish to exercise statutory appraisal rights or you wish to preserve the right to do so, as failure to comply with the procedures set forth in Section 262 will result in the loss of your appraisal rights. Procedure for filing a demand for Appraisal If you make the demand described below with respect to your shares, and 87 o are continuously the record holder of your shares through the effective time of the merger; o otherwise comply with the statutory requirements of Section 262 of the General Delaware Corporation Law of the State of Delaware; and o do not vote your shares of Carlyle common stock or Carlyle Series B preferred stock in favor of the approval and adoption of the merger agreement. You shall be entitled to an appraisal by the Delaware Court of Chancery of the "fair value" of your shares, exclusive of any element of value which might arise from either the accomplishment or expectation of the merger, together with a fair rate of interest, if any, as determined by the Delaware Court of Chancery. Under Section 262, where a merger agreement is to be submitted for approval and adoption at a meeting of stockholders, as in the special meeting, not less than 20 days prior to the meeting we must notify you that appraisal rights are available and include in the notice a copy of Section 262. This joint proxy statement/prospectus constitutes your notice of your appraisal rights, and the applicable statutory provisions are attached to this joint proxy statement/prospectus as Appendix B. Instructions for Voting As a holder of Carlyle common stock or Carlyle Series B preferred stock, if you desire to exercise your appraisal rights you must not vote in favor of the approval and adoption of the merger agreement and you must deliver a separate written demand for appraisal to us prior to the vote on the merger agreement at the special meeting. If you sign and return a proxy without expressly directing by checking the applicable boxes on the reverse side of the enclosed proxy card that your shares be voted against the proposal or that an abstention be registered with respect to your shares in connection with the proposal, you will effectively have waived your appraisal rights as to those shares because, in the absence of express contrary instructions, your shares will be voted in favor of the proposal. See page 55 (Voting and Revocation of Proxies). Accordingly, if you desire to perfect appraisal rights with respect to any of your shares you must, as one of the procedural steps involved in such perfection, either (1) refrain from executing and returning the enclosed proxy card and from voting in person in favor of the proposal to approve and adopt the merger agreement or (2) check either the "AGAINST" or the "ABSTAIN" box next to the proposal on the proxy card or affirmatively vote in person against the proposal or register in person an abstention with respect to the proposal. Holders of Record Only a holder of record is entitled to assert appraisal rights for the shares of Carlyle's common and Series B preferred stock registered in that holder's name. A demand for appraisal must be executed by or on behalf of the holders of record and must reasonably inform Carlyle of the holder of record's identity and that the holder of record intends to demand appraisal of the holder's shares. If you have a beneficial interest in shares that are held of record in the name of 88 another person, such as a broker, fiduciary or other nominee, you must act promptly to cause the record holder to follow properly and in a timely manner to perfect whatever appraisal rights are available, and your demand must be executed by or for the record owner. If your shares are owned of record by more than one person, as in a joint tenancy or tenancy in common, your demand must be executed by or for all joint owners. An authorized agent, including an agent for two or more joint owners, may execute the demand for appraisal; however, the agent must identify the record owner and expressly disclose the fact that, in exercising the demand, the agent is acting as agent for the record owner. A record owner, such as a broker, fiduciary or other nominee, who holds shares as a nominee for others, may exercise appraisal rights with respect to the shares held for all or less than all beneficial owners of shares as to which the person is the record owner. In such case, the written demand must set forth the number of shares covered by the demand. Where the number of shares is not expressly stated, the demand will be presumed to cover all shares in the name of such record owner. Delivering your written demand If you elect to exercise appraisal rights, you should mail or deliver your written demand to: Carlyle Industries, Inc. 1 Palmer Terrace Carlstadt, New Jersey 07072 Attention: Edward F. Cooke, Chief Financial Officer and Vice President The written demand for appraisal should specify your name and mailing address, the number of shares owned, and that you are demanding appraisal of your shares. A proxy or vote against the merger agreement will not by itself constitute a demand. Within ten days after the effective date, Levcor, as the surviving corporation, must provide notice of the effective time of the merger to you if you have complied with Section 262. Filing your petition Within 120 days after the effective date, either Levcor or you, if you have complied with the required conditions of Section 262 and are otherwise entitled to appraisal rights, may file a petition in the Delaware Court of Chancery, and if you file a petition you must serve a copy on Levcor, demanding a determination of the fair value of the shares of all stockholders demanding an appraisal. Levcor does not have any present intention to file any such petition in the event that a stockholder makes a proper written demand for appraisal of Carlyle common stock or Carlyle Series B preferred stock. Accordingly, if you desire to have your shares appraised you should initiate any petitions necessary for the perfection of your appraisal rights within the time periods and in the manner prescribed in Section 262. If appraisal rights are available and if you have complied with the applicable provisions of Section 262, within 120 days after the effective date of the merger, you will be entitled, upon written request, to receive from Levcor a statement setting forth the aggregate number of shares not voting in favor of the merger agreement and 89 with respect to which we received demands for appraisal, and the aggregate number of holders of such shares. The statement must be mailed within ten days after the written request for the statement has been received by Levcor or within ten days after the expiration of the period for delivery of demands for appraisal rights whichever is later. If a petition for an appraisal is timely filed by a holder of our shares and a copy thereof is served upon Levcor, Levcor will then be obligated within 20 days to file with the Delaware Register in Chancery a duly verified list containing the names and addresses of all stockholders who have demanded an appraisal of their shares of Carlyle common stock or Carlyle Series B preferred stock and with whom agreements as to the value of their shares have not been reached. After notice to those stockholders as required by the Court, the Delaware Court of Chancery is empowered to conduct a hearing on the petition to determine those stockholders who have complied with Section 262 and who have become entitled to appraisal rights thereunder. If you have demanded an appraisal, the Delaware Court of Chancery may require you to submit your certificates to the Register in Chancery for notation on the certificates of the pendency of the appraisal proceeding; and if you fail to comply with the direction, the Delaware Court of Chancery may dismiss the proceedings as to you. Where proceedings are not dismissed, the Delaware Court of Chancery will appraise the shares owned by stockholders demanding an appraisal, determining the "fair value" of such shares, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In such event, the Delaware Court of Chancery's appraisal may be more than, less than, or equal to the merger consideration and stockholders should be aware that financial advisors' opinions as to fairness from a financial point of view are not opinions as to "fair value" under Section 262. In determining fair value, the Delaware Court of Chancery is to take into account all relevant factors. In relevant case law, the Delaware Supreme Court discussed the factors that could be considered in determining fair value in an appraisal proceeding, stating that "proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court" should be considered, and that "fair price obviously requires consideration of all relevant factors involving the value of a company". The Delaware Supreme Court stated that in making this determination of fair value the court must consider market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts ascertainable as of the date of the merger that throw light on future prospects of the merged corporation. The Delaware Supreme Court also stated that "elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered." Section 262, however, provides that fair value is to be "exclusive of any element of value arising from the accomplishment or expectation of the merger." In addition, Delaware courts have decided that the statutory appraisal remedy, depending on factual circumstances, may or may not be a dissenting stockholder's exclusive remedy. Expenses incurred in connection with your appraisal The Court will also determine the amount of interest, if any, to be paid upon the amounts to be received by persons whose shares of Carlyle common stock or whose shares of Carlyle Series B preferred stock have been appraised. The cost of the appraisal proceeding may be determined by the Delaware 90 Court of Chancery and taxed against the parties, as the Delaware Court of Chancery deems equitable in the circumstances. Upon application of a stockholder who has demanded an appraisal, the Delaware Court of Chancery may order that all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, be charged pro rata against the value of all shares of stock entitled to appraisal. If you have demanded appraisal in compliance with Section 262 you will not, after the effective time of the merger, be entitled to vote for any purpose any shares subject to your demand or to receive payment of dividends or other distributions on your shares, except for dividends or distributions payable to holders of record as of a date prior to the effective time of the merger. At any time within 60 days after the effective date of the merger, you will have the right to withdraw your demand for appraisal; after this period, you may withdraw your demand for appraisal only with the consent of Levcor. If no petition for appraisal is filed with the Delaware Court of Chancery within 120 days after the effective date of the merger, your rights to appraisal shall cease. You may withdraw your demand for appraisal by delivering to Levcor a written withdrawal of your demand for appraisal and an acceptance of the merger, except that (1) any attempt to withdraw made more than 60 days after the effective time of the merger will require written approval of Levcor, and (2) no appraisal proceeding in the Delaware Court of Chancery shall be dismissed without the approval of the Delaware Court of Chancery, and the approval may be conditioned upon such terms as the Delaware Court of Chancery deems just. If you fail to comply fully with the statutory procedure set forth in Section 262 you will forfeit your rights of appraisal and will be entitled to receive the merger consideration for your shares. THE FOREGOING DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF THE PROCEDURES TO BE FOLLOWED BY HOLDERS OF CARLYLE COMMON STOCK AND CARLYLE SERIES B PREFERRED STOCK DESIRING TO EXERCISE DISSENTERS' RIGHTS, AND, IN VIEW OF THE FACT THAT EXERCISE OF SUCH RIGHTS REQUIRES STRICT ADHERENCE TO THE RELEVANT PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW STATUTES, EACH STOCKHOLDER WHO MAY DESIRE TO EXERCISE APPRAISAL RIGHTS IS ADVISED INDIVIDUALLY TO CONSULT THE LAW (AS SET FORTH IN APPENDIX B HERETO) AND COMPLY WITH THE PROVISIONS THEREOF. The foregoing discussion is only a summary of the provisions of Delaware law, does not purport to be complete and is qualified in its entirety by reference to Section 262 of the Delaware General Corporation Law, which is attached hereto as Appendix B. Any stockholder who intends to dissent from the approval and adoption of the merger agreement should review the text of Section 262 of the Delaware General Corporation Law carefully and should also consult with his or her own legal counsel. Any stockholder who fails to follow strictly the procedures set forth in said statute will forfeit his or her dissenters' rights. Any dissenting stockholder who perfects his or her right to be paid the value of his or her shares will recognize gain or loss, if any, for federal income tax purposes upon the receipt of 91 cash for such shares. The amount of gain or loss and its character as ordinary or capital gain or loss will be determined in accordance with applicable provisions of the Internal Revenue Code. BECAUSE OF THE COMPLEXITY OF THE PROVISIONS OF THE DELAWARE LAW RELATING TO DISSENTERS' APPRAISAL RIGHTS, STOCKHOLDERS WHO ARE CONSIDERING DISSENTING FROM THE MERGER ARE URGED TO CONSULT THEIR OWN LEGAL ADVISORS TO ENSURE THAT THEY FULLY AND PROPERLY COMPLY WITH THE REQUIREMENTS OF DELAWARE LAW. FEDERAL INCOME TAX CONSIDERATIONS The following is a discussion of the material federal income tax considerations of the merger that are generally applicable to holders of Carlyle common stock and Carlyle Series B preferred stock. This discussion does not deal with all income tax considerations that may be relevant to particular Carlyle stockholders in light of their particular circumstances, including those stockholders who are dealers in securities, foreign persons, banks, insurance companies or tax-exempt entities, stockholders who hold their shares as part of a hedging, straddle, conversion or other risk reduction transaction, stockholders who have elected to mark to market their investment in Carlyle stock, or stockholders who acquired their shares in connection with stock option or stock purchase plans or in other compensatory transactions. In addition, the following discussion does not address the tax consequences of transactions effectuated prior to or after the merger, whether or not such transactions are in connection with the merger, including transactions in which shares of Carlyle stock were or are acquired or in which shares of Levcor stock were or are disposed of. Furthermore, no foreign, state or local tax considerations are addressed in this joint proxy statement/prospectus. The discussion is based on federal income tax law in effect as of the date of this joint proxy statement/prospectus, which could change at any time, possibly with retroactive effect. Accordingly, Carlyle stockholders are urged to consult their own tax advisors as to the specific tax consequences of the merger, including the applicable federal, state, local and foreign tax consequences to them of the merger and applicable tax return reporting requirements. In General In the opinion of Katten Muchin Zavis Rosenman, counsel to Levcor, and Stroock & Stroock & Lavan LLP, counsel to Carlyle, respectively, the proposed merger of Carlyle with and into Levcor will qualify as a "reorganization" within the meaning of Section 368 of the Internal Revenue Code. Accordingly, Katten Muchin Zavis Rosenman and Stroock & Stroock & Lavan LLP are of the opinion that the following federal income tax consequences will result from the merger: o No gain or loss will be recognized by holders of Carlyle stock solely upon their receipt of Levcor stock in the merger; 92 o The aggregate tax basis of the Levcor stock received in the merger by a Carlyle stockholder will be the same as the aggregate tax basis of the Carlyle stock surrendered in exchange for such Levcor stock; o The holding period of the Levcor stock received in the merger by a Carlyle stockholder will include the period during which the stockholder held the Carlyle stock surrendered in exchange for such Levcor stock, so long as the Carlyle stock is held as a capital asset at the time of the merger; and o Neither Levcor nor Carlyle will recognize gain or loss solely as a result of the merger. The conclusions set forth above are based upon certain customary representations as to factual matters made by Levcor and Carlyle, respectively, and on the assumption that the merger is consummated as described in this Registration Statement. A successful IRS challenge to the "reorganization" status of the merger would result in a Carlyle stockholder recognizing gain or loss with respect to each share of Carlyle stock surrendered equal to the difference between the stockholder's basis in such share and the fair market value, as of the effective time of the merger, of the Levcor stock received in exchange therefor. In such event, a stockholder's aggregate basis in the Levcor stock so received would equal its fair market value and his holding period for such stock would begin the day after the merger. Dissenters' Rights Holders of Carlyle stock that exercise dissenters' rights and receive cash in the merger generally will recognize gain or loss equal to the difference between such holder's basis in the shares surrendered and the amount of cash received. Any such gain or loss will be capital gain or loss and will be long-term capital gain or loss if such stock has been held for more than one year. In the case of an individual, long-term capital gain generally is taxed at a maximum United States Federal income tax rate of 20%. The deductibility of capital losses is subject to limitations. Backup Withholding Under the United States federal income tax backup withholding rules, any cash payments made to a Carlyle stockholder in connection with the merger will be subject to withholding at a rate of 30%, unless (i) the Carlyle stockholder provides Levcor or the exchange agent with a taxpayer identification number (social security number, in the case of an individual, or employer identification number, in the case of other stockholders), and certifies under penalties of perjury that (a) such number is correct, (b) the stockholder is not otherwise subject to withholding and (c) the stockholder is a United States person or (ii) otherwise establishes an exemption. The information and certification required to avoid backup withholding can be provided to Levcor or the exchange agent by completing and signing the substitute Form W-9 that will be attached to the letter of transmittal. The backup withholding rules generally do not apply to corporate stockholders and certain foreign individuals. In order to qualify for such exemption, however, a foreign individual must submit a signed statement (such as a Form W-8BEN) attesting to his or her foreign status. Backup withholding is not an additional tax. Rather, any amounts withheld will be allowed as a refund or credit against the stockholder's United States Federal income tax liability for that year. 93 COMPLETION AND EFFECTIVENESS OF THE MERGER The merger will be completed when all of the conditions to completion of the merger are satisfied or waived, including approval and adoption of the merger agreement by the stockholders of Carlyle and Levcor. The merger will become effective upon the filing of a certificate of merger with the State of Delaware. We are working to complete the merger as quickly as possible. We hope to complete the merger during the third quarter of calendar year 2002, however, we cannot predict the exact date at this time. ANTICIPATED ACCOUNTING TREATMENT The merger will be treated as a "purchase" for accounting purposes. Therefore, the purchase price will be allocated to Carlyle's assets and liabilities based on their estimated fair market values at the completion of the merger. Any excess of the purchase price over these fair market values will be accounted for as goodwill. DEREGISTRATION OF CARLYLE COMMON STOCK If the merger is consummated, Carlyle common stock will no longer be traded on the OTC Bulletin Board and will be deregistered under the Exchange Act. RESTRICTION ON RESALES OF LEVCOR COMMON STOCK AND LEVCOR SERIES A PREFERRED STOCK The Levcor common stock and Series A preferred stock to be issued in the merger will have been registered under the Securities Act, thereby allowing such shares to be freely traded without restriction by all former stockholders of Carlyle who are not "affiliates," as such term is defined in Rule 144 of the Securities Act, of Carlyle at the time of the special meeting. Persons who may be deemed to be affiliates of Carlyle generally include individuals or entities that control, are controlled by or are under common control with, such party and may include certain officers and directors of Carlyle, as well as significant stockholders. Levcor's registration statement on Form S-4, of which this joint proxy statement/prospectus forms a part, does not cover resales of Levcor common stock and Levcor Series A preferred stock received by any person who may be deemed to be an affiliate of Levcor or Carlyle. OPERATIONS AFTER THE MERGER After completion of the merger, Levcor will continue its operations as the surviving corporation. The stockholders of Carlyle will become stockholders of Levcor and their rights as stockholders will be governed by Levcor's certificate of incorporation, bylaws and the laws of the State of Delaware. 94 THE MERGER AGREEMENT THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL PROVISIONS OF THE MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED AS APPENDIX A TO THIS JOINT PROXY STATEMENT/PROSPECTUS. STOCKHOLDERS OF LEVCOR AND CARLYLE ARE URGED TO READ THE MERGER AGREEMENT IN ITS ENTIRETY FOR A MORE COMPLETE DESCRIPTION OF THE MERGER. IN THE EVENT OF ANY DISCREPANCY BETWEEN THE TERMS OF THE MERGER AGREEMENT AND THE FOLLOWING SUMMARY, THE MERGER AGREEMENT WILL CONTROL. THE MERGER Following the approval and adoption of the merger agreement by the stockholders of Carlyle and Levcor, and the satisfaction or waiver of the other conditions to the merger, Carlyle will merge with and into Levcor and Levcor will continue as the surviving corporation. THE EFFECTIVE TIME As soon as practicable on or after the closing of the merger, the parties will cause the merger to become effective by filing a certificate of merger with the Delaware Secretary of State. The parties anticipate that this will occur in the third quarter of calendar year 2002. CONVERSION OF SHARES IN THE MERGER At the effective time, each five shares of Carlyle common stock will be automatically cancelled and converted into the right to receive one share of Levcor common stock, and each share of Carlyle Series B preferred stock will automatically be cancelled and converted into the right to receive one share of Levcor Series A preferred stock. THE EXCHANGE AGENT Levcor is required to appoint an institution reasonably satisfactory to Carlyle to act as the exchange agent in the merger and must enter into an agreement with the exchange agent that is reasonably satisfactory to Carlyle, which will provide that Levcor will make available to the exchange agent the shares of Levcor common stock and Levcor Series A preferred stock to be exchanged for shares of Carlyle common stock and Carlyle Series B preferred stock. PROCEDURES FOR EXCHANGING STOCK CERTIFICATES Promptly after the effective time, Levcor will cause the exchange agent to mail to the holders of record of Carlyle stock certificates (1) a letter of transmittal and (2) instructions on how to surrender Carlyle stock certificates in exchange for certificates representing shares of Levcor common stock and Levcor Series A preferred stock HOLDERS OF CARLYLE STOCK SHOULD NOT SURRENDER THEIR CARLYLE STOCK CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. Upon surrendering their Carlyle stock certificates to the exchange agent for cancellation, together with the letter of transmittal and any other document required by the exchange agent, 95 the holders of Carlyle stock certificates will be entitled to receive a certificate representing that number of whole shares of Levcor stock which that holder has the right to receive. Until surrendered to the exchange agent, outstanding Carlyle stock certificates will be deemed from and after the effective time to evidence only the right to receive the number of full shares of Levcor stock into which the shares of Carlyle stock have converted. DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES Until each Carlyle stockholder surrenders his or her Carlyle stock certificate in exchange for a Levcor stock certificate, that stockholder will not receive any dividends or other distributions declared or made by Levcor after the effective time of the merger. However, once that stockholder surrenders his or her Carlyle stock certificate to the exchange agent, he or she will receive (1) a Levcor stock certificate, and (2) cash, without interest, as payment for any dividends or other distributions declared or made by Levcor after the effective time of the merger. NO FRACTIONAL SHARES No fractional shares of Levcor stock will be issued in the merger. Instead, Carlyle stockholders who would be entitled to a fractional share of Levcor common stock shall have their fractional share interest rounded up to the nearest whole share. DISSENTING SHARES Any shares of Carlyle common stock or Carlyle Series B preferred stock outstanding immediately prior to the effective time that were not voted in favor of the merger and which are held by stockholders who have complied with the applicable provisions of Delaware law with regard to dissenters' rights shall not be converted into or represent the right to receive Levcor common stock or Levcor Series A preferred stock. Instead, each dissenter shall be entitled only to those rights as are provided to holders of dissenting shares under Delaware law. REPRESENTATIONS AND WARRANTIES In the merger agreement, Carlyle made a number of representations and warranties in favor of Levcor that relate to a number of matters, including: o Carlyle and its subsidiaries' organization, standing and power; o Carlyle and its subsidiaries' capital structure; o its corporate authority to enter into and consummate its obligations under the merger agreement and the enforceability of the merger agreement; o the required consents and approvals of governmental entities and absence of conflict with its governing documents and certain agreements and permits; o the making and accuracy of SEC filings (including financial statements); 96 o the accuracy of this joint proxy statement/prospectus with respect to the information provided by Carlyle; o the absence of certain material changes since December 31, 2001 that may reasonably be expected to have a material adverse effect on Carlyle and its subsidiaries; o the absence of material litigation; and o the receipt by the board of directors of the opinion of Houlihan Lokey. The merger agreement also includes representations and warranties made by Levcor in favor of Carlyle that relate to a number of matters, including the following: o its organization, standing and power; o its capital structure; o its corporate authority to enter into and consummate its obligations under the merger agreement and the enforceability of the merger agreement; o the making and accuracy of SEC filings (including financial statements); o the veracity and completeness of information provided by it in connection with the preparation of this joint proxy statement/prospectus; o the accuracy of this joint proxy statement/prospectus with respect to the information provided by Carlyle; o the absence of certain material changes since December 31, 2001 that may reasonably be expected to have a material adverse effect on Levcor; o the absence of material litigation; and o the receipt by the board of directors of the opinion of Willamette. CONCEPT OF MATERIAL ADVERSE EFFECT Many of the representations and warranties contained in the merger agreement are qualified by the concept of "material adverse effect." This concept also applies to some of the covenants and conditions to the merger described under "--Conduct of Business of Carlyle Pending Completion of the Merger," "Conduct of Business of Levcor Pending Completion of the Merger" and "--Conditions to the Merger" below, as well as to termination of the merger agreement for breaches of representations and warranties as described under "--Termination of the Merger Agreement." For purposes of the merger agreement, the concept of "material adverse effect" means any change, effect, event or condition that has a material adverse effect on the business, results of operations or financial condition of Levcor or Carlyle, as the case may be, taken as a whole, or would prevent or materially delay its ability to complete the merger, other 97 than any such change, effect, event or condition that arises as a result of the merger or from changes in general economic conditions. The representations and warranties of Carlyle and Levcor will terminate at the effective time. The representations and warranties in the merger agreement are complicated and not easily summarized. You are urged to read carefully the relevant articles of the merger agreement. All of Carlyle's and Levcor's covenants will terminate at the effective time of the merger, except those that by their terms survive the effective time of the merger. COVENANTS OF CARLYLE Carlyle has agreed that it and each of its subsidiaries will, except as expressly contemplated by the merger agreement or consented to in writing by Levcor, conduct their respective businesses and operations only according to their ordinary course of business, consistent with past practice, and use reasonable best efforts to preserve intact their respective business organization, keep available the services of their present officers, employees and consultants and maintain existing relationships with suppliers, creditors, business associates and others having business dealings with them. Carlyle has also agreed that, except as expressly contemplated by the merger agreement or consented to in writing by Levcor, until the effective time of the merger, it will not and will not permit any of its subsidiaries to: Dividends; Changes In Stock o declare or pay any dividends on or make other distributions in respect of any of its own or subsidiaries' capital stock, other than cash dividends payable by a subsidiary to Carlyle or pay 6% quarterly dividends on its Series B preferred stock; o split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for its shares of capital stock; or o repurchase, redeem or otherwise acquire any shares of its capital stock or permit any subsidiary to acquire any shares of its capital stock or any securities convertible into or exercisable for any of its capital stock; Issuance of Securities o issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock of any class, any debt securities having the right to vote or any securities convertible into or exercisable for or any rights, warrants or options to acquire any such shares or debt securities having the right to vote, or enter into any agreement with respect to the foregoing other than issuances of its common stock pursuant to exercises of stock options; 98 Governing Documents o amend or propose to amend its certificate of incorporation, bylaws or other governing documents; No Acquisitions o acquire or agree to acquire (by merger, consolidation, purchase of a substantial equity interest in or purchase of a substantial portion of the assets of, or by any other manner) any business or any corporation, limited liability company, partnership, association or other business organization or division thereof; or o otherwise acquire any assets which are material, individually or in the aggregate, to it; No Dispositions o sell, lease, encumber or otherwise dispose of any of or agree to sell, lease, encumber or otherwise dispose of its assets, except for dispositions in the ordinary course of business and consistent with past practice and of substantially the same character, type and magnitude as dispositions in the past; Indebtedness o incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any of its subsidiaries' long term debt securities, or guarantee any long term debt securities of others or enter into or amend any contract, agreement, commitment or arrangement with respect to any of the foregoing, other than in replacement for existing or maturing debt, indebtedness of any of Carlyle subsidiaries or other borrowing under existing lines of credit in the ordinary course of business consistent with prior practice; or o make any loans, advances or capital contributions to any person; Benefits Plans o enter into, adopt, amend (except as may be required by law) or terminate any employee benefit plan or any agreement, arrangement, plan or policy between Carlyle or any of its subsidiaries, on the one hand, and one or more of their directors or officers, on the other hand; o except for normal increases in the ordinary course of business and consistent with past practice and of substantially the same character, type and magnitude as increases in the past that in the aggregate, do not result in a material increase in benefits or compensation expense to Carlyle or any of its subsidiaries, increase in any manner the compensation or fringe benefits of any director, officer or employee or pay any benefit not required by any plan and arrangement as in effect as of the date of the 99 merger agreement, or enter into any contract, agreement, commitment or arrangement to do any of the foregoing; or o enter into or renew any contract, agreement, commitment or arrangement providing for the payment to any of Carlyle's or its subsidiaries' directors, officers or employees of compensation or benefits contingent, or the terms of which are materially altered, upon the occurrence of any transaction contemplated by the merger agreement; Other Covenants o change its methods of accounting in effect at December 31, 2001, except as required by changes in generally accepted accounting principles as concurred by its independent auditors; o except in the ordinary course of business and consistent with past practice and of substantially the same character, type and magnitude as elections made in the past, make any material tax election or settle or compromise any material federal, state, local or foreign income tax claim or liability or amend any previously filed tax return in any respect; o take any action that would or is reasonably likely to result in any of the conditions to the merger not being satisfied or that would materially impair the ability of Levcor or Carlyle to consummate the merger or materially delay the merger; or o agree, authorize or announce to take any of the actions described above. CONDITIONS TO THE MERGER The respective obligations of Levcor and Carlyle to complete the merger are subject to the prior satisfaction or waiver of each of the following conditions: o the Carlyle stockholders and Levcor stockholders approve and adopt the merger agreement; o there are no restraining orders, injunctions or administrative actions or proceedings preventing completion of the merger; o the SEC has declared effective the registration statement of which this prospectus is a part; and o all other authorizations, consents and approvals legally required to be obtained to consummate the merger must have been obtained from all governmental entities. Levcor's obligations to complete the merger are subject to the prior satisfaction or waiver of each of the following conditions: 100 o the representations and warranties of Carlyle made in the merger agreement must be true and correct in all material respects; o Carlyle must have performed and complied in all material respects with all obligations required by the merger agreement; o Carlyle must have obtained the consent or approval of all other persons whose consent or approval is required in order to permit the succession by Levcor to any obligation, right or interest of Carlyle under any agreement, except for those consents or approvals for which the failure to obtain could not reasonably be expected to have a material adverse effect on Carlyle; o No action shall have been taken, and no statute, rule, regulation or order shall have been enacted, entered, enforced or deemed applicable to the merger by any governmental entity which would so materially adversely impact the economic or business benefits of the transactions contemplated by the merger agreement as to render uneconomic the consummation of the merger, or which would require Levcor to dispose of any material asset prior to the consummation of the merger; o After the date of the merger agreement, there shall not have occurred a material adverse effect with respect to Carlyle, and no facts or circumstances arising after the date of the merger agreement shall have occurred which could reasonably be expected to have a material adverse effect on Carlyle; o All proceedings to be taken and all documents incident to the transaction on the part of Carlyle shall be reasonably satisfactory to Levcor, and Levcor must have received all copies of such documents and other evidence as Levcor may reasonably request; and o The holders of no more than 20% of the Carlyle stock shall have exercised their statutory right to appraisal. Carlyle's obligations to complete the merger are subject to the prior satisfaction or waiver of each of the following conditions: o the representations and warranties of Levcor made in the merger agreement must be true and correct in all material respects; o Levcor must have performed and complied in all material respects with all obligations required by the merger agreement; o After the date of the merger agreement, there shall not have occurred a material adverse effect with respect to Levcor, and no facts or circumstances arising after the date of the merger agreement shall have occurred which could reasonably be expected to have a material adverse effect on Levcor; and 101 All proceedings to be taken and all documents incident to the transaction on the part of Levcor shall be reasonably satisfactory to Carlyle, and Carlyle must have received all copies of such documents and other evidence as Carlyle may reasonably request. NO SOLICITATION Carlyle has agreed not to initiate or, subject to certain limited exceptions, engage in discussions with another party regarding any business combination while the proposed merger with Levcor is pending. Nothing contained in the merger agreement shall prohibit Carlyle from, prior to the date of the stockholders' meetings, doing any of the following: o furnishing information to or entering into discussions or negotiations with any person that makes an unsolicited written proposal to Carlyle with respect to a competing transaction if the board of directors determines that there is a reasonable probability that failure to take such action would be inconsistent with the Carlyle board of directors' fiduciary duties to the Carlyle stockholders. Carlyle must provide notice to Levcor that they are furnishing information or negotiating with such person, and will have received from such person a fully executed confidentiality agreement; o complying with Rule 14d-9 or Rule 14e-2 under the Exchange Act with regard to a tender offer or exchange offer; or o failing to make or withdrawing or modifying its recommendation to the Carlyle stockholders or recommending an unsolicited, bona fide proposal to acquire Carlyle pursuant to a merger, consolidation, share exchange, business combination, tender or exchange offer or other similar transaction, following the receipt of such a proposal, if Carlyle's board of directors determines in good faith that there is a reasonable probability that the failure to take such action would be inconsistent with the board of directors' fiduciary duties to Carlyle's stockholders. TERMINATION OF THE MERGER AGREEMENT Either Levcor or Carlyle may terminate the merger agreement at any time prior to the effective time, whether before or after approval of the matters presented to its stockholders in connection with the merger if: o consented to by both parties in writing; o a governmental entity issues a non-appealable permanent injunction or action that prevents consummation of the merger; o the merger does not occur on or prior to December 31, 2002 and the terminating party has not caused the failure of the merger to occur by such date; or o any approval of either the stockholders of Carlyle or the stockholders of Levcor required for the consummation of the merger is not obtained by reason of the failure to obtain the required vote at either the annual or special meetings, and the 102 inability to get such stockholder approval is not the result of the action or failure to act of Levcor or Carlyle where such action or failure to act would constitute a material breach of the merger agreement. Levcor may terminate the merger agreement if: o there is a material breach by Carlyle of any of its covenants or agreements set forth in the merger agreement, or any of their representations or warranties set forth in the merger agreement shall have become untrue, such that Carlyle would be incapable of satisfying Levcor's conditions precedent to the merger agreement by December 31, 2002; or o Carlyle's board of directors shall have (a) withdrawn, modified or changed its approval or recommendation of the merger agreement, the merger or any of the other transactions contemplated in the merger agreement in any manner which is adverse to Levcor; or (b) approved or recommended to the Carlyle stockholders a competing transaction or a superior proposal or entered into an agreement with respect thereto or have resolved to do so. Carlyle may terminate the merger agreement if: o there is a material breach by Levcor of any of its covenants or agreements set forth in the merger agreement, or any of their representations or warranties set forth in the merger agreement shall have become untrue, such that Levcor would be incapable of satisfying Carlyle's conditions precedent to the merger agreement by December 31, 2002; or o it has entered into a competing transaction. FEES, EXPENSES AND OTHER PAYMENTS Whether or not the merger is consummated, all costs and expenses incurred in connection with the merger agreement are to be borne by the party which incurs those costs and expenses. However, Carlyle has agreed to pay Levcor an amount equal to $300,000, plus all of Levcor's expenses not to exceed $200,000, if the merger agreement is terminated: o by Levcor as a result of a material breach of any of Carlyle's covenants or agreements, or if any of Carlyle's representations or warranties shall have become untrue such that Carlyle would be incapable of satisfying conditions precedent of Levcor under the merger agreement by December 31, 2002 and at any time within 12 months after the date of termination Carlyle enters into a competing transaction which values, in the reasonable determination of the Carlyle board of directors, the Carlyle common stock at more than $.56 per share; o because the Carlyle stockholders do not approve and adopt the merger agreement at the Carlyle stockholders' meeting and at the time of the stockholders' meeting there exists a proposal with respect to a competing transaction which either (1) 103 Carlyle's board of directors has not publicly opposed or (2) is consummated or a definitive agreement providing for such competing transaction is entered into at any time during the period commencing on the date of execution of the merger agreement and ending 12 months after the termination of the merger agreement; o by Levcor, if the board of directors of Carlyle has withdrawn, modified or adversely changed its approval or recommendation of the merger agreement in any manner which is adverse to Levcor or recommended or approved a competing transaction or shall have resolved to do any of the foregoing; o by Levcor, if Carlyle furnishes information to, or enters into discussions or negotiations with any person that makes an unsolicited proposal and Carlyle enters into a competing transaction; o by Levcor, if Carlyle fails to reject a tender offer or exchange offer proposal by a third party within ten days of its commencement or the date such proposal is first publicly disclosed; or o by Levcor, upon Carlyle's board of directors' authorization to enter into a written agreement with respect to a competing transaction that the Carlyle board of directors have determined to be a superior proposal. In addition, Levcor has agreed to pay Carlyle all of Carlyle's expenses not to exceed $200,000, if the merger agreement is terminated as a result of a material breach of any of Levcor's covenants or agreements, or if any of Levcor's representations or warranties shall have become untrue such that Levcor would be incapable of satisfying conditions precedent of Carlyle under the merger agreement by December 31, 2002. AMENDMENT OR WAIVER OF THE MERGER AGREEMENT The merger agreement may be amended at any time in a writing signed by Levcor and Carlyle; provided, that any amendment made after the Levcor annual or Carlyle special meeting that would otherwise require stockholder approval under applicable law must be submitted to the stockholders of Carlyle and Levcor. At any time prior to the effective time of the merger, any party to the merger agreement may, to the extent legally allowed: o extend the time for the performance of any of the obligations or other acts of the other party to the merger agreement; o waive any inaccuracies in the representations and warranties of the other party contained in the merger agreement; and o waive compliance by the other party with any of the agreements or conditions for the benefit of such party as contained in the merger agreement. 104 ADDITIONAL PROPOSALS AT THE LEVCOR ANNUAL MEETING, IN ADDITION TO VOTING ON THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT, LEVCOR STOCKHOLDERS WILL BE ASKED TO VOTE ON THE FOLLOWING PROPOSALS: AMENDMENT AND RESTATEMENT OF THE LEVCOR CERTIFICATE OF INCORPORATION In connection with the proposal to approve and adopt the merger agreement, the holders of Levcor common stock will also be asked to approve a proposal to amend and restate Levcor's certificate of incorporation. The merger agreement provides that each share of Carlyle Series B preferred stock will be exchanged for one share of a new class of Levcor preferred stock, which has been designated as Series A preferred stock. The Levcor common stockholders will be asked to amend and restate the Levcor certificate of incorporation in order to provide for the creation and issuance of the Levcor Series A preferred stock. In addition to the creation of the Series A preferred stock, the amendment and restatement of the Levcor certificate of incorporation will also result in the Levcor common stock being capitalized at $.01 per share. The following section describes the material terms of Levcor's capital stock, as well as the terms of the amended and restated certificate of incorporation, which will be in effect upon approval by the holders of a majority of the shares of Levcor common stock. AUTHORIZED CAPITAL STOCK Total Shares. Under the amended and restated certificate of incorporation, Levcor will be authorized to issue a total of 23,000,000 shares of capital stock consisting of: o 15,000,000 shares of common stock, par value $0.01 per share; and o 8,000,000 shares of preferred stock, par value $0.01 per share. Common Stock. Following completion of the merger, Levcor anticipates that 5,125,166 shares of its common stock will be outstanding and 550,000 shares reserved for issuance upon exercise of outstanding options to purchase shares of Levcor common stock. Series A Preferred Stock. Following completion of the merger, Levcor anticipates that 4,555,007 shares of its preferred stock, designated as Series A preferred stock, will be outstanding. LEVCOR COMMON STOCK Under the amended and restated certificate of incorporation, holders of Levcor common stock will be entitled to one vote for each share held on all matters submitted to a vote of Levcor stockholders and will vote together with the Levcor Series A preferred stock as a single class. Holders of Levcor common stock will be entitled to receive dividends, ratably, if any, as may be declared by the Levcor board of directors out of legally available funds, subject to any 105 preferential dividend rights of the preferred stock. If Levcor liquidates, dissolves or winds up, the holders of Levcor common stock will be entitled to share ratably in all assets remaining after satisfaction of liabilities and the liquidation preference of any then outstanding shares of preferred stock. Holders of common stock will have no preemptive rights and no right to convert their common stock into any other securities. Under the amended and restated certificate, there are no redemption or sinking fund provisions applicable to Levcor common stock. The rights, preferences and privileges of holders of Levcor common stock will be subject to, and may be adversely affected by, the rights of holders of shares of Levcor Series A preferred stock or any other series of preferred stock which Levcor's board of directors may designate and issue in the future without further stockholder approval. LEVCOR SERIES A PREFERRED STOCK In connection with the creation of the Levcor Series A preferred stock, certain powers, preferences and rights will be afforded to such shares similar to the preferences and rights currently afforded to the Carlyle Series B preferred stock. These preferences and rights will result in benefits to the Series A preferred stock not afforded to the Levcor common stock. These preferences and rights include: Rank. So long as the Series A preferred stock is outstanding, it will rank senior to all existing and future series of preferred stock and senior to the common stock with respect to dividends, distributions and payments on liquidation or redemption. Dividends. Holders of Levcor Series A preferred stock will be entitled to receive dividends at a rate of $.06 per annum per share, if any, as may be declared by the Levcor board of directors out of legally available funds. Such dividends shall be payable quarterly on March 15, June 15, September 15 and December 15 of each year. Quarterly dividends which are not paid in full in cash on any dividend payment date will acccumulate without interest. So long as any shares of Series A Preferred Stock shall be outstanding, no dividend, whether in cash, or share of any security or property, shall be paid or declared, nor shall any other distribution be made, on any other capital stock of Levcor, nor shall any shares of any such other capital stock of Levcor be purchased, redeemed, or otherwise acquired for value by Levcor until all dividends described above shall have been paid or declared and set apart. Voting Rights. Each holder of Levcor's Series A preferred stock shall have 1/5 vote for each share of Series A preferred stock held of record. Liquidation. Upon any liquidation, dissolution or winding up of Levcor, the holders of Levcor Series A preferred stock will be entitled to receive payment of $1 per share held by them, plus an amount in cash equal to all accrued and unpaid dividends thereon, before any distribution is made to the holders of common stock of Levcor. Mandatory Redemption. The Levcor Series A preferred stock shall be subject to mandatory redemption, to the extent Levcor may lawfully do so, in three equal annual 106 installments on June 15, 2007, June 15, 2008 and June 15, 2009, in each case, from funds legally available therefor, at a price per share of Series A preferred stock equal to $1 per share, together with an amount representing accrued and unpaid dividends, whether or not declared, to the date of redemption. ADDITIONAL LEVCOR PREFERRED STOCK Levcor's proposed amended and restated certificate of incorporation provides that the Levcor board of directors will be authorized to issue from time to time, without further stockholder approval, up to an additional 3,444,993 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each series, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of any series. Such shares of preferred stock could have preferences over Levcor's common stock with respect to dividends and liquidation rights. Such shares of Levcor preferred stock may be issued with voting rights that may adversely affect the voting power of the holders of Levcor common stock and Levcor Series A preferred stock by increasing the number of outstanding shares having voting rights, and by the creation of class or series voting rights. The board of directors believes that the creation of the preferred stock is advisable and in the best interests of Levcor and its stockholders for several reasons. The authorization of the preferred stock would permit the board of directors to issue such stock without further stockholder approval and thereby, provide Levcor with maximum flexibility in structuring acquisitions, joint ventures, strategic alliances and for other corporate purposes. The preferred stock would enable Levcor to respond promptly and take advantage of market conditions and other favorable opportunities without incurring the delay and expense associated with calling a stockholders' meeting to approve a contemplated stock issuance. The authorization of the preferred stock would also afford Levcor greater flexibility in responding to unsolicited acquisition proposals and hostile takeovers bid. The issuance of preferred stock could have the effect of making it more difficult or time consuming for a third party to acquire a majority of the outstanding voting stock of Levcor or otherwise effect a change of control. The availability of preferred stock could have an effect of delaying change of control and of increasing the consideration ultimately paid to Levcor and its stockholders. Levcor cannot state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of the common stock and the Series A preferred stock until the board of directors determines the specific rights of the holders of such preferred stock. However, the effects might include, among other things, restricting dividends on the shares of common stock, reducing the market price of the common stock, or impairing the liquidation rights of the common stock, without further action by the stockholders. Holders of Levcor's common stock and Series A preferred stock will not have preemptive rights with respect to the preferred stock. 107 Although Levcor may consider issuing preferred stock in the future for purposes of raising additional capital or in connection with acquisition transactions, Levcor currently has no agreements or commitments with respect to the issuance of the preferred stock, and may never issue any preferred stock. TRADING Levcor common stock is, and will continue to be, traded on the OTC Bulletin Board under the symbol "LEVC.OB". COMPARISON OF CARLYLE'S, LEVCOR'S AND THE SURVIVING CORPORATION'S STOCKHOLDERS' RIGHTS Levcor and Carlyle are both organized under the laws of the State of Delaware. Any differences in the rights of holders of Levcor common stock and Carlyle capital stock arise primarily from differences between the respective companies' certificates of incorporation and bylaws. Upon completion of the merger, holders of Carlyle common stock will become holders of Levcor common stock and holders of Carlyle Series B preferred stock will become holders of Levcor Series A preferred stock and their rights will be governed by Delaware law, as well as the Levcor amended and restated certificate of incorporation and the Levcor by-laws. The following describes the material differences between the current rights of Carlyle stockholders and Levcor stockholders and the rights those stockholders are expected to have as the stockholders of the surviving corporation upon the effective time of the merger. This section does not include a complete description of all differences between the rights of Carlyle and Levcor stockholders, nor does it include a complete description of the specific rights of these stockholders. A copy of the proposed amended and restated Levcor certificate of incorporation is attached as Exhibit A to the merger agreement. A copy of the Levcor's by-laws that will be in effect upon the effective time of the merger is attached as Exhibit B to the merger agreement. The merger agreement is attached to this joint proxy statement/prospectus as Appendix A. Levcor urges you to read the proposed amended and restated certificate of incorporation and its by-laws. 108 SUMMARY OF MATERIAL DIFFERENCES OF STOCKHOLDER RIGHTS BEFORE AND AFTER THE MERGER
RIGHTS CARLYLE LEVCOR SURVIVING CORPORATION Capitalization 20,000,000 authorized 15,000,000 authorized 15,000,000 authorized shares of common stock, shares of common stock, shares of common stock, par value $0.01 per share. par value $0.56 per share. par value $0.01 per share. 11,187,451 authorized No preferred stock 8,000,000 authorized shares of preferred stock, authorized. shares of preferred stock, par value $0.01 per share, par value $0.01 per share, of which 4,555,007 shares of which 4,555,007 shares are designated as Series B are designated as Series A preferred stock. preferred stock. Voting Rights Common stock and Series B One vote per share of Common stock and Series A preferred stock are common stock. preferred stock shall vote entitled to one vote per together as a single share and vote together as No preferred stock class. Each holder of the a single class. authorized. common stock shall have one vote for each share of common stock held of record by such stockholder and each holder of Series A preferred stock shall have 1/5 vote for each share of Series A preferred stock held of record by such stockholder.
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RIGHTS CARLYLE LEVCOR SURVIVING CORPORATION Number and election of Determined by resolution Determined by resolution Determined by resolution directors of the board of directors, of the board of directors, of the board of directors, but shall not be less than but shall not be less than but shall not be less than three or more than nine. three or more than nine. one. Currently it is Currently there are five Currently there are three expected that there will directors. directors. be six directors. All elections shall be All elections shall be All elections shall be decided by a plurality of decided by a plurality of decided by a plurality of the votes cast. the votes cast. the votes cast. Vacancies on the board of Vacancies filled by a Vacancies filled by a Vacancies filled by a directors majority of remaining majority of remaining majority of remaining directors until the next directors until the next directors until the next meeting of stockholders. meeting of stockholders. meeting of stockholders. Power to call special Special meetings may be Special meetings may be Special meetings may be meetings of stockholders called by a majority of called by the President or called by the Chairman of the board of directors or by the board of directors. the board of directors, the Chairman of the board President or by a majority of directors or the of the board of directors holders of not less than or the holders of record 25% of the outstanding of at least a majority of shares of common stock. the votes of the outstanding shares of the voting stock entitled to vote at such meeting. Action by written consent of Stockholders may act by Stockholders may act by Stockholders may act by stockholders written consent. written consent. written consent.
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RIGHTS CARLYLE LEVCOR SURVIVING CORPORATION Amendment of organizational The by-laws may be The by-laws may be The by-laws may be documents amended, altered or amended, altered or amended, altered or repealed by a majority repealed by a majority repealed by a majority stockholder vote or by the stockholder vote or by the stockholder vote or by the board of directors. board of directors. board of directors. The certificate of The certificate of The certificate of incorporation may be incorporation may be incorporation may be amended, altered or amended, altered or amended, altered or repealed in accordance repealed in accordance repealed in accordance with Delaware law. with Delaware law. with Delaware law. State anti-takeover statute Governed by Section 203 of Governed by Section 203 of Governed by Section 203 of Delaware Law. Delaware Law. Delaware Law.
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RIGHTS CARLYLE LEVCOR SURVIVING CORPORATION Limitation on director A director shall not be A director shall not be A director shall not be liability liable for breach of liable for breach of liable for breach of fiduciary duty as a fiduciary duty as a fiduciary duty as a director, except for director, except for director, except for liability: liability: liability: o for breach of the o for breach of the o for breach of the director's duty of loyalty director's duty of loyalty director's duty of loyalty to Carlyle or its to Levcor or its to Levcor or its stockholders; stockholders; stockholders; o for acts or omissions o for acts or omissions o for acts or omissions not in good faith or which not in good faith or which not in good faith or which involve intentional involve intentional involve intentional misconduct or a knowing misconduct or a knowing misconduct or a knowing violation of law; violation of law; violation of law; o under section 174 of the o under section 174 of the o under section 174 of the General Corporation Law of General Corporation Law of General Corporation Law of Delaware; and Delaware; and Delaware; and o for any transaction from o for any transaction from o for any transaction from which the director derived which the director derived which the director derived an improper personal an improper personal an improper personal benefit. benefit. benefit. Indemnification of directors Indemnification provided Indemnification provided Indemnification provided and officers to fullest extent of to fullest extent of to fullest extent of Delaware law. Delaware law. Delaware law.
THE AFFIRMATIVE VOTE OF AT LEAST A MAJORITY OF THE OUTSTANDING LEVCOR COMMON STOCK ENTITLED TO VOTE AT THE LEVCOR ANNUAL MEETING IS REQUIRED TO APPROVE THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION, AND THE APPROVAL BY THE LEVCOR COMMON STOCKHOLDERS OF THIS PROPOSAL IS REQUIRED FOR THE CONSUMMATION OF THE MERGER. BROKER NON-VOTES ARE NOT TREATED AS VOTES CAST FOR THIS PURPOSE AND HAVE NO EFFECT ON THE OUTCOME OF THE VOTE. ACCORDINGLY, YOU ARE URGED TO RETURN THE ENCLOSED PROXY CARD MARKED TO INDICATE YOUR VOTE. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE LEVCOR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION. 112 ELECTION OF LEVCOR DIRECTORS In connection with the proposal to approve and adopt the merger agreement, the holders of Levcor common stock will also be asked to elect six persons to serve as directors of Levcor until the next annual meeting or until their successors have been elected and qualified. Set forth below is information regarding each person who will serve as a director and officer of Levcor upon the effective time of the merger, including information furnished by them as to principal occupations, certain other directorships held by them, any arrangements pursuant to which they were elected as directors or nominees and their ages. NAME AGE TITLE ---- --- ----- Robert A. Levinson 76 Chairman of the Board of Directors, President and Chief Executive Officer Joseph S. DiMartino 58 Director Giandomenico Picco 53 Director John McConnaughy 72 Director Edward H. Cohen 63 Director Edward F. Cooke 48 Chief Financial Officer, Vice President, Secretary, Treasurer and Director BACKGROUND OF DIRECTORS Robert A. Levinson has been Chairman of the board of directors, President, Secretary and Principal Financial Officer of Levcor since June 1989. Since May 1998, Mr. Levinson has been Chairman of the board of directors, President and Chief Executive Officer of Carlyle Industries, Inc. From 1979 until May 1, 1995, Mr. Levinson was Chairman of the board of directors of Andrex Industries Corp., a company engaged in textile manufacturing and processing. Mr. Levinson is a member of the Advisory Board of The National Dance Institute and The Harlem School of the Arts, and is Vice Chairman of the board of directors of The Academy of Design and Museum. John McConnaughy has been a director of Levcor since June 1989. Mr. McConnaughy is chairman and chief executive officer of JEMC Corporation, a company engaged in exploring investment opportunities. From 1981 until his retirement in 1992, Mr. McConnaughy was chairman of the board and chief executive officer of GEO International Corporation, a company engaged in screen-printing and oil services. Mr. McConnaughy also served as President of GEO International Corporation from 1985 until his retirement in 1992. Mr. McConnaughy is Chairman of the Board of the Excellence Group, LLC, which filed a petition for bankruptcy under Chapter 11 of the Bankruptcy Code on January 13, 1999. The Excellence Group's subsidiaries produced labels for a variety of customers. Mr. McConnaughy serves as a director 113 of Varsity Sports, Inc., Adrien Arpel, Inc., Mego Corporation, Transact International, Inc., Wave Systems Corp. and DeVlieg-Bullard, Inc. Edward H. Cohen has been a director of Levcor since June 1998. Mr. Cohen is currently Counsel to the law firm of Katten Muchin Zavis Rosenman, and for more than the past five years, until January 31, 2002, Mr. Cohen was a Senior Partner at its predecessor law firm, Rosenman & Colin LLP. Mr. Cohen also serves as a director of Franklin Electronic Publishers, Inc., a designer and developer of electronic products, and its 82%-owned subsidiary, Voice Powered Technology, Inc., Phillips-Van Heusen Corporation, a manufacturer and retailer of apparel and footwear, and Merrimac Industries, Inc., a designer and producer of microwave and radio frequency components. Mr. DiMartino has been a director of Carlyle since May 1995. Mr. DiMartino was a director of The Noel Group Inc. and served as a director and chairman of the board of Noel from March 1995 until its dissolution in September 1999. Since January 1995, Mr. DiMartino has been a director, a trustee or the managing general partner of various funds in the Dreyfus Family of Funds. He also currently serves on the board of directors of Century Business Services, Inc. Mr. Picco has been a director of Carlyle since May 2000. Since 1994, Mr. Pico has served as chief executive officer of GDA Associates, Inc., a consulting company to industrial corporations. Mr. Pico currently serves as president of the Non-Governmental Peace Strategies Project, a Geneva, Switzerland non-profit institute aimed at devising new vehicles for the private sector to support peace efforts. Mr. Cooke has been a director of Carlyle since May 2000 and Carlyle's Chief Financial Officer, Secretary and Vice President since February 1998. Since January 1, 1999, Mr. Cooke has been president and chief executive officer of Blumenthal Lansing Company, a wholly-owned subsidiary of Carlyle. Mr. Cooke was previously appointed to serve as Carlyle's Chief Financial Officer, Secretary and Vice President in February 1997, April 1996 and May 1996, respectively, until he resigned from such positions in September 1997. From October 1997 to January 1998, Mr. Cooke served as chief financial officer for Missbrenner, Inc., a supplier of printed fabrics. Mr. Cooke served as Controller of Carlyle from April 1994 until May 1996 and served as Chief Accounting Officer of Carlyle from March 1995 until February 1997. Since 1999, Mr. Cooke has also been a member of the board of directors of the Home Sewing Association. THE ELECTION OF THE LEVCOR DIRECTORS REQUIRES THE AFFIRMATIVE VOTE OF A PLURALITY OF THE VOTES OF THE SHARES OF LEVCOR COMMON STOCK PRESENT IN PERSON OR REPRESENTED BY PROXY AT THE MEETING, AND THE APPROVAL BY THE LEVCOR COMMON STOCKHOLDERS OF EACH OF THE ABOVE LISTED CANDIDATES TO SERVE AS A DIRECTOR OF LEVCOR IS REQUIRED FOR THE CONSUMMATION OF THE MERGER. BROKER NON-VOTES ARE NOT TREATED AS VOTES CAST FOR THIS PURPOSE AND HAVE NO EFFECT ON THE OUTCOME OF THE VOTE. ACCORDINGLY, YOU ARE URGED TO RETURN THE ENCLOSED PROXY CARD MARKED TO INDICATE YOUR VOTE. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE NOMINEES LISTED ABOVE TO SERVE AS DIRECTORS OF LEVCOR UNTIL THE NEXT ANNUAL MEETING AND UNTIL THEIR SUCCESSORS ARE DULY ELECTED AND QUALIFIED. 114 APPROVAL OF 2002 STOCK OPTION PLAN In connection with the proposal to approve and adopt the merger agreement, the holders of Levcor common stock will also be asked to approve the Levcor 2002 Stock Option Plan. On June 20, 2002, the board of directors of Levcor adopted, subject to stockholder approval, the 2002 Stock Option Plan. The 2002 Stock Option Plan is intended to supplement the 1992 Option Plan which has insufficient shares to enable Levcor to provide for the assumption by Levcor of the outstanding Carlyle stock options and to grant stock options to Levcor employees, officers, directors and independent contractors after the merger. The following summary of certain features of the 2002 Stock Option Plan is qualified in its entirety by reference to the full text of the Plan, which is attached to this joint proxy statement/prospectus as Appendix E. The 2002 Stock Option Plan authorizes the grant of options to purchase up to an aggregate of 550,000 shares of common stock to employees and officers of Levcor, as well as directors of Levcor who are not employees. Under the 2002 Stock Option Plan, Levcor may grant to eligible individuals incentive stock options, as defined in Section 422(b) of the Internal Revenue Code of 1986 (the "Code") and/or non-qualified stock options. Nature and Purpose of the 2002 Stock Option Plan The purpose of the 2002 Stock Option Plan is to induce key personnel, including employees, officers, directors and independent contractors to remain in the employ or service of Levcor, to attract new individuals to enter into such employment or service and to encourage such individuals to secure stock ownership in, or increase on reasonable terms their stock ownership in Levcor. The board of directors believes that the granting of options under the 2002 Stock Option Plan will promote continuity of management and increased incentive and personal interest in the welfare of Levcor by those who are or may become primarily responsible for shaping and carrying out the long-range plans of Levcor and securing its continued growth and financial success. Duration and Modification The 2002 Stock Option Plan will terminate not later than June 20, 2012. The board of directors may at any time terminate the 2002 Stock Option Plan or make such modifications to the 2002 Stock Option Plan as it may deem advisable. However, the board may not, without approval by the stockholders of Levcor, increase the number of shares of common stock as to which options may be granted under the 2002 Stock Option Plan, change the manner of determining option prices, change the class of persons eligible to participate in the 2002 Stock Option Plan or extend the period during which an option may be granted or exercised. 115 Administration The 2002 Stock Option Plan is administered by the Compensation Committee consisting of at least two directors. It is intended that the Compensation Committee consist of members of the board of directors who are "non-employee directors" within the meaning of Rule 16b-3 under the Exchange Act and "outside directors" within the meaning of Section 162(m) of the Code. If the Compensation Committee does not have at least two members who qualify as non-employee directors under Rule 16b-3, the Committee members will make recommendations to the board of directors with respect to option grants (instead of the Committee making the determination) and such recommendations will be subject to approval by the full board of directors. The members of the Compensation Committee are to be appointed annually by, and serve at the pleasure of, the board. The anticipated members of the Compensation Committee after the effective time of the merger (assuming the approval and adoption of the merger agreement) will be Messrs. Giandomenico Picco, Joseph S. DiMartino and John McConnaughy. The Compensation Committee has discretion to determine the participants under the 2002 Stock Option Plan, the time and price at which options will be granted, the period during which options will be exercisable, the number of shares subject to each option and whether an option will be an incentive stock option, a non-qualified stock option or a combination thereof. All options granted to non-employee directors and independent contractors are non-qualified stock options. The members of the Compensation Committee do not receive additional compensation for serving on the Compensation Committee. Eligibility and Extent of Participation The 2002 Stock Option Plan provides for discretionary grants of options to participants (including any director or officer who is also an employee as well as any director who is not an employee). At the effective time of the merger, approximately 23 persons will be eligible to receive options pursuant to the 2002 Stock Option Plan. No single participant (including any director or officer who is also an employee as well as any director who is not an employee) may receive options under the 2002 Stock Option Plan in any one fiscal year of Levcor to purchase more than 300,000 shares of common stock. Exercise of Options Unless otherwise provided by the Compensation Committee at the time an option is granted, an option will be exercisable one-third on and after the first anniversary of the date of grant, two-thirds on and after the second anniversary of the date of grant and in full after the third anniversary of the grant, except that all options issued in exchange for Carlyle stock options in the merger will be fully vested. An option may be exercised by a written notice with respect to a specified number of shares and payment of the exercise price for the number of shares so specified. The exercise price of an option may be paid in cash or in shares of common stock. Except in the case of the 116 assumed Carlyle options, the initial per share exercise price for an incentive stock option may not be less than the fair market value thereof on the date of grant, or 110% of such fair market value with respect to a participant who, at such time, owns stock representing more than 10% of the total combined voting power of all classes of stock of Levcor. Except in the case of the assumed Carlyle options, the initial per share exercise price for a non-qualified stock option may not be less than 75% of the fair market value thereof on the date of grant. No option granted pursuant to the 2002 Stock Option Plan may be exercised more than 10 years after the date of grant, except that incentive stock options granted to participants who own more than 10% of the total combined voting power of all classes of stock of Levcor at the time the incentive stock option is granted may not be exercised more than five years after the date of grant. No participant may be granted incentive stock options which are exercisable for the first time in any one calendar year with respect to common stock having an aggregate fair market value in excess of $100,000 on the date of grant. Other than certain transfers to a member of the participant's "Immediate Family," no option granted under the 2002 Stock Option Plan is transferable by the optionee other than by death. In the event of the death of an optionee, each option granted to him or her will become immediately exercisable in full, and will terminate upon the earlier to occur of the expiration of three months from the date of the qualification of a representative of his or her estate and the date of termination specified in such option. In the event that an optionee leaves the employ or service or ceases to serve as a director of Levcor or its subsidiaries by reason of retirement on or after his or her 65th birthday, each option granted to him or her shall immediately become exercisable and will terminate upon the earlier to occur of the expiration of three months from the date of such retirement or the date of termination specified in such option. In the event that an optionee leaves the employ or service or ceases to serve as a director of Levcor or its subsidiaries by reason of his or her disability, each option granted to him or her will immediately become exercisable in full and will terminate upon the earlier to occur of the expiration of three months from the date of such retirement or the date of termination specified in such option. In the event that an optionee leaves the employ or service or ceases to serve as a director of Levcor or its subsidiaries for any reason other than death, retirement or disability, each option granted to him or her generally will, to the extent exercisable on the date of his or her termination, terminate on the earlier to occur of the expiration of 30 days after the date of such optionee's termination and the date of termination specified in such option. In the event that an optionee leaves the employ or service or ceases to serve as a director of Levcor or its subsidiaries by reason of his or her termination for "cause," each option granted to him or her will terminate immediately. If the fair market value of the common stock declines below the option price of any option, the Committee (with the prior approval of the board of directors) may adjust, reduce, or cancel and regrant such option or take any similar action it deems to be for the benefit of the optionee in light of such declining value. 117 The number of shares available for grant under the 2002 Stock Option Plan and covered by each option granted thereunder will be adjusted in the event of a stock dividend, reorganization, recapitalization, stock split-up, combination of shares, sale of assets, merger or consolidation in which Levcor is the surviving corporation or merger or consolidation in which the shares of stock or other securities of the surviving corporation into which the outstanding shares of Levcor common stock shall be changed into or for which the outstanding shares shall be exchanged are registered under the Securities Act of 1933, or, as may be determined by the Committee, in the event of any other change affecting the number or kind of Levcor's outstanding common stock. In the event of the dissolution or liquidation of Levcor, or a merger or consolidation in which Levcor is not the surviving corporation, unless the shares of stock or other securities of the surviving corporation into which the outstanding shares of the Levcor common stock shall be changed into or for which the outstanding shares shall be exchanged are registered under the Securities Act of 1933, all outstanding options shall terminate; provided, however, that, each optionee shall have had a period of at least 20 days prior to the date of such dissolution, liquidation, merger or consolidation in which to exercise his or her options in full. In the event that a "change of control" of Levcor, all options granted which have not yet expired shall immediately become exercisable in full. For purposes of when a change of control will be deemed to occur, you should refer to the 2002 Stock Option Plan, which is attached to this joint proxy statement/prospectus as Appendix E. Assumed Carlyle Stock Options Notwithstanding the foregoing, Levcor will issue new options for each outstanding Carlyle option, with the number of such options and their corresponding exercise price to be appropriately adjusted, on substantially the same terms and conditions as the outstanding Carlyle options. Federal Income Tax Consequences of Issuance and Exercise of Options The following discussion of the Federal income tax consequences of the granting and exercise of options under the 2002 Stock Option Plan, and the sale of common stock acquired as a result thereof, is based on an analysis of the Code (as currently in effect), existing laws, judicial decisions and administrative rulings and regulations, all of which are subject to change. In addition to being subject to the Federal income tax consequences described below, an optionee may also be subject to state and/or local income tax consequences in the jurisdiction in which he or she works and/or resides. Non-Qualified Stock Options No income will be recognized by an optionee at the time a non-qualified stock option is granted. Ordinary income will be recognized by an optionee at the time a non-qualified stock option is exercised, and the amount of such income will be equal to the excess of the fair market value on the exercise date of the shares issued to the optionee over the exercise price. In the case of an option granted to an employee, this ordinary (compensation) income will also constitute wages subject to the withholding of income tax and Levcor will be required to make whatever 118 arrangements are necessary to ensure that the amount of the tax required to be withheld is available for payment in money. Capital gain or loss on a subsequent sale or other disposition of the shares of common stock acquired upon exercise of a non-qualified stock option will be measured by the difference between the amount realized on the disposition and the tax basis of such shares. The tax basis of the shares acquired upon the exercise of the option will be equal to the sum of the exercise price of an option and the amount included in income with respect to the option. If an optionee makes payment of the exercise price by delivering shares of common stock, he or she generally will not recognize any gain with respect to such shares as a result of such delivery, but the amount of gain, if any, which is not so recognized will be excluded from his or her basis in the new shares received. Levcor will be entitled to a deduction for Federal income tax purposes at such time and in the same amount as the amount included in ordinary income by the optionee upon exercise of his or her non-qualified stock option, subject to the usual rules as to reasonableness of compensation and provided that Levcor timely complies with the applicable information reporting requirements. Incentive Stock Options In general, neither the grant nor the exercise of an incentive stock option will result in taxable income to an optionee or a deduction to Levcor. However, for purposes of the alternative minimum tax, the spread on the exercise of an incentive stock option will be considered as part of the optionee's income. The sale of the shares of common stock received pursuant to the exercise of an incentive stock option which satisfies the holding period rules will result in capital gain to an optionee and will not result in a tax deduction to Levcor. To receive incentive stock option treatment as to the shares acquired upon exercise of an incentive-stock option, an optionee must neither dispose of such shares within two years after the option is granted nor within one year after the exercise of the option. In addition, an optionee generally must be an employee of Levcor at all times between the date of grant and the date three months before exercise of the option. If the holding period rules are not satisfied, the portion of any gain recognized on the disposition of the shares acquired upon the exercise of an incentive stock option that is equal to the lesser of (a) the fair market value of the common stock on the date of exercise minus the exercise price or (b) the amount realized on the disposition minus the exercise price, will be treated as ordinary (compensation) income, with any remaining gain being treated as capital gain. Levcor will be entitled to a deduction equal to the amount of such ordinary income. If an optionee makes payment of the exercise price by delivering shares of common stock, he or she generally will not recognize any gain with respect to such shares as a result of such delivery, but the amount of gain, if any, which is not so recognized will be excluded from his or her basis in the new shares received. However, the use by an optionee of shares previously acquired pursuant to the exercise of an incentive stock option to exercise an incentive stock option will be treated as a taxable disposition if the transferred shares were not held by the participant for the requisite holding period. 119 New Plan Benefits The following table summarizes the estimated number and dollar value of options to be received by Levcor's current officer and current directors under the 2002 Stock Option Plan. Mr. Levinson is the only executive officer of Levcor. ----------------------------------------------------------------------------- Levcor 2002 Stock Option Plan ----------------------------- ----------------------------------------------------------------------------- Dollar Number Name and Position Value ($) Of Options ----------------- ----- ---------- ----------------------------------------------------------------------------- Robert A. Levinson 107,184 42,390 (1)(2) Chairman of the Board of Directors, President, Secretary and Principal Financial Officer ----------------------------------------------------------------------------- John McConnaughy 1,233 1,190 (2) Director ----------------------------------------------------------------------------- Edward H. Cohen 1,233 1,190 (2) Director ----------------------------------------------------------------------------- Executive Group 107,184 42,390 (1)(2) ----------------------------------------------------------------------------- Non-Executive Group 109,650 44,770 (1)(2) ----------------------------------------------------------------------------- (1) Includes 41,200 options to purchase shares of Levcor common stock to be issued upon the assumption by Levcor of 206,000 options to purchase shares of Carlyle common stock currently held by Mr. Levinson. (2) Includes estimate of 1,190 options to purchase shares of Levcor common stock to be granted to Levcor directors in lieu of an annual fee for their services for the year ended December 31, 2002. Calculated by dividing $1,500 by the fair market value of a share of Levcor common stock on August 19, 2002. The closing price of a share of Levcor common stock on August 19, 2002 was $1.26. THE LEVCOR BOARD OF DIRECTORS HAS ADOPTED THE 2002 STOCK OPTION PLAN, HOWEVER THE ADOPTION OF THE PLAN IS SUBJECT TO APPROVAL BY THE AFFIRMATIVE VOTE OF THE MAJORITY OF SHARES PRESENT IN PERSON OR REPRESENTED BY PROXY AT THE MEETING, AND THE APPROVAL BY THE LEVCOR COMMON STOCKHOLDERS OF THE 2002 STOCK OPTION PLAN IS REQUIRED FOR THE CONSUMMATION OF THE MERGER. BROKER NON-VOTES ARE NOT TREATED AS VOTES CAST FOR THIS PURPOSE AND HAVE NO EFFECT ON THE OUTCOME OF THE VOTE. ACCORDINGLY, YOU ARE URGED TO RETURN THE ENCLOSED PROXY CARD MARKED TO INDICATE YOUR VOTE. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE LEVCOR 2002 STOCK OPTION PLAN. ELECTION OF DIRECTORS IF THE MERGER IS NOT CONSUMMATED You will be asked to elect three persons to serve as directors of Levcor in the event that the merger is not consummated, for a term of one year expiring at the annual meeting of 120 stockholders until their respective successors shall have been duly elected and shall qualify. Each of the nominees for director was previously elected as a director of Levcor. The election of directors requires the affirmative vote of a plurality of the votes cast in person or by proxy at the Levcor annual meeting. Each proxy received will be cast FOR the election of the nominees named below unless otherwise specified in the proxy. Each nominee has indicated that he is willing to serve as a director of Levcor, if elected, and the board of directors of Levcor has no reason to believe that any nominee may become unable or unwilling to serve. In the event that a nominee should become unavailable for election for any reason, the shares represented by a properly executed and returned proxy will be voted for any substitute nominee who shall be designated by the current board of directors. There are no arrangements or understandings between any director or nominee for director and any other person pursuant to which such person was selected as a director or nominee for director of Levcor. NAME AGE TITLE ---- --- ----- Robert A. Levinson 76 Chairman of the Board of Directors, President, Secretary and Principal Financial Officer Edward H. Cohen 63 Director John McConnaughy 72 Director For biographical information on each of the nominees for director, please refer to the section entitled "Election of Levcor Directors" on page 113. IN THE EVENT THAT THE MERGER IS NOT CONSUMMATED AND THE ELECTION FOR THE ABOVE THREE NOMINEES IS HELD, THE ELECTION OF THE THREE LEVCOR DIRECTORS REQUIRES THE AFFIRMATIVE VOTE OF A PLURALITY OF THE VOTES OF THE SHARES OF LEVCOR COMMON STOCK PRESENT IN PERSON OR REPRESENTED BY PROXY AT THE MEETING. BROKER NON-VOTES AND ABSTENTIONS ARE NOT TREATED AS VOTES CAST FOR THIS PURPOSE AND HAVE NO EFFECT ON THE OUTCOME OF THE VOTE. ACCORDINGLY, YOU ARE URGED TO RETURN THE ENCLOSED PROXY CARD MARKED TO INDICATE YOUR VOTE. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR EACH OF THE NOMINEES LISTED ABOVE TO SERVE AS DIRECTORS IN THE EVENT THAT THE MERGER IS NOT CONSUMMATED. 121 RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS Whether or not the merger agreement is adopted and approved, the Levcor stockholders will be asked to ratify the appointment of Friedman Alpren & Green LLP as Levcor's independent auditors for fiscal year 2002. The board of directors has selected Friedman Alpren & Green LLP as independent accountants to audit and report upon the financial statements of Levcor for the 2002 fiscal year and is submitting this matter to the Levcor stockholders for their ratification. Friedman Alpren & Green LLP first served as Levcor's independent auditors during the fiscal year 2001. Audit Fees Friedman Alpren & Green LLP's audit fees for auditing Levcor's annual financial statements for the year ended December 31, 2001 and reviews of the Company's interim financial statements included in the Company's Forms 10-QSB filed with the Securities and Exchange Commission during fiscal year 2002 were $59,000. All Other Fees All other fees for Friedman Alpren & Green LLP's services, for the year ended December 31, 2001, were $4,795. The estimated expense for Friedman Alpren & Green LLP to complete their work performed in connection with this joint proxy statement/prospectus is $100,000. The Levcor board of directors has considered whether the provision of the services set forth in the preceding paragraphs is compatible with maintaining Friedman Alpren & Green LLP's independence, and has determined that it is. A representative of Friedman Alpren & Green LLP is expected to be present at Levcor's annual meeting. The representative will have an opportunity to make a statement and will be able to respond to appropriate questions. THE APPOINTMENT BY THE BOARD OF DIRECTORS OF FRIEDMAN ALPREN & GREEN CAN ONLY BE RATIFIED BY THE AFFIRMATIVE VOTE OF THE MAJORITY OF SHARES PRESENT IN PERSON OR REPRESENTED BY PROXY AT THE MEETING. BROKER NON-VOTES ARE NOT TREATED AS VOTES CAST FOR THIS PURPOSE AND HAVE NO EFFECT ON THE OUTCOME OF THE VOTE. ACCORDINGLY, YOU ARE URGED TO RETURN THE ENCLOSED PROXY CARD MARKED TO INDICATE YOUR VOTE. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF FRIEDMAN ALPREN & GREEN LLP AS LEVCOR'S INDEPENDENT AUDITORS FOR THE YEAR ENDING DECEMBER 31, 2002. 122 LEVCOR GRANT OF AUTHORITY TO ADJOURN OR POSTPONE THE ANNUAL MEETING If there are not sufficient votes at the originally scheduled time of the Levcor annual meeting to approve each proposal, the Levcor stockholders will be asked to vote on whether to grant to the Levcor board of directors the discretionary authority to adjourn or postpone the annual meeting, in order to permit Levcor to solicit additional proxies for adoption and approval of the merger agreement, as well as for approval of each of the other proposals. THE GRANT TO THE LEVCOR BOARD OF DIRECTORS OF DISCRETIONARY AUTHORITY TO ADJOURN OR POSTPONE THE LEVCOR ANNUAL MEETING CAN ONLY BE APPROVED BY THE AFFIRMATIVE VOTE OF THE MAJORITY OF SHARES PRESENT IN PERSON OR REPRESENTED BY PROXY AT THE MEETING. BROKER NON-VOTES ARE NOT TREATED AS VOTES CAST FOR THIS PURPOSE AND HAVE NO EFFECT ON THE OUTCOME OF THE VOTE. ACCORDINGLY, YOU ARE URGED TO RETURN THE ENCLOSED PROXY CARD MARKED TO INDICATE YOUR VOTE. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE GRANT OF DISCRETIONARY AUTHORITY TO ADJOURN OR POSTPONE THE ANNUAL MEETING IN ORDER TO PERMIT LEVCOR TO SOLICIT ADDITIONAL PROXIES. CARLYLE GRANT OF AUTHORITY TO ADJOURN OR POSTPONE THE SPECIAL MEETING If there are not sufficient votes at the originally scheduled time of the Carlyle special meeting to approve and adopt the merger agreement, the Carlyle stockholders will be asked to vote on whether to grant to the Carlyle board of directors the discretionary authority to adjourn or postpone the special meeting, in order to permit Carlyle to solicit additional proxies for adoption and approval of the merger agreement. THE GRANT TO THE CARLYLE BOARD OF DIRECTORS OF DISCRETIONARY AUTHORITY TO ADJOURN OR POSTPONE THE CARLYLE SPECIAL MEETING CAN ONLY BE APPROVED BY THE AFFIRMATIVE VOTE OF THE MAJORITY OF SHARES PRESENT IN PERSON OR REPRESENTED BY PROXY AT THE MEETING. BROKER NON-VOTES ARE NOT TREATED AS VOTES CAST FOR THIS PURPOSE AND HAVE NO EFFECT ON THE OUTCOME OF THE VOTE. ACCORDINGLY, YOU ARE URGED TO RETURN THE ENCLOSED PROXY CARD MARKED TO INDICATE YOUR VOTE. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE GRANT OF DISCRETIONARY AUTHORITY TO ADJOURN OR POSTPONE THE SPECIAL MEETING IN ORDER TO PERMIT CARLYLE TO SOLICIT ADDITIONAL PROXIES. 123 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF LEVCOR GENERAL This management's discussion and analysis of Levcor's financial condition and results of operations and other portions of this joint proxy statement/prospectus contain forward-looking information that involve risks and uncertainties. Levcor's actual results could differ materially from those anticipated by this forward-looking information. Factors that may cause such differences include, but are not limited to, those discussed under the heading "risk factors" and elsewhere in this joint proxy statement/prospectus. This management's discussion and analysis of financial condition and results of operations should be read in conjunction with Levcor's financial statements and the related notes included elsewhere in this prospectus. CRITICAL ACCOUNTING POLICIES The following is a brief discussion of the critical accounting policies used in the preparation of Levcor's financial statements, including those accounting policies and methods used by Levcor which require subjective judgments and are considered very important to the understanding of Levcor's financial condition. Receivables Under our factoring agreement, the factor purchases substantially all of the trade accounts receivable without recourse and assumes substantially all credit risks with respect to such accounts. The agreement allows Levcor to obtain advances, computed on a borrowing base formula, from the factor that bear interest at 1/2% above the bank's prime rate (4.75% at September 30, 2002). The amounts due to Levcor from the factor earn no interest. Levcor has pledged its accounts receivable and property and equipment as collateral under the factor loan. Inventory Inventories are stated at the lower of cost (principally average cost) or market. Inventories consist of yarn and greige goods (collectively considered raw materials), work in process and finished goods. Levcor estimates the markdowns required for inventories based upon future marketability as well as general economic conditions. Levcor believes that it has adequate markdowns and therefore the inventory valuation does not require any additional valuation adjustments. Revenue Recognition Revenue is recognized when goods are shipped to customers. Usual sales terms are FOB shipping point, at which time Levcor has completed all performance obligations to consummate the sale. On occasion, Alfred Dunner has approached Levcor to bill and hold merchandise. Levcor recognizes revenue on these transactions only when all of the following occurs: the risks of ownership have passed to the buyer, the customer has made a fixed commitment to purchase the 124 goods, the customer has requested that the transaction be on a bill and hold basis even though the goods are ready for shipment, there is a fixed date of delivery, Levcor has performed all performance obligations to consummate the sale and the goods are segregated from the remainder of Levcor's goods in the warehouse. At September 30, 2002 and 2001, Levcor did not recognize any revenues from bill and hold transactions. Debt and Debt Covenants During the period ended September 30, 2002, Levcor was in compliance with all debt covenants. RESULTS OF OPERATIONS Three Months Ended September 30, 2002 as Compared to the Three Months Ended September 30, 2001. Sales for the three months ended September 30, 2002 were approximately $1,405,000, a decrease of approximately $2,609,000, or 65.0%, from approximately $4,014,000 for the same period in 2001. The decrease primarily results from a decline in sales by the woven division combined with a sales program with a customer from 2001 not repeated in the current year. As a result of the woven division not producing management's anticipated results during the year 2001, the operations of this division were scaled back significantly in the first quarter of 2002. The cost of sales for the three months ended September 30, 2002 decreased approximately $1,974,000, or 62.3%, from approximately $3,168,000 in 2001 to approximately $1,194,000 in 2002. The decrease resulted from reduced sales in 2002 as compared with the prior year combined with a one-time charge resulting from a dispute settlement in 2002. The gross profit on sales for the three months ended September 30, 2002 was approximately $211,000, a decrease of approximately $635,000, or 75.1%, from approximately $846,000 in 2001. The decrease in gross profit dollars results from the reduced sales in 2002 period as compared to the prior year combined with the one-time charge resulting from a dispute settlement in 2002. The gross profit percentage was 15.0% for the three months ended September 30, 2002 as compared to 21.1% for the same period of 2001. The gross profit percentage decrease resulted from measures taken by Levcor to remain competitive in the marketplace combined with the one-time charge resulting from a dispute settlement in 2002. Levcor's total selling, general and administrative expenses for the three months ended September 30, 2002 were approximately $770,000, an increase of approximately $31,000, or 4.2%, from approximately $739,000 in the same period in 2001. The increase was due primarily to the costs relating to the proposed merger between Levcor and Carlyle of approximately $103,000, offset somewhat by savings generated by Levcor significantly scaling back the woven division, reduced factor fees as sales were substantially less than last year and other cost-cutting measures taken by Levcor in 2002. During the three months ended September 30, 2002, Levcor had a decrease of interest expense of approximately $55,000 from approximately $96,000 in 2001 to approximately $41,000 in 2002, resulting from reduced borrowings and lower interest rates. In addition, Levcor replaced its old term note with a new term loan on May 2, 2002 at a significantly lower interest rate. Other income, which consisted principally of income earned in financing customer import purchases, increased approximately $22,000 from approximately $4,000 in 2001 to approximately $26,000 in 2002. As a result of the foregoing, Levcor reflected a net loss of approximately $574,000 in the three months ended September 30, 2002 compared to net income of approximately $15,000 for the same period of 2001. 125 Nine Months Ended September 30, 2002 as Compared to the Nine Months Ended September 30, 2001. Sales for the nine months ended September 30, 2002 were approximately $8,499,000, a decrease of approximately $8,380,000, or 49.7%, from approximately $16,879,000 for the same period in 2001. The decrease results from a decline in sales by the woven division combined with sales program with a customer from 2001 not repeated in the current year. As a result of the woven division not producing management's anticipated results during the year 2001, the operations of this division were scaled back significantly in the first quarter of 2002. The cost of goods sold for the nine months ended September 30, 2002 were approximately $6,681,000, a decrease of approximately $7,013,000, or 51.2%, from approximately $13,694,000 in 2001. The decrease resulted from reduced sales in 2002 as compared with the prior year. The gross profit on sales for the nine months ended September 30, 2002 was approximately $1,818,000, a decrease of approximately $1,367,000 or 42.9%, from approximately $3,185,000 in 2001. The decrease in gross profit dollars results from reduced sales in the 2002 period as compared to the prior year period combined with a one-time charge of approximately $60,000 resulting from a dispute settlement in 2002. The gross profit percentage was 21.4% for the nine months ended September 30, 2002 as compared to 18.9% for the same period of 2001. The gross profit percentage increase resulted from Levcor concentrating its business in products with higher overall profit margins offset somewhat by the one-time charge resulting from a dispute settlement in 2002. Levcor's total selling, general and administrative expenses for the nine months ended September 30, 2002 were approximately $2,152,000, a decrease of approximately $321,000, or 13.0%, from approximately $2,473,000 in the same period in 2001. The decrease was due primarily to the cost savings generated by Levcor significantly scaling back the woven division, reduced factor fees as sales were substantially less than last year and other cost-cutting measures taken by Levcor in 2002, offset somewhat by costs relating to the proposed merger between Levcor and Carlyle reported in 2002. During the nine months ended September 30, 2002, Levcor had a decrease of interest expense of approximately $196,000 from approximately $357,000 in 2001 to approximately $161,000 in 2002, resulting from reduced borrowings and lower interest rates. In addition, Levcor replaced its old term note with a new term loan on May 2, 2002 at a significantly lower interest rate. Other income, which consisted principally of income earned in financing customer import purchases, increased approximately $36,000 to approximately $53,000 in 2002 from $17,000 in 2001. As a result of the foregoing, Levcor reflected a net loss of approximately $442,000 in the nine months ended September 30, 2002 compared to net income of approximately $372,000 for the same period of 2001. Calendar Year 2001 Compared to Calendar Year 2000 Sales for 2001 were approximately $20,108,000, an increase of approximately $2,850,000, or 16.5%, from approximately $17,258,000 for 2000, due to new business from Levcor's woven division. The cost of sales in 2001 was approximately $16,252,000, an increase of approximately $1,903,000, or 13.3%, which is caused by the increase in sales, from approximately $14,349,000 in 2000. The gross 126 profit for 2001 was approximately $3,856,000, an increase of approximately $946,000, or 32.5%, from a gross profit of approximately $2,910,000 for 2000. The gross profit percentage was 19.2% in 2001 as compared to 16.9% in 2000. The gross profit increase resulted from Levcor's concentrating its business in products with higher overall profit margins. Levcor's total selling, general and administrative expenses for 2001 were approximately $3,236,000, an increase of approximately $230,000, or 7.7%, from approximately $3,006,000 in 2000. Such increase was due to the increased costs associated with the woven business that was in operation for the entire 2001 year. Other income was approximately $20,000 in 2001, a decrease of approximately $119,000, or 85.6%, from approximately $139,000 in 2000. The decrease in other income resulted from the inclusion of $100,000 of income from the Andrex lease buy-out agreement in 2000. Interest expense increased 2.2%, or approximately $9,000, to approximately $427,000 from approximately $418,000. A loss on impairment of assets held for sale of $20,000 was recognized in 2001 compared with a loss on impairment of assets held for sale of $50,000 in 2000. As a result of the above, net income was approximately $192,000 in 2001 as compared to a loss of approximately $432,000 in 2000. LIQUIDITY AND CAPITAL RESOURCES Under Levcor's factoring agreement with CIT Group, the factor purchases Levcor's trade accounts receivable and assumes substantially all credit risks with respect to such accounts. The amounts due to Levcor from the factor earn no interest. The agreement allows Levcor to obtain advances from the factor that bear interest at 1/2% above the bank's prime rate. Levcor has pledged its accounts receivable and property and equipment as collateral under the agreement. The amount available for advances under the factoring agreement is the difference between eligible receivables less funds in use and outstanding letters of credit. On December 15, 2000, Levcor refinanced $1,500,000 of the factor loan into a term note with the CIT Group. Levcor and Robert A. Levinson have provided substantially the same collateral that is provided under the factor loan as collateral for the term note. The term note is payable in 35 equal consecutive monthly installments of $8,696 beginning on February 1, 2001, with a final installment of $1,195,652 due on January 1, 2004. In addition, the term note contains covenants that include a limitation on the amount of capital expenditures and certain procedural covenants. Under the factoring agreement, the factor purchases the trade accounts receivable without recourse and assumes substantially all credit risks with respect to such accounts. The agreement allows Levcor to obtain advances from the factor that bear interest at 1/2% above the bank's prime rate (4.75% at December 31, 2001). The amounts due to Levcor from the factor earn no interest. Levcor has pledged its accounts receivable and property and equipment as collateral 127 under the advances. In addition, Robert A. Levinson a stockholder, officer and director of Levcor has provided certain side collateral against advances provided under the agreement. There is no set limit on borrowings. The amount available for borrowing is based on a formula consisting of 90 percent of eligible accounts receivable increased by side collateral and reduced by both the current loan balance and outstanding letters of credit. On May 2, 2002 Levcor borrowed $3,000,000 from JPMorgan Chase Bank pursuant to a promissory note due May 3, 2004. The note bears interest at a fixed rate per annum equal to the Adjusted LIBO Rate applicable to such note plus .75% (a "Eurodollar Loan"). The interest on the note at May 3, 2002 was 2.90625%. In addition, Robert A. Levinson a stockholder, officer and director of Levcor has provided certain additional collateral guaranteeing the note. The proceeds of the note were used to payoff the outstanding balance of $1,375,557 of its term note with the CIT Group and pay down Levcor's advance position of $1,160,000 with the CIT Group. The remainder was used for working capital requirements. If necessary, Mr. Levinson has agreed to personally support Levcor's cash requirements to enable it to fulfill its obligations through January 2, 2004. On September 27, 2002 Mr. Levinson delivered to Levcor his written commitment that he will continue to support Levcor's cash requirements until January 2, 2004, to the extent necessary, up to a maximum amount of $3 million. Levcor believes its reliance on such commitment is reasonable and that Mr. Levinson has sufficient liquidity and net worth to honor such commitment. Levcor believes that Mr. Levinson's written commitment provides Levcor with the legal right to request and receive such advances. In the event that Mr. Levinson did not honor such commitment, Levcor would have the right to sue Mr. Levinson for breach of his agreement. The amount owed by Levcor to Mr. Levinson as of June 30, 2002 under loans he has made to Levcor is $500,000 and is a demand obligation that Mr. Levinson has promised not to demand until at least January 2, 2004. On June 5, 2002 the Levcor board of directors determined that in light of the fact that the financing arrangement with CIT was paid off in May of 2002, Levcor currently has sufficient funds available, and Levcor's other sources of financing are at lower interest rates, it was in Levcor's best interest to prepay a portion of the outstanding principal amount owed to Mr. Levinson in order to save interest expenses. On June 5, 2002, Levcor prepaid $220,000 of the outstanding principal amount owed to Mr. Levinson. Also, the accrued interest on this obligation of $269,671 has been classified as a long-term obligation because Mr. Levinson has promised not to demand payment until at least January 2, 2004. Levcor's obligation to repay the sums owed to Mr. Levinson is not a demand obligation until after January 2, 2004. On February 28, 2002 Mr. Levinson delivered to Levcor his written undertaking that he will not require the repayment of the loan together with accrued and unpaid interest, prior to January 2, 2004. Levcor believes its reliance on such undertaking is reasonable. In the event that Mr. Levinson did demand repayment prior to January 2, 2004, Levcor believes that such demand would be unenforceable and that Levcor would have the right to sue Mr. Levinson for breach of his agreement. Mr. Levinson reaffirmed this undertaking in writing on September 27, 2002. Levcor believes that cash generated from Levcor's sale of fabrics, the advances under the CIT Group factoring agreement, the proceeds from its term note with JPMorgan Chase and loans from Mr. Levinson (if needed) will be sufficient to fund Levcor's operations through 2004. Levcor's unrestricted cash at September 30, 2002 was approximately $8,000 and was approximately, $2,000 at December 31, 2001. Levcor's future minimum lease payments under noncancelable operating leases at December 31, 2001 are approximately $900,000 for the years 2002 through 2006. The majority of these payments are for the Company's headquarters in New Jersey. The merger with Carlyle, if completed, will not impact Levcor's liquidity since Carlyle is self funding and no new debt is being incurred in the acquisition other then the assumption by Levcor of approximately $18.3 million of Carlyle's existing debt which includes an obligation commencing June 15, 2007 to redeem the Carlyle Series B preferred stock, which approximated $4.6 million at September 30, 2002 (notwithstanding that because Carlyle will be treated as the acquirer for accounting purposes, upon the consummation of the merger Carlyle will be deemed to assume approximately $4.935 million of Levcor's debt consisting of accounts payable and accrued expenses of $1.158 million, long-term debt of $3 million and a loan payable to Robert A. Levinson a stockholder, officer and director of Levcor in the amount of approximately $777,000). 128 Upon the consummation of the merger Levcor will issue in exchange for the Carlyle Series B preferred stock, shares of Levcor Series A preferred stock which shall by its terms, be subject to mandatory redemption, solely to the extent Levcor has sufficient funds to lawfully do so, in three equal annual installments on June 15, 2007, June 15, 2008 and June 15, 2009, in each case, from funds legally available therefor, at a price per share of Series A preferred stock equal to $1 per share, together with an amount representing accrued and unpaid dividends, whether or not declared, to the date of redemption. SEASONALITY The business of Levcor is seasonal and typically higher revenues and operating income are realized in the second and fourth calendar quarters. Such seasonality takes into account the standard lead-time required by the fashion industry to manufacture apparel, which corresponds to the respective retail selling seasons. Standard lead-time is the period of time commencing with when Levcor receives an order from a customer and ending with when Levcor ships the order to the customer. CURRENT ACCOUNTING ISSUES SFAS No. 142 In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill will no longer be subject to amortization over its estimated useful life. Rather, goodwill will be subject to an annual assessment for impairment by applying a fair-value based test. The standard will be effective beginning January 1, 2002. Levcor has yet to determine the impact of the statement on its financial position and results of operations. SFAS No. 144 In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and discontinued operations. The standard is effective beginning January 1, 2002. Levcor has determined that the impact of initial adoption will not have a material impact on Levcor's financial position or results of operations. BUSINESS OF LEVCOR Levcor was incorporated in 1964 as Pantepec International, Inc. under the laws of the Islands of Bermuda and was reorganized in 1967 under the laws of the State of Delaware. In 1995, Pantepec International, Inc. changed its name to Levcor International, Inc. 129 In 1995, Levcor acquired a woven fabric converting business that converts cotton, synthetics, and blend fabrics for sale to domestic apparel manufacturers. This acquisition formed the basis of Levcor's current business. On July 1, 1999, Levcor purchased from Andrex Industries Corp. ("Andrex") its knit fabric and processing business that produces knit fabrics used in the production of apparel. During the fourth quarter of 2000, Levcor started a new woven division selling to the dress market. As a result of the current soft retailing climate for dresses, the woven division has not produced management's anticipated results and therefore has been scaled back significantly during the first quarter of 2002. Levcor is engaged in converting woven textile fabrics and processing knit textile fabrics which are sold for production principally to domestic manufacturers of women's apparel. The textile fabric converting process consists of (i) designing fabrics, (ii) purchasing yarns both dyed and undyed and commissioning knitting mills to knit the yarns into greige fabric (unfinished fabric) according to Levcor's specifications, and (iii) commissioning fabric finishers to finish the fabrics through a process of washing, bleaching, dyeing and applying certain chemical finishes to greige fabric according to Levcor's specifications. Finished apparel fabric is ready to be cut and sewn into garments. Levcor contracts with commercial transporters to deliver greige fabric from textile mills to the fabric finishers. Levcor receives orders for the sale of finished fabrics through its sales personnel and independent commissioned agents. The principal raw materials used by Levcor to fabricate textiles are typically a combination or blend of two or more fibers, such as rayon, acetate, polyester, cotton and acrylic. The principal suppliers of raw materials, greige goods and yarn used by Levcor during 2001 were JPS Converter and Industrial Corp. and National Spinning, Inc. The primary knitters used in the conversion process were Fairfield Textiles Corp. and Ramseur Interlock Knitting. The primary finishers in the conversion process were United Piece Dye Works, Inc. and Oxford Textiles, Inc. During the year 2001, JPS Converter and Industrial Corp. filed for bankruptcy. Levcor had anticipated the filing and had provided alternative sourcing to insure continuity of the supply of raw materials required for its business. In 2001, Alfred Dunner, Inc. and Nygard International, Ltd., manufacturers of women's apparel, accounted for approximately 47% and 11% of Levcor's revenues, respectively. Levcor currently employs 16 persons, all of whom are employed full time, and none of its employees are represented by a collective bargaining agreement. Levcor does not have any long-term agreements with Alfred Dunner, Nygard International or any of its other customers. The textile conversion business in which Levcor competes is extremely competitive, and it competes on the basis of the price and uniqueness in styling of its fabrics. Levcor competes with numerous domestic and foreign fabric manufacturers, including companies that are larger in size and have financial resources that are greater than that of Levcor. Foreign competition, in particular, is a significant factor in the business of Levcor, as the United States textile industry has been and continues to be negatively impacted by existing worldwide trade practices. 130 DESCRIPTION OF PROPERTY Levcor's offices are located at 462 Seventh Avenue, 20th Floor, New York, New York 10018. Levcor has entered into a seven-year lease of this property, which expires on January 21, 2007, at an annual rent of $162,500. Levcor believes that this office is suitable to service its current level of sales and satisfy its foreseeable needs. MANAGEMENT OF LEVCOR DIRECTORS AND EXECUTIVE OFFICERS For a description of Levcor's current directors and officers see the section entitled Election of Levcor Directors beginning on page 113. There are no arrangements or understandings pursuant to which any person has been elected as a director or executive officer of Levcor. Directors are elected annually by the stockholders and hold office until the next annual meeting of stockholders or until their respective successors are elected and qualified. Levcor has not held a stockholder meeting since 1995. Executive officers are elected by the board of directors and hold office until their respective successors are elected and qualified. There is no family relationship among any directors or executive officers of Levcor. DIRECTOR COMPENSATION Directors do not receive any annual fee for their services, but do receive an annual grant (in January) of options to purchase the number of shares of Levcor common stock derived by dividing $1,500 by the fair market value of a share of Levcor common stock on the date of grant. In 2001, 2,400 shares of Levcor common stock were granted to non-employee directors. EXECUTIVE COMPENSATION The following table and discussion summarizes all compensation awarded to, earned by, or paid to the President of Levcor for services rendered in all capacities to Levcor during the three fiscal years ended December 31, 2001. Mr. Levinson is the only executive officer of Levcor. ANNUAL COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS ----------------------------------------- ---------------------------------------- OTHER RESTRICTED ANNUAL STOCK STOCK NAME AND SALARY BONUS COMPENSATION AWARDS OPTIONS ALL OTHER PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) COMPENSATION ------------------ ---- ------ ----- ------------ ---------- ------- ------------ Robert A. Levinson, Chairman, President, 2001 $37,500 -0- -0- -0- -0- -0- Secretary and Principal Financial Officer 2000 $37,500 -0- -0- -0- -0- -0- 1999 $25,000 -0- -0- -0- -0- -0-
131 FISCAL YEAR-END OPTION VALUE TABLE Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options Options at Fiscal at Fiscal Year-End (#) Year-End ($) -------------- -------------- Exercisable/ Exercisable/ Name Un-exercisable Un-exercisable ---- -------------- -------------- Robert A. Levinson 50,000/100,000 $100,000/$200,000 Mr. Levinson did not exercise any options to purchase shares of Levcor common stock during the fiscal year 2001. STOCK OPTION PLANS On December 8, 1992, the board of directors of Levcor adopted a Stock Option Plan. The plan, as amended, authorizes Levcor to grant options to purchase an aggregate of 500,000 shares of common stock to induce employees and directors to remain in the employ or service of Levcor and to attract new employees. The plan terminates in December 2002 and options to purchase all of the shares available under the plan have heretofore been granted. For a summary of Levcor's proposed 2002 Stock Option Plan, see the section entitled Approval of 2002 Stock Option Plan beginning on page 120. 132 EQUITY COMPENSATION PLAN INFORMATION
------------------------------- ---------------------------- ---------------------------- ---------------------------- (a) (b) (c) ------------------------------- ---------------------------- ---------------------------- ---------------------------- Plan category Number of securities to be Weighted- average exercise Number of securities issued upon exercise of price of outstanding remaining available for outstanding options options future issuance under equity compensation plans (excluding securities reflected in column (a) ------------------------------- ---------------------------- ---------------------------- ---------------------------- Equity compensation plans 262,400 $.81 0 approved by security holders ------------------------------- ---------------------------- ---------------------------- ---------------------------- Equity compensation plans not N/A N/A N/A approved by security holders ------------------------------- ---------------------------- ---------------------------- ---------------------------- Total 262,400 $.81 0 ------------------------------- ---------------------------- ---------------------------- ----------------------------
BOARD OF DIRECTORS INTERLOCKS AND INSIDER PARTICIPATION During the fiscal year 2001, except for Mr. Levinson, who also serves as the Chairman of the board of directors, President and Chief Executive Officer of Carlyle, no executive officer of Levcor served as a director of or a member of a compensation committee of any entity for which any of the persons serving on the board of directors of Levcor is an executive officer. THE BOARD OF DIRECTORS AND ITS COMMITTEES MEETINGS OF THE BOARD OF DIRECTORS During the fiscal year 2001, the board held no meetings. Levcor's directors discharge their responsibilities throughout the year, not only at board meetings, but also through personal meetings and other communications, including telephone contacts, with the Chairman and President and others regarding matters of interest and concern to Levcor. COMMITTEES OF THE BOARD OF DIRECTORS Levcor's board of directors does not have a nominating, compensation or audit committee. The board, throughout the year, performs the functions of such committees. OTHER LEVCOR MATTERS SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF LEVCOR The following table sets forth certain information as of November 21, 2002 with respect to the number of shares of common stock beneficially owned by: (i) each person known to Levcor to be the beneficial owner of more than five percent of the common stock; (ii) each of the directors of Levcor; and (iii) all of the directors and executive officers of Levcor as a group. Except as 133 otherwise indicated, each such stockholder has sole voting and investment power with respect to the shares beneficially owned by such stockholder. A person is deemed to beneficially own a security if he has or shares the power to vote or dispose of the security or has the right to acquire it within 60 days. AMOUNT AND NATURE OF BENEFICIAL PERCENT OF NAME AND ADDRESS OWNERSHIP CLASS ---------------- ----------------- ---------- Robert A. Levinson 749,175 (1) 31.4% 462 Seventh Avenue New York, NY 10018 John McConnaughy 32,825 (2) 1.4% 1011 High Ridge Road Stamford, CT 06905 Edward H. Cohen, Esq. 111,691 (3)(4)(5) 4.8% c/o Katten Muchin Zavis Rosenman 575 Madison Avenue New York, NY 10022 Roger L. and Theresa S. Hueglin 125,250 5.35% 11 Blueberry Hill Road Wilton, CT 06897 All directors and executive 893,691 (6) 37% officers as a group (3 persons) ---------- (1) Includes 50,000 shares of common stock subject to currently exercisable options. (2) Includes 22,850 shares of common stock subject to currently exercisable options. (3) Includes 2,050 shares of common stock subject to currently exercisable options which are held by Mr. Cohen for the benefit of his law firm, Katten Muchin Zavis Rosenman. (4) Includes 101,741 shares owned by Katten Muchin Zavis Rosenman, of which Mr. Cohen is counsel. (5) Mr. Cohen disclaims beneficial ownership of all shares of Levcor common stock and options to purchase shares of Levcor common stock he holds for the benefit of Katten Muchin Zavis Rosenman. (6) Includes 74,900 shares of common stock subject to currently exercisable options. RELATED PARTY TRANSACTIONS Mr. Levinson has also provided $720,000 of loans to Levcor, bearing interest at 6% per annum. In connection with Levcor's financing arrangement with CIT, Mr. Levinson had agreed to defer the payment of interest during 2002 and not to require payment of these loans and $267,000 of the related accrued interest at December 31, 2001, prior to January 2, 2004. On June 5, 2002, the Levcor board of directors determined that, in light of the fact that the financing arrangement with CIT was paid off in May of 2002, Levcor currently has sufficient funds available, and Levcor's other sources of financing are at lower interest rates, it was in Levcor's best interest to prepay a portion of the outstanding principal amount owed to Mr. Levinson in order to save interest expenses. On June 5, 2002, Levcor prepaid $220,000 of the outstanding 134 principal amount owed to Mr. Levinson. As of November 22, 2002, the aggregate amount of principal and interest owed to Mr. Levinson by Levcor equaled $777,000. LEVCOR MARKET PRICE AND DIVIDEND DATA Levcor common stock, par value $0.56 per share, is traded on the Over The Counter Bulletin Board under the symbol "LEVC.OB." The common stock is traded sporadically, and no established liquid trading market currently exists therefor. The following table sets forth the range of high and low bids of Levcor common stock for the calendar quarters indicated. The quotes listed below reflect inter-dealer prices or transactions solely between market-makers, without retail mark-up, mark-down or commission and may not represent actual transactions. 2000 High Low First Quarter $1.375 $0.625 Second Quarter 1.125 0.625 Third Quarter 1.000 0.625 Fourth Quarter 2.031 0.750 2001 First Quarter 2.438 1.188 Second Quarter 4.400 1.250 Third Quarter 5.000 2.150 Fourth Quarter 3.000 1.800 2002 First Quarter 2.250 1.850 Second Quarter 3.150 1.610 Third Quarter 1.260 1.260 Fourth Quarter (through December 4, 2002) 2.500 0.900 Holders of Record As of December 4, 2002, the last date prior to the printing of this joint proxy statement/prospectus for which it was practicable for Levcor to obtain this information, there were approximately 6,389 registered holders of Levcor common shares. Dividend Policy Levcor has not paid any cash dividends on shares of its common stock and has no present intention to declare or pay cash dividends on such shares in the foreseeable future. 135 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION AT CARLYLE GENERAL The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto of Carlyle and other financial information appearing elsewhere in this joint proxy statement/prospectus. CRITICAL ACCOUNTING POLICIES The following is a brief discussion of the critical accounting policies used in the preparation of Carlyle's financial statements, including those accounting policies and methods used by Carlyle which require subjective judgments and are considered very important to the understanding of Carlyle's financial condition. Revenue Recognition Carlyle records sales based on shipment of goods from its distribution facilities. Most of its shipments are FOB shipping point. Deliveries generally take place within three days of shipment. Legal title passes to Carlyle's customers based on shipping terms. In the case of FOB shipping point, title passes to customers at time of shipment. In the case of FOB destination, title passes at time of delivery. Approximately $115,000 and $106,000 of sales were recorded in the last weeks of December 2001 and 2000, respectively, both of which were FOB destination and not yet received by the customer. These amounts are very consistent from year to year. The difference in methods (shipping versus title) in terms of both sales dollars and the related gross profits are monitored. Carlyle does not consider these differences material. Accounts Receivable, Trade In the normal course of business, Carlyle extends credit to customers which satisfy established credit criteria. Carlyle has a significant concentration of credit risk due to the large volume of business with major retail chain store customers. Most of these retail chain stores are public companies and as such, Carlyle monitors their financial reports on a regular basis and obtains accounts receivable insurance in certain circumstance. Accounts receivable, trade, as shown on the Consolidated Balance Sheet, is net of allowances for returns and allowances, markdowns and estimated bad debts. An allowance for returns and markdowns is determined based on specific programs and customer agreements. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of the financial statements, assessments of collectability are based on historical trends. Inventory Carlyle values inventory at the lower of the average weighted cost or its current estimated market value. Carlyle regularly reviews inventory quantities on hand, by item, and records a provision 136 for excess inventory based primarily on Carlyle's historical experience and estimated forecast of product demand using historical and recent ordering data relative to the quantity on hand for each item. A significant decrease in demand for Carlyle's products could result in an increase in the amount of excess inventory quantities on hand, however, Carlyle manages inventory and monitors product purchasing to minimize this risk. Impairment of Long Lived Assets During the years ended December 31, 2001 and 2000 Carlyle recorded goodwill amortization in the amounts of $157,000 and $165,000, respectively. Debt Carlyle's credit facilities with CIT are comprised of a term loan which amortizes $12 thousand per month and revolving credit which provides advances in accordance with a formula of 85% of eligible accounts receivable and 20% of eligible inventory. Seasonality and New Products Carlyle's business is largely based on reorders from its retail customers and as a result the business is influenced by the buying habits of consumers. Home sewing and craft activities take 137 place on a year-round basis; however, they are generally indoor activities and as a result they experience an increased participation level during the fall, winter and early spring months. Anticipating this pattern, our retail customers place somewhat larger reorders during the July through March period. Sales are also influenced by the introduction of new products and or the discontinuance of existing products. A successful new product requires the retail customer to add the product and experience an acceptable level of sell-through. Carlyle develops and introduces new product ideas on a regular basis, however there is no assurance that its retail customers will buy the new products and if they do, there is no assurance the consumer will purchase the new product at an acceptable level. RESULTS OF OPERATIONS Three Months Ended September 30, 2002 as Compared to the Three Months Ended September 30, 2001. Sales during the third quarter of 2002 totaled $5.9 million as compared to $6.0 million during the third quarter of 2001. Gross margin during the third quarter of 2002 totaled $2.1 million as compared to $2.0 million in the third quarter of 2001. The gross margin percent during the third quarter of 2002 was 34.7% as compared to 32.9% during the third quarter of 2001. Selling, general and administrative expenses in the third quarter of 2002 totaled $1.6 million as compared to $1.5 million in the third quarter of 2001. Other income totaling $100 thousand was recorded during the third quarter of 2001 related to the sale of property in North Grosvenordale, CT. The changes to Carlyle's sales, gross margin, selling, general and administrative expenses as well as other income during the third quarter of 2002 as compared to the third quarter of 2001 were nominal and reflect normal variations. Income before interest and income taxes totaled $459 thousand during the third quarter of 2002 as compared to $553 thousand during the comparable period last year. The decrease in income before interest and income taxes was primarily the result of lower other income during the third quarter of 2002. Net interest expense during the third quarter of 2002 totaled $111 thousand as compared to net interest expense of $135 thousand during the third quarter of 2001. The reduction in third quarter interest expense as compared to the same period last year was the result of lower average debt outstanding during the third quarter of 2002 and the lower weighted average interest rates in effect during the third quarter of 2002 versus the third quarter of 2001. The provision for income taxes during the third quarter of 2002 totaled $128 thousand as compared to $166 thousand during the same period last year. The combined effective income tax rate totaled 36.7% in the third quarter of 2002 as compared to 39.7% in the third quarter of 2001. Series B Preferred Stock dividends during the third quarters of 2002 and 2001 totaled $68 thousand and $69 thousand respectively. 138 Third quarter results may not be indicative of future quarterly results due to programs with major retail customers which may vary as to timing and amount from quarter to quarter. In addition, consolidation within Carlyle's customer base and inventory reduction efforts by major retail customers may affect Carlyle's revenue and operating results in subsequent quarters. Nine Months Ended September 30, 2002 as Compared to the Nine Months Ended September 30, 2001. Sales during the nine months ended September 30, 2002 totaled $17.5 million as compared to $18.7 million during the same period last year. The sales decrease reflects the effect of two products launched in the first quarter of 2001, which were later discontinued, offset in part by a new product line introduced during the third quarter of 2002. During the first quarter of 2001, Carlyle sold $826 thousand of a new line of chenille teddy bears, Carlyle also introduced a spray fabric paint line in March 2001. These two programs provided $1.2 million of sales in the first nine months of 2001. Because these product lines failed to generate sufficient consumer interest they were discontinued by our retail customers and produced no net sales in 2002. Gross margin during the first nine months of 2002 totaled $6.6 million as compared to $7.0 million during the first nine months of 2001. The gross margin percent during the first nine months of 2002 was 39.1% as compared to 39.3% during the first half of 2001. The gross margin dollar decrease in 2002 as compared to 2001 was the result of lower sales volume as discussed above. The improvement in gross margin percent was the result of a change in sales mix. Selling, general and administrative expenses totaled $4.9 million during the nine months ended September 30, 2002 as compared to $5.5 million during the comparable period last year. The reduction in selling, general and administrative expense in 2002 was primarily the result of a reduction in compensation expense following a headcount reduction in the second half of 2001. Other income totaling $100 thousand was recorded during the nine months ended September 30, 2001 related to the sale of property in North Grosvenordale, CT. Income before interest and income taxes for the nine months ended September 30, 2002 totaled $1.7 million as compared to $1.5 million for the same period in 2001. The increase in income before interest and income taxes in 2002 as compared to 2001 was primarily the result of lower selling, general and administrative expenses. The provision for income taxes during the nine months ended September 30, 2002 totaled $485 thousand as compared to $437 thousand during the first nine months of 2001. The combined effective income tax rate was 36.1% during the nine months ended September 30, 2002 as compared to 40.1% during the comparable period in 2001. Series B Preferred Stock dividends during the nine months ended September 30, 2002 and 2001 totaled $204 thousand and $205 thousand respectively. Year to date results may not be indicative of full year results due to programs with major retail customers which may vary as to timing and amount from quarter to quarter. In addition, consolidation within Carlyle's customer base and inventory reduction efforts by major retail customers may affect Carlyle's revenue and operating results in subsequent quarters. 139 Calendar Year 2001 Compared to Calendar Year 2000 Net sales during the year ended December 31, 2001 totaled $24.9 million as compared to $27.1 million during the year ended December 31, 2000, a decrease of $2.2 million or 8%. The decline in net sales was primarily attributable to a continued softness of the button product line during most of 2001. Gross margin during the year ended December 31, 2001 totaled $9.5 million as compared with $11.1 million in 2000. The gross margin percent during the year ended December 31, 2001 was 38% as compared to 40.9% during last year. The gross margin decline, in both dollars and percent, was the result of lower sales volume and a change in sales mix as revenues from higher margin product lines declined. Selling, general and administrative expenses during the year ended December 31, 2001 totaled $7.2 million or 29% of net sales as compared to $8.5 million or 31% of net sales in 2000. The reduction in selling, general and administrative expenses totaling $1.3 million was primarily the result of headcount reductions made during 2001 in response to reduced revenues. Included in selling, general and administrative expenses is pension accounting income which totaled $150,000 during the year ended December 31, 2001 as compared to $300,000 for the year ended December 31, 2000. For the year ended December 31, 2001 the Company's actual return on pension plan assets totaled a loss of $483 thousand as compared to the projected return on pension plan assets of $1.8 million; for the year ended December 31, 2000 the Company's actual return on plan assets totaled income of $2.2 million as compared to a projected income of $1.8 million. Differences between actual and expected returns on pension plan assets will increase or decrease pension accounting income or expense in future periods. The Company does not expect to record pension income in 2002 due to the poor relative performance of the plan assets in 2001 as compared to the expected performance. Continued poor relative performance could require the Company to record pension expense in future periods and could also require the Company to make cash contributions to the pension plan. Income from continuing operations before interest and income taxes totaled $2.2 million during the year ended December 31, 2001 as compared to $2.6 million during last year. The reduction was the result of a combination of the lower gross margin dollars totaling $1.6 million mostly offset by lower selling, general and administrative expenses totaling $1.3 million as described above. Net interest expense during the year ended December 31, 2001 totaled $565 thousand as compared to $746 thousand during 2000. The decrease in interest expense in 2001 was the result of the lower average level of bank debt outstanding during 2001 combined with lower interest rates in effect during the year. The average level of outstanding bank debt in 2001 was $6.9 million as compared to $8.6 million for the year ended December 31, 2000. The weighted average interest rate on bank borrowings during the year ended December 31, 2001 was 6.54% as compared to 7.61% during the year ended December 31, 2000. The provision for income tax during the year ended December 31, 2001 totaled $672 thousand as compared to $709 thousand during last year. The combined effective income tax rate was 40.4% in 2001 and 38.2% in 2000. The combined effective income tax rates are higher than combined statutory rates principally because of state income taxes and nondeductible goodwill. Preferred dividends during the year ended December 31, 2001 totaled $273 thousand as compared to $274 thousand during 2000. In connection with the refinancing of the Fleet Credit Agreement, Carlyle wrote-off $90 thousand, net of income tax benefit, of un-amortized deferred financing costs in the fourth quarter of 2001 and such amount is presented as an extraordinary item in the 2001 Consolidated Statement of Operations. 140 Calendar Year 2001 Compared to Calendar Year 2000 Net sales during the year ended December 31, 2001 totaled $24.9 million as compared to $27.1 million during the year ended December 31, 2000, a decrease of $2.2 million or 8%. The decline in net sales was primarily attributable to a continued softness of the button product line during most of 2001. Gross margin during the year ended December 31, 2001 totaled $9.5 million as compared with $11.1 million in 2000. The gross margin percent during the year ended December 31, 2001 was 38% as compared to 40.9% during last year. The gross margin decline, in both dollars and percent, was the result of lower sales volume and a change in sales mix as revenues from higher margin product lines declined. Selling, general and administrative expenses during the year ended December 31, 2001 totaled $7.2 million or 29% of net sales as compared to $8.5 million or 31% of net sales in 2000. The reduction in selling, general and administrative expenses totaling $1.3 million was primarily the result of headcount reductions made during 2001 in response to reduced revenues. Included in selling, general and administrative expenses is pension accounting income which totaled $150,000 during the year ended December 31, 2001 as compared to $300,000 for the year ended December 31, 2000. For the year ended December 31, 2001 the Company's actual return on pension plan assets totaled a loss of $483 thousand as compared to the projected return on pension plan assets of $1.8 million; for the year ended December 31, 2000 the Company's actual return on plan assets totaled income of $2.2 million as compared to a projected income of $1.8 million. Differences between actual and expected returns on pension plan assets will increase or decrease pension accounting income or expense in future periods. The Company does not expect to record pension income in 2002 due to the poor relative performance of the plan assets in 2001 as compared to the expected performance. Continued poor relative performance could require the Company to record pension expense in future periods and could also require the Company to make cash contributions to the pension plan. Income from continuing operations before interest and income taxes totaled $2.2 million during the year ended December 31, 2001 as compared to $2.6 million during last year. The reduction was the result of a combination of the lower gross margin dollars totaling $1.6 million mostly offset by lower selling, general and administrative expenses totaling $1.3 million as described above. Net interest expense during the year ended December 31, 2001 totaled $565 thousand as compared to $746 thousand during 2000. The decrease in interest expense in 2001 was the result of the lower average level of bank debt outstanding during 2001 combined with lower interest rates in effect during the year. The average level of outstanding bank debt in 2001 was $6.9 million as compared to $8.6 million for the year ended December 31, 2000. The weighted average interest rate on bank borrowings during the year ended December 31, 2001 was 6.54% as compared to 7.61% during the year ended December 31, 2000. The provision for income tax during the year ended December 31, 2001 totaled $672 thousand as compared to $709 thousand during last year. The combined effective income tax rate was 40.4% in 2001 and 38.2% in 2000. The combined effective income tax rates are higher than combined statutory rates principally because of state income taxes and nondeductible goodwill. 141 Preferred dividends during the year ended December 31, 2001 totaled $273 thousand as compared to $274 thousand during 2000. In connection with the refinancing of the Fleet Credit Agreement, Carlyle wrote-off $90 thousand, net of income tax benefit, of un-amortized deferred financing costs in the fourth quarter of 2001 and such amount is presented as an extraordinary item in the 2001 Consolidated Statement of Operations. Calendar Year 2000 Compared to Calendar Year 1999 Net sales during the year ended December 31, 2000 totaled $27.1 million as compared to $28.9 million during the year ended December 31, 1999 for a decrease of $1.8 million or 6%. The decline in net sales was mostly attributable to a softness of the button product line. Incremental sales from our new European button business (Button Fashion B.V.) during the year ended December 31, 2000 was insufficient to fully offset a decline in the domestic sales of buttons. This decline was the result of, among other things, a continued decline in home sewing as well as the current fashion cycle, which has been placing less emphasis on buttons and other embellishments. The softness in our market has also caused our retail customers to be more cautious with regard to controlling inventory dollars at store level. During the year, two of our largest button customers made changes in their ordering patterns in response to market conditions in an effort to reduce store inventory levels. These changes had a direct impact on our sales of buttons during the year and are expected to have a continuing impact at least through the end of 2001. Sales of our craft and gift product line increased modestly by approximately $261 thousand during the year ended December 31, 2000. Gross margin during the year ended December 31, 2000 totaled $11.1 million as compared with $13.0 million in 1999. The gross margin percent during the year ended December 31, 2000 was 40.9% as compared to 45.0% during last year. The gross margin decline, in both dollars and percent, was the result of a change in sales mix as revenues from higher margin product lines declined, for the reasons noted above. Sales of lower margin product lines were modestly higher but experienced significantly lower margins as a result of higher variable cost of sales caused partially by inventory write-offs. Selling, general and administrative expenses during the year ended December 31, 2000 totaled $8.5 million or 31% of net sales as compared to $8.2 million or 28.5% of net sales in 1999. The increase in selling, general and administrative expenses was primarily the result of incremental costs associated with new product lines. Included in selling, general and administrative expenses is pension accounting income which totaled $300,000 during the year ended December 31, 2000 as compared to $467,000 for the year ended December 31, 1999. For the year ended December 31, 2000 the Company's actual return on pension plan assets totaled $2.2 million as compared to the projected return on pension plan assets of $1.8 million; for the year ended December 31, 1999 the Company's actual return on plan assets totaled income of $774 thousand as compared to a projected income of $1.9 million. Differences between actual and expected returns on pension plan assets will increase or decrease pension accounting income or expense in future periods. Continued poor relative performance could require the Company to record pension expense in future periods and could also require the Company to make cash contributions to the pension plan. Income from continuing operations before interest and income taxes totaled $2.6 million during the year ended December 31, 2000 as compared to $4.8 million during last year. The reduction was the result of a combination of the lower gross margin and higher selling, general and administrative expenses as described above. 142 Net interest expense during the year ended December 31, 2000 totaled $746 thousand as compared to $753 thousand during 1999. The decrease in interest expense in 2000 was the result of the lower average level of bank debt outstanding during 2000 offset by an increase in interest rates. The average level of outstanding bank debt in 2000 was $8.6 million as compared to $9.0 million for the year ended December 31, 1999. The weighted average interest rate during the year ended December 31, 2000 was 7.61% as compared to 6.78% during the year ended December 31, 1999. The provision for income tax during the year ended December 31, 2000 totaled $709 thousand as compared to $1.477 million in 1999. The combined effective income tax rate totaled 38.2% in 2000 and 36.8% in 1999. The combined effective income tax rates are higher than combined statutory rates because of nondeductible goodwill. Preferred dividends during the year ended December 31, 2000 totaled $274 thousand as compared to $611 thousand during 1999. The reduction from 1999 was due to the partial redemption of preferred stock in August 1999. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2002 Carlyle's principal sources of liquidity included cash and cash equivalents of $14,000 and trade accounts receivable of $2.6 million. Carlyle's principal sources of cash flow are from internally generated funds and borrowings under revolving credit facilities. Net cash provided by operating activities totaled $38,000 during the first nine months of 2002. Net cash used in operating activities totaled $470,000 during the same period last year. Net cash used in investing activities totaled $121,000 in 2002 as compared to $66,000 in 2001. The increase in cash flows used in investing activity was primarily the result of software development costs. Net cash used by financing activities totaled $301 thousand in 2002 as compared to net cash provided of $670 thousand in 2001. Repayments under Carlyle's credit facilities during the nine months ended September 30 totaled $67 thousand in 2002 as compared to borrowings of $875 during the same period last year. Cash used for preferred stock dividend payments during the nine-month period totaled $204 thousand in 2002 and $205 thousand in 2001. Deferred financing costs totaling $30 thousand were capitalized in connection with the CIT Facilities during the nine months ended September 30, 2002. On January 24, 2002, Carlyle and the CIT Group/Financial Services, Inc. ("CIT") entered into a series of agreements (the "CIT Facilities") providing for maximum aggregate revolving credit of up to $7.5 million to Carlyle. Carlyle utilized the CIT Facilities to pay off all amounts outstanding under its previous credit agreement with Fleet Bank in the amount of $5.3 million on such date. 143 The CIT Facilities are comprised of separate financing agreements with each of Carlyle and its wholly-owned subsidiaries, Blumenthal Lansing Company, Inc. and Westwater Industries, Inc. The financing agreements with Blumenthal Lansing Company, Inc. and Westwater Industries, Inc. provide for revolving credit advances to such facilities based on eligible accounts receivable and inventory and include a Letter of Credit agreement with a limit of $500,000. The financing agreement provides for a term loan (the "Term Loan") in the amount of $2.0 million and revolving credit of $500 thousand. The Term Loan amortizes $12,000 per month during each of the first twenty five months followed by a final installment payment of $1.7 million during the twenty-sixth month. All amounts outstanding under the CIT Facilities bear interest at the Chase Bank N.A. prime rate plus .5% with a minimum rate of 5%. In connection with the CIT Facilities, Carlyle and its subsidiaries have made guarantees and have issued first priority liens covering substantially all of the assets of Carlyle and its subsidiaries. In addition, Mr. Robert A. Levinson, Carlyle's Chairman and Chief Executive Officer, provided certain collateral against advances provided under the CIT Facilities. The CIT Facilities contain representations and warranties and events of default customary for agreements of this nature, such as restrictions on incurring more debt, acquisitions, preferred stock payments in excess of $300,000 per year, the use of proceeds from the sale of assets and change in voting control of Carlyle. The CIT Facilities also contain a subjective acceleration clause which states that, except for the term loan, all remaining obligations under the Facilities shall, at CIT's option, be immediately due and payable without notice or demand upon the occurrence of any change in Carlyle's condition or affairs (financial or otherwise) that in CIT's sole discretion exercised by CIT in accordance with CIT's business judgement materially impairs the collateral or increases CIT's risk. In the case of the term loan, CIT may accelerate the maturity in the event of a default by Carlyle after thirteen months notice of such acceleration. Management of Carlyle believes that the likelihood of CIT accelerating the payment of any of the Facilities in 2002 is remote. CIT has advised Carlyle that it will permit the acquisition by Levcor and will not consider such transaction to be an event of default or a breach of any covenant. Dividends on the Series B Preferred Stock accrue at an annual rate of 6% and are payable quarterly on March 15, June 15, September 15, and December 15. Additional dividends accrue on all scheduled but unpaid dividends at a rate of 6% per annum. Under the terms of the CIT Facilities, preferred stock redemption payments are currently not permitted. Carlyle expects to remain current with respect to quarterly preferred dividends, which total approximately $273 thousand per year. 144 Carlyle believes that its available cash balances together with any cash generated from operations and any funds available under existing credit facilities will be sufficient to meet operating and recurring cash needs for foreseeable periods. The Company's future minimum lease payments under noncancelable operating leases at December 31, 2001 are approximately $900,000 for the years 2002 through 2006. The majority of these payments are for the Company's headquarters in New Jersey. CURRENT ACCOUNTING ISSUES Carlyle adopted Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long Lived Assets" ("SFAS 144") beginning with the first quarter of 2002. Pursuant to SFAS 144, Carlyle evaluates its long-lived assets for impairment based on accounting pronouncements that require management to assess fair value of these assets by estimating the future cash flows that will be generated by the assets and then selecting an appropriate discount rate to determine the present value of these future cash flows. An evaluation for impairment is conducted when circumstances indicate that an impairment may exist; but not less frequently than on an annual basis. The determination of impairment is subjective and based on facts and circumstances specific to Carlyle and the relevant long-lived asset. Factors indicating an impairment condition exists may include permanent declines in cash flows, continued decreases in utilization of a long-lived asset or a change in business strategy. Carlyle believes that its long-lived assets are currently being carried on Carlyle's books at their fair value. Carlyle adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") beginning with the first quarter of 2002. SFAS 142 requires that goodwill and intangible assets that have indefinite useful lives not be amortized but, instead, tested at least annually for impairment while intangible assets that have finite useful lives continue to be amortized over their respective useful lives. SFAS No. 142 requires that goodwill be tested for impairment using a two-step process. The first step is to determine the fair value of the reporting unit, which may be calculated using a discounted cash flow methodology, and compare this value to its carrying value. If the fair value exceeds the carrying value, no further work is required and no impairment loss would be recognized. The second step is an allocation of the fair value of the reporting unit to all of the reporting unit's assets and liabilities under a hypothetical purchase price allocation. Pursuant to the adoption of SFAS 142, Carlyle has completed the initial valuation analysis required by the transitional goodwill impairment test, which indicated that the fair value of its only reporting unit with reported goodwill was greater than its carrying value. Carlyle based this conclusion on the selling price of Carlyle in the proposed merger with Levcor International, Inc. ("Levcor"), exceeding the net book value. Statement of Financial Accounting Standards No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), requires that a liability for costs associated with exit or disposal activities be recognized when the liability is incurred. The provisions of the new standard are effective for exit or disposal activities initiated after December 31, 2002. It is not expected that SFAS 146 will materially effect the financial statements. BUSINESS OF CARLYLE General Carlyle and its subsidiaries manufacture, package and distribute buttons, embellishments, gift and craft products. Carlyle's business is conducted principally through three subsidiaries: Blumenthal Lansing Company, Inc., Westwater Industries, Inc. and Button Fashion B.V. Carlyle markets buttons, embellishments, gift and craft products and complementary product lines, including appliques, craft kits and fashion and jewelry accessories, to its home sewing and craft customers. In addition, Carlyle markets casein and polyester buttons through its European subsidiary. Carlyle's products are sold under the La Mode (R), Le Chic (R), Streamline (R) Westwater Enterprises (R), Favorite Findings (R), and Button Fashion (R) registered trademarks and the Le Bouton, La Petite, Classic, Boutique Elegant and Mill Mountain brand names. 145 Carlyle also produces and distributes a private-label button line for one of the nation's best-known retailers. Customer Base Carlyle's button products are sold primarily for use in the home sewing market where buttons are used for garment construction, replacement and the upgrading and/or restyling of ready-to-wear clothing. More modest button usage is found in craft projects, home decorating and garment manufacturing. The domestic market is concentrated and is served by national and regional fabric specialty chains, mass merchandisers, independent fabric stores, notions wholesalers and craft stores and chains. During the years ended December 31, 2001 and 2000 sales to Carlyle's four largest customers (Wal-Mart, Jo-Ann Stores, Hancock Fabrics and Michaels) accounted for 75% and 71%, respectively, of its aggregate net sales volume. A reduction in sales among any of these customers could adversely impact the financial condition and results of operations of Carlyle. The button lines are sourced from more than 75 button manufacturers from around the world, with most buttons coming from the traditional markets of Europe and Asia. Button manufacturers specialize in different materials (plastic, wood, glass, leather, metal, jewel, pearl, etc.) and have varying approaches to fashion, coloration, finishing and other factors. Most craft and gift products are developed within Carlyle and produced in the U.S. and Asia. Shipping Procedures All imported and domestically purchased buttons for sale in the North American market are shipped to Carlyle's Lansing, Iowa facility for carding and distribution to customers. As thousands of button styles are received in bulk, computerized card printing systems enable Blumenthal Lansing to economically imprint millions of button cards with such necessary data as style number, price, number of buttons, bar code, country of origin and care instructions. Carlyle also blister-packages and shrink-wraps some products. Domestic shipments are made primarily to individual stores with a smaller percentage to warehouse locations. Craft and gift products are also distributed from the Lansing, Iowa facility. The European business is primarily serviced by distributors from Carlyle's manufacturing and distribution facility in Holland. Carlyle's Accounts Carlyle's accounts include fabric and craft specialty chains, mass merchandisers carrying buttons and crafts, distributors and many independent stores. Mass merchandisers and specialty chain customers are characterized by the need for sophisticated electronic support, rapid turn-around of merchandise and direct-to-store service to customers with hundreds to thousands of locations nationwide. Carlyle enjoys long-standing ties to all of its key accounts and the average relationship with its ten largest customers extends over 20 years. Due to the large account nature of its customer base, most customer contact is coordinated by management; additional sales coverage is provided by regional sales managers. Many smaller retailers are serviced by independent representatives and representative organizations. Competition The retail button market in the United States is served by several competitors. Carlyle competes primarily with full-line button packagers and distributors in the general button market 146 and several smaller competitors in the promotional button market. Carlyle believes that the principal bases for competition are product innovation, range of selection, brand names, price, display techniques and speed of distribution. The craft and gift markets are served by many and varied competitors with innovation and competitive pricing being of major importance. Carlyle believes that retail button distribution depends on trends in the mature home-sewing market. The retail customer base for buttons has changed substantially over the past two decades as department stores and small independent fabric stores have been replaced by mass merchandisers and specialty retail chains which have continued to consolidate recently through mergers and store closings. In response to this trend, Carlyle has broadened its lines to include embellishments, novelty buttons, and products used in the craft and gift industries which are not viewed by management as mature markets. In addition, Carlyle has sought to expand its markets beyond the traditional U.S. retail outlets by expansion into the major European countries through the Button Fashion operation. The bulk of Carlyle's revenues are derived in the United States. In 2001, less than 4% of revenues related to export or non-U.S. based sales. Inventory levels are generally higher during the months of March through September. Carlyle believes its policies related to merchandise return and payment terms are in accordance with industry standards. Carlyle fills at least 95% of its orders within 48 hours and as a result had no backlog of any significance at either December 31, 2001 or 2000. Employees Carlyle has approximately 161 employees, none of whom are covered by a collective bargaining agreement, and believes relations with employees are satisfactory. MANAGEMENT OF CARLYLE DIRECTORS AND EXECUTIVE OFFICERS For a description of Carlyle's directors and officers who will serve as directors and officers of Levcor upon the effective time of the merger, see section entitled Election of Levcor Directors beginning on page 113. There are no arrangements or understandings pursuant to which any person has been elected as a director or executive officer of Carlyle. Directors are elected annually by the stockholders and hold office until the next annual meeting of stockholders or until their respective successors are elected and qualified. Executive officers are elected by the board of directors and hold office until their respective successors are elected and qualified. There is no family relationship among any directors or executive officers of Carlyle. 147 DIRECTORS COMPENSATION During the fiscal year 2001, each director who was not an officer or an employee of Carlyle received annual compensation in the amount of $12,000, plus $1,000 for such director's attendance at each meeting of the board of directors. EXECUTIVE COMPENSATION The following table sets forth the compensation paid by Carlyle during the years ended December 31, 2001, 2000 and 1999 to its two most highly compensated employees, including the Chief Executive Officer, who were serving as Carlyle's executive officers at the end of 2001. EXECUTIVE COMPENSATION TABLE
NAME AND PRINCIPAL ALL OTHER POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($) (2) ------------------------------- ---------- ---------- --------- ----------- -------------------- Robert A. Levinson, Chairman of the Fiscal 2001 200,000 81,912 100,000 (3) 0 Board, President and Chief Fiscal 2000 200,000 59,611 0 0 Executive Officer Fiscal 1999 150,000 52,861 175,000 (1) 0 Edward F. Cooke, Vice President, Fiscal 2001 150,000 60,990 0 3,791 Chief Financial Officer and Fiscal 2000 150,000 59,611 0 3,802 Secretary Fiscal 1999 143,250 66,978 125,000 (1) 3,474
(1) Stock options granted pursuant to the Carlyle's 1994 Incentive Program. (2) The amounts reported in this column are the matching Carlyle's contributions to Carlyle's Deferred Compensation 401(k) Plan. (3) On December 13, 2001, stock options were granted in connection with Mr. Levinson agreeing to serve as a limited guarantor with respect to the obligations of Carlyle, and its subsidiaries, Blumenthal Lansing Co., Inc., and Westwater Industries, Inc., under the financing agreements dated January 24, 2002 with The CIT Group/Commercial Services, Inc. During the years ended December 31, 2001, 2000 and 1999, Carlyle did not grant any restricted stock awards or pay other annual compensation to its executive officers that exceeded the lesser of $50,000 or 10% of any such executive officer's salary and bonus. OPTION GRANTS DURING THE FISCAL YEAR 2001 On December 13, 2001, Mr. Levinson was granted immediately exercisable non-plan stock options to purchase 100,000 shares of Carlyle's common stock at an exercise price of $0.23, as consideration for Mr. Levinson agreeing to serve as a limited guarantor with respect to the obligations of Carlyle and its subsidiaries under the financing agreements dated January 24, 2002 with The CIT Group/Commercial Services, Inc. 148 AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES The following table provides certain summary information concerning the value of unexercised stock options held by the Carlyle executive officers as of December 31, 2001. There were no stock option exercises during the fiscal year 2001 by the executive officers.
NUMBER OF VALUE OF UNEXERCISED OPTIONS AT "IN THE MONEY" FISCAL OPTIONS AT YEAR END FISCAL YEAR END ($) -------- ------------------- VALUE NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Robert A. Levinson 232,250(1) 43,750 0 0 Edward F. Cooke 170,750(2) 31,250 0 0
(1) Includes 132,250 stock options held as of December 31, 2001 which could and could not be exercised on that date pursuant to Carlyle's 1994 Incentive Program. (2) Represents the aggregate number of stock options held as of December 31, 2001 which could and could not be exercised on that date pursuant to Carlyle's 1994 Incentive Program. EMPLOYMENT/SEPARATION/CONSULTING AGREEMENTS Mr. Levinson is employed pursuant to an employment agreement, which commenced on January 1, 1999 and had an initial term of one year. The term of employment automatically renews annually, unless Mr. Levinson or Carlyle gives not less than 30 days written notice to the other. The employment agreement currently provides for a base salary of $200,000 per year (subject to increases as may be approved by the board from time to time). If Mr. Levinson's employment is terminated without cause by Carlyle, Mr. Levinson will be entitled to receive the base salary for a period equal to the remainder of the term of employment. In the event of a change in control of Carlyle, Mr. Levinson would be entitled to a lump sum severance payment generally equal to 2.99 times his average annual compensation for the five calendar years preceding the calendar year during which a change in control occurred or for such shorter period during which he was employed. Mr. Levinson has agreed to waive such provision upon the effective time of the merger. Mr. Cooke entered into an agreement with Carlyle in March 1998 which sets forth the terms under which Mr. Cooke's employment with Carlyle may be terminated. Pursuant to such agreement, if within one year after a change in control of Carlyle Mr. Cooke's employment is terminated for any reason, Carlyle shall pay Mr. Cooke an amount equal to one year of his base salary then in effect. 149 BOARD OF DIRECTORS INTERLOCKS AND INSIDER PARTICIPATION During the fiscal year 2001, except for Mr. Levinson who also serves as the Chairman of the board of directors, President and Secretary of Levcor, no executive officer of Carlyle served as a director of or a member of a compensation committee of any entity for which any of the persons serving on the board of directors of Carlyle is an executive officer. THE BOARD OF DIRECTORS AND ITS COMMITTEES MEETINGS OF THE BOARD OF DIRECTORS During the fiscal year 2001, the board held four meetings. Each member of the board attended over 75% of the meetings of the board held during the fiscal year 2001. Carlyle's directors discharge their responsibilities throughout the year, not only at board meetings, but also through personal meetings and other communications, including telephone contacts, with the Chairman and Chief Executive Officer and others regarding matters of interest and concern to Carlyle. COMMITTEES OF THE BOARD OF DIRECTORS Carlyle's board of directors does not have a nominating, compensation or audit committee. The board throughout the year performs the functions of such committees. THE BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION Carlyle's board of directors reviews compensation of the executive officers of Carlyle to determine if such compensation is in line with similar organizations. Carlyle's executive compensation program is designed to attract and retain qualified executives with competitive levels of compensation that are related to performance goals and which recognize individual initiative and accomplishments. The principal components of Carlyle's executive compensation program are fixed compensation in the form of base salary, variable compensation in the form of annual cash bonuses and stock options. Carlyle is subject to Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), which limits the deductibility of certain compensation payments to its executive officers. Carlyle does not have a policy requiring the board of directors to qualify all compensation for deductibility under this provision. The board of directors however considers the net cost to Carlyle in making all compensation decisions and will continue to evaluate the impact of this provision on its executive compensation. To date, Section 162(m) of the Code, has not been a factor with respect to Carlyle's compensation payments to its executive officers. 150 Salaries Any discretionary increases in base salary are based on an annual evaluation by the board of directors of the performance of Carlyle and each executive officer, and take into account any new responsibilities of the executive, his experience and years of service with Carlyle and a comparison of base salaries for comparable positions at similar companies. Bonuses The board of directors may decide to award a bonus to any executive officer. Any awards of discretionary bonuses are based on an annual evaluation by the board of directors of the performance of Carlyle and each executive officer, and take into account Carlyle's performance against Carlyle's projected budget. Messrs. Levinson and Cooke were awarded discretionary bonuses of $81,912 and $60,990, respectively, in 2001. Stock Options Carlyle's 1994 Incentive Program was adopted and ratified by Carlyle's stockholders in December 1994. The board of directors believes that the equity interests in Carlyle held by its executive officers have served to link the interest of the executive officers with those of the stockholders. Under Carlyle's 1994 Incentive Program, options to purchase shares of common stock may be granted to the executive officers of Carlyle. The board of directors believes that the grant of stock options is, and will continue to be, an important component of Carlyle's executive compensation program. During 2001, no stock options were granted to Carlyle's executive officers under the 1994 Incentive Program. Historically, in determining the size of any grants to executive officers, the board of directors reviewed various factors, including the executives' total compensation package and the performance of Carlyle and each executive officer. The stockholdings of an executive officer are not a factor in determining the size of such grants. Compensation of Chief Executive Officer Compensation for Mr. Levinson, Carlyle's Chairman of the board of directors, President and Chief Executive Officer, historically has been established in accordance with the principles described above. The board of directors reviews Mr. Levinson's performance and determines any base salary adjustments, additional bonuses and stock option grants considering the various factors described above with respect to executive officers. Mr. Levinson's employment agreement with Carlyle currently provides for a base salary of $200,000 per year (subject to increases as may be approved by the board of directors from time to time). 151 EQUITY COMPENSATION PLAN INFORMATION
------------------------------- ---------------------------- ---------------------------- ---------------------------- (a) (b) (c) ------------------------------- ---------------------------- ---------------------------- ---------------------------- Plan category Number of securities to be Weighted-average exercise Number of securities issued upon exercise of price of outstanding remaining available for outstanding options options future issuance under equity compensation plans (excluding securities reflected in column (a) ------------------------------- ---------------------------- ---------------------------- ---------------------------- Equity compensation plans 262,400 $.81 0 approved by security holders ------------------------------- ---------------------------- ---------------------------- ---------------------------- Equity compensation plans not N/A N/A N/A approved by security holders ------------------------------- ---------------------------- ---------------------------- ---------------------------- Total 262,400 $.81 0 ------------------------------- ---------------------------- ---------------------------- ----------------------------
OTHER CARLYLE MATTERS SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF CARLYLE The following table sets forth information with respect to the beneficial ownership of Carlyle's capital stock by (a) each person known by Carlyle to be the beneficial owner of more than 5% of Carlyle's outstanding voting securities, (b) each director, (c) each of the executive officers, and (d) all executive officers and directors as a group (6 persons). Beneficial ownership has been determined for purposes herein in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, under which a person is deemed to be the beneficial owner of securities if such person has or shares voting power or investment power in respect of such securities or has the right to acquire beneficial ownership within 60 days. On November 21, 2002, there were outstanding 13,934,858 shares of common stock and 4,555,007 shares of preferred stock of Carlyle. Unless otherwise noted herein, the information set forth below is as of November 21, 2002.
COMMON STOCK SERIES B PREFERRED STOCK ---------------------------- ------------------------ PERCENT OF AMOUNT OF AMOUNT OF AGGREGATE SHARES SHARES VOTING POWER NAME AND ADDRESS OF BENEFICIALLY PERCENT BENEFICIALLY PERCENT OF CAPITAL BENEFICIAL OWNER OWNED OF CLASS OWNED OF CLASS STOCK ------------------- ------------ ------- ------------ ------- ---------- Robert A. Levinson(1) (2)........ 2,878,423 20.4% 4,479,485 98.3% 38.7% c/o Carlyle Industries, Inc. 1 Palmer Terrace Carlstadt, NJ 07072 GAMCO Investors, Inc (3)......... 2,009,529 14.4% -- -- 10.9% Corporate Center Rye, NY 10580 HBK Investments LP (4) .......... 966,075 6.9% -- -- 5.2% 300 Crescent Ct. Suite 700 Dallas, TX 75201
152
Ralph Langer (5)................. 114,750 * -- -- * c/o Carlyle Industries, Inc. 1 Palmer Terrace Carlstadt, NJ 07072 Edward F. Cooke(6)............... 218,100 1.5% -- -- * c/o Carlyle Industries, Inc. 1 Palmer Terrace Carlstadt, NJ 07072 Joseph S. DiMartino(7)........... 10,000 * -- -- * c/o Dreyfus Corporation 200 Park Avenue 10th Floor New York, NY 10166 All directors and........ 3,221,273 22.4% 4,479,485 98.3% 39.2% executive officers as a group (6 persons) (8)
*Less than 1% of the aggregate votes entitled to be cast. (1) Includes: (i) 498,693 shares of common stock held of record by Mr. Levinson; (ii) 2,098,730 shares of common stock held by Swenvest Corporation, as to which Mr. Levinson has sole voting and investment power; (iii) 75,000 shares of common stock held by three trusts for the benefit of Mr. Levinson's children, as to all of which trusts Mr. Levinson serves as co-trustee; and (iv) 206,000 shares of common stock subject to currently exercisable options. (2) Includes 4,479,485 shares of preferred stock held by Swenvest Corporation, as to which Mr. Levinson has sole voting and investment power. (3) Represents shares held by GAMCO Investors, Inc. and various other entities which are directly or indirectly controlled by Mario J. Gabelli and for which he acts as chief investment officer, including registered investment companies and pension plans. This information is based solely upon the contents of a filing on Schedule 13D dated February 15, 2000, made by Mario J. Gabelli and related entities with the Securities and Exchange Commission. (4) Represents shares held by HBK Investments LP based solely upon the contents of a filing on Schedule 13G dated January 25, 2000 made by HBK Investments LP and related entities with the Securities and Exchange Commission. (5) Includes: (i) 50,750 shares held of record by Mr. Langer; and (ii) 64,000 shares subject to currently exercisable options. (6) Includes: (i) 21,100 shares held of record by Mr. Cooke; and (ii) 172,000 shares subject to currently exercisable options. (7) Includes 10,000 shares subject to currently exercisable options. (8) Includes 352,000 shares of common stock subject to stock options issued under Carlyle's 1994 Incentive Program which were exercisable within 60 days after November 21, 2002 and 100,000 shares of common stock subject to stock options issued outside of Carlyle's 1994 Incentive Program. 153 CARLYLE MARKET PRICE AND DIVIDEND DATA Carlyle's common stock, par value $0.01 per share is traded on the Over the Counter Bulletin Board under the symbol "CRLH.OB." The common stock is traded sporadically, and no established liquid trading market currently exists therefor. The following table sets forth the range of high and low bids of Carlyle common stock for the calendar quarters indicated. The quotes listed below reflect inter-dealer prices or transactions solely between market-makers, without retail mark-up, mark-down or commission and may not represent actual transactions. 2000 High Low First Quarter $1.06 $0.56 Second Quarter 0.81 0.50 Third Quarter 0.53 0.27 Fourth Quarter 0.44 0.19 2001 First Quarter 0.27 0.20 Second Quarter 0.40 0.20 Third Quarter 0.39 0.20 Fourth Quarter 0.33 0.21 2002 First Quarter 0.23 0.19 Second Quarter 0.37 0.21 Third Quarter 0.30 0.25 Fourth Quarter (through December 4, 2002) 0.53 0.20 Holders of Record As of December 4, 2002, the last date prior to the printing of this joint proxy statement/prospectus for which it was practicable for Carlyle to obtain this information, there were approximately 1,227 registered holders of Carlyle common stock and three holders of Carlyle Series B preferred stock. Dividend Policy Carlyle has not paid any cash dividends on shares of its common stock and has no present intention to declare or pay cash dividends on such shares in the foreseeable future. STOCKHOLDERS As of November 21, 2002 there were 20,000,000 shares of common stock authorized and 13,934,858 shares issued and outstanding. 154 LEGAL PROCEEDINGS Carlyle is not currently a party to any significant litigation except as indicated below. ENVIRONMENTAL MATTERS Carlyle is subject to a number of federal, state and local environmental laws and regulations, including those concerning the treatment, storage and disposal of waste, the discharge of effluents into waterways, the emissions of substances into the air and various health and safety matters. In addition, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), and comparable state statutes generally impose joint and several liability on present and former owners and operators, transporters and generators for remediation of contaminated properties regardless of fault. These parties are typically identified as "potentially responsible parties" or PRP. Approximately six years ago a property owned by the Carlyle Manufacturing Company, Inc. ("CM") (a non-operating subsidiary) located at 30 Echo Lake Road in Watertown, Connecticut was being investigated by the United States Environmental Protection Agency ("EPA") for possible inclusion on the National Priorities List promulgated pursuant to CERCLA but no such listing has occurred. A Site Inspection conducted at this location detected certain on-site soil and groundwater contamination, as well as contamination of nearby water. This site is listed on the Connecticut State Hazardous Waste Disposal Site list, but remediation activity has not been required by the Connecticut Department of Environmental Protection ("CTDEP"). Carlyle has accrued approximately $400,000 in connection with the estimated cost to remediate the site. In or about June 1992 Carlyle received notices from the EPA that Carlyle, Belding Corticelli Thread Co. ("BCTC") (a discontinued operation) and CM had been identified, along with 1,300 other parties, as PRPs in connection with the alleged release of hazardous substances from the Solvents Recovery Service of New England Superfund Site in Southington, Connecticut (the "SRS site"). Carlyle settled its alleged liability in connection with the SRS sites by paying $1,626 in connection with a settlement offered to de minimis parties at the SRS site in 1994. BCTC and CM, along with other PRPs, committed to perform the Remedial Investigation and Feasibility Study ("RIFS") and two Non-Time Critical Removal Actions ("NTCRA") at the SRS site. The RIFS, and the first NTCRA (except for certain maintenance activities) have been completed. BCTC and CM have been allocated approximately .04% and 1.26%, respectively, of costs incurred to date, based on their alleged volume of waste shipped to the SRS site. It is presently anticipated that EPA will not issue the ROD for this site for at least two years. Carlyle is unable, at this time, to estimate the ultimate cost of the remedy for the SRS site. Carlyle has accrued approximately $1 million in connection with this site. In early April 2000, CM and BCTC (as well as numerous other members of the SRS PRP Group) received written notification that they had been designated as PRPs in connection with the alleged transshipment of waste from the SRS site to the Angelillo Property Superfund site in Southington, Connecticut (the "Angelillo Site") from October 30, 1967 through February 28, 1987. To date, the EPA claims it has incurred approximately $1.2 million in response costs in 155 connection with the Angelillo Site and it has demanded reimbursement of those costs (as well as interest and future costs) from CM, BCTC, and other PRPs. In March 2001, the members of the SRS Group named as PRPs at the Angelillo Site accepted EPA's offer to settle its claim for past costs relating to the Angelillo transshipment site for a payment of $626,000. In May 2001, CM and BCTC received invoices in the amounts of $12,574.20 and $349.01, respectively, representing their share of the Angelillo settlement with EPA and CM and BCTC paid said amounts later that month. The above Angelillo settlement agreement is subject to a public comment period of not less than 30 days pursuant to CERCLA. In accordance with CERCLA, EPA may modify or withdraw its consent to this agreement if comments disclose facts or considerations that cause it to believe that the agreement is inappropriate improper or inadequate. The public comment period that followed execution of the Angelillo settlement with EPA has expired. The settling parties and the EPA are working towards a resolution of all comments received from the public. Carlyle does not believe it is probable that additional costs will be incurred at this site. By third-party summons and complaint dated November 27, 1991, CM was named as a third-party defendant in an action pending in the United States District Court for the District of Rhode Island entitled United States v. Davis. In addition to CM, approximately 60 other companies were joined as third-party defendants. Amended third-party complaints named additional third-party defendants. The third-party complaint against CM alleged claims for contribution under CERCLA, common law indemnification and state law contribution. The third-party complaint alleged that CM (and the majority of the other third-party defendants) shipped waste to the Chemical Control Corporation, which waste was commingled and then shipped to the Davis Liquid Waste site located in Smithfield, Rhode Island. CM has entered into an agreement to settle liability in connection with the above claims for payment of the sum of $200,000. The Consent Decree was approved in 1998 by the Federal District Court. At least one non-settling party appealed from the District Court's approval of the Consent Decree. The appellate court affirmed the district court's approval of the Consent Decree. Carlyle does not believe that it is probable that additional costs will be incurred at this site. The estimates provided above do not include costs that Carlyle or its subsidiaries may incur for consultants' or attorneys' fees or for administrative expenses in connection with their participation as part of the PRP group at the SRS site. The reserve Carlyle has established for environmental liabilities, in the amount of $1.4 million, represents Carlyle's best current estimate of the costs of addressing all identified environmental problems, including the obligations of Carlyle and its subsidiaries relating to the Remedial Investigation and two Non-Time Critical Removal Actions at the Solvents Recovery Superfund site, based on Carlyle's review of currently available evidence, and takes into consideration Carlyle's prior experience in remediation and that of other companies, as well as public information released by EPA and by the PRP groups in which Carlyle or its subsidiaries are participating. Although the reserve currently appears to be sufficient to cover these environmental liabilities, there are uncertainties associated with environmental liabilities, and no assurances can be given that Carlyle's estimate of any environmental liability will not increase or decrease in the future. The uncertainties relate to the difficulty of estimating the ultimate cost of any remediation that may be undertaken, 156 including any operating costs associated with remedial measures, the duration of any remediation required, the amount of consultants' or attorneys' fees that may be incurred, the administrative costs of participating in the PRP groups, and any additional regulatory requirements that may be imposed by the federal or state environmental agencies. FUTURE STOCKHOLDER PROPOSALS Pursuant to Rule 14a-8 under the Exchange Act, Levcor stockholders may present proper proposals for inclusion in Levcor's proxy statement for consideration at its 2003 annual meeting of stockholders by submitting such proposals to Levcor in a timely manner. In order to be so included for the 2003 annual meeting, stockholder proposals must be received by Levcor on or before March 1, 2003, and must otherwise comply with the requirements of Rule 14a-8. OTHER MATTERS The boards of directors of Levcor and Carlyle do not know of any other business to be presented for consideration at the respective meetings. LEGAL MATTERS The legality of shares of Levcor common stock and Levcor Series A preferred stock to be issued to Carlyle stockholders in the merger will be passed upon by Katten Muchin Zavis Rosenman. INDEPENDENT ACCOUNTANTS The consolidated balance sheets of Levcor as of December 31, 2001 and the related consolidated statements of operations, stockholders' equity and cash flows included in this joint proxy statement/prospectus have been so included in reliance on the report of Friedman Alpren & Green LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. Levcor consolidated statements of stockholders' equity and cash flows for the year ended December 31, 2000 included in this joint proxy statement/prospectus have been so included in reliance on the report of Grant Thornton LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The consolidated balance sheets of Carlyle as of December 31, 2001 and 2000 and the related consolidated statements of operations, changes in stockholders' deficit and cash flows included in this joint proxy statement/prospectus have been audited by Arthur Andersen LLP, independent public accountants, and have been included in this joint proxy statement/prospectus in reliance on the report of Arthur Andersen LLP, independent certified public accountants. Carlyle have not been able to obtain, after reasonable efforts, the written consent of Arthur Andersen to our naming it in this joint proxy statement/prospectus as having certified our consolidated financial statements which are included herein as required by Section 7 of the Securities Act of 1933, and we have dispensed with the requirement to file its consent in reliance 157 on Rule 437a promulgated under the Securities Act. As a result, your ability to assert claims against Arthur Andersen may be limited. Since we have not been able to obtain the written consent of Arthur Andersen, you will not be able to recover against Arthur Andersen under Section 11 of the Securities Act for any untrue statements of a material fact contained in the financial statements audited by Arthur Andersen or any omissions to state a material fact required to be stated therein. Carlyle has not been able to obtain, after reasonable efforts, a new manually signed report of Arthur Andersen LLP for inclusion in this joint proxy statement/prospectus and the report of Arthur Andersen LLP included in this joint proxy statement/prospectus is a copy of the latest signed and dated report of Arthur Anderson LLP. On November 28, 2001, Levcor filed a form 8-K with the Securities and Exchange Commission disclosing that it was dismissing Grant Thornton LLP as its principal independent accountant and has engaged Friedman Alpren & Green LLP as its new principal independent accountant. The audit reports of Grant Thornton LLP on Levcor's financial statements for the years ended December 31, 2000 and 1999 did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles. On July 11, 2002, Carlyle filed a form 8-K with the Securities and Exchange Commission disclosing that it was dismissing Arthur Andersen LLP as its principal independent accountant and has engaged Friedman Alpren & Green LLP as its new principal independent accountant. The audit reports of Arthur Andersen LLP on Levcor's financial statements for the years ended December 31, 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles. WHERE YOU CAN FIND MORE INFORMATION Levcor filed a registration statement with the SEC on Form S-4 under the Securities Act to register the Levcor common stock and Series A Preferred Stock to be issued to Carlyle stockholders in the merger. This joint proxy statement/prospectus is a part of that registration statement and constitutes a prospectus of Levcor in addition to being a proxy statement for the meetings of Levcor and Carlyle stockholders. This joint proxy statement/prospectus does not contain all the information contained in the registration statement. For further information with respect to Levcor or Carlyle and the shares of Levcor stock to be issued in connection with the merger, Levcor and Carlyle refer you to the registration statement and the exhibits and schedules filed with the registration statement. Levcor and Carlyle have described all material information for each contract, agreement or other document filed with the registration statement in this joint proxy statement/prospectus. However, statements contained in this joint proxy statement/prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. As a result, you should refer to the copy of the contract, agreement or other document filed as an exhibit to the registration statement for a complete description of the matter involved. Levcor and Carlyle file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy all or any portion of the registration 158 statement and any reports, statements or other information filed by either company at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549 or at any of the SEC's other public reference rooms in New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Levcor's and Carlyle's SEC filings including this registration statement are also available to the public from commercial document retrieval services and at the Web site maintained by the SEC at http://www.sec.gov. Levcor stockholders may request a copy of the Levcor SEC filings (not including exhibits), which will be provided at no cost, by contacting Levcor International, Inc. at 462 Seventh Avenue, New York, New York 10018: Attention Robert A. Levinson, telephone: (212) 354-8500. Carlyle stockholders may request a copy of the Carlyle SEC filings (not including exhibits), which will be provided at no cost, by contacting Carlyle Industries, Inc. at 1 Palmer Terrace Carlstadt, New Jersey 07072: Attention Edward F. Cooke, telephone: (201) 935-6220 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS TO VOTE ON THE APPROVAL OF THE MERGER AGREEMENT. NEITHER LEVCOR NOR CARLYLE HAS AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED DECEMBER 5, 2002. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY OTHER DATE, AND NEITHER THE MAILING OF THIS JOINT PROXY STATEMENT/PROSPECTUS TO CARLYLE STOCKHOLDERS NOR THE ISSUANCE OF LEVCOR COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY. 159 LEVCOR INTERNATIONAL, INC. INDEX TO FINANCIAL STATEMENTS Page ---- AUDITED FINANCIAL STATEMENTS Reports of Independent Certified Public Accountants.........................F1-2 Balance Sheet for the Year Ended December 31, 2001..........................F1-4 Statement of Operations for the Years Ended December 31, 2001 and 2000......F1-5 Statement of Stockholders' Deficiency December 31, 2001 and 2000............F1-6 Statement of Cash Flows December 31, 2001 and 2000..........................F1-7 Notes to Financial Statements...............................................F1-8 UNAUDITED FINANCIAL STATEMENTS Balance Sheet at September 30, 2002 .......................................F1-23 Statements of Operations and Accumulated Deficit for the Nine and Three Months Ended September 30, 2002 and September 30, 2001................F1-24 Statements of Cash Flows for the Nine Months Ended September 30, 2002 and September 30, 2001..................................F1-25 Notes to Financial Statements .............................................F1-26 F1-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF LEVCOR INTERNATIONAL, INC. We have audited the accompanying balance sheet of LEVCOR INTERNATIONAL, INC. as of December 31, 2001, and the related statements of operations, stockholders' deficiency and cash flows for the year then ended. 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 audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LEVCOR INTERNATIONAL, INC. as of December 31, 2001, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Friedman Alpren & Green LLP New York, New York March 1, 2002 F1-2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To The Board of Directors and Stockholders of Levcor International, Inc. We have audited the accompanying statements of operations, stockholders' deficiency and cash flows of Levcor International, Inc. (the "Company") for the year ended December 31, 2000. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements of operations, stockholders' deficiency and cash flows are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements of operations, stockholders' deficiency and cash flows. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the results of operations. We believe that our audit of the statements of operations, stockholders' deficiency and cash flows provides a reasonable basis for our opinion. In our opinion, the statements of operations, stockholders' deficiency and cash flows referred to above present fairly, in all material respects, the results of operations of Levcor International, Inc. for the year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Grant Thornton LLP New York, New York April 16, 2001 F1-3 LEVCOR INTERNATIONAL, INC. BALANCE SHEET DECEMBER 31, 2001 ASSETS
Current assets Cash $ 2,685 Accounts receivable, less allowances of $17,525 43,297 Inventories 2,211,503 Prepaid expenses and other current assets 49,150 ----------- Total current assets 2,306,635 Property and equipment, less accumulated depreciation and amortization of $69,043 87,426 Assets held for sale 234,400 Security deposits 34,650 ----------- $ 2,663,111 =========== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities Accounts payable and accrued expenses $ 1,518,637 Due to factor 788,329 Deferred income 33,267 Current maturities of long-term debt 154,348 ----------- Total current liabilities 2,494,581 ----------- Long-term debt, less current maturities 1,306,651 ----------- Loans payable - officer/stockholder 969,080 ----------- Commitment and contingencies -- Stockholders' deficiency Common stock - par value $.56 per share; authorized 15,000,000 shares, issued 2,383,647 shares and outstanding 2,326,047 shares 1,334,842 Capital in excess of par value 5,267,561 Accumulated deficit (8,632,417) ----------- (2,030,014) Less - Treasury stock - at cost, 57,600 shares (77,187) ----------- (2,107,201) ----------- $ 2,663,111 ===========
The accompanying notes are an integral part of these financial statements. F1-4 LEVCOR INTERNATIONAL, INC. STATEMENT OF OPERATIONS YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000 ------------ ------------ Net sales $ 20,107,692 $ 17,258,354 Cost of goods sold 16,252,165 14,348,638 ------------ ------------ Gross profit 3,855,527 2,909,716 ------------ ------------ Selling, general and administrative expenses 3,236,402 3,005,684 Loss on impairment of assets held for sale 20,000 50,000 ------------ ------------ 3,256,402 3,055,684 ------------ ------------ Income (loss) from operations 599,125 (145,968) ------------ ------------ Other income (expense) Interest expense (426,555) (418,018) Other income 19,580 139,027 ------------ ------------ (406,975) (278,991) ------------ ------------ Income (loss) from continuing operations 192,150 (424,959) Loss from discontinued operations -- (7,487) ------------ ------------ Net income (loss) $ 192,150 $ (432,446) ============ ============ Earnings per share: Basic Income (loss) from continuing operations $ 0.08 $ (0.19) Loss from discontinued operations -- -- ------------ ------------ Basic net income (loss) per common share $ 0.08 $ (0.19) ============ ============ Diluted Income (loss) from continuing operations $ 0.08 $ (0.19) Loss from discontinued operations -- -- ------------ ------------ Diluted net income (loss) per common share $ 0.08 $ (0.19) ============ ============ Weighted average number of shares outstanding - basic 2,321,337 2,316,727 Potential common stock 73,857 -- ------------ ------------ Weighted average number of shares outstanding - diluted 2,395,194 2,316,727 ============ ============
*The amount of loss per share is less than $0.01. The accompanying notes are an integral part of these financial statements. F1-5 LEVCOR INTERNATIONAL, INC. STATEMENT OF STOCKHOLDERS' DEFICIENCY YEARS ENDED DECEMBER 31, 2001 AND 2000
Common Stock Treasury Stock ------------------------ Capital ------------------------ Total in Exces Accumulated Stockholders' Shares Amount of Par Value Deficit Shares Amount Deficiency ----------- ----------- ------------ ------------ ----------- ----------- ------------- Balance, January 1, 2000 2,354,299 $ 1,318,407 $ 5,246,177 $(8,392,121) 54,000 $ (74,062) $(1,901,599) Shares issued for services rendered 17,000 9,520 8,480 -- -- -- 18,000 Stock options exercised 5,000 2,800 325 -- 3,600 (3,125) -- Net loss -- -- -- (432,446) -- -- (432,446) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 2000 2,376,299 1,330,727 5,254,982 (8,824,567) 57,600 (77,187) (2,316,045) Shares issued for services rendered 7,348 4,115 12,579 -- -- -- 16,694 Net income -- -- -- 192,150 -- -- 192,150 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 2001 2,383,647 $ 1,334,842 $ 5,267,561 $(8,632,417) 57,600 $ (77,187) $(2,107,201) =========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F1-6 [CO EAH] LEVCOR INTERNATIONAL, INC. STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000 ----------- ----------- Cash flows from operating activities of continuing operations Net income (loss) from continuing operations $ 192,150 $ (424,959) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation and amortization 30,860 21,494 Provision for doubtful accounts 10,825 -- Services paid in common stock 16,694 18,000 Disposal of assets from discontinued operations charged to continuing operations as compensation -- 33,138 Loss on sale of assets held for sale -- 37,600 Loss on impairment of assets held for sale 20,000 50,000 Loss on disposal of property and equipment -- 522 Changes in operating assets and liabilities Accounts receivable 88,248 (87,131) Inventories 1,476,081 (1,364,596) Prepaid expenses and other current assets 53,502 (69,664) Security deposits -- (5,400) Accrued interest on loan payable - officer/stockholder 43,200 43,318 Accounts payable and accrued expenses (2,311,788) 2,892,635 Deferred income 33,267 -- ----------- ----------- Net cash provided by (used in) operating activities of continuing operations (346,961) 1,144,957 ----------- ----------- Cash used in operating activities of discontinued operations -- (33,523) ----------- ----------- Cash flows from investing activities Proceeds from sale of assets held for sale 20,650 49,550 Purchases of property and equipment (8,815) (98,046) ----------- ----------- Net cash provided by (used in) investing activities 11,835 (48,496) ----------- ----------- Cash flows from financing activities Payment of long-term debt (689,001) (827,500) Proceeds from (payments to) factor 1,019,406 (231,077) Net cash provided by (used in) financing activities 330,405 (1,058,577) ----------- ----------- Net increase (decrease) in cash (4,721) 4,361 Cash, beginning of year 7,406 3,045 ----------- ----------- Cash, end of year $ 2,685 $ 7,406 =========== =========== Supplemental disclosure of cash flow information Cash paid during the year for interest $ 383,355 $ 395,686 =========== ===========
The accompanying notes are an integral part of these financial statements. F1-7 LEVCOR INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of Operations and Liquidity Levcor International, Inc. (the "Company") was engaged in two industry segments through June 2000: the ownership of fractional interests in oil and gas wells and leases with respect thereto (see Note 15 for discontinued operations); and the operation of a fabric-converting business that produces fabrics used in the production of apparel. The Company sells its products to customers in the United States and Canada. The Company sustained substantial losses in prior years that have adversely affected the Company's liquidity. At December 31, 2001, current liabilities exceeded current assets by approximately $188,000 and the Company had a stockholders' deficiency of approximately $2,107,000. Robert A. Levinson, an officer, director and stockholder of the Company has agreed to continue to personally support the Company's cash requirements to enable the Company to meet its current obligations through January 2, 2004 and to fund future operations. The Company has successfully implemented several actions to reduce losses and improve cash flow. These actions, which include beginning a new product line in October 2000 and the reduction of certain operating costs, have produced a profit from continuing operations during the year ended December 31, 2001. Although there can be no assurance that these measures will continue to be successful, the Company believes that future operations and support from Robert A. Levinson will provide sufficient liquidity to fund current operations. Inventories Inventories are stated at the lower of cost (principally average cost) or market. Inventories consist of yarn and greige goods (collectively considered raw materials), work in process and finished goods. The Company estimates the markdowns required for inventories based upon future marketability as well as general economic conditions. Consequently, an adverse change in those factors could affect the Company's estimate of the markdowns. F1-8 LEVCOR INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Cost of Sales The significant items included in the Company's cost of sales include purchases of yarn, purchases of greige goods, dyeing and finishing costs and freight in. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided for, on a straight-line basis, in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, which range from three to seven years. Leasehold improvements are amortized over the lesser of the lease term or the service lives of the improvements. Impairment and Disposal of Long-Lived Assets On an ongoing basis, the Company reviews the valuation of long-term assets. As part of the review, the Company estimates the undiscounted future cash flow expected to be generated by the related assets to determine whether an impairment has occurred. If such future cash flows are insufficient to recover the carrying amount of the assets, impairment is recognized and the carrying value of any impaired assets would be reduced to fair value. The Company initiated a process to sell certain operating machinery and equipment. This machinery and equipment was acquired in a business combination in September 1999. The machinery and equipment has never been used and, accordingly, no depreciation has ever been taken. In 2001, the Company sold part of the equipment for book value. The Company expects to complete the sale of the remaining machinery and equipment in 2002. Earnings (Loss) Per Share The computation of basic net income (loss) per share of common stock is based upon the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated similarly to basic net income (loss) per share except that the weighted average of shares outstanding is increased to reflect additional shares from the assumed exercise of stock options (see Note 10), if dilutive. For the year ended December 31, 2000, stock options have been excluded from the calculation of diluted income (loss) per share, as their effect would have been antidilutive. F1-9 LEVCOR INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes The Company accounts for income taxes using the asset and liability method. Under this method, deferred income taxes are recognized for the estimated future tax effects of the temporary differences between the financial reporting basis and the tax basis of assets and liabilities. Deferred income taxes are recognized for the estimated future tax effects of the temporary differences between the financial reporting basis and the tax basis of assets and liabilities. Financial Instruments The Company's financial instruments include long-term debt and loans payable - officer/stockholder. The fair value of the CIT promissory note, the largest portion of the long-term debt, approximates its carrying value because that note had a market-based interest rate. It was not practicable to estimate the fair value of the loans payable - officer/stockholder because no market exists for that type of instrument. New Accounting Pronouncements In the third quarter of 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 eliminates the pooling-of-interests method for business combinations and requires use of the purchase method. SFAS No. 142 changes the accounting for goodwill and indefinite life intangibles by requiring periodic tests for impairment of the asset instead of amortizing those assets over time. Upon adoption on January 1, 2002, SFAS No. 142 requires discontinuance of amortization of goodwill and indefinite life intangibles which had been recorded in connection with previous business combinations. At this time, the Company does not expect these statements to have a material impact on its financial position, results of operations and cash flows. In the third quarter of 2001, the FASB also issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This Statement addresses the conditions under which an impairment charge should be recorded related to long-lived assets to be held and used, except for goodwill, and those to be disposed of by sale or otherwise. The provisions of this Statement are effective on January 1, 2002. At this time, the Company is evaluating the potential impact of this Statement on its financial position, results of operations and cash flows. F1-10 LEVCOR INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Revenue Recognition Revenue is recognized when goods are shipped to customers. Usual sales terms are FOB shipping point, and at this time the Company has performed all performance obligations to consummate the sale. On occasion, the Company recognizes revenue on bill and hold sales for its most significant customer (see Note 13). The Company recognizes revenue on these transactions only when all of the following occurs: the risks of ownership have passed to the buyer, the customer has made a fixed commitment to purchase the goods, the customer has requested that the transaction be on a bill and hold basis even though the goods are ready for shipment, there is a fixed date of delivery, the Company has performed all performance obligations to consummate the sale and the goods are segregated from the remainder of the Company's goods in the warehouse. During the year ended December 31, 2001, the Company did not recognize any revenues from bill and hold transactions. During the year ended December 31, 2000, the Company recognized $519,518 of revenue from bill and hold sales. The significant costs included in selling, general and administrative expenses are salaries, sales commissions, benefits and related payroll taxes, rent and utilities, professional fees, factor fees, product development costs, shipping and warehousing, travel and entertainment and telecommunication expenses. Shipping and Handling For each of the years December 31, 2001 and 2000, the Company billed approximately $10,000 of shipping and handling fees to customers in each year. During the same period, the Company incurred shipping and handling costs of $110,000 and $100,000, respectively. Because the amount billed was not material, these fees were netted against the costs, which were included in selling, general and administrative expenses. Stock-Based Compensation Plans The Company maintains a stock option plan, as more fully described in Note 10 to the financial statements, accounted for using the "intrinsic value" method pursuant to the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The fair value of options granted and the pro forma effects on the Company's net income (loss) and net income (loss) per share are disclosed pursuant to Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." F1-11 LEVCOR INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Use of Estimates in Financial Statements In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. 2 - AMENDMENT TO ASSET PURCHASE AGREEMENT On September 2, 1999, the Company purchased from Andrex Industries Corp. ("Andrex") inventory; machinery and equipment; furniture, fixtures and supplies; sales orders; and Andrex's trade name, "Andrex Knits." The purchase price consisted of: $660,000 in cash; a promissory note ("Promissory Note 1") totaling $282,450; and a second promissory note ("Promissory Note 2") totaling $1,214,750. The promissory notes originally bore interest at 6% per annum. The Company funded the $660,000 cash payment with a promissory note due to CIT Group bearing interest at 8.5% per annum, which was repaid on December 31, 2000. Promissory Note 1 was to be repaid with the proceeds from the sale of the machinery and equipment after the promissory note due to the CIT Group was paid. Promissory Note 2 was to be paid down with proceeds from the sale of the inventory purchased by the Company and by an additional $120,704 on April 1, 2000 in a final settlement of the purchase price of the Andrex inventory. An agreement between the Company and Andrex dated July 15, 2000 deemed Promissory Note 1 as satisfied in full and Promissory Note 2 as canceled. In return, the Company agreed to pay Andrex $900,000, payable in 18 equal monthly installments beginning August 1, 2000, together with accrued interest at the rate of 6-1/2% per annum from April 1, 2000 payable on each principal payment date. At December 31, 2001, the balance due to Andrex under the amended asset purchase agreement was $50,000, which was subsequently paid in January 2002. 3 - ACCOUNTS RECEIVABLE FACTORED Under a factoring agreement, the factor purchases the trade accounts receivable without recourse and assumes substantially all credit risks with respect to such accounts. The agreement allows the Company to obtain advances, computed on a borrowing base formula, from the factor that bear interest at 1/2% above the bank's prime rate (4.75% at December 31, 2001). The amounts due to the Company from the factor earn no interest. The Company has pledged its accounts receivable and property and equipment as collateral under the factor loan. In addition, Robert A. Levinson has provided certain side collateral against advances provided under the agreement. On December 15, 2000, the Company refinanced $1,500,000 of the factor loan into a term note with the CIT Group (see Note 6), the Company's factor. The Company and Robert A. Levinson have provided substantially he same collateral that is provided under the factor loan as collateral for the term note. F1-12 LEVCOR INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS
4 - INVENTORIES Inventories consist of the following: Raw materials $ 975,602 Work in process 535,852 Finished goods 700,049 -------------- $ 2,211,503 ============== 5 - PROPERTY AND EQUIPMENT Property and equipment consist of the following: Computer equipment $ 102,108 Furniture and fixtures 26,244 Leasehold improvements 18,132 Machinery and equipment 9,985 -------------- 156,469 Less - Accumulated depreciation and amortization 69,043 -------------- $ 87,426 ============== 6 - LONG-TERM DEBT Long-term debt at December 31, 2001 is as follows: Amended note payable to Andrex (see Note 2), bearing interest at a rate of 6.5% per annum $ 50,000 Term promissory note payable to CIT Group (see Note 3), bearing interest at Chase's prime rate (4.75% at December 31, 2001) plus 1/2% 1,410,999 ------------- 1,460,999 Less - Current maturities 154,348 ------------- $ 1,306,651 =============
F1-13 LEVCOR INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS 6 - LONG-TERM DEBT (Continued) On December 15, 2000, the Company refinanced $1,500,000 of the factor loan into a term note with the CIT Group, the Company's factor. The Company and Robert A. Levinson have provided substantially the same collateral that is provided under the factor loan as collateral for the term note. The term note is payable in 23 equal consecutive monthly installments of $8,696 beginning on February 1, 2001, with a final installment of $1,300,000 due on January 1, 2003. In addition, the term note contains covenants that include a limitation on the amount of capital expenditures and certain procedural covenants. The Company was in violation of the covenant regarding limitations on capital expenditures and requiring audited financial statements within 90 days of the December 31, 2000 year-end. In May 2001, the term note was amended to revise those covenants. The Company is now in compliance with the loan's covenants. In December 2001, the term note was amended to extend its due date to January 1, 2004 with a final installment of $1,195,652 due at that date and the factoring agreement was amended to provide a reduction of its factoring fees and a termination date that coincides with the January 1, 2004 due date of the term note. All other terms of the term note and factoring agreement remain in force. 7 - RELATED PARTY TRANSACTIONS Robert Levinson has provided $720,000 of loans to the Company. The loans bear interest at 6% per annum. Mr. Levinson has agreed to defer the payment of interest during 2001 and 2000. In addition, Mr. Levinson has agreed not to require payment of these loans and $249,080 of the related accrued interest at December 31, 2001, prior to January 2, 2004. In addition to being a director of Levcor, Edward H. Cohen serves as counsel to Katten Muchin Zavis Rosenman, legal counsel to Levcor. During the six months ended June 30, 2002, fees for those services provided to Levcor by Katten Muchin Zavis Rosenman totaled $41,540, of which $12,343 was settled through the issuance to Katten Muchin Zavis Rosenman of 4,448 shares of Levcor common stock with a fair market value of $2.76 per share on the date of such issuance. 8 - INCOME TAXES The following summarizes the Company's deferred tax assets at December 31, 2001: Net operating loss carryforwards $ 2,251,000 Provision for losses on accounts receivable 7,000 Loss on impairment of assets held for sale 8,000 Deferred rent 13,000 -------------- 2,279,000 Less - Valuation allowance 2,279,000 -------------- $ -0- ============== F1-14 LEVCOR INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS 8 - INCOME TAXES (Continued) At December 31, 2001, the Company had a net tax operating loss carryforward of approximately $5,627,000 available to reduce taxable income in future years, expiration of which occurs between 2002 and 2020. No assurance can be given as to the Company's ability to realize the net operating loss carryforward. Additionally, the net operating loss carryforward is subject to Internal Revenue Code Section 382, which limits the use of the net operating loss, if there is a change in ownership. 9 - LITIGATION The 0.67% carried interest in the Kotaneelee gas field sold by the Company in August 1991, as well as Magellan Petroleum Corporation's 2.67% carried interest in such field, is held in trust by Canada Southern Petroleum Ltd. ("Canada Southern"), which has a 30% carried interest in such field. In late 1987, Canada Southern commenced an action against Allied-Signal, Inc. in Florida alleging its failure to fulfill certain contractual obligations to develop the field (the "Florida Action"). In September 1988, Allied-Signal, Inc. commenced an action (the "Allied-Signal Action") in Calgary, Canada against Dome Petroleum Limited, Amoco Production Company and Amoco Canada Petroleum Company, Ltd. ("Amoco Canada" and, collectively, the "Amoco-Dome Group") seeking a declaration that the defendants were responsible for the development of the field, and also seeking reimbursement of its legal costs incurred in the Florida Action. The Florida Action has since been dismissed. In March 1989, Allied-Signal, Inc. amended its complaint in the Allied-Signal Action to add the Company, Canada Southern and Magellan Petroleum Corporation ("Magellan") as additional defendants. Certain of the other defendants in the Allied-Signal Action have filed counterclaims against the Company and other defendants seeking indemnification for unspecified costs and expenses incurred by them in defending the Allied-Signal Action. In January 1996, the Company, Allied-Signal, Inc., Canada Southern and Magellan Petroleum Corporation entered into a settlement whereby each party agreed not to sue any of the other parties and, subsequently, the Allied-Signal Action was discontinued. Shortly after the Allied-Signal Action commenced, the Amoco-Dome Group filed a counterclaim against the Company, Canada Southern and Magellan seeking certain declaratory relief with respect to their alleged failure to fulfill certain contractual obligations to develop and market gas from the Kotaneelee gas field. The trial on the counterclaim action commenced on September 3, 1996, and is ongoing. F1-15 LEVCOR INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS 9 - LITIGATION (Continued) On October 27, 1989, in the Court of Queen's Bench of Alberta, Judicial District of Calgary, Canada (the "Canada Court"), Canada Southern filed a statement of claim against the Amoco-Dome Group, Columbia Gas Development of Canada Ltd. ("Columbia"), Mobil Oil Canada Ltd. ("Mobil") and Esso Resources of Canada Ltd. ("Esso") seeking a declaratory judgment (the "Declaratory Action") regarding two issues relating to the Kotaneelee gas field. The Declaratory Actions seeks a judgment on: (1) whether interest accrued on the carried interest account (Canada Southern maintains it does not), and (2) whether expenditures for gathering lines and dehydration equipment are expenditures chargeable to the carried interest account (Canada Southern maintains they are). Mobil, Esso and Columbia have filed answers essentially agreeing to the granting of the relief requested by Canada Southern. The Amoco-Dome Group has now admitted to the claim that interest does not accrue on the carried interest account. In 1991, Anderson Exploration Ltd. acquired all of the shares in Columbia, and changed its name to Anderson Oil & Gas Inc. ("Anderson"). Anderson is now the sole operator of the Kotaneelee gas field, and is a direct defendant in the Declaratory Action. Columbia's previous parent, The Columbia Gas System, Inc., was reorganized in a bankruptcy proceeding in the United States, and is contractually liable to Anderson in the Declaratory Action. On March 7, 1990, Canada Southern filed a statement of claim in the Canada Court against the Amoco-Dome Group, Columbia, Mobil and Esso seeking forfeiture of the Kotaneelee gas field, damages and other relief for breach of fiduciary duty (the "Forfeiture Action"). The Company was added as a party plaintiff to this action in November 1993. If such claim is upheld, the Company could recover a 2 percent interest in the Kotaneelee gas field and damages. The defendants have contested the claim and Canada Southern is pursuing discovery and trial. Columbia filed a counterclaim seeking, if Canada Southern is successful in its claims, repayment from Canada Southern, the Company and Magellan Petroleum Corporation of all sums expended by Columbia on the Kotaneelee gas fields before Canada Southern, the Company and Magellan Petroleum Corporation are entitled to their interests. The trial commenced in September 1996, and is ongoing. Based on recently discovered evidence, Canada Southern petitioned the Canada Court for leave to amend its complaint to add a claim that the defendants in the action failed to develop the field in a timely manner. F1-16 LEVCOR INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS 9 - LITIGATION (Continued) The field operator has entered into a contract for the sale of the Kotaneelee gas field. The Company believes that it is too early to determine the impact, if any, that this contract may have on the status of these cases. On August 6, 1991, the Company sold to an independent third party (the "Buyer") its carried interest in a lease in property, including the Kotaneelee gas field. The agreement for the transfer of the Company's interest provides that the Company shall continue to prosecute the Declaratory Action and the Forfeiture Action. The Company and the Buyer have agreed to share equally all costs and expenses of the Declaratory Action and the Forfeiture Action and to share equally any payments or other benefit resulting from the resolution of such actions. The agreement further provides that the Company shall indemnify the Buyer against all actions, proceedings, claims, demands, damages and expenses brought against or suffered by the Buyer which arise out of, or are attributable to, the Allied-Signal Action. The Company has been advised that under Canadian law certain costs (known as "Taxable Costs") of a litigation may be assessed against a nonprevailing party. Taxable costs consist primarily of attorneys and expert witness fees incurred during a trial. Effective September 1, 1998, the Alberta Rules of Court were amended to provide for a material increase in the costs which may be awarded to the prevailing party in matters before the Court. In addition, a judge in complex and lengthy trials has the discretion to increase an award of Taxable Costs. The Company's ultimate legal and financial liability in respect to all claims, lawsuits and proceedings referred to above cannot be estimated with any degree of certainty. Accordingly, the Company has not recognized any loss related to these contingencies. 10 - STOCK OPTION PLAN On December 8, 1992, the Board of Directors of the Company adopted a Stock Option Plan (the "Plan"). The Plan, as amended, authorizes the Company to grant options to purchase an aggregate of 500,000 shares of Common Stock to induce employees and directors to remain in the employ or service of the Company and its subsidiaries and to attract new employees. Options granted under the Plan are intended to qualify as incentive stock options ("ISOs") within the meaning of Section 422A(b) of the Internal Revenue Code of 1986 (the "Code"), as amended, or as nonincentive stock options ("NISOs"). The Plan is administered by the Board of Directors. During January 2001, the Company granted the remaining 61,700 options available under the Plan. The Plan terminates in December 2002. F1-17 LEVCOR INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS 10 - STOCK OPTION PLAN (Continued) The Plan provides for discretionary grants of ISOs and NISOs to employees (including directors or officers who are also employees) of the Company and an automatic annual grant to each nonemployee director of options to purchase the number of shares derived by dividing $1,500 by the fair market value of a share of Common Stock on the date of grant. The initial per share option exercise price for the options granted to the non-employee directors is the fair market value of the common stock on the date of the grant thereof. As described in Note 1, the Company has adopted the disclosure-only provisions of SFAS No. 123 and, accordingly, no compensation cost has been recognized for grants made under its stock option plan. Had compensation cost been determined based on the fair value at the grant date for stock option awards in 2001 and 2000 in accordance with the provisions of SFAS No. 123, the Company's net income (loss) and net income (loss) per common share would have been reduced to the pro forma amounts indicated below: 2001 2000 -------- --------- Net income (loss) As reported $192,150 $(432,446) Pro forma 99,150 (444,446) Basic earnings (loss) per share As reported $ .08 $ (.19) Pro forma .04 (.19) Diluted earnings (loss) per share As reported $ .08 $ (.19) Pro forma .04 (.19) F1-18 LEVCOR INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS 10 - STOCK OPTION PLAN (Continued) The weighted-average fair value at date of grant for options granted during 2001 and 2000 was $1.05 and $.82 per option, respectively. The fair value of each option at date of grant was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions for grants in: 2001 2000 --------------- -------------- Risk-free interest rates 4.69% - 6.58% 5.45% Expected life Employees 9 years 10 years Officers/directors 9 years 10 years Expected volatility 99% 250% Expected dividends $-0- $-0- The following table summarizes option activity for the years ended December 31, 2001 and 2000: Incentive Options Weighted - Number Average of Exercise Options Price ------- ----------- Balance, January 1, 2000 77,300 $ .581 Granted 152,700 .818 Exercised (5,000) .625 ------- -------- Balance, December 31, 2000 225,000 .741 Granted 61,700 1.05 ------- -------- Balance, December 31, 2001 286,700 $ .819 ======= ======== During October 2000, an option holder utilized shares previously owned in excess of six months to pay for the exercise price of the options. The amount was recorded as a treasury stock transaction at the cost to the Company of acquiring 3,600 shares at the date of exercise, or $3,125. F1-19 LEVCOR INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS 10 - STOCK OPTION PLAN (Continued) The following table summarizes information about stock options as of December 31, 2001:
Options Outstanding Options Exercisable -------------------------------------------- ----------------------- Weighted - Average Weighted - Weighted - Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ----------- ----------- --------------- ---------- -------------- --------- $.25 to $.50 20,800 3.2 $ .36 20,800 $ .36 $.63 to $.81 200,000 8.2 $ .77 100,000 $ .72 $1.10 to $2.00 65,900 9.8 $ 1.13 1,900 $ 1.58 ----------- ------------ 286,700 122,700 =========== ============
11 - EMPLOYEE BENEFIT PLAN The Company's eligible employees may participate in a Company-sponsored 401(k) benefit plan (the "Plan"). The Plan covers substantially all employees and permits employees to defer up to 15% of their salary up to statutory maximums. The Plan also provides for the Company to make contributions solely at the Company's discretion. There were no Company contributions to the Plan for the years ended December 31, 2001 and 2000. 12 - LEASE COMMITMENT In February 2000, the Company entered into an operating lease for office space that expires on January 21, 2007. Approximate annual future minimum rents are as follows: Year Ending December 31, ------------ 2002 $ 169,000 2003 169,000 2004 169,000 2005 175,000 2006 175,000 2007 15,000 ------------ $ 872,000 ============ F1-20 LEVCOR INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS 12 - LEASE COMMITMENT (Continued) In addition to minimum lease commitments, the operating lease requires payments of real estate taxes, utilities and other occupancy costs. Rent expense charged to operations under this lease was $174,000 and $153,100 for the years ended December 31, 2001 and 2000, respectively. 13 - MAJOR CUSTOMERS During the years ended December 31, 2001 and 2000, one customer accounted for 47% of sales. In addition, during the years ended December 31, 2001 and 2000, another customer located in Canada accounted for 11% and 16% of sales, respectively. 14 - MAJOR SUPPLIER During the years ended December 31, 2001 and 2000, one supplier accounted for 64% and 73% of greige goods purchases. In addition, during the fourth quarter of 2000, the Company recorded an adjustment of approximately $146,000 to reduce the amount payable to the vendor due to quality problems with a style of greige goods purchased during 2000. 15 - DISCONTINUED OPERATIONS Since 1995, the Company's primary operating segment has been its textile converting business. Due to the potentially significant insurance cost increases relating to the oil and gas segment, coupled with the retirement of the Treasurer of the Company, management decided to transfer its interest in the remaining oil well to the Treasurer as a noncash retirement arrangement. The transfer resulted in a charge to operations during 2000 of $33,138. The retirement settlement charge in 2000 is included in selling, general and administrative expenses. Accordingly, the operating results have been segregated from continuing operations and are reported as discontinued operations in the accompanying statements of operations and cash flows. F1-21 LEVCOR INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS 15 - DISCONTINUED OPERATIONS (Continued) Summary financial information of the discontinued operations as of and for the year ended December 31, 2000 is as follows: Sales $ 15,664 Cost of sales 19,716 Gross profit (loss on sales) (4,052) Net loss (7,487) 16 - QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for the year ended December 31, 2001 is as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ----- Total revenue $ 7,763,092 $ 5,102,196 $ 4,014,204 $ 3,228,200 $ 20,107,692 Net income (loss) 306,432 51,027 14,777 (180,086) 192,150 Earnings (loss) per share Basic .13 .02 .01 (.08) .08 Diluted .13 .02 .01 (.08) .08
17 - OTHER INCOME Other income consists principally of reimbursement of expenses in the year 2001, and a lease buyout for $100,000 and an insurance recovery of $40,000 for the year 2000. F1-22 LEVCOR INTERNATIONAL, INC. BALANCE SHEET SEPTEMBER 30, 2002 (UNAUDITED)
ASSETS Current assets Cash $ 2,414 Due from factor 228,214 Accounts receivable, net of allowances of $48,999 219,258 Inventories 1,573,012 Prepaid expenses and other current assets 58,239 -------------- Total current assets 2,081,137 Property and equipment, less accumulated depreciation and amortization of $90,258 66,211 Assets held for sale 219,400 Security deposits 34,650 -------------- $ 2,401,398 ============== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities Accounts payable and accrued expenses $ 1,157,552 Long-term debt 3,000,000 Loans payable - officer/stockholder 777,233 Commitment and contingencies - Stockholders' deficiency Common stock - par value $.56 per share; authorized 15,000,000 shares, issued 2,395,794 and outstanding 2,338,194 shares 1,341,644 Capital in excess of par value 5,276,739 Accumulated deficit (9,074,583) ----------- (2,456,200) Less - Treasury stock, at cost, 57,600 shares (77,187) --------------- (2,533,387) $ 2,401,398 ==============
The accompanying notes are an integral part of these financial statements. F1-23 LEVCOR INTERNATIONAL, INC. STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT (Unaudited)
Nine Months Ended Three Months Ended ---------------------------- ---------------------------- September 30, September 30, 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Net sales $ 8,499,132 $ 16,879,492 $ 1,404,919 $ 4,014,204 Cost of goods sold 6,680,998 13,694,472 1,193,953 3,167,833 ------------ ------------ ------------ ------------ Gross profit 1,818,134 3,185,020 210,966 846,371 Selling, general and administrative expenses 2,152,009 2,473,095 770,249 738,800 ------------ ------------ ------------ ------------ Income (loss) from operations (333,875) 711,925 (559,283) 107,571 Other income (expense) Interest expense (161,524) (356,752) (40,577) (96,444) Other income 53,233 17,063 25,844 3,650 ------------ ------------ ------------ ------------ (108,291) (339,689) (14,733) (92,794) ------------- ------------- ------------- ------------- Net Income (loss) (442,166) 372,236 (574,016) 14,777 Accumulated deficit at beginning of period (8,632,417) (8,824,570) (8,500,567) (8,467,111) ------------ ------------ ------------ ------------ Accumulated deficit at end of period $ (9,074,583) $(8,452,334) $(9,074,583) $(8,452,334) ============ =========== =========== =========== Earnings per share: Basic Net income (loss) $ (0.19) $ 0.16 $ (0.25) $ 0.01 =========== =========== =========== =========== Diluted Net income (loss) $ (0.18) $ 0.15 $ (0.25) $ 0.01 =========== =========== =========== =========== Weighted average number of shares outstanding - basic 2,335,572 2,376,299 2,338,194 2,376,299 Potential common stock 95,425 73,956 - 48,511 ------------- ------------- ------------- ------------- Weighted average number of shares outstanding - diluted 2,430,997 2,450,255 2,338,194 2,424,810 ========= ========= ========= ============
The accompanying notes are an integral part of these financial statements. F1-24 LEVCOR INTERNATIONAL, INC. STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (Unaudited)
2002 2001 ----------- ----------- Cash flows from operating activities Net income (loss) $ (442,166) $ 372,236 Adjustments to reconcile net income (loss) to net cash (used in) operating activities: Depreciation and amortization 21,215 23,259 Provision for doubtful accounts 31,474 1,429 Services paid in common stock 5,238 -- Changes in operating assets and liabilities: Accounts receivable (207,435) 10,877 Inventories 638,491 926,603 Prepaid expenses and other current assets (9,089) 66,923 Accrued interest on loan payable - officer/stockholder 28,153 32,312 Accounts payable and accrued expenses (361,085) (1,924,932) Deferred income (33,267) 102,887 ----------- ----------- Net cash (used in) operating activities (328,471) (388,406) ----------- ----------- Cash flows from investing activities: Proceeds from sale of assets held for sale 15,000 20,650 Purchases of property and equipment -- (8,815) ----------- ----------- Net cash provided by investing activities 15,000 11,835 ----------- ----------- Cash flows from financing activities: Payment of long-term debt (1,680,999) (511,221) Proceeds from long-term debt 3,000,000 -- Proceeds from (payments to) factor (1,016,543) 885,876 Proceeds from exercise of stock options 10,742 -- ----------- ----------- Net cash provided by financing activities 313,200 374,655 ----------- ----------- Net (decrease) in cash (271) (1,916) Cash at beginning of period 2,685 7,406 ----------- ----------- Cash at end of period $ 2,414 $ 5,490 =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 118,114 $ 100,987 =========== ===========
The accompanying notes are an integral part of these financial statements. F1-25 LEVCOR INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS September 30, 2002 (unaudited) NOTE A - BASIS OF PRESENTATION, NATURE OF OPERATIONS AND LIQUIDITY The accompanying unaudited condensed financial statements of Levcor International, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation have been included. Operating results for the nine and three months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. These statements should be read in conjunction with the financial statements and related notes included in the Company's annual report on Form 10-KSB for the year ended December 31, 2001. In 1995, the Company acquired a woven fabric converting business that converts cotton, synthetic and synthetic cotton-blend fabrics for sale to domestic apparel manufacturers. This acquisition formed the basis of the Company's current business. In 1999, the Company purchased a knit fabric and processing business that produces knit fabrics used in the production of apparel. During the fourth quarter of 2000, the Company started a new woven division selling to the dress market. As a result of the current soft retailing climate for dresses, the woven division has not produced management's anticipated results and therefore was scaled back significantly during the first quarter of 2002. All production for this division was done at outside contractors and therefore the Company had no investment in fixed assets to run this business. The Company sustained substantial losses in prior years that have adversely affected the Company's liquidity. On May 2, 2002, the Company borrowed $3,000,000 from JPMorgan Chase Bank pursuant to a promissory note due May 3, 2004. The note bears interest at a fixed rate per annum equal to the Adjusted LIBO Rate applicable to such note plus .75% (a "Eurodollar Loan"). The interest rate on the note at May 3, 2002 was 2.90625%. In addition, Robert A. Levinson, a stockholder, officer and director of the Company, has provided certain additional collateral guaranteeing the note. The proceeds of the note were used to pay off the outstanding balance of $1,375,557 of the Company's term note with the CIT Group and pay down the Company's advance position of $1,160,000 with the CIT Group. The remainder was used for working capital requirements. At September 30, 2002, the Company had working capital of approximately $924,000. Robert A. Levinson, a stockholder, officer and director of the Company, has agreed to continue to personally support the Company's cash requirements to enable the Company to meet its current obligations through January 2, 2004 and to fund future operations. F1-26 LEVCOR INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS September 30, 2002 (unaudited) The Company has successfully implemented several actions to reduce losses and improve cash flow. Although there can be no assurance that these measures will continue to be successful, the Company believes that future operations and support from the stockholder, officer and director will provide sufficient liquidity to fund current operations. NOTE B - INVENTORIES Inventories consist of the following at September 30, 2002: Raw materials $ 829,231 Work-in process 230,039 Finished goods 513,742 ------------ Inventory $ 1,573,012 ============ NOTE C - EARNINGS PER SHARE The computation of basic net income (loss) per share of common stock is based upon the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated similarly to basic net income (loss) per share except that the weighted average of shares outstanding is increased to reflect additional shares from the assumed exercise of stock options, if dilutive. For the nine and three months ended September 30, 2002, there were 95,425 and 0 stock options outstanding, respectively, and included in the fully diluted earnings per share calculations for the respective periods. NOTE D - RECENT ACCOUNTING PRONOUNCEMENTS In 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses the conditions under which an impairment charge should be recorded related to long-lived assets to be held and used, except for goodwill, and those to be disposed of by sale or otherwise. The provisions of this Statement are effective on January 1, 2002. Pursuant to the transition provisions of this Statement, assets held for sale at December 31, 2001 are accounted for under the provisions of prior pronouncements. In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146 requires that a liability for costs F1-27 LEVCOR INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS September 30, 2002 (unaudited) associated with exit or disposal activities be recognized when the liability is incurred. Existing generally accepted accounting principles provide for the recognition of such costs at the date of management's commitment to an exit plan. In addition, SFAS No. 146 requires that the liability be measured at fair value and be adjusted for changes in estimated cash flows. The provisions of the new standard are effective for exit or disposal activities initiated after December 31, 2002. It is not expected that SFAS No. 146 will materially affect the financial statements. NOTE E - RECLASSIFICATIONS Certain amounts in 2001 have been reclassified to conform to the presentation used in 2002. NOTE F - PROPOSED MERGER WITH CARLYLE INDUSTRIES, INC. In May 2002, the Company announced it had executed a definitive merger agreement with Carlyle Industries, Inc. ("Carlyle"). The merger agreement provides for the merger of Carlyle with and into the Company, and the issuance of one share of the Company's common stock in exchange for each five shares of common stock of Carlyle, and the issuance of one share of a new class of the Company's preferred stock, designated as Series A preferred stock, in exchange for each share of Series B preferred stock of Carlyle. The transaction is subject to the approval of the Company's and Carlyle's stockholders and other customary conditions, including the declaration of effectiveness by the Securities and Exchange Commission of a Registration Statement on Form S-4, and is expected to close in the fourth quarter of 2002. Robert A. Levinson, the Company's Chairman and President and also Chairman and Chief Executive Officer of Carlyle, beneficially holds 31.4% of the Company's common stock and approximately 20.4% of Carlyle's outstanding common stock and 98.3% of Carlyle's outstanding Series B preferred stock, which represents 38.7% of the voting power of Carlyle's capital stock. NOTE G - RELATED PARTY TRANSACTIONS In addition to being a director of the Company, Edward H. Cohen serves as counsel to Katten Muchin Zavis Rosenman, legal counsel to the Company. During the nine months ended September 30, 2002, fees for those services provided to the Company by Katten Muchin Zavis Rosenman totaled $18,437, of which $5,238 was settled through the issuance to Katten Muchin Zavis Rosenman of 2,381 shares of the Company's common stock with a fair market value of $2.20 per share on the date of such issuance. F1-28 CARLYLE INDUSTRIES, INC. INDEX TO FINANCIAL STATEMENTS Page ---- AUDITED FINANCIAL STATEMENTS Report of Independent Public Accountants...................................F2-2 Consolidated Balance Sheets- December 31, 2001 and 2000....................F2-3 Consolidated Statements of Operations - for the Years Ended December 31, 2001, 2000 and 1999..................F2-5 Consolidated Statements of Cash Flows - for the Years Ended December 31, 2001, 2000 and 1999..................F2-6 Consolidated Statements of Stockholders' Equity - for the Years Ended December 31, 2001, 2000 and 1999..................F2-7 Notes to Consolidated Financial Statements - for the Years Ended December 31, 2001, 2000 and 1999..................F2-8 UNAUDITED FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001....................................................F2-24 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001 .......................F2-25 Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2002 and 2001....................F2-25 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001 .........................................F2-26 Notes to Condensed Unaudited Consolidated Financial Statements ...........F2-27 F2-1 THIS IS A COPY OF THE PREVIOUSLY ISSUED ARTHUR ANDERSEN LLP REPORT. A REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP FOR INCLUSION IN THIS FILING. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Carlyle Industries, Inc. We have audited the accompanying consolidated balance sheets of Carlyle Industries, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended December 31, 2001. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 referred to above present fairly, in all material respects, the consolidated financial position of Carlyle Industries, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements and schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, New York March 13, 2002 F2-2 CARLYLE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, 2001 DECEMBER 31, 2000 ----------------- ----------------- ASSETS Current Assets: Cash and cash equivalents $ 398 $ 197 Accounts receivable trade (net of allowance of $935 and $636, respectively) 2,685 3,090 Inventories, net 4,615 5,313 Deferred income taxes 604 664 Other current assets 284 189 -------- -------- Total current assets 8,586 9,453 -------- -------- Property, Plant and Equipment, at cost: Land 60 60 Building and improvements 2,276 2,235 Machinery and equipment 1,515 1,581 -------- -------- 3,851 3,876 Less: Accumulated Depreciation and Amortization (1,595) (1,372) -------- -------- Net property, plant and equipment 2,256 2,504 -------- -------- Goodwill (net of accumulated amortization of $1,247 and $1,090, respectively) 2,543 2,700 Deferred income taxes 1,883 1,505 Other assets 1,018 940 -------- -------- Total Assets $ 16,286 $ 17,102 ======== ========
See Notes to Consolidated Financial Statements F2-3 CARLYLE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE AND SHARE DATA)
DECEMBER 31, 2001 DECEMBER 31, 2000 ----------------- ----------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 599 $ 1,439 Current maturities of long-term debt 3,832 -- Income taxes payable 43 15 Other current liabilities 1,113 1,210 ---------- ---------- 5,587 2,664 ---------- ---------- Long-term Debt 1,868 6,325 Other Liabilities 8,378 7,009 ---------- ---------- Total Liabilities 15,833 15,998 ---------- ---------- Redeemable Preferred Stock, par value $0.01 per share 11,187,451 shares authorized: Shares issued and outstanding: Series A - None -- -- Series B - 4,555,007 at December 31, 2001 and at December 31, 2000 4,555 4,555 Accumulated dividends on preferred stock 13 12 ---------- ---------- 4,568 4,567 ---------- ---------- STOCKHOLDERS' EQUITY Common Stock, par value $0.01 per share 20,000,000 shares authorized: Shares issued and outstanding: 13,934,858 at December 31, 2001 and at December 31, 2000 139 139 Paid in Capital 26,345 26,345 Retained Earnings (29,237) (29,864) Accumulated Other Comprehensive Earnings (1,362) (83) ----------- ---------- Total Stockholders' Equity (4,115) (3,463) ---------- ---------- Total Liabilities, Redeemable Preferred Stock and Stockholders' Equity $ 16,286 $ 17,102 ========== ==========
See Notes to Consolidated Financial Statements F2-4 CARLYLE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 2001 2000 1999 ---------- ---------- --------- Net sales $ 24,925 $ 27,076 $ 28,889 Cost of sales 15,456 15,998 15,887 --------- -------- --------- 9,469 11,078 13,002 Selling, general and administrative expenses 7,242 8,478 8,234 --------- -------- --------- 2,227 2,600 4,768 Interest expense, net 565 746 753 --------- -------- --------- Income from continuing operations before income taxes 1,662 1,854 4,015 Provision for income taxes 672 709 1,477 --------- -------- --------- Income from continuing operations 990 1,145 2,538 Gain on disposal of discontinued operations, net of income tax -- -- 1,544 --------- -------- --------- Income before extraordinary loss 990 1,145 4,082 Extraordinary loss on debt prepayment, net of tax benefit of $50 (90) -- -- --------- -------- --------- Net income 900 1,145 4,082 Less dividends on preferred stock 273 274 611 Gain on preferred stock redemption -- -- 3,011 --------- -------- --------- Income applicable to common stock $ 627 $ 871 $ 6,482 ========= ======== ========= Basic earnings per common share: Continuing operations $ .05 $ .06 $ .20 Gain on preferred stock redemption -- -- .30 Extraordinary loss on debt prepayment (.01) -- -- Discontinued operations -- -- .16 --------- -------- --------- Total $ .04 $ .06 $ .66 ========= ======== ========= Diluted earnings per common share: Continuing operations $ .05 $ .06 $ .20 Gain on preferred stock redemption -- -- .30 Extraordinary loss on debt prepayment (.01) -- -- Discontinued operations -- -- .16 --------- -------- --------- Total $ .04 $ .06 $ .66 ========= ======== ========= Dividend declared per common share -- -- -- ========= ======== ========= Weighted average common shares outstanding - basic and diluted (in thousands) 13,935 13,935 9,896 ========= ======== =========
See Notes to Consolidated Financial Statements. F2-5 CARLYLE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 2001 2000 1999 --------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations before extraordinary item $ 990 $ 1,145 $ 2,538 Reconciliation of net income from continuing operations to net cash provided by operations: Depreciation and amortization 717 818 719 Deferred tax provision 448 446 172 Cash flow from discontinued operations -- -- (163) Changes in operating assets and liabilities, net of effect from acquired businesses: Accounts receivable 405 1,211 400 Inventory 698 (855) 357 Income taxes payable 23 (390) 70 Accounts payable (840) 204 (61) Other current liabilities (42) (619) 662 Other operating assets and liabilities (1,179) (758) (1,347) --------- --------- -------- Net cash provided by operating activities 1,220 1,202 3,347 --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of discontinued operations -- -- 1,544 Investment in net assets of acquired businesses -- -- (834) Capital expenditures (24) (207) (220) Investment in other assets (94) (53) (85) --------- --------- -------- Net cash (used in) provided by investing activities (118) (260) 405 --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facility and capitalized lease obligations 4,350 4,850 4,975 Repayment of long-term debt and capital lease obligations (4,975) (5,746) (8,239) Preferred stock payments (273) (274) (110) --------- --------- -------- Net cash used in financing activities (898) (1,170) (3,374) --------- --------- -------- Effect of exchange rate changes on cash balances (3) (8) -- --------- --------- -------- Increase (decrease) in cash and cash equivalents 201 (236) 378 Cash and cash equivalents beginning of year 197 433 55 --------- --------- -------- Cash and cash equivalents end of year $ 398 $ 197 $ 433 ========= ========= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 582 $ 733 $ 729 ========= ========= ======== Income taxes $ 506 $ 906 $ 2,089 ========= ========= ========
See Notes to Consolidated Financial Statements F2-6 CARLYLE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
ACCUMULATED OTHER COMPRE- COMPRE- COMMON STOCK HENSIVE RETAINED PAID IN HENSIVE ----------------------- TOTAL EARNINGS EARNINGS CAPITAL EARNINGS AMOUNT SHARES ----- -------- -------- ------- -------- ------ ------ DECEMBER 31, 1998 $ (17,285) $(37,217) $ 19,858 -- $ 74 7,382,782 ========= ======== ======== ========= ========= ========= Net income before preferred stock activity 4,082 $ 4,082 4,082 Preferred stock dividend accrued (611) (611) (611) Gain on preferred stock redemption 3,011 3,011 3,011 Common stock issued 6,552 6,487 -- 65 6,552,076 --------- Total Comprehensive income $ 6,482 ========= --------- -------- -------- --------- --------- ---------- DECEMBER 31, 1999 $ (4,251) $(30,735) $ 26,345 -- $ 139 13,934,858 ========= ======== ======== ========= ========= ========== Net income before preferred stock activity 1,145 $ 1,145 1,145 Preferred stock dividend accrued (274) (274) (274) Foreign translation adjustment (83) (83) -- (83) -- -- ---------- Total Comprehensive income $ 788 ========= --------- -------- -------- --------- --------- ---------- DECEMBER 31, 2000 $ (3,463) (29,864) $ 26,345 $ (83) $ 139 13,934,858 ========= ======== ======== ========= ========= ========== Net income before preferred stock activity $ 900 $ 900 900 Preferred stock dividends accrued (273) (273) (273) Foreign translation adjustment (29) (29) -- (29) -- -- Pension adjustment (1,250) (1,250) (1,250) --------- Total Comprehensive loss $ (652) ========= --------- -------- -------- --------- --------- ---------- DECEMBER 31, 2001 $ (4,115) $(29,237) $ 26,345 $ (1,362) $ 139 13,934,858 ========= ======== ======== ========= ========= ==========
See Notes to Consolidated Financial Statements F2-7 CARLYLE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Nature of Operation: Carlyle Industries, Inc. and its subsidiaries (the "Company"), manufacture, package and distribute buttons, embellishments, gift and craft products. Substantially all of the Company's operations and assets are currently in the United States; however, the Company has begun to service the European market from a location in the Netherlands. The Company was organized under the laws of the State of Delaware in 1947. Consolidation: The accompanying consolidated financial statements include the accounts of the Company including all subsidiaries after elimination of intercompany items and transactions. Reclassifications: In order to conform to the 2001 presentation, certain reclassifications were made to the prior years' financial statements. Revenue Recognition: The Company recognizes revenue upon shipment of product. Shipment is made generally by UPS or common carrier. The majority of our customers' shipments are F.O.B. Lansing , Iowa, the location of our distribution facility. In some circumstances, shipments are made F.O.B. destination, in which case the Company insures the sales value of most shipments. All shipping costs incurred by the Company are expensed as cost of goods sold. Sales Returns: The Company estimates an allowance for sales returns based on historical sales and sales returns and records a related allowance. Allowance for Doubtful Accounts: The Company maintains a reserve for doubtful accounts which includes 100% of all invoices that management deems doubtful of collection. Shipping and Handling Costs: Shipping and handling costs are included in the cost of goods sold. Classification of Expenses: The significant components of cost of goods sold are raw materials, labor, shipping and handling and depreciation. The significant components of selling, general and administrative expense are commissions, sales salaries, trade and consumer advertising, trade show costs, management salaries, costs associated with product development activities, office rent and professional fees. Property, Plant and Equipment: Property, Plant and Equipment are stated at cost less accumulated depreciation. Depreciation and amortization are computed principally by the straight-line method for each class of depreciable and amortizable assets based on their estimated useful lives. Buildings and improvements, machinery and equipment, and furniture, fixtures and leasehold improvements are generally depreciated over periods of 20-35, 5-25 and 5-10 years, respectively. Income Taxes: Deferred income taxes are determined using the liability method following the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109 (Accounting for Income F2-8 Taxes) whereby the future expected consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements are recognized as deferred tax assets and liabilities. Impairment: Long-term assets are reviewed for impairment following the provisions of SFAS No. 121 (Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of). Goodwill not associated with particular assets is reviewed for impairment based on an analysis of undiscounted future cash flows associated with the related operation. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and discontinued operations. The standard is effective beginning January 1, 2002. The Company has determined that the impact of initial adoption will not have a material impact on the Company's financial position or result of operations. Goodwill: For all periods through December 31, 2001, goodwill was amortized on a straight line basis over periods ranging from 15 to 30 years. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill will no longer be subject to amortization over its estimated useful life. Rather, goodwill will be subject to an annual assessment for impairment by applying a fair-value based test. The standard will be effective beginning January 1, 2002. The Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142") as of January 1, 2002. Under SFAS 142, the Company no longer amortizes goodwill, but is required to review goodwill for impairment annually, or more frequently if impairment indicators arise. In accordance with SFAS 142, prior period amounts were not restated. A reconciliation of the previously reported net income and earning per share for the three years ended December 31, 2001 to the amounts adjusted for the reduction of amortization expense is as follows (dollars in thousands):
For the Year Ended December 31, 2001 2000 1999 ------------------------ ------------------------ ----------------------- Basic and Basic and Basic and Diluted Diluted Diluted Earnings Per Earnings Per Earnings Per Net Common Net Common Net Common Income Share Income Share Income Share ------ ----- ------ ----- ------ ----- Reported income $ 627 $ .04 $ 871 $ .06 $ 6,482 $ .66 Add: Amortization adjustment 157 .01 165 .01 166 .02 ------- -------- ------- -------- -------- -------- Adjusted $ 784 $ .05 $ 1,036 $ .07 $ 6,648 $ .68 ======= ======== ======= ======== ======== ========
Pursuant to the adoption of SFAS 142, the Company has completed the initial valuation analysis required by the transitional goodwill impairment test, which indicated that the fair value of its only reporting unit was greater than its carrying value. The Company based this conclusion on the selling price of the Company in the proposed merger with Levcor International, Inc., exceeding the net book value. Environmental Liabilities: The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent 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. Foreign Currency Translation: For translation of its non-U.S. dollar currencies, the Company has determined that the local currency of its international subsidiary is the functional currency. In consolidating the international subsidiary, balance sheet currency effects are recorded as a component of accumulated other comprehensive income. This equity account includes the results of translating all balance sheet assets and liabilities at current exchange rates. Net currency transaction and translation gains and losses included in income were not material. F2-9 2. ACQUISITIONS: On December 29, 1999, the Company's wholly-owned subsidiary Button Fashion B.V. ("Button Fashion") acquired the operating assets of Button Fashion Holland B.V. for approximately $834 thousand in cash including transaction costs. An additional $162 thousand may be payable over four years contingent on the realizability of certain inventory assets acquired. No goodwill was recorded with respect to this transaction. Button Fashion manufactures and distributes buttons for sale principally in the European market. On December 16, 1998, the Company acquired certain assets and the business of Streamline Industries, Inc. ("Streamline") for approximately $1.6 million in cash. No goodwill was recorded with respect to this transaction. Streamline packages and distributes a line of carded buttons and embellishments for sale to retail and specialty chain stores. All acquisitions have been recorded using the purchase method of accounting. The Company's historical results of operations include Button Fashion and Streamline from their respective acquisition dates. 3. DISCONTINUED OPERATIONS: On March 26, 1997, the Company sold the assets and specified liabilities of the Company's Thread division to an affiliate of Hicking Pentecost PLC ("HP"). The aggregate cash consideration was $54.9 million, of which $3.0 million was placed in escrow subject to certain post-closing adjustments, plus the assumption of approximately $6.8 million of long term liabilities. On October 22, 1999, the Company reached final agreement with HP regarding all outstanding issues related to the sale transaction and $2.4 million of escrow proceeds were received from the escrow agent. This receipt was reported as income from discontinued operations totaling $1.5 million, after tax, during the year ended December 31, 1999. 4. INVENTORIES: The components of inventories as of December 31, net of reserves are as follows (dollars in thousands): 2001 2000 --------- --------- Raw materials $ 1,686 $ 2,115 Work in progress 20 21 Finished goods 2,909 3,177 --------- --------- $ 4,615 $ 5,313 ========= ========= At December 31, 2001 and 2000 inventories were valued on a weighted-average cost method basis. Inventories are stated at lower of cost or market. Cost elements included in inventory are material, labor and overhead, primarily using standard cost, which approximates actual cost. 5. OTHER CURRENT LIABILITIES AND OTHER LIABILITIES: Other liabilities as of December 31 consist of the following (dollars in thousands): F2-10
CURRENT 2001 2000 ------- --------- --------- Salaries, wages, bonuses and other compensation...... $ 519 $ 425 Other................................................ 594 785 --------- --------- $ 1,113 $ 1,210 ========= ========= LONG TERM 2001 2000 --------- --------- --------- Pension liabilities.................................. $ 3,271 1,394 Environmental accruals............................... 1,442 1,660 Other post-retirement benefits....................... 2,717 2,947 Other liabilities.................................... 948 1,008 --------- --------- $ 8,378 $ 7,009 ========= =========
6. DEBT: On June 23, 1998, the Company entered into a $9 million revolving credit agreement (the "Credit Agreement") with Fleet Bank, N.A. ("Fleet"). The Credit Agreement had an original term of five years. Advances bear interest equal to, at the Company's option, (1) the rate at which deposits in U.S. dollars are offered by the principal office of Fleet in London, England, to prime banks in the London interbank market (LIBOR) plus 1.5% or (2) Fleet's prime rate. A performance price grid provides that interest rates will step down upon the Company's achievement of specified ratios of funded debt to earnings before interest, income taxes, depreciation and amortization. The weighted average interest on outstanding debt under the Company's credit facility was 6.54% during the year ended December 31, 2001 and 7.61% during the year ended December 31, 2000. The weighted average outstanding debt under the facility during the year ended December 31, 2001 was $6.9 million and in 2000 was $8.6 million. The Company's revolving credit facility with Fleet Bank, N.A. contained certain financial covenants with which the failure to comply lead to an event of default. Primarily as a result of losses incurred by its Westwater subsidiary during 2000 and 2001, the Company was in violation of a financial covenant in its revolving credit facility with Fleet Bank N.A. during 2001 and it was therefore necessary to renegotiate the financial covenant or refinance its debt. On January 24, 2002, the Company and the CIT Group/Financial Services, Inc. ("CIT") entered into a series of agreements (the "CIT Facilities") providing for maximum aggregate revolving credit of up to $7.5 million to the Company. The Company utilized the CIT Facilities to pay off all amounts outstanding under its previous credit agreement with Fleet Bank in the amount of $5.3 million on such date. The CIT Facilities are comprised of separate financing agreements with each of the Company and its wholly-owned subsidiaries, Blumenthal Lansing Company, Inc. and Westwater Industries, Inc. The financing agreements with Blumenthal Lansing Company, Inc. and Westwater Industries, Inc. ("Subsidiary Financing Agreements") provide for revolving credit advances to such facilities based on eligible accounts receivable and inventory and include a Letter of Credit agreement with a limit of $500,000. The financing agreement with Carlyle ("Carlyle Financing Agreement") provides for a term loan (the "Term Loan") in the amount of $2.0 million and revolving credit of $500 thousand. The Term Loan amortizes $12 thousand per month during each of the first twenty five months followed by a final installment payment of $1.7 million during the twenty-sixth month. All amounts outstanding under the F2-11 CIT Facilities bear interest at the Chase Bank N.A. ("Chase") prime rate plus .5% with a minimum rate of 5%. In connection with the CIT Facilities, the Company and its subsidiaries have made guarantees and have issued first priority liens covering substantially all of the assets of the Company and its subsidiaries. In addition, Mr. Robert A. Levinson, the Company's Chairman and Chief Executive Officer provided certain side collateral against advances provided under the CIT Facilities. On December 13, 2001, the Company's Board of Directors authorized a grant of 100,000 stock options with an exercise price of $.23 per share to Mr. Levinson in consideration for his collateral support. The options vested immediately and are exercisable for 10 years. The Company estimated on the date of grant the fair value of this option grant using the Black-Scholes option pricing model. The fair value of this grant is immaterial and no expense was recorded. The CIT Facilities contain representations and warranties and events of default customary for agreements of this nature, such as restrictions on incurring more debt, acquisitions, preferred stock payments in excess of $300,000 per year, the use of proceeds from the sale of assets and change in voting control of the Company. The CIT Facilities also contain a subjective acceleration clause which states that, all obligations under the Facilities shall, at CIT's option, be immediately due and payable without notice or demand upon the occurrence of any change in the Company's condition or affairs (financial or otherwise) that in CIT's sole discretion exercised by CIT in accordance with CIT's business judgement materially impairs the collateral or increases CIT's risk. Management of the Company believes that the likelihood of CIT accelerating the payment of any of the Facilities in 2002 is remote. The weighted average interest rate on outstanding debt under the Company's credit facility was 6.54% during the year ended December 31, 2001 and 7.61% during the year ended December 31, 2000. The weighted average outstanding debt under the facility during the year ended December 31, 2001 was $6.9 million and was $8.6 million during the year ended December 31, 2000. In connection with the refinancing of the Fleet Credit Agreement, the Company wrote-off $90 thousand, net of income tax benefit, of un-amortized deferred financing costs in the fourth quarter of 2001 and such amount is presented as an extraordinary item in the 2001 Consolidated Statement of Operations. 7. LEASE PAYMENTS: The following is a schedule of future minimum lease payments under capital and non-cancelable operating leases at December 31, 2001 (dollars in thousands): 2002 $ 204 2003 204 2004 204 2005 188 2006 125 --------- $ 925 Amount representing interest -- --------- Present value of minimum lease payments $ 925 ========= F2-12 Rental expense for premises and machinery and equipment leased by the Company under operating leases was as follows (dollars in thousands): YEARS ENDED DECEMBER 31, 2001 2000 1999 -------- --------- ------ Premises $ 333 $ 304 $ 259 Machinery $ 8 $ 15 $ 20 8. FINANCIAL INSTRUMENTS: The Company's financial instruments are comprised of cash, cash equivalents, accounts receivable, revolving debt and Series B Preferred Stock at December 31, 2001 and 2000. The carrying amounts of cash, cash equivalents, accounts receivable and revolving debt approximate fair values due to the short-term maturity of cash, cash equivalents and accounts receivable and revolving debt. It was not practicable to obtain an estimate of the fair value of the Company's Series B Preferred Stock. 9. CUSTOMER CONCENTRATION: During the years ended December 31, 2001, 2000 and 1999, the Company conducted business with four customers whose aggregate sales volume represented approximately 74%, 71% and 78% of the Company's net revenues, respectively. These customers also represented approximately 82%, and 78%, respectively, of the total outstanding accounts receivable as of December 31, 2001 and 2000. A reduction in sales to any of these customers could adversely impact the financial condition and results of operations of the Company. 10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS: The Company sponsors a defined benefit plan, which requires no contribution from the employees. The plan was frozen as of December 31, 1994, and no new employees have been eligible to join this plan after that date. Prior to December 31, 1994, the Plan covered substantially all employees. The employees covered under this plan do not receive any additional accruals for service rendered after December 31, 1994. Plan assets consist principally of common stocks and U.S. Government and corporate obligations. The benefits under this plan are determined based on formulas, which reflect the employees' years of service and compensation during their employment period. The projected unit credit method is used to determine pension cost. Funding requirements for the plan are based on the unit credit method. The Company's policy is to fund pension cost as required by ERISA. The Company provides certain health and life insurance benefits for eligible retirees and their dependents. The Company accounts for post retirement benefits in accordance with SFAS Number 106 (Employers' Accounting for Post-retirement Benefits Other Than Pensions), whereby the cost of post-retirement benefits are accrued during employees' working careers. The plan is not funded. The Company's policy is to pay the cost of benefits as incurred. Certain benefits are available to full-time employees who were over age 30, as of January 1, 1992, provided such employees work for the Company for 25 years and reach certain ages, but not less than age 55. Employees hired after January 1, 1993 are not eligible to receive benefits under this plan. F2-13 The prepaid benefit balances of $555 thousand and $405 thousand at December 31, 2001 and 2000, respectively, are included in other assets on the Company's consolidated balance sheets. A minimum pension liability in the amount of $2.0 million has been recorded on the December 31, 2001 balance sheet in connection with this plan and a corresponding charge to stockholders' equity net of a deferred tax benefit of $702 thousand has also been recorded. These adjustments were recognized and charged to "Accumulated Other Comprehensive Earnings". The minimum pension liability was calculated in accordance with SFAS Number 87 ("Employer's Accounting for Pensions"), as of December 31, 2001 based on the plan's portfolio investments as of such date which totaled $19.2 million, and the actuarially determined accumulated benefit obligation. The plan's portfolio was adversely affected in 2001, particularly during the third and fourth quarters by the decline in the stock market. At March 15, 2002, the plan's portfolio investments totaled $19.6 million.
PENSION BENEFITS OTHER BENEFITS YEARS ENDED YEARS ENDED DECEMBER 31, DECEMBER 31, DOLLARS IN THOUSANDS: 2001 2000 2001 2000 -------- -------- -------- -------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 20,278 $ 19,350 $ 2,090 $ 2,730 Service cost -- -- -- 1 Interest costs 1,455 1,470 141 157 Actuarial (gain) loss 691 1,242 (39) (567) Benefits paid (1,790) (1,784) (267) (231) -------- -------- -------- -------- Benefit obligation at end of year $ 20,634 $ 20,278 $ 1,925 $ 2,090 ======== ======== ======== ======== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ 21,509 $ 21,070 $ -- $ -- Actual return on plan assets (483) 2,223 -- -- Employer contribution -- -- -- -- Benefits paid (1,790) (1,784) -- -- -------- -------- -------- -------- Fair value of plan assets at end of year $ 19,236 $ 21,509 $ -- $ -- ======== ======== ======== ======== Funded status $ (1,397) $ 1,231 $ (1,925) $ (2,090) Unrecognized net actuarial loss (gain) 1,952 (826) (661) (712) Unrecognized prior service cost -- -- (131) (145) -------- -------- -------- -------- Accrued benefit (cost) prepaid $ 555 $ 405 $ (2,717) $ (2,947) ======== ======== ======== ======== Weighted average assumptions as of December 31: Discount rate 7.25% 7.5% 7.25% 7.5% Expected return on plan assets 8.5% 8.5% N/A N/A Rate of compensation increase N/A N/A N/A N/A COMPONENTS OF NET PERIODIC BENEFIT COST Service $ -- $ -- $ -- $ 1 Interest cost 1,455 1,470 141 157 Expected return on plan assets (1,753) (1,770) -- -- Amortization of prior service cost -- -- (15) (15) Recognized net actuarial loss (gain) 148 -- (90) (75) -------- -------- -------- -------- Net periodic benefit cost $ (150) $ (300) $ 36 $ 68 ======== ======== ======== ========
F2-14 A one-percentage-point change in assumed health care cost trend rates would not change the actuarial present value of the accumulated post-retirement benefit obligations due to annual limitations of Company contributions per employee. 11. PENSION BENEFIT GUARANTY CORPORATION: In January 1997, the Pension Benefit Guaranty Corporation ("PBGC") notified the Company that it was considering whether the sale of the Thread division to HP would create an obligation under ERISA to immediately fund, in whole or in part, the Company's unfunded liability to its defined benefit plan. In February 1997, at the request of the PBGC, the Company agreed to provide the PBGC with at least 30 days advance notice of any proposed dividend, stock redemption, stockholder buyback or other distribution to shareholders of any class of equity which is projected to occur at any time prior to March 31, 2002. In consideration of such agreement, the PBGC agreed not to take action solely with respect to the proposed sale transaction. In December 1997, the Company notified the PBGC that it intended to redeem $10 million of Preferred Stock as soon after year end as was practicable, plus additional amounts quarterly thereafter, but only to the extent of legally available funds as determined by the Board of Directors and if appropriate bank financing had been satisfactorily obtained. Following such notice, the PBGC indicated that it would not take any action with respect to such payments. If the PBGC had taken the position that the Company should fund, in whole or in part, the unfunded liability to the defined benefit plan, after receiving notice of a proposed dividend, stock redemption, stockholder buyback or other distribution to shareholders, and if such position were upheld, the ability of the Company to take any such proposed action could be adversely affected. Were the plan to be terminated or were the PBGC to require that the plan be funded according to different standards, the Company could have a resulting obligation to transfer cash to the plan. Based on an actuarial estimate, the obligation to transfer cash in the event of a termination would be $7.2 million as of December 31, 2001. Any actual amounts transferred in the event of a plan termination would depend on PBGC action and market conditions at the time of transfer and could differ significantly from this estimate. For information with respect to the Company's liability to its defined benefit plan, see Note 10. 12. REDEEMABLE PREFERRED STOCK: Each share of Series B Preferred Stock is entitled to one vote per share. As of December 31, 2001 there were 11,187,451 shares of Preferred Stock authorized and 4,555,007 shares of Series B Preferred Stock issued and outstanding. The Series B Preferred Stock is entitled to a preference on liquidation equal to $1 per share plus accrued and unpaid dividends at the rate of 6% per annum per share. There remain 499,995 shares of authorized but un-issued shares of blank check Preferred Stock. Twenty percent of the shares of Series B Preferred Stock were scheduled to be redeemed by the Company, from funds legally available therefore, on March 15th of each year commencing in 1995 and ending in 1999. Such shares may also be redeemed at any time at the Company's option. On June 23, 1998, the Company paid $12.5 million to holders of its Series B Preferred Stock of record as of June 22, 1998. $10.1 million of this amount represented the original redemption amount and $2.4 million reflected the increase in the redemption amount resulting from accumulated and unpaid dividends. On July 30, 1999, the Company announced that its Board had adopted a voluntary Plan of Recapitalization (the "Plan") to provide for the issuance of shares of Common Stock in exchange for F2-15 accrued and unpaid Preferred Stock dividends and the exchange of additional shares of Common Stock for Preferred Stock. Pursuant to the Plan the Board authorized the issuance of 2,757,363 shares of Common Stock in exchange for $3.4 million accrued dividends through August 13, 1999, on its Series B Preferred Stock. The dividend exchange offer valued the Common Stock at $1.25 per share. The offer was made to holders of record as of July 16, 1999. At that date there were twelve holders of Preferred Stock holding a total of 10,687,456 shares. Pursuant to the Plan, the Company's Board also approved an offer to the holders of its Preferred Stock to exchange their shares of Preferred Stock for shares of Common Stock at the rate .620911 of a share of Common Stock for each share of Preferred Stock. In connection with this exchange offer 6,132,449 shares of Preferred Stock were exchanged for 3,807,704 shares of Common Stock. On August 13, 1999, the Company paid $3.4 million of accrued preferred dividends and made a Preferred Stock redemption payment of $6.1 million all by issuance of Common Stock. As of December 31, 2001, the Preferred Stock payments in arrears aggregated $4.6 million. Under the terms of the CIT Facilities, the Company is not permitted to redeem Preferred Stock and dividend payments are limited to $300 thousand per year. Dividends on the Series B Preferred Stock accrue at an annual rate of 6% and are payable quarterly on March 15, June 15, September 15, and December 15. Additional dividends accrue on all scheduled but unpaid dividends at a rate of 6% per annum. There were no dividends in arrears at December 31, 2001 and 2000. In addition, the availability of resources to make dividend payments to the holders of Preferred Stock in the future will depend on the Company's future cash flow and the timing of the settlement of the liabilities recorded in the financial statements of the Company. 13. STOCKHOLDERS' EQUITY: COMMON STOCK Each share of Common Stock is entitled to one vote per share. As of December 31, 2001 there were 20,000,000 shares of Common Stock authorized and 13,934,858 shares issued and outstanding. 14. INCOME TAXES: Income from continuing operations before income taxes for the years ended December 31 consisted of the following components (dollars in thousands): 2001 2000 1999 -------------------------------------- United States $ 1,950 $ 2,048 $ 4,015 Other (288) (194) -- --------- --------- -------- $ 1,662 $ 1,854 $ 4,015 ========= ========= ======== The components of the income tax provision or benefit are (dollars in thousands): F2-16 CONTINUING OPERATIONS YEARS ENDED DECEMBER 31, 2001 2000 1999 -------------------------------------- Current provision $ 311 $ 331 $ 1,305 Foreign benefit (87) (68) -- Deferred provision 448 446 172 --------- --------- -------- $ 672 $ 709 $ 1,477 ========= ========= ======== DISCONTINUED OPERATIONS YEARS ENDED DECEMBER 31, 2001 2000 1999 -------------------------------------- Current provision $ -- $ -- $ 869 Deferred provision -- -- -- --------- --------- -------- $ -- $ -- $ 869 ========= ========= ======== The Company's tax provision differed from that which would have been provided at a 34% rate as follows (dollars in thousands): CONTINUING OPERATIONS YEARS ENDED DECEMBER 31, 2001 2000 1999 ------------------------------------- Federal provision at 34% $ 565 $ 630 $ 1,321 State and local provision, net 41 46 123 Amortization of goodwill 48 33 33 Foreign rate differential 12 -- -- Other 6 -- -- --------- --------- -------- $ 672 $ 709 $ 1,477 ========= ========= ======== DISCONTINUED OPERATIONS YEARS ENDED DECEMBER 31, 2001 2000 1999 ------------------------------------- Federal provision at 34% $ -- $ -- $ 797 State and local provision, net -- -- 72 --------- --------- -------- $ -- $ -- $ 869 ========= ========= ======== At December 31, 2001 and 2000, the components of the net deferred tax asset are (dollars in thousands): 2001 2000 ---------- --------- Book value of fixed assets over tax basis $ (536) $ (536) Pension liabilities 1,212 546 Other post-retirement benefit liability 1,005 1,090 Environmental accruals 691 771 Operating and capital loss carryforwards 402 402 Other, net (287) (104) --------- --------- $ 2,487 $ 2,169 ========= ========= Based on the Company's business plan for the future, management is of the opinion that it is more likely than not that the deferred tax asset at December 31, 2001 will be realized. F2-17 15. STOCK OPTIONS: As of December 6, 1994, the Company's stockholders adopted the 1994 Incentive Program (the "Program"). Grants under the Program may consist of incentive stock options, non-qualified stock options, stock appreciation rights in tandem with stock options or freestanding, restricted stock grants, or restored options. In connection with the Program, 500,000 shares of Common Stock were available for grants at the start of the Program. In addition, on April 22, 1997, the stockholders voted to amend the Program by increasing the number of shares available for grant by 500,000. SFAS No. 123 (Accounting for Stock-Based Compensation) modifies the accounting and reporting standards for the Company's stock-based compensation plans. SFAS 123 provides that stock-based awards be measured at their fair value at the grant date in accordance with a valuation model. This measurement may either be recorded in the Company's basic financial statements or the pro forma effect on earnings may be disclosed in its financial statements. The Company has elected to provide the pro forma disclosures. The Company's reported and pro forma net income and earnings per share are as follows (dollars in thousands, except per share amounts): 2001 2000 1999 -------- --------- -------- Income applicable to common stock As Reported $ 627 $ 871 $ 6,482 Pro Forma $ 608 $ 843 $ 6,327 Basic EPS: As Reported $ .04 $ .06 $ .66 Pro Forma $ .04 $ .06 $ .65 Diluted EPS: As Reported $ .04 $ .06 $ .66 Pro Forma $ .04 $ .06 $ .65 The Company has granted options on 814,000 shares through December 31, 2001 in connection with the Program. Under the Program the option exercise price equals the stock's market price on date of grant. Program options vest over a three to four-year period and expire after ten years. A summary of the status of outstanding grants and weighted average exercise prices at December 31, 2001, 2000 and 1999 and changes during the years then ended is presented in the table and narrative below (shares in thousands):
2001 2000 1999 ------------------- ------------------ -------------------- SHARES PRICE SHARES PRICE SHARES PRICE ------ ----- ------ ----- ------ ----- Beginning of year 929 $ 1.51 987 $1.47 773 $ 4.40 Granted 100 .23 -- -- 585 .50 Exercised -- -- -- -- -- -- Forfeited (115) 1.15 (58) .83 (371) 4.07 Expired -- -- -- -- -- -- ----- ------ ------ ------ ------ ------- End of year 914 $ 1.41 929 $ 1.51 987 $ 1.47 ===== ====== === ====== ====== ======= Shares exercisable at year-end 783 502 382 === === ====== Weighted average exercise price of exercisable options $1.54 $ 2.19 $2.73 ===== ====== =====
F2-18 The fair value of each option grant in 2001 and 1999 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions, risk-free interest rates of 5.14-6.41 percent, expected dividend yields of zero percent; expected lives of 10 years; expected volatility of 82-97 percent. During 2001 and 1999, the Company issued 100,000 and 585,000 options with an estimated fair value of $19 and $155, respectively. SUMMARY INFORMATION ABOUT CARLYLE'S STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 2001 IS AS FOLLOWS:
Options o/s Options o/s Date Options Exercise X Contractual X Granted Outstanding Price Exerc. Price Periods C.P. ---------------------------------------------------------------------------------------------- 12/14/1994 60,000 10.00 600,000 2.9 174,000 12/01/1995 9,500 3.13 29,735 3.9 37,050 05/09/1996 2,000 2.13 4,260 4.4 8,800 05/16/1997 145,278 2.00 290,556 5.4 784,501 02/25/1998 22,222 1.31 29,111 6.2 137,776 12/10/1998 50,000 1.00 50,000 6.9 345,000 12/29/1999 525,000 0.50 262,500 8.0 4,200,000 12/13/2001 100,000 0.23 23,000 10.0 1,000,000 --------------------------------------------------------------------- 914,000 20.30 1,289,162 6,687,128 (2) (1) (3) Weighted Average Exercise Price (1)/(2) 1.41 ========= Weighted Average (3)/(2) Contractual Periods 7.32 =========
16. EARNINGS PER COMMON SHARE: Options to purchase shares of Common Stock of the Company had no effect on earnings per share because the exercise price of such options exceeded the market price of the Common Stock in each of the years ended December 31, 2001, 2000 and 1999. Basic and diluted earnings per common share have been presented as earnings from continuing operations and earnings from discontinued operations. Basic and diluted earnings per share from continuing operations have been calculated as net income from continuing operations after preferred dividend requirements of $273,000, $274,000, and $611,000 for 2001, 2000 and 1999 respectively, divided by weighted-average common shares outstanding during the period. Basic and F2-19 diluted earnings per common share from discontinued operations have been calculated as income (loss) from discontinued operations plus net loss on disposition of discontinued operations divided by the weighted-average number of common shares outstanding. 17. COMMITMENT AND CONTINGENCIES: The Company may be involved in various legal actions from time to time arising in the normal course of business. In the opinion of management, there are no matters outstanding that would have a material adverse effect on the consolidated financial position or results of operations of the Company. The Company is subject to a number of federal, state and local environmental laws and regulations, including those concerning the treatment, storage and disposal of waste, the discharge of effluents into waterways, the emissions of substances into the air and various health and safety matters. In addition, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), and comparable state statutes generally impose joint and several liability on present and former owners and operators, transporters and generators for remediation of contaminated properties regardless of fault. These parties are typically identified as "potentially responsible parties" or PRP. Approximately six years ago a property owned by the Carlyle Manufacturing Company, Inc. ("CM") (a non-operating subsidiary) located at 30 Echo Lake Road in Watertown, Connecticut was being investigated by the United States Environmental Protection Agency ("EPA") for possible inclusion on the National Priorities List promulgated pursuant to CERCLA but no such listing has occurred. A Site Inspection conducted at this location detected certain on-site soil and groundwater contamination, as well as contamination of nearby water. This site is listed on the Connecticut State Hazardous Waste Disposal Site list, but remediation activity has not been required by the Connecticut Department of Environmental Protection ("CTDEP"). The Company has accrued approximately $400,000 in connection with the estimated cost to remediate the site. CM owned an inactive facility located in North Grosvenordale, Connecticut at which soil contamination had been found. The Company reported this contamination to the CTDEP in 1989 and was working with the CTDEP to define remedial options for the site, which it expected would focus primarily on removal and possible stabilization of contaminated soil on site. The Company estimated the cost of soil remediation at this site to be approximately $100,000 based upon information on the costs incurred by others in remediating similar contamination at other locations. The facility was sold in 2001 and related environmental liability was assumed by the buyer. In or about June 1992 the Company received notices from the EPA that the Company, Belding Corticelli Thread Co. ("BCTC") (a discontinued operation) and CM had been identified, along with 1,300 other parties, as PRPs in connection with the alleged release of hazardous substances from the Solvents Recovery Service of New England Superfund Site in Southington, Connecticut (the "SRS site"). The Company settled its alleged liability in connection with the SRS sites by paying $1,626 in connection with a settlement offered to de minimis parties at the SRS site in 1994. BCTC and CM, along with other PRPs, committed to perform the Remedial Investigation and Feasibility Study ("RIFS") and two Non-Time Critical Removal Actions ("NTCRA") at the SRS site. The RIFS, and the first NTCRA (except for certain maintenance activities) have been completed. BCTC and CM have been allocated approximately .04% and 1.26%, respectively, of costs incurred to date, based on their alleged volume of waste shipped to the SRS site. It is presently anticipated that EPA will not issue the record of decision for this site for at least two years. The Company is unable, at this time, to estimate the ultimate cost of the remedy for the SRS site. The Company has accrued approximately $1 million in connection with this site. F2-20 In April 2000, CM and BCTC (as well as numerous other member of the SRS PRP Group) received written notification that they had been designated as PRPs in connection with the alleged transshipment of waste from the SRS site to the Angelillo Property Superfund site in Southington, Connecticut (the "Angelillo Site") from October 30, 1967 through February 28, 1987. To date, the EPA claims it has incurred approximately $1.2 million in response costs in connection with the Angelillo Site and it has demanded reimbursement of those costs (as well as interest and future costs) from CM, BCTC, and other PRPs. In March 2001, the members of the SRS Group named as PRPs at the Angelillo Site accepted EPA's offer to settle its claim for past costs relating to the Angelillo transshipment site for a payment of $626,000. In May 2001, CM and BCTC received invoices in the amounts of $12,574.20 and $349.01, respectively, representing their share of the Angelillo settlement with EPA, and CM and BCTC paid said amounts later that month. The Angelillo settlement agreement was subject to a public comment period which has expired. In accordance with CERCLA, the EPA may modify or withdraw its consent to this agreement if comments disclose facts or considerations that cause it to believe that the agreement is inappropriate improper or inadequate. The settling parties and the EPA are working towards a resolution of all comments received from the public. The Company does not believe it is probable that additional costs will be incurred at this site. By third-party summons and complaint dated November 27, 1991, CM was named as a third-party defendant in an action pending in the United States District Court for the District of Rhode Island entitled United States v. Davis. In addition to CM, approximately 60 other companies were joined as third-party defendants. Amended third-party complaints named additional third-party defendants. The third-party complaint against CM alleged claims for contribution under CERCLA, common law indemnification and state law contribution. The third-party complaint alleged that CM (and the majority of the other third-party defendants) shipped waste to the Chemical Control Corporation, which waste was commingled and then shipped to the Davis Liquid Waste site located in Smithfield, Rhode Island. CM has entered into an agreement to settle liability in connection with the above claims for payment of the sum of $200,000. The Consent Decree was approved in 1998 by the Federal District Court. At least one non-settling party appealed from the District Court's approval of the Consent Decree. The appellate court affirmed the district court's approval of the Consent Decree. The Company does not believe it is probable that additional costs will be incurred at this site. The amounts referred to above do not include costs that the Company or its subsidiaries may incur for consultants' or attorneys' fees or for administrative expenses in connection with their participation as part of a PRP group. The reserve the Company has established for environmental liabilities, in the amount of $1.4 million, represents the Company's best current estimate of the costs of addressing all identified environmental problems, including the obligations of the Company and its subsidiaries relating to the Remedial Investigation and two Non-Time Critical Removal Actions at the Solvents Recovery Superfund site, based on the Company's review of currently available evidence, and takes into consideration the Company's prior experience in remediation and that of other companies, as well as public information released by EPA and by the PRP groups in which the Company or its subsidiaries are participating. Although the reserve currently appears to be sufficient to cover these environmental liabilities, there are uncertainties associated with environmental liabilities, and no assurances can be given that the Company's estimate of any environmental liability will not increase or decrease in the future. The uncertainties relate to the difficulty of estimating the ultimate cost of any remediation that may be undertaken, including any operating costs associated with remedial measures, the duration of any remediation required, the amount of consultants' or attorneys' fees that may be incurred, the administrative costs of participating in the PRP groups, and any additional regulatory requirements that may be imposed by the federal or state environmental agencies. F2-21 The reserve the Company has established for environmental liabilities, in the amount of $1.4 million, represents the Company's best current estimate of the costs of addressing all identified environmental problems. F2-22 18. UNAUDITED QUARTERLY RESULTS OF OPERATIONS: (IN THOUSANDS EXCEPT FOR PER SHARE DATA)
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, QUARTER ENDED 2001 2001 2001 2001 ------------ ------------- ---------- ---------- Net sales $ 6,253 $ 5,958 $ 6,019 $ 6,695 Cost of sales 3,740 3,997 3,693 4,026 --------- --------- --------- --------- Gross profit 2,513 $ 1,961 $ 2,326 $ 2,669 ========= ========= ========= ========= Income applicable to common stock $ 179 $ 183 $ 115 $ 150 ========= ========= ========= ========= Basic and diluted income per common share: Continuing operations $ .01 $ .01 $ .01 $ .01 ========= ========= ========= ========= DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, QUARTER ENDED 2000 2000 2000 2000 ------------ ------------- ---------- ---------- Net sales $ 5,688 $ 8,206 $ 6,934 $ 6,248 Cost of sales 3,392 5,156 4,140 3,310 --------- --------- --------- --------- Gross profit $ 2,296 $ 3,050 $ 2,794 $ 2,938 ========= ========= ========= ========= Income applicable to common stock $ 62 $ 384 $ 211 $ 214 ========= ========= ========= ========= Basic and diluted income per common share: Continuing operations $ -- $ .03 $ .02 $ .02 ========= ========== ========= =========
F2-23 CARLYLE INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
ASSETS SEPTEMBER 30, 2002 (UNAUDITED) DECEMBER 31, 2001 ---------------- ------------------- Current Assets: Cash and cash equivalents $ 14 $ 398 Accounts receivable trade, net 2,583 2,685 Inventories, net 5,568 4,615 Deferred income taxes 536 604 Other current assets 376 284 --------- -------- Total current assets 9,077 8,586 --------- -------- Property, Plant and Equipment, at cost 4,013 3,851 Less: Accumulated Depreciation and Amortization (1,770) (1,595) --------- -------- Net property, plant and equipment 2,243 2,256 --------- -------- Goodwill, net 2,543 2,543 Deferred income taxes 1,951 1,883 Other assets 939 1,018 --------- -------- Total Assets $ 16,753 $ 16,286 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 638 $ 599 Income taxes payable 100 43 Other current liabilities 1,111 1,113 Revolving credit debt 3,865 5,700 --------- -------- Total current liabilities 5,714 7,455 --------- -------- Long-term debt 1,768 -- Other Liabilities 8,063 8,378 --------- -------- Total Liabilities 15,545 15,833 --------- -------- Redeemable Preferred Stock, par value $0.01 per share 11,187,451 shares authorized: Shares issued and outstanding: Series A - None -- -- Series B - 4,555,007 at September 30, 2002 and at December 31, 2001 4,555 4,555 Accumulated dividends on preferred stock 13 13 --------- -------- 4,568 4,568 --------- -------- STOCKHOLDERS' EQUITY Common Stock, par value $0.01 per share 20,000,000 shares authorized; Shares issued and outstanding at September 30, 2002 and December 31, 2001: 13,934,858 139 139 Paid in Capital 26,345 26,345 Retained Deficit (28,584) (29,237) Accumulated Other Comprehensive Loss (1,260) (1,362) ---------- -------- Total Common Stockholders' Deficit (3,360) (4,115) --------- -------- Total Liabilities, Redeemable Preferred Stock and Stockholders' Equity $ 16,753 $ 16,286 ========= ========
See Notes to Unaudited Consolidated Financial Statements. F2-24 CARLYLE INDUSTRIES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30, ----------------------------- ----------------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Net sales $ 5,912 $ 5,958 $ 17,514 $ 18,672 Cost of sales 3,860 3,997 10,928 11,716 -------- -------- -------- -------- 2,052 1,961 6,586 6,956 Selling, general & administrative expenses 1,593 1,508 4,929 5,521 Other (income) -- (100) -- (100) -------- -------- -------- -------- Income before interest and income taxes 459 553 1,657 1,535 Interest expense, net 111 135 315 445 -------- -------- -------- -------- Income before income taxes 348 418 1,342 1,090 Provision for income taxes 128 166 485 437 -------- -------- -------- -------- Income before preferred dividends 220 252 857 653 Less dividends on preferred stock 68 69 204 205 -------- -------- -------- -------- Income applicable to common stock $ 152 $ 183 $ 653 $ 448 -------- ======== ======== ======== Basic and diluted earnings per common share $ .01 $ .01 $ .05 $ .03 ======== ======== ======== ======== Weighted average common shares outstanding (in thousands) 13,935 13,935 13,935 13,935 ======== ======== ======== ========
See Notes to Unaudited Consolidated Financial Statements. CARLYLE INDUSTRIES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30, 2002 2001 2002 2001 ------- ------ ------- ------- Net income before dividends on preferred stock $ 220 $ 252 $ 857 $ 653 Other comprehensive income: Foreign currency translation adjustment 1 66 102 6 ------- ------ ------- ------- Comprehensive income $ 221 $ 318 $ 959 $ 659 ======= ====== ======= =======
See Notes to Unaudited Consolidated Financial Statements. F2-25 CARLYLE INDUSTRIES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2002 2001 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Income before preferred dividends $ 857 $ 653 Reconciliation of income before preferred dividends to net cash provided by (used in) operations: Depreciation and amortization 415 526 Deferred tax provision -- 175 Changes in operating assets and liabilities: Accounts receivable 102 (36) Inventories (916) 334 Other assets (199) (546) Accounts payable 39 (938) Income taxes payable 57 78 Other current liabilities (2) (231) Other liabilities (315) (485) --------- --------- Net cash provided by (used in) operating activities 38 (470) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (71) (12) Investment in other assets (50) (54) --------- --------- Net cash used in investing activities (121) (66) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds (repayments) from credit facilities, net (67) 875 Deferred financing costs (30) -- Dividends on preferred stock (204) (205) --------- --------- Net cash provided by (used in) financing activities (301) 670 --------- --------- Effect of exchange rate changes on cash and cash equivalents -- -- Increase (decrease) in cash and cash equivalents (384) 134 Cash and cash equivalents beginning of period 398 197 --------- --------- Cash and cash equivalents end of period $ 14 $ 331 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 322 $ 447 ========= ========= Income taxes $ 428 $ 156 ========= =========
See Notes to Unaudited Consolidated Financial Statements F2-26 CARLYLE INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 NOTE 1: BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the nine-month period ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 2001. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operation: Carlyle Industries, Inc. (the "Company") and its subsidiaries manufacture, package and distribute a line of buttons, craft and gift products. Consolidation: The accompanying consolidated financial statements include the accounts of the Company and all subsidiaries after elimination of intercompany items and transactions. Depreciation and Amortization: Depreciation and amortization are computed principally by the straight-line method for each class of depreciable and amortizable asset based on their estimated useful lives. Buildings and improvements, machinery and equipment, and furniture, fixtures and leasehold improvements are generally depreciated over periods of 20-35, 5-25 and 5-10 years, respectively. Revenue Recognition: Revenue is recognized upon shipment of merchandise. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent 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. Reclassifications: Certain reclassifications have been made to the prior period's financial statements to conform to the current period presentation. F2-27 NOTE 3: EARNINGS PER SHARE Earnings per share of the Company's Common Stock have been computed on the basis of weighted average common shares outstanding after providing for quarterly preferred dividend requirements. Substantially all stock options have been excluded from the diluted earnings per share because the effect would have been antidilutive or had no dilutive effect. NOTE 4: INVENTORIES The components of inventories, net of reserves, are as follows (dollars in thousands): SEPTEMBER 30, 2002 DECEMBER 31, 2001 ------------------ ----------------- Raw materials $ 2,199 $ 1,686 Work in Progress 21 20 Finished goods 3,348 2,909 ----------- ----------- $ 5,568 $ 4,615 =========== =========== NOTE 5: CREDIT FACILITIES On January 24, 2002, the Company and the CIT Group/Financial Services, Inc. ("CIT") entered into a series of agreements (the "CIT Facilities") providing for maximum aggregate revolving credit of up to $7.5 million to the Company. The Company utilized the CIT Facilities to pay off all amounts outstanding under its previous credit agreement with Fleet Bank in the amount of $5.3 million on such date. The CIT Facilities are comprised of separate financing agreements with each of the Company and its wholly-owned subsidiaries, Blumenthal Lansing Company, Inc. and Westwater Industries, Inc. The financing agreements with Blumenthal Lansing Company, Inc. and Westwater Industries, Inc. provide for revolving credit advances to such facilities based on eligible accounts receivable and inventory and include a Letter of Credit agreement with a limit of $500 thousand. The financing agreement provides for a term loan (the "Term Loan") in the amount of $2 million and revolving credit of $500 thousand. The Term Loan amortizes $12 thousand per month during each of the first twenty five months followed by a final installment payment of $1.7 million during the twenty-sixth month. All amounts outstanding under the CIT Facilities bear interest at the Chase Bank N.A. prime rate plus .5% with a minimum rate of 5%. In connection with the CIT Facilities, the Company and its subsidiaries have made guarantees and have issued first priority liens covering substantially all of the assets of the Company and its subsidiaries. In addition, Mr. Robert A. Levinson, the Company's Chairman and Chief Executive Officer, provided certain collateral against advances provided under the CIT Facilities. On December 13, 2001, the Company's Board of Directors authorized a grant of 100 thousand stock options with an exercise price of $.23 per share to Mr. Levinson in consideration for his collateral support. The options vested immediately and are exercisable for ten years. During the second quarter of 2002, Mr. Levinson made a temporary advance of $200 thousand to the Company. The loan was repaid during the third quarter of 2002. The CIT Facilities contain representations and warranties and events of default customary for agreements of this nature, such as restrictions on incurring more debt, acquisitions, preferred stock principal and dividend payments in excess of $300 thousand per year, the use of proceeds from the sale of assets and F2-28 change in voting control of the Company. The CIT Facilities also contain a subjective acceleration clause which states that, except for the term loan, all remaining obligations under the Facilities shall, at CIT's option, be immediately due and payable without notice or demand upon the occurrence of any change in the Company's condition or affairs (financial or otherwise) that materially impairs the collateral or increases CIT's risk. In the case of the term loan, CIT may accelerate the maturity in the event of a default by the Company after thirteen months notice of such acceleration. Management of the Company believes that the likelihood of CIT accelerating the payment of any of the CIT Facilities in 2002 is remote. NOTE 6: PREFERRED STOCK Dividends on the Series B Preferred Stock accrue at an annual rate of 6% and are payable quarterly on March 15, June 15, September 15, and December 15. The availability of resources to make dividend payments to the holders of Series B Preferred Stock in the future will depend on the Company's future cash flow. In addition, the Series B Preferred Stock by its terms was originally required to be fully redeemed by the Company in annual installments beginning March 15, 1995 through March 15, 1999, subject among other things to the approval of the Company's senior lenders, if any, and to the extent of legally available funds as determined by the Board of Directors. The Company expects to stay current with respect to Series B Preferred Stock dividends. However, redemption payments on account of the Series B Preferred Stock are not permitted under the CIT Facilities. NOTE 7: GOODWILL The Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") as of January 1, 2002. Under SFAS 142, the Company no longer amortizes goodwill, but is required to review goodwill for impairment annually, or more frequently if impairment indicators arise. In accordance with SFAS 142, prior period amounts were not restated. A reconciliation of the previously reported net income and earnings per share for the three months and nine months ended September 30, 2001 to the amounts adjusted for the reduction of amortization expense is as follows (dollars in thousands):
Three Months Ended Nine Months Ended September 30, 2001 September 30, 2001 ------------------------- ------------------------- Basic and Basic and Diluted Diluted Net Earnings Per Net Earnings Per Income Common Share Income Common Share Reported $ 183 $ .01 $ 448 $ .03 Add: Amortization adjustment 40 * 120 .01 ------- ----- -------- ------- Adjusted $ 223 $ .01 $ 568 $ .04 ======= ===== ======== =======
* This amount is less than $.01. F2-29 Pursuant to the adoption of SFAS 142, the Company has completed the initial valuation analysis required by the transitional goodwill impairment test, which indicated that the fair value of its only reporting unit with reported goodwill was greater than its carrying value. The Company based this conclusion on the selling price of the Company in the proposed merger with Levcor International, Inc. ("Levcor"), exceeding the net book value. NOTE 8: OTHER INCOME During the third quarter 2001, the Company sold its North Grosvenordale, Connecticut property for a nominal amount. This property was the site of the former Belding Corticelli Thread manufacturing facility which had ceased operating at that location over 25 years ago. In connection with this sale, the new owner has assumed all environmental clean up and salvage responsibilities. The Company reduced its environmental liability by $100 thousand as a result of this transaction. NOTE 9: PROPOSED MERGER WITH LEVCOR INTERNATIONAL, INC. The Company's board of directors has approved a merger which will result in the acquisition of the Company by Levcor, an apparel fabric processor. The terms of the proposed merger provide that Levcor will issue one share of Levcor common stock for each five shares of Carlyle common stock and one share of a new class of Levcor preferred stock for each share of Carlyle Series B preferred stock. The proposed merger is subject to Carlyle and Levcor stockholders' approval at a special meeting and other customary conditions, including the declaration of effectiveness by the Securities and Exchange Commission of a Registration Statement on Form S-4, and is expected to close in the fourth quarter of 2002. Robert A. Levinson, Chairman and Chief Executive Officer of the Company is also the Chairman and Chief Executive officer of Levcor and beneficially holds approximately 31.4% of Levcor's common stock and approximately 20.4% of the Company's outstanding common stock and approximately 98.3% of the Company's outstanding Series B preferred stock, which collectively represents approximately 38.7% of the voting power of the Company's capital stock. F2-30 APPENDIX A ================================================================================ AGREEMENT AND PLAN OF MERGER BETWEEN LEVCOR INTERNATIONAL, INC. AND CARLYLE INDUSTRIES, INC. DATED AS OF MAY 24, 2002 ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE I THE MERGER..............................................................................................1 1.1 The Merger....................................................................................1 1.2 Closing.......................................................................................1 1.3 Effective Time of the Merger..................................................................1 1.4 Effects of the Merger.........................................................................1 1.5 Corporate Organization........................................................................2 ARTICLE II MERGER CONSIDERATION...................................................................................2 2.1 Effect on Capital Stock.......................................................................2 2.2 Exchange of Certificates......................................................................3 ARTICLE III REPRESENTATIONS AND WARRANTIES........................................................................5 3.1 Representations and Warranties of Carlyle.....................................................5 3.2 Representations and Warranties of Levcor.....................................................15 ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS.............................................................24 4.1 Covenants of Carlyle.........................................................................24 4.2 Covenants of Levcor..........................................................................28 ARTICLE V ADDITIONAL AGREEMENTS..................................................................................31 5.1 Prospectus/Proxy Statement; Registration Statement...........................................31 5.2 Meetings of Stockholders; Board Recommendation...............................................31 5.3 Legal Conditions to Merger...................................................................32 5.4 Access to Information........................................................................33 5.5 Brokers or Finders...........................................................................33 5.6 Indemnification..............................................................................33 5.7 Stock Options................................................................................33 ARTICLE VI CONDITIONS............................................................................................34 6.1 Conditions to Each Party's Obligation To Effect the Merger...................................34 6.2 Conditions to Obligations of Levcor..........................................................35 6.3 Conditions to Obligations of Carlyle.........................................................36 ARTICLE VII TERMINATION AND AMENDMENT............................................................................36 7.1 Termination..................................................................................36 7.2 Effect of Termination........................................................................38 7.3 Fees, Expenses and Other Payments............................................................38 7.4 Amendment....................................................................................39 7.5 Extension; Waiver............................................................................39 ARTICLE VIII GENERAL PROVISIONS..................................................................................40 8.1 Nonsurvival of Representations, Warranties and Agreements....................................40 8.2 Notices......................................................................................40 8.3 Certain Definitions..........................................................................41 i 8.4 Interpretation...............................................................................43 8.5 Counterparts.................................................................................43 8.6 Entire Agreement; No Third Party Beneficiaries; Rights of Ownership..........................43 8.7 Governing Law................................................................................44 8.8 Severability; No Remedy in Certain Circumstances.............................................44 8.9 Publicity....................................................................................44 8.10 Assignment...................................................................................44 8.11 Specific Performance.........................................................................44
Exhibit A - Form of Certificate of Incorporation of Surviving Corporation Exhibit B - Form of By-Laws of Surviving Corporation Exhibit C - Directors of Surviving Corporation Exhibit D - Officers of Surviving Corporation ii AGREEMENT AND PLAN OF MERGER, dated as of May 24, 2002 (the "Agreement"), between LEVCOR INTERNATIONAL, INC., a Delaware corporation ("Levcor"), and CARLYLE INDUSTRIES, INC., a Delaware corporation ("Carlyle"). WHEREAS, the Boards of Directors of Levcor and Carlyle have determined that it is in the best interests of their respective corporations and stockholders that Levcor and Carlyle merge (the "Merger") pursuant to this Agreement and in accordance with the applicable provisions of the General Corporation Law of the State of Delaware ("Delaware Law"), have approved this Agreement and the transactions contemplated hereby, and have recommended to their respective stockholders the approval and adoption of this Agreement and the approval of the Merger; and WHEREAS, terms listed in Section 8.3 are defined in the Sections set forth therein. NOW, THEREFORE, the parties agree as follows: ARTICLE I THE MERGER 1.1 THE MERGER. At the Effective Time and upon the terms of this Agreement and the applicable provisions of Delaware Law, Carlyle shall be merged with and into Levcor, the separate corporate existence of Carlyle shall cease and Levcor shall continue as the surviving corporation (the "Surviving Corporation"). 1.2 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 7.1 and subject to the satisfaction or waiver of the conditions set forth in Article VI, the closing of the Merger (the "Closing") shall take place as promptly as practicable (and in any event within two business days) following satisfaction or waiver of the last of the conditions set forth in Article VI (the "Closing Date"), at 10:00 a.m., at the offices of Katten Muchin Zavis Rosenman, 575 Madison Avenue, New York, New York 10022, unless another date, time or place is agreed to in writing by the parties hereto. 1.3 EFFECTIVE TIME OF THE MERGER. As soon as practicable following the Closing, Levcor shall file a certificate of merger in accordance with the relevant provisions of Delaware Law (the "Certificate of Merger") with the Secretary of State of the State of Delaware and make all other filings or recordings required by the relevant provisions of Delaware Law in connection with the Merger. The Merger shall become effective at such time as the Certificate of Merger is duly filed with the Secretary of State of the State of Delaware (the "Effective Time"). 1.4 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in this Agreement and the applicable provisions of Delaware Law. A-1 1.5 CORPORATE ORGANIZATION. (a) At the Effective Time, the certificate of incorporation of the Surviving Corporation shall be in the form of the certificate of incorporation attached hereto as Exhibit A. (b) At the Effective Time, the by-laws of the Surviving Corporation shall be in the form of the by-laws attached hereto as Exhibit B. (c) At the Effective Time, the directors of the Surviving Corporation shall be the individuals set forth in Exhibit C. (d) At the Effective Time, the officers of the Surviving Corporation shall be the individuals set forth in Exhibit D. ARTICLE II MERGER CONSIDERATION 2.1 EFFECT ON CAPITAL STOCK. At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of capital stock of Carlyle or any shares of capital stock of Levcor: (a) COMMON STOCK OF CARLYLE. Each share of common stock, par value $0.01 per share, of Carlyle (the "Carlyle Common Stock") issued and outstanding immediately prior to the Effective Time (other than any shares of Carlyle Common Stock to be cancelled pursuant to Section 2.1(c) and other than Dissenting Shares), shall be converted into the right to receive 0.2 (the "Common Exchange Ratio") of a validly issued, fully paid and nonassessable share of common stock, par value $0.56 per share, of the Surviving Corporation (the "Surviving Corporation Common Stock"). After the Effective Time, the holders of shares of Carlyle Common Stock shall cease to have any rights with respect thereto, except the right to receive the Surviving Corporation Common Stock as provided herein. (b) SERIES B PREFERRED STOCK OF CARLYLE. Each share of preferred stock, par value $0.01 per share, of Carlyle (the "Carlyle Preferred Stock") issued and outstanding immediately prior to the Effective Time (other than any shares of Carlyle Preferred Stock to be cancelled pursuant to Section 2.1(c) and other than Dissenting Shares), shall be converted into the right to receive one of a validly issued, fully paid and nonassessable share of series A preferred stock, par value $0.01 per share, of the Surviving Corporation (the "Surviving Corporation Series A Preferred Stock"). After the Effective Time, the holders of shares of Carlyle Preferred Stock shall cease to have any rights with respect thereto, except the right to receive Surviving Corporation Series A Preferred Stock as provided herein. (c) CANCELLATION OF TREASURY STOCK. Each share of Carlyle Common Stock and/or Carlyle Preferred Stock (collectively, the "Carlyle Capital Stock"), that is owned by Carlyle or by any subsidiary of Carlyle shall be cancelled and retired and shall cease to exist. A-2 (d) STOCK OPTIONS. All options to purchase Carlyle Common Stock outstanding immediately prior to the Effective Time, whether under Carlyle's 1994 Incentive Program the ("Carlyle Option Plan"), pursuant to another Carlyle compensatory plan or otherwise (each such option, a "Carlyle Option"), shall be assumed by Levcor in accordance with Section 5.7. (e) FRACTIONAL SHARES. Only whole shares of Surviving Corporation Common Stock or Surviving Corporation Series A Preferred Stock (collectively, the "Surviving Corporation Capital Stock") will be issued to holders of Carlyle Capital Stock in the Merger. Any holder of shares of Carlyle Capital Stock who would otherwise be entitled to a fraction of a share of the Surviving Corporation Capital Stock (after aggregating all fractional shares of the Surviving Corporation Capital Stock to be received by such holder) shall have such fractional share interest rounded up to the nearest whole share. (f) APPRAISAL RIGHTS. Notwithstanding anything in this Agreement to the contrary, to the extent provided by the relevant provisions of Delaware Law, shares of Carlyle Capital Stock held by any person (a "Dissenting Stockholder") who elects to demand appraisal of his shares and duly and timely complies with all the provisions of Delaware Law concerning the right of holders of Carlyle Capital Stock to require appraisal of their shares ("Dissenting Shares"), shall not be converted into shares of the Surviving Corporation Capital Stock, but each Dissenting Stockholder shall have the right to receive such consideration as may be determined to be due the Dissenting Stockholders pursuant to Delaware Law. If, after the Effective Time, a Dissenting Stockholder withdraws his demand for appraisal or fails to perfect or otherwise loses his right of appraisal, in any case pursuant to the relevant provisions of Delaware Law, his shares will be deemed to be converted as of the Effective Time into shares of the Surviving Corporation Capital Stock pursuant to Sections 2.1(a) or 2.1(b). Carlyle shall give Levcor (i) prompt notice of any demands for appraisal of Dissenting Shares received by Carlyle and (ii) the opportunity to participate in and direct all negotiations and proceedings with respect to any such demands. Carlyle will not, without the prior written consent of Levcor, make any payment with respect to, or enter into any negotiations or discussions or a binding settlement agreement or make an offer, written or oral, to settle, any such demands. (g) LEVCOR COMMON STOCK. The shares of Levcor Common Stock shall not be canceled, retired or converted by reason of the Merger. 2.2 EXCHANGE OF CERTIFICATES. (a) EXCHANGE AGENT. Levcor shall appoint an institution reasonably satisfactory to Carlyle to act as the exchange agent (the "Exchange Agent") in the Merger and shall enter into an agreement with the Exchange Agent, reasonably satisfactory to Carlyle, which shall provide that Levcor shall make available to the Exchange Agent for exchange in accordance with this Article II, the shares of the Surviving Corporation Capital Stock issuable pursuant to Sections 2.1(a) or 2.1(b). (b) EXCHANGE PROCEDURES. Promptly after the Effective Time, Levcor shall cause the Exchange Agent to mail to each holder of record of Carlyle Capital Stock as of the A-3 Effective Time (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the certificates which immediately prior to the Effective Time represented outstanding shares of Carlyle Capital Stock (the "Carlyle Certificates") shall pass, only upon delivery of the Carlyle Certificates to the Exchange Agent and shall be in such form and have such other provisions as Levcor may reasonably specify), and (ii) instructions for use in effecting the surrender of the Carlyle Certificates in exchange for certificates representing shares of the Surviving Corporation Capital Stock into which the surrendered shares of Carlyle Capital Stock were converted (the "Surviving Corporation Certificates"). Upon surrender of Carlyle Certificates for exchange to the Exchange Agent, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto and such other documents as may reasonably be required by the Exchange Agent, the holder of such Carlyle Certificates shall be entitled to receive in exchange therefor the number of shares of Surviving Corporation Capital Stock (after taking into account all Carlyle Certificates surrendered by such holder) to which such holder is entitled pursuant to Sections 2.1(a) or 2.1(b) and the Carlyle Certificates so surrendered shall forthwith be cancelled. Until so surrendered, outstanding Carlyle Certificates will be deemed from and after the Effective Time, for all corporate purposes, to evidence the ownership of the number of full shares of the Surviving Corporation Capital Stock into which such shares of Carlyle Capital Stock represented by such Carlyle Certificate shall have been converted. (c) TRANSFERS OF OWNERSHIP. If Surviving Corporation Certificates are to be issued in a name other than that in which the Carlyle Certificates surrendered in exchange therefor are registered, it will be a condition of the issuance thereof that the Carlyle Certificates so surrendered will be properly endorsed and otherwise in proper form for transfer and that the Persons requesting such exchange will have paid to Levcor or any agent designated by it any transfer or other Taxes required by reason of the issuance of the Surviving Corporation Certificates in any name other than that of the registered holder of the Carlyle Certificates surrendered in exchange therefore, or established to the satisfaction of Levcor or any agent designated by it that such Tax has been paid or is not payable. (d) UNDISTRIBUTED SHARES OF THE SURVIVING CORPORATION CAPITAL STOCK. Any shares of the Surviving Corporation Capital Stock which remain undistributed to the holders of Carlyle Certificates six months after the Effective Time shall, at the request of Levcor, be redelivered to Levcor or otherwise on the instruction of Levcor, and any holders of shares of Carlyle Capital Stock who have not surrendered Carlyle Certificates representing such shares in compliance with this Section 2.2 shall thereafter look only to Levcor for the shares of the Surviving Corporation Capital Stock into which such shares were converted pursuant to Sections 2.1(a) or 2.1(b). (e) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Carlyle Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed Carlyle Certificates, upon the making of an affidavit of that fact by the holder thereof, such Surviving Corporation Certificates as may be required pursuant to Sections 2.2(b); provided, however, that Levcor may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Carlyle Certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any A-4 claim that may be made against Levcor, Carlyle or the Exchange Agent with respect to the Carlyle Certificates alleged to have been lost, stolen or destroyed. (f) NO FURTHER TRANSFERS. At the Effective Time, the stock transfer books of Carlyle shall be closed, and no transfers of Carlyle Capital Stock shall thereafter be made. ARTICLE III REPRESENTATIONS AND WARRANTIES 3.1 REPRESENTATIONS AND WARRANTIES OF CARLYLE. Carlyle represents and warrants to Levcor that, except as specifically disclosed in the letter dated the date hereof and delivered by Carlyle to Levcor simultaneously with the execution and delivery of this Agreement (the "Carlyle Disclosure Letter") or in the Carlyle SEC Documents: (a) ORGANIZATION, STANDING AND POWER. Each of Carlyle and its subsidiaries is a corporation or other organization duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, has all requisite power to own, lease and operate its properties and assets and to conduct its business as it is now being conducted and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its properties and assets makes such qualification necessary, other than in such jurisdictions where the failure so to qualify would not, individually or in the aggregate, have a Material Adverse Effect on Carlyle. Carlyle has made available to Levcor true and complete copies of its certificate of incorporation and by-laws and the certificate of incorporation and by-laws (or equivalent organizational documents) of each subsidiary of Carlyle, each as amended to date. Such certificates of incorporation, by-laws or equivalent organizational documents are in full force and effect, and neither Carlyle nor any subsidiary of Carlyle is in violation of any provision of its certificate of incorporation, by-laws or equivalent organizational documents. As used in this Agreement, (i) any reference to any event, change or effect being "material" with respect to any entity means an event, change or effect which is material in relation to the condition (financial or otherwise), properties, assets, liabilities, businesses or operations of such entity and its subsidiaries taken as a whole, and (ii) the term "Material Adverse Effect" means, with respect to Carlyle or Levcor, any change, event or effect shall have occurred or been threatened that, when taken together with all other adverse changes, events or effects that have occurred or been threatened would or would reasonably be expected to (I) be materially adverse to the business, assets, properties, results of operations or condition (financial or otherwise) of such party and its subsidiaries taken as a whole, or (II) prevent or materially delay the consummation of the Merger. (b) SUBSIDIARIES. Carlyle owns, directly or indirectly, all of the outstanding capital stock or other equity interests in each of its subsidiaries, free and clear of any claim, lien, encumbrance, security interest or agreement with respect thereto. The Carlyle Disclosure Letter sets forth a complete list of Carlyle's subsidiaries. Other than the capital stock or other interests held by Carlyle in such subsidiaries, neither Carlyle nor any such subsidiary owns any direct or A-5 indirect equity interest in any person, domestic or foreign. All of the outstanding shares of capital stock in each of its subsidiaries are duly authorized, validly issued, fully paid and nonassessable and were issued free of preemptive rights and in compliance with applicable securities laws and regulations. There are no irrevocable proxies or similar obligations with respect to such capital stock of such subsidiaries and no equity securities or other interests of any of its subsidiaries are or may become required to be issued or purchased by reason of any options, warrants, rights to subscribe to, puts, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, shares of any capital stock or any other equity interest of any such subsidiary, and there are no agreements, contracts, commitments, understandings or arrangements by which any such subsidiary is bound to issue additional shares of its capital stock or other equity interests, or options, warrants or rights to purchase or acquire any additional shares of its capital stock or other equity interests or securities convertible into or exchangeable for such shares or other equity interests. (c) CAPITAL STRUCTURE. (i) The authorized capital stock of Carlyle consists of 20,000,000 shares of Carlyle Common Stock and 41,000,000 shares of Carlyle Preferred Stock, 11,187,451 of which have been designated Series B Preferred Stock. As of the date of this Agreement, (A) 13,934,858 shares of Carlyle Common Stock are outstanding, (B) Carlyle Options are outstanding to purchase 1,000,000 shares of Carlyle Common Stock, and (C) 4,555,007 shares of Carlyle Preferred Stock are outstanding. Carlyle has provided Levcor with a true and complete list of the outstanding Carlyle Options as of the date hereof, including the exercise prices and vesting schedules therefor. (ii) No bonds, debentures, notes or other indebtedness having the right to vote (or convertible into or exercisable for securities having the right to vote) on any matters on which stockholders may vote ("Voting Debt") of Carlyle are issued or outstanding. (iii) All outstanding shares of Carlyle Capital Stock are validly issued, fully paid and nonassessable and free of preemptive rights and were issued in compliance with applicable securities laws and regulations. All shares of Carlyle Common Stock subject to issuance upon the exercise of Carlyle Options, upon issuance on the terms specified in the instruments pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and nonassessable and free of preemptive rights and will be issued in compliance with applicable securities laws and regulations. (iv) Except for this Agreement, the Carlyle Preferred Stock and the Carlyle Options, there are no options, warrants, calls, rights, convertible securities, subscriptions, stock appreciation rights, phantom stock plans or stock equivalents, or other rights, commitments or agreements of any character to which Carlyle or any subsidiary of Carlyle is a party or by which it is bound obligating Carlyle or any subsidiary of Carlyle to issue, deliver or sell, or cause to be issued, delivered or sold, on the date hereof or any date in the future, additional shares of capital stock or any Voting Debt of Carlyle or of any subsidiary of Carlyle or obligating Carlyle or any subsidiary of Carlyle to grant, extend or enter into any such option, warrant, call, right, commitment or agreement. The execution, delivery and performance by Carlyle of this Agreement and the consummation of the Merger and the other transactions contemplated hereby will not obligate Carlyle to issue, or result in the issuance of, any capital stock of Carlyle A-6 pursuant to any other agreement or arrangement, except for the acceleration of vesting and potential exercise of Carlyle Options contemplated by Section 5.7. There are no outstanding contractual obligations of Carlyle or any of its subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of Carlyle or any of its subsidiaries. (v) Since December 31, 2001, Carlyle and each of its subsidiaries has not (A) issued, permitted to be issued or entered into any obligation to issue, any shares of capital stock, or securities exercisable for or convertible into shares of capital stock, of Carlyle or any of its subsidiaries, other than pursuant to and as required by the terms of any Carlyle Options that were issued and outstanding on such date; (B) repurchased, redeemed or otherwise acquired, directly or indirectly through one or more of its subsidiaries, any shares of capital stock of Carlyle or any of its subsidiaries; (C) declared, set aside, made or paid to the stockholders of Carlyle dividends or other distributions on the outstanding shares of capital stock of Carlyle; or (D) split, combined or reclassified any of its shares of capital stock of Carlyle or any of its subsidiaries. (d) AUTHORITY. (i) Carlyle has all requisite corporate power and authority to enter into this Agreement and, subject to approval by the stockholders of Carlyle, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Carlyle, other than such approval by the stockholders of Carlyle. This Agreement has been duly executed and delivered by Carlyle and constitutes a valid and binding obligation of Carlyle enforceable in accordance with its terms, except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and general equitable principles (whether considered in a proceeding in equity or at law). The affirmative vote of holders of a majority of the outstanding shares of Carlyle Capital Stock entitled to vote at a duly called and held meeting of stockholders is the only vote of Carlyle's stockholders necessary to approve and adopt this Agreement and approve the Merger. At a meeting duly called and held on May 24, 2002, Carlyle's Board of Directors adopted resolutions approving this Agreement and the Merger, determining that the terms of the Merger are fair, from a financial point of view, to, and in the best interests of, Carlyle's stockholders and recommending that Carlyle's stockholders approve and adopt this Agreement and approve the Merger. (ii) Subject to compliance with the applicable requirements of the Securities Exchange Act of 1934, (the "Exchange Act"), and the filing of the Certificate of Merger as contemplated by Section 1.3, the execution and delivery of this Agreement and the Certificate of Merger, the consummation of the transactions contemplated hereby and thereby, and compliance by Carlyle with any of the provisions hereof or thereof will not breach, constitute an ultra vires act under, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or the loss of a material benefit under, or the creation of a lien, pledge, security interest, charge or other encumbrance on assets (any such breach, ultra vires act, violation, default, right of termination, cancellation, acceleration loss or creation, a "Violation") pursuant to, (x) any provision of the certificate of incorporation or by-laws of Carlyle or the governing instruments of any subsidiary of Carlyle or (y) subject to obtaining or making the consents, approvals, orders, authorizations, registrations, declarations and filings referred to in paragraph (iii) below or in the A-7 Carlyle Disclosure Letter, any loan or credit agreement, note, mortgage, indenture, lease, Carlyle Benefit Plan or other agreement, obligation, instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Carlyle or any subsidiary of Carlyle or their respective properties or assets except Violations under clause (y) which would not have a Material Adverse Effect on Carlyle. (iii) No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign (a "Governmental Entity"), is required by or with respect to Carlyle or any subsidiary of Carlyle in connection with the execution and delivery of this Agreement and the Certificate of Merger by Carlyle, the consummation by Carlyle of the transactions contemplated hereby and thereby, and compliance by Carlyle with any of the provisions hereof or thereof, the failure to obtain which would have a Material Adverse Effect on Carlyle, except for (A) the filing with the Securities and Exchange Commission (the "SEC") of (1) the Prospectus/Proxy Statement in definitive form and the effectiveness of the Registration Statement and (2) such other filings under the Exchange Act as may be required in connection with this Agreement and the transactions contemplated hereby, and (B) the filing of the Certificate of Merger as contemplated by Section 1.3 and appropriate documents with the relevant authorities of states in which Carlyle is qualified to do business. (e) SEC DOCUMENTS. The reports, schedules, registration statements and definitive proxy statements (including all exhibits) filed by Carlyle with the SEC since January 1, 1999, including all amendments thereto (the "Carlyle SEC Documents"), are all the documents (other than preliminary material) that Carlyle was required to file with the SEC since such date. As of their respective dates, (i) the Carlyle SEC Documents complied in all material respects with the requirements of the Securities Act of 1933 (the "Securities Act") or the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such Carlyle SEC Documents, and (ii) none of the Carlyle SEC Documents contained any untrue statement of a material fact or omitted 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. The financial statements of Carlyle included in the Carlyle SEC Documents (such financial statements as of and for the year ended December 31, 2001 being referred to hereinafter as the "Carlyle Year-End Financial Statements" and the balance sheet included in such financial statements as of December, 31, 2001 being referred to as the "Carlyle Balance Sheet"), and the unaudited financial statements of Carlyle and its subsidiaries for the fiscal quarter ended March 31, 2002, complied in all material respects with the applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited financial statements, as permitted by Form 10-Q of the SEC) and fairly present the consolidated financial position of Carlyle and its consolidated subsidiaries as at the dates thereof and the consolidated results of their operations, stockholders' equity and cash flows for the periods then ended in accordance with GAAP, subject to normal year-end audit adjustments in the case of the March 31, 2002 financial statements. As of December 31, 2001, neither Carlyle nor any of its subsidiaries had any material liabilities or obligations of any nature, whether or not accrued, contingent or otherwise, A-8 that would be required by GAAP to be reflected on a consolidated balance sheet of Carlyle and its subsidiaries (including the notes thereto) and which were not reflected on the Carlyle Balance Sheet. Since December 31, 2001, except as and to the extent set forth in the Carlyle SEC Documents and except for liabilities or obligations incurred in the ordinary course of business consistent with past practice and of substantially the same character, type and magnitude as incurred in the past, neither Carlyle nor any of its subsidiaries has incurred any liabilities of any nature, whether or not accrued, contingent or otherwise, that would have a Material Adverse Effect on Carlyle, or would be required by GAAP to be reflected on a consolidated balance sheet of Carlyle and its subsidiaries (including the notes thereto). All material agreements, contracts and other documents required to be filed as exhibits to any of the Carlyle SEC Documents have been so filed. No subsidiary of Carlyle is required to file any form, report or other document with the SEC. (f) INFORMATION SUPPLIED. None of the information supplied or to be supplied by or on behalf of Carlyle for inclusion or incorporation by reference in the registration statement on Form S-4 to be filed with the SEC by Levcor in connection with the issuance of the Surviving Corporation Capital Stock in the Merger (including amendments or supplements thereto) (the "Registration Statement") will, at the time the Registration Statement becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. None of the information supplied or to be supplied by or on behalf of Carlyle for inclusion or incorporation by reference in the Prospectus/Proxy Statement to be filed with the SEC as part of the Registration Statement (the "Prospectus/Proxy Statement"), will, at the time the Prospectus/Proxy Statement is mailed to the stockholders of Carlyle or Levcor, at the time of the meeting of stockholders' of Levcor or Carlyle or as of the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. The Prospectus/Proxy Statement will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations promulgated by the SEC thereunder. (g) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as contemplated by this Agreement, since December 31, 2001, Carlyle and its subsidiaries have conducted their respective businesses only in the ordinary course and consistent with prior practice and there has not been any event, occurrence, fact, condition, change, development or effect that has had or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on Carlyle. (h) COMPLIANCE WITH APPLICABLE LAWS. Carlyle and its subsidiaries have been operated at all times in compliance with all applicable laws and regulations, and are not in default or violation of any notes, bonds, mortgages, indentures, contracts, agreements, leases, licenses, permits, franchises, or other instruments or obligations to which Carlyle or any of its subsidiaries is a party or by which any of their property or assets is bound, except where any such noncompliance, conflicts, defaults or violations would not have a Material Adverse Effect on Carlyle. As of the date hereof, no investigation by any Governmental Entity with respect to A-9 Carlyle or any of its subsidiaries is pending or, to Carlyle's knowledge, threatened. For the purposes of this Agreement, "knowledge" shall mean the knowledge of the executive officers of the relevant entity after appropriate due diligence inquiry. (i) ENVIRONMENTAL. Except for any matters which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on Carlyle and to Carlyle's knowledge, (i) Carlyle and each of its subsidiaries is in compliance in material respects with all applicable laws relating to Environmental Matters; (ii) Carlyle and each of its subsidiaries has obtained, and is in compliance in material respects with, all permits, licenses or approvals required by any Governmental Entity under applicable laws for the use, storage, treatment, transportation, emission and handling of raw materials, by-products, wastes and other substances, including, without limitation, hazardous substances and wastes, used or produced by or otherwise relating to the operations of any of them; (iii) except for matters resulting from the inaction or failure to act by any Governmental Entity, there currently are no events, conditions, activities or practices that would prevent compliance or continued compliance with any law or give rise to any Environmental Liability; and (iv) there are no claims either by any Governmental Entity or any third party pending, or to Carlyle's knowledge, threatened, against Carlyle or any of its subsidiaries arising from any Environmental Matter. As used in this Agreement, the term (1) "Environmental Matter" means any matter arising out of or relating to pollution or protection of the environment, human safety or health including, without limitation, emissions, discharges, releases, exposures, or threatened releases of pollutants, contaminants, or hazardous or toxic substances or wastes including petroleum and its fractions, radiation, or polychlorinated byphenols, into ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants or hazardous or toxic substances or wastes including petroleum and its fractions, or radiation, under the jurisdiction or subject to the authority of any Governmental Entity, and (2) "Environmental Liability" means any liability or obligation arising under any statutory or common law (including, without limitation, any liability for personal injury, property damage or remediation) arising from or relating to any Environmental Matters. (j) LITIGATION. There are (i) no claims, actions, suits or legal or administrative arbitrations or other proceedings or investigations ("Litigation") pending against Carlyle or any of its subsidiaries, or, to Carlyle's knowledge, threatened against or affecting Carlyle or any of its subsidiaries, or to which Carlyle or any of its subsidiaries is a party, before or by any Federal, foreign, state, local or other governmental or non-governmental department, commission, board, bureau, agency, court or other instrumentality, or by any private person or entity, and (ii) no existing or, to the knowledge of Carlyle, threatened orders, judgments or decrees of any court or other Governmental Entity which specifically apply to Carlyle, any of its subsidiaries or any of their respective properties or assets. (k) TAXES. (i) Each Tax Entity has timely filed all material Tax Returns required to be filed by any of them (subject to permitted extensions). All such Tax Returns were true, correct and complete when filed, except for such instances which individually or in the aggregate could not have a Material Adverse Effect on Carlyle. All Taxes of each Tax Entity A-10 which are (i) shown as due on such Tax Returns, (ii) otherwise due and payable or (iii) claimed or asserted by any taxing authority to be due, have been paid, except for those Taxes being contested in good faith and for which adequate reserves have been established in the financial statements included in Carlyle SEC Documents in accordance with GAAP. Carlyle does not know of any proposed or threatened Tax claims or assessments which, if upheld, could individually or in the aggregate have a Material Adverse Effect on Carlyle. Each Tax Entity has withheld and paid over to the relevant taxing authority all Taxes required to have been withheld and paid in connection with payments to employees, independent contractors, creditors, stockholders or other third parties, except for such Taxes which individually or in the aggregate could not have a Material Adverse Effect on Carlyle. No material deficiencies for any Taxes have been proposed, asserted or assessed against any Tax Entity that are not adequately reserved for, no audit of any Tax Return of any Tax Entity is being conducted by a tax authority, and no extension of the statute of limitations on the assessment of any taxes has been granted to any Tax Entity and is currently in effect, except that Carlyle and its subsidiaries have various ongoing federal and state income tax audits which are not material but are open and statute of limitations have been extended. As used in this Agreement, the term (1) "Tax" means any federal, state, local or foreign income, gross receipts, property, sales, use, license, excise, franchise, employment, payroll, premium, withholding, alternative or added minimum, ad valorem, transfer or excise tax, or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or penalty, imposed by any Governmental Entity; (2) "Tax Return" means any return, report or similar statement required to be filed with respect to any Tax (including any attached schedules), including, without limitation, any information return, claim for refund, amended return or declaration of estimated Tax; and (3) "Tax Entity" means Carlyle, each of Carlyle's subsidiaries, and each consolidated, combined, unitary or similar group of which Carlyle or any of its subsidiaries is now, or within the preceding eight years has been, a member. (ii) No Tax Entity has executed any closing agreement pursuant to Section 7121 of the Internal Revenue Code of 1986 (the "Code") or any predecessor provisions thereof, or any similar provision of foreign, state or local law, or has any ruling request pending with any tax authority. There are no tax certiorari proceedings currently pending, tax abatements currently in effect or proposed materially increased tax assessments of which any Tax Entity has been notified or has knowledge in the context of such Tax Entity's real estate assets. No assets of any Tax Entity constitutes tax-exempt financed property or tax-exempt use property within the meaning of Section 168 of the Code, and no assets of any Tax Entity are subject to a lease, safe-harbor lease, or other arrangement as a result of which any Tax Entity is not treated as the owner for federal income tax purposes. No Tax Entity has filed a consent pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a "subsection (f) asset" (as such term is defined in Section 341(f)(4) of the Code). No Tax Entity (i) is required or has agreed to make any adjustments pursuant to Section 481(a) of the Code or any similar provision of foreign, state or local law by reason of a change in accounting method initiated by it or any other relevant party, (ii) has knowledge that any tax authority has proposed any such adjustment or change in accounting method, and/or (iii) has an application pending with any tax authority requesting permission for any changes in accounting methods that relate to A-11 the business or assets of any Tax Entity. No Tax Entity is a party to any contract, agreement, plan or arrangement covering any periods that, individually or collectively, could give rise to any amount not being deductible by reason of Section 280G of the Code. Carlyle and each of its subsidiaries are not, have not been within the preceding eight years, own no interest in, and have never owned an interest in, "S corporations" within the meaning of Section 1361(a)(1) of the Code, "qualified subchapter S subsidiaries" within the meaning of Section 1361(b)(3)(B) of the Code, "personal holding companies" within the meaning of Section 542 of the Code, "controlled foreign corporations" within the meaning of Section 957 of the Code, "foreign personal holding companies" within the meaning of Section 552 of the Code, "passive foreign investment companies" within the meaning of Section 1296 of the Code, "foreign investment companies" within the meaning of Section 1246 of the Code, an "FSC" within the meaning of Section 922 of the Code, or a "DISC" or "Former DISC" within the meaning of Section 992 of the Code. No Tax Entity has made, been party to, or been the subject of, any elections under Sections 108, 168, 338, 441, 472, 1017, 1033 or 4977 of the Code. No Tax Entity has entered into any transfer pricing agreements with any tax authority. No assets of any Tax Entity are held in an arrangement for which partnership Tax Returns are being filed or are required to be filed. No Tax Entity has availed itself of any Tax amnesty or similar relief in any taxing jurisdiction. Levcor will not be required to withhold tax under Section 1445 of the Code with respect to any consideration paid pursuant to this Agreement. (l) EMPLOYEE BENEFIT PLANS. All employee benefit plans, compensation arrangements and other benefit arrangements covering employees of Carlyle or any of its subsidiaries (the "Carlyle Benefit Plans"), and all employee agreements providing compensation, severance or other benefits to any employee or former employee of Carlyle or any of its subsidiaries which are not disclosed in the Carlyle SEC Documents and which exceed $50,000 per annum are set forth in the Carlyle Disclosure Letter. To the extent applicable, the Carlyle Benefit Plans comply in all material respects with the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"), and the Code, and any Carlyle Benefit Plan intended to be qualified under Section 401(a) of the Code has received a determination letter and, to the knowledge of Carlyle, continues to satisfy the requirements for such qualification. Neither Carlyle nor any of its subsidiaries nor any ERISA Affiliate of Carlyle maintains, contributes to or is obligated to contribute to or has maintained or contributed or been obligated to contribute to in the past six years to any benefit plan which is covered by Title IV of ERISA or Section 412 of the Code or a "multi-employer plan" within the meaning of Section 3(37) of ERISA or Section 4001(a)(3) of the Code. No Carlyle Benefit Plan nor Carlyle nor any subsidiary has incurred any liability or penalty under Section 4975 of the Code or Section 502(i) of ERISA or, to the knowledge of Carlyle, engaged in any transaction that would reasonably be expected to result in any such liability or penalty. Each Carlyle Benefit Plan has been maintained and administered in compliance with its terms and with ERISA and the Code to the extent applicable thereto, except for such non-compliance which individually or in the aggregate would not have a Material Adverse Effect on Carlyle. There is no pending or, to the knowledge of Carlyle, anticipated, Litigation against or otherwise involving any of Carlyle Benefit Plans and no Litigation (excluding claims for benefits incurred in the ordinary course of the Carlyle Benefit Plan activities) has been brought against or with respect to any such Carlyle Benefit Plan. All contributions required to be made as of the date hereof to the Carlyle Benefit Plans have been made or provided for. Except as described in the Carlyle SEC Documents or as required by law, A-12 neither Carlyle nor any of its subsidiaries maintains or contributes to any plan or arrangement which provides or has any liability to provide life insurance or medical or other employee welfare benefits to any employee or former employee upon his retirement or termination of employment, and neither Carlyle nor any of its subsidiaries has ever represented, promised or contracted (whether in oral or written form) to any employee or former employee that such benefits would be provided. No Carlyle Benefit Plan is under investigation or audit by either the United States Department of Labor or the Internal Revenue Service. Except as provided for in this Agreement, the execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any benefit plan, policy, arrangement or agreement or any trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any employee. No payment or benefit which will or may be made by Carlyle, any of its subsidiaries or Levcor with respect to any employee of Carlyle or any of its subsidiaries will constitute an "excess parachute payment" within the meaning of Section 280G(b)(1) of the Code. As used in this Agreement, the term "ERISA Affiliate" means any business or entity which is a member of the same "controlled group of corporations," under "common control" or an "affiliated service group" with the relevant entity within the meaning of Sections 414(b), (c) or (m) of the Code, as required to be aggregated with the relevant entity under Section 414(o) of the Code, or is under "common control" with the relevant entity, within the meaning of Section 4001(a)(14) of ERISA, or any regulations promulgated or proposed under any of the foregoing Sections. (m) PROPERTIES. Carlyle or its subsidiaries has good title and, in the case of owned real property, good and marketable fee simple title, to its properties and assets, including the properties and assets reflected in the Carlyle Balance Sheet or acquired after December 31, 2001 (other than assets disposed of since December 31, 2001 in the ordinary course of business consistent with past practice and of substantially the same character, type and magnitude as assets disposed of in the past), in each case free and clear of all title defects, liens, claims, charges, encumbrances and restrictions, except for (i) liens, encumbrances or restrictions which secure indebtedness which is properly reflected in the Carlyle Balance Sheet; (ii) liens for Taxes accrued but not yet payable; (iii) liens arising as a matter of law in the ordinary course of business with respect to obligations incurred after December 31, 2001, provided that the obligations secured by such liens are not delinquent; and (iv) such title defects, liens, encumbrances and restrictions, if any, as individually or in the aggregate would not have a Material Adverse Effect on Carlyle. None of Carlyle's or its subsidiaries' properties or assets is owned jointly with any other person, nor does any other person have any right or option to acquire the same. Carlyle and each of its subsidiaries either own, or have valid leasehold interests in, and are in possession of, all properties and assets used by them in the conduct of their business and each such lease is valid without material default thereunder by the lessee or, to Carlyle's knowledge, by the lessor. (n) LABOR CONTROVERSIES. Neither Carlyle nor any of its subsidiaries is a party to, or bound by, any collective bargaining agreement or other contracts or understanding with a A-13 labor union or labor organization. Except for such matters which, individually or in the aggregate, would not have a Material Adverse Effect on Carlyle, there is no (i) unfair labor practice, labor dispute (other than routine individual grievances or complaints) or labor arbitration proceeding pending or, to the knowledge of Carlyle, threatened, against Carlyle or any of its subsidiaries relating to their business, (ii) to the knowledge of Carlyle, activity or proceeding by a labor union or representative thereof to organize any employees of Carlyle or any of its subsidiaries, or (iii) lockouts, strikes, slowdowns, work stoppages or, to the knowledge of Carlyle, threats thereof by or with respect to such employees. (o) INTELLECTUAL PROPERTY.(1) Carlyle and its subsidiaries own or license all United States and foreign patents, trademarks, trade names, service marks, copyrights and applications therefor (the foregoing, together with Carlyle's trade dress and trade secrets (including secret recipes and formulae), the "Carlyle Intellectual Property Rights") which are material to the business of Carlyle and its subsidiaries as presently conducted or as currently contemplated to be conducted. All owned Carlyle Intellectual Property Rights are free and clear of any liens, claims or encumbrances and are not subject to any material license (royalty bearing or royalty-free) or any other arrangement requiring any payment to any person nor the obligation to grant rights to any person in exchange and all licensed Carlyle Intellectual Property Rights are free and clear of any liens, claims, encumbrances, royalties or other obligations other than such terms, conditions and restrictions as are contained in the document granting such license. The business as presently conducted by each of Carlyle and its subsidiaries, to the knowledge of Carlyle, does not conflict with and has not been alleged to conflict with any patents, trademarks, trade names, service marks, copyrights or other intellectual property rights of others, which conflict will have a Material Adverse Effect on Carlyle. Carlyle does not know of any use by others of any of the Carlyle Intellectual Property Rights material to the business of Carlyle or its subsidiaries as presently conducted. (p) CHANGE OF CONTROL AGREEMENTS. Neither the execution and delivery of this Agreement nor the consummation of the Merger or the other transactions contemplated by this Agreement, will (either alone or in conjunction with any other event) result in, cause the accelerated vesting or delivery of (except as contemplated by Section 5.7), or increase the amount or value of, any payment or benefit to any director, officer or employee of Carlyle or its subsidiaries, and, without limiting the generality of the foregoing, no amount paid or payable by Carlyle or its subsidiaries in connection with the Merger or the other transactions contemplated by this Agreement (either solely as a result thereof or as a result of such transactions in conjunction with any other event) will be an "excess parachute payment" within the meaning of Section 280G of the Code. (q) CONTRACTS. All material contracts of Carlyle or its subsidiaries (the "Carlyle Material Contracts") have been filed as exhibits to the Carlyle SEC Documents, except for those contracts not required to be filed pursuant to the rules and regulations of the SEC. To the knowledge of Carlyle: (i) all Carlyle Material Contracts are valid, binding and enforceable against the other parties thereto in accordance with their terms, and are in full force and effect; (ii) all parties to Carlyle Material Contracts (other than Carlyle) have complied in all material respects with the provisions thereof and have performed all obligations required to be performed by each of them to date; (iii) no such party is in default under any of the terms thereof, and (iv) A-14 no event has occurred that with the passage of time or the giving of notice or both would constitute a default by any party (other than Carlyle) under any provision thereof except, in each case, for such non-compliance or default which will not have a Material Adverse Effect on Carlyle. (r) AFFILIATED TRANSACTIONS. All transactions between Carlyle or any of its subsidiaries, on the one hand, and any officer, director or holder of in excess of 5% of the Carlyle Capital Stock, or any affiliate of any of them, have been disclosed in the Carlyle SEC Documents. Except as disclosed in the Carlyle SEC Documents, no officer, director or holder of in excess of 5% of Carlyle Capital Stock has any material interest in (i) any assets, including, without limitation, any intellectual property, used or held for use in the business of Carlyle and its subsidiaries or (ii) any creditor, or supplier of Carlyle or any or its subsidiaries. (s) INSURANCE. Carlyle and each of its subsidiaries are adequately insured in such amounts and against such risks as are usually insured against by persons operating in the businesses in which Carlyle and its subsidiaries operate, and all policies relating to such insurance are in full force and effect. All products liability and general liability policies maintained by or for the benefit of Carlyle or its subsidiaries have been "claims made" policies. (t) RECORDS. The respective corporate record books of or relating to Carlyle and each of its subsidiaries are substantially complete and correct and contain accurate and substantially complete records of all material corporate actions of the respective stockholders and directors (and committees thereof) of Carlyle and its subsidiaries. (u) SECTION 203 OF DELAWARE LAW. The Board of Directors of Carlyle has approved the Merger and this Agreement, and such approval is sufficient to render inapplicable to the Merger and this Agreement, and the transactions contemplated by this Agreement, the provisions of Section 203 of Delaware Law. No other state takeover statute or similar statute or regulation applies or purports to apply to the Merger, this Agreement or the transactions contemplated by this Agreement. (v) OPINION OF FINANCIAL ADVISOR. Carlyle has received the opinion of Houlihan Lokey Howard & Zukin (the "Carlyle Independent Advisor"), dated May 24, 2002, to the effect that, as of such date, the consideration to be received by the stockholders of Carlyle pursuant to this Agreement is fair to such stockholders from a financial point of view. (w) DISCLOSURE. No representation, warranty or covenant made by Carlyle in this Agreement or the Carlyle Disclosure Letter contains an untrue statement of a material fact or omits to state a material fact required to be stated herein or therein or necessary to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. True and complete copies of all Carlyle SEC Documents, Tax Returns, Carlyle Benefit Plans, Carlyle Material Contracts, corporate records, books and other documents referred to in the Carlyle Disclosure Letter have been made available to Levcor. 3.2 REPRESENTATIONS AND WARRANTIES OF LEVCOR. Levcor represents and warrants to Carlyle that, except as specifically disclosed in the letter dated the date hereof and A-15 delivered by Levcor to Carlyle simultaneously with the execution and delivery of this Agreement (the "Levcor Disclosure Letter") or in the Levcor SEC Documents: (a) ORGANIZATION, STANDING AND POWER. Levcor is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has all requisite power and authority and all necessary governmental approvals to own, lease and operate its properties and assets and to conduct its business as it is now being conducted and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its properties and assets makes such qualification necessary, other than in such jurisdictions where the failure so to qualify would not, individually or in the aggregate, have a Material Adverse Effect on Levcor. Levcor made available to Carlyle true and complete copies of its certificate of incorporation and by-laws, each as amended to date. Such certificate of incorporation and by-laws are in full force and effect, and Levcor is not in violation of any provision of its certificate of incorporation or by-laws. Levcor does not have any subsidiaries or interests in any persons. (b) CAPITAL STRUCTURE. (i) (i) The authorized capital stock of Levcor consists of 15,000,000 shares of common stock, par value $0.56 per share (the "Levcor Common Stock"). As of the date of this Agreement, (A) 2,383,647 shares of Levcor Common Stock are outstanding, (B) options to purchase Levcor Common Stock whether under Levcor's Stock Option Plan (the "Levcor Option Plan"), pursuant to another Levcor compensatory plan or otherwise (each such option, a "Levcor Option") are outstanding to purchase 262,400 shares of Levcor Common Stock, and (C) 57,600 shares of Levcor Common Stock are held by Levcor in its treasury. Levcor has provided Carlyle with a true and complete list of the outstanding Levcor Options as of the date hereof, including the exercise prices and vesting schedules therefor. (ii) No Voting Debt of Levcor is issued or outstanding. (iii) All outstanding shares of Levcor Common Stock are validly issued, fully paid and nonassessable and free of preemptive rights and were issued in compliance with applicable securities laws and regulations. All shares of Levcor Common Stock subject to issuance upon the exercise of Levcor Options, upon issuance on the terms specified in the instruments pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and nonassessable and free of preemptive rights and will be issued in compliance with applicable securities laws and regulations. (iv) Except for this Agreement, the Levcor Option Plan and the Levcor Options, there are no options, warrants, calls, rights, convertible securities, subscriptions, stock appreciation rights, phantom stock plans or stock equivalents, or other rights, commitments or agreements of any character to which Levcor is a party or by which it is bound obligating Levcor to issue, deliver or sell, or cause to be issued, delivered or sold, on the date hereof or any date in the future, additional shares of capital stock or any Voting Debt of Levcor or obligating Levcor to grant, extend or enter into any such option, warrant, call, right, commitment or agreement. The execution, delivery and performance by Levcor of this Agreement and the consummation of the Merger and the other transactions contemplated hereby will not obligate Levcor to issue, or result in the issuance of, any capital stock of Levcor pursuant to any other agreement or A-16 arrangement. There are no outstanding contractual obligations of Levcor to repurchase, redeem or otherwise acquire any shares of capital stock of Levcor. (v) Since December 31, 2001, Levcor has not (A) issued, permitted to be issued or entered into any obligation to issue, any shares of capital stock, or securities exercisable for or convertible into shares of capital stock, of Levcor, other than pursuant to and as required by the terms of any Levcor Options that were issued and outstanding on such date; (B) repurchased, redeemed or otherwise acquired any shares of capital stock of Levcor; (C) declared, set aside, made or paid to the stockholders of Levcor dividends or other distributions on the outstanding shares of capital stock of Levcor; or (D) split, combined or reclassified any of its shares of capital stock of Levcor. (c) AUTHORITY. (i) Levcor has all requisite corporate power and authority to enter into this Agreement and, subject to approval by the stockholders of Levcor, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Levcor, other than such approval by the stockholders of Levcor. This Agreement has been duly executed and delivered by Levcor and constitutes a valid and binding obligation of Levcor enforceable in accordance with its terms, except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and general equitable principles (whether considered in a proceeding in equity or at law). The affirmative vote of holders of a majority of the outstanding shares of Levcor Common Stock entitled to vote at a duly called and held meeting of stockholders is the only vote of Levcor's stockholders necessary to approve this Agreement and the Merger. At a meeting duly called and held on May 24, 2002, Levcor's Board of Directors adopted resolutions approving this Agreement and the Merger, determining that the terms of the Merger are fair, from a financial point of view, to, and in the best interests of, Levcor's stockholders and recommending that Levcor's stockholders approve and adopt this Agreement and approve the Merger. (ii) Subject to compliance with the applicable requirements of the Exchange Act and the filing of the Certificate of Merger as contemplated by Section 1.3, the execution and delivery of this Agreement and the Certificate of Merger, the consummation of the transactions contemplated hereby and thereby, and compliance by Levcor with any of the provisions hereof or thereof will not breach, constitute an ultra vires act under, or result in a Violation pursuant to, (x) any provision of the certificate of incorporation or by-laws of Levcor or (y) subject to obtaining or making the consents, approvals, orders, authorizations, registrations, declarations and filings referred to in paragraph (iii) below or in the Levcor Disclosure Letter, any loan or credit agreement, note, mortgage, indenture, lease, Levcor Benefit Plan or other agreement, obligation, instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Levcor or its properties or assets except Violations under clause (y) which would not have a Material Adverse Effect on Levcor. (iii) No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to Levcor in connection with the execution and delivery of this Agreement and the Certificate of Merger by Levcor, the A-17 consummation by Levcor of the transactions contemplated hereby and thereby, and compliance by Levcor with any of the provisions hereof or thereof, the failure to obtain which would have a Material Adverse Effect on Levcor, except for (A) the filing with the SEC of (1) the Prospectus/Proxy Statement in definitive form and the effectiveness of the Registration Statement and (2) such other filings under the Exchange Act as may be required in connection with this Agreement and the transactions contemplated hereby, (B) the filing of the Certificate of Merger as contemplated by Section 1.3 and appropriate documents with the relevant authorities of states in which Levcor is qualified to do business, and (C) filings and approvals required under state securities or blue sky laws. (d) SEC DOCUMENTS. The reports, schedules, registration statements and definitive proxy statements (including all exhibits) filed by Levcor with the SEC since January 1, 1999 including all amendments thereto (the "Levcor SEC Documents"), are all the documents (other than preliminary material) that Levcor was required to file with the SEC since such date. As of their respective dates, (i) the Levcor SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such Levcor SEC Documents, and (ii) none of the Levcor SEC Documents contained any untrue statement of a material fact or omitted 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. The financial statements of Levcor included in the Levcor SEC Documents (such financial statements as of and for the year ended December 31, 2001 being referred to hereinafter as the "Levcor Year-End Financial Statements" and the balance sheet included in such financial statements as of December, 31, 2001 being referred to hereinafter as the "Levcor Balance Sheet"), and the unaudited financial statements of Levcor for the fiscal quarter ended March 31, 2002 complied in all material respects with the applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited financial statements, as permitted by Form 10-QSB of the SEC) and fairly present the financial position of Levcor as at the dates thereof and the results of its operations, stockholders' equity and cash flows for the periods then ended in accordance with GAAP, subject to normal year-end audit adjustments in the case of the March 31, 2002 financial statements. As of December 31, 2001, Levcor did not have any material liabilities or obligations of any nature, whether or not accrued, contingent or otherwise, that would be required by GAAP to be reflected on a balance sheet of Levcor (including the notes thereto) and which were not reflected on the Levcor Balance Sheet. Since December 31, 2001, except as and to the extent set forth in the Levcor SEC Documents and except for liabilities or obligations incurred in the ordinary course of business consistent with past practice and of substantially the same character, type and magnitude as incurred in the past, Levcor has not incurred any liabilities of any nature, whether or not accrued, contingent or otherwise, that would have a Material Adverse Effect on Levcor, or would be required by GAAP to be reflected on a balance sheet of Levcor (including the notes thereto). All material agreements, contracts and other documents required to be filed as exhibits to any of the Levcor SEC Documents have been so filed. (e) INFORMATION SUPPLIED. None of the information supplied or to be supplied by or on behalf of Levcor for inclusion the Registration Statement will, at the time the A-18 Registration Statement becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. None of the information supplied or to be supplied by or on behalf of Levcor for inclusion or incorporation by reference in the Prospectus/Proxy Statement, will, at the time the Prospectus/Proxy Statement is mailed to the stockholders of Carlyle or Levcor, at the time of the meeting of stockholders' of Levcor or Carlyle or as of the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. The Prospectus/Proxy Statement will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations promulgated by the SEC thereunder. (f) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as contemplated by this Agreement, since December 31, 2001, Levcor has conducted its business only in the ordinary course and consistent with prior practice and there has not been any event, occurrence, fact, condition, change, development or effect that has had or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on Levcor. (g) COMPLIANCE WITH APPLICABLE LAWS. Levcor has been operated at all times in compliance with all applicable laws and regulations, and is not in default or violation of any notes, bonds, mortgages, indentures, contracts, agreements, leases, licenses, permits, franchises, or other instruments or obligations to which Levcor is a party or by which any of its property or assets is bound, except where any such noncompliance, conflicts, defaults or violations would not have a Material Adverse Effect on Levcor. As of the date hereof, no investigation by any Governmental Entity with respect to Levcor is pending or, to Levcor's knowledge, threatened. (h) ENVIRONMENTAL. Except for any matters which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on Levcor and to Levcor's knowledge, (i) Levcor is in compliance in material respects with all applicable laws relating to Environmental Matters; (ii) Levcor has obtained, and is in compliance in material respects with, all permits, licenses or approvals required by any Governmental Entity under applicable laws for the use, storage, treatment, transportation, emission and handling of raw materials, by-products, wastes and other substances, including, without limitation, hazardous substances and wastes, used or produced by or otherwise relating to the operations of any of them; (iii) except for matters resulting from the inaction or failure to act by any Governmental Entity, there currently are no events, conditions, activities or practices that would prevent compliance or continued compliance with any law or give rise to any Environmental Liability; and (iv) there are no claims either by any Governmental Entity or any third party pending, or to Levcor's knowledge, threatened, against Levcor arising from any Environmental Matter. (i) LITIGATION. There is (i) no Litigation pending against Levcor or, to Levcor's knowledge, threatened against or affecting Levcor before or by any Federal, foreign, state, local or other governmental or non-governmental department, commission, board, bureau, agency, court or other instrumentality, or by any private person or entity, and (ii) no existing or, A-19 to the knowledge of Levcor, threatened orders, judgments or decrees of any court or other Governmental Entity which specifically apply to Levcor or any of its properties or assets. (j) TAXES. (i) Levcor has timely filed all material Tax Returns required to be filed by it (subject to permitted extensions). All such Tax Returns were true, correct and complete when filed, except for such instances which individually or in the aggregate could not have a Material Adverse Effect on Levcor. All Taxes of Levcor which are (i) shown as due on such Tax Returns, (ii) otherwise due and payable or (iii) claimed or asserted by any taxing authority to be due, have been paid, except for those Taxes being contested in good faith and for which adequate reserves have been established in the financial statements included in Levcor SEC Documents in accordance with GAAP. Levcor does not know of any proposed or threatened Tax claims or assessments which, if upheld, could individually or in the aggregate have a Material Adverse Effect on Levcor. Levcor has withheld and paid over to the relevant taxing authority all Taxes required to have been withheld and paid in connection with payments to employees, independent contractors, creditors, stockholders or other third parties, except for such Taxes which individually or in the aggregate could not have a Material Adverse Effect on Levcor. No material deficiencies for any Taxes have been proposed, asserted or assessed against Levcor that are not adequately reserved for, no audit of any Tax Return of Levcor is being conducted by a tax authority, and no extension of the statute of limitations on the assessment of any taxes has been granted to Levcor and is currently in effect. (ii) Levcor has not executed any closing agreement pursuant to Section 7121 of the Code or any predecessor provisions thereof, or any similar provision of foreign, state or local law, or has any ruling request pending with any tax authority. There are no tax certiorari proceedings currently pending, tax abatements currently in effect or proposed materially increased tax assessments of which Levcor has been notified or has knowledge in the context of Levcor's real estate assets. No assets of Levcor constitute tax-exempt financed property or tax-exempt use property within the meaning of Section 168 of the Code, and no assets of Levcor are subject to a lease, safe-harbor lease, or other arrangement as a result of which any Levcor is not treated as the owner for federal income tax purposes. Levcor has not filed a consent pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a "subsection (f) asset" (as such term is defined in Section 341(f)(4) of the Code). Levcor (i) is not required or has agreed to make any adjustments pursuant to Section 481(a) of the Code or any similar provision of foreign, state or local law by reason of a change in accounting method initiated by it or any other relevant party, (ii) has no knowledge that any tax authority has proposed any such adjustment or change in accounting method, and/or (iii) has no application pending with any tax authority requesting permission for any changes in accounting methods that relate to the business or assets of Levcor. Levcor is not a party to any contract, agreement, plan or arrangement covering any periods that, individually or collectively, could give rise to any amount not being deductible by reason of Section 280G of the Code. Levcor has not been within the preceding eight years, own no interest in, and have never owned an interest in, "S corporations" within the meaning of Section 1361(a)(1) of the Code, "qualified subchapter S subsidiaries" within the meaning of Section 1361(b)(3)(B) of the Code, "personal holding companies" within the meaning of Section 542 of the Code, "controlled foreign corporations" within the meaning of Section 957 of the Code, "foreign personal holding companies" within the meaning of Section 552 of the Code, "passive foreign investment companies" within the A-20 meaning of Section 1296 of the Code, "foreign investment companies" within the meaning of Section 1246 of the Code, an "FSC" within the meaning of Section 922 of the Code, or a "DISC" or "Former DISC" within the meaning of Section 992 of the Code. Levcor has not made, been party to, or been the subject of, any elections under Sections 108, 168, 338, 441, 472, 1017, 1033 or 4977 of the Code. Levcor has not entered into any transfer pricing agreements with any tax authority. No assets of Levcor are held in an arrangement for which partnership Tax Returns are being filed or are required to be filed. Levcor has not availed itself of any Tax amnesty or similar relief in any taxing jurisdiction. Levcor will not be required to withhold tax under Section 1445 of the Code with respect to any consideration paid pursuant to this Agreement. (k) EMPLOYEE BENEFIT PLANS. All employee benefit plans, compensation arrangements and other benefit arrangements covering employees of Levcor (the "Levcor Benefit Plans"), and all employee agreements providing compensation, severance or other benefits to any employee or former employee of Levcor which are not disclosed in the Levcor SEC Documents and which exceed $50,000 per annum are set forth in the Levcor Disclosure Letter. To the extent applicable, the Levcor Benefit Plans comply in all material respects with the requirements of the ERISA, and the Code, and any Levcor Benefit Plan intended to be qualified under Section 401(a) of the Code has received a determination letter and, to the knowledge of Levcor, continues to satisfy the requirements for such qualification. Levcor nor any ERISA Affiliate of Levcor maintains, contributes to or is obligated to contribute to or has maintained or contributed or been obligated to contribute to in the past six years to any benefit plan which is covered by Title IV of ERISA or Section 412 of the Code or a "multi-employer plan" within the meaning of Section 3(37) of ERISA or Section 4001(a)(3) of the Code. No Levcor Benefit Plan nor Levcor has incurred any liability or penalty under Section 4975 of the Code or Section 502(i) of ERISA or, to the knowledge of Levcor, engaged in any transaction that would reasonably be expected to result in any such liability or penalty. Each Levcor Benefit Plan has been maintained and administered in compliance with its terms and with ERISA and the Code to the extent applicable thereto, except for such non-compliance which individually or in the aggregate would not have a Material Adverse Effect on Levcor. There is no pending or, to the knowledge of Levcor, anticipated, Litigation against or otherwise involving any Levcor Benefit Plans and no Litigation (excluding claims for benefits incurred in the ordinary course of the Levcor Benefit Plan activities) has been brought against or with respect to any such Levcor Benefit Plan. All contributions required to be made as of the date hereof to the Levcor Benefit Plans have been made or provided for. Except as described in the Levcor SEC Documents or as required by law, Levcor does not maintain or contribute to any plan or arrangement which provides or has any liability to provide life insurance or medical or other employee welfare benefits to any employee or former employee upon his retirement or termination of employment, and Levcor has never represented, promised or contracted (whether in oral or written form) to any employee or former employee that such benefits would be provided. No Levcor Benefit Plan is under investigation or audit by either the United States Department of Labor or the Internal Revenue Service. Except as provided for in this Agreement, the execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any benefit plan, policy, arrangement or agreement or any trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any A-21 employee. No payment or benefit which will or may be made by Levcor with respect to any employee of Levcor will constitute an "excess parachute payment" within the meaning of Section 280G(b)(1) of the Code. (l) PROPERTIES. Levcor has good title to its properties and assets, including the properties and assets reflected in the Levcor Balance Sheet or acquired after December 31, 2001 (other than assets disposed of since December 31, 2001 in the ordinary course of business consistent with past practice and of substantially the same character, type and magnitude as assets disposed of in the past), in each case free and clear of all title defects, liens, claims, charges, encumbrances and restrictions, except for (i) liens, encumbrances or restrictions which secure indebtedness which is properly reflected in the Levcor Balance Sheet; (ii) liens for Taxes accrued but not yet payable; (iii) liens arising as a matter of law in the ordinary course of business with respect to obligations incurred after December 31, 2001, provided that the obligations secured by such liens are not delinquent; and (iv) such title defects, liens, encumbrances and restrictions, if any, as individually or in the aggregate would not have a Material Adverse Effect on Levcor. None of Levcor's properties or assets is owned jointly with any other person, nor does any other person have any right or option to acquire the same. Levcor either owns, or has valid leasehold interests in, and is in possession of, all properties and assets used by it in the conduct of its business and each such lease is valid without material default thereunder by the lessee or, to Levcor's knowledge, by the lessor. (m) LABOR CONTROVERSIES. Levcor is not a party to, or bound by, any collective bargaining agreement or other contracts or understanding with a labor union or labor organization. Except for such matters which, individually or in the aggregate, would not have a Material Adverse Effect on Levcor, there is no (i) unfair labor practice, labor dispute (other than routine individual grievances or complaints) or labor arbitration proceeding pending or, to the knowledge of Levcor, threatened, against Levcor relating to its business, (ii) to the knowledge of Levcor, activity or proceeding by a labor union or representative thereof to organize any employees of Levcor, or (iii) lockouts, strikes, slowdowns, work stoppages or, to the knowledge of Levcor, threats thereof by or with respect to such employees. (n) INTELLECTUAL PROPERTY. Levcor owns or licenses all United States and foreign patents, trademarks, trade names, service marks, copyrights and applications therefor (the foregoing, together with Levcor's trade dress and trade secrets (including secret recipes and formulae), the "Levcor Intellectual Property Rights") which are material to the business of Levcor as presently conducted or as currently contemplated to be conducted. All owned Levcor Intellectual Property Rights are free and clear of any liens, claims or encumbrances and are not subject to any material license (royalty bearing or royalty-free) or any other arrangement requiring any payment to any person nor the obligation to grant rights to any person in exchange and all licensed Levcor Intellectual Property Rights are free and clear of any liens, claims, encumbrances, royalties or other obligations other than such terms, conditions and restrictions as are contained in the document granting such license. The business as presently conducted by Levcor, to the knowledge of Levcor, does not conflict with and has not been alleged to conflict with any patents, trademarks, trade names, service marks, copyrights or other intellectual property rights of others, which conflict will have a Material Adverse Effect on Levcor. Levcor A-22 does not know of any use by others of any of the Levcor Intellectual Property Rights material to the business of Levcor as presently conducted. (o) CHANGE OF CONTROL AGREEMENTS. Neither the execution and delivery of this Agreement nor the consummation of the Merger or the other transactions contemplated by this Agreement, will (either alone or in conjunction with any other event) result in, cause the accelerated vesting or delivery of, or increase the amount or value of, any payment or benefit to any director, officer or employee of Levcor, and, without limiting the generality of the foregoing, no amount paid or payable by Levcor in connection with the Merger or the other transactions contemplated by this Agreement (either solely as a result thereof or as a result of such transactions in conjunction with any other event) will be an "excess parachute payment" within the meaning of Section 280G of the Code. (p) CONTRACTS. All material contracts of Levcor (the "Levcor Material Contracts") have been filed as exhibits to the Levcor SEC Documents, except for those contracts not required to be filed pursuant to the rules and regulations of the SEC. To the knowledge of Levcor: (i) all Levcor Material Contracts are valid, binding and enforceable against the other parties thereto in accordance with their terms, and are in full force and effect; (ii) all parties to Levcor Material Contracts (other than Levcor) have complied in all material respects with the provisions thereof and have performed all obligations required to be performed by each of them to date; (iii) no such party is in default under any of the terms thereof, and (iv) no event has occurred that with the passage of time or the giving of notice or both would constitute a default by any party (other than Levcor) under any provision thereof except, in each case, for such non-compliance or default which will not have a Material Adverse Effect on Levcor. (q) AFFILIATED TRANSACTIONS. All transactions between Levcor, on the one hand, and any officer, director or holder of in excess of 5% of the Levcor Common Stock, or any affiliate of any of them, have been disclosed in the Levcor SEC Documents. Except as disclosed in the Levcor SEC Documents, no officer, director or holder of in excess of 5% of the Levcor Common Stock has any material interest in (i) any assets, including, without limitation, any intellectual property, used or held for use in the business of Levcor or (ii) any creditor, or supplier of Levcor. (r) INSURANCE. Levcor is adequately insured in such amounts and against such risks as are usually insured against by persons operating in the businesses in which Levcor operates, and all policies relating to such insurance are in full force and effect. All products liability and general liability policies maintained by or for the benefit of Levcor have been "claims made" policies. (s) RECORDS. The corporate record books of or relating to Levcor are substantially complete and correct and contain accurate and substantially complete records of all material corporate actions of the stockholders and directors (and committees thereof) of Levcor. (t) OPINION OF FINANCIAL ADVISOR. Levcor has received the opinion of Willamette Management Association (the "Levcor Independent Advisor"), dated May 24, 2002 A-23 to the effect that, as of such date, the transactions contemplated by this Agreement are fair to the Levcor stockholders from a financial point of view. (u) DISCLOSURE. No representation, warranty or covenant made by Levcor in this Agreement or the Levcor Disclosure Letter contains an untrue statement of a material fact or omits to state a material fact required to be stated herein or therein or necessary to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. True and complete copies of all Levcor SEC Documents, Tax Returns, Levcor Benefit Plans, Levcor Material Contracts, corporate records, books and other documents referred to in the Levcor Disclosure Letter have been made available to Carlyle. ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS 4.1 COVENANTS OF CARLYLE. During the period from the date of this Agreement and continuing until the Effective Time, Carlyle agrees as to itself and its subsidiaries that (except as expressly contemplated or permitted by this Agreement or as disclosed in the Carlyle SEC Documents or to the extent that Levcor shall otherwise consent in writing): (a) ORDINARY COURSE. Carlyle and its subsidiaries shall carry on their respective businesses in the usual, regular and ordinary course and use commercially reasonable efforts to preserve intact their present business organizations, maintain their rights and franchises and preserve their relationships with employees, officers, customers, suppliers and others having business dealings with them. Carlyle and its subsidiaries shall maintain in force all insurance policies and Consents with respect to Carlyle and its subsidiaries and shall maintain all assets and properties of Carlyle and its subsidiaries in customary repair, order and condition, reasonable wear and tear excepted. Carlyle shall not, nor shall it permit any of its subsidiaries to, (i) enter into any new material line of business or (ii) incur or commit to any significant capital expenditures or any obligations or liabilities other than capital expenditures and obligations or liabilities incurred or committed to as disclosed in the Carlyle Disclosure Letter. Carlyle and its subsidiaries will comply with all applicable laws and regulations wherever its business is conducted, including without limitation the timely filing of all reports, forms or other documents with the SEC required pursuant to the Securities Act or the Exchange Act, except where such noncompliance would not have a Material Adverse Effect on Carlyle. (b) DIVIDENDS; CHANGES IN STOCK. Carlyle shall not, nor shall it permit any of its subsidiaries to, nor shall Carlyle propose to, (i) declare or pay any dividends on or make other distributions in respect of any of its capital stock, other than cash dividends payable by a subsidiary of Carlyle to Carlyle or one of its subsidiaries and other than cash dividends required to be paid on the Carlyle Series B Preferred Stock, (ii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or (iii) repurchase, redeem or otherwise acquire, or permit any subsidiary to purchase or otherwise acquire any shares of its capital stock or any securities convertible into or exercisable for any shares of its capital stock. A-24 (c) ISSUANCE OF SECURITIES. Carlyle shall not, nor shall it permit any of its subsidiaries to, issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock of any class, any Voting Debt or any securities convertible into or exercisable for (including any stock appreciation rights, phantom stock plans or stock equivalents), or any rights, warrants or options to acquire, any such shares or Voting Debt, or enter into any agreement with respect to any of the foregoing, other than issuances of Carlyle Common Stock pursuant to exercises of Carlyle Options. (d) GOVERNING DOCUMENTS. Carlyle shall not amend or propose to amend, nor shall it permit any of its subsidiaries to amend, their respective certificates of incorporation, by-laws or other governing instruments. (e) NO SOLICITATIONS. Carlyle shall not, nor shall it permit any of its subsidiaries to, directly or indirectly, through any officer, director, employee or agent, initiate, solicit or knowingly encourage (including by way of furnishing information or assistance), or take any other action to facilitate knowingly, any inquiries or the making of any proposal that constitutes, or would reasonably be expected to lead to, any Competing Transaction, or enter into or maintain or continue discussions or negotiate with any person in furtherance of such inquiries or to obtain a Competing Transaction, or agree to or endorse any Competing Transaction, or authorize or permit any of the officers, directors or employees of Carlyle or any of its subsidiaries or any investment banker, financial advisor, attorney, accountant or other representative retained by Carlyle or any of its subsidiaries to take any such action. Carlyle shall notify Levcor in writing (as promptly as practicable) if any written or oral request for information or proposal relating to a Competing Transaction is made and shall keep Levcor promptly advised of all such requests and proposals, and shall provide a copy of any written proposals or requests and a summary of all oral proposals or requests. Nothing contained in this Section 4.1(e) shall prohibit Carlyle from (i) furnishing information to, or entering into discussions or negotiations with, any person that makes an unsolicited written, bona fide proposal to acquire it pursuant to a merger, consolidation, share exchange, business combination, tender or exchange offer or other similar transaction, if, (A) Carlyle's Board of Directors determines in good faith that there is a reasonable probability that the failure to take such action would be inconsistent with the Board of Directors' fiduciary duties to Carlyle's stockholders under applicable law, and (B) prior to furnishing such information to, or entering into discussions or negotiations with, such person, Carlyle (x) provides reasonable notice to Levcor to the effect that it is furnishing information to, or entering into discussions or negotiations with, such person and (y) receives from such person an executed confidentiality agreement in customary form (the "Confidentiality Agreement"), (ii) complying with Rule 14d-9 or Rule 14e-2 promulgated under the Exchange Act with regard to a tender or exchange offer, or (iii) failing to make or withdrawing or modifying its recommendation referred to in Section 5.2, or recommending an unsolicited, bona fide proposal to acquire Carlyle pursuant to a merger, consolidation, share exchange, business combination, tender or exchange offer or other similar transaction, following the receipt of such a proposal, if Carlyle's Board of Directors determines in good faith that there is a reasonable probability that the failure to take such action would be inconsistent with the Board of Directors' fiduciary duties to Carlyle's stockholders under applicable law. In addition, if Carlyle proposes to enter into an agreement with respect to any Competing Transaction, it shall A-25 concurrently with entering into such agreement pay, or cause to be paid, to Levcor any amounts due to Levcor from Carlyle pursuant to Section 7.3. As used in this Agreement, "Competing Transaction" shall mean any of the following (other than the transactions contemplated by this Agreement) involving Carlyle or any of its subsidiaries: (i) any merger, consolidation, share exchange, exchange offer, business combination, recapitalization, liquidation, dissolution or other similar transaction involving such person; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of assets representing 20% or more of the total assets of such person and its subsidiaries, in a single transaction or series of transactions; (iii) any tender offer or exchange offer for 20% or more of the outstanding shares of capital stock of such person or the filing of a registration statement under the Securities Act in connection therewith; (iv) any person or group having acquired beneficial ownership of 15% or more of the outstanding shares of capital stock of such person with respect to Carlyle Common Stock); or (v) any public announcement of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing. (f) NO ACQUISITIONS. Carlyle shall not, nor shall it permit any of its subsidiaries to, (i) acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial equity interest in or a substantial portion of the assets of, or by any other manner, any business or any corporation, limited liability company, partnership, association or other business organization or division thereof or (ii) otherwise acquire or agree to acquire any assets which, in the case of this clause (ii), are material, individually or in the aggregate, to Carlyle. (g) NO DISPOSITIONS. Carlyle shall not, nor shall it permit any of its subsidiaries to, sell, lease, encumber or otherwise dispose of, or agree to sell, lease, encumber or otherwise dispose of any of its assets (including capital stock of subsidiaries), except as disclosed in the Carlyle Disclosure Letter or the Carlyle SEC Documents and for dispositions in the ordinary course of business consistent with past practice and of substantially the same character, type and magnitude as dispositions in the past. (h) INDEBTEDNESS. Carlyle shall not, nor shall it permit any of its subsidiaries to, (i) incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any long-term debt securities of Carlyle or any of its subsidiaries or guarantee any long-term debt securities of others or enter into or amend any contract, agreement, commitment or arrangement with respect to any of the foregoing, other than (x) in replacement for existing or maturing debt, (y) indebtedness of any subsidiary of Carlyle to Carlyle or to another subsidiary of Carlyle or (z) other borrowing under existing lines of credit in the ordinary course of business consistent with prior practice and of substantially the same character, type and magnitude as borrowings made in the past or (ii) make any loans, advances or capital contributions to any person. (i) OTHER ACTIONS. Carlyle shall not, nor shall it permit any of its subsidiaries to, take any action that would, or might reasonably be expected to, result in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect, or in any of the conditions to the Merger set forth in Article VI not being satisfied, or which would adversely affect the ability of any of them to obtain any of the A-26 Requisite Regulatory Approvals without imposition of a condition or restriction of the type referred to in Section 6.2(d) and Carlyle shall, in the event of, or promptly after the occurrence of, or promptly after obtaining knowledge of the occurrence of or the impending or threatened occurrence of, any fact or event which would cause or constitute a breach of any of the representations and warranties set forth in this Agreement, the non-satisfaction of any of the conditions to the Merger set forth in Article VI or the failure to obtain the Requisite Regulatory Approvals, in each case at any time after the date hereof and through the Closing Date, give detailed notice thereof to Levcor, and Carlyle shall use commercially reasonable efforts to prevent or promptly to remedy such breach, non-satisfaction or failure, as the case may be. (j) ADVICE OF CHANGES; GOVERNMENT FILINGS. Except to the extent prevented by law, Carlyle shall confer on a regular basis with Levcor, report on operational matters and promptly advise Levcor, orally and in writing, of any material change or event or any change or event which would cause or constitute a material breach of any of the representations, warranties or covenants of Carlyle contained herein. Carlyle shall file all reports required to be filed by Carlyle with the SEC between the date of this Agreement and the Effective Time and shall make available to Levcor copies of all such reports promptly after the same are filed. Carlyle shall cooperate with Levcor in determining whether any filings are required to be made with, or consents required to be obtained from, or fees or expenses required to be paid to, any third party or Governmental Entity prior to the Effective Time in connection with this Agreement or the transactions contemplated hereby, and shall cooperate in making any such filings promptly and in seeking to obtain timely any such consents and, subject to Levcor's approval, paying any such fees or expenses. Carlyle shall promptly make available to Levcor copies of all other filings made by Carlyle with any state or Federal Governmental Entity in connection with this Agreement, the Merger or the other transactions contemplated hereby. Nothing contained in this Agreement shall give Levcor, directly or indirectly, the right to control or direct Carlyle's operations prior to the Effective Time. Prior to the Effective Time, Carlyle shall exercise, consistent with the terms and conditions of this Agreement, complete control and supervision over its operations. (k) ACCOUNTING METHODS. Carlyle shall not change its methods of accounting in effect at December 31, 2001, except as required by changes in GAAP as concurred in by Carlyle's independent auditors. (l) BENEFIT PLANS. During the period from the date of this Agreement and continuing until the Effective Time, Carlyle agrees as to itself and its subsidiaries that it will not, without the prior written consent of Levcor, except as set forth in the Carlyle Disclosure Letter or the Carlyle SEC Documents, (i) enter into, adopt, amend (except as may be required by law) or terminate any Carlyle Benefit Plan or any other employee benefit plan or any agreement, arrangement, plan or policy between Carlyle or any of its subsidiaries, on the one hand, and one or more of its or their directors or officers, on the other hand, (ii) except for normal increases in the ordinary course of business consistent with past practice and of substantially the same character, type and magnitude as increases in the past that, in the aggregate, do not result in a material increase in benefits or compensation expense to Carlyle or any of its subsidiaries, increase in any manner the compensation or fringe benefits of any director, officer or employee or pay any benefit not required by any plan and arrangement as in effect as of the date hereof A-27 (including, without limitation, the granting of stock options, stock appreciation rights, restricted stock, restricted stock units or performance units or shares) or enter into any contract, agreement, commitment or arrangement to do any of the foregoing or (iii) enter into or renew any contract, agreement, commitment or arrangement providing for the payment to any director, officer or employee of Carlyle or any of its subsidiaries of compensation or benefits contingent, or the terms of which are materially altered, upon the occurrence of any of the transactions contemplated by this Agreement. (m) TAX ELECTIONS. Except in the ordinary course of business and consistent with past practice and of substantially the same character, type and magnitude as elections made in the past, Carlyle shall not make any material tax election or settle or compromise any material federal, state, local or foreign income tax claim or liability or amend any previously filed tax return in any respect. 4.2 COVENANTS OF LEVCOR. During the period from the date of this Agreement and continuing until the Effective Time, Levcor agrees that (except as expressly contemplated or permitted by this Agreement or as disclosed in the Levcor SEC Documents or to the extent that Carlyle shall otherwise consent in writing): (a) ORDINARY COURSE. Levcor shall carry on its businesses in the usual, regular and ordinary course and use commercially reasonable efforts to preserve intact its present business organizations, maintain its rights and franchises and preserve its relationships with employees, officers, customers, suppliers and others having business dealings with it. Levcor shall maintain in force all insurance policies and Consents with respect to Levcor and shall maintain all assets and properties of Levcor in customary repair, order and condition, reasonable wear and tear excepted. Levcor shall not (i) enter into any new material line of business or (ii) incur or commit to any significant capital expenditures or any obligations or liabilities other than capital expenditures and obligations or liabilities incurred or committed to as disclosed in the Levcor Disclosure Letter. Levcor will comply with all applicable laws and regulations wherever its business is conducted, including without limitation the timely filing of all reports, forms or other documents with the SEC required pursuant to the Securities Act or the Exchange Act, except where such noncompliance would not have a Material Adverse Effect on Levcor. (b) DIVIDENDS; CHANGES IN STOCK. Levcor shall not, nor shall Levcor propose to, (i) declare or pay any dividends on or make other distributions in respect of any of its capital stock, (ii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or (iii) repurchase, redeem or otherwise acquire any shares of its capital stock or any securities convertible into or exercisable for any shares of its capital stock. (c) ISSUANCE OF SECURITIES. Levcor shall not issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock of any class, any Voting Debt or any securities convertible into or exercisable for (including any stock appreciation rights, phantom stock plans or stock equivalents), or any rights, warrants or options to acquire, any such shares or Voting Debt, or enter into any agreement with respect to any of the A-28 foregoing, other than issuances of Levcor Common Stock pursuant to exercises of Levcor Options. (d) GOVERNING DOCUMENTS. Levcor shall not amend or propose to amend its certificate of incorporation or by-laws. (e) NO ACQUISITIONS. Levcor shall not (i) acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial equity interest in or a substantial portion of the assets of, or by any other manner, any business or any corporation, limited liability company, partnership, association or other business organization or division thereof or (ii) otherwise acquire or agree to acquire any assets which, in the case of this clause (ii), are material, individually or in the aggregate, to Levcor. (f) NO DISPOSITIONS. Levcor shall not sell, lease, encumber or otherwise dispose of, or agree to sell, lease, encumber or otherwise dispose of any of its assets (including capital stock of subsidiaries), except as disclosed in the Levcor Disclosure Letter or the Levcor SEC Documents and for dispositions in the ordinary course of business consistent with past practice and of substantially the same character, type and magnitude as dispositions in the past. (g) INDEBTEDNESS. Levcor shall not (i) incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any long-term debt securities of Levcor or guarantee any long-term debt securities of others or enter into or amend any contract, agreement, commitment or arrangement with respect to any of the foregoing, other than (x) in replacement for existing or maturing debt, or (y) other borrowing under existing lines of credit in the ordinary course of business consistent with prior practice and of substantially the same character, type and magnitude as borrowings made in the past or (ii) make any loans, advances or capital contributions to any person. (h) OTHER ACTIONS. Levcor shall not take any action that would, or might reasonably be expected to, result in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect, or in any of the conditions to the Merger set forth in Article VI not being satisfied, or which would adversely affect the ability of any of them to obtain any of the Requisite Regulatory Approvals and Levcor shall, in the event of, or promptly after the occurrence of, or promptly after obtaining knowledge of the occurrence of or the impending or threatened occurrence of, any fact or event which would cause or constitute a breach of any of the representations and warranties set forth in this Agreement, the non-satisfaction of any of the conditions to the Merger set forth in Article VI or the failure to obtain the Requisite Regulatory Approvals, in each case at any time after the date hereof and through the Closing Date, give detailed notice thereof to Carlyle, and Levcor shall use commercially reasonable efforts to prevent or promptly to remedy such breach, non-satisfaction or failure, as the case may be. (i) ADVICE OF CHANGES; GOVERNMENT FILINGS. Except to the extent prevented by law, Levcor shall confer on a regular basis with Carlyle, report on operational matters and promptly advise Carlyle, orally and in writing, of any material change or event or any change or event which would cause or constitute a material breach of any of the representations, warranties A-29 or covenants of Levcor contained herein. Levcor shall file all reports required to be filed by Levcor with the SEC between the date of this Agreement and the Effective Time and shall make available to Carlyle copies of all such reports promptly after the same are filed. Carlyle shall cooperate with Levcor in determining whether any filings are required to be made with, or consents required to be obtained from, or fees or expenses required to be paid to, any third party or Governmental Entity prior to the Effective Time in connection with this Agreement or the transactions contemplated hereby, and shall cooperate in making any such filings promptly and in seeking to obtain timely any such consents and, subject to Carlyle's approval, paying any such fees or expenses. Levcor shall promptly make available to Carlyle copies of all other filings made by Levcor with any state or Federal Governmental Entity in connection with this Agreement, the Merger or the other transactions contemplated hereby. Nothing contained in this Agreement shall give Carlyle, directly or indirectly, the right to control or direct Levcor's operations. Levcor shall exercise, consistent with the terms and conditions of this Agreement, complete control and supervision over its operations. (j) ACCOUNTING METHODS. Levcor shall not change its methods of accounting in effect at December 31, 2001, except as required by changes in GAAP as concurred in by Levcor's independent auditors. (k) BENEFIT PLANS. During the period from the date of this Agreement and continuing until the Effective Time, Levcor agrees that it will not, without the prior written consent of Carlyle, except as set forth in the Levcor Disclosure Letter or the Levcor SEC Documents, (i) enter into, adopt, amend (except as may be required by law) or terminate any Levcor Benefit Plan or any other employee benefit plan or any agreement, arrangement, plan or policy between Levcor, on the one hand, and one or more of its or their directors or officers, on the other hand, (ii) except for normal increases in the ordinary course of business consistent with past practice and of substantially the same character, type and magnitude as increases in the past that, in the aggregate, do not result in a material increase in benefits or compensation expense to Levcor, increase in any manner the compensation or fringe benefits of any director, officer or employee or pay any benefit not required by any plan and arrangement as in effect as of the date hereof (including, without limitation, the granting of stock options, stock appreciation rights, restricted stock, restricted stock units or performance units or shares) or enter into any contract, agreement, commitment or arrangement to do any of the foregoing or (iii) enter into or renew any contract, agreement, commitment or arrangement providing for the payment to any director, officer or employee of Levcor of compensation or benefits contingent, or the terms of which are materially altered, upon the occurrence of any of the transactions contemplated by this Agreement. (l) TAX ELECTIONS. Except in the ordinary course of business and consistent with past practice and of substantially the same character, type and magnitude as elections made in the past, levcor shall not make any material tax election or settle or compromise any material federal, state, local or foreign income tax claim or liability or amend any previously filed tax return in any respect. A-30 ARTICLE V ADDITIONAL AGREEMENTS 5.1 PROSPECTUS/PROXY STATEMENT; REGISTRATION STATEMENT. As promptly as practicable after the execution of this Agreement, Levcor and Carlyle will prepare and file with the SEC a Prospectus/Proxy Statement and Levcor will prepare and file with the SEC the Registration Statement in which the Prospectus/Proxy Statement is to be included as a prospectus. Levcor and Carlyle will provide each other with any information which may be required in order to effectuate the preparation and filing of the Prospectus/Proxy Statement and the Registration Statement pursuant to this Section 5.1. Each of Levcor and Carlyle will respond to any comments from the SEC, will use all reasonable efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as practicable after such filing and to keep the Registration Statement effective as long as is necessary to consummate the Merger and the transactions contemplated hereby. Each of Levcor and Carlyle will notify the other promptly upon the receipt of any comments from the SEC or its staff in connection with the filing of, or amendments or supplements to, the Registration Statement and/or the Prospectus/Proxy Statement. Whenever any event occurs which is required to be set forth in an amendment or supplement to the Prospectus/Proxy Statement or the Registration Statement, Levcor and Carlyle, as the case may be, will promptly inform the other of such occurrence and cooperate in filing with the SEC or its staff, and/or mailing to stockholders of Levcor and/or Carlyle, such amendment or supplement. Each of Levcor and Carlyle shall cooperate and provide the other (and its counsel) with a reasonable opportunity to review and comment on any amendment or supplement to the Registration Statement and Prospectus/Proxy Statement prior to filing such with the SEC, and will provide each other with a copy of all such filings made with the SEC. Each of Levcor and Carlyle will cause the Prospectus/Proxy Statement to be mailed to its respective stockholders at the earliest practicable time after the Registration Statement is declared effective by the SEC. Levcor shall also use all reasonable efforts to take any action required to be taken by it under any applicable state securities laws in connection with the issuance of the Surviving Corporation Capital Stock in the Merger and the conversion of Carlyle Options into options to acquire the Surviving Corporation Common Stock, and Carlyle shall furnish any information concerning Carlyle and the holders of Carlyle Capital Stock and Carlyle Options as may be reasonably requested in connection with any such action. 5.2 MEETINGS OF STOCKHOLDERS; BOARD RECOMMENDATION. (a) MEETING OF STOCKHOLDERS. Promptly after the Registration Statement is declared effective under the Securities Act, each of Levcor and Carlyle will take all action necessary in accordance with Delaware Law and its respective certificate of incorporation and by-laws to call, hold and convene a meeting of its respective stockholders to consider the adoption and approval of this Agreement and the approval of the Merger (each, a "Stockholders' Meeting") to be held as promptly as practicable (without limitation, within 60 days, if practicable) after the declaration of effectiveness of the Registration Statement. Each of Levcor and Carlyle will use all reasonable efforts to hold their respective Stockholders' Meetings on the A-31 same date. Subject to Section 4.1(e), each of Levcor and Carlyle will use all reasonable efforts to solicit from its respective stockholders proxies in favor of the adoption and approval of this Agreement and the approval of the Merger. Notwithstanding anything to the contrary contained in this Agreement, Levcor or Carlyle, as the case may be, may adjourn or postpone its Stockholders' Meeting to the extent necessary to ensure that any necessary supplement or amendment to the Prospectus/Proxy Statement is provided to its respective stockholders in advance of a vote on the Merger and this Agreement or, if as of the time for which the Stockholders' Meeting is originally scheduled (as set forth in the Prospectus/Proxy Statement) there are insufficient shares of Capital Stock of Levcor or Carlyle, as the case may be, represented (either in person or by proxy) to constitute a quorum necessary to conduct the business of such Stockholders' Meeting. Each of Levcor and Carlyle shall ensure that its respective Stockholders' Meeting is called, noticed, convened, held and conducted, and that all proxies solicited by it in connection with the Stockholders' Meeting are solicited in compliance with Delaware Law, its certificate of incorporation and by-laws, and all other applicable Legal Requirements. "Legal Requirements" shall mean any federal, state, local, municipal, foreign or other law, statute, constitution, principle of common law, resolution, ordinance, code, order, edict, decree, rule, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Entity. (b) BOARD RECOMMENDATION. Except to the extent expressly permitted by Section 4.1(e): (i) the Board of Directors of each of Levcor and Carlyle shall recommend that the respective stockholders of Levcor and Carlyle vote in favor of the adoption and approval of this Agreement and the approval of the Merger, at their respective Stockholders' Meetings, (ii) the Prospectus/Proxy Statement shall include a statement to the effect that the Board of Directors of Levcor and Carlyle has recommended that its stockholders vote in favor of adoption and approval of this Agreement and the approval of the Merger, and (iii) neither the Board of Directors of Levcor or Carlyle nor any committee thereof shall withdraw, amend or modify, or propose or resolve to withdraw, amend or modify in a manner adverse to the other party, the recommendation of its respective Board of Directors that the respective stockholders of Levcor and Carlyle vote in favor of the adoption and approval of this Agreement and the approval of the Merger. 5.3 LEGAL CONDITIONS TO MERGER. Each of Carlyle, Carlyle's subsidiaries and Levcor shall use all reasonable efforts (i) to take, or cause to be taken, all actions necessary to comply promptly with all legal requirements which may be imposed on such party or its subsidiaries with respect to the Merger and to consummate the transactions contemplated by this Agreement, subject to the appropriate vote of stockholders of Levcor and Carlyle described in Section 6.1 (a), and (ii) to obtain (and to cooperate with the other party to obtain) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity and of any other public or private third party which is required to be obtained or made by such party or any of its subsidiaries in connection with the Merger and the transactions contemplated by this Agreement; provided, however, that a party shall not be obligated to take any action pursuant to the foregoing if the taking of such action or such compliance or the obtaining of such consent, authorization, order, approval or exemption is likely, in such party's reasonable opinion, (x) to be materially burdensome to such party and its subsidiaries taken as a whole or to impact in a materially adverse manner the economic or business benefits of the transactions contemplated by A-32 this Agreement so as to render uneconomic the consummation of the Merger, or (y) in the case of Carlyle, to result in the imposition of a condition or restriction on Carlyle or any of their respective subsidiaries of the type referred to in Section 6.2(d). Each of Carlyle and Levcor will promptly cooperate with and furnish information to the other in connection with any such burden suffered by, or requirement imposed upon, any of them or any of their subsidiaries in connection with the foregoing. 5.4 ACCESS TO INFORMATION. Upon reasonable notice, Levcor and Carlyle and each of its subsidiaries shall afford to the other party's officers, employees, accountants, counsel and other representatives, access, during normal business hours during the period prior to the Effective Time, to all its properties, books, commitments and records and, during such period, shall make available to the other party (a) a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant to the requirements of Federal securities laws and (b) all other information concerning its business, properties and personnel as such other party may reasonably request. The parties will hold any such information which is nonpublic in confidence. No investigation by either Levcor or Carlyle shall affect the representations and warranties of the other, except to the extent such representations and warranties are by their terms qualified by disclosures made to such first party. 5.5 BROKERS OR FINDERS. Each of Levcor and Carlyle represents, as to itself, its subsidiaries and its affiliates, that no agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement, except the Carlyle Independent Advisor and the Levcor Independent Advisor, whose fees and expenses will be paid by Carlyle and Levcor respectively, in accordance with their respective agreements with such firms, and each party agrees to indemnify the other party and hold the other party harmless from and against any and all claims, liabilities or obligations with respect to any other fees, commissions or expenses asserted by any person on the basis of any act or statement alleged to have been made by such first party or its affiliates. 5.6 INDEMNIFICATION. The provisions with respect to indemnification contained in the certificate of incorporation of the Surviving Corporation shall not be amended, repealed or otherwise modified for a period of six years from the Effective Time in any manner that would adversely affect the rights thereunder of individuals who at the Effective Time were directors, officers or employees of Carlyle. Levcor and Carlyle agree that the directors, officers and employees of Carlyle covered thereby are intended to be third party beneficiaries under this Section 5.6 and shall have the right to enforce the obligations of the Surviving Corporation and the Levcor. 5.7 STOCK OPTIONS. At the Effective Time, each outstanding Carlyle Option, whether or not then exercisable, will be assumed by Levcor. Each Carlyle Option so assumed by Levcor under this Agreement will continue to have, and be subject to, the same terms and conditions set forth in the applicable Carlyle Option Plan, if any, pursuant to which the Carlyle Option was issued and any option agreement between Carlyle and the optionee with regard to the Carlyle Option immediately prior to the Effective Time (including, without limitation, any repurchase rights or vesting provisions), except that (i) each Carlyle Option will be exercisable A-33 (or will become exercisable in accordance with its terms) for that number of whole shares of the Surviving Corporation Common Stock equal to the product of the number of shares of Carlyle Common Stock that were issuable upon exercise of such Carlyle Option immediately prior to the Effective Time multiplied by the Common Exchange Ratio, rounded up to the nearest whole number of shares of the Surviving Corporation Common Stock and (ii) the per share exercise price for the shares of the Surviving Corporation Common Stock issuable upon exercise of such assumed Carlyle Option will be equal to the quotient determined by dividing the exercise price per share of Carlyle Common Stock at which such Carlyle Option was exercisable immediately prior to the Effective Time by the Common Exchange Ratio, rounded up to the nearest whole cent. Continuous employment with Carlyle or its subsidiaries shall be credited to the optionee and to all Carlyle employees for purposes of determining the vesting of all assumed Carlyle Options and other employee benefits after the Effective Time it being understood that all Carlyle options immediately vest upon consummation of the Merger. It is intended that Carlyle Options assumed by Levcor shall qualify following the Effective Time as incentive stock options as defined in Section 422 of the Code to the extent Carlyle Options qualified as incentive stock options immediately prior to the Effective Time and the provisions of this Section 5.7 shall be applied consistent with such intent. ARTICLE VI CONDITIONS 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The respective obligation of each party to effect the Merger shall be subject to the satisfaction prior to the Closing Date of the following conditions: (a) STOCKHOLDER APPROVAL. The adoption and approval of this Agreement and the approval of the Merger, shall have been approved and adopted by the affirmative vote of the holders of a majority of the outstanding shares of Levcor Common Stock and Carlyle Capital Stock entitled to vote thereon. (b) OTHER APPROVALS. All authorizations, consents, orders or approvals of, or declarations or filings with, and all expirations or early terminations of waiting periods imposed by, any Governmental Entity (all the foregoing, "Consents") which are necessary for the consummation of the Merger shall have been filed, occurred or been obtained (all such permits, approvals, filings and consents and the lapse of all such waiting periods being referred to as the "Requisite Regulatory Approvals") and all such Requisite Regulatory Approvals shall be in full force and effect. (c) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect, nor shall any proceeding by any Governmental Entity seeking any of the foregoing be pending. There shall not be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, which makes the consummation of the Merger illegal. A-34 (d) REGISTRATION STATEMENT EFFECTIVE; PROSPECTUS/PROXY STATEMENT. The SEC shall have declared the Registration Statement effective. No stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose, and no similar proceeding in respect of the Prospectus/Proxy Statement, shall have been initiated or threatened in writing by the SEC. 6.2 CONDITIONS TO OBLIGATIONS OF LEVCOR. The obligations of Levcor to effect the Merger are subject to the satisfaction of the following conditions unless waived by Levcor: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Carlyle set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, and Levcor shall have received a certificate signed on behalf of Carlyle by the President and Chief Executive Officer of Carlyle, and by the Chief Financial Officer of Carlyle to such effect. (b) PERFORMANCE OF OBLIGATIONS OF CARLYLE. Carlyle shall have performed and complied in all material respects with all obligations required to be performed or complied with by it under this Agreement at or prior to the Closing Date, and Levcor shall have received a certificate signed on behalf of Carlyle by the President and Chief Executive Officer of Carlyle and by the Chief Financial Officer of Carlyle to such effect. (c) CONSENTS UNDER AGREEMENTS. Carlyle shall have obtained the consent or approval of each person (other than the Requisite Regulatory Approvals) whose consent or approval shall be required in order to permit the succession by Levcor pursuant to the Merger to any obligation, right or interest of Carlyle or any subsidiary of Carlyle under any loan or credit agreement, note, mortgage, indenture, lease, license or other agreement or instrument except for those consents or approvals for which failure to obtain such consents or approvals could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Carlyle, it being agreed that consent under the CIT Financing facilities entered into on January 24, 2002 shall not be required. (d) BURDENSOME CONDITION. There shall not be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, by any Governmental Entity which, in connection with the grant of a Requisite Regulatory Approval, imposes any requirement upon Levcor which would so materially adversely impact the economic or business benefits of the transactions contemplated by this Agreement as to render uneconomic the consummation of the Merger, or which would require Levcor to dispose of any asset which is material to Levcor prior to the Effective Time. (e) MATERIAL ADVERSE EFFECT. Since the date of this Agreement, there shall not have occurred a Material Adverse Effect with respect to Carlyle and no facts or circumstances arising after the date of this Agreement shall have occurred which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect with respect to Carlyle. A-35 (f) PROCEEDINGS. All proceedings to be taken on the part of Carlyle in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be reasonably satisfactory in form and substance to Levcor, and Levcor shall have received copies of all such documents and other evidences as Levcor may reasonably request in order to establish the consummation of such transactions and the taking of all proceedings in connection therewith. (g) DISSENTING STOCKHOLDERS. No more than 20% of the holders of Carlyle's outstanding Capital Stock elect to become Dissenting Stockholders. 6.3 CONDITIONS TO OBLIGATIONS OF CARLYLE. The obligation of Carlyle to effect the Merger is subject to the satisfaction of the following conditions unless waived by Carlyle: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Levcor set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, and Carlyle shall have received a certificate signed on behalf of Levcor by the Chairman and Chief Executive Officer of Levcor to such effect. (b) PERFORMANCE OF OBLIGATIONS OF LEVCOR. Levcor shall have performed and complied in all material respects with all obligations required to be performed or complied with by it under this Agreement at or prior to the Closing Date, and Carlyle shall have received a certificate signed on behalf of Levcor by the President and Chief Executive Officer of Levcor to such effect. (c) MATERIAL ADVERSE EFFECT. Since the date of this Agreement, there shall not have occurred a Material Adverse Effect with respect to Levcor and no facts or circumstances arising after the date of this Agreement shall have occurred which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect with respect to Levcor. (d) PROCEEDINGS. All proceedings to be taken on the part of Levcor in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be reasonably satisfactory in form and substance to Carlyle, and Carlyle shall have received copies of all such documents and other evidences as Carlyle may reasonably request in order to establish the consummation of such transactions and the taking of all proceedings in connection therewith. ARTICLE VII TERMINATION AND AMENDMENT 7.1 TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the matters presented in connection with the Merger by the stockholders of Levcor and/or Carlyle: A-36 (a) by mutual consent of Levcor and Carlyle in a written instrument; (b) by Levcor, if any representation or warranty of Carlyle shall have become untrue or upon a material breach of any covenant or agreement on the part of Carlyle set forth in this Agreement such that the conditions set forth in Section 6.2(a) or Section 6.2(b), as the case may be, would be incapable of being satisfied by December 31, 2002; (c) by Carlyle, if any representation or warranty of Levcor shall have become untrue or upon a material breach of any covenant or agreement on the part of Levcor set forth in this Agreement such that the conditions set forth in Section 6.3(a) or Section 6.3(b), as the case may be, would be incapable of being satisfied by December 31, 2002; (d) by either Levcor or Carlyle, if any permanent injunction or action by any Governmental Entity preventing the consummation of the Merger shall have become final and nonappealable; (e) by either Levcor or Carlyle if the Merger shall not have been consummated on or prior to December 31, 2002 (or such later date as may be agreed to in writing by Carlyle and Levcor) (other than due to the failure of the party seeking to terminate this Agreement to perform its obligations under this Agreement required to be performed at or prior to the Effective Time); (f) by either Carlyle or Levcor if the required approval of the stockholders of Levcor contemplated by this Agreement shall not have been obtained by reason of the failure to obtain the required vote at the Levcor Stockholders' Meeting duly convened therefor or at any adjournment thereof; provided, however, that the right to terminate this Agreement under this Section 7.1(f) shall not be available to Levcor where the failure to obtain Levcor stockholder approval shall have been caused by the action or failure to act of Levcor and such action or failure to act constitutes a material breach by Levcor of this Agreement; (g) by either Carlyle or Levcor if the required approval of the stockholders of Carlyle contemplated by this Agreement shall not have been obtained by reason of the failure to obtain the required vote at the Carlyle Stockholders' Meeting duly convened therefore or at any adjournment thereof; provided, however, that the right to terminate this Agreement under this Section 7.1(g) shall not be available to Carlyle where the failure to obtain Carlyle stockholder approval shall have been caused by the action or failure to act of Carlyle and such action or failure to act constitutes a material breach by Carlyle of this Agreement; (h) by Levcor, if the Board of Directors of Carlyle shall have (i) withdrawn, modified or changed its approval or recommendation of this Agreement, the Merger or any of the other transactions contemplated herein in any manner which is adverse to Levcor or shall have resolved to do the foregoing; or (ii) approved or have recommended to the stockholders of Carlyle a Competing Transaction or shall have resolved to do the foregoing; (i) by Levcor, if (i) Carlyle shall have exercised a right specified in clause (i) of the third sentence of Section 4.1(e) with respect to any transaction referred to therein and shall A-37 enter into a Competing Transaction, or (ii) (x) a tender offer or exchange offer or a proposal by a third party to acquire Carlyle pursuant to a merger, consolidation, share exchange, business combination, tender or exchange offer or similar transaction shall have been commenced or publicly proposed which contains a proposal as to price (without regard to the specificity of such price proposal) and (y) Carlyle shall not have rejected such proposal within 10 business days of its commencement or the date such proposal first becomes publicly disclosed, if sooner; or (j) by Carlyle, if it has entered into a Competing Transaction. (k) The right of any party hereto to terminate this Agreement pursuant to this Section 7.1 shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any party hereto, any person controlling any such party or any of their respective officers or directors, whether prior to or after the execution of this Agreement. 7.2 EFFECT OF TERMINATION. In the event of termination of this Agreement and abandonment of the Merger by either Carlyle or Levcor as provided in Section 7.1, this Agreement shall forthwith terminate and there shall be no liability or obligation on the part of Levcor or Carlyle or their respective officers or directors except with respect to the penultimate sentence of Section 5.4 and Sections 5.5 and 7.3; provided, however, that, subject to the provisions of Section 8.8, nothing herein shall relieve any party of liability for any breach hereof. 7.3 FEES, EXPENSES AND OTHER PAYMENTS. (a) Except as otherwise provided in this Section 7.3, whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby (including, without limitation, fees and disbursements of counsel, financial advisors and accountants) shall be borne solely and entirely by the party which has incurred such costs and expenses (with respect to such party, its "Expenses"). (b) Carlyle agrees that if this Agreement shall be terminated pursuant to: (i) Section 7.1(b) and (x) such termination is the result of material breach of any covenant, agreement, representation or warranty contained herein and (y) at any time during the period commencing on the date hereof and ending twelve months after the date of termination of this Agreement, a Competing Transaction involving Carlyle shall have occurred or Carlyle shall have entered into a definitive agreement providing for such a Competing Transaction, which Competing Transaction values, in the reasonable determination of the Carlyle Board of Directors, the Carlyle Common Stock at more than 2/10 of the closing price of the Levcor Common Stock over the 20-day trading period ending on May 23, 2002; (ii) Section 7.1(g) because this Agreement, the Merger and the other transactions contemplated hereby shall fail to receive the requisite vote for approval and adoption by the stockholders of Carlyle at a meeting of the stockholders of Carlyle called to vote thereon, and at the time of such meeting there shall exist a proposal with respect to a Competing Transaction with respect to Carlyle which either (x) the Board of Directors of Carlyle has not publicly opposed or (y) is consummated, or a definitive agreement with respect to which is A-38 entered into, at any time during the period commencing on the date hereof and ending twelve months after the date of termination of this Agreement; or (iii) Section 7.1(h), Section 7.1(i) or Section 7.1(j); then in each such event Carlyle shall pay to Levcor an amount equal to $300,000, plus all of Levcor's Expenses not to exceed $200,000. (c) Carlyle agrees that if this Agreement shall be terminated pursuant to Section 7.1(b), then Carlyle shall pay to Levcor an amount equal to Levcor's Expenses not to exceed $200,000; provided that Carlyle shall not be obligated to make any payment pursuant to this Section 7.3(c) if Carlyle shall be obligated to make a payment to Levcor pursuant to Section 7.3(b). (d) Levcor agrees that if this Agreement shall be terminated pursuant to Section 7.1(c), then Levcor shall pay to Carlyle an amount equal to Carlyle's Expenses not to exceed $200,000. (e) Any payment required to be made pursuant to Section 7.3(b), 7.3(c) or Section 7.3(d) shall be made as promptly as practicable but not later than five business days after termination of this Agreement and shall be made by wire transfer of immediately available funds to an account designated by Levcor, except that any payment to be made as the result of an event described in Section 7.3(b)(i) or clause (y) of Section 7.3(b)(ii) shall be made as promptly as practicable but not later than five business days after the occurrence of the Competing Transaction or the execution of the definitive agreement providing for a Competing Transaction. 7.4 AMENDMENT. This Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with the Merger by the stockholders of Carlyle or of Levcor, but, after any such approval, no amendment shall be made which by law requires further approval by such stockholders without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 7.5 EXTENSION; WAIVER. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Board of Directors, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. A-39 ARTICLE VIII GENERAL PROVISIONS 8.1 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of the representations, warranties, covenants and agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time, except for the agreements contained in Sections 2.1, 2.2, 5.6, 5.7, 7.3 and Article VIII. 8.2 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (with confirmation) or 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): (a) if to Levcor, to: Levcor International, Inc. 462 Seventh Avenue New York, New York 10018 Attention: Robert A. Levinson, Chief Executive Officer Facsimile: (212) 354-8500 With a copy to: Katten Muchin Zavis Rosenman 575 Madison Avenue New York, New York 10022-2585 Attention: Edward Cohen, Esq. Facsimile: (212) 940-8776 (b) if to Carlyle, to: Carlyle Industries Inc. 1 Palmer Terrace Carlstadt, New Jersey 07072 Attention: Edward F. Cooke, Chief Financial Officer and Vice President Facsimile: (201) 935-6220 With a copy to: Stroock & Stroock & Lavan LLP 180 Maiden Lane New York, New York 10038-4982 Attention: Martin H. Neidell, Esq. Facsimile: (212) 806-6006 A-40 8.3 CERTAIN DEFINITIONS. (a) For purposes of this Agreement: (i) an "affiliate" of any person means another person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first person; (ii) "beneficial ownership" with respect to any securities, means having "beneficial ownership" of such securities in accordance with the provisions of Rule 13d-3 under the Exchange Act. Without duplicative counting of the same securities by the same holder, securities beneficially owned by a person include securities beneficially owned by all other persons with whom such person would constitute a group; (iii) "group" means two or more persons acting together for the purpose of acquiring, holding, voting or disposing of any securities, which persons would be required to file a Schedule 13D or Schedule 13G with the SEC as a "person" within the meaning of Section 13(d)(3) of the Exchange Act if such persons beneficially owned a sufficient amount of such securities to require such a filing under the Exchange Act; (iv) "person" means an individual, corporation, limited liability company, partnership, joint venture, association, trust, unincorporated organization or other legal entity; (v) a "subsidiary" of any person means another person, an amount of the voting securities, other voting ownership or voting partnership interests of which is sufficient to elect at least a majority of its Board of Directors or other governing body (or, if there are no such voting interests, 50% or more of the equity interests of which) is owned directly or indirectly by such first person; and (vi) Any accounting term that is used in the context of describing or referring to an accounting concept and that is not specifically defined herein shall be construed in accordance with GAAP as applied in the preparation of the financial statements of Carlyle included in Carlyle SEC Documents (including, without limitation, the Carlyle Year-End Financial Statements and the Carlyle Balance Sheet) and the financial statements of Levcor included in Levcor SEC Documents (including, without limitation, the Levcor Year-End Financial Statements and the Levcor Balance Sheet). (b) Each of the following terms has the meaning ascribed thereto in the Section indicated below next to such term:
Defined Term Section Defined In Defined Term Section Defined In ------------ ------------------ ------------ ------------------ Agreement Recital knowledge 3.1(h) Carlyle Recital Legal Requirements 5.2(a) Carlyle Balance Sheet 3.1(e) Levcor Recital A-41 Carlyle Benefit Plan 3.1(l) Levcor Balance Sheet 3.2(d) Carlyle Capital Stock 2.1 (c) Levcor Benefit Plans 3.2(k) Carlyle Certificates 2.2(b) Levcor Common Stock 3.2(b) Carlyle Common Stock 2.1(a) Levcor Disclosure Letter 3.2 Carlyle Disclosure Letter 3.1 Levcor Independent Advisor 3.1(v) Carlyle Independent Advisor 3.1(v) Levcor Intellectual Property 3.2(n) Rights Carlyle Intellectual Property Rights 3.1(o) Levcor Material Contracts 3.2(p) Carlyle Option 2.1(e) Levcor Option 3.2(b)(i) Carlyle Option Plan 2.1(e) Levcor Option Plan 3.2(b)(i) Carlyle Preferred Stock 2.1(b) Levcor SEC Documents 3.2(d) Carlyle SEC Documents 3.1(e) Levcor Year-End Financial 3.2(d) Statements Carlyle Year-End Financial Statement 3.1(e) Litigation 3.1(j) Certificates of Merger 1.3 Material 3.1(a) Closing 1.2 Material Adverse Effect 3.1(a) Closing Date 1.2 Prospectus/Proxy Statement 3.1(f) Code 3.1(k) Registration Statement 3.1(f) Confidentiality Agreement 3.1(e) Requisite Regulatory Approvals 6.1(b) Consents 6.1(b) SEC 3.1(d)(iii) Common Exchange Ratio 2.1(a) Securities Act 3.1(e) Competing Transaction 4.1(e) Series B Preferred Stock 3.1(c) Delaware Law Recital Stockholders' Meeting 5.2(a) Dissenting Shares 2.1(g) Surviving Corporation 1.1 Dissenting Stockholder 2.1(g) Surviving Corporation Certificates 2.2(b) Effective Time 1.3 Surviving Corporation Capital 2.1(e) Stock A-42 Environmental Liability 3.1(i) Surviving Corporation Common Stock 2.1(a) Environmental Matter 3.1(i) Surviving Corporation Series A 2.1(b) Preferred Stock ERISA 3.1(l) Tax 3.1(k)(ii) ERISA Affiliate 3.1(l) Tax Entity 3.1(k)(ii) Exchange Act 3.1(d)(ii) Tax Return 3.1(k)(ii) Exchange Agent 2.2(a) Violation 3.1(d)(ii) Expenses 7.3 Voting Debt 3.1(c)(ii) GAAP 3.1(e) Governmental Entity 3.1(d)(iii)
8.4 INTERPRETATION. When a reference is made in this Agreement to Sections or Exhibits, such reference shall be to a Section of or Exhibit to this Agreement unless otherwise indicated. The recitals hereto constitute an integral part of this Agreement. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". The phrase "made available" in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. The phrases "the date of this Agreement", "the date hereof" and terms of similar import, unless the context otherwise requires, shall be deemed to refer to the date in the parties section of the first page of this Agreement. 8.5 COUNTERPARTS. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. 8.6 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES; RIGHTS OF OWNERSHIP. This Agreement (including the documents and the instruments referred to herein) (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (b) except as provided in Sections 2.2 and 5.6, is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. The parties hereby acknowledge that, except as hereinafter agreed to in writing, no party shall have the right to acquire or shall be deemed to have acquired shares of common stock of the other party pursuant to the Merger until consummation thereof. A-43 8.7 GOVERNING LAW. This Agreement shall be governed and construed in accordance with the laws of the State of New York, except to the extent Delaware law shall govern the Merger, without regard to any applicable conflicts of law provisions thereof. 8.8 SEVERABILITY; NO REMEDY IN CERTAIN CIRCUMSTANCES. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed unless the foregoing inconsistent action or the failure to take an action constitutes a material breach of this Agreement or makes this Agreement impossible to perform, in which case this Agreement shall terminate pursuant to Article VII hereof. Except as otherwise contemplated by this Agreement, to the extent that a party hereto took an action inconsistent herewith or failed to take action consistent herewith or required hereby pursuant to an order or judgment of a court or other competent authority, such party shall incur no liability or obligation unless such party did not in good faith seek to resist or object to the imposition or entering of such order or judgment. 8.9 PUBLICITY. Unless otherwise required by law, so long as this Agreement is in effect, neither Carlyle, nor Levcor shall issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement without the consent of the other party, which consent shall not be unreasonably withheld. 8.10 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. 8.11 SPECIFIC PERFORMANCE. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court of applicable jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (i) consents to submit such party to the personal jurisdiction of any Federal court or New York state court located in the State and City of New York in the event any dispute arises out of this Agreement or any of the transactions contemplated hereby, (ii) agrees that such party will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court, (iii) agrees that such party A-44 will not bring any action relating to this Agreement or any of the transactions contemplated hereby in any court other than a Federal court or New York state court sitting in the State and City of New York, and (iv) waives any right to trial by jury with respect to any claim or proceeding related to or arising out of this Agreement or any of the transactions contemplated hereby. IN WITNESS WHEREOF, Levcor and Carlyle have caused this Agreement, to be signed by their respective officers thereunto duly authorized, all as of May 24, 2002. LEVCOR INTERNATIONAL, INC. By: /s/ Robert A. Levinson Name: Robert A. Levinson Title: Chief Executive Officer CARLYLE INDUSTRIES, INC. By: /s/ Edward F. Cooke Name: Edward F. Cooke Title: Vice President A-45 EXHIBIT A Certificate of Incorporation of Surviving Corporation AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF LEVCOR INTERNATIONAL, INC. Levcor International, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "GCL"), does hereby certify: FIRST: That the date of filing of the Corporation's original Certificate of Incorporation with the Secretary of State of the State of Delaware was August 17, 1967. SECOND: This Amended and Restated Certificate of Incorporation (the "Certificate") has been adopted pursuant to Sections 242 and 245 of the GCL and restates and amends the provisions of the Certificate of Incorporation of the Corporation. THIRD: That the Board of Directors of the Corporation (the "Board") adopted resolutions dated May 24, 2002 proposing and declaring advisable the amendment and restatement of the Certificate of Incorporation, and that such amendment and restatement of the Certificate of Incorporation was approved by the holders of a majority of the shares of common stock entitled to vote at a special meeting of stockholders held on June , 2002, to read as follows: RESOLVED, that the text of the Certificate of Incorporation be amended and restated to read in its entirety as follows: I. The name of the corporation is Levcor International, Inc. (the "Corporation"). II. The address of its registered office in the State of Delaware is 15 North Street, City of Dover, Delaware 19901, County of Kent. The name of the Corporation's registered agent in the State of Delaware at such address is Nationwide Information Services, Inc. III. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the GCL. IV. Section 1. Capitalization. The total number of shares of stock which the Corporation shall have authority to issue is 23,000,000 consisting of 15,000,000 shares of common stock, $.01 par value per share (the "Common Stock"), and 8,000,000 shares of preferred stock, $.01 par value per share (the "Preferred Stock"). (a) The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares of Common Stock then outstanding) by the affirmative vote of the holders of a majority of the capital stock of the Corporation. (b) The Board of Directors is hereby expressly authorized to provide for the issuance of the Preferred Stock in one or more series, and to fix for each such series such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such series. (c) There is hereby designated a series of Preferred Stock to be known as "Series A Preferred Stock," the number of shares constituting such Series being 4,555,007 (the "Series A Preferred Stock"). (d) The powers, preferences, rights, restrictions and other matters relating to the Series A Preferred are as follows: Section 2. Dividends. (a) Each holder of a share of Series A Preferred shall be entitled to receive cumulative cash dividends at a rate of $.06 per annum per share of Series A Preferred Stock (the "Series A Base Rate") from funds legally available therefor, when, as and if declared by the Corporation's Board of Directors. Such dividends shall be payable quarterly on March 15, June 15, September 15 and December 15 (each a "Dividend Payment Date") of each year (unless such day is not a business day, in which event on the next succeeding business day) to holders of record of the Series A Preferred Stock as they appear in the register for the Series A Preferred Stock (the "Series A Preferred Stock Register") on the March 1, June 1, September 1 or December 1 immediately preceding such Dividend Payment Date. In the event that the Corporation shall have failed (for whatever reason) to redeem shares of Series A Preferred Stock scheduled to be redeemed on any Mandatory Redemption Date (as defined below), then the holders of Series A Preferred Stock shall be entitled to receive, from and after such Mandatory Redemption Date, cumulative cash dividends (in lieu of cash dividends at the Series A Base Rate) at a rate (the "Special Rate") per share of Series A Preferred Stock equal to 6% per annum on the Base Amount (as defined below). The Base Amount means, with respect to each share of Series A Preferred Stock, $1; provided that subsequent to the Mandatory Redemption Date, for purposes of calculating the dividend due on any Dividend Payment Date 2 (if cumulative dividends have not been paid in full prior to such date), the full amount of any accrued but unpaid dividends as of the immediately preceding Dividend Payment Date shall be added to the Base Amount. Dividends payable on the Preferred Stock for any period less than a full quarter dividend period shall be computed on the basis of the 365 or 366 day year, as applicable, and the actual number of days elapsed. Dividends on each share of Series A Preferred Stock shall accrue from the date of original issue of such share of Series A Preferred Stock. Quarterly dividends which are not paid in full in cash on any Dividend Payment Date will cumulate without interest as if quarterly dividends had been paid in cash on each succeeding Dividend Payment Date until such accumulated quarterly dividends shall have been declared and paid in full in cash. Any declaration of dividends may be for a portion, or all, of the then accumulated dividends. Any accumulated dividends which are not paid will continue to cumulate in the manner described above. No dividend or distribution in cash, shares of capital stock or other property shall be paid or declared and set apart for payment on any date on or in respect of the Common Stock, of the Corporation or on any other series of stock issued by the Corporation ranking junior to the Preferred Stock in payment of dividends or upon liquidation, dissolution or winding-up of the Corporation (collectively, the "Junior Securities") (any such dividend or distribution hereinafter referred to as a "Junior Securities Distribution"), unless, contemporaneously therewith or with respect to the immediately preceding Dividend Payment Date for the Series A Preferred Stock, a dividend or distribution is or was paid or declared and set apart for payment, as the case may be, on or in respect of the Series A Preferred Stock payable at the rate set forth herein and payable on a date no later than the payment date set for such Junior Securities Distribution. In no event may the Corporation (i) make a Junior Securities Distribution in cash unless, contemporaneously therewith or with respect to the immediately preceding Dividend Payment Date for the Series A Preferred Stock, a dividend or distribution in cash is or was paid or declared and set apart for payment on or in respect of the Series A Preferred Stock, payable at the rate set forth herein and on a date no later than the payment date set for such Junior Securities Distribution, (ii) make a Junior Securities Distribution while there are dividends in arrears on the Series A Preferred Stock or (iii) redeem, purchase or otherwise acquire for value any Junior Securities unless, prior to or contemporaneously with such redemption, purchase or acquisition the Series A Preferred Stock is redeemed in full; provided that the Corporation may redeem, purchase or otherwise acquire Junior Securities (and options in respect thereof) held by employees or former employees (or employee benefit plans) of the Corporation or fractional shares in Junior Securities of the Corporation which redemption, purchase or other acquisition shall be approved by the Board of Directors of the Corporation. Notwithstanding the foregoing, this provision shall not prohibit the payment or declaration and setting aside of a dividend payable in shares of Junior Securities or a redemption, purchase or acquisition of Junior Securities with shares of Junior Securities. (b) So long as any shares of Series A Preferred Stock shall be outstanding, no dividend, whether in cash, or share of any security or property, shall be paid or declared, nor shall any other distribution be made, on any other capital stock of the Corporation, nor shall any shares of any such other capital stock of the Corporation be purchased, redeemed, or otherwise acquired for value by the Corporation until all dividends set forth in Section 2(a) above on the 3 Series A Preferred Stock shall have been paid or declared and set apart. Section 3. Liquidation, Dissolution or Winding Up. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Corporation, before any payment or distribution of the assets of the Corporation (whether capital or surplus), or proceeds thereof, shall be made to or set apart for the holders of shares of any Junior Securities, holders of shares of Series A Preferred Stock shall be entitled to receive payment of $1 per share held by them, plus an amount in cash equal to all accrued and unpaid dividends thereon, which dividends shall have accrued at the Series A Base Rate or the Special Rate, as the case may be, provided in Section 2, whether or not declared to the date of such payment. If, upon any liquidation, dissolution or winding-up of the Corporation, the assets of the Corporation or proceeds thereof, distributed among the holders of shares of Series A Preferred Stock and any other series of Preferred Stock which ranks pari passu in right of payment upon liquidation, dissolution or winding-up of the Corporation with the Series A Preferred Stock shall be insufficient to pay in full the respective preferential amounts of shares of Series A Preferred Stock and such other series of Preferred Stock, then such assets, or the proceeds thereof, shall be distributed among the holders of all such stock ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. After payment of the full amount of the liquidation preference to which the holders of the Series A Preferred Stock are entitled, such holders will not be entitled to any further participation in any distribution of assets of the Corporation. For the purposes of this paragraph, none of the merger or the consolidation of the Corporation into or with another corporation or the merger or consolidation of any other corporation into or with the Corporation or the sale, transfer or other disposition of all or substantially all the assets of the Corporation, shall be deemed to be voluntary or involuntary liquidation, dissolution or winding-up of the Corporation. (b) Voting. Except as otherwise expressly required by the GCL, the holders of the capital stock of the Corporation, irrespective of the class or series, shall vote together as a single class for the election or removal of directors of the Corporation and on all other matters to which stockholders are entitled to vote. Each holder of the Corporation's Common Stock shall have one vote for each share of Common Stock held of record by such stockholder and each holder of the Corporation's Series A Preferred Stock shall have 1/5 vote for each share of Series A Preferred Stock held of record by such stockholder. Section 4. Redemption of Series A Preferred Stock. (a) Mandatory Redemption. The Series A Preferred Stock shall, subject to the limitations described herein, be subject to mandatory redemption, to the extent it may lawfully do so, in three equal annual installments on June 15, 2007, June 15, 2008 and June 15, 2009 (each a "Redemption Date"), in each case, from funds legally available therefor, at a price per share of Series A Preferred Stock equal to $1 per share (the "Series A Redemption Price"), together with an amount representing accrued and unpaid dividends, whether or not declared, to the date of redemption (the "Series A Redemption Date"). 4 Each such date on which the Corporation is required to redeem shares of Series A Preferred Stock is hereinafter referred to as a "Mandatory Redemption Date". Any shares of Series A Preferred Stock which have been issued and have been redeemed, repurchased or reacquired in any manner by the Corporation (other than through the operation of this mandatory redemption provision) prior to any Mandatory Redemption Date may be credited by the Corporation against the number of shares of Series A Preferred Stock required to be redeemed on any Mandatory Redemption Date after the date of such other redemption, repurchase or reacquisition, unless such shares have been previously so credited. The Corporation shall cause to be mailed to each holder of Series A Preferred Stock, at their last addresses as they shall appear upon the Series A Preferred Stock Register, at least 30 and not more than 60 days prior to the Mandatory Redemption Date, a notice stating the number of shares of Series A Preferred Stock owned by such holder that are to be redeemed on the Mandatory Redemption Date. Except as otherwise required by law, the failure to give any such notice, or any defect therein, shall not affect the validity of such a redemption. Notwithstanding the terms of the foregoing paragraphs, the Corporation shall be obligated to redeem Series A Preferred Stock pursuant to the mandatory redemption herein described only to the extent that such Series A Preferred Stock can be redeemed without contravening or causing a default under any contract, agreement or other instrument by which any of the Corporation or its subsidiaries or any of their property is bound. If on any Mandatory Redemption Date the Corporation shall not be obligated, by reason of the operation of the foregoing paragraph, to redeem shares of Series A Preferred Stock, then the Corporation shall be obligated, to the extent and on the first date after such Mandatory Redemption Date on which the limitations described in the foregoing paragraph shall no longer apply (the "Delayed Redemption Date"), to redeem the number of shares of Series A Preferred Stock which it would have been obligated to redeem on the Mandatory Redemption Date, at a price per share of Series A Preferred Stock equal to the Series A Redemption Price; it being understood that in any event the unpaid dividends included in such Redemption Prices shall have accrued at the respective Base Rate or the Special Rate, as the case may be, as provided in Section 2. The Series A Preferred Stock may be redeemed at the Corporation's option (subject to the legal availability of funds) at any time, in whole or in part, at a price per share equal to the Redemption Price. The Corporation shall cause to be mailed to each holder of Series A Preferred Stock, at their last addresses as they shall appear upon the Series A Preferred Stock Register, at least 30 and not more than 60 days prior to the Optional Redemption Date, a notice stating the date on which such redemption is expected to take place (the "Optional Redemption Date") and, if less than all the shares of Series A Preferred Stock are to be redeemed, the notice shall also specify the number of shares of Series A Preferred Stock owned by such holder that are to be redeemed. Except as otherwise required by applicable law, the failure to give any such notice, or any defect therein, shall not affect the validity of such a redemption. If less than all the shares of Series A Preferred Stock are to be redeemed, the shares to be redeemed shall be redeemed, on a pro rata basis, according to the number of shares of Series A Preferred Stock held by each holder. 5 On or after the Mandatory Redemption Date, the Optional Redemption Date or the Delayed Redemption Date, as the case may be, the holders of shares of Series A Preferred Stock which have been redeemed shall surrender their certificates representing such shares to the Corporation at its principal place of business or as otherwise notified, and thereupon the redemption price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. Notice having been given as aforesaid, from and after the Mandatory Redemption Date, the Optional Redemption Date or the Delayed Redemption Date, as the case may be, unless there shall have been a default in payment of the redemption price, all rights of the holders of such redeemed shares of Series A Preferred Stock, except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates, shall cease with respect to such shares, and such shares shall not thereafter be transferred on the Series A Preferred Stock Register or be deemed to be outstanding for any purpose whatsoever. Section 5. Reissuance of Series A Preferred Stock. No shares of Series A Preferred Stock which are redeemed, purchased or acquired by the Corporation shall be reissued, and all such shares shall be canceled and eliminated from the shares which the Corporation shall be authorized to issue. V. Unless and except to the extent that the bylaws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot. VI. In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board is expressly authorized to make, alter and repeal the bylaws of the Corporation, subject to the power of the stockholders of the Corporation to alter or repeal any bylaw whether adopted by them or otherwise. VII. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the GCL, or (iv) for any transaction from which the director derived an improper personal benefit. If the GCL is amended after approval by the stockholders of this Article VII to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director shall be eliminated or limited to the fullest extent permitted by the GCL, as so amended. The Corporation shall, to the fullest extent permitted by the provisions of Section 145 of the GCL as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all expenses, 6 liabilities, or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-Law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her or their official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Any repeal or modification of this Article VII shall be prospective and shall not affect the rights under this Article VII in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. VIII. The Corporation reserves the right at any time, and from time to time, to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in a manner now or hereafter prescribed by the laws of the State of Delaware at the time in force; and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this Article VIII. IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated Certificate of Incorporation to be signed by its ________________ this ________ day of _________, 2002. By: _____________________________ Name: Title: 7 EXHIBIT B By-Laws of Surviving Corporation BY-LAWS OF LEVCOR INTERNATIONAL, INC. ARTICLE 1 STOCKHOLDERS Section 1.1 Annual Meeting. The annual meeting of the stockholders of the Corporation shall be held annually at the registered office of the Corporation in the State of Delaware or at such other place within or without the State of Delaware, at such time and on such date as may from time to time be designated by the Board of Directors, for the election of directors and for the transaction of any other proper business. Section 1.2 Special Meetings. Special meetings of the stockholders of the Corporation may be called at any time and from time to time by the Chairman, President or by a majority of the directors then in office, and shall be called by the Secretary upon the written request of stockholders holding of record at least a majority of the votes of the outstanding shares of the Corporation's voting stock entitled to vote at such meeting. Special meetings shall be held at such place within or without the State of Delaware, at such time and on such date as shall be specified in the call thereof. Section 1.3 Notice of Meetings. Written notice of each meeting of the stockholders, stating the place, date and hour thereof and, in the case of a special meeting, the purpose or purposes for which it is called, shall be given, not less than ten nor more than sixty days before the date of such meeting (or at such other time as may be required by statute), to each stockholder entitled to vote at such meeting. If mailed, such notice is given when deposited in the United States mail, postage prepaid, directed to each stockholder at his or her address as it appears on the records of the Corporation. Section 1.4 Waiver of Notice. Whenever notice is required to be given of any annual or special meeting of the stockholders, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated in such notice, shall be deemed equivalent to notice. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice. Attendance of a person at a meeting of the stockholders shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Section 1.5 Adjournment. When any meeting of the stockholders is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken. At the adjourned meeting any business may be transacted which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after such adjournment the Board of Directors shall fix a new record date for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at such meeting. Section 1.6 Quorum. At any meeting of the stockholders the presence, in person or by proxy, of the holders of a majority of the issued and outstanding shares of the Corporation entitled to vote at such meeting shall be necessary in order to constitute a quorum for the transaction of any business. If there shall not be a quorum at any meeting of the stockholders, the holders of a majority of the shares entitled to vote present at such meeting, in person or by proxy, may adjourn such meeting from time to time, without further notice to the stockholders other than an announcement at such meeting, until holders of the amount of shares required to constitute a quorum shall be present in person or by proxy. Section 1.7 Voting. Each holder of the Corporation's common stock shall have one vote for each share of common stock held of record by such stockholder. Each holder of the Corporation's Series A preferred stock shall have 1/5 vote for each share of Series A preferred stock held of record by such stockholder. Voting need not be by ballot, except that all election of directors shall be by written ballot unless otherwise provided in the Certificate of Incorporation. Whenever any corporate action is to be taken by vote of the stockholders, it shall, except as otherwise required by law or by the Certificate of Incorporation, be authorized by a majority of the votes cast at a meeting of stockholders of the holders of shares entitled to vote thereon, except that all elections shall be decided by a plurality of the votes cast. Section 1.8 Action Without a Meeting. Any action required or permitted to be taken at any annual or special meeting of stockholders may be taken without a meeting thereof, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of such corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Section 1.9 Record Date. The Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of any meeting of stockholders, nor more than sixty days prior to any other action, as the record date for the purpose of determining the stockholders entitled to notice of or to vote at any meeting of the stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action. Section 1.10 Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him or her by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. 2 ARTICLE 2 DIRECTORS Section 2.1 Number; Qualifications. The Board of Directors shall consist of one or more members as determined from time to time by the Board of Directors. Directors need not be stockholders of the Corporation. Section 2.2 Term of Office. Each director shall hold office until his or her successor is elected and qualified or until his or her earlier death, resignation or removal. Section 2.3 Meetings. A meeting of the Board of Directors shall be held for the election of officers and for the transaction of such other business as may come before such meeting as soon as practicable after the annual meeting of the stockholders. Other regular meetings of the Board of Directors may be held at such times as the Board of Directors of the Corporation may from time to time determine. Special meetings of the Board of Directors may be called at any time by the President of the Corporation or by a majority of the directors then in office. Meetings of the Board of Directors may be held within or without the State of Delaware. Section 2.4 Notice of Meetings; Waiver of Notice; Adjournment. No notice need be given of the first meeting of the Board of Directors after the annual meeting of stockholders or of any other regular meeting of the Board of Directors. Notice of a special meeting of the Board of Directors, specifying the place, date and hour thereof, shall be delivered personally, mailed or telegraphed to each director at his or her address as such address appears on the books of the Corporation at least two business days (Saturdays, Sundays and legal holidays not being considered business days for the purpose of these By-Laws) before the date of such meeting. Whenever notice is required to be given under any provision of the Certificate of Incorporation or these By-Laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a director at a special meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, the directors or any committee of directors need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or these By-Laws. A majority of the directors present whether or not a quorum is present, may adjourn any meeting to another time and place. Notice need not be given of the adjourned meeting if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken, and at the adjourned meeting any business may be transacted that might have been transacted at the original meeting. Section 2.5 Quorum; Voting. A majority of the total number of directors shall constitute a quorum for the transaction of business. The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 2.6 Participation by Telephone. Members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or such committee by 3 means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. Section 2.7 Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceeding of the Board of Directors or of such committee. Section 2.8 Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed by the officers on all papers which may require it, but no such committee shall have the power or authority in reference to (a) amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of the assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation, or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series); (b) adopting an agreement of merger or consolidation; (c) recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets; (d) recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution; or (e) amending these By-Laws and, unless the resolution expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. The Board of Directors may designate one or more directors as alternate members of any such committee, who may replace any absent or disqualified member at any meeting of such committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another director to act at the meeting in the place of such absent or disqualified member. Section 2.9 Removal; Resignation. Any director or the entire Board of Directors may be removed with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. Any director may resign at any time, upon written notice to the Corporation. Section 2.10 Vacancies. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of directors then in office, although less than a quorum, or by a sole remaining director. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become 4 effective, and each director so chosen shall hold office as provided above in the filling of other vacancies. A director elected to fill a vacancy shall hold office for the unexpired term of his or her predecessor. Section 2.11 Compensation. The Board of Directors may fix the compensation of directors. ARTICLE 3 OFFICERS Section 3.1 Election; Qualifications. At the first meeting of the Board of Directors and as soon as practicable after each annual meeting of stockholders, the Board of Directors shall elect or appoint a Chairman, a President, one or more Vice-Presidents, a Secretary and a Treasurer, and may elect or appoint at such time or from time to time such additional officers as it deems advisable. No officer need be a director of the Corporation. Any number of offices may be held by the same person, except that there shall always be two persons who hold offices which entitle them to sign instruments and stock certificates. Section 3.2 Term of Office; Vacancies. Each officer shall hold office until the election and qualification of his or her successor or until his or her earlier death, resignation or removal. Any vacancy occurring in any office, whether because of death, resignation or removal, with or without cause, or otherwise, shall be filled by the Board of Directors. Section 3.3 Removal; Resignation. Any officer may be removed from office at any time with or without cause by the Board of Directors. Any officer may resign his or her office at any time upon written notice to the Corporation. Section 3.4 Powers and Duties of the Chairman. The Chairman shall be the chief executive officer of the Corporation and shall have general charge and supervision of its business and affairs. The Chairman shall from time to time make such reports concerning the Corporation as the Board of Directors of the Corporation may direct. The Chairman shall preside at all meetings of the stockholders and the Board of Directors. The Chairman shall have such other powers and shall perform such other duties as may from time to time be assigned to him or her by the Board of Directors. Section 3.5 Powers and Duties of the President. The President shall be the chief operating officer of the Corporation and shall have general charge and supervision of its operations, subject to the supervision of the Chairman. The President shall from time to time make such reports concerning the Corporation as the Board of Directors or the Chairman of the Corporation may direct. The President shall have such other powers and shall perform such other duties as may from time to time be assigned to him or her by the Board of Directors or the Chairman. Section 3.6 Powers and Duties of the Vice-Presidents. Each of the Vice-Presidents shall be given such titles and designations and shall have such powers and perform such duties as may from time to time be assigned to him or her by the Board of Directors. 5 Section 3.7 Powers and Duties of the Secretary. The Secretary shall record and keep the minutes of all meetings of the stockholders and of the Board of Directors in a book to be kept for that purpose. The Secretary shall attend to the giving and serving of all notices by the Corporation. The Secretary shall be the custodian of, and shall make or cause to be made the proper entries in, the minute book of the Corporation and such other books and records as the Board of Directors may direct. The Secretary shall be the custodian of the corporate seal of the Corporation and shall affix or cause to be affixed such seal to such contracts and other instruments as the Board of Directors may direct. The Secretary shall have such other powers and shall perform such other duties as may from time to time be assigned to him or her by the Board of Directors. Section 3.8 Powers and Duties of the Treasurer. The Treasurer shall be the custodian of all funds and securities of the Corporation. Whenever required by the Board of Directors, the Treasurer shall render a statement of the Corporation's cash and other accounts, and shall cause to be entered regularly in the proper books and records of the Corporation to be kept for such purpose full and accurate accounts of the Corporation's receipts and disbursements. The Treasurer shall at all reasonable times exhibit the Corporation's books and accounts to any director of the Corporation upon application at the principal office of the Corporation during business hours. The Treasurer shall have such other powers and shall perform such other duties as may from time to time be assigned to him or her by the Board of Directors. Section 3.9 Delegation. In the event of the absence of any officer of the Corporation or for any other reason that the Board of Directors may deem sufficient, the Board of Directors may at any time or from time to time delegate all or any part of the powers or duties of any officer to any other officer or officers or to any director or directors. ARTICLE 4 STOCK The shares of the Corporation shall be represented by certificates signed by the President or any Vice-President and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary. Any of or all the signatures on the certificate may be a facsimile. ARTICLE 5 EXECUTION OF DOCUMENTS All contracts, agreements, instruments, bills payable, notes, checks, drafts, warrants or other obligations of the Corporation shall be made in the name of the Corporation and shall be signed by such officer or officers as the Board of Directors may from time to time designate. 6 ARTICLE 6 SEAL The seal of the Corporation shall contain the name of the Corporation, the words "Corporate Seal", the year of its organization and the word "Delaware". ARTICLE 7 INDEMNIFICATION The Corporation shall indemnify all persons to the full extent permitted, and in the manner provided, by the Delaware General Corporation Law, as the same now exists or may hereafter be amended. ARTICLE 8 FISCAL YEAR The fiscal year of the Corporation shall end on such date as shall be determined by the Board of Directors. ARTICLE 9 AMENDMENT OF BY-LAWS These By-Laws may be amended or repealed, and any new By-Law may be adopted, by the stockholders entitled to vote or by the Board of Directors. 7 EXHIBIT C Directors of Surviving Corporation Robert A. Levinson Joseph S. Dimartino Giandomenico Picco Edward F. Cooke Edward H. Cohen John E. McConnaughy EXHIBIT D Officers of Surviving Corporation NAME POSITION --------------------- -------------------------------------------------------- Robert A. Levinson Chief Executive Officer, President, and Chairman of the Board of Directors Edward F. Cooke Chief Financial Officer, Vice President, Secretary and Treasurer APPENDIX B SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to Section 228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder's shares of stock under the circumstances described in subsections (b) and (c) of this section. As used in this section, the word "stockholder" means a holder of record of stock in a stock corporation and also a member of record of a nonstock corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words and also membership or membership interest of a member of a nonstock corporation; and the words "depository receipt" mean a receipt or other instrument issued by a depository representing an interest in one or more shares or fractions thereof, solely of stock of a corporation, which stock is deposited with the depository. (b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to Section 251 (other than a merger effected pursuant to Section 251 (g) of this title), Section 252, Section 254, Section 257, Section 258, Section 263 or Section 264 of this title: (1) Provided, however, that no appraisal rights under this section shall be available for the shares of any class or series of stock, which stock, or depository receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation as provided in subsection (f) of Section 251 of this title. (2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything except: a. Shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof; B-1 b. Shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock (or depository receipts in respect thereof) or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 holders; c. Cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a. and b. of this paragraph; or d. Any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a., b. and c. of this paragraph. (3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under Section 253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation. (c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such a provision, the procedures of this section, including those set forth in subsections (d) and (e) of this section, shall apply as nearly as is practicable. (d) Appraisal rights shall be perfected as follows: (1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available pursuant to subsections (b) or (c) hereof that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this section. Each stockholder electing to demand the appraisal of such stockholder's shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of such stockholder's shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such stockholder's shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented B-2 to the merger or consolidation of the date that the merger or consolidation has become effective; or (2) If the merger or consolidation was approved pursuant to Section 228 or Section 253 of this title, then, either a constituent corporation before the effective date of the merger or consolidation, or the surviving or resulting corporation within ten days thereafter, shall notify each of the holders of any class or series of stock of such constituent corporation who are entitled to appraisal rights of the approval of the merger or consolidation and that appraisal rights are available for any or all shares of such class or series of stock of such constituent corporation, and shall include in such notice a copy of this section. Such notice may, and, if given on or after the effective date of the merger or consolidation, shall, also notify such stockholders of the effective date of the merger or consolidation. Any stockholder entitled to appraisal rights may, within 20 days after the date of mailing of such notice, demand in writing from the surviving or resulting corporation the appraisal of such holders' shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such holder's shares. If such notice did not notify stockholders of the effective date of the merger or consolidation, either (i) each such constituent corporation shall send a second notice before the effective date of the merger or consolidation notifying each of the holders of any class series of stock of such constituent corporation that are entitled to appraisal rights of the effective date of the merger or consolidation or (ii) the surviving or resulting corporation shall send such a second notice to all such holders on or within 10 days after such effective date; provided, however, that if such second notice is sent more than 20 days following the sending of the first notice, such second notice need only be sent to each stockholder who is entitled to appraisal rights and who has demanded appraisal of such holder's shares in accordance with this subsection. An affidavit of the secretary or assistant secretary or of the transfer agent of the corporation that is required to give either notice that such notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. For purposes of determining the stockholders entitled to receive either notice, each constituent corporation may fix, in advance, a record date that shall be not more than 10 days prior to the date the notice is given, provided, that if the notice is given on or after the effective date of the merger or consolidation, the record date shall be such effective date. If no record date is fixed and the notice is given prior to the effective date, the record date shall be the close of business on the day next preceding the day on which the notice is given. (e) Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder shall have the right to withdraw such stockholder's demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (d) hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the B-3 consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after such stockholder's written request for such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) hereof, whichever is later. (f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation. (g) At the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceeding as to such stockholder. (h) After determining the stockholders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its discretion, permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the stockholder entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has submitted such B-4 stockholder's certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that such stockholder is not entitled to appraisal rights under this section. (i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and the case of holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any state. (j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all of the shares entitled to an appraisal. (k) From and after the effective date of the merger or consolidation, no stockholder who has demanded appraisal rights as provided in subsection (d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however; that if no petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of such stockholder's demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. (l) The shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation. (Last amended by Ch. 82, L. '01. eff. 7-1-01.) B-5 APPENDIX C May 24, 2002 Board of Directors Levcor International, Inc. 462 Seventh Avenue New York, NY 10018 Gentlemen: We understand that the Board of Directors of Levcor International, Inc. ("Levcor") has approved a plan to acquire 100 percent of the capital stock of Carlyle Industries, Inc. ("Carlyle") It is our understanding that Levcor and Carlyle have entered into an agreement in principle for a merger of the two companies whereby each Carlyle stockholder would receive one share of Levcor capital stock for every five shares of Carlyle capital stock (the "Transaction"). In connection with the Transaction, Levcor has requested us to render our opinion, as of the Transaction Date, as to whether the terms of the Transaction are fair to the shareholders of Levcor from a financial point of view. For purposes of this opinion, we measure the fairness of the Transaction based upon the relative fair market values of the shares of Levcor and Carlyle. Fair market value is defined as the most likely price that a typical (or hypothetical) willing buyer would pay to a typical (or hypothetical) willing seller, with neither being under undue influence to transact, with both fully cognizant of all relevant facts and circumstances and with both seeking their maximum economic self interest. In connection with this opinion, we have made such reviews, analyses, and inquiries as we deemed necessary and appropriate under the circumstances. Among other things we have: (i) reviewed certain financial statements and other financial and operational data concerning Levcor and Carlyle; (ii) discussed the past and current operations and financial condition and the prospects of Levcor and Carlyle with senior executives of Levcor and Carlyle; (iii) compared the financial performances of Levcor and Carlyle with those of certain publicly traded companies involved in similar lines of business as Levcor and Carlyle; and (iv) considered such other factors as we deemed appropriate. C-1 May 24, 2002 Board of Directors Levcor International, Inc. 462 Seventh Avenue New York, NY 10018 Although our discussions with the managements of Levcor and Carlyle and review of supporting documentation give us comfort that our due diligence efforts are appropriate, we have not conducted a physical examination of all of Levcor's and Carlyle's properties or facilities and we have not obtained or been provided with any independent formal evaluation of such properties or facilities. We have assumed and relied upon, without independent verification, the accuracy and completeness of the information reviewed by us for the purpose of this opinion. With respect to the internally-prepared historical and projected financial statements of Levcor and Carlyle, we have assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the prospects of Levcor and Carlyle. Our opinion is necessarily based on economic, market, and other conditions as in effect on, and the information made available to us as of the date hereof. Willamette Management Associates, Inc. is one of the nation's leading independent financial advisory and business valuation firms. Willamette Management Associates, Inc.'s principal business is the valuation of businesses and business interests, including both closely held and publicly traded companies, for numerous purposes, including mergers and acquisitions, employee stock ownership plan transactions and administration, divestitures, public offerings, gift and estate taxes, corporate and partnership recapitalizations, dissolutions, and other objectives. We have acted as financial advisor to the Board of Directors of Levcor in connection with this transaction and will receive a fee for our services. Our fees for these services have not been contingent upon the resulting opinions and neither Willamette Management Associates, Inc. nor any of its employees has a present or intended future interest in Levcor or Carlyle. It is understood that this letter is for the information of the Board of Directors of Levcor and may not be used for any other purpose without our prior written consent. Notwithstanding the foregoing, we consent to the inclusion of this fairness opinion in Levcor's registration statement on Form S-4 and any amendments thereto. Based upon and subject to the foregoing and based upon such other matters as we consider relevant, we are of the opinion on the date hereof that the Transaction is fair from a financial point of view to the holders of shares of Levcor. Respectfully submitted, WILLAMETTE MANAGEMENT ASSOCIATES C-2 APPENDIX D May 24, 2002 To The Board of Directors Carlyle Industries, Inc. Dear Directors: We understand that Carlyle Industries, Inc. ("Carlyle" or the "Company" hereafter) and Levcor International, Inc. ("Levcor" hereafter) are considering entering into a transaction whereby Levcor will issue one share of Levcor common stock in exchange for each five shares of Carlyle common stock and Levcor will issue one share of Series A Preferred Stock in exchange for each share of Series B Preferred Stock of Carlyle. Such transaction and other related transactions disclosed to Houlihan Lokey Howard & Zukin ("Houlihan Lokey") are referred to collectively herein as the "Transaction." You have requested our opinion (the "Opinion") as to the matters set forth below. The Opinion does not address the Company's underlying business decision to effect the Transaction. We have not been requested to, and did not, solicit third party indications of interest in acquiring all or any part of the Company. Furthermore, at your request, we have not negotiated the Transaction or advised you with respect to alternatives to it. In connection with this Opinion, we have made such reviews, analyses and inquiries as we have deemed necessary and appropriate under the circumstances. Among other things, we have: 1. reviewed the following financial data regarding Carlyle's operations: (i) audited consolidated financial statements for the fiscal year ended December 31, 1998 through 2001; (ii) unaudited consolidated publicly available financial statements for the period ending March 31, 2002; (iii) projected quarterly balance sheet, income statement and cash flow for the fiscal years ended December 31, 2002 through 2004. 2. reviewed the following financial data regarding Levcor's operations: (i) audited consolidated financial statements for the fiscal year ended December 31, 1998 through 2001; D-1 To The Board of Directors Carlyle Industries, Inc. May 24, 2002 (ii) unaudited consolidated publicly available financial statements for the period ending March 31, 2002; (iii) projected quarterly balance sheet and income statement for the fiscal year ended December 31, 2002. 3. reviewed copies of the following documents and agreement: (i) Agreement and Plan of Merger between Levcor International, Inc. and Carlyle Industries, Inc., dated May 24, 2002; (ii) Amended and Restated Certificate of Incorporation of Levcor International, Inc., dated May 24, 2002; (iii) By-Laws of Levcor International, Inc., dated May 24, 2002. 4. visited Levcor's offices and met with members of management of Carlyle and Levcor, to discuss the terms of the Transaction, and the operations, financial condition, future prospects and projected operations and performance of Levcor and Carlyle; 5. reviewed publicly available financial data for certain companies that we deem comparable to Carlyle and Levcor; and 6. considered other data and factors that we deemed appropriate under the circumstances. We have relied upon and assumed, without independent verification, that the financial forecasts and projections provided to us have been reasonably prepared and reflect the best currently available estimates of the future financial results and condition of the Company, and that there has been no material change in the assets, financial condition, business or prospects of the Company since the date of the most recent financial statements made available to us. We have not independently verified the accuracy and completeness of the information supplied to us with respect to the Company and do not assume any responsibility with respect to it. We have not made any physical inspection or independent appraisal of any of the properties or assets of the Company. Our opinion is necessarily based on business, economic, market and other conditions as they exist and can be evaluated by us at the date of this letter. Based upon the foregoing, and in reliance thereon, it is our opinion that the consideration to be received by the Public Stockholders of the Company in connection with the Transaction is fair to them from a financial point of view. We consent to the inclusion of this fairness opinion in Levcor's registration statement on Form S-4 and any amendments thereto. HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC. D-2 Appendix E LEVCOR INTERNATIONAL, INC. 2002 STOCK OPTION PLAN (SUBJECT TO STOCKHOLDER APPROVAL) 1. Purpose. The purpose of this 2002 Stock Option Plan (the "Plan") is to induce key personnel, including employees, officers, directors and independent contractors, to remain in the employ or service of Levcor International, Inc. (the "Company") and its future subsidiary corporations ("Subsidiaries"), as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"), to attract new key personnel to enter into such employ or service of the Company and the Subsidiaries to encourage such key personnel to secure or increase on reasonable terms their stock ownership in the Company and to provide for the assumption of stock options granted by an Acquired Company (as such term is hereinafter defined). The Board of Directors of the Company (the "Board") believes that the granting of stock options ("Options") under the Plan will promote continuity of management and increased incentive and personal interest in the welfare of the Company and aid in securing its continued growth and financial success by those who are or may become primarily responsible for shaping and carrying out the long range plans of the Company. Options granted hereunder are intended to be either (i) "incentive stock options" (which term, when used herein, shall have the meaning ascribed thereto by the provisions of Section 422(b) of the Code) or (ii) options which are not incentive stock options ("non-qualified stock options") or (iii) a combination thereof, as determined by the Committee (the "Committee") referred to in Section 5 hereof at the time of the grant thereof. 2. Effective Date of the Plan. The Plan became effective on June 20, 2002, subject to approval by the stockholders of the Company, prior to June 20, 2003. 3. Stock Subject to Plan. 550,000 of the authorized but unissued shares of the common stock of the Company (the "Common Stock") are hereby reserved for issue upon the exercise of Options granted under the Plan; provided, however, that the number of shares so reserved may from time to time be reduced to the extent that a corresponding number of issued and outstanding shares of the Common Stock are purchased by the Company and set aside for issue upon the exercise of Options. If any Options expire or terminate for any reason without having been exercised in full, the unpurchased shares subject thereto shall again be available for the purposes of the Plan. 4. Committee. The committee (the "Committee") shall consist of two or more members of the Board. It is intended that all of the members of the Committee shall be "non-employee directors" within the meaning of Rule 16b-3(b)(3) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and "outside directors" within the contemplation of Section 162(m)(4)(C)(i) of the Code. The Committee shall be appointed annually by the Board, which may at any time and from time to time remove any member of the Committee, with or without cause, appoint additional members to the Committee and fill vacancies, however caused, in the Committee. A majority of the members of the Committee shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members present at a duly called meeting of the Committee at which a quorum is present. Any determination of the 2 Committee signed by all of the members of the Committee shall be fully as effective as if it had been made at a meeting duly called and held. 5. Administration. The Plan shall be administered by the Committee. Subject to the express provisions of the Plan, the Committee shall have complete authority, in its discretion, to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to determine the terms and provisions of the option agreements or certificates which evidence Options, to determine the individuals (each a "Participant") to whom and the times and the prices at which Options shall be granted, the periods during which Options shall be exercisable, the number of shares of the Common Stock to be subject to Options and to make all other determinations necessary or advisable for the administration of the Plan. In making such determinations, the Committee may take into account the nature of the services rendered by the respective Participants, their present and potential contributions to the success of the Company and the Subsidiaries and such other factors as the Committee in its discretion shall deem relevant. The Committee shall have the authority to determine whether Options granted hereunder shall be (a) incentive stock options, (b) non-qualified stock options or (c) a combination thereof. The Committee's determination on the matters referred to in this Section 5 shall be conclusive. Any dispute or disagreement which may arise under or as a result of or with respect to any Option shall be determined by the Committee, in its sole discretion, and any interpretation by the Committee of the terms of any Option shall be final, binding and conclusive. 3 6. Eligibility. An Option may be granted only to (a) employees of the Company or a Subsidiary (including officers and/or directors), (b) directors of the Company who are not employees or officers of the Company or a Subsidiary, (c) independent contractors retained by the Company or a Subsidiary to provide consulting services for the Company or a Subsidiary and (d) employees of a corporation which has been acquired by the Company or a Subsidiary, whether by way of exchange or purchase of stock, purchase of assets, merger or reverse merger, or otherwise, who hold options with respect to the stock of such corporation which the Company has agreed to assume. 7. Option Prices. A. Except as otherwise provided in Section 21, the initial per share option price of any Option which is an incentive stock option shall be the price determined by the Committee, but shall not be less than the fair market value of a share of the Common Stock on the date such Option is granted; provided, however, that, in the case of a Participant who owns more than 10% of the total combined voting power of all classes of the Company's stock at the time an Option which is an incentive stock option is granted to such Participant, the initial per share option price shall not be less than 110% of the fair market value of a share of the Common Stock on the date such Option is granted. B. Except as otherwise provided in Section 21, the initial per share option price of any Option which is a non-qualified stock option shall not be less than 75% of the fair market value of a share of the Common Stock on the date such Option is granted. 4 C. For all purposes of the Plan, the fair market value of a share of the Common Stock on any date shall be equal to (i) the closing sale price of the Common Stock on the Over the Counter Bulletin Board on the last business day preceding such date or (ii) if there is no sale of the Common Stock on such business day, the average of the bid and asked prices on the Over the Counter Bulletin Board at the close of the market on such business day. 8. Option Term. Participants shall be granted Options for such term as the Committee shall determine, not in excess of ten years from the date of the granting thereof; provided, however, that, in the case of a Participant who owns more than 10% of the total combined voting power of all classes of the Company's stock at the time an Option which is an incentive stock option is granted to such Participant, the term with respect to such Option shall not be in excess of five years from the date such Option is granted. 9. Limitations on Amount of Stock Options Granted. A. The aggregate fair market value of the shares of the Common Stock for which any Participant may be granted incentive stock options which are exercisable for the first time in any calendar year (whether under the terms of the Plan or any other stock option plan of the Company) shall not exceed $100,000. B. No Participant shall, during any fiscal year of the Company, be granted Options to purchase more than 300,000 shares of the Common Stock. 10. Exercise of Options. A. A Participant may exercise each Option granted to such Participant in such installments as the Committee shall determine at the time of the grant thereof; provided, 5 however, that, unless the Committee shall otherwise determine at the time of grant, a Participant may not exercise an Option prior to the first anniversary of the date of the granting of such Option and a Participant may (i) during the period commencing on the first anniversary of the date of the granting of such Option and ending on the day preceding the second anniversary of such date, exercise such Option with respect to one-third of the shares subject thereto, (ii) during the period commencing on such second anniversary and ending on the day preceding the third anniversary of the date of the granting of such Option, exercise such Option with respect to two-thirds of the shares originally subject thereto and (iii) during the period commencing on such third anniversary, exercise such Option with respect to all of the shares subject thereto. B. Except as hereinbefore otherwise set forth, an Option may be exercised either in whole at any time or in part from time to time. C. The Committee may, in its discretion, permit any Option to be exercised, in whole or in part, prior to the time when it would otherwise be exercisable in accordance with the provisions of Section 10A hereof. D. An Option may be exercised only by a written notice of intent to exercise such Option with respect to a specific number of shares of the Common Stock and payment to the Company of the exercise price for the Common Stock so specified; provided, however, that, if the Committee in its sole discretion so determines at the time of the grant of any Option, all or any portion of such payment may be made in kind by the delivery of shares of the Common Stock which have been owned by the Participant for a minimum period of six months having a fair market value on the date of delivery equal to the portion of the option price so paid; 6 provided, further, however, that, subject to the requirements of Regulation T (as in effect from time to time) promulgated under the Exchange Act, the Committee may implement procedures to allow a broker chosen by a Participant to make payment of all or any portion of the option price payable upon the exercise of an Option and to receive, on behalf of such Participant, all or any portion of the shares of the Common Stock issuable upon such exercise. E. I. Notwithstanding the provisions of Section 10A, in the event that a Change in Control shall occur, each Option theretofore granted to any Participant which shall not have theretofore expired or otherwise been cancelled or become unexercisable shall become immediately exercisable in full. For the purposes of this Section 10E, a "Change in Control" shall be deemed to occur upon (i) the election of one or more individuals to the Board which election results in one-third of the directors of the Company consisting of individuals who have not been directors of the Company for at least two years, unless such individuals have been elected as directors or nominated for election by the stockholders as directors by at least three-fourths of the directors of the Company who have been directors of the Company for at least two years, (ii) the sale by the Company of all or substantially all of its assets to any Person, the consolidation of the Company with any Person, the merger of the Company with any Person as a result of which merger the Company is not the surviving entity as a publicly held corporation, (iii) the sale or transfer of shares of the Company by the Company and/or any one or more of its stockholders, in one or more transactions, related or unrelated, to one or more Persons under circumstances whereby any Person and its Affiliates shall own, after such sales and transfers, at least one-fourth, but less than one-half, of the shares of the Company having voting power for the election of directors, unless such sale or transfer has 7 been approved in advance by at least three-fourths of the directors of the Company who have been directors of the Company for at least two years, (iv) the sale or transfer of shares of the Company by the Company and/or any one or more of its stockholders, in one or more transactions, related or unrelated, to one or more Persons under circumstances whereby any Person and its Affiliates shall own, after such sales and transfers, at least one-half of the shares of the Company having voting power for the election of directors or (v) as defined in the Participant's employment agreement, if any, with the Company or a Subsidiary. For the purposes of this Section 10E, (i) the term "Affiliate" shall mean any Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, any other Person, (ii) the term "Person" shall mean any individual, partnership, firm, trust, corporation or other similar entity and (iii) when two or more Persons act as a partnership, limited partnership, syndicate or other group for the purpose of acquiring, holding or disposing of securities of the Company, such partnership, limited partnership, syndicate or group shall be deemed a "Person." II. In the event that a Change of Control shall occur, then, from and after the time of such event, neither the provisions of this Section 10E nor any of the rights of any Participant thereunder shall be modified or amended in any way. 11. Transferability. A. Except as otherwise provided in Section 11B hereof, no Option shall be assignable or transferable except by will and/or by the laws of descent and distribution and, during the life of any Participant, each Option granted to such Participant may be exercised only by him or her. 8 B. A Participant may, with the prior approval of the Committee, transfer for no consideration an Option which is a non-qualified stock option to or for the benefit of the Participant's Immediate Family, a trust for the exclusive benefit of the Participant's Immediate Family or to a partnership or limited liability company for one or more members of the Participant's Immediate Family, subject to such limits as the Committee may establish, and the transferee shall remain subject to all the terms and conditions applicable to the Option prior to such transfer. The term "Immediate Family" shall mean the Participant's spouse, parents, children, stepchildren, adoptive relationships, sisters, brothers and grandchildren and any of their respective spouses. 12. Termination of Service. Except as otherwise provided by the Committee, in the event a Participant leaves the employ or service of the Company and the Subsidiaries for any reason, whether voluntarily or otherwise, other than by reason of death, or, in the case of a Participant who shall be an employee or director, retirement on or subsequent to his or her 65th birthday or permanent disability, each Option theretofore granted to such Participant shall, to the extent it is exercisable on the date of such termination of employment or service, terminate upon the earlier to occur of (i) the expiration of 30 days after such termination of employment or cessation of service or (ii) the expiration date specified in such Option. Except as otherwise provided by the Committee, in the event a Participant's employment or service with the Company and the Subsidiaries terminates by reason of death, retirement on or subsequent to his or her 65th birthday or permanent disability, each Option granted to such Participant shall become immediately exercisable in full and shall terminate upon the earlier to occur of (i) the expiration of three 9 months after the date of such death, retirement or permanent disability or (ii) the expiration date specified in such Option. Notwithstanding the foregoing, if a Participant is terminated for cause (as defined herein), each Option theretofore granted to him or her which shall not have theretofore expired or otherwise been cancelled shall, to the extent not theretofore exercised, terminate forthwith. For purposes of the foregoing, (a) the term "cause" shall mean: (i) the commission by the Participant of any act or omission that would constitute a crime under federal, state or equivalent foreign law, (ii) the commission by the Participant of any act of moral turpitude, (iii) fraud, dishonesty or other acts committed by the Participant that result in a breach of any fiduciary or other material duty to the Company and/or the Subsidiaries, (iv) continued substance abuse that renders the Participant incapable of performing his or her material duties to the satisfaction of the Company and/or the Subsidiaries, or (v) as defined in the Participant's employment agreement, if any, with the Company or a Subsidiary and (b) the term "retirement" shall mean (I) the termination of a Participant's employment with the Company and all of the Subsidiaries (x) other than for cause or by reason of his or her death and (y) on or after the earlier to occur of (1) the first day of the calendar month in which his or her 65th birthday shall occur and (2) the date on which he or she shall have both attained his or her 55th birthday and completed 10 years of employment with the Company and/or the Subsidiaries or (II) the termination of a Participant's service as a director with the Company and all of the Subsidiaries (x) other than for cause or by reason of his or her death and (y) on or after the first day of the calendar month in which his or her 65th birthday shall occur. 10 13. Adjustment of Number of Shares. In the event that a dividend shall be declared upon the Common Stock payable in shares of the Common Stock, the number of shares of the Common Stock then subject to any Option, the number of shares of the Common Stock which may be issued pursuant to the Plan but not yet covered by Options and the number of shares set forth in Section 9B hereof shall be adjusted by adding to each share the number of shares which would be distributable thereon if such shares had been outstanding on the date fixed for determining the stockholders entitled to receive such stock dividend. In the event that the outstanding shares of the Common Stock shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Company or of another corporation, whether through reorganization, recapitalization, stock split-up, combination of shares, sale of assets, merger or consolidation in which the Company is the surviving corporation, or merger or consolidation in which the shares of stock or other securities of the surviving corporation into which the outstanding shares of the Common Stock shall be changed into or for which the outstanding shares shall be exchanged are registered under the Securities Act of 1933, as amended (the "Securities Act") then, there shall be substituted for each share of the Common Stock then subject to any Option, for each share of the Common Stock which may be issued pursuant to the Plan but not yet covered by Options and for each share of the Common Stock referred to in Section 9B hereof the number and kind of shares of stock or other securities into which each outstanding share of the Common Stock shall be so changed or for which each such share shall be exchanged. In the event that there shall be any change, other than as specified in this Section 13, in the number or kind of outstanding shares of the Common Stock, or of any stock or other securities into which the Common Stock shall have been changed, 11 or for which it shall have been exchanged, then, if the Committee shall, in its sole discretion, determine that such change equitably requires an adjustment in the number or kind of shares then subject to any Option, the number or kind of shares which may be issued pursuant to the Plan but not yet covered by Options and the number of shares set forth in Section 9B hereof, such adjustment shall be made by the Committee and shall be effective and binding for all purposes of the Plan and of each outstanding Option. In the case of any substitution or adjustment in accordance with the provisions of this Section 13, the option price in each Option for each share covered thereby prior to such substitution or adjustment shall be the option price for all shares of stock or other securities which shall have been substituted for such share or to which such share shall have been adjusted in accordance with the provisions of this Section 13. No adjustment or substitution provided for in this Section 13 shall require the Company to sell a fractional share under any Option. 14. Dissolution, Liquidation, Certain Mergers and Consolidations. In the event of the dissolution or liquidation of the Company, or a merger or consolidation in which the Company is not the surviving corporation, unless the shares of stock or other securities of the surviving corporation into which the outstanding shares of the Common Stock shall be changed into or for which the outstanding shares shall be exchanged are registered under the Securities Act, all outstanding Options shall terminate; provided, however, that, notwithstanding Section 10A, each Optionee shall have had a period of at least 20 days prior to the date of such dissolution, liquidation, merger or consolidation in which to exercise his or her Options in full. 12 15. Purchase for Investment, Withholding and Waivers. A. Unless the shares to be issued upon the exercise of an Option by a Participant shall be registered prior to the issuance thereof under the Securities Act, such Participant will be required, as a condition of the Company's obligation to issue such shares, to give a representation in writing that he or she is acquiring such shares for his or her own account as an investment and not with a view to, or for sale in connection with, the distribution of any thereof. B. In the event of the death of a Participant, a condition of exercising any Option shall be the delivery to the Company of such tax waivers and other documents as the Committee shall determine. C. Each Participant shall be required, as a condition of exercising any non-qualified stock option, to make such arrangements with the Company with respect to withholding as the Committee may determine. 16. No Stockholder Status. Neither any Participant nor his or her legal representatives, legatees or distributees shall be or be deemed to be the holder of any share of the Common Stock covered by an Option unless and until a certificate for such share has been issued. Upon payment of the purchase price thereof, a share issued upon exercise of an Option shall be fully paid and non-assessable. 17. No Restrictions on Corporate Acts. Neither the existence of the Plan nor any Option shall in any way affect the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference 13 stock ahead of or affecting the Common Stock or the rights thereof, or dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding whether of a similar character or otherwise. 18. No Employment Right. Neither the existence of the Plan nor the grant of any Option shall require the Company or any Subsidiary to continue any Participant in the employ or other service of the Company or such Subsidiary. 19. Amendment of the Plan. The Board may at any time terminate the Plan or make such modifications of the Plan as it shall deem advisable; provided, however, that the Board may not, without further approval of stockholders representing a majority of the votes of the outstanding shares of all classes of the Company's voting stock present in person or by proxy at any special or annual meeting of the stockholders, increase the number of shares of the Common Stock as to which Options which are intended to be incentive stock options may be granted under the Plan (as adjusted in accordance with the provisions of Section 13 hereof), or change the class of persons eligible to receive Options which are intended to be incentive stock options, or change the manner of determining the Option prices. Except as provided in Section 13 hereof, no termination or amendment of the Plan may, without the consent of the Participant to whom any Option shall theretofore have been granted, adversely affect the rights of such Participant under such Option. The Committee may not, without further approval of a majority of the votes of the outstanding shares of all classes of the Company's voting stock, present in person or by proxy at any special or annual meeting of the stockholders, amend any outstanding Option to reduce the option price, or cancel any 14 outstanding Option and contemporaneously award a new Option to the same optionee for substantially the same number of shares at a lower option price. 20. Expiration and Termination of the Plan. The Plan shall terminate on June 20, 2012, or at such earlier time as the Board may determine. Options may be granted under the Plan at any time and from time to time prior to its termination. Any Option outstanding under the Plan at the time of the termination of the Plan shall remain in effect until such Option shall have been exercised or shall have expired in accordance with its terms. 21. Options Granted in Connection with Acquisitions. In connection with the acquisition by the Company or a Subsidiary of another corporation (an "Acquired Company"), Options may be granted to employees and other personnel of such Acquired Company in exchange or substitution for then outstanding options to purchase securities of the Acquired Company, such Options may be granted at such option prices, may be exercisable immediately or at any time or times either in whole or in part, and may contain such other provisions not inconsistent with the Plan, as the Committee, in its discretion, shall deem appropriate at the time of the granting of such Options. 15 CARLYLE INDUSTRIES, INC. PROXY FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON DECEMBER 31, 2002 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby constitutes and appoints Edward F. Cooke and Martin H. Neidell, or either of them acting singly, with the power of substitution in either of them, the proxies of the undersigned to vote with the same force and effect as the undersigned all shares of common stock and Series B preferred stock of Carlyle Industries, Inc. (the "Company") which the undersigned is entitled to vote at the Special Meeting of Stockholders to be held at the offices of Katten Muchin Zavis Rosenman, 575 Madison Avenue, New York, New York, on December 31, 2002, at 11:00 a.m., and at any adjournment or adjournments thereof. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1 AND 2. 1. The approval and adoption of an Agreement and Plan of Merger, dated as of May 24, 2002, by and among Levcor International, Inc. and the Company, providing for the merger of the Company with and into Levcor International, Inc. [ ] FOR [ ] AGAINST [ ] ABSTAIN 2. To permit the Company's Board of Directors, in its discretion, to adjourn or postpone the Special Meeting of Stockholders if necessary for further solicitation of proxies if there are not sufficient votes at the originally scheduled time of the Special Meeting of Stockholders to approve each proposal. [ ] FOR [ ] AGAINST [ ] ABSTAIN 3. The proxy is authorized to transact such other business as may properly come before the Special Meeting. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS INDICATED, THE PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2 AND IN THE DISCRETION OF SAID PROXY ON ANY OTHER MATTER WHICH MAY COME BEFORE THE MEETING OR ANY ADJOURNMENTS THEREOF. Shares cannot be voted unless this proxy card is signed and returned or shares are voted in person at the Special Meeting. Dated _____________________, 2002 ------------------------------- Print Name ------------------------------- Signature Please sign your name exactly as it appears hereon. When signing as attorney, executor, administrator, trustee or guardian, please give your full title as it appears hereon. When signing as joint tenants, all parties in the joint tenancy must sign. When a proxy is given by a corporation, it should be signed by an authorized officer and the corporate seal affixed. When a proxy is given by a partnership, it should be signed in the partnership name by an authorized person. PLEASE SIGN, DATE AND MAIL THIS PROXY IMMEDIATELY IN THE ENCLOSED ENVELOPE. 2