SCHEDULE 14A INFORMATION
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Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
(Amendment No. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
DVL, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the
Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1),
14a-6(i)(2) or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange
Act Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-
6(i)(4) and 0-11.
1) Title of each class of securities to which transaction
applies:
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2) Aggregate number of securities to which transaction
applies:
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule
and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
[REVISED PRELIMINARY PROXY MATERIAL]
DVL, INC.
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 17, 1996
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TO OUR STOCKHOLDERS:
You are cordially invited to be present, either in person or by proxy,
at the Annual Meeting of Stockholders of DVL, Inc., a Delaware corporation
(the "Company"), to be held at 24 River Road, Bogota, New Jersey on
September 17, 1996, at 10:00 a.m., local time, or at any adjournments
thereof (the "Meeting"), to consider and act upon the following:
1. To elect three directors to serve until the next Annual Meeting
of Stockholders and until their successors are duly elected and
qualified;
2. To approve a certain loan agreement and the consummation of the
transactions contemplated thereby (the "Loan Transaction")
pursuant to which, among other things, an independent third party
lender (the "New Lender") will acquire approximately $7.5 million
of outstanding indebtedness of the Company, lend the Company
additional funds and simultaneously consolidate all such
indebtedness into a single long term loan and, in connection
therewith, the Company will (i) issue and sell to affiliates of
the New Lender 1,000,000 shares of Common Stock of the Company at
$0.20 per share, (ii) issue to affiliates of the New Lender
warrants to purchase such additional shares of Common Stock of
the Company at $0.16 per share which, when added to the
aforementioned 1,000,000 shares (and any other shares of Common
Stock then owned by such warrantholders and their affiliates),
will represent, on a fully diluted basis, 49% of the outstanding
Common Stock of the Company, and (iii) continue in effect a
certain Asset Servicing Agreement with an affiliate of the New
Lender;
3. To approve an amendment to the Company's Certificate of
Incorporation, as amended (the "Certificate"), to create a class
of 100 shares of Preferred Stock to be issued to the New Lender
in connection with the Loan Transaction at $10.00 per share
entitling the holders thereof to elect a special purpose Director
to the Company's Board of Directors (the "Preferred Stock");
4. To approve amendments to the Company's Certificate and By-laws to
create certain restrictions on the transferability of shares of
the Company's Common Stock to help preserve the utilization of
the Company's carryforwards of net operating losses and credits
for federal income tax purposes;
5. To ratify and approve the 1996 Stock Option Plan of the Company
which will replace the Company's Performance Unit (Stock
Appreciation Rights) Plan; and
6. To transact such other business as may properly come before the
Meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on July 25,
1996 as the record date for determining the stockholders entitled to notice
of, and to vote at, the Meeting or any adjournments thereof. A proxy and a
Proxy Statement for the Meeting are enclosed.
THE DIRECTORS HOPE THAT YOU WILL FIND IT CONVENIENT TO ATTEND THE
MEETING IN PERSON, BUT WHETHER YOU PLAN TO ATTEND, PLEASE SIGN, DATE AND
RETURN THE ENCLOSED PROXY TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE
MEETING. RETURNING YOUR PROXY DOES NOT DEPRIVE YOU OF YOUR RIGHT TO ATTEND
THE MEETING AND TO VOTE YOUR SHARES IN PERSON.
Please relay any questions to the Company at 201-487-1300.
By Order of the Board of Directors
. , 1996 Robert W. LoSchiavo
Secretary
<PAGE>
[REVISED PRELIMINARY PROXY MATERIAL]
DVL, INC.
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
To Be Held September 17, 1996
This Proxy Statement is furnished to the stockholders of DVL, Inc., a
Delaware corporation (the "Company"), in connection with the solicitation
by the Company's Board of Directors (the "Board of Directors") of proxies
to be used at the Annual Meeting of Stockholders to be held on September
17, 1996, at 10:00 a.m., local time, or at any adjournments thereof (the
"Meeting"), for the purposes set forth in the accompanying Notice of Annual
Meeting of Stockholders (the "Notice").
The approximate mailing date to stockholders of the Notice, this Proxy
Statement and the accompanying form of proxy is July 25, 1996.
VOTING OF PROXIES
A form of proxy is enclosed for use at the Meeting if a stockholder is
unable to attend in person. Each proxy may be revoked at any time
thereafter by the person giving the proxy by writing such to the Secretary
of the Company prior to the Meeting, by execution and delivery of a
subsequent proxy, or by attendance and voting in person at the Meeting,
except as to any matter or matters upon which, prior to such revocation, a
vote shall have been cast pursuant to the authority conferred by such
proxy. Shares represented by a valid proxy which if received pursuant to
this solicitation and not revoked before it is exercised, will be voted as
provided on the proxy at the Meeting or at any adjournments thereof.
The directors of the Company have advised the Company that they will
vote the 478,004 shares of common stock, $.01 par value per share, of the
Company (the "Common Stock") which they control (approximately 3.35% of the
outstanding shares of Common Stock) in favor of the proposals to:
i. elect three Directors to serve until the next Annual Meeting of
Stockholders and until their successors are duly elected and
qualified;
ii. approve a certain loan agreement and the consummation of
the transactions contemplated thereby (the "Loan Transaction")
pursuant to which, among other things, an independent third party
lender (the "New Lender") will acquire approximately $7.5 million
of outstanding indebtedness of the Company, lend the Company
additional funds and simultaneously consolidate all such
indebtedness into a single long term loan and, in connection
therewith, the Company will (i) issue and sell to affiliates of
the New Lender 1,000,000 shares of Common Stock at $0.20 per
share, (ii) issue to affiliates of the New Lender warrants to
purchase such additional shares of Common Stock at $0.16 per
share which, when added to the aforementioned 1,000,000 shares
(and any other shares of Common Stock then owned by such
warrantholders and their affiliates), will represent, on a fully
diluted basis, 49% of the outstanding Common Stock of the Company
(the "Warrants"), and (iii) continue in effect a certain Asset
Servicing Agreement with an affiliate of the New Lender;
iii. approve an amendment to the Company's Certificate of
Incorporation, as amended (the "Certificate"), to create a class
of 100 shares of preferred stock to be issued to the New Lender
in connection with the Loan Transaction at $10.00 per share
entitling the holders thereof to elect a special purpose Director
to the Company's Board of Directors;
iv. approve amendments to the Company's Certificate and By-laws to
create certain restrictions on the transferability of shares of
Common Stock to help preserve the utilization of the Company's
carryforwards of net operating losses and credits for federal
income tax purposes;
v. ratify and approve the 1996 Stock Option Plan of the Company (the
"1996 Option Plan") which will replace the Company's Performance
Unit (Stock Appreciation Rights) Plan (the "Performance Plan");
and
vi. transact such other business as may properly come before the
Meeting or any adjournments thereof.
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY RECOMMENDED
THAT STOCKHOLDERS OF THE COMPANY VOTE THEIR SHARES OF COMMON STOCK TO ELECT
EACH OF THE COMPANY'S NOMINEES FOR DIRECTOR AND TO APPROVE EACH OF THE
MATTERS SET FORTH IN PROPOSAL NOS. 2 THROUGH 5 HEREIN.
As of the date of this Proxy Statement, the Board of Directors
does not intend to present to the Meeting any other business, and it has
not been informed of any business intended to be presented by others.
Should any other matters, however, properly come before the Meeting, the
persons named in the enclosed proxy will take action, and vote proxies, in
accordance with their judgment on such matters.
The executive offices of the Company are located at 24 River
Road, Bogota, New Jersey 07603; telephone no: (201) 487-1300.
IMPORTANT NOTE: STOCKHOLDERS WHO HOLD SHARES OF COMMON STOCK IN
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THE NAME OF ONE OR MORE BROKERAGE FIRMS, BANKS OR NOMINEES CAN ONLY VOTE
THEIR SHARES OF COMMON STOCK WITH RESPECT TO THE MATTERS SET FORTH IN
PROPOSAL NOS. 2 THROUGH 5 IF SUCH BROKERAGE FIRMS, BANKS OR NOMINEES GIVE
SUCH STOCKHOLDERS A LEGAL PROXY TO VOTE SUCH SHARES OF COMMON STOCK OR IF
SUCH STOCKHOLDERS GIVE SUCH BROKERAGE FIRMS, BANKS OR NOMINEES SPECIFIC
INSTRUCTIONS AS TO HOW TO VOTE SUCH STOCKHOLDERS' COMMON STOCK.
ACCORDINGLY, IT IS CRITICAL THAT STOCKHOLDERS WHO HOLD SHARES OF COMMON
STOCK IN THE NAME OF ONE OR MORE BROKERAGE FIRMS, BANKS OR NOMINEES
PROMPTLY CONTACT THE PERSON RESPONSIBLE FOR SUCH STOCKHOLDERS' ACCOUNTS AND
GIVE SPECIFIC INSTRUCTIONS AS TO HOW SUCH SHARES OF COMMON STOCK SHOULD BE
VOTED WITH RESPECT TO THE MATTERS SET FORTH IN PROPOSAL NOS. 2 THROUGH 5.
MANNER OF VOTING AND VOTE REQUIRED
Only holders of shares of Common Stock of record at the close of
business on July 25, 1996 (the "Record Date"), will be entitled to vote at
the Meeting. As of the Record Date, 14,279,450 shares of Common Stock, the
only class of voting securities of the Company, were issued and
outstanding. Each holder of Common Stock is entitled to one vote for each
share held by such holder. The presence, in person or by proxy, of the
holders of a majority of the outstanding shares of Common Stock is
necessary to constitute a quorum at the Meeting.
Under the rules of the Securities and Exchange Commission (the
"Commission"), boxes and a designated blank space are provided on the proxy
card for stockholders to mark if they wish to withhold authority to vote
for one or more nominees for Director or for Proposal Nos. 2 through 5.
Votes withheld in connection with the election of one or more of the
nominees for Director or Proposal Nos. 2 through 5 and broker "non-votes"
will be counted as votes cast against such individuals or Proposals and
will be counted toward the presence of a quorum for the transaction of
business. If no direction is indicated, the proxy will be voted FOR the
election of the nominees for Director and FOR each of Proposal Nos. 2
through 5. The form of proxy does not provide for abstentions with respect
to the election of Directors; however, a stockholder present at the Meeting
may abstain with respect to such election.
The election of Directors will be by a plurality of the votes
actually cast thereon. Approval of the Loan Transaction and the 1996
Option Plan, set forth in Proposal Nos. 2 and 5, respectively, requires the
affirmative vote of a majority of the shares of Common Stock voting, in
person or by proxy, at the Meeting. Approval of the amendments to the
Company's Certificate and By-laws, as the case may be, to authorize the
creation of the Preferred Stock and to create certain restrictions on the
transferability of shares of Common Stock, set forth in Proposal Nos. 3 and
4, respectively, requires the affirmative vote of a majority of the
outstanding shares of Common Stock of the Company, whether voted at the
Meeting in person or by proxy.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of July 11, 1996, by
(a) each person known by the Company to own beneficially more than 5% of
such stock, (b) each Director and nominee for Director of the Company and
(c) all Directors and executive officers of the Company as a group. Unless
otherwise indicated, the shares listed in the table are owned directly by
the individual and the individual has sole voting and investment power with
respect to such shares. All Directors of the Company have indicated to the
Company that they will vote their shares of Common Stock (aggregating
478,004 shares, or approximately 3.35% of the outstanding shares of Common
Stock) in favor of each of the proposals set forth herein.
NAME OF BENEFICIAL AMOUNT AND NATURE OF
OWNER BENEFICIAL OWNERSHIP* % OF CLASS*
------------------ --------------------- -----------
Alan E. Casnoff(1) 200,000(3) 1.40%
Herbert L. Golden(1) 56,600 **
Myron Rosenberg 163,854(4) 1.15%
Frederick E. Smithline 57,550(5) **
Allen Yudell(2) -0- --
All current Directors and 578,004 4.05%
executive officers as a
group (6 persons)
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* Each named person and all executive officers, Directors and nominees
for Director, as a group, are deemed to be the beneficial owners of
securities that may be acquired within 60 days through the exercise of
options, warrants or exchange or conversion rights. Accordingly, the
number of shares and percentage set forth opposite each stockholder's
name in the above table under the columns captioned "Amount and Nature
of Beneficial Ownership" include shares of Common Stock issuable upon
exercise of presently exercisable warrants, convertible debentures and
stock options. The shares of Common Stock so issuable upon such
exercise, exchange or conversion by any such stockholder are not
included in calculating the number of shares or percentage of Common
Stock beneficially owned by any other stockholder.
** Less than 1%.
(1) Will not seek re-election as a Director.
(2) Nominee for, and currently not a, Director.
(3) Excludes 461 shares of the Company's Common Stock held by Mr.
Casnoff's adult son, as to which shares Mr. Casnoff disclaims
beneficial ownership. Includes 26,000 shares of the Company's
Common Stock owned by a corporation, partially owned and
controlled by Mr. Casnoff.
(4) Includes 4,300 shares held by Mr. Rosenberg's wife, of which Mr.
Rosenberg disclaims beneficial ownership.
(5) Includes 550 shares held by Mr. Smithline and his brother as
tenants-in-common and 6,000 shares held by Mr. Smithline's wife,
of which 6,000 shares Mr. Smithline disclaims beneficial
ownership.
Proposal No. 5 to this Proxy Statement asks stockholders to ratify and
approve the 1996 Option Plan of the Company. If the 1996 Option Plan is
ratified and approved by stockholders, the 673,131 performance units (i.e.,
stock appreciation rights) currently owned by former and current officers
of the Company pursuant to the Company's Performance Plan will be exchanged
for options to purchase up to 673,131 shares of Common Stock under the 1996
Option Plan of the Company. The per share exercise price of these options
will be $0.21 per share. Concurrently therewith, the Company's Performance
Plan will be terminated. As the proposed 1996 Option Plan requires
stockholder ratification and approval, the options proposed to be issued
thereunder and exchanged for outstanding performance units are not
currently owned by the Company's former and current officers and,
therefore, the shares of Common Stock underlying the proposed options
cannot be voted at the Meeting. See "Stock Based Compensation," and
"Proposal No. 5 -- Condition Precedent to Loan Transaction: Approval of
the 1996 Stock Option Plan in Connection with the Exchange of Certain Stock
Appreciation Rights."
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's Directors and executive officers
and persons who own more than ten percent of a registered class of the
Company's equity securities (i.e., the Company's Common Stock), to file
with the Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company.
Executive officers, Directors and greater than ten percent shareholders are
required by Commission regulation to furnish the Company with copies of all
Section 16(a) forms they file. To the Company's knowledge, based solely on
review of the copies of such reports furnished to the Company and written
representations that no other reports were required during the two fiscal
years ended December 31, 1995, all Section 16(a) filing requirements
applicable to the Company's executive officers, Directors and greater than
ten percent beneficial owners were complied with.
PROPOSAL 1 - ELECTION OF DIRECTORS
The Board of Directors, acting in accordance with the By-laws of the
Company, has reconstituted the Board of Directors, effective immediately
following the Meeting, to be comprised of four directors provided that
Proposals Nos. 2 and 3 herein are approved by stockholders and the
transactions contemplated by the Loan Transaction are consummated.
Otherwise, the Board of Directors has been reconstituted to be comprised of
three directors.
Three Directors are to be elected at the Meeting to serve until the
next Annual Meeting of Stockholders of the Company and until their
successors shall be duly elected and shall qualify. If stockholders of the
Company approve Proposal Nos. 2 and 3 herein and the transactions
contemplated by the Loan Transaction are consummated, the holders of the
newly issued shares of Preferred Stock of the Company will have the right
to elect a special purpose Director to the Board of Directors. See
"Proposal No. 2--Approval of Loan Agreement and Consummation of the
Transactions Contemplated Thereby" and "Proposal No. 3--Condition Precedent
to Loan Transaction: Approval of Amendment to Certificate of Incorporation
to Create Class of 100 Shares of Preferred Stock to be Issued at $10.00 Per
Share Entitling the Holders Thereof to Elect Special Purpose Director."
As noted, unless otherwise indicated thereon, all proxies received
will be voted in favor of the election individually, of the nominees of the
Board of Directors named below. Should any of the nominees not remain a
candidate for election at the date of the Meeting (which contingency is not
now contemplated or foreseen by the Board of Directors), proxies solicited
thereunder will be voted in favor of those nominees who do remain
candidates and may be voted for substitute nominees selected by the Board
of Directors. Directors shall be elected by a plurality of the votes cast
at the Meeting. Whether a nominee is currently serving as a Director of
the Company is indicated below. The names of the nominees and certain
information with regard to each nominee follows:
POSITION WITH
NOMINEE AGE DIRECTOR SINCE COMPANY
------- --- -------------- -------------
Myron Rosenberg 68 1973 Director
Frederick E. Smithline 64 1982 Chairman of the
Board and Director
Allen Yudell 57 -- --
Messrs. Alan E. Casnoff and Herbert Golden, each of whom is currently
serving as a Director of the Company, are not seeking re-election to the
Board of Directors of the Company.
NOMINEES FOR DIRECTORS AND EXECUTIVE OFFICERS
FREDERICK E. SMITHLINE has served as Chairman of the Board of the
Company since 1990 and as a Director since 1982. Since September 1989, Mr.
Smithline has been Of Counsel to the law firm of Epstein, Becker & Green,
P.C., New York, New York.
MYRON ROSENBERG has served as a Director of the Company since 1973.
Mr. Rosenberg is currently Executive Vice President of Rosenthal &
Rosenthal, Inc., New York, New York, a commercial finance concern, and has
been employed by Rosenthal & Rosenthal, Inc. since 1961.
ALLEN YUDELL is a nominee for election as a Director of the Company.
Mr. Yudell currently has no other affiliation with the Company. Since
1967, Mr. Yudell has been President of Delco Development Corporation and a
Vice President of Unidel Realty Corp., Boca Raton, Florida based shopping
center development companies. Mr. Yudell has been responsible for the
development and operation of more than 40 shopping centers in 13 states
comprising over 5 million square feet. Mr. Yudell has over 30 years
experience in the development, construction, management and leasing of
shopping centers and retail properties. Mr. Yudell is also a member of the
International Council of Shopping Centers. During 1990 and 1991, two
limited partnerships in which Mr. Yudell was one of the general partners,
filed for bankruptcy protection under Chapter 11 of Title 11 of the United
States Code.
In addition, Alan E. Casnoff serves as President of the Company, Joel
Zbar serves as Chief Operating Officer, Chief Financial Officer and
Treasurer of the Company and Robert W. LoSchiavo serves as Vice President,
Secretary and General Counsel of the Company.
ALAN E. CASNOFF (age 52) has served as President of the Company since
November 1994 and as a Director since October 1991. Mr. Casnoff served as
Executive Vice President of the Company from October 1991 to November 1994.
Since June 1992, Mr. Casnoff has also served as Of Counsel to the
Philadelphia, Pennsylvania law firm of Fox, Rothschild, O'Brien & Frankel.
From November 1990 to October 1991, Mr. Casnoff served as a consultant to
the Company and from 1971 to October 1991, as Secretary of the Company.
Since May 1991, Mr. Casnoff has also served as a Director of Kenbee
Management, Inc. ("Kenbee"), an affiliate of the Company, and as President
of Kenbee since November 1994. Since 1977, Mr. Casnoff has also been a
Partner of P&A Associates, a private real estate development firm
headquartered in Philadelphia, Pennsylvania. From 1969 to October 1990,
Mr. Casnoff was associated with the Philadelphia, Pennsylvania law firm of
Saul, Ewing, Remick & Saul, previous legal counsel to the Company and
Kenbee.
JOEL ZBAR (age 39) has served as the Company's Chief Operating Officer
since November 1994, as Chief Financial Officer of the Company since
January 1993, and as Treasurer of the Company since 1988. Mr. Zbar also
serves as Chief Operating Officer, Chief Financial Officer and Treasurer of
Kenbee. In November 1993, the Commission commenced an administrative
proceeding against Mr. Zbar in connection with certain events related to
the Company's 1990 stock offering and market price decline. Without
admitting or denying the allegations of the complaint, Mr. Zbar has agreed,
and the Commission has consented to, the issuance of a cease and desist
order. Such order does not affect the ability of Mr. Zbar to perform his
duties for the Company.
ROBERT W. LOSCHIAVO (age 38) has served as Vice President of the
Company since January 1990, as Secretary of the Company since October 1991
and as General Counsel since December 1991. Mr. LoSchiavo also serves as
Vice President, General Counsel and Secretary of Kenbee.
During 1995, the Board of Directors of the Company held eleven
meetings. Each Director of the Company attended at least 75% of these
meetings.
The Board of Directors has established two committees of the Board,
the Audit Committee and the Compensation Committee. The Audit Committee,
which is comprised of Messrs. Rosenberg, Smithline and Golden, reviews the
services provided by the Company's independent auditors, consults with the
independent auditors on audits and proposed audits of the Company and
reviews certain filings with the Commission and the need for internal
auditing procedures and the adequacy of internal controls. The Audit
Committee held two meetings during 1995, at which all members were present.
The Compensation Committee, which is also comprised of Messrs. Rosenberg,
Smithline and Golden, determines executive compensation and reviews
transactions between the Company and its affiliates. The Compensation
Committee held one meeting during 1995, at which all members were present.
EXECUTIVE COMPENSATION
The following table discloses the compensation awarded to or earned
by, during the Company's last three fiscal years, the Chief Executive
Officer and the two other most highly compensated executive officers as of
the end of fiscal 1995 whose annual salary plus other forms of compensation
exceeded $100,000:
SUMMARY COMPENSATION TABLE
-------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- -------------------------
CASH OTHER ANNUAL
NAME YEAR SALARY BONUS COMPENSATION(2)
---- ---- ------ ----- ----------------
Alan E. Casnoff 1995 $314,002 None $15,000
President since 1994 339,810(1) None None
November 1994 1993 340,636(1) None None
Joel Zbar 1995 250,000 None 7,500
Treasurer, Chief 1994 250,000 None None
Financial Officer 1993 226,000 $13,000 None
and Chief Operating
Officer
Robert W. LoSchiavo 1995 160,260 None 7,500
Vice President, 1994 144,530 None None
Secretary and 1993 119,189 5,000 None
General Counsel
ALL OTHER
LONG-TERM COMPENSATION COMPENSATION
----------------------------------- ------------
RESTRICTED PERFORMANCE LTIP
NAME STOCK AWARDS UNITS(3) PAYOUTS
---- ------------ ----------- -------
Alan E. Casnoff None -0- $7,500(4) None
President since None -0- None None
November 1994 None 50,000 None None
Joel Zbar None 100,000 23,469(4) None
Treasurer, Chief None -0- None None
Financial Officer None 50,000 None None
and Chief Operating
Officer
Robert W. LoSchiavo None 18,750 7,219(4) None
Vice President, None -0- None None
Secretary and None 15,000 None None
General Counsel
----------------
(1) Does not include payments made to a corporation partially owned and
controlled by Mr. Casnoff which provided management assistance for two
properties in Philadelphia, Pennsylvania owned by affiliated
partnerships for which such corporation received $9,187.50 and $12,000
in 1994 and 1993, respectively. During 1994, Mr. Casnoff was appointed
President of the Company and as part of the Company's ongoing efforts
to reduce overhead, Mr. Casnoff's salary was reduced by $35,000.
(2) Other Annual Compensation represents the value of 100,000 shares,
50,000 shares and 50,000 shares of the Company's common stock issued
in 1995 to Messrs. Casnoff, Zbar and LoSchiavo, respectively.
(3) The performance units granted under the Company's Performance Plan are
considered stock appreciation rights.
(4) Mr. Zbar exercised 50,000 performance units and Mr. LoSchiavo
exercised 18,750 performance units in 1995 realizing $23,469 and
$7,219, respectively. Mr. Casnoff surrendered 50,000 performance
units in consideration of the issuance to him of 50,000 shares of the
Company's common stock which shares the Company valued at $7,500.
The Company has employment contracts with Messrs. Zbar and LoSchiavo
pursuant to which they are paid current salaries at the rate per annum of
$250,000 and $150,000, respectively. The employment contracts with Messrs.
Zbar and LoSchiavo provide for certain payments if the employment term is
terminated without cause or is not renewed at the end of the contract term
in amounts equal to six (6) months salary. The employment contracts with
Messrs. Zbar and LoSchiavo expire on October 31, 1996 and December 31,
1996, respectively. In addition, the Board of Directors has authorized the
Company to make certain termination payments to Mr. Casnoff upon a change
of control of the Company in an amount equal to six (6) months salary
payable over a period of three months. Mr. Casnoff intends, following the
consummation of the transactions contemplated by the Loan Transaction, to
continue to serve as President of the Company through at least December 31,
1996. Mr. Casnoff has agreed that all compensation paid to him following
the consummation of the transactions contemplated by the Loan Agreement
will be credited, on a dollar-for-dollar basis, against the aforementioned
termination payments, if any, owing to him. See "Proposal No. 2--Approval
of the Loan Agreement and Consummation of the Transactions Contemplated
Thereby."
Directors who are not officers or employees of the Company presently
receive a Directors fee of $1,500 per month plus $500 for each Audit
Committee meeting of the Board of Directors attended. Directors who are
officers or employees of the Company receive no compensation for their
services as Directors or attendance at any Board of Directors or committee
meetings.
INDEBTEDNESS OF MANAGEMENT
No officers, Directors or stockholders of the Company have obtained
loans or loan commitments from the Company in excess of $60,000.
STOCK BASED COMPENSATION
On November 15, 1990, the Board of Directors adopted the Company's
Performance Plan for the purpose of providing long-term incentives to
Company employees who are largely responsible for the management, growth
and protection of the Company's business.
The Performance Plan authorized the grant of performance units,
considered to be stock appreciation rights, only to officers who are also
employees of the Company or any subsidiary thereof, and who are in a
position to make substantial contributions to the management, growth and
success of the business of the Company or any subsidiary thereof, as
determined by the Board of Directors, or a committee thereof, as the case
may be. In March 1996, as a condition to the Loan Transaction, current and
former employees who currently own performance units have agreed,
concurrently with the ratification and approval by stockholders of the
Company's 1996 Option Plan, to exchange their outstanding performance units
for a like number of options to purchase, pursuant to the 1996 Option Plan,
shares of Common Stock of the Company. The per share exercise price of
these options will be $0.21 per share. Concurrently with the ratification
and approval by stockholders of the 1996 Option Plan, the Company will
terminate the Performance Plan. See "Proposal No. 5 - Condition Precedent
to Loan Transaction: Approval of the 1996 Stock Option Plan in Connection
with the Exchange of Certain Stock Appreciation Rights."
The number of performance units reserved for issuance under the
Performance Plan is 900,000, of which 673,131 performance units were
outstanding as of May 24, 1996. Under the Performance Plan, the holder of
performance units is entitled to receive upon exercise of such units an
amount equal to the Fair Market Value (as defined in the Performance Plan)
of a performance unit at the time of exercise plus all dividends declared
with respect to a single share of the Company's Common Stock from the date
of exercise minus the Fair Market Value of a performance unit at the time
of grant, multiplied by the total number of performance units being
exercised by the holder.
Under the Performance Plan, the Fair Market Value of a performance
unit means an amount equal to the fair market value of a share of Common
Stock as determined by the Board of Directors, or a committee thereof,
either (a) by determining the average of the closing prices for the
Company's Common Stock for the 20 most recent trading days (or for such
other period as may be agreed upon between the Company and the holder) on
the New York Stock Exchange or such other national securities exchange
(including the NASDAQ system) on which the Company's Common Stock may then
be publicly traded or (b) in the event no such market exists, pursuant to
such other reasonable method as may be adopted by the Board of Directors or
the committee, as the case may be, in good faith for such purpose.
The following tables set forth certain information with respect to
performance units granted under the Performance Plan to, and performance
units exercised by (i) the executive officers of the Company listed in the
Cash Compensation Table and (ii) all current executive officers of the
Company as a group, during fiscal 1995. All performance units granted are
vested and fully exercisable.
PERFORMANCE UNIT GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------
INDIVIDUAL GRANTS
-----------------------------------------------------
PERCENT OF TOTAL
PERFORMANCE UNITS
GRANTED TO EXERCISE OR
PERFORMANCE EMPLOYEES IN BASE PRICE EXPIRATION
UNITS GRANTED FISCAL YEAR 1995 ($/SH) DATE
NAME (#)(b) (c) (d) (e)
---- ------------ ---------------- ----------- ----------
Alan E. -0- 0% -0- None
Casnoff
Robert W. 18,750 15.8 .39 None
LoSchiavo
Joel Zbar 50,000 42.1 .39 None
Joel Zbar 50,000 42.1 .29 None
POTENTIAL REALIZABLE ALTERNATIVE
VALUE AT ASSUMED ANNUAL TO (f) AND
RATES OF STOCK PRICE (g): GRANT
APPRECIATION FOR TERM DATE VALUE
---------------------- -----------
GRANT DATE
PRESENT
5% ($) 10% ($) VALUE
NAME (f) (g) ($) (h)
----- ------ ------- ----------
Alan E. Casnoff N/A N/A -0-
Robert W. LoSchiavo N/A N/A -0-
Joel Zbar N/A N/A -0-
Joel Zbar N/A N/A -0-
AGGREGATED PERFORMANCE UNITS EXERCISED AND SURRENDERED
IN FISCAL YEAR ENDED DECEMBER 31, 1995
PERFORMANCE UNIT VALUES
-------------------------------------------------------
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
PERFORMANCE PERFORMANCE
UNITS AT UNITS AT
FISCAL FISCAL
YEAR-END YEAR-END
(#) ($)
-------- ---------
PERFORMANCE
UNITS
EXERCISED OR
SURRENDERED VALUE EXERCISABLE/ EXERCISABLE/
NAME (3) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
---- ------------ ------------ ------------- -------------
Ben S. Read, Jr.(1) 50,000 $-0- 198,131/-0- -0-/-0-
Alan E. Casnoff 50,000 7,500 300,000/-0- -0-/-0-
Robert W. LoSchiavo 18,750 7,219 15,000/-0- -0-/-0-
Joel Zbar(2) 50,000 23,469 150,000/-0- -0-/-0-
All others(3) 130,000 -0- 10,000/-0- -0-/-0-
(Footnotes appear on next page)
<PAGE>
----------------
(1) Mr. Read surrendered 50,000 performance units to the Company in
consideration of the Company's settlement of a legal matter in which
Mr. Read was personally named. As Mr. Read was under no legal
obligation to surrender these units, the Company considers the value
realized to be $ 0.
(2) Mr. Casnoff surrendered 50,000 performance units to the Company in
consideration of the issuance to him of 50,000 shares of the Company's
Common Stock, which shares the Company valued at $7,500.
(3) Certain former officers of the Company whose employment terminated
during 1995 surrendered a total of 130,000 performance units to the
Company as part of their termination agreements.
In April 1995, the Board of Directors authorized the issuance of up to
450,000 shares of the Company's Common Stock as a special incentive bonus.
50,000 of such shares were issued to each of Messrs. Smithline, Rosenberg
and Golden, 100,000 of such shares to Mr. Casnoff, 50,000 of such shares to
each of Messrs. Zbar and LoSchiavo and 25,000 of such shares to other
officers of the Company. In addition, Mr. Casnoff was issued 50,000 shares
of Common Stock in exchange for his surrender of 50,000 performance units.
REPORT OF COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors of the Company is
comprised of the independent Directors, Messrs. Golden, Rosenberg and
Smithline. The purpose of the Compensation Committee is to review
compensation of the executive officers of the Company to determine if such
compensation is in line with similar organizations and to recommend and
provide appropriate incentives to key employees.
During 1995, the Compensation Committee adopted a compensation policy
with respect to the Company's executive officers which was consistent with
the Company's general policy of reducing overhead and expenses. In line
with this policy, and as a consequence of the Company's continuing to
experience operating losses during 1995, the Company elected to not replace
three executive positions which were vacated during 1995. In addition, the
Compensation Committee determined, in light of the Company's financial
performance during 1995, that increases in cash compensation to the
Company's President and Chief Financial Officer were not appropriate at
that time. As a result of these decisions, the responsibilities of the
three departing executives were merged into the duties of the three
remaining executive officers without any concomitant increase in
compensation or any bonus payments. Moreover, the President's salary which
was reduced by $35,000 in 1994, remained at $300,000. To provide the three
remaining executive officers with incentives similar to those of the
Company's stockholders while not imposing cash requirements on the Company,
the Board of Directors, during 1995, authorized one-time issuances of
100,000 shares, 50,000 shares and 50,000 shares, respectively, of the
Company's Common Stock to Messrs. Casnoff, Zbar and LoSchiavo.
This report was furnished by Messrs. Golden, Rosenberg and Smithline,
all members of the Compensation Committee.
STOCK PERFORMANCE CHART
The following graph compares the yearly percentage change in the
cumulative total stockholder return on the Company's Common Stock for each
of the Company's last five fiscal years with the cumulative return
(assuming reinvestment of dividends) of the Dow Jones Equity Market Index
and the Dow Jones Real Estate Investment Index.
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
DVL, Inc. 100 31 67 111 25 6
Dow Jones Equity Market Index 100 91 90 100 91 130
Dow Jones Real Estate Investment 100 112 101 118 112 139
Index
PROPOSAL NO. 2 - APPROVAL OF THE LOAN AGREEMENT AND
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED
THEREBY (COLLECTIVELY, THE "LOAN TRANSACTION")
REASONS FOR AND SUMMARY DESCRIPTION OF THE LOAN TRANSACTION
During early 1995, the Board of Directors of the Company determined
that it was in the Company's best interests to seek a strategic alliance
with an entity which was both experienced in, among other things, real
estate and limited partnership matters, and capable of providing the
Company with new capital and business opportunities not necessarily limited
to the Company's current line of business (the "Strategic Alliance"). The
Board of Directors concluded that either a new long term loan, a debt
refinancing or restructuring or a third party's purchase of certain of the
Company's indebtedness was necessary to help alleviate the Company's short
term liquidity problems, particularly in light of the Company's having
several loans aggregating approximately $7.5 million which either had
current payment requirements or were required to be repaid currently in
order to obtain significant payment discounts (two of which ("Loan A" and
"Loan B," respectively) currently have approximately $600,000 and
$1,850,000 outstanding thereunder, and which Loans matured on or about
December 1995 and were subsequently extended to August 1996 and September
1996, respectively, and one loan ("Loan C"), currently in the outstanding
amount of approximately $5,000,000, maturing in January 1999 (Loan A, Loan
B and Loan C are sometimes hereinafter collectively referred to as the
"1996 Loans").
Loan A bears interest at the rate equal to the prime rate of interest
charged from time to time by the lender under Loan A plus one-half of one
percentage point, provided that the applicable interest rate shall not be
less than six percent nor more than eight and one-half percent per annum.
Currently, Loan A bears interest at the rate of eight and one-half percent
per annum. Loan B bears interest at the rate equal to the prime rate of
interest charged from time to time by the lender under Loan B plus five and
one-half percentage points per annum. Currently, Loan B bears interest at
the rate of 13.75% per annum. Loan C bears interest at the rate equal to
the prime rate of interest charged from time to time by the lender under
Loan C plus one percentage point, provided that the applicable interest
rate shall not be less than six percent nor more than nine percent per
annum. Currently, Loan C bears interest at the rate of nine percent per
annum.
The maturity dates of Loan A and Loan B previously had been extended
several times and the Board of Directors believed that the current lenders
under these two Loans would not extend these Loans further for any
meaningful period without any assurance of repayment or, in the
alternative, without the payment of significant extension fees, significant
increases in the effective interest rates charged under these Loans and/or
the loss of any negotiated payment discount. The Board of Directors
reached these conclusions based principally upon the tenor of the Company's
prior negotiations with the current lenders under Loan A and Loan B. The
lenders of these two Loans, after extensive discussions with the Company,
extended the maturity dates of these Loans primarily due to the Company's
representation that it was actively engaged in negotiations with an entity
to acquire these Loans. Moreover, the lender of Loan B agreed to provide
the Company with an approximate $320,000 payment discount if the Company
satisfied the obligations under Loan B by the September 1996 maturation
date. The Company and the current lender of Loan C had previously
negotiated a payment discount currently approximating $2.45 million
conditioned upon the Company's satisfying this Loan by June 1996. The
Company has been granted an extension, while not compromising the payment
discount, until September 1996, to satisfy Loan C in consideration for the
payment of a $125,000 extension fee and the Company's representation that
it had entered into an agreement to consummate the Loan Transaction with
the New Lender, the consummation of which transaction was subject to
stockholder approval. Moreover, the Board of Directors had determined that
it was critical that the Company settle Loan C by the September 1996
deadline and avail itself of the negotiated payment discount since the
Company believed that it was highly unlikely that it could satisfy its
payment obligations under Loan C at maturity. In any case, the lenders
under Loans A, B or C could, upon the occurrence of a default under any of
these Loans, put the Company in default under their Loans to the Company.
The declaration of such default would also trigger the cross-default
provisions contained in the Company's other material items of indebtedness.
In such case, the Company's lenders would foreclose upon substantially all
of the Company's principal assets, thereby eliminating any intrinsic or
residual value to the Company's shares of Common Stock.
The Board of Directors reasoned further that the Strategic Alliance,
with its corresponding new long term loan, debt refinancing or
restructuring or debt purchase, effectively would enable the Company to
refinance the 1996 Loans over several years on acceptable terms, thereby
affording the Company the opportunity, subject to then prevailing market
conditions, to operate, refinance or sell its assets in an orderly manner
in an effort to increase stockholder value. The Board of Directors also
concluded that a Strategic Alliance with an entity experienced in, among
other things, real estate and limited partnership matters could result in
new business opportunities for the Company, not necessarily limited to the
Company's current line of business. Moreover, the Company had determined
that refinancing the 1996 Loans with new lenders could not be accomplished
on terms acceptable to the Company or on terms as favorable to the Company
as contained in the Loan Transaction. This determination was based upon
the fact that the Company was unsuccessful in identifying new lenders who
were willing to refinance the 1996 Loans on terms comparable to those
contained in the Loan Transaction. In addition, the Board of Directors had
concluded that the Company, without giving effect to the Loan Transaction,
had no other source from which to satisfy the 1996 Loans at their maturity.
For these reasons, and the synergies that could be created and
maximized with the Strategic Alliance, the Company decided to seek the
Strategic Alliance. While there can be no assurance that the Strategic
Alliance will result in new business opportunities for the Company, the
Board of Directors believes that the structure of the Strategic Alliance
(i.e., NPM Capital's (as defined below) ability to acquire up to 49% of the
outstanding Common Stock of the Company) provides NPM Capital with an
economic incentive to maximize the value of the Company. NPM Capital,
prior to the Closing (as defined below), is not expected to have introduced
any new business opportunities to the Company. However, NPM Capital has
advised the Company that following the consummation of the transactions
contemplated by the Loan Transaction, NPM Capital and its affiliates will
evaluate further the Company's business and assets for the purpose of
determining and assessing possible new business opportunities for the
Company. See "Background, Alternatives and General Business
Considerations."
On March 27, 1996, the Company, following the unanimous approval of
its Board of Directors, entered into an Amended and Restated Loan
Agreement, as further amended as of July 10, 1996 (the "Loan Agreement"),
with NPM Capital LLC, a Delaware limited liability company ("NPM Capital"),
whose principals and affiliates have over 20 years of experience in both
real estate and limited partnership matters and the operation of businesses
in the manufacturing and finance industries. NPM Capital has agreed to
acquire 100% of the 1996 Loans (the "Debt Acquisition") owing to three of
the Company's lenders (the "Lenders"). NPM Capital will consolidate the
indebtedness of the Company acquired in the Debt Acquisition, will lend to
the Company an amount (the "Advance") necessary for the Company to make
regularly scheduled principal payments to a lender (the "Other Lender") of
other indebtedness of the Company and consolidate all of such indebtedness
into a single six year loan (the "Long Term Loan"). None of the Lenders or
the Other Lender is an affiliate of the Company. A copy of the Loan
Agreement is attached hereto as Exhibit A.
The Company and NPM Capital reasonably believe that the aggregate
amount to be paid by NPM Capital for the Debt Acquisition, including
related closing costs, and giving effect to the payment discounts to be
realized upon acquisition of the 1996 Loans (the "Debt Acquisition Price"),
will be approximately $5.2 million and that the Advance to the Company will
be $600,000 over time. As a result of the Debt Acquisition and the
Advance, and NPM Capital's simultaneous consolidation of the 1996 Loans
into the Long Term Loan, NPM Capital will hold a six-year promissory note,
requiring periodic principal payments, bearing interest at the rate of
10.25% per annum (of which the Company is only required to pay the actual
cash flow generated by certain mortgage assets and may defer and accrue
payment of up to 5.25% per annum prior to the periodic principal
prepayments) in the principal amount of approximately $8,950,000 (the
"Note"). This sum represents the Debt Acquisition Price of approximately
$4.7 million, the $600,000 Advance, the negotiated payment discount of
approximately $2.8 million, the $350,000 that the Company and NPM Capital
have agreed to add to the principal amount of the Note and NPM Capital's
expenses incurred in connection with the Loan Transaction to the extent
that such expenses exceed $175,000 (which excess is currently estimated to
be approximately $500,000). Pursuant to the Loan Agreement, the Company
and NPM Capital have agreed that if the approximate $2.8 million negotiated
payment discount is reduced prior to the Closing (as defined below), then
the aforementioned $350,000 payment by the Company will be increased by the
amount of the decrease in such negotiated discount. As a result of the
mandatory principal payments required under the Note (and assuming that
such payments are made when required) and the inclusion in the principal
amount of the Note of the approximate $2.8 million of negotiated payment
discounts and the additional $350,000 that the Company and NPM Capital have
agreed to add to the principal amount of the Note as a result of, among
other things, the consolidation by NPM Capital of the 1996 Loans and the
Advance into the Long Term Loan, NPM Capital and its affiliates will
effectively receive an internal rate of return on their loan to the Company
of approximately 27.5% per annum. See "Terms of Amended and Restated Loan
Agreement."
In connection with the Loan Transaction, the Company and NPO
Management LLC, a Delaware limited liability company and an affiliate of
NPM Capital ("NPO Management"), have entered into an Asset Servicing
Agreement effective as of March 27, 1996 (the "Asset Servicing Agreement").
Pursuant to the Asset Servicing Agreement, among other things, NPO
Management has begun providing the Company with administrative and advisory
services relating to the assets of the Company and the Company's affiliated
partnerships. In addition, in connection with the Loan Transaction, NPO
Holdings LLC, a Delaware limited liability company and an affiliate of NPM
Capital and NPO Management ("NPO Holdings"), has agreed to acquire from the
Company at the closing of the transactions contemplated by the Loan
Agreement (the "Closing") (i) 1,000,000 shares of Common Stock of the
Company (representing approximately 7% of the outstanding Common Stock of
the Company) for $200,000 ($0.20 per share), (ii) shares of a newly created
class of Preferred Stock for an aggregate purchase price of $1,000, which
shares of Preferred Stock will enable the holders to elect a special
purpose Director to the Board of Directors but will not entitle the holders
to any regular annual or cumulative dividends or other material
preferential rights and (iii) Warrants to purchase an additional number of
shares of Common Stock at $0.16 per share which, when added to the
1,000,000 shares of Common Stock to be acquired by NPO Holdings at the
Closing (and any other shares of Common Stock then owned by the
Warrantholders and their affiliates, including shares issuable upon the
exercise of the Warrants), will represent, on a fully diluted basis, 49% of
the outstanding shares of Common Stock of the Company (collectively, the
"Securities Purchases"). See "Terms of Asset Servicing Agreement," "Terms
of Stock Purchase Agreement," "Terms of Securities Purchase Agreement" and
"Proposal No. 3 - Condition Precedent to Loan Transaction: Approval of
Amendment to Certificate of Incorporation to Create Class of 100 Shares of
Preferred Stock to be Issued at $10.00 per Share Entitling the Holders
Thereof to Elect Special Purpose Director."
On the whole, the Board of Directors of the Company believes that the
Loan Transaction and the associated Strategic Alliance, which results in
the Company being affiliated with an entity that could present new business
opportunities to the Company, is the only viable alternative available to
the Company in its efforts to continue as a going concern. Refinancing the
1996 Loans with new lenders on terms as favorable to the Company as those
contained in the Loan Transaction (i.e., a six year term, a fixed interest
rate and the ability to defer interest payments) could not be achieved.
Moreover, dealing with one lender on a long-term basis is more manageable
to the Company than dealing with numerous lenders with respect to numerous
loans over time.
Consummation of the Loan Transaction, including the Loan Agreement,
the Debt Acquisition, the Asset Servicing Agreement and the Securities
Purchases, is conditioned upon, among other things, the Loan Transaction
being approved by a majority of the Company's outstanding shares of Common
Stock present at the Meeting, whether in person or by proxy. The
transactions encompassed by the Loan Agreement, the Asset Servicing
Agreement and the Securities Purchases constitute significant and
indivisible aspects of the Loan Transaction. Accordingly, a vote by a
stockholder in favor of the Loan Transaction (Proposal No. 2) will be
deemed a vote in favor of each of the Loan Agreement, the Asset Servicing
Agreement, the Securities Purchases and the transactions contemplated
thereby.
General information with respect to NPM Capital and its affiliates
(including NPO Management and NPO Holdings) is included elsewhere in this
Proxy Statement. Such information has been supplied by the management of
NPM Capital. Although the Company does not know of any misstatement or
omission in the information supplied by the management of NPM Capital, the
Company does not assume responsibility for its accuracy or completeness or
for any failure by NPM Capital to disclose to the Company events that may
have occurred and may affect the significance or accuracy of any such
information.
Attached hereto as Exhibits A through H are copies of the Loan
Agreement and the Asset Servicing Agreement, the documents governing the
Securities Purchases and the form of the Note (collectively, the "Related
Documents"). The following description of the Loan Transaction, the Loan
Agreement and the Related Documents is only a summary, is necessarily
general and is not complete. The entire discussion is qualified in its
entirety by reference to Exhibits A through H attached hereto. INASMUCH AS
THE LOAN TRANSACTION IS OF GREAT IMPORTANCE TO THE COMPANY AND ITS
STOCKHOLDERS AND CONSUMMATION OF THE LOAN TRANSACTION WOULD HAVE A DILUTIVE
EFFECT ON THE RELATIVE EQUITY INTERESTS OF STOCKHOLDERS IN THE COMPANY, ALL
STOCKHOLDERS ARE URGED STRONGLY TO READ THE ATTACHED DOCUMENTS CAREFULLY
AND IN THEIR ENTIRETY AND NOT TO RELY ON THE SUMMARY DESCRIPTION THAT
FOLLOWS.
BACKGROUND, ALTERNATIVES AND GENERAL BUSINESS CONSIDERATIONS
As set forth above, during early 1995, the Board of Directors
determined, principally in light of the Company's short term liquidity
problems and the necessity to satisfy Loans A and B when they became due
and to benefit from the use of the significant payment discount associated
with Loan C in the structuring of a loan transaction, that a Strategic
Alliance was in the best interests of the Company. There was serious
concern among the Company's Directors as to whether the Company could
continue as a going concern if a Strategic Alliance, consisting of both, a
new long term loan, a debt refinancing or restructuring or a debt purchase,
and the possibility of new business opportunities, was not consummated with
some third party. The Board of Directors had also concluded that the
Company, without giving effect to the Loan Transaction, would have no other
source from which to satisfy the 1996 Loans as they matured. If the Loan
Transaction is not consummated, the Company will default on its payments
under Loans A and B. These defaults will trigger the cross-default
provisions contained in the Company's other material items of indebtedness.
In such event, the Company's lenders will foreclose upon substantially all
of the Company's principal assets, thereby eliminating any intrinsic or
residual value to the shares of the Company's Common Stock. As such, the
Board of Directors has determined that the consummation of the Loan
Transaction and the associated Strategic Alliance was the only viable
alternative available to the Company which could result in the Company's
continuing as a going concern. In this regard, the Board of Directors
retained an independent investment banker to introduce potential Strategic
Alliance entities to the Company.
During 1995, numerous potential Strategic Alliance entities were
introduced to the Company, including affiliates of NPM Capital. Many of
these potential Strategic Alliance entities reviewed information supplied
to them by the Company relating to the Company's operations and financial
condition. Following extensive discussions and negotiations with several
of these entities, the Board of Directors determined that there were only
two viable Strategic Alliance entities, one of which was NPM Capital.
Following further discussions and negotiations, and after receiving
indications that the other potential Strategic Alliance entity was not
interested in pursuing a Strategic Alliance with the Company, in September
1995, the Company entered into a letter of intent with the principals of
NPM Capital to proceed with the Loan Transaction. The Board of Directors
of the Company had further determined not to pursue the Strategic Alliance
with any of the other potential Strategic Alliance entities because certain
of such entities were requiring, as part of their proposals, that the
Company sell to them a loan which the Company did not desire to sell. This
loan was subsequently satisfied by the Company at a significant discount.
The Board of Directors also questioned seriously whether certain of the
other potential Strategic Alliance entities would be capable of introducing
viable new business opportunities to the Company. In addition, the Board
of Directors did not feel comfortable doing business with certain other
potential Strategic Alliance entities. Following an exclusive due
diligence period, NPM Capital, in December 1995, advised the Company of its
intention to proceed with the Loan Transaction.
On March 27, 1996, the Board of Directors of the Company unanimously
approved the Loan Transaction and the consummation of the transactions
contemplated thereby. This decision was based, in part, on (i) the Board
of Directors' assessment that the proposal submitted by NPM Capital
satisfied the criteria for a Strategic Alliance in that (a) the Debt
Acquisition and the Advance by NPM Capital and its simultaneous
consolidation of this indebtedness into the Long Term Loan, effectively,
would refinance the Company's 1996 Loans over a six year period, thereby
affording the Company the opportunity, subject to then prevailing market
conditions, to operate, refinance or sell its assets in an orderly manner
in an effort to increase stockholder value and that (b) the principals and
affiliates of NPM Capital and NPO Management, with over 20 years experience
in real estate, limited partnership and other matters, and expertise in
maximizing the value of assets on a cost-effective basis, could provide the
Company with new business opportunities not necessarily limited to the
Company's current line of business, (ii) the Board of Directors belief that
the 1996 Loans could not meaningfully be extended or refinanced with the
existing lenders, in which case the Company would be faced with liquidation
(iii) the Board of Directors' assessment that the terms encompassing the
proposal submitted by NPM Capital, in their entirety, were the most
favorable that the Company could obtain after having canvassed the market,
with its investment banker, for entities interested in the Strategic
Alliance or in refinancing the Company's 1996 Loans, (iv) the fact that the
$0.20 per share purchase price to be paid by NPO Holdings and its
affiliates at the Closing for 1,000,000 shares of the Company's Common
Stock was reasonable given the fact that the 1,000,000 shares constituted
restricted securities and that such shares could not be disposed of without
a blockage discount and (v) the opinion of Duff & Phelps Capital Markets
Co. ("Duff & Phelps"), independent financial advisors to the Company and
NPM Capital, that the exercise price of the Warrants of $0.16 per share is
greater than the fair market value of the underlying stock specific to the
Warrants as of the date of Duff & Phelps' opinion. See "Terms of
Securities Purchase Agreement--Warrants."
As a result of the Loan Transaction and the associated Securities
Purchases, the Company will (i) issue and sell to NPM Capital and its
affiliates 1,000,000 shares of Common Stock for $200,000, (ii) issue them
Warrants to acquire additional shares of Common Stock at $0.16 per share
which, when added to the 1,000,000 shares to be acquired at the Closing
(and any other shares then owned by them, including shares issuable upon
the exercise of the Warrants) will represent, on a fully diluted basis, 49%
of the outstanding shares of Common Stock of the Company, (iii) issue and
sell to them shares of Preferred Stock which will enable them to elect a
special purpose Director to the Board of Directors but will not entitle
them to any regular annual or cumulative dividends or other material
preferential rights and (iv) issue a six-year Note, requiring periodic
principal payments, bearing interest at the rate of 10.25% per annum of
which the Company is only required to pay the actual cash flow generated by
certain mortgage assets and may defer and accrue payment of up to 5.25% per
annum prior to the periodic principal prepayments), in the principal amount
of approximately $8,950,000. If the Company could renegotiate the 1996
Loans with the current lenders, which the Board of Directors of the Company
does not think is possible, the Company would, more likely than not, have
to forfeit any negotiated payment discounts, and be obligated to pay an
aggregate of approximately $7.5 million with respect to the 1996 Loans.
(Loans A, B and C would have outstanding principal balances of $600,000,
$1,850,000 and $5,000,000, respectively.) The 1996 Loans would continue to
accrue interest at floating rates currently ranging from 8 1/2% to 13 1/4%
per annum. Moreover, the Company, even if it could get the current lenders
of Loans A and B to renegotiate the terms of such Loans, more likely than
not, would be required to pay the current lenders of such Loans significant
fees and increased interest rates in consideration for their agreements to
renegotiate or refinance these Loans and such Lenders would not, in the
opinion of the Board of Directors, agree to renegotiate maturity dates for
the 1996 Loans which would extend out six years, as proposed by NPM
Capital.
Subsequent to the execution of the Loan Agreement, the Company
received an indication of interest from certain stockholders of the Company
who were considering lending the Company up to $6 million (of which only $2
million was guaranteed at the time of delivery of the indication of
interest), with interest thereon accruing at the highest prime rate of
interest from time to time charged plus eight percentage points, in order
to help alleviate the Company's liquidity problems. After reviewing this
indication of interest, the Company reaffirmed its decision to proceed with
the Loan Transaction. This reaffirmation was based upon several factors,
including, without limitation, (i) the Board of Directors' determination
that the indication of interest did not satisfy both of the criteria for
the Strategic Alliance in that the Board of Directors believed that it did
not appear reasonable, based upon the background and experience of the
proponents of the indication of interest, that these proponents could
realistically present new business opportunities to the Company in that
they did not control or have access to businesses compatible to the
Company's business, (ii) the Board of Directors' uncertainty as to whether
certain conditions to the indication of interest could be satisfied,
including (a) complete financing of the transaction contemplated by the
indication of interest (the proposal incorporating the indication of
interest could not guaranty, as of the time of the proposal, financing in
excess of $2,000,000) and (b) NPM Capital's release of the Company and the
proponents of the indication of interest from any liability resulting from
the termination of the Loan Agreement (NPM Capital advised the Company that
no such release would be given), (iii) the Board of Directors'
determination, based upon the advice of counsel, that the Company's failure
to continue to use its best efforts to consummate the transactions
contemplated by the Loan Agreement would constitute a breach by the Company
of the Loan Agreement that could potentially expose the Company to
substantial damages which could materially adversely affect the Company and
(iv) the Board of Directors' conclusion, after contrasting in their
entirety the transactions contemplated by the Loan Transaction and the
indication of interest, that the perceived long term benefits to the
Company offered by the Loan Transaction (that NPM Capital was not only
providing capital and potential new business opportunities but real estate
and financial expertise as well) outweighed the benefits that may have been
derived by the Company from the indication of interest.
While the Board of Directors is optimistic that the Strategic Alliance
will address the Company's foreseeable liquidity problems in connection
with the 1996 Loans, the Board of Directors does not expect the Strategic
Alliance to eliminate the Company's continuing operating cash flow
problems. Even after consummation of the Strategic Alliance, the Company
will continue to have to rely upon the sale or refinancing of its assets to
meet current expenses. The timing of these sales, however, may be delayed,
if possible, since the consummation of the Loan Transaction will address
the Company's foreseeable liquidity problems in connection with the 1996
Loans. Delaying these sales will allow the Company to more effectively
market its properties and allow NPO Management to use its expertise to
strategically enhance the value of the Company's assets prior to their
sale. Moreover, consummation of the Loan Transaction will result in the
Company's not being forced to accept unsatisfactory sales prices resulting
from hurried and forced sales of its assets. The Board of Directors is
optimistic that the Company, with the assistance and expertise that NPO
Management is providing pursuant to the Asset Servicing Agreement, will be
able to maximize the value of its assets so that future asset sales and
refinancings can be on favorable terms to the Company, thereby increasing
stockholder value.
Moreover, the Board of Directors is hopeful that the proposed
Strategic Alliance with NPM Capital and its affiliates will ultimately
provide new business opportunities for the Company which may enable the
Company to overcome its operating cash flow shortfalls. NPM Capital, prior
to Closing, is not expected to have introduced any new business
opportunities to the Company. However, NPM Capital has advised the Company
that following the consummation of the transactions contemplated by the
Loan Transaction, NPM Capital and its affiliates will evaluate further the
Company's business and assets for the purpose of determining and assessing
possible new business opportunities for the Company. While the Company
believes that NPM Capital and its affiliates, with over 25 years of
experience in owning, operating, financing and selling operating companies
in a variety of manufacturing and financing businesses and real estate
investments, have the ability to introduce new business opportunities to
the Company that could improve stockholder value, there can be no
assurance, however, that NPM Capital will successfully introduce any new
businesses to the Company or that the Company will be able to continue to
meet its operating expenses in the short term or that the Strategic
Alliance, if consummated, will provide long term solutions to the Company's
operating cash flow problems. See "Terms of Amended and Restated Loan
Agreement--NPM Capital."
As a result of the complex nature of the transactions comprising the
Loan Transaction, it is possible that, following an audit, if any, of the
Company, the Internal Revenue Service (the "IRS") could assert that certain
consequences of the Loan Transaction have the effect of limiting or
eliminating all or a portion of the Company's net operating loss
carryforwards. While the Company will not seek an advance ruling from the
IRS regarding the affect of the Loan Transaction, it is the opinion of Reid
& Priest LLP, counsel to the Company, that the transactions contemplated by
the Loan Transaction should not result in a limitation or elimination of
the Company's net operating loss carryforwards under Code Section 382.
Since opinions of counsel are not binding on the IRS, the Company's
treatment with respect to its net operating loss carryforwards as a result
of the Loan Transaction could be challenged by the IRS. Further, since
counsel's opinion sets forth the analyses, risks and qualifications with
respect to such opinion, stockholders are urged to review the information
concerning the Company's use of its net operating loss carryforwards in the
section entitled "Analysis of Certain Federal Income Tax Considerations
Affecting the Company's Net Operating Losses" attached hereto as Exhibit H.
Copies of Reid & Priest LLP's opinion to the Company will be made
available, without charge, to stockholders upon written request for the
same addressed to the Secretary of the Company at the Company's principal
executive offices.
In connection with its approval of the Loan Transaction, the Board of
Directors also elected for the Loan Transaction, including the associated
Securities Purchases, to be excluded from the purview of Article Ninth of
the Company's Certificate ("Article Ninth"), and Section 203 of the
Delaware General Corporation Law (the "DGCL"). In general, each of Article
Ninth and Section 203 of the DGCL ("Section 203") details certain
procedural and other requirements, including obtaining supermajority
disinterested stockholder approval, in order to consummate certain business
combinations and other material transactions between the Company and a
"control person" (with respect to Article Ninth) or an "interested
stockholder" (with respect to Section 203). A control person and an
interested stockholder are defined, generally, as the beneficial owners of
10% or more, and 15% or more, respectively, of the Company's outstanding
voting securities, taking into account shares to be acquired pursuant to
the exercise of a warrant or option.
Upon consummation of the Loan Transaction and the associated
Securities Purchases (pursuant to which NPM Capital and its affiliates,
including NPO Holdings and NPO Management, will be deemed to become the
beneficial owners of 49% of the Company's outstanding voting securities),
NPM Capital and its affiliates, including NPO Holdings and NPO Management,
will become "control persons" for purposes of Article Ninth and "interested
stockholders" for purposes of Section 203. If the Board of Directors did
not elect for the Loan Transaction and the associated Securities Purchases
to be excluded from the purview of Article Ninth and Section 203, then,
generally, the Company would be prohibited, during the three year period
immediately following the Closing of the Loan Transaction, from effecting
certain business combinations and other material transactions with NPM
Capital or its affiliates unless the holders of not less than two-thirds of
the outstanding shares of Common Stock of the Company (excluding NPM
Capital and its affiliates) approve such business combination or other
material transaction and certain other fair price and procedural
requirements are satisfied. By excluding the Loan Transaction and the
associated Securities Purchases from the purview of Article Ninth and
Section 203, the Board of Directors has enabled the Company to enter into
transactions potentially favorable to the Company with NPM Capital or its
affiliates without procuring disinterested stockholder approval of the
same.
In support of its decision to exclude the Loan Transaction and the
associated Securities Purchases from the purview of Article Ninth and
Section 203, the Board of Directors concluded that one of the goals of the
Strategic Alliance was to locate a person who could introduce new business
opportunities to the Company, including opportunities involving such
person. By excluding the Loan Transaction and the associated Securities
Purchases from the purview of Article Ninth and Section 203, and thereby
excluding NPM Capital and its affiliates from the definitions of control
persons (for purposes of Article Ninth) and interested stockholders (for
purposes of Section 203), the Board of Directors has eliminated an
impediment that could otherwise jeopardize an advantageous commercial
relationship or business venture involving the Company and NPM Capital or
its affiliates. NPM Capital has advised the Company that following the
consummation of the transactions contemplated by the Loan Transaction, NPM
Capital and its affiliates will evaluate further the Company's business and
assets for the purpose of determining and assessing possible new business
opportunities for the Company.
Exclusion of the Loan Transaction and the associated Securities
Purchases from the purview of Article Ninth and Section 203 in no way,
however, affects the fiduciary obligation of the Board of Directors to the
Company's stockholders in respect of transactions and ventures involving
the Company and NPM Capital or its affiliates.
TERMS OF AMENDED AND RESTATED LOAN AGREEMENT
THE FOLLOWING DESCRIPTION OF THE LOAN TRANSACTION AND RELATED
DOCUMENTS IS ONLY A SUMMARY, IS NECESSARILY GENERAL AND IS NOT COMPLETE.
IN VIEW OF THE IMPORTANCE OF THIS TRANSACTION TO THE COMPANY AND ITS
STOCKHOLDERS, STOCKHOLDERS ARE URGED STRONGLY TO READ THIS PROXY STATEMENT
IN FULL, INCLUDING THE FULL TEXT OF THE LOAN AGREEMENT AND THE RELATED
DOCUMENTS. THE FOLLOWING DISCUSSION IS QUALIFIED IN ITS ENTIRETY BY THE
ACTUAL TEXT OF THE DOCUMENTS ATTACHED HERETO.
General
On March 27, 1996, the Company, following the unanimous approval of
its Board of Directors, entered into the Loan Agreement with NPM Capital.
Pursuant to the Loan Agreement, among other things, NPM Capital agreed to
consummate the Debt Acquisition and to make the Advance to the Company.
Two of the three loans being purchased as part of the Debt Acquisition
(Loan A and B) are due and payable in August 1996 and September 1996,
respectively. The third loan comprising the Debt Acquisition (Loan C) is
not yet due, but a significant payment discount has been negotiated if
this Loan is satisfied by September 30, 1996. The holders of Loans B
and C, however, have agreed to discount the settlement amounts of these
loans by approximately $320,000 and $2.45 million, respectively, if
these Loans are satisfied prior to September 30, 1996. As of July 11,
1996, the Company was indebted to the Lenders under the 1996 Loans in the
approximate aggregate amount of $7.5 million. As of July 11, 1996, the
Company was indebted to the Other Lender in the approximate amount of
$1.5 million, with the next regularly scheduled quarterly principal payment
of $87,500 due on July 31, 1996.
As a result of the Debt Acquisition and the Advance, and NPM Capital's
simultaneous consolidation of the 1996 Loans into the Long Term Loan, NPM
Capital will hold the Note in the principal amount of approximately
$8,950,000. This sum represents the Debt Acquisition Price of
approximately $4.7 million, the $600,000 Advance, the negotiated payment
discount of approximately $2.8 million, the $350,000 that the Company and
NPM Capital have agreed to add to the principal amount of the Note and NPM
Capital's expenses incurred in connection with the Loan Transaction to the
extent that such expenses exceed $175,000 (which excess is currently
estimated to be approximately $500,000). The Company has agreed to include
the above-referenced $350,000 in the Note because it believes that the Debt
Acquisition and the Advance, and the resulting consolidation of such
indebtedness into the Long Term Loan, affords the Company the opportunity,
subject to then prevailing market conditions, to operate, refinance or sell
its assets in an orderly manner in an effort to increase stockholder value
and that the Company's ability to defer the payment of significant amounts
of interest under the Note and fees under the Asset Servicing Agreement
will assist the Company in managing its operating cash flow problems.
Pursuant to the Loan Agreement, the Company and NPM Capital have agreed
that if the approximate $2.8 million negotiated payment discount is reduced
prior to the Closing, then the aforementioned $350,000 payment by the
Company will be increased by the amount of the decrease in such negotiated
discount. See "--The Note" and "Terms of Asset Servicing Agreement."
NPM Capital
NPM Capital was formed in March 1996 principally for the purpose of
effecting the Loan Transaction and to date, has no other business
operations. NPM Capital is owned and controlled by the principals of
National Financial Companies LLC, a Delaware limited liability company
("NFC"), Omni Partnership Services, Inc., a Delaware corporation ("Omni"),
and Pembroke Companies, Inc., a New Jersey corporation ("Pembroke").
NFC is a privately held investment and management firm specializing in
equity investments in, and the operation of, middle-market companies and
business and real estate ventures. The principals of NFC and certain of
their affiliates currently own controlling interests in several operating
companies, including Bulova Technologies L.L.C., which is engaged in
defense and commercial manufacturing, National Auto Finance Company L.P.
and Auto Credit Clearinghouse L.P., each of which specializes in non-prime
auto financing, Hospitality Finance Company L.P., which is engaged in
commercial financing of furniture, fixtures, and equipment to the
hospitality industry, Environmental Systems and Services, Inc., which is
engaged in environmental consulting, National Metalworking Corporation,
which is engaged in manufacturing metal parts and products, and several
equipment leasing portfolios and real estate interests.
Omni and its affiliates are diversified financial services companies
specializing in providing administrative and management services to limited
partnerships and other businesses. Omni manages or provides administrative
and partnership services, including the facilitation of all investor
communications, cash distributions and solicitation services, to
approximately 450 limited partnerships that are comprised of an aggregate
of more than 50,000 partners. Omni also acts as transfer agent for its
client partnerships, coordinating the administrative, legal and accounting
functions to properly record changes in title. Omni further operates an
independent valuation service providing, on a fee basis, fair market value
analysis to estate and qualified plans which own limited partnerships that
are not publicly traded. Omni is also affiliated with Millennium Financial
Services, Inc., a Delaware corporation ("Millennium"). Millennium provides
collection services for 25 major banks throughout the United States with a
collection portfolio in excess of $40 million. Millennium specializes in
the collection of limited partner promissory notes, recovering over $60
million on behalf of its clients over the past five years, and has entered
into a separate agreement with the Company with respect to the collection
of limited partner notes held by the Company. See "Terms of Asset
Servicing Agreement."
Millennium utilizes the legal services of the New York City law firm
of Jacobs and Simms in connection with litigation matters pertaining to
Millennium's collection activities. The principals of Jacobs & Simms are
also principals of Omni and Millennium.
Pembroke specializes in equity investments in a variety of venture
capital, commercial finance and real estate investments. The sole
stockholder of Pembroke is one of the principals of NFC.
Over the past 25 years, the principals and affiliates of NFC, Omni and
Pembroke have owned, operated, financed and sold numerous operating
companies which have been engaged in a variety of manufacturing and
financing businesses and real estate ventures. As described above, the
principals and affiliates of NFC, Omni and Pembroke have significant
experience in the acquisition, financing and management of commercial real
estate, particularly net leased real estate, and in the management of
limited partnerships, including with respect to legal, tax and
administrative matters.
The Note
The principal amount of the Note, and accrued interest thereon, shall
be paid in installments in the amounts and on the dates specified therein
and (unless sooner paid by prepayment, acceleration or otherwise, as
provided in the Loan Agreement) shall be paid in full by the sixth
anniversary date of the Closing of the Loan Transaction. The form of the
Note is attached hereto as Exhibit B.
Pursuant to the Note, and assuming no default by the Company
thereunder, the Company shall pay to NPM Capital or any of its successors
or assigns (together referred to as the "Holder") on or before the tenth
day of each calendar month, an amount equal to 100% of the Cash Flow (as
defined below) of the Company and its subsidiaries during the preceding
calendar month; provided, however, that in the event the Company receives
in excess of $10,000 of Cash Flow at any one time, the Company shall
immediately pay all such Cash Flow to the Holder. For purposes of the
Note, Cash Flow has been defined as, with respect to the Company and each
of its subsidiaries for any period, the collective reference to the sum of
(i) the gross proceeds generated by the Primary Collateral (as defined in
the Note) (including, without limitation, all payments of interest and
principal, all proceeds from the refinancing of any notes and mortgages
(including, without limitation, the Underlying Mortgages and the Wrap
Mortgages (each as defined in the Note)) and all proceeds of any payoff of,
or sale of, or with respect to, any of the Primary Collateral), plus (ii)
----
the excess of (a) the gross proceeds generated by all of the Wrap Notes (as
-------------
defined in the Note) and Wrap Mortgages included within the collateral
securing the Other Secured Debt (as defined in the Note) (including,
without limitation, all payments of interest and principal, all proceeds
from the refinancing of any notes and mortgages (including, without
limitation, the Underlying Mortgages and the Wrap Mortgages included within
such collateral) and all proceeds of any payoff of, or sale of, or with
respect to such collateral) over (b) any and all payments then due and
----
payable under, or with respect to, such Other Secured Debt.
Interest on the outstanding principal balance of the Note shall accrue
at the rate of 10.25% per annum, compounded monthly; provided, however,
that the Company, effectively, may defer and accrue up to 5.25% per annum
of such interest charges. Interest shall be payable as and when payments
out of Cash Flow are made by the Company. In the event that, for any
fiscal year of the Company (a "Fiscal Year"), the Company fails to pay the
Holder accrued interest at a rate of at least 5.00% per annum, compounded
monthly (the "Annual Minimum Interest Payment"), then the Company shall
make a further mandatory payment of accrued interest to the Holder in an
amount equal to such shortfall on or before the thirtieth day after the
expiration of such Fiscal Year.
In addition to the foregoing Annual Minimum Interest Payments, the
Company shall pay to the Holder, on or before the last day of the
applicable calendar month set forth in the following chart, a sufficient
amount of principal of, and accrued interest on, the Note in order (i) to
reduce the then outstanding principal balance of the Note by an amount
equal to the applicable percentage of the original principal amount of the
Note set forth below (the "Applicable Percentage Reduction") and (ii) to
pay the full accrued and unpaid interest on the entire outstanding
principal balance of the Note as of such last day of such calendar month
(such payments shall be referred to as "Installment Payments").
Calendar Month After Closing Date Applicable Percentage Reduction
--------------------------------- -------------------------------
Last day of 18th Calendar Month 15.0%
Last day of 27th Calendar Month 33.0%
Last day of 36th Calendar Month 50.0%
Last day of 42nd Calendar Month 67.0%
Last day of 48th Calendar Month 72.5%
Last day of 54th Calendar Month 80.0%
Last day of 60th Calendar Month 85.0%
Last day of 66th Calendar Month 92.0%
Last day of 72nd Calendar Month 100%
The Company also shall pay to the Holder any and all cash and cash
equivalents as and when received by the Company from the sale, issuance,
conversion, transfer or distribution of capital stock of the Company, or
rights, options, warrants or agreements with respect thereto, in excess of
$250,000 in the aggregate, at any time prior to the full payment of moneys
due under the Note.
The Note may be prepaid voluntarily in whole or in part by the Company
and is subject to acceleration upon default at the times and in the manner
specified in the Loan Agreement. The Company's obligations under the Note
will be secured by the Company's grant to NPM Capital of a security
interest in all assets of the Company then not encumbered by liens securing
other indebtedness of the Company, as specified in the Loan Agreement.
Upon the consummation of the transactions contemplated by the Loan
Transaction, affiliates of NPM Capital will be issued shares of Common
Stock and Warrants to purchase additional shares of Common Stock such that
NPM Capital and its affiliates will become the beneficial owners, on a
fully diluted basis, of approximately 49% of the outstanding Common Stock
of the Company. As such, NPM Capital and its affiliates will become
affiliates of the Company. As a result of the mandatory principal payments
required under the Note (and assuming that such payments are made when
required) and the inclusion in the principal amount of the Note of the
approximate $2.8 million of negotiated payment discounts and the additional
$350,000 that the Company and NPM Capital have agreed to add to the
principal amount of the Note (subject to adjustment as discussed above) as
a result of, among other things, the consolidation by NPM Capital of the
1996 Loans and the Advance into the Long Term Loan, NPM Capital and its
affiliates will effectively receive an internal rate of return on their
loan to the Company of approximately 27.5% per annum. The negotiated
discounts of approximately $2.8 million on the 1996 Notes will be amortized
over the life of the Long Term Loan resulting in an effective interest rate
to the Company for financial reporting purposes of 11.7%, exclusive of any
amortization in connection with the issuance of the Warrants.
Conditions Precedent to Closing of Loan Agreement
The consummation of the Loan Agreement and, consequently, the Loan
Transaction, is subject to a number of conditions which are set forth in
Section 3 of the Loan Agreement. Such conditions include, but are not
limited to, the following: (i) the Debt Acquisition shall have been
consummated; (ii) each of the Loan Transaction, the Preferred Stock
Amendment and the Stock Transfer Amendments (each as defined herein) shall
have been approved by the stockholders of the Company; (iii) the
performance units (considered to be stock appreciation rights) granted
under the Company's Performance Plan shall have been canceled; (iv) the
1996 Option Plan of the Company shall have been ratified and approved by
stockholders; (v) the Equity Documents (as defined in the Loan Agreement),
generally consisting of stock options, Common Stock purchase warrants and
convertible debentures, shall have been amended by the parties thereto in
the manner agreed upon by the Company and NPM Capital; (vi) the Stipulation
of Settlement Agreement, dated August 12, 1992, of the class action
litigation entitled In re Kenbee Limited Partnerships Litigation, as
---------------------------------------------
amended, shall have been amended by all of the parties thereto in
substantially the form agreed upon by the Company and NPM Capital and such
amended Stipulation of Settlement Agreement shall have been approved
finally by the courts having jurisdiction thereof; (vii) there shall not
have occurred any Material Adverse Effect (as defined in the Loan
Agreement) since December 31, 1995; and (viii) other usual conditions as
are customary for a transaction of the type embodied by the Loan Agreement
shall have been satisfied. See "Proposal No. 3--Condition Precedent to
Loan Transaction: Approval of Amendment to Certificate of Incorporation to
Create Class of 100 Shares of Preferred Stock to be Issued at $10.00 per
Share Entitling the Holders Thereof To Elect Special Purpose Director,"
"Proposal No. 4--Condition Precedent to Loan Transaction: Approval of
Amendments to Certificate of Incorporation and By-laws to Place Restriction
on Transfer of Common Stock" and "Proposal No. 5--Condition Precedent to
Loan Transaction: Approval of the 1996 Stock Option Plan in Connection
with the Exchange of Certain Stock Appreciation Rights."
Covenants
The Loan Agreement contains numerous affirmative and negative
covenants concerning the conduct of business by, and other activities of,
the Company and its subsidiaries during the period in which the Company is
indebted to NPM Capital or its affiliates and these covenants, as
applicable, will continue during the period that any of the Warrants is
outstanding or remains unexercised. See "Terms of Securities Agreement."
The affirmative and negative covenants are set forth in Sections 6 and
7 of the Loan Agreement and include, without limitation, those that are
usual and customary for a transaction of the type embodied by the Loan
Agreement for an entity in comparable financial condition as the Company,
including covenants requiring the Company and its subsidiaries (i) to use
commercially reasonable efforts to actively seek, directly or indirectly,
the refinancing of the Underlying Notes (as defined in the Loan Agreement)
as soon as reasonably practicable upon terms reasonably acceptable, (ii) to
use best efforts to collect the amounts owing under each of the Investor
Notes and the other Investor Loan Documents (each as defined in the Loan
Agreement), (iii) not to assume or permit to exist any additional
indebtedness, other than as expressly provided in the Loan Agreement, (iv)
not to sell, transfer or otherwise dispose of, except as expressly
permitted by the Loan Agreement, any of the Company's properties or assets,
(v) not to pay or agree to pay employee compensation in excess of certain
stated maximum amounts, (vi) not to issue (except as expressly permitted by
the Loan Agreement) any additional shares of capital stock or options,
warrants or other securities exercisable or convertible into shares of
capital stock, and (vii) not to make any changes in their capital
structure, amend their Articles of Incorporation or By-laws, or make any
changes in any of their business objectives, purposes or operations, except
as required by the Loan Transaction.
Termination
In the event that the Closing shall not have occurred on or prior to
September 30, 1996, for any reason or for no reason, including the failure
by the Company's stockholders to approve the Loan Transaction, NPM Capital
may, upon notice to the Company, terminate all of NPM Capital's obligations
under the Loan Agreement and the Related Documents, provided, however, that
upon such termination, the Company (i) shall be and remain liable to NPM
Capital for any damages NPM Capital may suffer as a result of any breach by
the Company of any obligation it has to indemnify NPM Capital under the
Loan Agreement and (ii) the Company shall pay to NPM Capital up to $100,000
of NPM Capital's Transaction Expenses (as defined in the Loan Agreement)
and a $300,000 "Break-Up" fee. In the event that each of the conditions
precedent to the effectiveness of the obligations of NPM Capital are
satisfied on or before September 30, 1996, but after the date that such
conditions precedent are met, a Lender Default (as defined in the Loan
Agreement) occurs, then the Company will not be required to pay the "Break-
Up" fee.
TERMS OF ASSET SERVICING AGREEMENT
In connection with the Loan Transaction, the Company and NPO
Management have entered into the Asset Servicing Agreement, pursuant to
which, among other things, the Company has engaged NPO Management, on an
exclusive basis, as an independent contractor to assist the Company in
performing certain "Partnership Property Level Services" and certain
"Partnership Administrative Services" on behalf of the Company in the
Company's capacity as general partner of approximately 100 limited
partnerships (the "Partnerships"), and to assist the Company and its
affiliates in the supervision and management of the Company's other assets.
The Company believes that the Asset Servicing Agreement is in the best
interests of the Company and, as a result of the expertise and
recommendations that it anticipates NPO Management providing, affords the
Company an opportunity to maximize the value of the Company's assets while
preserving cash flow without, due to the Company's ability to defer a
portion of the annual service fee, as discussed below, any concomitant
increase in cash required to meet current overhead. The Company's deferral
of the annual service fee will provide the Company with the ability to
preserve its cash flow during the term of the Asset Servicing Agreement,
other than during the initial transition period which began upon the
commencement of the Asset Servicing Agreement and during any period that
the Company may be required to make severance payments to former employees
whose positions have been eliminated. See "--Servicing Fees." A copy of
the Asset Servicing Agreement is attached hereto as Exhibit C.
NPO Management
NPO Management, which was formed in March 1996 principally for the
purpose of providing services under the Asset Servicing Agreement, is owned
and controlled by NFC, Pembroke and Omni. Omni, which is an affiliate of
Millennium, and its affiliates, are diversified financial services
companies specializing in providing administrative and management services
to limited partnerships and other operating businesses.
The principals and affiliates of NFC, Pembroke and Omni have, in the
aggregate, over 20 years experience in acquiring, developing, financing and
disposing of net lease properties and managing and administering real
estate limited partnerships. Currently, the principals and affiliates of
NFC, Pembroke and Omni manage or provide administrative or partnership
services, including the facilitation of all investor communications, cash
distributions and solicitation services, to approximately 450 limited
partnerships which are comprised of an aggregate of more than 50,000
partners.
Services Provided
The "Partnership Property Level Services" that NPO Management will
provide include (i) evaluating each property owned by any of the
Partnerships (the "Partnership Property"), advising the Company of
potential sales price ranges that NPO Management deems appropriate for each
such property, listing those properties which NPO Management believes to be
saleable at the highest current return to the respective partnerships and
obtaining offers to purchase such properties using consultants selected by
NPO Management in connection with the Company's strategic asset evaluation
and disposition program; (ii) coordinating all aspects of the refinancing
of the indebtedness of the Partnerships upon terms acceptable to the
Company; (iii) assisting the Company in obtaining and reviewing insurance
certificates delivered by tenants of the Partnership Properties and
confirming that such insurance is in full force and effect; (iv) assisting
the Company in obtaining annual financial statements from the Partnership
tenants; (v) providing other general assistance to the Company with respect
to the relationships between the Partnerships and its tenants as specified
in the Asset Servicing Agreement; and (vi) generally, maximizing the
current value of the Partnership Property.
The "Partnership Administrative Services" that NPO Management will
provide include: (i) maintaining records of each of the limited partners
in each of the Partnerships to assist in maintaining documentation for
transfers of partnership interests, changes of addresses of limited
partners and other similar transactions; (ii) assisting the Company in the
preparation and distribution of tax returns and annual financial statements
for certain Partnerships; (iii) assisting the Company in upgrading and
redeveloping the Company's management information systems, including
recommending appropriate hardware and software systems; (iv) assisting the
Company in preparing and submitting solicitations to limited partners in
the Partnerships to obtain any consents required for any sale, financing,
refinancing, leasing, re-leasing or renovation of the Partnership Property
or any other required consent; (v) assisting the Company and its counsel in
analyzing the income tax consequences with respect to any of the
Partnership Property; (vi) acting as a liaison and assisting the Company in
communications with the Partnerships, the limited partners of the
Partnerships and the Partnership tenants; and (vii) providing cash
management services to the Company.
In addition, under the Asset Servicing Agreement, NPO Management will
assist the Company in performing the following asset and mortgage servicing
services with respect to the following assets of the Company:
Mortgages. NPO Management will (a) coordinate all aspects of the
refinancing of Underlying Mortgages (as defined in the Asset Servicing
Agreement) upon terms acceptable to the Company, (b) engage
consultants to list and offer for sale the Mortgages (as defined in
the Asset Servicing Agreement) for prices and upon terms approved by
the Company and manage all aspects of any such sale to the extent
approved by the Company, (c) assist the Company in collecting payments
due under the Mortgages and provide loan servicing services to the
Company with respect to the Mortgages; and (d) act as liaison and
coordinate all communications between the Company and the obligors
under the Mortgages.
Investor Notes. NPO Management will assist in monitoring the
collection and reporting services provided by Millennium with respect
to certain promissory notes owned by the Company executed by certain
limited partners in certain Partnerships (the "Investor Notes") and
will act as liaison and manage all communication between the Company
and Millennium with respect to the Investor Notes.
In addition, NPO Management will provide to the Company and its
subsidiaries and their affiliates asset services with respect to certain
real property and limited partnership interests owned by the Company and
certain master leases (the "Master Leases") pursuant to which the Company's
subsidiaries and their affiliates have leased, and subsequently re-leased,
commercial space from certain limited partnerships of which affiliates of
the Company are the general partner. With respect to such assets, NPO
Management will engage and oversee the work of asset managers, property
managers and other consultants, will make recommendations with respect to
any proposed alterations to any such assets, will monitor the performance
of the Master Leases, and provide other asset management services.
NPO Management is required to use its commercially reasonable efforts
to perform its obligations under the Asset Servicing Agreement pursuant to
a standard of professional service provided by other asset management firms
in the industry providing the types of asset management and partnership
administrative services which are similar to the services described in the
Asset Servicing Agreement.
Servicing Fees
In consideration for the services to be provided by NPO Management
under the Asset Servicing Agreement, the Company shall pay to NPO
Management a servicing fee at the rate of $600,000 per year, less the 20%
Collection Amount (as defined below), payable in 12 equal monthly
installments of $50,000. The servicing fee will be increased annually
after the third anniversary of the date of the Asset Servicing Agreement to
account for inflation. For purposes of the Asset Servicing Agreement, the
20% Collection Amount means 20% of all net amounts collected on each
Investor Note which is actually received and retained by Millennium or
Millennium's affiliates in accordance with the terms of Millennium's
agreement with the Company. Pursuant to Millennium's agreement with the
Company, Millennium has been retained by the Company to collect and service
the Investor Notes for the account of the Company.
The Asset Servicing Agreement further provides that in the event that
Non-Primary Collateral Cash Flow (as defined in the Asset Servicing
Agreement and from which the monthly servicing fee is intended to be paid)
is not sufficient in any month to pay the entire servicing fee then due,
then, any unpaid portion of such monthly servicing fee may be deferred by
the Company (subject to the limitations discussed below) and will bear
interest at the rate of 15% per annum, compounded monthly, until the
earlier to occur of (i) the existence of sufficient Non-Primary Collateral
Cash Flow to pay all deferred servicing fees and accrued interest thereon
and all then due and owing servicing fees or (ii) the expiration or earlier
termination of the Asset Servicing Agreement.
Deferred and unpaid servicing fees (excluding accrued and unpaid
interest thereon) may not, however, exceed $600,000 at any time prior to 90
days after the second anniversary date of the Asset Servicing Agreement
(the "Second Anniversary Date"), $450,000 during the time period commencing
91 days after the Second Anniversary Date and ending 90 days thereafter,
$300,000 during the time period commencing 91 days after the Second
Anniversary Date and ending 180 days after the Second Anniversary Date or
$150,000 during the time period commencing 181 days after the Second
Anniversary Date and ending 270 days after the Second Anniversary Date.
The Company has advised NPO Management that the Company anticipates
that it will significantly defer payments, possibly up to the maximum
amounts permitted, under the Asset Servicing Agreement. In light of the
Company's projected restricted cash flow and its potential inability to pay
the servicing fee on a current basis, the Company, to secure its
obligations to NPO Management and in return for NPO Management's agreement
to permit the Company to defer the monthly servicing fee as described
above, has granted NPO Management a lien covering the Company's assets,
subordinated only to liens then granted by the Company securing other
indebtedness of the Company and the liens granted to NPM Capital pursuant
to the Loan Agreement.
Term
The term of the Asset Servicing Agreement is seven years from the date
of Closing of the Loan Transaction. Thereafter, the term of the Asset
Servicing Agreement shall automatically renew for successive periods of
three years each unless sooner terminated in accordance with the provisions
of the Asset Servicing Agreement.
Termination
If the Closing of the Loan Agreement fails to occur for any reason or
for no reason in accordance with the provisions thereof (including, if
stockholders of the Company fail to approve the Loan Transaction), the
Company shall be entitled to terminate the Asset Servicing Agreement by
giving written notice of the same to NPO Management within 30 days after
the termination of the Loan Agreement. In such event, NPO Management shall
be entitled to payment, over a six month period, of all fees accrued and
unpaid as of the date of such termination.
The Company has no right to terminate the Asset Servicing Agreement
unless an NPO Default thereunder has occurred. An NPO Default includes the
occurrence of fraud or gross negligence in connection with the performance
of NPO Management's duties under the Asset Servicing Agreement or felony
conviction of, or by, any executive officer of NPO Management. NPO
Management has, in addition to other contractual termination rights, the
right to terminate the Asset Servicing Agreement upon 30 days written
notice to the Company for any reason or no reason.
TERMS OF STOCK PURCHASE AGREEMENT
As part of the Loan Transaction, the Company has agreed, at the
Closing, to sell and issue to NPO Holdings, and NPO Holdings has agreed to
acquire from the Company, 1,000,000 shares of Common Stock of the Company
in consideration for $200,000 (or $0.20 per share). This per share
purchase price was determined by the Board of Directors of the Company to
be reasonable given the fact that the 1,000,000 shares constitute
restricted securities and that such shares could not be disposed of without
a blockage discount.
The terms and conditions of this stock purchase are embodied in the
Stock Purchase Agreement attached hereto as Exhibit D (the "Stock Purchase
Agreement"). The closing of the Loan Agreement is an express condition
precedent to the closing of the Stock Purchase Agreement.
TERMS OF SECURITIES PURCHASE AGREEMENT
General
As part of the Loan Transaction, the Company has also agreed, at the
Closing, to (i) sell and issue to NPM Capital (or its designee), and NPM
Capital (on behalf of itself and its designee) has agreed to acquire from
the Company, 100 shares of a newly created class of Preferred Stock of the
Company, par value $10.00 per share, for an aggregate purchase price of
$1,000, which Preferred Stock will enable the holders thereof to elect a
special purpose Director to the Board of Directors but will not entitle the
holders to any regular annual or cumulative dividends or other material
preferential rights and (ii) issue to NPM Capital (or its designee) the
Warrants to purchase, at an exercise price of $0.16 per share, such
additional shares of Common Stock which, when added to the 1,000,000 shares
of Common Stock to be acquired by NPO Holdings pursuant to the Stock
Purchase Agreement (and any other shares of Common Stock then owned by the
Warrantholders and their affiliates), will represent, on a fully diluted
basis, 49% of the outstanding Common Stock of the Company.
The terms and conditions governing the Company's issuance of the
Preferred Stock and the Warrants are embodied in the Securities Purchase
Agreement attached hereto as Exhibit E (the "Securities Purchase
Agreement"). The Company's obtaining stockholder approval to create the
Preferred Stock and the closing of the Loan Agreement are express
conditions precedent to the closing of the Securities Purchase Agreement.
See "Proposal No. 3 - Condition Precedent to Loan Transaction: Approval of
Amendment to Certificate of Incorporation to Create Class of 100 Shares of
Preferred Stock to be Issued at $10.00 Per Share Entitling the Holders
Thereof to Elect Special Purpose Director."
Special Purpose Director
Holders of the Preferred Stock will be entitled to nominate and elect
a Director (the "Special Purpose Director") to the Board of Directors. The
Special Purpose Director, however, will have no right to vote on or consent
to matters presented for a vote at meetings of the Board of Directors other
than with respect to certain bankruptcy matters. Such bankruptcy matters
will require, for passage, the unanimous vote of the fully constituted
Board of Directors (including the Special Purpose Director). The Special
Purpose Director will have Board visitation rights and will be able to be
removed without cause only by the holders of the then outstanding shares of
Preferred Stock. The Special Purpose Director shall be paid $100 per year
by the Company for his services. It is currently anticipated that if the
Loan Transaction and the amendment to the Company's Certificate to
authorize the creation of the Preferred Stock are approved by stockholders,
NPM Capital (or its designee), the proposed holder of the Preferred Stock,
will nominate and elect Keith B. Stein as the Special Purpose Director.
Mr. Stein is currently a Managing Director of NFC, one of the entities that
controls NPM Capital and its affiliates. For a more complete description
of the powers, designations and other rights of the Preferred Stock and for
more information concerning the proposed Special Purpose Director, see
"Proposal No. 3 - Condition Precedent to Loan Transaction: Approval of
Amendment to Certificate of Incorporation to Create Class of 100 Shares of
Preferred Stock to be Issued at $10.00 Per Share Entitling the Holders
Thereof to Elect Special Purpose Director."
Warrants
NPO Holdings (or its designee) will be entitled, as holder of the
Warrants, to purchase from the Company, at any time before 5:00 p.m., New
York time, on December 31, 2007 (the "Expiration Date"), such number of
shares of Common Stock of the Company which, when added to the 1,000,000
shares of Common Stock to be acquired by NPM Capital and its affiliates
pursuant to the Stock Purchase Agreement (and any other shares of Common
Stock then owned by such Warrantholders and their affiliates), will
represent, on a fully diluted basis, 49% of the outstanding Common Stock of
the Company. Notwithstanding the foregoing, except under certain
circumstances, no portion of the Warrants may be exercised prior to January
1, 1999 without the prior consent of the Board of Directors of the Company.
The Warrants specify certain conditions under which the exercise price
for, and the number of shares of Common Stock issuable under, the Warrants
will be adjusted to reflect certain corporate actions, including stock
splits and sales of shares of Common Stock. In addition to the customary
anti-dilution provisions included in the Warrants relating to
reorganizations, reclassifications, consolidations and mergers, the
Warrants contain anti-dilution provisions which are designed to grant the
holder of the Warrants the right to purchase additional shares of Common
Stock each time currently outstanding options, warrants and other
derivative securities are exercised so that the holder can always acquire
(after taking into account their then owned shares of Common Stock and the
shares of Common Stock owned by their affiliates) 49% of the outstanding
Common Stock of the Company. The holder of the Warrants also will be
granted certain demand and piggyback registration rights. Moreover, the
Warrants provide that certain of the affirmative and negative covenants
concerning the conduct of the business by, and other activities of, the
Company and its subsidiaries during the period in which the Company is
indebted to NPM Capital or its affiliates pursuant to the Loan Agreement
will continue, notwithstanding the satisfaction of all such indebtedness,
during the period that any of the Warrants is outstanding or remains
unexercised.
In connection with the proposed issuance of the Warrants, each of the
Board of Directors of the Company and NPM Capital has received the opinion
of Duff & Phelps, independent financial advisors, that, based upon and
subject to the assumptions and reliances set forth in the opinion of Duff &
Phelps, and as of the date of such opinion, the exercise price of the
Warrants of $0.16 per share was greater than the fair market value of the
underlying stock specific to the Warrants. A copy of the opinion of Duff &
Phelps is attached hereto as Exhibit G.
Duff & Phelps was retained jointly by the Company and NPM Capital to
act as independent financial advisor to provide its opinion as to whether,
as of the date of its opinion, the exercise price of the Warrants of $0.16
per share was greater than the fair market value of the underlying stock
specific to the Warrants as of such date. Previously, Duff & Phelps had
not provided any professional services to the Company, NPM Capital or any
of their respective affiliates.
In conducting its analysis and arriving at its opinion, Duff & Phelps
reviewed and analyzed, among other things (i) the Securities Purchase
Agreement, (ii) the Stock Purchase Agreement, (iii) the form of Warrant,
(iv) the Loan Agreement, (v) the audited financial statements for the
Company for the three years ended December 31, 1994, (vi) the unaudited
interim financial statements for the Company for the year ended
December 31, 1995, (vii) the Annual Report of the Company on Form 10-K for
the year ended December 31, 1994 and a draft Annual Report of the Company
on Form 10-K for the year ended December 31, 1995, (viii) the Quarterly
Report of the Company on Form 10-Q for the three months ended September 30,
1995, (ix) documents relating to the settlement of the In re Kenbee Limited
--------------------
Partnerships Litigation, the settlement of the In re Del-Val Financial
----------------------- -----------------------
Corp. Securities Litigation, and the various other settlement agreements of
---------------------------
loans and litigation to which the Company is a party, (x) conditions and
trends with respect to the markets where the Company has operated and
currently operates, (xi) publicly available information concerning other
companies deemed comparable, in whole or in part, to the Company and (xii)
such other documents, financial studies and analyses deemed appropriate by
Duff & Phelps.
As background for its analysis, Duff & Phelps held discussions with
members of the senior management of the Company, NPM Capital, and an
affiliate of NPM Capital regarding the history, current business
operations, financial condition, future prospects and strategic objectives
of the Company.
In performing its analysis and rendering its opinion, Duff & Phelps
relied upon the accuracy and completeness of all information provided to
it, whether obtained from public or private sources, and did not attempt to
independently verify any such information. Duff & Phelps also took into
account its assessment of general economic, market and financial conditions
as well as its experience in securities and business valuation, in general,
and with respect to similar transactions, in particular. Duff & Phelps did
not make any independent appraisals of the assets or liabilities of the
Company.
In consideration for its analysis and the delivery of its opinion,
Duff & Phelps will be paid an aggregate of $27,500, plus expenses, $10,000
of which has been paid to date. Each of the Company and NPM Capital will
be responsible for one-half of Duff & Phelps' total fee and expenses.
Neither the Warrants nor the shares of Common Stock underlying the
Warrants will be registered under the Securities Act of 1933, as amended
(the "Securities Act"). However, the Company has agreed that it will at
all times maintain and keep available adequate public information and will
file with the Commission all required reports under the Exchange Act in
order to permit the use of Rule 144 promulgated by the Commission under the
Securities Act.
The form of the Warrants is attached hereto as Exhibit F.
VOTE NEEDED FOR APPROVAL
Although Delaware law does not require approval of the Loan
Transaction by the Company's stockholders, such approval has been made a
condition to Closing. Approval of the Loan Transaction requires the
affirmative vote of a majority of the shares of Common Stock voting, in
person or by proxy, at the Meeting. As a result of this voting
requirement, the holders of a minority of the outstanding shares of Common
Stock of the Company may have the ability to ratify the Loan Transaction.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY ADOPTED A RESOLUTION APPROVING
THE LOAN TRANSACTION AND DECLARING ITS ADVISABILITY, AND HEREBY RECOMMENDS
THAT THE STOCKHOLDERS OF THE COMPANY VOTE FOR THE LOAN TRANSACTION.
IN CONNECTION WITH THE CONSUMMATION OF THE LOAN TRANSACTION, IT IS
NECESSARY THAT STOCKHOLDERS OF THE COMPANY APPROVE THE MATTERS SET FORTH IN
PROPOSALS 3, 4, AND 5 BELOW, EACH OF WHICH IS A CONDITION PRECEDENT (THAT
MAY BE WAIVED OR MODIFIED BY NPM CAPITAL) TO THE CONSUMMATION OF THE LOAN
TRANSACTION.
PROPOSAL NO. 3 - CONDITION PRECEDENT TO LOAN TRANSACTION:
APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION
TO CREATE CLASS OF 100 SHARES OF PREFERRED STOCK
TO BE ISSUED AT $10.00 PER SHARE ENTITLING THE
HOLDERS THEREOF TO ELECT SPECIAL PURPOSE DIRECTOR
GENERAL
In connection with the consummation of the Loan Transaction, the
Company and NPM Capital have entered into the Securities Purchase Agreement
pursuant to which, among other things, the Company, at the Closing of the
Loan Transaction, will sell and issue to NPM Capital, 100 shares of
Preferred Stock in consideration for an aggregate of $1,000. Such
Preferred Stock will enable the holders thereof to elect the Special
Purpose Director to the Board of Directors of the Company but will not
entitle the holders to any regular annual or cumulative dividends or other
material preferential rights.
Prior to the issuance of any shares of Preferred Stock, however, an
amendment to the Certificate authorizing the Company to create a series of,
and to issue, such shares of Preferred Stock must be effected. In this
regard, the Board of Directors has adopted a resolution unanimously
approving and recommending to the Company's stockholders for their
approval, an amendment to Article FOURTH of the Certificate of
Incorporation to provide therein for the authorization and creation of 100
shares of Class A Preferred Stock, par value $10.00 per share (the
"Preferred Stock Amendment"). The text of proposed new Article FOURTH,
which gives effect to the Preferred Stock Amendment, is attached hereto as
Exhibit I.
DESCRIPTION OF PREFERRED STOCK
Voting Rights
The holders of shares of Preferred Stock shall be entitled to nominate
and elect the Special Purpose Director to the Board of Directors by a vote
of a majority of the then outstanding shares of Preferred Stock voting as
one class at a meeting of such holders or by written consent of the holders
of a majority of such shares then outstanding. However, the Special
Purpose Director, in accordance with Section 141(d) of the DGCL, will have
no right to vote on, or consent to, matters presented for a vote at
meetings of the Board of Directors other than with respect to matters
relating to (i) the filing by the Company of a petition in bankruptcy
pursuant to Title 11 of the United States Code (the "Bankruptcy Code") and
(ii) in connection with the insolvency of the Company, the dissolution or
liquidation of the Company or the making of a compromise or arrangement
under applicable state law between the Company and its creditors who hold a
substantial portion of the Company's indebtedness (collectively, the
"Bankruptcy Matters"). As to any Bankruptcy Matter, the unanimous vote of
the fully constituted Board of Directors (including, without limitation,
the Special Purpose Director), will be required to constitute an act of the
Board of Directors. Accordingly, the Special Purpose Director will have
the ability to veto the filing by the Company of any voluntary petition in
bankruptcy under the Bankruptcy Code.
For so long as there is a Special Purpose Director, (i) he shall be
entitled to notice of each meeting of the Board of Directors at the same
time and in the same manner as notice is given to the other Directors; (ii)
he shall be entitled to attend in person all meetings held in person and to
participate in telephone or other meetings of the Board of Directors; (iii)
he shall be provided by the Company copies of all notices, minutes,
consents, and all other materials or information that the Company provides
to the other Directors of the Company with respect to meetings of the Board
of Directors, or otherwise, at the same time such materials and information
are given to the other Directors of the Company; (iv) if the Board of
Directors proposes to take any action by written consent in lieu of a
meeting, he shall be given written notice thereof prior to the effective
date of such consent describing in reasonable detail the nature and
substance of such action; and (v) he shall, except as otherwise provided in
the Certificate, enjoy all rights, privileges and benefits conferred upon
Directors of the Company by the Certificate, the Company's By-laws or by
law, including, without limitation, with respect to indemnification and
advancement of expenses.
The Special Purpose Director may be removed without cause only by the
holders of the then outstanding shares of Preferred Stock. Any vacancy in
the position of Special Purpose Director shall be filled only by the
holders of the then outstanding shares of Preferred Stock. The Special
Purpose Director shall be paid $100 per year by the Company for his
services.
It is currently anticipated that if stockholders approve this Proposal
No. 3, the holders of the Preferred Stock will nominate and elect Keith B.
Stein as the Special Purpose Director. Mr. Stein, age 38, currently is a
Senior Managing Director of NFC and has served as a principal of NFC since
January 1995. From 1993 through December 1994, Mr. Stein was Senior Vice
President, Secretary and General Counsel of WestPoint Stevens Inc., a
textile manufacturer, where he assisted in leading that company through its
complete recapitalization, involving over $1.5 billion of equity, debt and
securitization transactions. For more than ten years prior to his
affiliation with WestPoint Stevens Inc., Mr. Stein was engaged in private
legal practice, primarily with the law firm of Weil, Gotshal & Manges, New
York, New York, during which time he represented clients in all aspects of
corporate finance, mergers and acquisitions, securities and restructuring
transactions and the representation and restructuring of numerous real
estate limited partnerships. Mr. Stein is a graduate of the Emory
University School of Law and the University of Michigan, a member of the
bars of both New York and Georgia, and serves as a member of the Emory Law
School Council.
Redemption by the Company
The Company shall have the right, commencing on the date that is three
years following the date that the Company's obligations to NPM Capital and
its affiliates are satisfied in full, to redeem all or any part of the
shares of Preferred Stock at the redemption price of $10.00 per share (or
an aggregate redemption price of $1,000 for all shares of Preferred Stock).
No Regular or Cumulative Dividends; Immaterial Liquidation Preference
The holders of shares of Preferred Stock shall not be entitled to
receive any regular or cumulative dividends with respect to their shares.
Such holders, however, may receive dividends with respect to such shares of
Preferred Stock as, when and if declared by the Board of Directors of the
Company. Moreover, in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Company, the
holders of shares of Preferred Stock then outstanding shall be entitled to
be paid, prior to any distribution of the assets of the Company, an amount
in cash equal to $10.00 for each share of Preferred Stock owned by them (or
an aggregate of $1,000 for all shares of Preferred Stock).
Other
The holders of shares of Preferred Stock will not have any rights to
convert such shares into shares of any other class or series of capital
stock or into any other securities of, or any other interest in, the
Company. In addition, no holder of shares of Preferred Stock shall have
any preemptive or subscription rights in respect of any securities of the
Company that may be issued. All certificates for shares of Preferred Stock
issued by the Company will conspicuously bear a legend to the effect that
the Certificate of the Company contains the powers, designations,
preferences and rights of each class of stock of the Company or series
thereof and the qualifications, limitations or restrictions of such
preferences and/or rights, and that, upon written request to the Company at
its principal place of business, the Company will furnish a copy of the
Certificate at no charge.
NO AUTHORIZATION TO CREATE BLANK CHECK PREFERRED STOCK
The proposed Preferred Stock Amendment authorizes only the creation
and issuance of the shares of Preferred Stock to be issued in connection
with the Securities Purchase Agreement. The proposed Preferred Stock
Amendment does not authorize the issuance of any additional shares of
Preferred Stock or the creation of any other series or class of preferred
stock. In the event that the Company, at a later date, determines that it
is advisable to issue additional shares of preferred stock or to authorize
the creation of another series or class of preferred stock, the Company,
following the recommendation of its Board of Directors, will be required to
seek stockholder approval of the same before any additional shares of
preferred stock can be issued or any additional series or classes of
preferred stock can be created.
OTHER CONSIDERATIONS
Approval by stockholders of the Preferred Stock Amendment as
contemplated in this Proposal No. 3 is required as a condition (which may
be waived or modified) to the closing of the Loan Transaction.
VOTE NEEDED FOR APPROVAL
Pursuant to the DGCL, approval and adoption of the Preferred Stock
Amendment requires the affirmative vote of a majority of the outstanding
shares of Common Stock of the Company, whether voted at the Meeting in
person or by proxy. The Preferred Stock Amendment, if approved, would
become effective upon the filing of an appropriate Certificate of Amendment
to the Company's Certificate (the "Certificate of Amendment") with the
Secretary of State of the State of Delaware, which would be accomplished as
soon as practicable after stockholder approval is obtained.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY ADOPTED A RESOLUTION SETTING FORTH
THE PROPOSED PREFERRED STOCK AMENDMENT AND DECLARING ITS ADVISABILITY, AND
HEREBY RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY VOTE FOR THE
PROPOSED PREFERRED STOCK AMENDMENT.
PROPOSAL NO. 4 - CONDITION PRECEDENT TO LOAN TRANSACTION:
APPROVAL OF AMENDMENTS TO CERTIFICATE OF
INCORPORATION AND BY-LAWS TO PLACE RESTRICTION
ON TRANSFER OF COMMON STOCK
GENERAL
At the Meeting, stockholders will consider and vote upon a proposal
providing for amendments (the "Stock Transfer Amendments") to each of the
Company's Certificate and By-laws that would impose certain restrictions
upon the transfer of shares of Common Stock of the Company to designated
persons (the "Stock Transfer Restrictions") for a period of three years
from the Closing of the Loan Transaction. It is currently possible that
certain future transfers of the Company's capital stock could result in the
imposition of limitations on the ability of the Company to utilize its
carryforwards of net operating losses and certain credits for federal
income tax purposes. The Board of Directors believes that it is advisable
and in the best interests of the Company to attempt to prevent the
imposition of such limitations by adopting the amendments described below.
The proposed Stock Transfer Restrictions will be effected by means of
an amendment to each of the Company's Certificate and By-laws. As such,
pursuant to the DGCL, no appraisal rights will be available to dissenting
stockholders under Delaware law. The text of each of the proposed Stock
Transfer Amendments is contained as a proposed new Article ELEVENTH to the
Certificate and as a proposed new Article XII to the By-laws. The text of
the proposed new Article ELEVENTH to the Certificate is attached hereto as
Exhibit J. The text of proposed new Article XII to the By-laws is
identical to the text of the proposed new Article ELEVENTH to the
Certificate.
BACKGROUND REGARDING DELAWARE LAW
Under the laws of the State of Delaware, the Company's jurisdiction of
incorporation, a corporation may provide in its certificate of
incorporation or by-laws that a transfer of a security of the corporation
to designated persons or classes of persons may be prohibited so long as
the designation of the persons or classes of persons is not manifestly
unreasonable. Under Delaware law, a restriction on the transfer of shares
of common stock of a company for the purpose of maintaining any tax
advantage is conclusively presumed to be for a reasonable purpose. The
transfer restriction must be noted conspicuously on the certificate
representing the shares to be enforceable against the holder of the
restricted shares or any successor or transferee of the holder. If the
restriction is not conspicuously noted on the certificate representing the
shares, Delaware law provides that the restriction is ineffective except
against a person with actual knowledge of the restriction. Finally, no
restriction so imposed is binding with respect to shares issued prior to
the inclusion of such restrictions in the certificate of incorporation or
by-laws unless the holders of such shares agree thereto or vote in favor
thereof.
REASONS FOR ADOPTION OF STOCK TRANSFER AMENDMENTS
The restrictions imposed by the proposed Stock Transfer Amendments are
designed to restrict for a period of three years from the Closing of the
Loan Transaction transfers of shares of the Common Stock of the Company
that could result in the imposition of limitations on the use, for federal
income tax purposes, of the Company's carryforwards of net operating losses
and certain credits. The Company estimates that it had, as of December 31,
1995, carryforwards of net operating losses of approximately $65 million.
For federal income tax purposes, the carryforwards of net operating losses
will expire through the year 2010. Because the amount and timing of the
Company's taxable income in the current fiscal year and thereafter cannot
be accurately predicted, it is not presently feasible to estimate the
amount, if any, of carryforwards that ultimately may be used to reduce the
Company's federal income tax liability.
The benefit of the Company's existing and future loss and credit
carryforwards can be reduced or eliminated if the Company undergoes an
"ownership change," as defined in Section 382 of the Internal Revenue Code
of 1986, as amended (the "Code"). Generally, an "ownership change" occurs
if one or more stockholders, any of whom owns five percent or more in value
of a company's capital stock, increase their aggregate percentage ownership
by more than 50 percentage points over the lowest percentage of stock owned
by such stockholders over the preceding three-year period. For this
purpose, all holders who each own less than five percent of a company's
capital stock generally are treated together as one five-percent
stockholder. In addition, certain attribution rules, which generally
attribute ownership of stock to the ultimate beneficial owner thereof
without regard to ownership by nominees, trusts, corporations, partnerships
or other entities, are applied to determine the level of stock ownership of
a particular stockholder. If a principal purpose of the issuance, transfer
or structuring of an option (including a warrant) to acquire stock is to
avoid or ameliorate the impact of an "ownership change," and the issuance,
transfer or structuring of the option satisfies the ownership, control or
income test under the applicable Treasury Regulations, such option may be
treated as if it had been exercised for purposes of determining whether an
"ownership change" has occurred. All percentage determinations are based
on the fair market value of a company's capital stock, including, if any,
preferred stock that is voting or convertible and certain other interests
in the Company.
If the Company were to undergo an "ownership change," the amount of
future taxable income of the Company that could be offset in any year by
its carryforwards of net operating losses and credits incurred prior to
such "ownership change" could not exceed an amount equal to the product
obtained by multiplying (i) the aggregate value of the Company's
outstanding capital stock immediately prior to the "ownership change"
(reduced by certain capital contributions made during the immediately
preceding two years and certain other items) by (ii) the federal long-term
tax-exempt interest rate (5.78% at June 1996). Because the aggregate value
of the Company's outstanding stock and the federal long-term tax-exempt
interest rate fluctuate, it is impossible to predict with any accuracy the
annual limitation upon the amount of taxable income of the Company that
could be offset by such loss carryforwards and credits were an "ownership
change" to occur in the future. While the carryovers not used as a result
of this limitation would remain available to offset variable income in
future years (again, subject to the limitation), an ownership change could
significantly defer the utilization of the carryovers, accelerate payment
of federal income tax and cause a portion of the carryovers to expire
unused.
The Company knows of no stockholder currently owning more than five
percent, based on value, of the Company's capital stock other than the
persons listed in the table under "Security Ownership of Certain Beneficial
Owners, Directors and Officers" above. The Company, however, during 1995,
issued a number of shares of Common Stock representing approximately 37.5%
of the currently outstanding number of shares of Common Stock of the
Company to plaintiffs in various stockholder litigation settlements. If
the Loan Transaction is approved by the stockholders and the transactions
contemplated thereby are consummated, the designee of NPM Capital, as
holder of the Warrants, will become the owner of more than five percent of
the Company's capital stock. In addition, under the attribution rules,
since NPM Capital and NPO Holdings are affiliates, each of NPM Capital and
NPO Holdings, and their respective affiliates and designees, will be deemed
to be owner of more than five percent of the Company's capital stock. It
is possible that additional accumulations of shares of Common Stock of the
Company by NPO Holdings, NPM Capital, their affiliates and designees or by
the persons listed in the table under "Security Ownership of Certain
Beneficial Owners, Directors and Executive Officers" or by stockholders who
become holders of at least five percent of the Company's capital stock
would result in an "ownership change" with the consequent limitation or
loss of the potential benefits arising from the Company's carryforwards of
net operating losses and credits. The Stock Transfer Restrictions
recommended by the Board of Directors are intended to reduce the risk of
such additional accumulations by prohibiting certain transfers of the
Common Stock of the Company.
DESCRIPTION AND EFFECT OF PROPOSED STOCK TRANSFER AMENDMENTS
Upon approval of the Stock Transfer Amendments, the Company's
Certificate will be amended to add a new Article ELEVENTH ("Article
ELEVENTH"), and the By-laws will be amended to add a new Article XII
("Article XII"), each of which will prohibit, until three years from the
Closing of the Loan Transaction, unless otherwise permitted by the Board of
Directors in accordance with Article ELEVENTH and Article XII, any
individual, partnership, firm, corporation, association, trust,
unincorporated organization or other entity, as well as any syndicate or
group deemed to be a person under Section 14(d)(2) of the Exchange Act
(each a "Person"), who (i) purports to purchase or acquire any shares of
capital stock of the Company from the Company by the exercise of a warrant
or option or otherwise or (ii) beneficially owns directly or through
attribution (as determined under Section 382 of Code) five percent or more
of the value of the outstanding shares of capital stock of the Company or
who, upon the acquisition of any shares of capital stock of the Company,
would beneficially own directly or through attribution (as determined under
Section 382 of the Code) five percent or more of the value of the
outstanding shares of capital stock of the Company (each such Person
described in (i) or (ii) above being a "Restricted Holder"), from selling,
transferring, or disposing, or purchasing or acquiring in any manner
whatsoever, whether voluntarily or involuntarily, by operation of law or
otherwise (any such sale, transfer, disposition, purchase, acquisition or
contract being a "Transfer"), any shares of capital stock of the Company or
any option, warrant or other security containing a right to purchase or
acquire capital stock of the Company (such warrant, option or security
being an "Option") or any securities convertible into or exchangeable for
capital stock of the Company. For purposes of both Article ELEVENTH and
Article XII, "capital stock" shall include the Common Stock and the
Preferred Stock of the Company and any Option. Notwithstanding the
preceding sentence, for purposes of determining whether a Person owns five
percent or more of the value of the outstanding shares of capital stock of
the Company, shares issuable pursuant to Options shall be taken into
account to the extent taking such shares into account would cause a Person
to become a Restricted Holder. Each of Article ELEVENTH and Article XII
will provide, however, that notwithstanding the foregoing, nothing shall
prohibit the acquisition by NPM Capital and its affiliates, including NPO
Holdings, of the 1,000,000 shares of Common Stock included in the Stock
Purchase Agreement.
In order for the Stock Transfer Restrictions to be effectively
enforced, the Stock Transfer Amendments will further provide that a
Restricted Holder who proposes to transfer shares of capital stock will be
required, prior to the date of the proposed Transfer, to request in writing
that the Board of Directors review the proposed Transfer and authorize or
not authorize such proposed Transfer. Any Transfer attempted to be made in
violation of the Stock Transfer Restrictions will be null and void. In the
event of an attempted or purported Transfer involving a sale or disposition
of capital stock in violation of the Stock Transfer Restrictions, the
Restricted Holder shall remain the owner of such shares. In the event of
an attempted or purported Transfer involving the purchase or acquisition by
a Restricted Holder in violation of the Stock Transfer Restrictions, the
Company shall be deemed to be the exclusive and irrevocable agent for the
transferor of such capital stock. The Company shall be such agent for the
limited purpose of consummating a sale of such shares to a Person who is
not a Restricted Holder (an "eligible transferee"), which may include,
without limitation, the transferor. The record ownership of the subject
shares shall remain in the name of the transferor until the shares have
been sold by the Company or its assignee, as agent, to an eligible
transferee.
The Board of Directors shall authorize a Transfer by a Restricted
Holder, or to a Restricted Holder, if, in its sole discretion and judgment
it determines that the Transfer will not jeopardize the Company's
preservation of its federal income tax attributes pursuant to Section 382
of the Code. In deciding whether to approve any proposed Transfer of
capital stock by or to a Restricted Holder, the Board of Directors may seek
the advice of counsel with respect to the Company's preservation of its
federal income tax attributes pursuant to Section 382 of the Code and may
request all relevant information from the Restricted Holder with respect to
all capital stock directly or indirectly owned by such Restricted Holder.
Any Person who makes such a Request of the Board of Directors to Transfer
shares of capital stock shall reimburse the Company, on demand, for all
costs and expenses incurred by the Company with respect to any proposed
Transfer of capital stock, including, without limitation, the Company's
costs and expenses incurred in determining whether to authorize that
proposed Transfer.
The Company believes that, as of the Record Date, no stockholder
beneficially owns more than five percent in value of the Company's
outstanding capital stock, as defined herein to include capital stock
underlying the Options. If the Loan Transaction is approved by the
stockholders, NPO Holdings will become the owner of more than five percent
of the Company's capital stock. In addition, under the attribution rules,
NPM Capital and NPO Holdings, as affiliates of NPO Holdings, will be deemed
to be owners of more than five percent of the Company's capital stock. The
Stock Transfer Restrictions, to the extent applicable, would prohibit any
other person, entity or group from acquiring sufficient shares of Common
Stock to cause such person, entity or group to become the owner of more
than five percent of the value of Company's outstanding capital stock
(within the meaning of Section 382 of the Code).
Assuming adoption by stockholders of the Stock Transfer Amendments,
Article ELEVENTH and Article XII will each provide that all certificates
representing shares of Common Stock must bear the following legend:
"Each of the Certificate of Incorporation (the "Certificate") and
the By-laws (the "By-laws") of the Corporation contains
restrictions prohibiting the sale, transfer, disposition,
purchase or acquisition of any capital stock until . 1999,
without the authorization of the Board of Directors of the
Corporation (the "Board of Directors"), by or to any holder (a)
who beneficially owns directly or through attribution (as
generally determined under Section 382 of the Internal Revenue
Code of 1986, as amended (the "Code")) five percent or more of
the value of the then issued and outstanding shares of capital
stock of the Corporation or (b) who, upon the sale, transfer,
disposition, purchase or acquisition of any capital stock of the
Corporation would beneficially own directly or through
attribution (as generally determined under Section 382 of the
Code) five percent or more of the value of the then issued and
outstanding capital stock of the Corporation, if that sale,
transfer, disposition, purchase or acquisition would, in the sole
discretion and judgment of the Board of Directors, jeopardize the
Corporation's preservation of its federal income tax attributes
pursuant to Section 382 of the Code. The Corporation will
furnish without charge to the holder of record of this
certificate a copy of the Certificate and/or By-laws, containing
the above-referenced restrictions on transfer of stock, upon
written request to the Corporation at its principal place of
business."
The Board of Directors intends to issue instructions to or make
arrangements with the transfer agent for the Company's Common Stock to
implement the Stock Transfer Restrictions. These instructions or
arrangements may result in the delay or refusal of transfers initially
determined by the transfer agent to be in violation of the Stock Transfer
Restrictions, including such transfers as might be ultimately determined by
the Company and its transfer agent not to be in violation of such
restrictions. The Company believes that such delays would be minimal but
could occur at any time while the Stock Transfer Restrictions are in
effect.
PROPOSED AMENDMENT NO GUARANTEE
Although the Stock Transfer Amendments are intended to reduce the
likelihood of an ownership change, it will not prevent all transfers that
might result in an "ownership change." Furthermore, certain changes in
relationships and other events not addressed by the Stock Transfer
Amendments could cause the Company to undergo an "ownership change."
Section 382 of the Code is an extremely complex provision with respect to
which there are many uncertainties. In addition, the Company has not
requested a ruling from the IRS regarding the effectiveness of the Stock
Transfer Amendments and, therefore, there can be no assurance that the IRS
will agree that the Stock Transfer Amendments are effective for purposes of
Section 382 of the Code. As a result of the foregoing, the Stock Transfer
Amendments serve to reduce, but do not eliminate, the risk that the Company
will undergo an ownership change. In addition, although the Company
believes that no "ownership change" has occurred as of the date hereof,
there can be no assurance that the Company has not already undergone an
"ownership change." Finally, there can be no assurances that upon audit,
the IRS would agree that all of the Company's net operating loss, capital
loss and tax credit carryforwards are allowable. The Board of Directors
nevertheless believes that the adoption of the Stock Transfer Amendments is
in the best interests of the Company because it discourages transfers that
could cause or contribute to an "ownership change."
OTHER CONSIDERATIONS
The Stock Transfer Amendments, if adopted, may be deemed to have an
"anti-takeover" effect because it will restrict the ability of a person,
entity or group to accumulate in the aggregate, through transfers of Common
Stock, more than five percent, in value, of the Company's capital stock and
the ability of persons, entities or groups now owning more than five
percent, in value, of the Company's capital stock from acquiring additional
shares of Common Stock without the approval of the Board of Directors, with
the result that the Board of Directors may be able to prevent any future
takeover attempt, in its discretion. Therefore, the Stock Transfer
Amendments would discourage or prevent accumulations of substantial blocks
of shares in which stockholders might receive a substantial premium above
market value. Similarly, because the Stock Transfer Amendments operate to
prevent the accumulation of more than five percent of the Company's Common
Stock, they will discourage the assumption of control by third parties and
tend to insulate management against the possibility of removal. These
results might be considered disadvantageous by some stockholders. However,
such disadvantages are outweighed, in the opinion of the Board of
Directors, by the fundamental importance to the Company's stockholders of
maintaining the availability of the Company's tax benefits. The Board of
Directors is not aware of any efforts of others to take control of the
Company and has no present intent to propose any provisions designed to
inhibit a change of control. The aforementioned "anti-takeover" effect of
the proposed Stock Transfer Amendments is not, however, the reason for the
Stock Transfer Restrictions. The Board of Directors has adopted and
proposed the Stock Transfer Amendments in an effort to reduce the risk that
the Company may be unable to fully utilize the tax benefits described above
as a result of future transfers of the Common Stock of the Company.
The Board of Directors believes that attempting to safeguard the tax
benefits of the Company as described above is in the best interests of the
Company and its stockholders. Nonetheless, the Stock Transfer Amendments,
if adopted, could restrict a stockholder's ability to acquire additional
shares of the Company's Common Stock to the extent those shares exceed the
specified limitations of the Stock Transfer Restrictions. Furthermore, a
stockholder's ability to dispose of his Common Stock could be restricted as
a result of the Stock Transfer Restrictions. The Board of Directors has
the discretion to approve a transfer of the Company's Common Stock that
would otherwise violate the Stock Transfer Restrictions. If the Board of
Directors decides to permit a transfer that would otherwise violate the
Stock Transfer Restrictions, that transfer or later transfers may result in
an "ownership change" that would limit the Company's use of its
carryforwards. The Board of Directors intends to consider any such
attempted transfer individually and determine at the time whether it is in
the best interest of the Company, after consideration of any factors that
the Board deems relevant, to permit such transfer notwithstanding that an
"ownership change" may then occur.
For more information on use of the Company's net operating loss
carryforwards and credits for federal income tax purposes, see "Analysis of
Certain Federal Income Tax Considerations Affecting the Company's Net
Operating Losses" attached hereto as Exhibit H.
Approval by stockholders of the Stock Transfer Amendments as
contemplated in this Proposal No. 3 is required as a condition (which may
be waived or modified) to the closing of the Loan Transaction.
VOTE NEEDED FOR APPROVAL
Pursuant to the DGCL, approval and adoption of the proposed Stock
Transfer Amendments requires the affirmative vote of a majority of the
outstanding shares of Common Stock of the Company, whether voted at the
Meeting in person or by proxy. The Stock Transfer Amendments, if approved,
will become effective immediately following stockholder approval of the
same. As soon as practicable thereafter, the Company will file the
Certificate of Amendment with the Secretary of State of the State of
Delaware.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY ADOPTED A RESOLUTION SETTING
FORTH THE PROPOSED STOCK TRANSFER AMENDMENTS AND DECLARING THEIR
ADVISABILITY, AND HEREBY RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY
VOTE FOR THE PROPOSED STOCK TRANSFER AMENDMENTS.
PROPOSAL NO. 5 - CONDITION PRECEDENT TO LOAN TRANSACTION:
APPROVAL OF THE 1996 STOCK OPTION PLAN IN
CONNECTION WITH THE EXCHANGE OF CERTAIN
STOCK APPRECIATION RIGHTS
GENERAL
In connection with the Loan Transaction, and as a condition precedent
thereto, all current holders of performance units, considered to be stock
appreciation rights, granted under the Company's Performance Plan, have
agreed, as required by NPM Capital, to exchange such stock appreciation
rights for options ("Options") to be granted under the Company's 1996
Option Plan concurrently with the ratification and approval by stockholders
of the 1996 Option Plan. The Company will terminate the Performance Plan
concurrently with the stockholders' ratification and approval of the 1996
Option Plan, irrespective of whether stockholders approve the Loan
Transaction.
The Performance Plan authorizes the grant of performance units,
considered to be stock appreciation rights, to directors and officers of
the Company or any of its subsidiaries who are in a position to make
substantial contributions to the management, growth and success of the
business of the Company or its subsidiaries. Under the Performance Plan,
the holder of performance units is entitled to receive upon exercise of
such units an amount equal to the Fair Market Value (as defined in the
Performance Plan) of a performance unit at the time of exercise (plus all
dividends with respect to a single share of the Common Stock from the date
of exercise) minus the Fair Market Value of a performance unit at the time
of grant, multiplied by the total number of performance units being
exercised by the holder. As of May 24, 1996, 673,131 performance units
were outstanding, each fully vested and exercisable. As of such date, the
Fair Market Value of such performance units was less than the Fair Market
Value of such performance units as of their time of grant.
In contemplation of the Loan Transaction and in light of the Company's
operating cash flow deficiencies, the Board of Directors deems it advisable
to cancel the Performance Plan and, with the consent of the holders of the
performance units (which consents have been obtained, subject to
stockholder approval of this Proposal No. 5), the stock appreciation rights
granted thereunder, in order for the Company to avoid having to make
potentially large outlays of cash upon the future exercise of such stock
appreciation rights if the market value of the Company's Common Stock
substantially increases.
As a replacement for the Performance Plan and the stock appreciation
rights that will be exchanged for Options upon the Closing of the Loan
Transaction if the stockholders ratify and approve the 1996 Option Plan,
the Board of Directors adopted the 1996 Option Plan in April 1996, subject
to stockholder ratification and approval at the Meeting. The Plan provides
for discretionary grants of Options to purchase up to 1,500,000 shares of
Common Stock to officers and key Employees (as defined below) of the
Company, for automatic grants of 15,000 Options to individuals upon their
becoming Non-Employee Directors (as defined below) of the Company and for
annual grants of 15,000 Options to each Non-Employee Director of the
Company. The 1,500,000 shares of Common Stock reserved for issuance under
the 1996 Option Plan include the shares of Common Stock underlying the
Options to be granted (i) upon a person's becoming a Non-Employee Director,
(ii) annually to the Company's Non-Employee Directors and (iii) to those
holders of performance units who will exchange their performance units for
Options under the 1996 Option Plan concurrently with the ratification and
approval by stockholders of the 1996 Option Plan. See "--Grant of Options
in Exchange for Performance Units."
The 1996 Option Plan permits the grant only of stock options which do
not satisfy the requirements for, or which are not intended to be eligible
for, tax-favored treatment under Section 422 of the Code ("Non-Qualified
Stock Options"). The exercise price for each share of Common Stock
underlying an Option granted under the 1996 Option Plan, however, may not
be less than the fair market value for one share of the Company's Common
Stock on the date of grant of such Option; provided, however, that the
exercise price for each Option granted in exchange for currently
outstanding performance units under the Company's Performance Plan shall be
$0.21 per share.
The purpose of the Plan and the associated exchange of the stock
appreciation rights for Options is to promote the success and enhance the
value of the Company by eliminating potentially large outlays of cash upon
the future exercise of stock appreciation rights and by linking the
personal interests of those participating under the 1996 Option Plan,
including those persons who may exchange stock appreciation rights for
Options, to those of the Company's stockholders.
As a cost savings measure, the Company intends to terminate the
Performance Plan and cause the stock appreciation rights granted thereunder
to be exchanged for Options under the 1996 Option Plan irrespective of
whether stockholders approve the Loan Transaction.
A copy of the 1996 Option Plan is attached hereto as Exhibit K.
DESCRIPTION OF PLAN
Administration
The Plan will be administered by the Compensation Committee of the
Board of Directors (the "Committee"), which at all times must be composed
of at least two directors who meet the requirements of disinterested
administrators under Section 16 of the Exchange Act. Subject to the
express provisions of the Plan, including the provisions of the Plan
relating to the grant of Options to Non-Employee Directors (as defined
below), the Committee will have the authority, in its discretion, to
determine the persons to whom Options shall be granted, the times when such
Options shall be granted, the number of Options, the exercise price of each
Option (subject to the requirement, however, that the exercise price of the
Option (other than Options granted in exchange for currently outstanding
performance units) not be less than the fair market value for one share of
the Company's Common Stock as of the date of grant of the Option), the
period(s) during which such Option shall be exercisable (whether in whole
or in part), the restrictions to be applicable to Options and the other
terms and provisions thereof (which need not be identical).
Eligible Persons
All officers and full-time employees of the Company, including all
officers and full-time employees who also serve as Directors of the
Company, and all consultants of the Company (each, an "Employee"), and all
members of the Board of Directors who are not officers of the Company and
who are not regularly employed on a salaried basis as employees of the
Company (each, a "Non-Employee Director") will be eligible to participate
in the Plan.
Options Granted to Employees
The Committee also will have the authority, in its discretion, to
grant Options to Employees on such terms and conditions as determined by
the Committee. The Committee will be given complete discretion in
determining the exercise price of any Option, provided, however, that the
exercise price for each Option granted under the Plan (other than Options
granted in exchange for currently outstanding performance units) shall be
not less than the fair market value per share of Common Stock as of the
date of grant of such Option. The price per share of Common Stock with
respect to each Option shall be payable at the time the Option is
exercised. Such price shall be payable in cash or, upon the discretion of
the Committee, by having withheld from the total number of shares of Common
Stock to be acquired upon the exercise of an Option that number of shares
having a value equal to the exercise price of the Option, the effect of
which shall be that an Optionee can in sequence utilize such newly acquired
shares of Common Stock in payment of the exercise price of the entire
Option, together with such cash as shall be paid in respect of fractional
shares or by engaging in any form of "cashless" exercise. Shares of Common
Stock delivered to the Company in payment of the exercise price shall be
valued at the Fair Market Value (as defined in the Plan) of the Common
Stock on the date preceding the date of the exercise of the Option.
The Committee shall have the discretion either (i) to establish
provisions relating to the forfeiture of an Option upon the Employee's
termination of employment with the Company or (ii) to grant an Option not
subject to any forfeiture provisions upon the Employee's termination of
employment with the Company. No Option shall be granted to an Employee
under the Plan with a term longer than ten (10) years from the date of
grant of the Option. The Options to be granted in exchange for currently
outstanding performance units will not contain any forfeiture provisions
upon the Optionholder's termination of employment with the Company.
Options Granted to Non-Employee Directors
Each Non-Employee Director will automatically be granted an Option to
purchase shares of Common Stock, subject to availability under the Plan, as
follows: (i) upon the person's becoming a Non-Employee Director, an Option
to purchase 15,000 shares of Common Stock (the "Initial Grant") and (ii) on
the anniversary date in each subsequent calendar year of the Initial Grant,
or, if the person is a Non-Employee Director at the time of stockholder
ratification and approval of the 1996 Option Plan, then, on the anniversary
date in each subsequent calendar year of the stockholders' ratification and
approval of the 1996 Option Plan, an Option to purchase 15,000 additional
shares of Common Stock (the "Annual Grant"). The exercise price of the
shares of Common Stock underlying the Initial Grant and each Annual Grant
shall be the fair market value of such shares on the date of each
respective grant.
All Options granted to Non-Employee Directors will vest immediately
and will be exercisable for a term of ten (10) years from the date of grant
of the Option.
The methods of exercising Options granted to Non-Employee Directors
are the same as those for exercising Options granted to Employees.
Non-Employee Directors will be ineligible to receive any other grant
or award under any section of the 1996 Option Plan other than the section
specifically relating to grants to Non-Employee Directors. The provisions
of the 1996 Option Plan relating to grants to Non-Employee Directors may
not be amended more than one time in any six month period, other than to
comport with changes in the Code, the Employee Retirement Income Security
Act of 1974, as amended, or any rules or regulations promulgated
thereunder.
Prior Board Approval for Exercise of Options
Any Employee or Non-Employee wishing to exercise his Option must,
prior to exercising such Option, furnish to the Board of Directors notice
(the "Notice") of such intent to exercise his Option. Upon receipt of the
Notice, the Board of Directors will have seven business days in which to
determine whether exercise of such Option by the Employee will cause an
"ownership change" (as such term is defined in Section 382 of the Code) in
the Company which would have an adverse effect on the Company's use of its
"net operating loss carryforwards" (as such term is defined in Section 382
of the Code) (an "Adverse Ownership Change"). If the Board of Directors,
in its reasonable discretion, determines that such exercise would cause an
Adverse Ownership Change, the Board of Directors shall deny approval for
the exercise and such holder shall not be permitted to exercise the Option.
If, however, the Board of Directors determines, in its reasonable
discretion, that such exercise would not cause an Adverse Ownership Change,
the Board of Directors shall approve the exercise of the Option. In either
case, the Board of Directors shall provide to the Employee notice of its
approval or denial within seven business days of receipt of the Notice.
The determination by the Board of Directors shall be conclusive and binding
on the Company and the Employee.
Adjustments
Upon the occurrence of certain events, including stock dividends,
reorganizations, recapitalizations or similar changes or transactions of or
by the Company, the aggregate number and kind of shares available for
issuance under the 1996 Option Plan or pursuant to an individual Option
grant agreement will be appropriately adjusted and all of the provisions of
the 1996 Option Plan with respect to the number and kind of shares so
available will likewise be adjusted so as to maintain the economic reality,
and the intent, of the grant.
Merger or Consolidation of the Company
Upon (i) the merger or consolidation of the Company with or into
another corporation, if the agreement of merger or consolidation does not
provide for (a) the continuance of the Options granted under the 1996
Option Plan or (b) the substitution of new Options of equivalent value for
Options granted under the 1996 Option Plan, or for the assumption of such
Options by the surviving corporation or (ii) the dissolution, liquidation,
or sale of substantially all the assets, of the Company, the holder of any
such Option theretofore granted and still outstanding (and not otherwise
expired) shall have the right immediately prior to the effective date of
such merger, consolidation, dissolution, liquidation or sale of assets to
exercise such Option(s) in whole or in part without regard to any
installment provision that may have been made part of the terms and
conditions of such Option(s). All such Options which are not so exercised
shall be forfeited as of the effective time of such merger, consolidation,
dissolution, liquidation or sale of assets.
Amendment of 1996 Option Plan
The Board of Directors may, at any time and from time to time, subject
to the restrictions on amendment set forth with respect to Option grants to
Non-Employee Directors, alter, amend, suspend or terminate the 1996 Option
Plan in whole or in part; provided, however, that no amendment which
requires stockholder approval in order for the 1996 Option Plan to continue
to comply with Rule 16b-3 under the Exchange Act, including any successor
to such Rule, shall be effective unless such amendment shall be approved by
the requisite vote of the stockholders of the Company entitled to vote
thereon.
Term of 1996 Option Plan
The 1996 Option Plan shall remain in effect until the earlier of March
31, 2006, or the tenth anniversary of the date the 1996 Option Plan was
adopted by the Board of Directors, unless sooner terminated by such Board
of Directors. Options outstanding as of the termination date of the 1996
Option Plan shall remain valid obligations of the Company in accordance
with their terms irrespective of the termination of the 1996 Option Plan.
FEDERAL INCOME TAX CONSEQUENCES
The Company has been advised by its counsel that under currently
applicable provisions of the Code, the following tax consequences may be
expected by an Optionee and by the Company in respect of the grant and
exercise of Options under the 1996 Option Plan.
Consequences to the Optionee
There are no federal income tax consequences to the Optionee by reason
of the grant of an Option under the 1996 Option Plan.
Upon exercise of the Option, the Optionee will generally recognize
ordinary income in an amount equal to the excess of the fair market value
of the shares of Common Stock at the time of exercise over the amount paid
as the exercise price. The Committee shall have the authority to establish
a procedure whereby a number of shares of Common Stock or other securities
may be withheld from the total number of shares of Common Stock or other
securities to be issued upon exercise of an Option to meet the obligation
of withholding for taxes incurred by the Optionee upon such exercise.
The Optionee's tax basis in the shares acquired pursuant to the
exercise of an Option will be the amount paid on exercise, plus the amount
of any ordinary income recognized by the Optionee upon exercise.
If an Optionee disposes of shares of the Company's Common Stock
acquired upon exercise of an Option in a taxable transaction, the Optionee
will recognize capital gain or loss in an amount equal to the difference
between his basis (as discussed above) in the shares sold and the amount
realized upon disposition. Any such capital gain or loss will be long-term
or short-term depending on whether the shares of the Company's Common Stock
were held for more than one year from the date such shares were transferred
to the Optionee.
Consequences to the Company
There are no federal income tax consequences to the Company by reason
of the grant of Options.
At the time the Optionee recognizes ordinary income from the exercise
of an Option, the Company will be entitled to a federal income tax
deduction in the amount of the ordinary income so recognized (as described
above) so long as it timely reports to the IRS the ordinary income
recognized by the Optionee by reason of the exercise of the Option.
Other Tax Consequences
The foregoing discussion is not a complete description of the federal
income tax aspects of Options issued pursuant to the 1996 Option Plan. In
addition, administrative and judicial interpretations of the application of
the federal income tax laws are subject to change. Furthermore, the
foregoing discussion does not address state or local tax consequences.
GRANT OF OPTIONS IN EXCHANGE FOR PERFORMANCE UNITS
Pursuant to the 1996 Option Plan, Options to purchase an aggregate of
673,131 shares of Common Stock will be granted to those persons exchanging
presently outstanding performance units for Options concurrently with the
ratification and approval by stockholders, at the Meeting, of the 1996
Option Plan. These Options will have a $0.21 per share exercise price.
Moreover, should the 1996 Option Plan be ratified and approved by
stockholders and Mr. Yudell be elected a Director of the Company, Mr.
Yudell, pursuant to the terms of the 1996 Option Plan, will receive an
automatic grant of 15,000 Options thereunder as a result of his becoming a
Non-Employee Director of the Company.
The following table discloses the benefits to be received or allocated
to the persons identified therein upon the ratification and approval by
stockholders of the 1996 Option Plan:
PLAN BENEFITS
--------------------------------
DVL, INC. 1996 STOCK OPTION PLAN
Number of
Options to be
Initially
Granted
Name and Position Dollar Value($) Under the Plan
----------------- ---------------- --------------
Alan E. Casnoff, President -0- 300,000
Joel Zbar, Treasurer and Chief Financial -0- 150,000
and Operating Officer
Robert W. LoSchiavo -0- 15,000
All Current Executive Officers, as a -0- 465,000
group
All Current Directors who are not -0- -0-
Executive Officers, as a group
All Employees, Including All Current -0- 208,131
Officers who are not Executive
Officers, as a group
OTHER CONSIDERATIONS
Ratification and approval by stockholders of the 1996 Option Plan as
contemplated in this Proposal No. 5 is required as a condition (which may
be waived or modified) to the closing of the Loan Transaction.
VOTE NEEDED FOR APPROVAL
Approval of the 1996 Option Plan requires the affirmative vote of a
majority of the shares of Common Stock voting, in person or by proxy, at
the Meeting. Insofar as the Non-Employee Directors of the Company will
personally benefit from the adoption of the 1996 Option Plan, there may be
an inherent conflict of interest in any recommendation made by the Board of
Directors with respect thereto.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY ADOPTED A RESOLUTION APPROVING
THE 1996 OPTION PLAN AND DECLARING ITS ADVISABILITY, AND HEREBY RECOMMENDS
THAT THE STOCKHOLDERS OF THE COMPANY VOTE FOR RATIFICATION AND ADOPTION OF
THE 1996 OPTION PLAN.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
P&A Associates, a Pennsylvania general partnership of which Mr.
Casnoff, President and a Director of the Company, is a partner, provided
management services for certain properties located in Philadelphia,
Pennsylvania which are owned by partnerships affiliated with the Company.
During 1995, these properties were transferred to unrelated parties and no
management fees were paid to P&A Associates. Further, since February 1992,
the Company and related entities have used a partner of Mr. Casnoff in P&A
Associates to perform legal services for the Company and affiliates in
connection with certain real estate transactions. Mr. Casnoff's partner
earned $2,775 in legal fees from the Company and affiliates in 1995.
Certain officers and directors of the Company serve as officers and
directors of Kenbee, which was the Company's largest debtor and previous
manager, and control over which has been given to Mr. Casnoff by virtue of
certain voting trust agreements. Mr. Casnoff, who also serves as President
of Kenbee, acquired sole voting power over the shares of capital stock of
R&M Holding, a Delaware corporation and the sole stockholder of Kenbee,
pursuant to the terms of a Voting Trust Agreement dated May 15, 1991,
between R&M Holding and Mr. Casnoff, as trustee. The shares subject to the
Agreement are owned by Roger D. Stern and Martin Wright, each a 50% owner
of the shares of capital stock of R&M Holding, and each a former officer
and director of the Company. The term of the Voting Trust Agreement
expires on January 1, 2000 as to 50% of the shares of capital stock owned
by Mr. Stern and on February 28, 2001 as to 50% of the shares of capital
stock owned by Mr. Wright.
Rosenthal & Rosenthal Inc., a commercial finance concern of which Mr.
Rosenberg, a Director of the Company, is Executive Vice President, made a
loan to the Company in 1990 in the aggregate principal amount of
$1,331,700, secured by the assignment of a certain promissory note and
mortgage executed by the Company. Regular payments of principal and
interest on this loan were made through September 1990. In 1992, the
Company completed a settlement in which this loan was exchanged for the
assignment to Rosenthal & Rosenthal, Inc. of a wraparound mortgage, certain
limited partnership units and options to acquire 600,000 shares of the
Company's Common Stock for $1.00 per share. Rosenthal & Rosenthal, Inc.
was also provided with a note with a face value of $107,000 bearing
interest at 10% per annum and 214,000 warrants to purchase Common Stock for
$1.00 per share, which warrants would have expired in April 1998.
Rosenthal & Rosenthal, Inc. had an option to return either the wraparound
mortgage or the notes and warrants within five years of the settlement. In
February 1996, the settlement agreement with Rosenthal & Rosenthal was
amended whereby the Company agreed to issue to Rosenthal & Rosenthal
warrants to purchase 800,000 shares of the Company's Common Stock at $.50
per share in consideration of Rosenthal & Rosenthal's surrender of all
options to purchase common stock of the Company for $1.00 per share, the
return of $107,000 of Company debentures accompanied by 214,000 warrants to
purchase the Company's Common Stock at $1.00 per share and the release of
the Company from certain contingent obligations. Rosenthal & Rosenthal's
interests in the promissory note and mortgage and in certain partnership
units were not effected by this amendment.
Since June 1992, the Company and affiliates have periodically retained
Fox, Rothschild, O'Brien & Frankel to perform certain legal services in
connection with various matters. Mr. Casnoff, director and President,
serves as Of Counsel to Fox, Rothschild, O'Brien & Frankel.
RELATIONSHIP WITH INDEPENDENT AUDITORS
The Board has selected the firm of Richard A. Eisner & Company LLP,
independent auditors, as auditors of the Company for the next fiscal year.
The Company has been advised by such firm that neither it nor any member or
associate of such firm has any relationship with the Company or with any of
its affiliates other than as independent accountants and auditors.
Representatives of Richard A. Eisner & Company LLP will be present at
the Meeting, will have an opportunity to make any statement they may desire
to make, and will be available to answer appropriate questions from
stockholders.
MISCELLANEOUS
All of the costs and expenses in connection with the solicitation of
proxies with respect to the matters described herein will be borne by the
Company. In addition to solicitation of proxies by use of the mails,
Directors, officers and employees (who will receive no compensation
therefor in addition to their regular remuneration) of the Company may
solicit the return of proxies by telephone, telegram or personal interview.
The Company intends to retain a proxy solicitation firm to assist the
Company in its solicitation of proxies in connection with the Meeting.
The Company will request banks, brokerage houses and other custodians,
nominees and fiduciaries to forward copies of the proxy material to their
principals and to request instructions for voting the proxies. The Company
may reimburse such banks, brokerage houses and other custodians, nominees
and fiduciaries for their expenses in connection therewith.
Action may be taken on the business to be transacted at the Meeting on
the date specified in the Notice of Meeting or on any date or dates to
which such Meeting may be adjourned.
IMPORTANT NOTE: STOCKHOLDERS WHO HOLD SHARES OF COMMON STOCK IN
--------------
THE NAME OF ONE OR MORE BROKERAGE FIRMS, BANKS OR NOMINEES CAN ONLY VOTE
THEIR SHARES OF COMMON STOCK WITH RESPECT TO THE MATTERS SET FORTH IN
PROPOSAL NOS. 2 THROUGH 5 IF SUCH BROKERAGE FIRMS, BANKS OR NOMINEES GIVE
SUCH STOCKHOLDERS A LEGAL PROXY TO VOTE SUCH SHARES OF COMMON STOCK OR IF
SUCH STOCKHOLDERS GIVE SUCH BROKERAGE FIRMS, BANKS OR NOMINEES SPECIFIC
INSTRUCTIONS AS TO HOW TO VOTE SUCH STOCKHOLDERS' COMMON STOCK.
ACCORDINGLY, IT IS CRITICAL THAT STOCKHOLDERS WHO HOLD SHARES OF COMMON
STOCK IN THE NAME OF ONE OR MORE BROKERAGE FIRMS, BANKS OR NOMINEES
PROMPTLY CONTACT THE PERSON RESPONSIBLE FOR SUCH STOCKHOLDERS' ACCOUNTS AND
GIVE SPECIFIC INSTRUCTIONS AS TO HOW SUCH SHARES OF COMMON STOCK SHOULD BE
VOTED WITH RESPECT TO THE MATTERS SET FORTH IN PROPOSAL NOS. 2 THROUGH 5.
STOCKHOLDER PROPOSALS
Any stockholder of the Company may present a proposal for
consideration at a future meeting of the stockholders of the Company. Any
proposal for consideration at the next meeting must be received by the
Company at its principal offices, 24 River Road, Bogota, New Jersey 07603,
Attention: Robert W. LoSchiavo, Vice President and General Counsel, no
later than January 1, 1997.
INCORPORATION BY REFERENCE
The Company hereby incorporates by reference into this Proxy
Statement all financial information concerning the Company set forth
in the Company's 1996 Annual Report to Stockholders, copies of which
Annual Report are accompanying this Proxy Statement.
ADDITIONAL FINANCIAL INFORMATION
Stockholders desiring additional information about the Company and its
operations should refer to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, a copy of which constitutes a portion
of the Annual Report to Stockholders being mailed concurrently with this
Proxy Statement.
Please relay any questions to the Company at 201-487-1300.
By Order of the Board of Directors
Robert W. LoSchiavo
Secretary
July . , 1996
<PAGE>
DVL, INC.
1996 ANNUAL MEETING OF STOCKHOLDERS
SEPTEMBER 17, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of DVL, INC., a Delaware corporation
(the "Company"), acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement, dated July . , 1996 and hereby
constitutes and appoints Alan E. Casnoff and Frederick E. Smithline, or
either of them acting singly in the absence of the other, 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 of
the Company held by the undersigned at the Annual Meeting of Stockholders
of the Company to be held at the Company's corporate headquarters, 24 River
Road, Bogota, New Jersey 07603, on Tuesday, September 17, 1996 at 10:00
a.m., local time, and at any adjournment thereof, hereby revoking any proxy
or proxies heretofore given and ratifying and confirming all that said
proxies may do or cause to be done by virtue thereof with respect to the
following matters:
The undersigned hereby instructs said proxies or their substitutes:
1. The election of three Directors nominated by the Board of
Directors:
FOR all nominees listed below WITHHOLD AUTHORITY
(except as indicated) [ ] to vote for all nominees
listed below [ ]
NOMINEES: Myron Rosenberg, Frederick E. Smithline, Allen Yudell
(INSTRUCTION: To withhold authority to vote for any individual nominee or
nominees, write such nominee's or nominees' name(s) in the
space provided below.)
2. To approve a certain loan agreement and the consummation of the
transactions contemplated thereby (the "Loan Transaction")
pursuant to which, among other things, an independent third party
lender (the "New Lender") will acquire certain outstanding
indebtedness of the Company and simultaneously consolidate this
indebtedness into a new long term loan to the Company and, in
connection therewith, the Company will (i) issue and sell to the
New Lender and its affiliates 1,000,000 shares of Common Stock of
the Company at $0.20 per share, (ii) issue to affiliates of the
New Lender warrants to purchase such additional shares of Common
Stock of the Company at $0.16 per share which, when added to the
aforementioned 1,000,000 shares (and any other shares of Common
Stock then owned by such warrantholders and their affiliates),
will represent, on a fully diluted basis, 49% of the outstanding
Common Stock of the Company, and (iii) enter into an Asset
Servicing Agreement with an affiliate of the New Lender;
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. To approve an amendment to the Company's Certificate of
Incorporation, as amended (the "Certificate"), to create a class
of 100 shares of Preferred Stock to be issued in connection with
the Loan Transaction at $10.00 per share entitling the holders
thereof to elect a special purpose Director to the Company's
Board of Directors (the "Preferred Stock");
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. To approve amendments to the Company's Certificate and By-laws to
create certain restrictions on the transferability of shares of
the Company's Common Stock to help preserve the utilization of
the Company's carryforwards of net operating losses and credits
for federal income tax purposes;
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. To ratify and approve the 1996 Stock Option Plan of the Company
which will replace the Company's Performance Unit (Stock
Appreciation Rights) Plan; and
FOR [ ] AGAINST [ ] ABSTAIN [ ]
In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the Meeting or any adjournment
thereof.
The proxy, when properly executed, will be voted as directed. If no
direction is indicated, the proxy will be voted FOR the election of the
three named individuals as Director and FOR each of the matters set forth
in Proposals Nos. 2 through 5 above.
PLEASE SIGN, DATE AND MAIL THIS PROXY
IMMEDIATELY IN THE ENCLOSED ENVELOPE.
Dated . . . . . . . . . . . . . . ,1996
. . . . . . . . . . . . . . . . (L.S.)
. . . . . . . . . . . . . . . . (L.S.)
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.
No postage is required if returned in
the enclosed envelope and mailed in the
United States.
<PAGE>
EXHIBIT H
DRAFT
ANALYSIS OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS AFFECTING
THE COMPANY'S NET OPERATING LOSSES
The following is an analysis concerning the potential application of
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code")
with respect to the Company's net operating losses ("NOLs") as a result of
the Company entering into the Loan Agreement and the Asset Servicing
Agreement with NPM Capital, the purchase by NPM Capital of Warrants and
Preferred Stock, the purchase by NPO Holdings of Common Stock, and the
amendment to the Certificate of Incorporation (hereinafter such
transactions are collectively referred to as the "Loan Transaction"). This
analysis does not discuss the application of Code Section 382 to
transactions that occurred prior to the date hereof or to transactions
other than the Loan Transaction. For purposes of this analysis, NPM
Capital, NPO Management, NPO Holdings and their respective affiliates are
hereinafter referred to as the "Lender Entities."
This analysis is based on federal income tax law in effect as of the
date of this Proxy Statement, which law is comprised of the current
provisions of the Code, existing and proposed treasury regulations
promulgated thereunder ("Treasury Regulations"), and current administrative
rulings, informal administrative positions and court decisions, all of
which are subject to change. Existing statutory, judicial, or
administrative authority under Code Section 382 is, generally, uncertain in
many respects and such authority does not directly address many of the
aspects of the Loan Transaction. Consequently, as discussed more fully
below, the application of Code Section 382 to the Loan Transaction is not
certain. No advance income tax ruling has been sought or obtained from the
Internal Revenue Service (the "IRS") regarding the federal income tax
consequences of any of the transactions described herein.
This analysis is also based upon certain factual representations made
by the Company and the following factual assumptions:
1. Except for the Common Stock, the Preferred Stock and Warrants to
be issued pursuant to the Loan Transaction, (i) the Lender Entities do not
own, directly or indirectly (taking into account all family members, all
entities or persons who are related to the Lender Entities pursuant to
section 267(b) or 707(b) of the Code, and affiliates and unaffiliated
associates who are acting in concert (the "Affiliates")) any additional
Common Stock or options to acquire such Common Stock, and (ii) the Lender
Entities and the Affiliates do not intend to purchase additional shares of
Common Stock.
2. The Lender Entities (and/or each of their respective members or
Affiliates) have no formal or informal agreement with any other stockholder
of the Company as to voting for members of the Board of Directors.
Further, no current member of the Board of Directors is and no member to be
elected pursuant to the Proxy Statement, dated July . , 1996 (excluding
for his purpose, the member of the Board of Directors to be elected by the
holders of the Preferred Stock) will act as nominee or agent of any
stockholder group, including for this purpose the Lender Entities.
3. The services rendered under the Asset Services Agreement by NPO
Management are services that the principals/entities of NPO Management have
rendered, and are currently rendering, in the ordinary course of their
business to third parties. Further, the members of NPO Management and its
Affiliates have no beneficial interest in many of such third parties.
4. The compensation to be paid NPO Management for its services under
the Asset Services Agreement constitutes reasonable compensation for such
services.
5. The term of the Asset Services Agreement and the termination
provisions therein are in all material respects substantially consistent
with the terms usually found in comparable outsourcing agreements entered
into by similar service providers under similar circumstances.
6. The Preferred Stock, the limited voting power of the Director
chosen by the holder of the Preferred Stock, and the terms of the Preferred
Stock were designed solely to protect the Lender Entities as creditors.
7. The rights of NPM Capital LLC under the Loan Agreement (and
related Note and Security Agreement) are not inconsistent with the typical
rights of a secured lender making a loan secured by the type of assets
owned by the Company. The rights of NPM Capital LLC under the Securities
Purchase Agreement and the Warrant Agreement, as part of the Proposed
Transaction, are not inconsistent with the typical rights granted a secured
lender who has been granted warrants as part of a loan transaction, such as
the Loan Agreement.
Some of such factual representations and assumptions involve matters
of interpretation which, if not correct in all material respects, would
require the analysis set forth herein to be modified and, possibly, any
favorable conclusions set forth herein to be altered.
COUNSEL'S OPINION
Subject to the analysis, qualifications, risks and conclusions
contained herein, it is the opinion of Reid & Priest LLP, counsel to the
Company ("Counsel"), that the Loan Transaction should not subject the
Company's NOLs to an annual limitation under Code Section 382, although
such opinion may be subject to challenge. Counsel's opinion set forth
above is based on a reasoned analysis because, as noted above, existing
authority does not directly address many of the aspects of the Loan
Transaction and, the authority under Code Section 382 is in many other
respects uncertain. Further, Counsel's reasoning (and ultimate conclusions
derived therefrom) relies upon the accuracy of certain factual
representations and assumptions, some of which are set forth herein, and a
number of which involve matters that are subject to interpretation, which
interpretation may be challenged. As a consequence, the IRS could disagree
with Counsel's reasoning and assert that Code Section 382 is applicable to
the Company to limit the utilization of the Company's NOLs based on a
different interpretation of the tax law in this uncertain area or based on
a different interpretation of the facts.
SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS TO REVIEW
THE ANALYSIS SET FORTH BELOW AND WEIGH THE BUSINESS BENEFITS TO THE COMPANY
OF THE LOAN TRANSACTION AGAINST THE FEDERAL INCOME TAX RISKS TO THE COMPANY
RELATED TO THE POSSIBLE LIMITATION ON THE COMPANY'S UTILIZATION OF ITS NOLs
IF THE COMPANY SHOULD GENERATE TAXABLE INCOME SUFFICIENT TO ABSORB PART, OR
ALL OF SUCH NOLs, NOTED BELOW. SEE DESCRIPTION UNDER "PROPOSAL NO. 2." IF
THE IRS SHOULD CHALLENGE THE ABOVE-NOTED ANALYSIS AND PREVAIL, THEN THE
ABILITY OF THE COMPANY TO UTILIZE ITS NOLs WILL BE SUBSTANTIALLY LOST
WHICH, IN TURN, MAY SIGNIFICANTLY IMPAIR THE VALUE OF THE COMPANY'S COMMON
STOCK. NO AUDIT BY THE IRS OF THE LOAN TRANSACTION CAN CREATE OR RESULT IN
ANY TAX LIABILITY TO ANY STOCKHOLDER.
THE RULES UNDER CODE SECTION 382
1. General Rules
-------------
In general, Code Section 382 limits the amount of NOLs a corporation
may use to offset its income in any year following an "ownership change"
(as described below) to the product of the fair market value of the
corporation's outstanding stock immediately before the ownership change and
a rate published monthly by the Treasury Department which is intended to
represent current interest rates on long-term tax-exempt debt obligations.
The current Treasury Department rate is 5.78% (June) percent. An
"ownership change" occurs under Code Section 382 if the percentage of stock
of the corporation owned actually or constructively by one or more "5-
percent Shareholders" increases by more than 50 percentage points relative
to the lowest percentage of stock of the corporation owned by those 5-
percent Shareholders at any time during the statutory "testing period"
(generally, the past three years). A "5-percent Shareholder" is a person
who, at any time during the testing period, owns at least five percent of
the stock of the corporation (not including certain nonvoting,
nonparticipating preferred stock), and all stock owned by shareholders who
are not 5-percent Shareholders (hereinafter referred to as "Public
Shareholders") is generally treated as being owned by one 5-percent
Shareholder.
2. Definition of Stock
-------------------
For purposes of Code Section 382, "stock" means stock other than stock
described under Code Section 1504(a)(4), which refers to stock that is not
entitled to vote, is limited and preferred as to dividends and does not
participate in corporate growth to any significant extent, has redemption
and liquidation rights that do not exceed the issue price of such stock
(except for a reasonable redemption or liquidation premium), and is not
convertible into another class of stock. The determination of the
percentage of stock of any corporation owned by any person shall be made on
the basis of the relative fair market value of the stock owned by such
person to the total fair market value of the outstanding stock of the
corporation.
Pursuant to Treasury Regulations, interests (other than options) that
are not "stock" can be treated as stock for purposes of Code Section 382,
if, among other requirements, as of the date of issuance to a 5-percent
Shareholder (or person who would be a 5-percent Shareholder if the interest
not constituting stock were treated as stock), such interest offers a
potential significant participation in the growth of the corporation.
While there is no published authority as to what constitutes an interest
that "offers a potential significant participation in the growth of the
corporation," the legislative history relating to an analogous part of Code
Section 382 concerning excluded preferred stock suggests that a "potential
significant participation" exists where the interest earns income at a rate
materially in excess of a market rate, and does not in any way suggest that
"participation" should be measured with reference to the earnings of the
corporation. See H.R. Rep. No. 841 (Conf.), 99th Cong., 2d Sess. at II-173
---
(1986). However, in commenting on the lack of clarity in this language,
the New York State Bar Association (Tax Section) noted the distinction
between the terms "growth" and "earnings," and suggested that the use of
the former term may mean that an open-ended participation right is required
before an interest is treated as stock. See New York State Bar
---
Association, Supplemental Report on Section 382, at 25 (February 22, 1988).
In any event, the Preamble to the Treasury Regulations clearly contemplates
that under this provision, debt of a corporation can be treated as stock.
The IRS has taken the position in Private Letter Rulings<1> that an
instrument does not significantly participate in growth provided,
generally, that such instrument can be repaid from existing assets and
current levels of earnings with respect to existing assets. In addition,
in
-----------------
1. Private Letter Rulings cannot be cited as precedent, but are
discussed herein to show the IRS administrative position
concerning certain issues, which position is subject to change.
See Code Section 1660(j)(3).
---
<PAGE>
DRAFT
determining that an instrument does not participate in growth to any
significant extent, the IRS has taken into account the projected
participation of the debtholder in the cumulative taxable income of an
insolvent loss corporation, although such level of acceptable participation
was not disclosed (consistent with the Freedom of Information Act).
Based on the legislative history relating to Code Section 382, Counsel
reasonably concludes that a debt obligation payable out of current assets
with an interest rate not exceeding the market rate that would be charged
to similar corporate borrowers under similar circumstances should not be
viewed as offering a "potential significant participation in the growth of
the corporation." However, the IRS may assert that "significant
participation" is present where the lender participates in a significant
percentage of the loss corporation's cumulative income.
3. The Option Rules
----------------
For purposes of Code Section 382, an option to acquire stock is
generally not treated as exercised. For this purpose, an option is any
contingent purchase, warrant, convertible debt, put, stock subject to a
risk of forfeiture, contract to acquire stock, or similar interest,
regardless of whether it is contingent or otherwise not currently
exercisable. An option to acquire an option with respect to stock of a
loss corporation, and each one of a series of such options, is treated as
an option to acquire such stock.
An option, however, is treated as exercised on the date of its
issuance or transfer, if on that date, the option satisfies either the
ownership test, or the control test or the income test under Treasury
Regulation Section 1.382-4. In general, the Treasury Regulation sets forth
the characteristics of the ownership test, the control test and the income
test and thereafter sets forth certain factors that are to be taken into
account with respect to each test. An option can only satisfy the
ownership, control or income test, if the option was issued with the
principal purpose to avoid or ameliorate an ownership change that would
have occurred if the underlying stock (rather than the option) was issued.
In making this determination, all the facts and circumstances and the
enumerated factors under the Treasury Regulations are to be taken into
account. Among the factors relevant in applying all three tests are any
business purposes for the issuance or structure of the option, the
likelihood of exercise of the option (taking into account, for example, any
contingencies to its exercise), transactions related to the issuance or
transfer of the option, and the consequences of treating the option as
exercised.
a. Ownership Test
--------------
An option satisfies the ownership test if a principal purpose of the
issuance or structuring of the option (alone or in combination with other
arrangements) is to avoid or ameliorate the impact of an ownership change
of the loss corporation by providing the holder of the option, prior to its
exercise, with "a substantial portion of the attributes of ownership of the
underlying stock." Among the factors that are taken into account in
applying the ownership test are the relationship, at the time of issuance
of the option, between the exercise price of the option and the value of
the underlying stock, and "whether the option provides its holder or a
related person with the right to participate in the management of the loss
corporation or with other rights that ordinarily would be afforded to
owners of the underlying stock." The ability of the holder with a fixed
exercise price to share in future appreciation of the underlying stock is a
relevant factor, but is not itself sufficient for the option to satisfy the
ownership test.
The ownership test, in effect, attempts to insure that the purported
option is in fact an option and not a contractual arrangement that provides
the holder with substantially the same rights that a holder would have if
he exercised the option and owned the underlying stock. The factors seem
to reflect this concern by addressing whether the option (or other
arrangement) provides the holder with a right to participate in management
or with other rights afforded owners of the underlying stock. In this
regard, Counsel believes that management activities include the principal
day to day business (profit making) decisions of a loss corporation, but do
not include the provision of services that are ministerial or "back-office"
activities, or activities that are generally provided by independent
contractors. In addition, the factors set forth in the Treasury
Regulations express concern about the value of the option. If the exercise
price of the option is well below the value of the stock, the IRS may
assert that the optionholder should be treated as the holder of the
underlying stock.
b. Control Test
------------
An option satisfies the control test if (i) a principal purpose of the
issuance or structuring of the option (alone or in combination with other
arrangements) is to avoid or ameliorate the impact of an ownership change
of the loss corporation, and (ii) the holder of the option and any persons
related to the holder have, in the aggregate, a direct and indirect
ownership interest in the loss corporation of more than 50 percent
(determined as if the increase in such persons' percentage ownership
interest that would result from the exercise of the option in question and
any other options to acquire stock held by such persons, and any other
intended increases in such persons' percentage ownership interest, actually
occurred on the date the option is issued). For purposes of the control
test, (i) a person includes an individual or entity, but not a public
group, as defined in Treasury Regulation Section 1.382-2T(f)(13), and
(ii) persons are related if they bear certain relationships or if they have
a formal or informal understanding among themselves to make a coordinated
acquisition of stock, within the meaning of Treasury Regulation Section
1.382-3(a)(1)(i). A coordinated acquisition of stock is made if the
investment decision of each member of a group is based upon the investment
decision of one or more other members. Among the additional factors that
are taken into account in applying the control test are the economic
interests of the optionholder or related persons and the influence of these
persons over the management of the loss corporation (in either case,
through the option or a related arrangement, or through rights in stock).
The control test, in effect, attempts to insure that an optionholder
does not indirectly become a controlling person by virtue of its
substantial, actual and potential, stock position (i.e., more than 50
percent) in the loss corporation. The control test presumes that the
optionholder with such potential control necessarily exercises actual
control over the loss corporation. The factors set forth in the Treasury
Regulation look to the optionholders' economic interests and influence over
the management of the loss corporation. Counsel reasonably concludes that
the influence that the control test is concerned with is the influence that
would be exercised by a shareholder that has a controlling (i.e., more than
50 percent) interest.
In determining the percentage interest to be acquired upon exercise of
an option exceeds 50 percent, the Treasury Regulations take into account
the total number of shares to be issued pursuant to an option without
regard to any contingencies that exist with respect to such option's
exercise. Thus, an option to acquire a number of shares in excess of 50
percent of the ownership interest of a loss corporation will be deemed to
be treated as exercised and result in the holder owning a percentage
interest of the loss corporation without regard to the exercise of other
stock options by third parties. The IRS has interpreted this requirement
in one Private Letter Ruling to provide that other issuances of stock can
be taken into account in a situation where all such issuances were
required, pursuant to an agreement, to occur.
c. Income Test
-----------
An option satisfies the income test if a principal purpose of the
issuance, transfer or structuring of the option (alone or in combination
with other arrangements) is to avoid or ameliorate the impact of an
ownership change of the loss corporation by facilitating the creation of
income (including accelerating income or deferring deductions) or value
(including unrealized built-in-gains) prior to the exercise or transfer of
the option. Among the additional factors that are taken into account in
applying the income test are whether, in connection with the issuance of
the option, the loss corporation engages in income acceleration
transactions or the holder of the option purchases stock from, or makes a
capital contribution or loan to, the loss corporation that can reasonably
be expected to avoid or ameliorate the impact of an ownership change.
Examples of income acceleration transactions are those outside the ordinary
course of the loss corporation's business that accelerate income or gain
into the period prior to the exercise of the option (or defer deductions to
the period after the exercise of the option). A stock purchase, capital
contribution, or loan is more probative of satisfaction of the income test
if a larger amount is received by the loss corporation in the transaction
or related transactions. However, a stock purchase, capital contribution,
or loan is generally not taken into account in applying the income test if
it is to enable the loss corporation to continue basic operations of its
business (e.g., to meet the monthly payroll or fund other operating
expenses of the loss corporation). The IRS has taken the position, in
certain Private Letter Rulings that involve the interpretation of the above
noted language under another subsection of Code Section 382, that
contributions will be treated as enabling the loss corporation to continue
basic operations of its business when such contributions are made to
increase a loss corporation's equity in order to avoid a form of
receivership.
The income test, in effect, attempts to insure that an option is not
merely a device to permit the acceleration of income into the period prior
to the exercise of the holder's option so that the loss corporation's NOLs
can be used to offset such income without limitation. Counsel reasonably
concludes, without any direct authority, that the income test is not
satisfied and therefore options would not be treated as exercised if the
sum of the loss corporation's actual current operating losses are in the
aggregate sufficient to offset any income that would be considered to be
accelerated pursuant to this test.
APPLICATION TO THE LOAN TRANSACTION
1. The Issues
----------
Pursuant to the Loan Transaction, the Company will issue shares of the
Common Stock of the Company that will constitute seven percent of the
outstanding Common Stock of the Company and will issue Warrants that will
permit the Lender Entities to own an additional 42 percent of the
outstanding Common Stock upon exercise. The original principal amount of
the Note is anticipated to be $8,950,000. As of [July 9,] 1996, we have
been advised by the Company the percentage of the stock of the Company
owned by 1 or more "5-percent Shareholders" has increased by approximately
35 percentage points over the lowest percentage of stock of the Company
owned by such shareholders at any time during the applicable Code Section
382 testing period.
If the Warrants were treated as exercised options or if the Note and
the rights, duties and obligations under the Asset Servicing Agreement were
treated as stock, then the Company would undergo an "ownership change"
under Code Section 382. As a result of such ownership change, the
Company's utilization of its NOLs would be dramatically and adversely
affected. The Company would be permitted to use approximately $200,000 of
its NOLs each year to reduce its taxable income, instead of having, absent
the Code Section 382 limitation, $65 million of NOLs to reduce its taxable
income. Further, if an ownership change were to occur and the annual
limitation were to apply, at least 60 million of the NOLs would expire
unutilized. However, in assessing the Loan Transaction, it should be kept
in mind that the amount of the Company's NOL's has not been audited and/or
not adjusted by the IRS.
2. The Analysis
------------
This section will examine the Loan Transaction (and its elements)
under Code Section 382. This analysis assumes that the Lender Entities are
one person, because the members of such group are acting in concert. See
---
Treas. Reg. Section 1.382-3(a)(1)(i).
a. Whether the Note and Asset Servicing
Agreement are Treated as Stock
------------------------------------
The Note and the Asset Servicing Agreement reasonably should be
treated as a debt obligation and servicing arrangement, respectively,
between the Lender Entities and the Company. Such non-stock interests are
required to be treated as stock under the Treasury Regulations if such
interests "offer a potential significant participation in the growth of the
corporation," in addition to satisfying certain other requirements. As
discussed above, there is no published authority as to what constitutes a
potential significant participation in the growth of the corporation under
the Treasury Regulations. As discussed above, the legislative history
relating to Code Section 382, discussing the same language, makes no
reference to the earnings of the corporation and instead would suggest by
analogy that the proscribed level of participation is present where the
debt being tested earns income at a rate exceeding the market rate
applicable to similar corporate borrowers under similar circumstances.
The Company has represented to Counsel that the Company reasonably
anticipates, based on the Company's existing assets, retiring the principal
and interest of the Note and its obligations under the Asset Servicing
Agreement according to their terms, taking into account all other
obligations of the Company. Furthermore, it is Counsel's understanding
that the Note provides the Lender Entities with an internal rate of return
of approximately 27 percent, which reflects the discount on issuance of the
Note. Moreover, the Company has represented to Counsel: (i) that the yield
and other terms of the Note (including for this purpose, the discount in
the yield) are similar to the terms that would be required by an unrelated
third-party lender under similar circumstances, (ii) that substantially all
of the assets proposed to secure the Note currently secure the 1996 Loans
or other obligations, and (iii) that the assets proposed to secure the Note
will be sufficient to satisfy the principal and interest of the Note. The
Company has represented to Counsel that the amounts to be paid to the
Lender Entities under the Note would not, in the absence of such
arrangement, inure to the benefit of the Company's stockholders; either the
Company would have to pay the full outstanding balance of the 1996 Loans
owed to the Lenders, or in order to replace such loans with a term
obligation, the Company would have to pay amounts under and charges related
to the term obligation. The Company has also represented to Counsel that
the amounts to be paid to the Lender Entities under and over the term of
the Asset Servicing Agreement would not, in the absence of such
arrangement, inure to the benefit of the Company's stockholders.
Therefore, based on the foregoing, it is the opinion of Counsel
that the Lender Entities' economic rights under the Note and the Asset
Servicing Agreement should not be treated as stock under Treasury
Regulations under Code Section 382. The foregoing opinion, however, may be
subject to challenge in light of the lack of supporting authority and the
possibility that the IRS may assert that "significant participation" is
present where the lender participates in a significant percentage of the
loss corporation's cumulative net income. If such analysis were applied,
the Note could be treated as stock.
b. Whether Warrants Will be Treated as Exercised
---------------------------------------------
(i) Whether the Ownership Test is Satisfied.
----------------------------------------
The Warrant Agreement, Securities Purchase Agreement and the Loan
Agreement do not in form provide the Lender Entities with any of
the attributes of ownership of the underlying stock or rights to
participate in management. In this regard, the Company has represented
to Counsel that Lender Entities' rights under the Loan Agreement (and
related Note and Security Agreement) are not inconsistent with the
typical rights of a secured lender making a loan secured by the type of
assets owned by the Company. Further, the Company has represented that
the rights of the Lender Entities under the Securities Purchase Agreement
and Warrant Agreement as part of the Loan Transaction, are not
inconsistent with the typical rights granted a secured lender who has
been granted such warrants as part of a loan transaction. Based on the
foregoing, Counsel concludes that such arrangements should not satisfy
the ownership test, but the IRS could assert that the rights under the
Loan Agreement and the Securities Purchase Agreement should be treated
as rights to participate in management of the Company, even though such
rights may also be viewed as typical rights of a lender. The Lender
Entities will hold Preferred Stock which will permit it to elect a
member of the Board of Directors that will vote solely on whether Company
will file voluntarily a bankruptcy petition seeking protection from
creditors or otherwise in the context of the Company's insolvency
compromise substantially all the Company's indebtedness. Such Director
will not vote on any other matter. Counsel has received the representation
from the Company that the Preferred Stock, the limited voting power of the
Director chosen by the holder of the Preferred Stock and the term of the
Preferred Stock were solely designed to protect the Lender Entities as
creditor. Because the Preferred Stock is essentially a creditor's
protection, the Preferred Stock should not reflect a voting power right
indicative of ownership of more than seven percent of the Common Stock,
which is the percentage actually owned by the Lender Entities. Based on
the opinion of Duff & Phelps, the exercise price of the Warrants was in
excess of the fair market value of the Common Stock of the Company as of
the date the agreement to issue the Warrants was entered into. The Lender
Entities have entered into an Asset Servicing Agreement with the Company.
The Company has represented to Counsel (or alternatively, it has been
assumed) that: (i) the principal officers of the Company are as follows:
President, Chief Financial Officer, and General Counsel; (ii) that such
principal officer positions will after the closing of the Loan Transaction
continue to make the management decisions and exercise the same managerial
authority that was exercised prior to the closing of the Loan Transaction;
(iii) the services rendered to the Company under the Asset Servicing
Agreement are not management services, but are administrative, "back-
office" services, as well as advisory services which are typically provided
by independent contractors; (iv) the services rendered under the Asset
Servicing Agreement by NPO Management are services that the
principals/entities of NPO Management have rendered and are currently
rendering in the ordinary course of their business to third parties and
that many of the principals/entities of NPO Management LLC and its
Affiliates have no beneficial interest in such third parties; (v) the
compensation to be paid NPO Management for its services under the Asset
Servicing Agreement constitutes reasonable compensation for such services;
(vi) the term of the Asset Servicing Agreement and the termination
provisions therein are in all material respects substantially consistent
with the terms usually found in comparable outsourcing agreements entered
into by similar service providers under similar circumstances; and (vii)
the Company is benefitting from the Asset Servicing Agreement such that the
Company would enter into such Agreement without regard to any and all other
aspects of the Loan Transaction. Based on the foregoing, it is the
opinion of Counsel that the Loan Transaction should not satisfy the
ownership test, although such opinion may be subject to challenge.
(ii) Whether the Control Test is Satisfied
-------------------------------------
Based upon the first assumption noted above, the Lender Entities will
not, taking into account its Common Stock and the Preferred Stock, own more
than 50 percent of the Company's stock upon the exercise of the Warrants.
Under the Warrant Agreement, the Lender Entities cannot own more than 49
percent of the Company's stock outstanding and, if, and to the extent,
options existing as of the date the Loan Agreement was entered into are
exercised, the Lender Entities will be able to exercise as to additional
shares under the Warrant Agreement so long as the potential stock interest
of the Lender Entities does not exceed 49 percent of the Company's stock
outstanding at such time. Thus, the Lender Entities can only exercise as
to additional shares if and only if certain other options are exercised.
Based on the administrative ruling noted above in the discussion of the
control test, Counsel believes it is reasonable to conclude that the Lender
Entities should not be treated as owning more than 49 percent of the
Company's Common Stock upon exercise of the Warrants, although such
conclusion may be subject to challenge. Further, the Lender Entities will
at first only own seven percent of the outstanding Common Stock that will
be voted in the election of members of the Board of Directors. Such
ownership interest will not control the Board of Directors. As discussed
above, Counsel believes that the factors to be taken into account under the
control test are to determine whether in fact the option holder, through
other means, has the equivalent control of a person who owns more than 50
percent ownership interest in a loss corporation. In this regard, the
Company has represented to Counsel that the Lender Entities have no formal
or informal agreement with any other stockholder of the Company as to
voting for the members of the Board of Directors. Further, the Company has
represented to Counsel that no current member of the Board of Directors is,
and no member to be elected pursuant to this Proxy Statement (excluding for
this purpose, the member of the Board of Directors to be elected by the
holders of Preferred Stock), will act as nominee or agent of any
stockholder group, including for this purpose, the Lender Entities. As
discussed above in the analysis of whether the ownership test is satisfied,
based on representations received by Counsel, NPO Management should not be
treated as rendering "management" type functions under the Asset Servicing
Agreement and NPO Capital should not be treated as having management
authority under the Loan Agreement. However, the IRS could assert that
the rights under the Loan Agreement and the Securities Purchase Agreement
should be treated as affording the Lender Entities with the equivalent
control of a person who owns more than 50 percent ownership of the
Company, even though such rights may also be viewed as typical rights
of a lender. The Lender Entities have economic interests in the Company
as a lender under the Loan Agreement and as a service provider under the
Asset Services Agreement. Based on the representations set forth above
concerning the various rights and obligations of the parties under the
Loan Agreement and Asset Services Agreement, which generally indicates
that the Lender's Entities' economic interests are consistent with that
of a lender and a service provider, respectively, Counsel believes that
such economic interests are not equivalent control of a person who owns
a more than 50 percent ownership interest. Based on the foregoing, it
is the opinion of Counsel that the Loan Transaction should not satisfy
the control test, although such opinion may be subject to challenge.
(iii) Whether the Income Test is Satisfied
------------------------------------
The Loan Transaction involves the purchase of the 1996 Loans and a
consolidation of such debt obligations. Except for $201,000 paid for the
Common Stock, Preferred Stock and Warrants and $600,000 advanced as part of
the Advance, no funds will actually be transferred to the Company.
Recently, the Company has settled certain of its debt obligations at a
discount. The Company entered into a settlement agreement with the FDIC in
December 1995 regarding the Amsave Loan pursuant to which the Company paid
the FDIC in 1995 $400,000 for cancellation of approximately $4 million of
the Company's debt obligation to Amsave and the Company will pay to the
FDIC over the next 18 months $600,000 for the cancellation of $7 million of
the Company's debt obligation to Amsave. Prior to the execution of the
Loan Agreement, the Company paid the $400,000 to the FDIC and the Company
gave as a security interest to the FDIC collateral sufficient to repay the
$600,000 amount. In this regard, the Company has represented to Counsel
that (i) such collateral is sufficient to repay the $600,000, (ii) the
Company could from such collateral or other revenue sources pay the
$600,000 to the FDIC as required pursuant to the FDIC Agreement, and (iii)
the Company can pay the $600,000 of payments to the FDIC without regard to
the Lender Entities' purchase of the 1996 Loans and the consolidation of
such indebtedness, the Advance, any amounts paid by the Lender Entities for
the Common Stock, Preferred Stock and Warrants, and expenses paid or
deferred under the Asset Servicing Agreement. Since no substantial amount
of funds of the Lender Entities was contributed or transferred to the
Company to be used to accelerate income, and since any income in the amount
of [____] that is created due to the consolidation of such indebtedness
will be offset by the Company's operating losses and since any income
created under the settlement with the FDIC concerning the Amsave Loan would
have been created without regard to the Loan Transaction and would not be
accelerated by the Loan Transaction, it is the opinion of Counsel that the
Loan Transaction should not satisfy the income test, although such opinion
may be subject to challenge. To the extent such operating losses are not
sufficient to offset such income (including for this purpose the discount
with respect to the Westrock Loan), it is the opinion of Counsel that, if
the IRS could assert that the Loan Transaction involved the transfer of
funds to the Company, the terming out of the 1996 Loans of the Lenders
essentially permits the Company to continue its business operations.
In this regard, Counsel has received the representation from the Company
that in light of the various factors that affect the ability of the
Company as a going concern, the consummation of the Loan Transaction
permits the Company to avoid an outright liquidation, and thus, continue
its basic business operations. Notwithstanding that such good business
reason is the principal reason for the Loan Agreement, the IRS could
challenge Counsel's opinion by asserting that the avoidance of a potential
liquidation by restructuring of a loss corporation's debt obligations is
outside of the scope of continuing business operations exception under
the income test which by way of example only refers to transfers of funds
to fund operating expenses. Further, Counsel's opinion is, in part,
based upon an analogy to certain Private Letter Rulings which, as
discussed above, involve an analogous issue under Section 382 of the
Code and the Company may not be viewed as satisfying all the factors
considered in such Rulings.
<PAGE>
AMENDMENT TO AMENDED AND RESTATED
LOAN AGREEMENT
AMENDMENT, dated as of July 10, 1996 (the "Amendment"), to
the Amended and Restated Loan Agremeent, dated as of March 27,
1996 (the "Loan Agreement"), between DVL, Inc., a Delaware
corporation ("Borrower"), and NPM Capital LLC, a Delaware limited
liability company ("Lender").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Borrower and Lender have agreed to amend the Loan
Agreement, subject to the terms and conditions of this Amendment.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Section 3.6 of the Loan Agreement is hereby amended by
deleting the September 1, 1996 date in the four places this date
appears in Section 3.6 and substituting therefor, in each of the
four places, the date "September 30, 1996."
2. Section 3.8 of the Loan Agreement is hereby amended by
deleting the September 1, 1996 date where it appears in Section
3.8 and substituting therefor the date "September 30, 1996."
3. Except as expressly amended and modified hereby, the
Loan Agreement is hereby reaffirmed and remains in full force and
effect. This Amendment may be executed in several counterparts,
each of which shall constitute one and the same instrument. This
Amendment shall be governed in all respects, including validity,
interpretation and effect, by the laws of the State of New York
without giving effect to the conflict of laws rules thereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their respective duly authorized
representatives as of the date first above written.
DVL, INC.
By:
--------------------------------
Name:
Title:
NPM CAPITAL LLC
By:
--------------------------------
Name:
Title:
