SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________________ to_________________________
Commission file number: 1-8356
DVL, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-2892858
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
24 River Road, Bogota, New Jersey 07603
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (201) 487-1300
--------------
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days Yes: X No:
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Class Outstanding at November 12, 1997
- ----------------------------- --------------------------------
Common Stock, $.01 par value 16,232,450
DVL, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.'s
----------
Consolidated Balance Sheets -
September 30, 1997 (unaudited) and December 31, 1996 1-2
Consolidated Statements of Operations -
Three Months Ended September 30, 1997 (unaudited)
and 1996 (unaudited) 3
Nine Months Ended September 30, 1997 (unaudited)
and 1996 (unaudited) 4
Consolidated Statement of Shareholders' Equity for
the nine months ended September 30, 1997 (unaudited) 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1997 (unaudited)
and 1996 (unaudited) 6-7
Notes to Consolidated Financial Statements (unaudited) 8-12
Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-18
Part II. Other Information:
Item 1 - Legal Proceedings 19
Item 2 - Changes in Securities 19
Item 5 - Other Information 19
Item 6 - Exhibits and Reports on Form 8-K 19
Part I - Financial Information
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
------
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
Loans receivable, including amounts maturing
after one year - principally pledged
Affiliates:
Wrap around and other mortgages due from
affiliated partnerships (net of underlying
liens of $45,449 and $49,749, respectively) $ 31,215 $ 42,163
Unearned interest (8,303) (12,325)
-------- --------
Net mortgage loans receivable from affiliated
partnerships (including $2,781 and $5,104 of
non-performing loans, respectively) 22,912 29,838
Others:
Non-performing loans collateralized by limited
partnership interests due from limited partners 2,424 3,066
-------- --------
Total loans receivable 25,336 32,904
Allowance for loan losses (10,842) (12,854)
-------- --------
Net loans receivable 14,494 20,050
Cash (including restricted cash of $77 for 1997
and 1996) 455 355
Due from affiliated partnerships (net of an allowance
for loss of $1,727 for 1997 and 1996) 161 114
Investments
Real estate at cost - pledged (net of an allowance
for loss of $208 for 1997 and 1996) 289 289
Real estate lease interests 1,609 1,965
Affiliated limited partnerships (net of an allowance
for loss of $1,528 and $1,342, respectively) 952 2,221
Other investments (net of an allowance for loss
of $400 for 1997 and 1996) 667 667
Other assets 983 973
-------- --------
Total assets $ 19,610 $ 26,634
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
1
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
Liabilities:
Long-term debt - NPM Capital LLC $ 5,245 $ 7,502
Long-term debt - Other 2,117 6,203
Notes payable - litigation settlement 7,493 6,635
Convertible subordinated debentures - 334
Accrued liability for indebtedness of Kenbee
Management, Inc. and affiliates - 115
Accounts payable and accrued liabilities 1,837 1,942
-------- --------
Total liabilities 16,692 22,731
-------- --------
Deferred credits 321 321
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock $10.00 par value, authorized -
100 shares, issued 100 shares 1 1
Common stock, $.01 par value, authorized -
40,000,000 shares, issued and outstanding -
15,679,450 and 15,479,450, respectively 157 155
Additional paid-in capital 95,174 95,146
Deficit (92,735) (91,720)
-------- --------
Total shareholders' equity 2,597 3,582
-------- --------
Total liabilities and shareholders'
equity $ 19,610 $ 26,634
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
2
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
(unaudited)
Three Months Ended
September 30,
-----------------------
1997 1996
---------- ----------
Income from affiliates
Interest on mortgage loans $ 199 $ 239
Partnership management fees 95 111
Transaction and other fees from partnerships 157 114
Rent income 9 10
Other income - 2
Income from others
Interest on mortgage loans - 27
Other interest 2 6
Other income 2 220
---------- ----------
464 729
---------- ----------
Operating expenses
Provision for losses - 9
General and administrative 383 448
Asset servicing fee - NPO Management LLC 150 156
Legal and professional fees 66 99
Interest expense
NPM Capital LLC 229 -
Others 391 587
---------- ----------
1,219 1,299
---------- ----------
(Loss) before extraordinary gain (755) (570)
Extraordinary gain on the settlement of
indebtedness - 6,419
---------- ----------
Net (loss) income $ (755) $ 5,849
========== ==========
Earnings (loss) per share:
(Loss) before extraordinary gain $ (.05) $ (.04)
Extraordinary gain on the settlement of
indebtedness - .45
---------- ----------
Net (loss) income $ (.05) $ .41
========== ==========
Weighted average shares outstanding 15,679,450 14,386,977
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
3
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
(unaudited)
Nine Months Ended
September 30,
-----------------------
1997 1996
---------- ----------
Income from affiliates
Interest on mortgage loans $ 794 $ 781
Partnership management fees 307 328
Transaction and other fees from partnerships 423 283
Rent income 50 28
Other income - 28
Income from others
Interest on mortgage loans - 83
Interest on loans to limited partners
collateralized by limited partnership interests - 14
Other interest 6 14
Other income 38 260
---------- ----------
1,618 1,819
---------- ----------
Operating expenses
Provision for losses - 65
General and administrative 1,127 1,342
Asset servicing fee - NPO Management LLC 450 306
Legal and professional fees 178 235
Interest expense
NPM Capital LLC 704 -
Others 1,278 1,904
---------- ----------
3,737 3,852
---------- ----------
(Loss) before extraordinary gain (2,119) (2,033)
Extraordinary gain on the settlement of
indebtedness 1,104 8,274
---------- ----------
Net (loss) income $ (1,015) $ 6,241
========== ==========
Earnings (loss) per share:
(Loss) before extraordinary gain $ (.13) $ (.14)
Extraordinary gain on the settlement of
indebtedness .07 .58
---------- ----------
Net (loss) income $ (.06) $ .44
========== ==========
Weighted average shares outstanding 15,679,450 14,126,052
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
4
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands except share data)
(unaudited)
Preferred Stock Common Stock Additional
--------------- -------------------- paid-in
Shares Amount Shares Amount capital Deficit Total
-------- ------ ----------- -------- ---------- --------- --------
Balance-January 1, 1997 100 $ 1 15,479,450 $ 155 $ 95,146 $(91,720) $ 3,582
Issuance of common stock in satisfaction
of certain claims 50,000 1 7 8
Issuance of common stock in connection
with the Loan from NPM Capital LLC 150,000 1 21 22
Net loss (1,015) (1,015)
-------- ------ ---------- ------- -------- -------- -------
Balance-September 30, 1997 100 $ 1 15,679,450 $ 157 $ 95,174 $(92,735) $ 2,597
======== ====== ========== ======= ======== ======== =======
<FN>
See notes to consolidated financial statements.
</FN>
5
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
---------------------
1997 1996
-------- --------
Cash flows from operating activities
Net (loss) before extraordinary gain $ (2,119) $ (2,033)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities
Provision for losses - 65
Accrued interest added to indebtedness 284 289
Amortization of unearned interest on
loan receivable (104) (10)
Amortization of deferred charges 146 299
Imputed interest on notes and debentures 858 737
Amortization of debt discount 158 -
Net (increase) in other assets (156) (467)
Net (increase) in due from affiliated
partnerships (47) -
Net (decrease) increase in accounts payable
and accrued liabilities (53) 204
-------- --------
Net cash (used in) operating activities (1,033) (916)
-------- --------
Cash flows from investing activities
Collections on loans receivable (net of
payments on underlying loans) 5,660 8,572
Net reductions in real estate lease
interests 356 277
Distributions received on affiliated
limited partnership interests and
other investments 1,269 204
Proceeds for common stock and preferred
stock issues - 201
-------- --------
Net cash provided by investing
activities $ 7,285 $ 9,254
-------- --------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
6
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
(continued)
Nine Months Ended
September 30,
--------------------
1997 1996
-------- --------
Cash flows from financing activities
Proceeds from new borrowings $ 2,625 $ -
Repayment of indebtedness (8,328) (8,509)
Payments on subordinated debentures (334) -
Payments on guaranteed indebtedness (115) (152)
-------- --------
Net cash (used in) financing activities (6,152) (8,661)
-------- --------
Net increase (decrease) in cash 100 (323)
Cash - beginning of year 355 1,042
-------- --------
Cash - end of period $ 455 $ 719
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest,
excluding amounts paid on underlying loans $ 488 $ 758
======== ========
Cash paid for income taxes $ 11 $ -
======== ========
Supplemental disclosure of non-cash
investing and financing activities:
Investments in affiliated partnerships
transferred to settle litigation claims $ - $ 108
======== ========
Net reduction in indebtedness pursuant
to creditor settlements $ 1,104 $ 8,274
======== ========
Reduction in accrued liabilities upon
issuance of common stock $ 22 $ 49
======== ========
Common stock issued in creditor settlement $ 8 $ 50
======== ========
Increase in other assets upon issuance
of common stock $ - $ 46
======== ========
Reduction in limited partners' loans upon
receipt of investments in affiliated
partnerships $ - $ 19
======== ========
Net loans transferred to settle debts $ - $ 250
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
7
DVL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation and Financial Condition
(A) In the opinion of DVL, Inc. ("DVL"), the accompanying financial
statements contain all adjustments (consisting of only normal accruals)
necessary for a fair presentation of the financial position and the results
of operations for the periods presented. The results of operations for the
nine months ended September 30, 1997 should not be regarded as necessarily
indicative of the results that may be expected for the full year. Certain
amounts from the three and nine months ended September 30, 1996 have been
reclassified to conform to the three and nine months ended September 30, 1997
presentation.
(B) DVL continues to experience liquidity problems primarily as a result of
the limited cash flow generated by its restructured mortgage portfolio, as the
mortgage debt service is used to pay senior liens before cash flow on such
mortgages is available to DVL. DVL's cash flow provided by current operations
is insufficient to meet its cash requirements, and DVL continues to liquidate
and/or refinance its assets in order to meet its operating cash flow
deficiency. There can be no assurance that the cash flow generated by DVL's
potential asset liquidations or refinancings will be sufficient to meet any
future operating cash flow deficiencies or future mandatory debt repayments.
DVL's ability to continue as a going concern is dependent upon (1) the
sale or refinancing of certain assets to improve its cash position to meet
operating expenses and mandatory debt payments, (2) the realization of the
estimated value of its loan portfolio over an extended period of time rather
than the value of the assets on a liquidation basis, (3) the return to
profitable operations and (4) availability of additional borrowings. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
2. Loans Receivable/Long Term Debt
(A) In January 1997, DVL, refinanced four underlying mortgages and generated
$821,000 in proceeds in excess of the existing underlying mortgage loans. The
excess proceeds were used to repay the NPM Loan, as required by the NPM loan
agreement.
(B) In February 1997, DVL repaid a creditor $1,474,000 in full satisfaction
of a loan which had a principal amount due of $1,901,000. This repayment
resulted in an extraordinary gain of approximately $406,000 in the first
quarter of 1997. The payment was made by refinancing that creditor's
collateral with a new unaffiliated lender in the principal sum of $2,000,000.
The new loan requires monthly payments of principal and interest equal to cash
flow, as defined, from the loan's collateral. Interest on the outstanding
balance of the loan shall accrue at 12% per annum. The principal amount of
the loan, and all accrued interest, is due February 27, 2000. The loan may
8
be prepaid prior to maturity, with certain prepayment penalties. From this
loan refinancing, DVL remitted approximately $406,000 to NPM to repay the NPM
Loan, as required by the NPM loan agreement. In July 1997, a portion of this
loan was prepaid (See Note 2(k)).
(C) In February 1997, DVL settled a creditor claim, which resulted in an
extraordinary gain of $47,000, in the quarter ended March 31, 1997.
(D) During the three months ended March 31, June 30 and September 30, 1997,
NPM advanced aggregate amounts of approximately $250,000, $87,500 and $87,500,
respectively, to pay certain creditors of DVL, as required by the NPM loan
agreement.
(E) In March and April 1997, NPM advanced DVL an aggregate of $200,000.
These advances, which were not required under the original NPM loan documents,
bear interest at 15% per annum and will be paid pari passu with the original
NPM loan.
(F) In April and September 1997, DVL paid approximately $358,000 and
$7,000, respectively, including principal and interest, in satisfaction of its
subordinated debenture obligations, as required by the terms thereof.
(G) In May 1997, DVL, as the general partner of a certain limited
partnership, negotiated the sale of the partnership's property which resulted
in net proceeds of approximately $625,000 to DVL in satisfaction of the
partnership's mortgage indebtedness. All of the proceeds were used to pay
interest and principal on the NPM Loan, as required by the NPM loan agreement.
(H) In June 1997, DVL repaid a creditor $1,037,335 in cash and transferred
its rights and economic interests in two mortgage loan receivables from
affiliated limited partnerships, as well as its ownership interest in a
limited partnership, in exchange for full satisfaction of its long-term debt
obligation to this creditor in the amount of $2,173,000. This transaction
resulted in an extraordinary gain of approximately $650,000 in the second
quarter ended June 30, 1997. The source of the cash payment was the sale of
a partnership property in which DVL held a 55% limited partnership interest.
(I) In July 1997, DVL received net proceeds of approximately $210,000 in
satisfaction of a partnership's mortgage indebtedness to DVL.
(J) In July 1997, DVL realized net cash proceeds of approximately $372,000
in full satisfaction of a certain limited partnership's mortgage indebtedness.
In connection therewith, as a result of a prior settlement agreement, an
affiliate of DVL released all of its rights under a certain master lease
agreement. From these cash proceeds, DVL repaid a long-term creditor
approximately $219,000.
(K) In July 1997, DVL as the general partner of a certain limited
partnership, negotiated the sale of the partnership's property. The sale
resulted in net cash proceeds of $1,075,000 to DVL in satisfaction of the
partnership's mortgage indebtedness to DVL. All of these proceeds were paid
to one of DVL's long-term creditors, as required.
9
(L) In September 1997, DVL, as the general partner of three separate
limited partnerships, negotiated the sales of each of these partnerships'
properties. From two of the sales, DVL received an aggregate amount of
$1,168,500 in satisfaction of mortgage indebtedness to DVL. All of the
proceeds were used to pay interest and principal on the NPM Loan, as required
by the NPM loan agreement. There was no partnership mortgage indebtedness due
DVL on the third partnership property sold.
3. Shareholders' Equity
In January 1997, DVL issued 150,000 shares of stock to an investment
banker for services rendered in connection with the NPM loan transaction and
issued 50,000 shares of stock to certain unrelated individuals in exchange for
100,000 warrants which such individuals received in connection with a prior
transaction with DVL.
See Notes 4(A) and 5(A) as to issuances of 500,000 shares of stock in the
settlement of the LEVY litigation, and 325,000 shares of stock to the Lender
in connection with the debt tender offer, which occurred in October 1997,
subsequent to the quarter ended September 30, 1997. In an unrelated
transaction, 272,000 shares were retired. Thus, the number of outstanding
shares of common stock increased by the net amount of 553,000, and as of
November 12, 1997, there are 16,232,450 shares outstanding. All of the shares
of newly issued stock constitute "restricted securities", within the meaning
of Rule 144 under the Securities Act of 1933, and were issued pursuant to the
exemption afforded by Section 4(2) of said Act for transactions by an issuer
not involving a public offering.
4. Legal Proceedings
(A) A suit entitled DONALD LEVY, ET AL. V. ROGER D. STERN, ET AL. ("LEVY"),
originally filed in New Castle County, Delaware on February 13, 1991, on
behalf of certain individual shareholders alleged breaches of fiduciary duty
of care and candor. As of June 1997, the parties to the action agreed to the
terms of a settlement, and the implementing documents were executed in
September 1997. Pursuant to the settlement, DVL delivered 500,000 shares of
common stock to the plaintiffs and their attorneys in October 1997.
(B) Federal Insurance Company ("Federal"), which carried DVL's directors and
officers insurance policy, declined to cover DVL for any legal costs or
liability. DVL commenced an action against its insurance broker and Federal
entitled DEL-VAL FINANCIAL CORPORATION, ET AL. V. FEDERAL INSURANCE COMPANY
ET AL. ("FEDERAL INSURANCE") on September 23, 1991 in the Supreme Court of the
State of New York, County of New York in which DVL alleged negligence against
its broker and sought declaratory and injunctive relief against Federal. The
New York Court in this matter has held that the Settling Defendants' insurance
excluded coverage of these matters. DVL has filed a notice of appeal of that
decision. DVL and the broker have agreed to the terms of a settlement
pursuant to which DVL will receive, after legal fees and other costs,
approximately $24,000.
10
(C) DVL was named in an action entitled VANGUARD CAPITAL V. KENBEE
MANAGEMENT, INC. ET AL. ("VANGUARD"), which was filed in 1994 in the Superior
Court of the State of California, in which Vanguard sought contractual
indemnity, equitable indemnity and declaratory relief on certain matters filed
against Vanguard in the Superior Court, State of California, by an investor.
This action is based on complaints by an investor with a $350,000 investment
in an affiliated limited partnership who alleged that the investor's broker
sold to her unsuitable investments. DVL defended the case and Vanguard
voluntarily dismissed the action without prejudice. On March 22, 1996, the
investor in the underlying matter against VANGUARD filed in the Superior Court
of Los Angeles, a motion to vacate an NASD Arbitration award made in July 1995
in favor of VANGUARD and has named DVL as an additional respondent in that
Petition.
5. Subsequent Events
(A) On October 27, 1997, DVL commenced a cash tender offer (the "Offer") for
any and all of its 10% Redeemable Promissory Notes due December 31, 2005 (the
"Notes"), at a price of $0.12 per $1.00 principal amount of Notes. The Offer
is scheduled to expire on December 1, 1997. The Notes were originally issued
in December 1995 in conjunction with the settlement of a shareholder class
action. Approximately $11,425,000 aggregate face amount of Notes were
outstanding as of the commencement of the Offer.
The Offer is intended to retire the Notes, effecting a reduction in DVL's
long-term debt, and eliminating the dilutive effect that would otherwise
result from redemption of the Notes for shares of common stock. DVL has the
option to redeem the Notes at any time after January 1, 1999 by issuing
additional shares of common stock with a market value, as of the date of
redemption, equal to 110% of the face value of the Notes.
DVL has entered into a financing arrangement with an unaffiliated entity
(the "Lender"), permitting DVL to borrow up to $1,760,000 (the "Loan") to fund
the purchase of Notes, and to pay related costs and expenses. The financing
arrangement is being implemented pursuant to an agreement dated as of October
20, 1997 (the "Fourth Amendment") among DVL, the Lender, and the NPM Parties
(as defined below), which amends the Amended and Restated Loan Agreement dated
as of March 27, 1996, as amended, between DVL and NPM Capital LLC (as amended
by the Fourth Amendment, the "Amended Loan Agreement").
Pursuant to the Fourth Amendment, DVL's obligations under the Loan are
secured by all of the assets of DVL currently pledged to NPM Capital LLC
("NPM") and NPO Management LLC ("NPO") under the Amended Loan Agreement and
the other documents executed in connection therewith (NPM and NPO are
collectively referred to as the "NPM Parties"). The Loan will be senior to
all indebtedness of DVL other than indebtedness owing to the NPM Parties and,
with respect to individual assets, the related secured lender. The Loan will
mature on September 30, 2002 and will bear interest at the rate of 12% per
annum. Interest payable in connection with the Loan will be payable in kind
until DVL satisfies all of its obligations owing to the NPM Parties.
Thereafter, interest and principal will be paid from 100% of the proceeds then
available to DVL from the mortgage collateral held as security for the Loan.
11
As further consideration for the Lender's providing DVL with the Loan,
DVL (i) upon the execution of the Fourth Amendment issued to the Lender
325,000 shares of DVL common stock and (ii) agreed to issue to the Lender, at
the expiration date of the Offer, additional shares of common stock, under
certain circumstances.
(B) In November 1997, DVL, as the general partner of a certain limited
partnership, refinanced an underlying mortgage and generated net proceeds of
$136,000 in excess of the existing underlying mortgage loan. The excess
proceeds were used to pay the expenses of the refinancing, and to repay the
NPM Loan as required by the NPM Loan Agreement.
6. New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS
#128 Earnings Per Share. SFAS #128 is effective for the Company's fiscal year
ended December 31, 1997 and provides for the restatement of the historical
EPS. The Company believes that SFAS #128 will not have a material effect on
its financial statements.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DVL continues to experience liquidity problems principally as a result
of the reduced cash flow received on the restructured and non-performing
portions of its loan portfolio. Although the limited partner settlement
substantially reduced the non-performing portion of DVL's loan portfolio, this
reclassification has not resulted, nor is it expected to result, in
significant income or cash flow on the majority of the restructured mortgages,
as the mortgage debt service is used to pay liens senior to DVL's.
To enable DVL to meet its short-term operating needs, DVL must continue
to augment its cash flow with the proceeds from the sale or refinancing of
assets and borrowings. There is a risk that DVL may not be able to raise the
necessary funds with which to continue operations.
DVL's ability to continue as a going concern is dependent upon (1) the
sale or refinancing of certain assets to improve its cash position to meet
operating expenses and mandatory debt payments; (2) the realization of the
estimated value of the assets collateralizing its loan portfolio over an
extended period of time rather than the value of the assets on a liquidation
basis; (3) the return to profitable operations and (4) availability of
additional borrowings.
Results of Operations
- ---------------------
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
- ----------------------------------------------------------------------------
DVL realized a net loss of $755,000 for the three months ended September
30, 1997, compared to net income of $5,849,000 for the corresponding 1996
period, a change of $6,604,000. DVL had operating losses in both periods
which increased by $185,000 in 1997. The income in 1996 was a result of the
extraordinary gains realized upon DVL's prepayments to creditors, offsetting
the continued operating losses. The effects of these items and the other
factors contributing to the net income are as follows:
Interest income on mortgage loans due from affiliates decreased from 1996
to 1997, due to the satisfaction of certain loans to affiliated partnerships
upon the sale of partnership properties. This decrease was offset by a
corresponding decrease in interest expense on the underlying debt obligations.
Also, the income reflects adjustments to unearned interest resulting from loan
payoffs, refinancings, etc.
Transaction and other fees from partnerships aggregating $157,000 in 1997
and $114,000 in 1996 principally represent the fees received upon the sale of
certain partnership properties.
Interest income on non-affiliate mortgage loans decreased due to the fact
that as of December 31, 1996 the mortgage loan matured that generated this
income.
13
Other income decreased from 1996 to 1997 primarily as a result of final
monies collected by DVL from the sale of FMF during 1996.
General and administrative expenses decreased by $65,000, primarily as a
result of a decrease in payroll and operating costs incurred in 1997.
Legal and professional fees decreased by $33,000 as a result of decreased
legal, accounting and other professional costs as compared to the same period
of the prior year.
Interest expense for the quarter ended September 30, 1997 aggregated
$620,000 compared to $587,000 for the same period in 1996. During 1997 and
1996, there was a significant amount of refinancings and restructurings of
existing debt, which resulted in substantial reductions in long-term debt
obligations. However, this is offset by $60,000 of amortization expense on
the long-term debt discount, that arose from the issuance of the NPM warrants.
Also, included in the other interest expense, is interest on the notes issued
in connection with the shareholder class action litigation settlement of
approximately $298,000. Interest is payable annually and, at the Company's
option, may be paid by the issuance of additional notes.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
- -------------------------------------------------------------------------
DVL realized a net loss of $1,015,000 for the nine months ended September
30, 1997, as compared to net income of $6,241,000 for the corresponding 1996
period, a change of $7,256,000. The loss in 1997 was a result of an operating
loss of $2,119,000 offset by extraordinary gains realized upon the
restructuring of indebtedness which aggregated $1,104,000. The income in 1996
was primarily a result of the extraordinary gains of $8,274,000 realized upon
DVL's prepayments to a creditor and the discount received upon the payoff of
indebtedness to another creditor partially offset by DVL's continued operating
losses including a reduction in transaction fees. The operating loss increased
by $86,000 in 1997. The effects of these items and the other factors
contributing to the loss are as follows:
Interest income on mortgage loans due from affiliates increased slightly
from 1996 to 1997. The increase in income is attributable to adjustments to
unearned interest resulting from loan payoffs, refinancing, etc. There was
a reduction in the amount of interest income on loans to affiliated
partnerships due to the satisfaction of certain loans upon the sale of
partnership properties. However, this decrease was offset by a corresponding
decrease in interest expense on the underlying debt obligations.
Transaction and other fees from partnerships aggregating $423,000 in 1997
and $283,000 in 1996 principally represent the fees received upon the sale of
certain partnership properties.
Rent income from affiliated partnerships increased from 1996 to 1997,
primarily as a result of the collection of old amounts due DVL that were not
accrued for in the prior year.
14
Interest income on non-affiliate mortgage loans decreased due to the fact
that as of December 31, 1996 the mortgage loan matured that generated this
income.
Other income decreased from 1996 to 1997 primarily as a result of final
monies collected by DVL from the sale of FMF during 1996.
General and administrative expenses decreased by $215,000 primarily as
a result of a decrease in payroll and operating costs incurred in 1997.
Asset Servicing fee increased by $144,000 from 1996 to 1997 since the NPO
Management agreement began March 27, 1996.
Legal and professional fees decreased by $57,000 primarily as a result
of decreased legal, accounting and other professional costs as compared to the
same period of the prior year.
Interest expense for the nine months ended September 30, 1997 aggregated
$1,982,000 compared to $1,904,000 for the same period in 1996. During 1997
and 1996, there was a significant amount of refinancings and restructurings
of existing debt, which resulted in substantial reductions in long-term debt
obligations. However, this is offset by $158,000 of amortization expense on
the long-term debt discount, that arose from the issuance of the NPM warrants.
Also, included in the other interest expense, is interest on the notes issued
in connection with the shareholder class action litigation settlement of
approximately $858,000. Interest is payable annually and, at the Company's
option, may be paid by the issuance of additional notes.
Liquidity and Capital Resources
- -------------------------------
DVL continues to experience liquidity problems and its cash flow provided
by operations is not sufficient to meet its operating needs. DVL is
attempting to augment its cash flow with the proceeds from the sale or
refinancing of assets. There is a risk that DVL may not be able to raise the
necessary funds with which to continue operations.
DVL has the right to refinance a number of mortgage loans underlying its
wrap-around mortgages due from affiliated partnerships and arrange senior
financing secured by properties on which it holds first or second mortgage
loans by subordinating its mortgage position. During the quarter ended March
31, 1997, DVL refinanced four underlying mortgages and generated $821,000 in
proceeds in excess of the existing underlying mortgage loans. The excess
proceeds were used to repay the NPM loan as required by the NPM loan
agreement. The amounts obtained from these refinancings were primarily based
on the value of the base rents during the period of the base lease term
subsequent to the payoff of the existing first mortgages. As a result of
DVL's prior and current refinancings, DVL's asset base available for future
refinancings has diminished. No additional mortgage loans were refinanced in
the quarters ended June 30 or September 30, 1997.
15
In the quarter ended March 31, 1997, DVL entered into a new loan for an
initial principal amount of $2,000,000. From the proceeds of this financing,
DVL repaid an existing creditor $1,474,000 in full satisfaction of a loan
which had a principal amount due of $1,901,000. This payment resulted in an
extraordinary gain, net of other amounts, of approximately $406,000 in the
first quarter of 1997. DVL used the $406,000 of excess proceeds to pay
interest and principal on the NPM loan, as required by the NPM Loan Agreement.
For the six months ended June 30, 1997, DVL borrowed $200,000 from NPM.
These advances were not required by the original NPM Loan Agreement. In
addition, NPM made aggregate advances, as required by the NPM Loan Agreement,
in the amount of $425,000 during the nine months ended September 30, 1997.
In the quarters ended June 30 and September 30, 1997, DVL paid aggregate
amounts of approximately $358,000 and $7,000, respectively, including
principal and interest, in satisfaction of its subordinated debenture
obligations, as required by the terms thereof.
In May 1997, DVL, as the general partner of a certain limited partnership,
negotiated the sale of the partnership's property which resulted in net
proceeds of approximately $625,000 to DVL in satisfaction of the partnership's
mortgage indebtedness. All of the proceeds were used to pay interest and
principal on the NPM loan to NPM, as required by the NPM loan agreement. In
addition, DVL earned approximately $82,000 in fees on the sale transaction.
In June 1997, DVL repaid a creditor $1,037,000 in cash and transferred its
rights and economic interest in two mortgage loan receivables from affiliated
limited partnerships, as well as its ownership interest in a limited
partnership, in exchange for full satisfaction of its long-term debt
obligation to this creditor. This transaction resulted in an extraordinary
gain of approximately $651,000 in the second quarter ended June 30, 1997. The
source of the cash payment was the sale of a partnership's property in which
DVL held a 55% limited partnership interest. In addition, DVL realized fees
on the sale of this property of approximately $153,000.
In July 1997, DVL received net proceeds of approximately $210,000 in
satisfaction of a partnership's mortgage indebtedness to DVL. In addition,
DVL earned approximately $23,000 in fees from the sale.
In July 1997, DVL realized net cash proceeds of approximately $372,000
in full satisfaction of a certain limited partnership's mortgage indebtedness.
In connection therewith, as a result of a prior settlement agreement, an
affiliate of DVL released all its rights under a certain master lease
agreement. From these cash proceeds, DVL repaid a long-term creditor
approximately $219,000.
In July 1997, DVL as the general partner of a certain limited partnership,
negotiated the sale of the partnership's property. The sale resulted in net
cash proceeds of $1,075,000 to DVL, in satisfaction of the partnership's
mortgage indebtedness. All of these proceeds were paid to one of DVL's long-
term creditors, as required. In addition, DVL earned approximately $45,000
in fees from this sale.
16
In September 1997, DVL, as the general partner of three separate limited
partnerships, negotiated the sales of each of these partnerships' properties.
From two of the sales, DVL received an aggregate amount of $1,168,500 in
satisfaction of mortgage indebtedness to DVL. All of the proceeds were used
to pay interest and principal on the NPM Loan, as required by the NPM loan
agreement. There was no partnership mortgage indebtedness on the sale of the
third partnership property. In addition, DVL earned approximately $89,000 in
aggregate fees from these three sales.
The following transactions occurred subsequent to the quarter ended
September 30, 1997:
On October 27, 1997, DVL commenced a cash tender offer (the "Offer") for
any and all of its 10% Redeemable Promissory Notes due December 31, 2005 (the
"Notes"), at a price of $0.12 per $1.00 principal amount of Notes. The Offer
is scheduled to expire on December 1, 1997. The Notes were originally issued
in December 1995 in conjunction with the settlement of a shareholder class
action. Approximately $11,425,000 aggregate face amount of Notes were
outstanding as of the commencement of the Offer.
The Offer is intended to retire the Notes, effecting a reduction in DVL's
long-term debt, and eliminating the dilutive effect that would otherwise
result from redemption of the Notes for shares of common stock. DVL has the
option to redeem the Notes at any time after January 1, 1999 by issuing
additional shares of common stock with a market value, as of the date of
redemption, equal to 110% of the face value of the Notes.
DVL has entered into a financing arrangement with an unaffiliated entity
(the "Lender"), permitting DVL to borrow up to $1,760,000 (the "Loan") to fund
the purchase of Notes, and to pay related costs and expenses. The financing
arrangement is being implemented pursuant to an agreement dated as of October
20, 1997 (the "Fourth Amendment") among DVL, the Lender, and the NPM Parties
(as defined below), which amends the Amended and Restated Loan Agreement dated
as of March 27, 1996, as amended, between DVL and NPM Capital LLC (as amended
by the Fourth Amendment, the "Amended Loan Agreement").
Pursuant to the Fourth Amendment, DVL's obligations under the Loan are
secured by all of the assets of DVL currently pledged to NPM Capital LLC
("NPM") and NPO Management LLC ("NPO") under the Amended Loan Agreement and
the other documents executed in connection therewith (NPM and NPO are
collectively referred to as the "NPM Parties"). The Loan will be senior to
all indebtedness of DVL other than indebtedness owing to the NPM Parties and,
with respect to individual assets, the related secured lender. The Loan will
mature on September 30, 2002 and will bear interest at the rate of 12% per
annum. Interest payable in connection with the Loan will be payable in kind
until DVL satisfies all of its obligations owing to the NPM Parties.
Thereafter, interest and principal will be paid from 100% of the proceeds then
available to DVL from the mortgage collateral held as security for the Loan.
As further consideration for the Lender's providing DVL with the Loan,
DVL (i) upon the execution of the Fourth Amendment issued to the Lender
325,000 shares of DVL common stock and (ii) agreed to issue to the Lender, at
the expiration date of the Offer, additional shares of common stock, under
certain circumstances.
17
In November 1997, DVL, as the general partner of a certain limited
partnership, refinanced an underlying mortgage and generated $186,000 in
proceeds in excess of the existing underlying mortgage loan. The excess
proceeds were used to pay the expenses of the refinancing, and to repay the
NPM Loan as required by the NPM Loan Agreement.
18
Part II - Other Information
Item 1. Legal Proceedings
-----------------
The information set forth in Note 4(A) [Legal Proceedings] of the
Notes to the Financial Statements included in Part I of this Report, regarding
the completion of the settlement of the LEVY litigation, is incorporated by
reference herein in response to this Item 1.
Item 2. Change in Securities
--------------------
The information set forth in Note 3 [Shareholders' Equity], 4(A)
[Legal Proceedings] and 5(A) [Subsequent Events] of the Notes to the Financial
Statements, regarding issuances of stock in October 1997, in the settlement
of the LEVY litigation, and to the Lender in connection with the debt tender
offer, is incorporated by reference herein in response to this Item 2.
Item 5. Other Information
-----------------
The information set forth in Note 5A [Subsequent Events] of the Notes
to the Financial Statements, regarding the commencement by DVL, in October
1997, of a cash tender offer for its 10% Redeemable Promissory Notes due
December 31, 2005, is incorporated by reference herein in response to this
Item 5.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(A) There were no reports on Form 8-K filed during the three months ended
September 30, 1997.
(B) Exhibits:
10.1 - Fourth Amendment, dated as of October 20, 1997, among
DVL, Bridge Capital, LLC (the "Lender"), NPM Capital
LLC ("NPM") and NPO Management LLC ("NPO"), to Amended
and Restated Loan Agreement, dated as of March 27,
1997, as amended, between DVL and NPM.
10.2 - Promissory Note dated as of October 20, 1997, in the
original principal amount of $1,760,000 from DVL to
Lender.
10.3 - Subordination Agreement, dated as of October 20, 1997,
among DVL, the Lender, NPM and NPO.
The Schedules to Exhibits 10.1 and 10.3, which are identified
therein, have been omitted and will be furnished supplementally
to the Commission upon request.
27 - Financial Data Schedule
19
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DVL, INC.
By: /s/ Gary Flicker
------------------------------
Gary Flicker, Vice President
and Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
November 12, 1997
20