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 June 30, 1998
---------------------------------------------
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.
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2892858
- -----------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
24 River Road, Bogota, New Jersey 07603
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (201) 487-1300
--------------
- -----------------------------------------------------------------------------
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 August 12, 1998
- ----------------------------- ------------------------------
Common Stock, $.01 par value 16,560,450
DVL, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.'s
----------
Consolidated Balance Sheets -
June 30, 1998 (unaudited) and December 31, 1997 1-2
Consolidated Statements of Operations -
Three Months Ended June 30, 1998 (unaudited)
and 1997 (unaudited) 3
Six Months Ended June 30, 1998 (unaudited) and
1997 (unaudited) 4
Consolidated Statement of Shareholders' Equity for
the six months ended June 30, 1998 (unaudited) 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 (unaudited)
and 1997 (unaudited) 6-7
Notes to Consolidated Financial Statements (unaudited) 8-11
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
Part II. Other Information:
Item 6 - Exhibits and Reports on Form 8-K 16
Part I - Financial Information
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
1998 1997
---------- ------------
ASSETS (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 $42,257 and $45,306, respectively) $ 28,051 $ 30,815
Unearned interest (8,017) (8,350)
-------- --------
Net mortgage loans receivable from affiliated
partnerships (including $1,178 and $2,711 of
non-performing loans, respectively) 20,034 22,465
Others:
Non-performing loans collateralized by limited
partnership interests due from limited partners 948 1,690
-------- --------
Total loans receivable 20,982 24,155
Allowance for loan losses (8,303) (10,142)
-------- --------
Net loans receivable 12,679 14,013
Cash (including restricted cash of $77 for 1998
and 1997) 385 496
Due from affiliated partnerships (net of an allowance
for loss of $1,727 for 1998 and 1997) 202 142
Investments
Real estate at cost - pledged (net of an allowance
for loss of $208 for 1998 and 1997) 289 289
Real estate lease interests 1,553 1,621
Affiliated limited partnerships (net of an allowance
for loss of $1,246 for 1998 and 1997) 1,609 1,461
Other investments (net of an allowance for loss
of $400 for 1998 and 1997) 648 648
Other assets 852 966
-------- --------
Total assets $ 18,217 $ 19,636
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
1
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
June 30, December 31,
1998 1997
---------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited)
- ------------------------------------
Liabilities:
Long-term debt - NPM Capital LLC $ 4,681 $ 5,310
Long-term debt - Other 2,092 2,773
Notes payable - litigation settlement 3,842 4,060
Accounts payable and accrued liabilities 1,896 1,918
Deferred Income 299 -
-------- --------
Total liabilities 12,810 14,061
-------- --------
Deferred credits 265 296
-------- --------
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 -
16,560,450 and 16,232,450, respectively 166 162
Additional paid-in capital 95,288 95,240
Deficit (90,313) (90,124)
-------- --------
Total shareholders' equity 5,142 5,279
-------- --------
Total liabilities and shareholders'
equity $ 18,217 $ 19,636
======== ========
<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
June 30,
-----------------------
1998 1997
---------- ----------
Income from affiliates
Interest on mortgage loans $ 374 $ 305
Partnership management fees 97 110
Transaction and other fees from partnerships 143 242
Distributions from investments 90 -
Rent income 7 32
Income from others
Rent Income 67 -
Other interest 4 2
Other income 40 -
---------- ----------
822 691
---------- ----------
Operating expenses
General and administrative 250 366
Asset servicing fee - NPO Management LLC 150 150
Legal and professional fees 31 62
Interest expense
NPM Capital LLC 236 258
Litigation Settlement 143 286
Others 124 116
---------- ----------
934 1,238
---------- ----------
Loss before extraordinary gain (112) (547)
Extraordinary gain on the settlement of
indebtedness 651
---------- ----------
Net (loss) income $ (112) $ 104
========== ==========
Loss per share - basic and diluted:
Loss before extraordinary gain $ (.01) $ (.03)
Extraordinary gain on the settlement of
indebtedness .04
---------- ----------
Net (loss) income $ (.01) $ .01
========== ==========
Weighted average shares outstanding 16,560,450 15,679,450
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
3
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
(unaudited)
Six Months Ended
June 30,
-----------------------
1998 1997
---------- ----------
Income from affiliates
Interest on mortgage loans $ 518 $ 595
Partnership management fees 187 212
Transaction and other fees from partnerships 324 266
Distributions from investments 99 -
Rent income 15 41
Other income 2 -
Income from others
Rent Income 147 -
Other interest 4 4
Other income 57 36
---------- ----------
1,353 1,154
---------- ----------
Operating expenses
Recovery of provision for losses (131) -
General and administrative 574 744
Asset servicing fee - NPO Management LLC 300 300
Legal and professional fees 63 112
Interest expense
NPM Capital LLC 392 526
Litigation Settlement 280 560
Others 266 276
---------- ----------
1,744 2,518
---------- ----------
Loss before extraordinary gain (391) (1,364)
Extraordinary gain on the settlement of
indebtedness 202 1,104
---------- ----------
Net loss $ (189) $ (260)
========== ==========
Loss per share - basic and diluted:
Loss before extraordinary gain $ (.02) $ (.09)
Extraordinary gain on the settlement of
indebtedness .01 .07
---------- ----------
Net loss $ (.01) $ (.02)
========== ==========
Weighted average shares outstanding 16,343,880 15,679,450
========== ==========
<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, 1998 100 $ 1 16,232,450 $ 162 $ 95,240 $(90,124) $ 5,279
Issuance of common stock in connection
with the Loan from Blackacre Bridge
Capital, LLC 328,000 4 48 52
Net loss (189) (189)
-------- ------ ---------- ------- -------- -------- -------
Balance-June 30, 1998 100 $ 1 16,560,450 $ 166 $ 95,288 $(90,313) $ 5,142
======== ====== ========== ======= ======== ======== =======
<FN>
See notes to consolidated financial statements.
</FN>
5
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
---------------------
1998 1997
-------- --------
Cash flows from operating activities
Net loss before extraordinary gain $ (391) $ (1,364)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities
Recovery of provision for losses (131) -
Accrued interest added to indebtedness 247 185
Amortization of unearned interest on
loan receivable (9) (100)
Amortization of real estate lease interests 68 -
Net (decrease) in deferred charges (31) -
Imputed interest on notes and debentures 280 561
Amortization of debt discount 47 98
Net increase in unearned income 299 -
Net decrease (increase) in other assets 114 (18)
Net (increase) in due from affiliated
partnerships (60) (23)
Net increase (decrease) in accounts payable
and accrued liabilities 30 (7)
-------- --------
Net cash provided by (used in)
operating activities 463 (668)
-------- --------
Cash flows from investing activities
Collections on loans receivable (net of
payments on underlying loans) 1,349 2,546
Investments in limited partnerships (23)
Net reductions in real estate lease
interests - 302
Distributions received on affiliated
limited partnership interests and
other investments - 1,253
-------- --------
Net cash provided by investing
activities $ 1,326 $ 4,101
-------- --------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
6
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
(continued)
Six Months Ended
June 30,
--------------------
1998 1997
-------- --------
Cash flows from financing activities
Proceeds from new borrowings $ 425 $ 2,537
Repayment of indebtedness (2,029) (5,517)
Payments related to debt tender offer (296) -
Payments on subordinated debentures - (329)
Payments on guaranteed indebtedness - (115)
-------- --------
Net cash (used in) financing activities (1,900) (3,424)
-------- --------
Net (decrease) increase in cash (111) 9
Cash - beginning of period 496 355
-------- --------
Cash - end of period $ 385 $ 364
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest,
excluding amounts paid on underlying loans $ 137 $ 370
======== ========
Supplemental disclosure of non-cash
investing and financing activities:
Net reduction in indebtedness pursuant
to creditor settlements $ - $ 1,104
======== ========
Reduction in accrued liabilities upon
issuance of common stock $ 52 $ 22
======== ========
Common stock issued in creditor settlement $ - $ 8
======== ========
Net reduction of Notes Payable - Debt
Tender Offer $ 202 $ -
======== ========
<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
six months ended June 30, 1998 should not be regarded as necessarily
indicative of the results that may be expected for the full year. Certain
amounts from the three and six months ended June 30, 1997 have been
reclassified to conform to the three and six months ended June 30, 1998
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 currently used to pay liens senior to DVL's, and any
excess is used to fund principal and interest payments on the NPM Loan, based
on the collateral interest of NPM Capital LLC ("NPM") in the mortgages, and
to pay certain other creditors. 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 in order
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
During the first quarter of 1998, 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 $619,000 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
agreements.
During the second quarter of 1998, 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 $500,000 to DVL in
satisfaction of the partnership's mortgage indebtedness. All of the proceeds
were used to pay interest and principal to one of DVL's long-term creditors,
as required.
8
In April and July of 1998, NPM Capital LLC ("NPM") advanced to DVL the
aggregate sum of $175,000 to fund two quarterly payments to a DVL creditor.
These advances were not required under the original loan transaction with NPM,
in the principal amount of $8,382,000, consummated in September 1996 (the
"Original Loan"). These advances bear interest at 15% per annum and will be
paid pari passu with the Original Loan, and with the additional advances
aggregating $200,000 made in March and April 1997. The Original Loan,
together with the 1997 and 1998 advances, are referred to in the aggregate
herein as the "NPM Loan".
During the second quarter of 1998, DVL as the mortgagee of various real
estate properties, received an aggregate amount of approximately $425,000 as
additional debt service from tenant percentage rent payments. All of these
proceeds were paid to NPM and were applied to interest and principal, as
required.
In May 1998, DVL repaid at maturity a loan which had been collaterized
by the Company's limited partner interests in certain partnerships for which
it also serves as general partner. The total payment, including principal and
accrued interest, was $227,111.
3. Debt Tender Offer
From October 27, 1997 through February 27, 1998(the "Expiration Date"),
the Company conducted a cash tender offer (the "Offer") for its 10% Redeemable
Promissory Notes due December 31, 2005 (the "Notes") at a price of $.12 per
$1.00 principal amount of Notes. The Notes were originally issued in December
1995 in conjunction with the settlement of a shareholder class action. The
Company purchased and retired a total of $6,224,532 principal amount of Notes
in the Offer ($5,818,540 through December 31, 1997, and an additional $405,992
through the Expiration Date). An additional $392,750 principal amount
($322,796 through December 31, 1997, and $69,954 thereafter), representing 15%
of the Notes tendered in excess of $3,998,000, were purchased by the Lender
(see below) based on the Lender's commitment to participate in the Offer to
that extent. A total of $6,166,381 principal amount of Notes remained
outstanding as of December 31, 1997, and $5,760,389 were outstanding at March
31, 1998 after taking into account all tenders through the Expiration Date.
The outstanding Notes include those purchased by the Lender.
The Offer effected a reduction in the Company's long-term debt and
resulted in an extraordinary gain for the year ended December 31, 1997 of
$2,906,000, after costs of $211,000, and an extraordinary gain of $202,000 for
the quarter ended March 31, 1998, after costs of $17,000.
DVL entered into a financing arrangement with Blackacre Bridge Capital,
LLC, an unaffiliated entity (the "Lender"), permitting DVL to borrow up to
$1,760,000, to fund the purchase of Notes, and to pay related costs and
expenses. A total of $810,000 had been borrowed as of December 31, 1997, and
an additional $250,000 had been borrowed through March 31, 1998. There were
no additional borrowings subsequent to March 31, 1998.
9
4. Shareholders' Equity
As part of the consideration for the Lender's providing DVL with the loan
referred to in Note 3, DVL issued to the Lender on February 27, 1998 (the
Expiration Date of the Offer) 328,000 shares of Common Stock, based on a
formula contained in the applicable loan documents, resulting in an increase
from 16,232,450 to 16,560,450 in the number of shares of outstanding Common
Stock. For the year ended December 31, 1997, the Company had recorded a cost
of $52,000 for the 328,000 shares (together with a cost of $29,000 for the
325,000 shares issued to the Lender upon execution of the loan documents in
October 1997), based on the market value of such shares as of the respective
dates of issuance, discounted to reflect the fact that they constitute
"restricted securities", within the meaning of Rule 144 under the Securities
Act of 1933, as amended. The shares were issued pursuant to the exemption
afforded by Section 4(2) of said Act, for transactions by an issuer not
involving a public offering.
5. Legal Proceedings
The sole case which is currently outstanding arises from an action
entitled VANGUARD CAPITAL V. KENBEE MANAGEMENT, INC. ET AL., which was filed
in 1994 in the Superior Court of the State of California, and, included DVL
as a defendant. Vanguard sought to be indemnified for an investor's claim
filed against it in said Court. The investor made a $350,000 investment in
an affiliated limited partnership and alleged that her broker sold her
unsuitable investments. DVL defended the case and Vanguard voluntarily
dismissed its 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. There has been no further activity in this case since March 1996,
and no determination can be made at this time as to the outcome.
6. Other Transactions.
(A) In May 1998, PBD Holdings, LP ("PBD"), a limited partnership
controlled by certain affiliates of NPM and NPO, and of Blackacre Capital
Group, LLC, acquired Major Realty Corporation ("MAJR") through a merger
transaction. The assets of MAJR, which had been a public company prior to the
merger, consist primarily of land for development located in Orlando, Florida.
PBD and the Company have entered into a Management Agreement under which
the Company will render financial, consulting and other administrative
services to PBD. The Company will receive a base fee of $5,000 per month,
plus additional compensation in an amount equal to 25% of all profits after
the members of PBD have received the return of their capital contributions and
a 20% internal rate of return. There can be no assurance as to the amount
or timing of any such additional compensation.
10
(B) In June 1998, the Opportunity Fund purchased certain wraparound
mortgages encumbering properties owned by limited partnerships for which DVL
serves as general partner. The seller of the mortgages is a party
unaffiliated with any member of the Opportunity Fund.
As previously reported in DVL's Report on Form 10-K for the fiscal year
ended December 31, 1997, the Opportunity Fund is a joint venture whose members
are DVL and certain affiliates of NPM and NPO, and of Blackacre Capital Group,
LLC.
7. Subsequent Events
The following events occurred subsequent to June 30, 1998:
(A) In July 1998, DVL, as the general partner of two separate limited
partnerships, negotiated the sale of these partnerships' properties which
resulted in aggregate net proceeds of $715,000 to DVL in satisfaction of the
partnerships' mortgage indebtedness. All of these proceeds were paid to NPM,
as required.
(B) In July 1998, DVL refinanced a mortgage obligation which generated
approximately $31,000 of cash proceeds in excess of the underlying mortgage
loan. These proceeds were paid to NPM, as required.
(C) In August, 1998, DVL entered into a lease of premises comprising
5,679 square feet at 70 East 55th Street, New York, New York. It is
anticipated that, on or about October 1, 1998, DVL will move its corporate
headquarters from their current location in Bogota, New Jersey to the new
space.
The term of the new lease commenced as of August 1, 1998, and terminates
on February 7, 2003. The base rent is $227,160 per annum, after an initial
90-day free rent period, and there are real estate tax and operating expense
escalation clauses. The New Jersey space is master leased to a subsidiary of
DVL, and is occupied without charge by the Company. After the move to New
York, the Company will retain a small portion of the New Jersey space, but
intends to lease out the remainder; the revenue from these leases will
partially offset the rental expense at the new location.
The new lease is a sublease to DVL by the original tenant, and is
cancelable by either party if the overlandlord's consent has not been obtained
by August 31, 1998.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
- -----------------------------------------------------------------------------
DVL continued to have operating losses in the second quarter of 1998
($112,000), but at a reduced level from the second quarter of 1997 ($547,000).
DVL realized a net loss of $112,000 for the three months ended June 30,
1998, compared to net income of $104,000 for the corresponding 1997 period.
The 1997 losses of $547,000 were offset by extraordinary gains of $651,000
realized upon settlements of indebtedness. In 1998, there were no
extraordinary gains.
Interest income on mortgage loans from affiliates increased in 1998 from
1997 primarily due to the Company's re-evaluation of several mortgage loans
in its portfolio. Previously, DVL was not recognizing interest income on
certain loans in its mortgage portfolio. Interest on loans was applied to
reduce the carrying value of assets, to the extent of cash payments received.
The Company has determined that no further reductions in carrying value are
appropriate. Therefore, commencing in the second quarter of 1998, interest
income is being recognized to the extent of said cash payments ratably over
the fiscal year. This increase was partially offset by decreases in mortgage
interest income as a result of a reduction in the size of the loan portfolio
which resulted from the repayment to DVL of mortgages by various
partnerships.
Partnership management fees decreased in 1998 from 1997 due to a
reduction in the number of limited partnerships under management resulting
from sales of these partnerships' properties. In connection with sales of
partnership properties and with refinancings of underlying mortgages on said
properties, DVL receives transaction and other fees from partnerships.
Decreased sales and refinancing activities resulted in a decrease in
transaction and other fees in 1998 compared to 1997.
In 1998, DVL recorded income of $90,000 from distributions received on
limited partnership unit investments, representing the excess proceeds over
the net carrying value. No income was recorded prior to December 31, 1997
from such distributions because the distributions were applied to reduce the
Company's carrying value. At December 31, 1997, the Company determined that
no further reductions in carrying value were appropriate.
Rental income from others increased in 1998 from 1997, as a result of the
Company's re-evaluation of the amounts to be realized from its real estate
lease interests and a higher occupancy level at the properties. Previously,
12
the Company's leasehold interests were amortized at a rate that would have
fully amortized the asset prior to the termination of the lease. Amortization
will now be over the remaining term of the lease.
General and administrative expense ("G&A") decreased in 1998 as compared
to 1997 primarily due to reductions in consulting costs, partially offset by
increases in payroll and payroll related costs. Legal and professional fees
in 1998 were lower than the amount for 1997, as a result of the settlement of
substantially all of DVL's litigation.
Interest expense in 1998 declined from 1997 (exclusive of interest on
notes issued in the settlement of the shareholder litigation) due to paydowns
and settlements of long-term debt obligations. Interest on notes issued in
settlement of the shareholder litigation is paid in the form of additional
notes, and does not represent a current cash obligation.
13
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
- -------------------------------------------------------------------------
DVL continued to have operating losses in the six months ended June 30,
1998 ($391,000), but at a reduced level from the six months ended June 30,
1997 ($1,364,000).
DVL realized a net loss of $189,000 for the six months ended June 30,
1998, compared to a net loss of $260,000 for the corresponding 1997 period.
In both years there were operating losses offset by extraordinary gains
realized upon settlements of indebtedness. In 1997, the extraordinary gain
of $1,104,000 was a result of the restructuring of certain indebtedness. In
1998, the extraordinary gains of $202,000 arose from gains realized upon DVL's
purchase of promissory notes which were issued in connection with the 1995
settlement of the shareholder litigation.
Interest income on mortgage loans from affiliates decreased in 1998 from
1997 as a result of a reduction in the size of the loan portfolio which
resulted from the repayment to DVL of mortgages by various partnerships. This
decrease was partially offset by interest income recognized in the second
quarter based on a re-evaluation of several mortgage loans in the portfolio.
Previously, DVL was not recognizing interest income on certain loans in its
mortgage portfolio. Interest on loans was applied to reduce the carrying
value of assets to the extent of cash payments received. The Company has
determined that no further reductions in carrying value are appropriate.
Therefore, commencing in the second quarter of 1998, interest income is being
recognized to the extent of said cash payments ratably over the fiscal year.
Partnership management fees decreased in 1998 from 1997 due to a
reduction in the number of limited partnerships under management resulting
from sales of these partnerships' properties. In connection with sales of
partnership properties and with refinancings of underlying mortgages on said
properties, DVL receives transaction and other fees from partnerships.
Increased sales and refinancing activities resulted in an increase in
transaction and other fees in 1998 compared to 1997.
In 1998, DVL recorded income of $99,000 from distributions received on
limited partnership unit investments, representing the excess proceeds over
the net carrying value. No income was recorded prior to December 31, 1997
from such distributions because the distributions were applied to reduce the
Company's carrying value. At December 31, 1997, the Company determined that
no further reductions in carrying value were appropriate.
Rental income from others increased in 1998 from 1997, as a result of the
Company's re-evaluation of the amounts to be realized from its real estate
lease interests and a higher occupancy level at the properties. Previously
the Company's leasehold interests were amortized at a rate that would have
fully amortized the asset prior to the termination of the lease. Amortization
will now be over the remaining term of the lease.
14
In 1998, the Company finalized settlement agreements that allow DVL to
realize cash proceeds that exceed the carrying value on previously reserved
limited partner notes receivable. As a result, in the first quarter of 1998,
DVL has reflected a recovery in the provision for losses of $(131,000).
General and administrative expense ("G&A") decreased in 1998 as compared
to 1997 primarily due to reductions in consulting costs, partially offset by
increases in payroll and payroll related costs. Legal and professional fees
in 1998 were lower than the amount for 1997, as a result of the settlement of
substantially all of DVL's litigation.
Interest expense in 1998 declined from 1997 (exclusive of interest on
notes issued in the settlement of the shareholder litigation) due to paydowns
and settlements of long-term debt obligations. Interest on notes issued in
settlement of the shareholder litigation is paid in the form of additional
notes, and does not represent a current cash obligation.
15
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
DVL's cash flow from operations is generated principally from management
fees from the operation of partnerships and transaction and other fees
received as a result of the sale and/or refinancing of partnership properties
and mortgages. DVL's portfolio of loans to affiliated partnerships currently
does not produce cash flow from operations because the cash received from the
mortgages is used to pay the debt service on liens on the properties senior
to those held by DVL, with any excess being used to pay principal and interest
on the NPM Loan based on the collateral interest in said mortgages held by NPM
Capital LLC ("NPM"), and by certain other creditors.
As a result of the above factors, DVL continues to experience liquidity
problems. 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 still remains some risk that DVL
may not be able to raise the necessary funds with which to continue
operations. Thus, DVL's ability to continue as a going concern is dependent
upon the four factors referred to in Note 1(B) of the Notes to Consolidated
Financial Statements (unaudited) included in Part I of this Report.
In April and July of 1998, NPM Capital LLC ("NPM") advanced to DVL the
aggregate sum of $175,000 to fund two quarterly payments to a DVL creditor.
These advances were not required under the original loan transaction with NPM,
consummated in September 1996 (the "Original Loan"). These advances bear
interest at 15% per annum and will be paid pari passu with the Original Loan,
and with the additional advances aggregating $200,000 made in March and April
1997. The Original Loan, together with the 1997 and 1998 advances, are
referred to in the aggregate herein as the "NPM Loan".
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(A) There were no reports on Form 8-K filed during the three months ended
June 30, 1998.
(B) Exhibits:
10.1 Management Services Agreement dated as of June 1, 1998 between
DVL, Inc. and PBD Holdings, L.P.
27 - Financial Data Schedule
16
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)
August 12, 1998
17