SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 1998
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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)
70 East 55th Street, New York, New York 10022
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (212) 350-9900
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24 River Road, Bogota, New Jersey
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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, 1998
- ----------------------------- --------------------------------
Common Stock, $.01 par value 16,560,450
DVL, INC. AND SUBSIDIARIES
INDEX
Part I. Item 1 - Financial Information: Page No.'s
----------
Consolidated Balance Sheets -
September 30, 1998 (unaudited) and December 31, 1997 1-2
Consolidated Statements of Operations -
Three Months Ended September 30, 1998 (unaudited)
and 1997 (unaudited) 3
Nine Months Ended September 30, 1998 (unaudited) and
1997 (unaudited) 4
Consolidated Statement of Shareholders' Equity for
the nine months ended September 30, 1998 (unaudited) 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 (unaudited)
and 1997 (unaudited) 6-7
Notes to Consolidated Financial Statements (unaudited) 8-12
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-18
Part II. Other Information:
Item 6 - Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
Part I - Financial Information
Item 1. Financial Statements
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 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 $41,911 and $45,306, respectively) $ 27,091 $ 30,815
Unearned interest (7,973) (8,350)
-------- --------
Net mortgage loans receivable from affiliated
partnerships (including $1,180 and $2,711 of
non-performing loans, respectively) 19,118 22,465
Others:
Non-performing loans collateralized by limited
partnership interests due from limited partners 904 1,690
-------- --------
Total loans receivable 20,022 24,155
Allowance for loan losses (8,289) (10,142)
-------- --------
Net loans receivable 11,733 14,013
Cash (including restricted cash of $77 for 1998
and 1997) 592 496
Due from affiliated partnerships (net of an allowance
for loss of $1,727 for 1998 and 1997) 131 142
Investments
Real estate at cost - pledged (net of an allowance
for loss of $208 for 1998 and 1997) 289 289
Real estate lease interests 1,519 1,621
Affiliated limited partnerships (net of an allowance
for loss of $1,159 and $1,246, respectively) 1,536 1,461
Other investments (net of an allowance for loss
of $400 for 1998 and 1997) 648 648
Prepaid financing and other assets 808 966
-------- --------
Total assets $ 17,256 $ 19,636
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
1
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
September 30, December 31,
1998 1997
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited)
- ------------------------------------
Liabilities:
Long-term debt - NPM Capital LLC $ 3,757 $ 5,310
Long-term debt - Other 1,986 2,773
Notes payable - litigation settlement 3,991 4,060
Accounts payable and accrued liabilities 2,056 1,918
Deferred income 169 -
-------- --------
Total liabilities 11,959 14,061
-------- --------
Deferred credits 256 296
-------- --------
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 (90,414) (90,124)
-------- --------
Total shareholders' equity 5,041 5,279
-------- --------
Total liabilities and shareholders'
equity $ 17,256 $ 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
September 30,
-----------------------
1998 1997
---------- ----------
Income from affiliates
Interest on mortgage loans $ 300 $ 199
Gain on satisfaction of mortgage loans 173 -
Partnership management fees 85 95
Transaction and other fees from partnerships 169 157
Distributions from investments 40 -
Rent and other income 10 9
Income from others
Rent income 72 -
Distributions from investments 31 -
Other interest 3 2
Other income 33 2
---------- ----------
916 464
---------- ----------
Operating expenses
Recovery of provision for losses (21) -
General and administrative 293 383
Asset servicing fee - NPO Management LLC 150 150
Legal and professional fees 30 66
Interest expense
NPM Capital LLC 285 254
Litigation settlement notes 149 298
Others 131 68
---------- ----------
1,017 1,219
---------- ----------
Net loss $ (101) $ (755)
========== ==========
Loss per share - basic and diluted:
Net loss $ (.01) $ (.05)
========== ==========
Weighted average shares outstanding 16,426,554 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)
Nine Months Ended
September 30,
-----------------------
1998 1997
---------- ----------
Income from affiliates
Interest on mortgage loans $ 818 $ 794
Gain on satisfaction of mortgage loans 173 -
Partnership management fees 272 307
Transaction and other fees from partnerships 493 423
Distributions from investments 139 -
Rent and other income 27 50
Income from others
Rent income 219 -
Distributions from investments 31 -
Other interest 7 6
Other income 90 38
---------- ----------
2,269 1,618
---------- ----------
Operating expenses
Recovery of provision for losses (152) -
General and administrative 867 1,127
Asset servicing fee - NPO Management LLC 450 450
Legal and professional fees 93 178
Interest expense
NPM Capital LLC 677 780
Litigation settlement notes 429 858
Others 397 344
---------- ----------
2,761 3,737
---------- ----------
Loss before extraordinary gain (492) (2,119)
Extraordinary gain on the settlement of
indebtedness 202 1,104
---------- ----------
Net loss $ (290) $ (1,015)
========== ==========
Loss per share - basic and diluted:
Loss before extraordinary gain $ (.03) $ (.13)
Extraordinary gain on the settlement of
indebtedness .01 .07
---------- ----------
Net loss $ (.02) $ (.06)
========== ==========
Weighted average shares outstanding 16,426,554 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 (290) (290)
-------- ------ ---------- ------- -------- -------- -------
Balance-September 30, 1998 100 $ 1 16,560,450 $ 166 $ 95,288 $(90,414) $ 5,041
======== ====== ========== ======= ======== ======== =======
<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,
---------------------
1998 1997
-------- --------
Cash flows from operating activities
Net loss before extraordinary gain $ (492) $ (2,119)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities
Recovery of provision for losses (152) -
Accrued interest added to indebtedness 338 284
Amortization of unearned interest on
loan receivable 35 (104)
Amortization of real estate lease interests 102 -
Net (decrease) in deferred credits (40) -
Imputed interest on notes and debentures 429 858
Amortization of debt discount 109 158
Net increase in deferred income 169 -
Net decrease (increase) in other assets 158 (10)
Net decrease (increase) in due from
affiliated partnerships 11 (47)
Net increase (decrease) in accounts payable
and accrued liabilities 190 (53)
-------- --------
Net cash provided by (used in)
operating activities 857 (1,033)
-------- --------
Cash flows from investing activities
Collections on loans receivable (net of
payments on underlying loans) 2,345 5,660
Investments in limited partnerships (23) -
Net reductions in real estate lease
interests - 356
Distributions received on affiliated
limited partnership interests and
other investments - 1,269
-------- --------
Net cash provided by investing
activities $ 2,322 $ 7,285
-------- --------
<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,
--------------------
1998 1997
-------- --------
Cash flows from financing activities
Proceeds from new borrowings $ 513 $ 2,625
Repayment of indebtedness (3,300) (8,328)
Payments related to debt tender offer (296) -
Payments on subordinated debentures - (334)
Payments on guaranteed indebtedness - (115)
-------- --------
Net cash (used in) financing activities (3,083) (6,152)
-------- --------
Net increase in cash 96 100
Cash - beginning of period 496 355
-------- --------
Cash - end of period $ 592 $ 455
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest,
excluding amounts paid on underlying loans $ 224 $ 488
======== ========
Cash paid for income taxes $ 10 $ 11
======== ========
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
nine months ended September 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 nine months ended September 30, 1997 have been
reclassified to conform to the three and nine months ended September 30,
1998 presentation. For further information, refer to the consolidated
financial statements and the accompanying notes included in DVL's Annual
Report on Form 10-K for the year ended December 31, 1997.
(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 required by
the NPM Loan (as defined in Note 2 herein), 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.
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 that partnership's
property which resulted in net proceeds of approximately $619,000 to DVL in
satisfaction of the partnership's mortgage indebtedness. During the second
quarter of 1998, DVL, as the general partner of a certain limited
partnership, negotiated the sale of that partnership's property which
resulted in net proceeds of approximately $500,000 to DVL in satisfaction
of the partnership's mortgage indebtedness. During the third quarter of
1998, DVL, as the general partner of three separate limited partnerships,
8
negotiated the sale of these partnerships' properties which resulted in
aggregate net proceeds of $1,125,000 to DVL in satisfaction of the
partnerships' mortgage indebtedness. All of the proceeds from the sales
were paid to NPM and other creditors and were applied to interest and
principal on their loans.
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 affiliated limited
partnerships for which it also serves as general partner. The total
payment, including principal and accrued interest, was $227,111.
During the third quarter of 1998, DVL refinanced a mortgage obligation
which generated approximately $40,000 of cash proceeds in excess of the
underlying mortgage loan. These proceeds were paid to NPM and were applied
to interest and principal on its loan.
In April, July and October of 1998, NPM advanced to DVL the aggregate
sum of $262,500 to fund three quarterly payments to another 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".
3. Note Payable - Litigation Settlement/Debt Tender Offer
In December 1995, DVL issued notes (the "Notes") in the aggregate
principal amount of $10,386,851 as a series in conjunction with the
settlement agreed upon in the DVL stockholder class action matter entitled
IN RE DEL-VAL FINANCIAL CORP. SECURITIES LITIGATION. The Notes, which are
general unsecured obligations of DVL, accrue interest at the rate of ten
(10%) percent per annum, with principal under the Notes, together with all
accrued and unpaid interest thereunder, due on December 31, 2005. Pursuant
to the terms of the Notes, accrued and unpaid interest payable on any of the
first five anniversary dates following the issuance of the Notes is payable,
at the option of DVL, by the issuance of similar additional Notes with a
principal amount equal to the accrued and unpaid interest obligation then
due. On the two anniversary dates following the issuance of the Notes, the
Company satisfied its interest obligations thereunder by issuing such
additional Notes in lieu of the payment of any cash. The Company currently
intends to issue additional Notes, rather than make payments in cash, to
satisfy its interest obligations under the Notes.
9
At any time after January 1, 1999, DVL may satisfy principal and
interest obligations under the Notes by issuing, in lieu of the payment of
cash, shares of its Common Stock with a then current market value equal to
110% of the principal and/or interest obligation in question. In addition,
after January 1, 1999, DVL may redeem the Notes in whole by issuing shares
of its Common Stock with a current market value as of the date of notice of
redemption equal to 110% of the face value of the Notes plus any accrued and
unpaid interest thereon. It is therefore not possible to ascertain
currently the precise number of shares of Common Stock that would be issued
by DVL upon redemption of the Notes. DVL currently intends to exercise its
redemption option and issue to noteholders shares of DVL's Common Stock, in
lieu of the payment of any cash, in exchange for the Notes.
From October 27, 1997 through February 27, 1998 (the "Expiration
Date"), the Company conducted a cash tender offer (the "Offer") for the
Notes at a price of $.12 per $1.00 principal amount of Notes. 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 (as defined 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 face
amount of Notes were outstanding at the Expiration Date. The outstanding
Notes include those purchased by the Lender.
The Offer effected a reduction in DVL'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 (the "BC Loan") 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 the
Expiration Date. There were no additional borrowings subsequent to the
Expiration Date. As further consideration for the Lender's providing DVL
with the BC Loan, DVL issued to the Lender 653,000 shares of Common Stock.
The BC Loan matures on September 30, 2002 and bears interest at the rate of
12% per annum. The effective rate to DVL for financial reporting purposes,
including DVL's costs associated with the BC Loan, and the value of the
653,000 shares issued to the Lender is approximately 15%. Interest payable
in connection with the BC Loan will be payable in the form of the issuance
of additional notes until DVL satisfies all of its obligations owing to NPM
and NPO Management LLC ("NPO"). 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 BC Loan.
10
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
for $350,000 filed against it in said Court. Vanguard voluntarily dismissed
its action against DVL without prejudice. On March 22, 1996, the investor
in the underlying matter against VANGUARD filed, 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.
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 partners 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.
(B) In June and July 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.
11
As previously reported in DVL's Annual 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. Lease
In August, 1998, DVL entered into a lease of premises comprising 5,679
square feet at 70 East 55th Street, New York, New York. DVL anticipates it
will move its corporate headquarters from their current location in Bogota,
New Jersey to the new space in November of 1998.
12
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This September 30, 1998, Quarterly Report on Form 10-Q contains
statements which constitute forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. Those statements
include statements regarding the intent, belief or current expectations of
DVL and its management team. DVL's stockholders and prospective investors
are cautioned that any such forward-looking statements are not guarantees
of future performance and involve risks and uncertainties, and that actual
results may differ materially from those projected in the forward-looking
statements. Such risks and uncertainties include, among other things,
general economic conditions and other risks and uncertainties that are
discussed, herein.
Results of Operations
- ---------------------
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
- ----------------------------------------------------------------------------
DVL had operating losses in the third quarter of 1998 of $101,000, as
compared to the third quarter loss in 1997 of $755,000.
Interest income on mortgage loans made to 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.
During the third quarter of 1998, DVL was paid aggregate proceeds of
$1,125,000 as full satisfaction on three of its mortgage loans. This amount
was $173,000 greater than its net carrying value which resulted in a gain
on satisfaction of mortgage loans.
13
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 refinancings of underlying mortgages, 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 $40,000 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.
Other income increased in 1998 from 1997, primarily due to the
performance by DVL of certain financial, consulting and other administrative
services to related entities.
General and administrative expense ("G&A") decreased in 1998 as compared
to 1997 primarily due to a reduction in service fees paid to agencies for
new employee hires. Legal and professional fees in 1998 were lower than
1997, as a result of the settlement of substantially all of DVL's
litigation.
Interest expense in 1998 increased from 1997 (exclusive of interest on
notes issued in the settlement of the shareholder litigation) due to the
accelerated amortization of financing costs associated with significant
paydowns and settlements of long-term debt obligations. Despite the lower
amount of interest costs incurred on lower outstanding debt obligations,
there was an increase in the amortization of financing costs as they are
written off in the same ratio as loan payoffs. 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.
14
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
- ---------------------------------------------------------------------------
DVL had operating losses in the nine months ended September 30, 1998 of
$492,000, as compared to the nine months ended September 30, 1997 loss of
$2,119,000.
DVL realized a net loss of $290,000 for the nine months ended September
30, 1998, compared to a net loss of $1,015,000 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 made to 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.
During the third quarter of 1998, DVL was paid aggregate proceeds of
$1,125,000 as full satisfaction on three of its mortgage loans. This amount
was $173,000 greater than its net carrying value which resulted in a gain
on the satisfaction of mortgage loans.
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 refinancings of underlying mortgages, 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 $139,000 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.
15
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.
Other income from others increased in 1998 from 1997, primarily due to
the performance by DVL of certain financial, consulting, and other
administrative services to related entities.
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 nine months ended
September 30, 1998, DVL has reflected a recovery in the provision for losses
of $152,000.
General and administrative expense ("G&A") decreased in 1998 as compared
to 1997 primarily due to reductions in consulting costs, as well as service
fees paid to agencies for new employee hires. Legal and professional fees
in 1998 were lower than 1997, as a result of the settlement of substantially
all of DVL's litigation.
Interest expense in 1998 declined from 1997 due to paydowns and
settlements of long-term debt obligations. The decrease in interest costs
incurred on lower outstanding debt obligations was partially offset by the
accelerated amortization of financing costs associated with significant
paydowns and settlements of long-term debt obligations. Financing costs are
written off in the same ratio as loan payoffs. 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.
16
LIQUIDITY AND CAPITAL RESOURCES
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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 (as defined below) based
on the collateral interest in said mortgages held by NPM Capital LLC
("NPM"), and by certain other creditors.
DVL entered into a financing arrangement (the "BC Loan") 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 the
Expiration Date. There were no additional borrowings subsequent to the
Expiration Date. As further consideration for the Lender's providing DVL
with the BC Loan, DVL issued to the Lender 653,000 shares of Common Stock.
The BC Loan matures on September 30, 2002 and bears interest at the rate of
12% per annum. The effective rate to DVL for financial reporting purposes,
including DVL's costs associated with the BC Loan, and the value of the
653,000 shares issued to the Lender is approximately 15%. Interest payable
in connection with the BC Loan will be payable in the form of the issuance
of additional notes until DVL satisfies all of its obligations owing to NPM
and NPO Management LLC ("NPO"). 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 BC Loan.
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. 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.
17
In April, July and October of 1998, NPM advanced to DVL the aggregate
sum of $262,500 to fund three 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".
Impact of Year 2000
- -------------------
Until recently, computer programs were generally written using two
digits rather than four to define the applicable year. Accordingly, such
programs may be unable to distinguish properly between the Year 1900 and the
Year 2000. DVL's internal computing systems are primarily limited to
hardware and software for its financial systems, such as general ledger and
accounts receivable and payable systems. DVL is not dependent on large
legacy systems and does not use mainframes.
DVL's management has conducted an assessment of DVL's operations from
an internal, vendor and customer perspective. The assessment addresses all
of DVL's material computer systems, applications and any other material
systems that DVL believes may be vulnerable to the Year 2000 Issue and
significantly affect operations. This assessment includes seeking
information from certain material vendors which provide certain external
services to DVL although DVL cannot control whether or the manner in which
such services will be provided. In addition, DVL's assessment includes
assessing whether its significant customers are Year 2000 compliant or will
be Year 2000 compliant prior to Year 2000. DVL believes that its internal
computer systems are currently Year 2000 compliant. To date, the cost of
DVL's Year 2000 assessment and compliance efforts has not been material to
DVL's results of operations or liquidity and DVL does not anticipate that
the cost of completing its assessment and compliance project will be
material to its results of operations or liquidity. Any costs associated
with addressing Year 2000 Issues will be expensed as incurred.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(A) Exhibits:
10.1 - Agreement of Sublease between
Barclays Bank PLC and DVL, Inc.
10.2 - Consent To Sublease
27 - Financial Data Schedule
(B) There were no reports on Form 8-K filed during the three months
ended September 30, 1998.
18
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:
_____________________________
Gary Flicker, Vice President
and Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
November 12, 1998
19
EXHIBIT INDEX
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10.1 - Agreement of Sublease between
Barclays Bank PLC and DVL, Inc.
10.2 - Consent To Sublease
27 - Financial Data Schedule
20