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, 1999
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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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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, 1999
- ----------------------------- --------------------------------
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, 1999 (unaudited) and December 31, 1998 1-2
Consolidated Statements of Operations -
Three Months Ended September 30, 1999 (unaudited)
and 1998 (unaudited) 3
Nine Months Ended September 30, 1999 (unaudited)
and 1998 (unaudited) 4
Consolidated Statement of Shareholders' Equity for
the nine months ended September 30, 1999 (unaudited) 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 (unaudited)
and 1998 (unaudited) 6-7
Notes to Consolidated Financial Statements (unaudited) 8-11
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-18
Part II. Other Information:
Item 6 - Exhibits and Reports on Form 8-K 18
Signatures 18
Exhibit Index 19
Part I - Financial Information
Item 1. Financial Statements
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
1999 1998
------------- ------------
ASSETS (unaudited)
- ------
Loans receivable (including amounts maturing
after one year)
Affiliates:
Mortgages due from affiliated partnerships
(net of underlying liens of $29,572 and
$38,517, respectively) $ 21,303 $ 26,323
Unearned interest (5,810) (7,944)
-------- --------
Net mortgage loans receivable from affiliated
partnerships 15,493 18,379
Others:
Non-performing loans collateralized by limited
partnership interests 851 894
Due from affiliated partnerships 23 431
-------- --------
Total loans receivable 16,367 19,704
Allowance for loan losses 7,454 8,435
-------- --------
Net loans receivable 8,913 11,269
Cash (including restricted cash of $77 for 1999
and 1998) 1,125 392
Investments
Real estate at cost (net of allowance for loss of
$0 and $208 for 1999 and 1998, respectively) 494 704
Real estate lease interests 1,384 1,489
Affiliated limited partnerships (net of allowance
for loss of $927 and $1,051, respectively) 1,294 1,449
Other investments (net of allowance for loss of
$400 for 1999 and 1998) 648 648
Prepaid financing and other assets 683 1,040
-------- --------
Total assets $ 14,541 $ 16,991
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
1
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
September 30, December 31,
1999 1998
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited)
- ------------------------------------
Liabilities:
Long-term debt - NPM Capital LLC $ - $ 3,921
Long-term debt - Blackacre Bridge Capital, LLC 1,812 1,207
Long-term debt - Other 397 663
Long-term debt - Notes payable - litigation
settlement 2,894 4,146
Asset Service Fee Payable - NPO 2,020 1,714
Accounts payable, security deposits and
accrued liabilities 358 565
Deferred income 113 -
-------- --------
Total liabilities 7,594 12,216
-------- --------
Commitments and contingencies - -
Shareholders' equity:
Preferred stock $10.00 par value, authorized -
100 shares, issued 100 shares at September 30,
1999 and December 31, 1998 1 1
Common stock, $.01 par value, authorized -
40,000,000 shares, issued and outstanding -
16,560,450, at September 30, 1999 and
December 31, 1998 166 166
Additional paid-in capital 95,288 95,288
Deficit (88,508) (90,680)
-------- --------
Total shareholders' equity 6,947 4,775
-------- --------
Total liabilities and shareholders' equity $ 14,541 $ 16,991
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
2
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
(unaudited)
Three Months Ended
September 30,
-----------------------
1999 1998
---------- ----------
Income from affiliates:
Interest on mortgage loans $ 231 $ 300
Gain on satisfaction of mortgage loans - 173
Partnership management fees 87 85
Transaction and other fees from partnerships 97 169
Distributions from investments 20 40
Rent and other income 2 10
Income from others
Rent income 173 72
Distributions from investments 34 31
Management fees 144 24
Other income and interest 10 12
---------- ----------
798 916
---------- ----------
Operating expenses
Recovery of provision for losses (33) (21)
General and administrative 257 293
Asset servicing fee - NPO Management LLC 150 150
Legal and professional fees 111 30
Interest expense
NPM Capital LLC - 285
Blackacre Bridge Capital, LLC 54 41
Litigation Settlement Notes 116 149
NPO 73 53
Others 28 37
---------- ----------
756 1,017
---------- ----------
Operating income (loss) before extraordinary gain 42 (101)
Extraordinary gain on the settlements of
indebtedness 25 -
---------- ----------
Net income (loss) $ 67 $ (101)
========== ==========
Basic earnings (loss) per share:
Income (loss) before extraordinary gain $ .00 $ (.01)
Extraordinary gain .00 -
---------- ----------
Net income (loss) $ .00 $ (.01)
========== ==========
Diluted earnings (loss) per share:
Income (loss) before extraordinary gain $ .00 $ (.01)
Extraordinary gain .00 -
---------- ----------
Net income (loss) $ .00 $ (.01)
========== ==========
Weighted average shares outstanding - basic 16,560,450 16,426,554
Effect of dilutive securities 47,609,919 -0-
---------- ----------
Weighted average shares outstanding - diluted 64,170,369 16,426,554
========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
3
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
(unaudited)
Nine Months Ended
September 30,
-----------------------
1999 1998
---------- ----------
Income from affiliates:
Interest on mortgage loans $ 821 $ 818
Gain on satisfaction of mortgage loans 1,581 173
Partnership management fees 302 272
Transaction and other fees from partnerships 440 493
Distributions from investments 97 139
Rent and other income 15 27
Income from others
Rent income 432 219
Distributions from investments 34 31
Management fees 192 47
Other income and interest 79 50
---------- ----------
3,993 2,269
---------- ----------
Operating expenses
Recovery of provision for losses (33) (152)
General and administrative 956 867
Asset servicing fee - NPO Management LLC 450 450
Legal and professional fees 211 93
Interest expense
NPM Capital LLC 665 677
Blackacre Bridge Capital, LLC 189 120
Litigation Settlement Notes 361 429
NPO 207 134
Others 73 143
---------- ----------
3,079 2,761
---------- ----------
Operating income (loss) before extraordinary gain 914 (492)
Extraordinary gain on the settlements of
indebtedness 1,258 202
---------- ----------
Net income (loss) $ 2,172 $ (290)
========== ==========
Basic earnings (loss) per share:
Income (loss) before extraordinary gain $ .05 $ (.03)
Extraordinary gain .08 .01
---------- ----------
Net income (loss) $ .13 $ (.02)
========== ==========
Diluted earnings (loss) per share:
Income (loss) before extraordinary gain $ .01 $ (.03)
Extraordinary gain .02 .01
---------- ----------
Net income (loss) $ .03 $ (.02)
========== ==========
Weighted average shares outstanding - basic 16,560,450 16,426,554
Effect of dilutive securities 47,609,919 -0-
---------- ----------
Weighted average shares outstanding - diluted 64,170,369 16,426,554
========== ==========
<FN>
See 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 Equity
Shares Amount Shares Amount capital (Deficit) Total
-------- ------ ----------- -------- ---------- --------- --------
Balance-January 1, 1999 100 $ 1 16,560,450 $ 166 $ 95,288 $(90,680) $ 4,775
Net income - - - - - 2,172 2,172
-------- ------ ---------- ------- -------- -------- -------
Balance-September 30, 1999 100 $ 1 16,560,450 $ 166 $ 95,288 $(88,508) $ 6,947
======== ====== ========== ======= ======== ======== =======
<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,
---------------------
1999 1998
-------- --------
Cash flows from operating activities
Income (loss) before extraordinary gain $ 914 $ (492)
Adjustments to reconcile net income (loss)
before extraordinary gain to net cash
provided by operating activities
Recovery of provision for losses (33) (152)
Accrued interest added to indebtedness 191 338
Gain on satisfaction of mortgage loans (1,581) -
Amortization of unearned interest on
loans receivable (68) 35
Amortization of real estate lease interests 105 102
Amortization of debt discount 234 109
Amortization of deferred charges - (40)
Imputed interest on notes 360 429
Net decrease in due from affiliated
partnerships 408 11
Net decrease in real estate 210 -
Net decrease in other assets 357 158
Net (decrease) in accounts payable and
accrued liabilities (207) (389)
Net increase in asset service fee - NPO 306 579
Net increase in deferred income 113 169
-------- --------
Net cash provided by operating
activities 1,309 857
-------- --------
Cash flows from investing activities
Collections on loans receivable (net of
payments on underlying loans) 3,629 2,345
Net decrease (increase) in affiliated
limited partnership interests and
other investments 156 (23)
-------- --------
Net cash provided by investing
activities $ 3,785 $ 2,322
-------- --------
<FN>
See 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,
--------------------
1999 1998
-------- --------
Cash flows from financing activities
Proceeds from new borrowings $ 588 $ 513
Repayment of indebtedness (4,595) (3,300)
Payments related to debt tender offer (354) (296)
-------- --------
Net cash (used in) financing activities (4,361) (3,083)
-------- --------
Net increase in cash 733 96
Cash - beginning of period 392 496
-------- --------
Cash - end of period $ 1,125 $ 592
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest,
excluding amounts paid on underlying loans $ 95 $ 224
======== ========
Cash paid for income taxes $ 11 $ 10
======== ========
Supplemental disclosure of non-cash
investing and financing activities:
Reduction in accrued liabilities upon
issuance of common stock $ - $ 52
======== ========
Net reduction of Notes Payable -
Litigation Settlement $ 1,258 $ 202
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
7
DVL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation and Financial Condition
In the opinion of DVL, Inc. ("DVL"), the accompanying financial
statements contain all adjustments (consisting of only normal accruals)
necessary in order to present a fair presentation of the financial position
of DVL and the results of its operations for the periods set forth herein.
The results of the Company's operations for the three and nine months ended
September 30, 1999 should not be regarded as indicative of the results that
may be expected from its operations for the full year. Certain amounts from
the three and nine months ended September 30, 1998 have been reclassified to
conform to the presentation for the three and nine months ended September 30,
1999. 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, 1998.
DVL's cash flow generated by its mortgage portfolio (after payments to
lien holders of senior underlying mortgages) was previously used principally
to repay the Company's outstanding loan obligation to NPM Capital LLC ("NPM").
Having repaid the loan to NPM in full as of May 1999, DVL intends to now use
such cash flow to repay DVL's other secured indebtedness. While DVL's cash
flow is still less than its cash requirements, the sums required to be funded
by the liquidation of assets has substantially been reduced over the past
years.
In November 1992, DVL, Kenbee Management, Inc. ("Kenbee"), DVL's former
manager, and the limited partners of certain affiliated partnerships reached
a settlement ("Limited Partner Settlement") of the class action suit by said
limited partners (the "Limited Partner Class Action"). The Limited Partner
Settlement established a settlement fund into which DVL is required to deposit
a portion of its cash flow received from affiliated partnership mortgages and
other loans receivable from affiliated partnerships, as well as a contribution
of 5% of DVL's net income subject to certain adjustments in the years 2001 to
2012.
In order to enable DVL to continue to meet its short term operating
needs, DVL intends to continue to augment its cash flow with additional cash
provided by proceeds from the sale or refinancing of assets and/or borrowings.
2. Loans Receivable/Long Term Debt
During the first quarter of 1999, DVL, as the general partner of three
limited partnerships, negotiated the sale of such partnerships' properties.
The sale resulted in aggregate net proceeds of $1,477,782 to DVL as the holder
of the mortgages on such properties. The aggregate net proceeds received
from the satisfaction of the mortgage loans was $564,000 greater than DVL's
carrying value, which resulted in a gain on satisfaction of mortgages during
the quarter ended March 31, 1999.
During the second quarter of 1999, DVL, as the general partner of four
separate limited partnerships, negotiated the sale of those partnerships'
properties. These sales resulted in the receipt by DVL, as the holder of
mortgages on the four properties, of approximately $2,432,000.
8
One of the four partnerships in the second quarter sold the leasehold
interest in its property to the Opportunity Fund (as defined below) which
resulted in net cash proceeds to DVL as holder of a mortgage of $1,266,000.
In connection with this transaction, DVL sold the land underlying this
property to the Opportunity Fund for $300,000. In connection with the sale,
DVL was retained by the Opportunity Fund to provide management services for
the property on a fee basis.
Sales during the second quarter of 1999 resulted in a gain on
satisfaction of mortgages and the land sale of approximately $1,017,000 of
which $701,000 was attributable to the transaction with the Opportunity Fund.
Substantially all of the net proceeds received by DVL from the
satisfaction of the mortgages in the first and second quarters were paid by
DVL to NPM in payment of principal and accrued interest on the loan to NPM.
These payments along with other payments made by DVL to NPM resulted in the
repayment in full of all outstanding balances owed to NPM by May of 1999.
During 1999, DVL paid an aggregate of $600,000 to NPO Management LLC
("NPO"), as partial payment of the asset service fees which were owed to NPO.
3. Note Payable - Litigation Settlement/Debt Tender Offer
In December 1995, DVL completed its obligations under a settlement of
a class action litigation by its stockholders, IN RE DEL-VAL FINANCIAL CORP.
SECURITIES LITIGATION (the "Stockholder Litigation"). The settlement, which
was approved by the court in 1993, provided that DVL would issue to the
plaintiffs (1) 900,000 shares of DVL common stock at a minimum price of $1.50
per share (or notes to cover any deficiency in the event that aggregate market
value was less than $1,340,000); (2) $9 million face value of notes (the
"Notes") due in ten years, with interest at 10% payable in kind for five
years, callable after the third year and payable in the tenth year in cash or
with DVL common stock equal to 110% of the face value of the notes (valued in
1993 at $3,690,000 by an independent investment banker) and (3) $1.4 million
plus interest at 3% from August 16, 1993 and expenses, payable in cash or DVL
common stock. In December 1995, DVL issued the 900,000 shares of common stock
and as a result of the deficiency in its market value, issued additional Notes
in the face amount of $1,386,351 (valued at $330,000 by DVL). In payment of
the $1.4 million plus interest and expenses, DVL issued 4,017,582 shares of
common stock in December 1995.
The notes were issued in December 1995, in the aggregate principal amount
of $10,386,851. 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 three anniversary dates following
the issuance of the Notes, the Company satisfied its interest obligations
thereunder by issuing such additional Notes in lieu of payment of any cash.
The Company currently intends to issue additional Notes, rather than make
payments in cash (other than in the "Offers" described below), to satisfy its
interest obligations under the Notes.
9
Since January 1, 1999, DVL has had the option to 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. 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 (other than in the
"Offers" described below), in exchange for the Notes. However, it is not
possible to ascertain currently the precise number of shares of Common Stock
that would be issued by DVL upon redemption of the Notes.
From October 27, 1997 through February 27, 1998 (the "First Tender
Expiration Date"), the Company conducted a cash tender offer (the "First
Offer") for the Notes at a price of $0.12 per $1.00 principal amount of the
Notes. The Company purchased and retired a total of $6,224,390 principal
amount of Notes in the First Offer. An additional $392,750 principal amount
of the Notes were purchased by Blackacre Bridge Capital, LLC ("Blackacre"),
an unaffiliated entity, pursuant to the terms of the BC Arrangement (as
defined below). Notes with an aggregate principal amount of $6,277,089
remained outstanding as of December 31, 1998, including those purchased by
Blackacre.
On February 26, 1999, the Company commenced a second cash tender offer
(the "Second Offer", and together with the First Offer, the "Offers") for its
outstanding Notes at a price of $0.12 per $1.00 principal amount of the Notes.
During the period from February 26, 1999 through May 14, 1999, the Company
purchased and retired a total of $2,398,208 principal amount of Notes. In
addition, $423,213 principal amount of the Notes were purchased by Blackacre,
pursuant to the terms of the BC Agreement. Notes with an aggregate principal
amount of $3,878,881 remained outstanding as of September 30, 1999, including
those purchased by Blackacre.
The Offers effected a reduction in the Company's long-term debt and
resulted in an extraordinary gain of $2,906,000 for the year ended December
31, 1997, $202,000 for the quarter ended March 31, 1998, $736,000 for the
quarter ended March 31, 1999, $497,000 for the quarter ended June 30, 1999 and
$25,000 for the quarter ended September 30, 1999. Despite the fact that the
Second Offer ended on May 14, 1999, there were certain reconciling items and
finalizations of certain purchases that resulted in a third quarter gain.
Furthermore, the Offers have reduced the potential dilutive effect on the
Company's current stockholders that would result from redemption of the Notes
for shares of Common Stock. However, given the aggregate principal amount of
Notes which remains outstanding, the potential dilutive effect of such a
redemption is still significant.
In order to fund the acquisition of the Notes and pay the related costs
and expenses, the Company entered into an amended financing arrangement (the
"BC Arrangement") with Blackacre, NPM and NPO as of October 20, 1997, in the
form of a Fourth Amendment to a Loan Agreement between such parties (as
amended, the "Amended Loan Agreement"), permitting the Company to borrow up
to $1,760,000 (the amount actually borrowed by the Company pursuant to the BC
Arrangement is referred to as the "BC Loan"). The BC Loan matures on
September 30, 2002 and bears interest at the rate of 12% per annum. Total
borrowings under the BC Arrangement were $1,560,000 as of September 30, 1999.
In addition, Blackacre is entitled to acquire 15% of all notes acquired by the
Company in excess of $3,998,000 under the same terms and conditions as the
Company. Blackacre acquired notes aggregating $392,750 under these terms from
the First Offer and $423,213 from the Second Offer.
10
As further consideration for Blackacre's providing the Company with the
BC Loan, the Company issued to Blackacre 653,000 shares of Common Stock.
The Company's obligations under the BC Loan are secured by all of the
assets of the Company currently pledged to NPO under the Amended Loan
Agreement and the other documents executed in connection therewith. The BC
Loan is senior to all other indebtedness of the Company other than
indebtedness to NPO and, with respect to individual assets, the related
secured lender. The effective interest rate to the Company for financial
reporting purposes, including the Company's costs associated with the BC Loan,
and the value of the 653,000 shares issued to Blackacre in connection
therewith is approximately 14% per annum. Interest payable in connection with
the BC Loan will be deferred until the Company satisfies all of its
obligations owing to NPO. Thereafter, interest and principal will be paid
from 100% of the proceeds then available to the Company from the mortgage
collateral held as security for the BC Loan.
4. Opportunity Fund
In April 1998, DVL, an affiliate of Blackacre, and affiliates of NPO
entered into a certain Agreement Among Members (the "Opportunity Agreement"),
providing for an arrangement (the "Opportunity Fund"), pursuant to which
entities would be formed, from time to time, to enter into certain
transactions involving the acquisition of limited partnership interests in the
assets of, or mortgage loans to, affiliated limited partnerships or other
assets in which the Company has an interest. These investment opportunities
will be presented to the Opportunity Fund on a first refusal basis, if the
Company, due to financial constraints, is unable to pursue such business
opportunity with its own funds.
The Opportunity Fund is expected to pursue each Opportunity with respect
to which it exercises its right of first refusal through the use of a special
purpose limited liability company. All of the required capital contributions
are to be provided by BCG and the NPO Affiliates. The Company will receive
up to 20% of the profits from an opportunity after BCG and the NPO Affiliates
receive the return of their investment plus preferred returns ranging from 12%
to 20%.
To date, the Opportunity Fund has purchased eight wrap mortgages of
Affiliated Limited Partnerships from unaffiliated third parties (one of which
was purchased in 1999), acquired limited partnership units from unaffiliated
individuals in two Affiliated Limited Partnerships, and acquired a leasehold
interest of a tenant of an Affiliated Limited Partnership. In addition,
during 1999, the Opportunity Fund acquired a property of an Affiliated Limited
Partnership and the land underlying this property from DVL (see Note 2).
11
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The September 30, 1999, 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 and in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
Recent Debt Tender Offers
- -------------------------
From October 27, 1997 through February 27, 1998 (the "First Tender
Expiration Date"), the Company conducted a cash tender offer (the "First
Offer") for the Notes at a price of $0.12 per $1.00 principal amount of the
Notes. The Notes were originally issued in December 1995 in conjunction with
the settlement of a stockholder class action lawsuit. The Company purchased
and retired a total of $6,224,390 principal amount of Notes in the First
Offer. An additional $392,750 principal amount of the Notes were purchased
by Blackacre Bridge Capital, LLC ("Blackacre"), an unaffiliated entity,
pursuant to the terms of the BC Arrangement (as defined below). Notes with
an aggregate principal amount of $6,277,089 remained outstanding as of
December 31, 1998, including those purchased by Blackacre.
On February 26, 1999, the Company commenced a second cash tender offer
(the "Second Offer", and together with the First Offer, the "Offers") for its
outstanding Notes at a price of $0.12 per $1.00 principal amount of the Notes.
During the period from February 26, 1999 through May 14, 1999, the Company
purchased and retired a total of $2,398,208 principal amount of Notes. In
addition, $423,213 principal amount of the Notes were purchased by Blackacre,
pursuant to the terms of the BC Agreement. Notes with an aggregate principal
amount of $3,878,881 remained outstanding as of September 30, 1999, including
those purchased by Blackacre.
The Company has had the option to redeem the outstanding Notes since
January 1, 1999 by issuing additional shares of Common Stock with a then
current market value (determined based on a formula set forth in the Notes),
equal to 110% of the face value of the Notes plus any accrued and unpaid
interest thereon. Because the applicable market value of the Common Stock
will be determined at the time of redemption, it is not possible currently to
ascertain the precise number of shares of Common Stock that may be issued to
redeem the outstanding Notes. The Company currently intends to exercise at
some point in the future its redemption option to the extent it does not buy
back the outstanding Notes by means of cash tender offers.
12
The Offers effected a reduction in the Company's long-term debt and
resulted in an extraordinary gain of $2,906,000 for the year ended December
31, 1997, $202,000 for the quarter ended March 31, 1998, $736,000 for the
quarter ended March 31, 1999, $497,000 for the quarter ended June 30, 1999 and
$25,000 for the quarter ended September 30, 1999. Despite the fact that the
Second Offer ended on May 14, 1999, there were certain reconciling items and
finalizations of certain purchases that resulted in a third quarter gain.
Furthermore, the Offers have reduced the potential dilutive effect on the
Company's current stockholders that would result from redemption of the Notes
for shares of Common Stock. However, given the aggregate principal amount of
Notes which remains outstanding, the potential dilutive effect of such a
redemption is still significant.
In order to fund the acquisition of the Notes and pay the related costs
and expenses, the Company entered into an amended financing arrangement (the
"BC Arrangement") with Blackacre, NPM Capital LLC ("NPM") and NPO Management
LLC ("NPO") as of October 20, 1997, in the form of a Fourth Amendment to a
Loan Agreement between such parties (as amended, the "Amended Loan Agreement),
permitting the Company to borrow up to $1,760,000 (the amount actually
borrowed by the Company pursuant to the BC Arrangement is referred to as the
"BC Loan"). The BC Loan matures on September 30, 2002 and bears interest at
the rate of 12% compounded monthly per annum payable at maturity. Total
borrowings under the BC Arrangement were $1,560,000 as of September 30, 1999.
In addition, Blackacre is entitled to acquire 15% of all notes acquired by the
Company in excess of $3,998,000 under the same terms and conditions as the
Company. Blackacre acquired notes aggregating $392,750 under these terms from
the First Offer and $423,213 from the Second Offer.
As further consideration for Blackacre's providing the Company with the
BC Loan, the Company issued to Blackacre 653,000 shares of Common Stock.
The Company's obligations under the BC Loan are secured by all of the
assets of the Company currently pledged to NPO under the Amended Loan
Agreement and the other documents executed in connection therewith. The BC
Loan is senior to all indebtedness of the Company other than indebtedness to
NPO and, with respect to individual assets, the related secured lender. The
effective interest rate to the Company for financial reporting purposes,
including the Company's costs associated with the BC Loan, and the value of
the 653,000 shares issued to Blackacre in connection therewith is
approximately 14% per annum. Interest payable in connection with the BC Loan
will be deferred until the Company satisfies all of its obligations owing to
NPO. Thereafter, interest and principal will be paid from 100% of the
proceeds then available to the Company from the mortgage collateral held as
security for the BC Loan.
Opportunity Fund
- ----------------
In April 1998, DVL, an affiliate of Blackacre, and affiliates of NPO
entered into a certain Agreement Among Members (the "Opportunity Agreement"),
providing for an arrangement (the "Opportunity Fund"), pursuant to which
entities would be formed, from time to time, to enter into certain
transactions involving the acquisition of limited partnership interests in the
assets of, or mortgage loans to, affiliated limited partnerships or other
assets in which the Company has an interest. These investment opportunities
will be presented to the Opportunity Fund on a first refusal basis, if the
Company, due to financial constraints, is unable to pursue such business
opportunity with its own funds.
13
The Opportunity Fund is expected to pursue each Opportunity with respect
to which it exercises its right of first refusal through the use of a special
purpose limited liability company. All of the required capital contributions
are to be provided by BCG and the NPO Affiliates. The Company will receive
up to 20% of the profits from an opportunity after BCG and the NPO Affiliates
receive the return of their investment plus preferred returns ranging from 12%
to 20%.
To date, the Opportunity Fund has purchased eight wrap mortgages of
Affiliated Limited Partnerships from unaffiliated third parties (one of which
was purchased in 1999), acquired limited partnership units from unaffiliated
individuals in two Affiliated Limited Partnerships, and acquired a leasehold
interest of a tenant of an Affiliated Limited Partnership. In addition,
during 1999, the Opportunity Fund acquired a property of an Affiliated Limited
Partnership and the land underlying this property from DVL (see Note 2 of
Notes to Financial Statements).
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
- ----------------------------------------------------------------------------
DVL realized net income from operations of $42,000 and a net income after
extraordinary gains of $67,000 for the three months ended September 30, 1999,
compared to a net loss, from operations and extraordinary gains, of $101,000
for the three months ended September 30, 1998. Extraordinary gains increased
as a result of increased gains on debt settlements ($25,000 for 1999 compared
to $-0- for 1998).
Interest earned on mortgage loans decreased in 1999 over 1998 as a result
of a decrease in the size of DVL's mortgage portfolio. Transaction fees and
other fees from affiliated limited partnerships decreased in 1999 from 1998.
Transaction fees are earned in connection with the sales of partnership
properties and refinancings of underlying mortgages.
Rental income from others was $173,000 in 1999 as compared to $72,000 in
1998. The primary reason for this increase was the 1998 foreclosure of a
property that secured a DVL mortgage loan receivable, thus transferring
receipts to rental income from mortgage income.
Management fee income from others was $144,000 in 1999 as compared to
$24,000 in 1998. The reason for this increase was the result of a $120,000
incentive management fee earned and paid in the quarter ended September 30,
1999, from an entity that is owned by affiliates of BCG and NPO.
General and administrative expenses ("G&A") decreased from $293,000 to
$257,000 from 1998 to 1999. The decrease in G&A was primarily attributed to
a decrease in salaries and salary related costs. This decrease was partially
offset by higher office costs as a result of DVL's move in November 1998 to
its new corporate headquarters.
Legal and professional fees increased in 1999 from 1998 primarily as a
result of certain one-time costs expended in connection with the collection
of limited partner note delinquencies, as well as higher outside legal
expenditures due to the reduction of in-house legal personnel.
14
Interest expense on the loan to NPM was $0 in 1999 compared to $285,000
in 1998 as a result of the accelerated paydown of the NPM Loan in May 1999.
Interest expense on the NPO asset service fee payable increased in 1999
compared to 1998 due to the continued accrual of the fees and the compounding
of interest. Interest expense on the litigation settlement notes decreased
in 1999 compared to 1998 as a result of DVL having repurchased notes in the
tender offers. Interest expense on the loan from Blackacre increased in 1999
from 1998 due to an additional borrowing of $500,000 in January 1999 for the
Second Offer, as well as the continued accrual of the fees and the compounding
of interest. Interest expense from others decreased in 1999 from 1998,
primarily due to the final paydown of debt to one of DVL's long-term creditors
at the end of 1998.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
- ----------------------------------------------------------------------------
DVL realized net income from operations of $914,000 and a net income after
extraordinary gains of $2,172,000 for the nine months ended September 30,
1999, compared to a net loss, from operations of $492,000 and a net loss after
extraordinary gains, of $290,000 for the nine months ended September 30, 1998.
Extraordinary gains increased as a result of increased gains on debt
settlements ($1,258,000 for 1999 compared to $202,000 for 1998).
Interest on mortgage loans and partnership management fees from affiliated
limited partnerships increased slightly in 1999 over 1998 even though DVL's
mortgage portfolio continued to reduce in size. This increase in interest was
primarily a result of the Company's re-evaluation of several mortgage loans
in its portfolio. Prior to the second quarter of 1998, DVL was not
recognizing interest income on certain loans in its mortgage portfolio.
Interest received on loans was applied to reduce the carrying value of assets.
The Company then determined that no further reductions in carrying value were
appropriate. Therefore, commencing in the second quarter of 1998, interest
income is recognized to the extent of cash payments ratably over the fiscal
year.
Transaction fees and other fees from affiliated limited partnerships
decreased in 1999 from 1998. Transaction fees are earned in connection with
the sales of partnership properties and refinancings of underlying mortgages.
Distributions from investments decreased in 1999 from 1998 primarily due
to the timing of which the Company realized amounts on its investments as a
limited partner.
During 1999, DVL was paid aggregate proceeds of $3,910,000 as full
satisfaction of seven of its mortgage loans. The aggregate net proceeds paid
on the satisfaction of mortgage loans was greater than the net carrying value,
which resulted in a gain of $1,581,000 on the satisfaction of mortgage loans.
During 1998, the gain recognized was $173,000.
Rental income from others was $432,000 in 1999 as compared to $219,000 in
1998. The primary reason for this increase was the 1998 foreclosure of a
property that secured a DVL mortgage loan receivable, thus transferring
receipts to rental income from mortgage income.
15
Management fee income from others was $192,000 in 1999 compared to
$47,000 in 1998. The primary reason for the increase was a $120,000 incentive
management fee earned and paid in the quarter ended September 30, 1999, from
an entity that is owned by affiliates of NPO and BCG.
During 1999 and 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, for 1999
and 1998 DVL has reflected a recovery in the provision for losses of $33,000
and $152,000, respectively.
General and administrative expenses ("G&A") increased from $867,000 to
$956,000 from 1998 to 1999, primarily as a result of DVL's move in November
1998 to its new corporate headquarters. This increase was partially reduced
by a decrease in salaries and salary related costs.
Legal and professional fees increased in 1999 from 1998 primarily as a
result of certain one time costs expended in connection with the collection
of limited partner note delinquencies, as well as higher outside legal
expenditures due to the reduction of in-house legal personnel.
Interest expense on the loan to NPM decreased in 1999 compared to 1998 as
a result of the accelerated paydown of this loan. The financing costs of the
loan, as well as the value of the warrants issued in connection with obtaining
the Loan, are amortized proportionately as the loan is repaid. As the loan
was totally repaid in May of 1999, all remaining costs were amortized in 1999.
Interest expense on the NPO asset service fee payable increased in 1999
compared to 1998 due to the continued accrual of the fees and the compounding
of interest. Interest expense on the litigation settlement notes decreased
in 1999 compared to 1998 as a result of DVL having repurchased notes in the
Tender Offers. Interest expense on the loan from Blackacre increased in 1999
from 1998 due to an additional borrowing of $500,000 in January 1999 for the
Second Offer, as well as the continued accrual of the fees and the compounding
of interest. Interest expense from others decreased in 1999 from 1998,
primarily due to the final paydown of debt to one of DVL's long-term creditors
at the end of 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash flow from operations is generated principally from
rental income from its leasehold interests in real estate, management fees
from the operation of affiliated limited partnerships and transaction and
other fees received as a result of the sale and/or refinancing of partnership
properties and mortgages. The Company's portfolio of loans to affiliated
limited partnerships currently does not produce substantial cash flow from
operations because most of the cash received from the mortgages is used to pay
the debt service on mortgages on the properties senior to those held by the
Company, with any excess being used to pay certain other creditors, including
NPO.
16
As a result of the above factors, the Company continues to experience
liquidity problems, though at a level lower than in prior years. To enable
the Company to meet its short-term operating needs, the Company still needs
to augment its cash flow with the proceeds from the sale or refinancing of
assets and borrowings. NPO has agreed to waive any events of default that may
exist under its servicing agreements due to the deferral of fees through
December 31, 1999 and has further agreed to loan to the Company any amounts
needed for quarterly obligations due to a creditor through January 1, 2000.
As of October 31, 1999, the Company owes approximately $1,845,000 to NPO.
During 1999, the Company paid an aggregate of $600,000 to NPO, as partial
payment of amounts due.
The Company entered into the BC Loan with Blackacre, permitting the
Company to borrow up to $1,760,000 to fund the purchase of Notes, and to pay
related costs and expenses. A total of $1,060,000 had been borrowed as of the
expiration of the First Offer and an additional $500,000 was borrowed as of
May 14, 1999 for the Second Offer. As further consideration for Blackacre's
providing the Company with the BC Loan, the Company issued to Blackacre
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 the
Company for financial reporting purposes, including the Company's costs
associated with the BC Loan, and the value of the 653,000 shares issued to
Blackacre is approximately 14%. Interest payable in connection with the BC
Loan will be payable in the form of the issuance of additional notes until the
Company satisfies all of its obligations owing to NPM and NPO. Thereafter,
interest and principal will be paid from 100% of the proceeds then available
to the Company from the mortgage collateral held as security for the BC Loan.
From January 1998 through April 1999, NPM advanced additional amounts
aggregating $370,000 to DVL to fund quarterly payments to a creditor of the
Company. These advances were not required under the original loan transaction
with NPM, consummated in September 1996 (the "Original Loan"). These advances
bore interest at 15% per annum and were 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 advances, are referred to
in the aggregate herein as the "NPM Loan". In May 1999, DVL paid all
remaining outstanding amounts due on the NPM Loan.
IMPACT OF INFLATION AND CHANGES IN INTEREST RATES
- -------------------------------------------------
The Company's portfolio of mortgage loans made to affiliated limited
partnerships consists primarily of loans made at fixed rates of interest.
Therefore, increases or decreases in market interest rates are generally not
expected to have an effect on the Company's earnings. Other than as a factor
in determining market interest rates, inflation has not had a significant
effect on the Company's net income for the past three years.
YEAR 2000 ISSUE
- ---------------
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.
The Company'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. The Company is not dependent on large legacy
systems and does not use mainframes.
17
The Company's management has conducted an assessment of the Company's
operations from an internal, vendor and customer perspective. The assessment
addressed all of the Company's material computer systems, applications and any
other material systems that the Company believed may be vulnerable to the Year
2000 Issue and significantly affect operations. This assessment included
seeking information from certain material vendors which provide certain
external services to the Company although the Company cannot control whether
or the manner in which such services will be provided. In addition, the
Company's assessment included assessing whether its significant customers are
Year 2000 compliant or will be Year 2000 compliant prior to Year 2000. The
Company believes that its internal computer systems are currently Year 2000
compliant. In addition, the Company believes that, although there can be no
assurance, its material vendors and customers are also Year 2000 compliant.
The cost of the Company's Year 2000 assessment and compliance efforts has not
been material to the Company's results of operations or liquidity and the
Company does not anticipate that the cost of completing its assessment and
compliance project will be material to its results of operations or liquidity.
Costs associated with addressing Year 2000 issues were expensed as incurred.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(A) Exhibits:
11 - Statement RE: Computation of Earnings Per Share
27 - Financial Data Schedule
(B) There were no reports on Form 8-K filed during the three months ended
September 30, 1999.
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, Executive Vice
President and Chief Financial
Officer (Principal Financial and
Chief Accounting Officer)
November 12, 1999
18
EXHIBIT INDEX
-------------
11 - Statement RE: Computation of Earnings Per Share - Three Months
11.1 - Statement RE: Computation of Earnings Per Share - Nine Months
27 - Financial Data Schedule
19