<PAGE>
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 March 31, 1999
-------------------------------------------
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)
70 East 55th Street, New York, New York 10022
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (212) 350-9900
--------------
- ----------------------------------------------------------------------------
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 May 13, 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 -
March 31, 1999 (unaudited) and December 31, 1998 1-2
Consolidated Statements of Operations -
Three Months Ended March 31, 1999 (unaudited)
and 1998 (unaudited) 3
Consolidated Statement of Shareholders' Equity for
the three months ended March 31, 1999 (unaudited) 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 (unaudited)
and 1998 (unaudited) 5-6
Notes to Consolidated Financial Statements (unaudited) 7-11
Item 2 - 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
Signatures 17
Exhibit Index 18
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
1999 1998
------------- ------------
ASSETS (unaudited)
- ------
<S> <C> <C>
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 $35,713 and $38,517, respectively) $ 25,583 $ 26,323
Unearned interest (7,915) (7,944)
-------- --------
Net mortgage loans receivable from affiliated
partnerships 17,668 18,379
Others:
Non-performing loans collateralized by limited
partnership interests due from limited partners 870 894
Due from affiliated partnerships 425 431
-------- --------
Total loans receivable 18,963 19,704
Allowance for loan losses 8,430 8,435
-------- --------
Net loans receivable 10,533 11,269
Cash (including restricted cash of $77 for 1999
and 1998) 631 392
Distributions and fees due from affiliated
partnerships 217 -
Investments
Real estate at cost - pledged (net of an allowance
for loss of $208 for 1999 and 1998) 703 704
Real estate lease interests 1,452 1,489
Affiliated limited partnerships (net of an allowance
for loss of $1,007 and $1,051, respectively) 1,400 1,449
Other investments (net of an allowance for loss
of $400 for 1999 and 1998) 648 648
Prepaid financing and other assets 864 1,040
-------- --------
Total assets $ 16,448 $ 16,991
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
1
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)
March 31, December 31,
1999 1998
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited)
- ------------------------------------
<S> <C> <C>
Liabilities:
Long-term debt - NPM Capital LLC $ 2,602 $ 3,921
Long-term debt - Other 2,327 1,870
Notes payable - litigation settlement 3,346 4,146
Asset Service Fee Payable - NPO 1,931 1,714
Accounts payable, security deposits and
accrued liabilities 497 565
-------- --------
Total liabilities 10,703 12,216
-------- --------
Commitments and contingencies - -
Shareholders' equity:
Preferred stock $10.00 par value, authorized -
100 shares, issued 100 shares at March 31,
1999 and December 31, 1998 1 1
Common stock, $.01 par value, authorized -
40,000,000 shares, issued and outstanding -
16,560,450, at March 31, 1999 and December
31, 1998 166 166
Additional paid-in capital 95,288 95,288
Deficit (89,710) (90,680)
-------- --------
Total shareholders' equity 5,745 4,775
-------- --------
Total liabilities and shareholders' equity $ 16,448 $ 16,991
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
2
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(unaudited)
Three Months Ended
March 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Income from affiliates:
Interest on mortgage loans $ 332 $ 144
Gain on satisfaction of mortgage loans 564 -
Partnership management fees 108 90
Transaction and other fees from partnerships 181 181
Distributions from investments 32 9
Rent and other income 9 10
Income from others
Rent income 120 80
Other interest 3 -
Other income 50 17
---------- ----------
1,399 531
---------- ----------
Operating expenses
Recovery of provision for losses - (131)
General and administrative 380 324
Asset servicing fee - NPO Management LLC 150 150
Legal and professional fees 42 32
Interest expense
NPM Capital LLC 291 156
Litigation Settlement 132 137
NPO 67 37
Others 103 105
---------- ----------
1,165 810
---------- ----------
Operating income (loss) before extraordinary gain 234 (279)
Extraordinary gain on the settlements of
indebtedness 736 202
---------- ----------
Net income (loss) $ 970 $ (77)
========== ==========
Basic earnings (loss) per share:
Income (loss) before extraordinary gain $ .01 $ (.02)
Extraordinary gain .04 .01
---------- ----------
Net income (loss) $ .05 $ (.01)
========== ==========
Diluted earnings (loss) per share:
Income (loss) before extraordinary gain $ .00 $ (.02)
Extraordinary gain .01 .01
---------- ----------
Net income (loss) $ .01 $ (.01)
========== ==========
Weighted average shares outstanding - basic 16,560,450 16,262,105
Effect of dilutive securities 58,456,127 -0-
---------- ----------
Weighted average shares outstanding - diluted 75,016,577 16,262,105
========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
3
<TABLE>
<CAPTION>
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
-------- ------ ----------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance-January 1, 1999 100 $ 1 16,560,450 $ 166 $ 95,288 $(90,680) $ 4,775
Net income - - - - - 970 970
-------- ------ ---------- ------- -------- -------- -------
Balance-March 31, 1999 100 $ 1 16,560,450 $ 166 $ 95,288 $(89,710) $ 5,745
======== ====== ========== ======= ======== ======== =======
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
4
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities
Income (loss) before extraordinary gain $ 234 $ (279)
Adjustments to reconcile net income (loss)
before extraordinary gain to net cash
provided by (used in) operating activities
Recovery of provision for losses - (131)
Accrued interest added to indebtedness 79 89
Gain on satisfaction of mortgage loans (564) -
Amortization of unearned interest on
loans receivable (29) 30
Amortization of real estate lease interests 37 34
Amortization of debt discount 82 26
Amortization of deferred charges - (15)
Imputed interest on notes and debentures 132 137
Net decrease in other assets 177 54
Net (decrease) in accounts payable and
accrued liabilities (68) (106)
Net increase in asset service fee - NPO 217 187
Net decrease (increase) in due from
affiliated partners 6 (153)
Net (increase) in distributions and fees
due from affiliated partnerships (217) -
-------- --------
Net cash provided by (used in)
operating activities 86 (127)
-------- --------
Cash flows from investing activities
Collections on loans receivable (net of
payments on underlying loans) 1,323 762
Distributions received on affiliated
limited partnership interests and
other investments 49 -
-------- --------
Net cash provided by investing
activities $ 1,372 $ 762
-------- --------
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
5
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
(continued)
Three Months Ended
March 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from financing activities
Proceeds from new borrowings $ 588 $ 338
Repayment of indebtedness (1,611) (774)
Payments related to debt tender offer (196) (273)
-------- --------
Net cash (used in) financing activities (1,219) (709)
-------- --------
Net increase (decrease) in cash 239 (74)
Cash - beginning of period 392 496
-------- --------
Cash - end of period $ 631 $ 422
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest,
excluding amounts paid on underlying loans $ 76 $ 73
======== ========
Supplemental disclosure of non-cash
investing and financing activities:
Reduction in accrued liabilities upon
issuance of common stock $ - $ 52
======== ========
Net reduction of Notes Payable - Debt
Tender Offer $ 736 $ 202
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
6
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 months ended March 31,
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 months
ended March 31, 1998 have been reclassified to conform to the presentation for
the three months ended March 31, 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.
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. Simultaneously with the settlement of the Limited Partner Class Action,
DVL also reached settlements with a number of its creditors providing for the
restructuring of a substantial portion of DVL's defaulted indebtedness and
loan guarantees.
DVL's limited cash flow generated by its restructured mortgage portfolio
is currently used to pay liens senior to those held by DVL, and any excess
cash is used to fund principal and interest payments on the NPM Loan (as
hereinafter defined), based on the collateral interest of NPM Capital LLC 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 cash
flow deficiency. Thus, NPO has agreed to defer amounts due from their
management agreement through December 31, 1999, unless DVL has sufficient cash
to fund its operations through that date.
DVL has implemented significant measures to reduce its operating
expenses. However, 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
separate limited partnerships, negotiated the sale of said partnerships'
properties which resulted in aggregate net proceeds of $1,477,782 to DVL,
after satisfaction of the partnerships' mortgage indebtedness. All such
proceeds from the sales were paid to NPM and were applied to interest and
7
principal on the NPM Loan. The aggregate net proceeds received from the
satisfaction of mortgage loans was $564,000 greater than the carrying value,
which resulted in a gain on satisfaction of mortgage loans during the quarter
ended March 31, 1999.
In January 1999, NPM advanced to DVL $87,500 to fund a quarterly payment
to another DVL creditor. From January 1998 through March 1999, the aggregate
of such NPM advances were $370,000. 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 all additional NPM advances, are
referred to in the aggregate herein as the "NPM Loan". In April and May 1999,
DVL paid $2,740,000 to NPM in full satisfaction of the amounts due on the NPM
Loan (see Subsequent Events).
3. Note Payable - Litigation Settlement/Debt Tender Offer
In December 1995, DVL completed its obligations under a 1993 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 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 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 with the same
terms, 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.
In conjunction with the settlement of said Stockholder Litigation, DVL
issued notes (the "Notes"), in December 1995, in the aggregate principal
amount of $10,386,851 as a series. 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.
8
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. 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 (other than in the
"Offers" described below), in exchange for 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 its outstanding 10% Redeemable Promissory Notes due December 31,
2005 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 ($5,818,540 through December 31, 1997, and an additional $405,850
through the First Tender Expiration Date). 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.
The Second Offer currently expires on May 14, 1999, unless the Second Offer
is extended by the Company. During the period from February 26, 1999 through
March 31, 1999, the Company purchased and retired a total of $1,410,564
principal amount of Notes in the Second Offer. In addition, $211,585
principal amount of the Notes will be purchased by Blackacre, pursuant to the
terms of the BC Agreement. Notes with an aggregate principal amount of
$5,078,110 remained outstanding as of March 31, 1999, including those to be
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 and $736,000 for the
quarter ended March 31, 1999. 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 and the NPM Parties 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 March 31, 1999.
In addition, Blackacre is entitled to acquire 15% of all notes acquired by the
9
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. In addition, $211,585 will be purchased by Blackacre for
Notes tendered from the Second Offer, through March 31, 1999.
As further consideration for Blackacre's providing the Company with the
BC Loan, the Company (i) upon the execution of the Amended Loan Agreement
issued to Blackacre 325,000 shares of Common Stock, and (ii) issued to
Blackacre, at the First Tender Expiration Date, 328,000 additional shares of
Common Stock, based on a formula contained in the Amended Loan Agreement.
The Company's obligations under the BC Loan are secured by all of the
assets of the Company currently pledged to the NPM Parties 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 the NPM Parties and, with respect to individual assets, the related secured
lender. 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 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
the NPM Parties. 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"),
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 loan 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%.
The transactions in which the Opportunity Fund may engage include, for
example, acquisition of partnership interests from existing limited partners
of affiliated limited partnerships, and investment in certain properties owned
by the Company of such partnerships, where capital may be required to enhance
value but is not currently available to the Company. There can be no
assurance that the Opportunity Fund's activities will generate profit
distributions to the Company.
10
5. Subsequent Events
In April and May 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 holder of mortgages on the four
properties, of approximately $2,432,000. From the $2,432,000, approximately
$2,300,000 was paid by DVL to NPM in payment of principal and accrued interest
on the NPM Loan, in accordance with the terms thereof.
One of the partnership properties was sold to the Opportunity Fund which
resulted in net cash proceeds of $1,266,000 to DVL which were used by DVL to
fully satisfy its mortgage. As part of this transaction, DVL sold land
underlying this property to the Opportunity Fund for $300,000. In connection
with the sale, DVL was retained by the Opportunity Fund to manage the property
on a fee basis.
The aggregate net proceeds received from the satisfaction of the four
mortgage loans and the land sale, was greater than DVL's carrying value, which
will result in a gain of approximately $1,040,000 during the second quarter
of 1999, of which $693,000 was attributable to the transaction with the
Opportunity Fund.
The $2,300,000 paid by DVL to NPM described above and additional payments
of $440,000 made in April and May received by DVL as additional debt service
from tenant percentage rent payments, fully satisfied all obligations to NPM,
DVL's largest creditor, under the NPM Loan.
In April 1999, DVL paid $300,000 to NPO, as partial payment of the asset
service fees which were owed to NPO.
11
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This March 31, 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.
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 its outstanding 10% Redeemable Promissory Notes due December 31,
2005 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 ($5,818,540 through
December 31, 1997, and an additional $405,850 through the First Tender
Expiration Date). 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.
The Second Offer currently expires on May 14, 1999, unless the Second Offer
is extended by the Company. During the period February 26, 1999 through March
31, 1999, the Company purchased and retired a total of $1,410,564 principal
amount of Notes in the Second Offer. In addition, $211,585 principal amount
of the Notes will be purchased by Blackacre, pursuant to the terms of the BC
Agreement. Notes with an aggregate principal amount of $5,078,110 remained
outstanding as of March 31, 1999, including those to be 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
12
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.
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 and $736,000 for the
quarter ended March 31, 1999. 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 and the NPM Parties 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, including $500,000 borrowed for the Second Offer as of March 15,
1999, payable at maturity. 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. In addition, $211,585 will
be purchase by Blackacre for Notes tendered, from the Second Offer, through
March 31, 1999.
As further consideration for Blackacre's providing the Company with the
BC Loan, the Company (i) upon the execution of the Amended Loan Agreement
issued to Blackacre 325,000 shares of Common Stock and (ii) issued to
Blackacre, at the First Tender Expiration Date, 328,000 additional shares of
Common Stock, based on a formula contained in the Amended Loan Agreement.
The Company's obligations under the BC Loan are secured by all of the
assets of the Company currently pledged to the NPM Parties 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 the NPM Parties and, with respect to individual assets, the related secured
lender. 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 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
the NPM Parties. 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.
13
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
- ----------------------------------------------------------------------------
DVL realized net income, after extraordinary gains, of $970,000 for the
three months ended March 31, 1999, compared to a net loss, after extraordinary
gains, of $77,000 for the three month ended March 31, 1998. Extraordinary
gains increased as a result of increased gains on debt settlements, to
$736,000 for 1999 compared to $202,000 for 1998. The net income from
operations in 1999 was $234,000 before extraordinary gains as compared to a
net loss before extraordinary gains in 1998 of $279,000.
Interest on mortgage loans and partnership management fees from affiliated
limited partnerships increased in 1999 over 1998 even though DVL's mortgage
portfolio and number of affiliated limited partnerships had continued to
reduce in size. This increase 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 on loans was applied to reduce the carrying
value of assets, to the extent of cash payments received. The Company then
determined that no further reductions in carrying value were 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.
Transaction fees and other fees from affiliated limited partnerships remained
constant in 1999 from 1998. Transaction fees are earned in connection with
the sales of partnership properties and refinancings of underlying mortgages.
During the first quarter in 1999, DVL was paid aggregate proceeds of
$1,477,782 as full satisfaction of three of its mortgage loans. The aggregate
net proceeds paid on the satisfaction of mortgage loans was $564,000 greater
than the net carrying value, which resulted in a gain on the satisfaction of
mortgage loans.
Rental income from others was $120,000 in 1999 as compared to $80,000 in
1998. The primary reason for this increase was a result of the foreclosure
of one of the real estate properties that secured a DVL mortgage loan
receivable in November 1998.
There was no provision (recovery) for losses during the first quarter in
1999 compared to a (recovery) of ($131,000) in the first quarter in 1998.
General and administrative expenses ("G&A") increased from $324,000 to
$380,000 from 1998 to 1999, primarily as a result of DVL's move in November
1998 to its new corporate headquarters.
Interest expense on the NPM Loan was greater in 1999 compared to 1998 as
a result of the accelerated paydown of the NPM Loan. The financing costs of
the loan, as well as the value of the warrants issued in connection with
14
obtaining the Loan, are amortized proportionately as the loan is repaid.
Interest expense on the NPO asset service fee payable increased in 1999
compared to 1998 due to DVL's inability to pay the fee currently and the
compounding of interest. Interest expense on the litigation settlement notes
decreased in 1999 compared to 1998 as a result of DVL's tender offers to
purchase the Notes.
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 principal and interest on the NPM
Loan based on the collateral interest in such mortgages held by NPM and
certain other creditors.
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 continues to
augment its cash flow with the proceeds from the sale or refinancing of assets
and borrowings. There still remains some risk that the Company may not be
able to raise the necessary funds with which to continue operations. NPO has
agreed to waive any events of default that may exist under their 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.
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
March 31, 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 the NPM Parties.
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 March 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
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 advances, are referred to
in the aggregate herein as the NPM Loan. In April and May 1999, DVL paid
$2,740,000 to NPM in full satisfaction of the amounts due on the NPM Loan.
15
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.
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. In
addition, the Company believes that its vendors and customers are also Year
2000 compliant. The Company believes that its internal computer systems are
currently 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 was 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
March 31, 1999.
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)
May 13, 1999
17
EXHIBIT INDEX
-------------
11 - Statement RE: Computation of Earnings Per Share
27 - Financial Data Schedule
18
<TABLE>
<CAPTION>
EXHIBIT 11.
DVL, INC. and Subsidiaries
Computation of Earnings Per Share
(in thousands except share data)
(unaudited)
Three Months Ended
March 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Income (loss) before extraordinary gain $ 234 $ (279)
Extraordinary gain 736 202
---------- ----------
Net income (loss) $ 970 $ (77)
========== ==========
Weighted average number of common
shares outstanding - basic 16,560,450 16,262,105
Shares issuable upon exercise of
dilutive options and warrants 68,233,027 -0-
Less shares assumed repurchased (9,776,900) -0-
---------- ----------
Weighted average number of common
shares outstanding - diluted 75,061,577 16,262,105
========== ==========
Basic earnings (loss) per share:
Income (loss) before extraordinary gain $ .01 $ (.02)
Extraordinary gain .04 .01
---------- ----------
Net income (loss) $ .05 $ (.01)
========== ==========
Diluted earnings (loss) per share:
Income before extraordinary gain $ .00 $ (.02)
Extraordinary gain .01 .01
---------- ----------
Net income (loss) $ .01 $ (.01)
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 631
<SECURITIES> 0
<RECEIVABLES> 18,963
<ALLOWANCES> 8,430
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,448
<CURRENT-LIABILITIES> 0
<BONDS> 8,275
<COMMON> 166
0
1
<OTHER-SE> 5,578
<TOTAL-LIABILITY-AND-EQUITY> 16,448
<SALES> 0
<TOTAL-REVENUES> 1,399
<CGS> 0
<TOTAL-COSTS> 572
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 593
<INCOME-PRETAX> 234
<INCOME-TAX> 0
<INCOME-CONTINUING> 234
<DISCONTINUED> 0
<EXTRAORDINARY> 736
<CHANGES> 0
<NET-INCOME> 970
<EPS-PRIMARY> .05
<EPS-DILUTED> .01
</TABLE>
