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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997, OR
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to _____________
Commission File No. 1-8356
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DVL, INC.
- -------------------------------------------------------------------------------
Exact name of Registrant as specified in its charter)
Delaware 13-2892858
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24 River Road, Bogota, New Jersey 07603
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 487-1300
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
---------------------------- ------------------------------------------
Common Stock, $.01 par value National Association of Securities Dealers
Securities registered pursuant to Section 12(g) of the Act: None
----
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy information statements
incorporated by reference in Part IV of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock of the Registrant held by non-
affiliates as of March 25, 1998 was $2,794,248.
The number of shares outstanding of Common Stock of the Registrant as of March
25, 1998 was 16,560,450.
PART I
ITEM 1. BUSINESS
A. GENERAL DESCRIPTION
-------------------
DVL, Inc. ("DVL" or the "Company"), is a commercial finance company which
manages numerous properties and partnerships and owns and services commercial
mortgage loans all of which are secured by properties for which DVL or an
affiliate serves as general partner. The Common Stock of DVL is traded on the
over-the-counter market and is quoted on the OTC Bulletin Board maintained by
the NASD under the symbol "DVLN". The principal address of DVL is 24 River
Road, P.O. Box 408, Bogota, New Jersey 07603; telephone number: (201) 487-1300.
DVL's business has been to invest in and service mortgage loans to
affiliated partnerships, which loans are secured principally by income-producing
commercial, office and industrial properties. In addition, DVL purchased loans
to limited partners of said partnerships. See "Mortgage Loans and Loans Secured
by Limited Partner Interests". In 1993, pursuant to the settlement of
litigation with limited partners, DVL succeeded to the position of Kenbee
Management, Inc. ("Kenbee"), DVL's former manager as general partner in
substantially all of the affiliated partnerships.
Effective January 1, 1994 DVL revoked its election to be taxed as a real
estate investment trust ("REIT") and elected to be treated as a "Sub-chapter C"
corporation for tax purposes. Management's intent in making this change was to
enable DVL to pursue new business activities which would generate income which
is not qualified as REIT income.
Currently, DVL lacks sufficient cash resources to develop a new business,
and it is therefore focused on (1) managing, administering and servicing its
existing real estate properties, the affiliated partnerships and the mortgages
it holds on such properties, and (2) seeking to sell or refinance the assets of
limited partnerships in those instances where this is deemed the most prudent
means of maximizing the value of the assets.
DVL is the general partner of approximately 100 affiliated limited
partnerships from which it receives management, transaction and other fees. In
addition, through Professional Service Corporation ("PSC"), a wholly-owned
subsidiary, DVL is engaged in the management of certain properties located in
New Jersey pursuant to master lease interests.
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 must continue to augment its cash flow with additional cash provided
by proceeds from the sale or refinancing of assets and/or borrowings.
B. RECENT DEVELOPMENTS
-------------------
1. DEBT TENDER OFFER
-----------------
From October 27, 1997 through February 27, 1998(the "Expiration Date"), the
Company conducted a cash tender offer (the "Offer") for its 10% Redeemable
Promissory Notes due December 31, 2005 (the "Notes") at a price of $.12 per
$1.00 principal amount of Notes. The Notes were originally issued in December
1
1995 in conjunction with the settlement of a shareholder class action. The
Company purchased and retired a total of $6,224,390 principal amount of Notes
in the Offer ($5,818,540 through December 31, 1997, and an additional $405,850
through the Expiration Date). An additional $392,892 principal amount ($322,796
through December 31, 1997, and $70,086 thereafter), representing 15% of the
Notes tendered in excess of $3,998,000, were purchased by the Lender (see below)
based on the Lender's commitment to participate in the Offer to that extent. A
total of $6,166,381 principal amount of Notes remained outstanding as of
December 31, 1997, and $5,760,531 are currently outstanding after taking into
account all tenders through the Expiration Date. The outstanding Notes include
those purchased by the Lender. The amounts stated for purchases after December
31, 1997, and for the Notes currently outstanding, are subject to minor
adjustments based on final reconciliation of data between the depository agent
and the transfer agent for the Offer.
The Company has the option to redeem the outstanding Notes at any time
after 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, and not any cash. Because the applicable market value will
be determined in the future, it is not possible to ascertain currently the
precise number of shares that would be issued in redemption of the Notes. The
Company's present intention is to exercise its redemption option.
The Offer effected a reduction in the Company's long-term debt and
resulted in an extraordinary gain for the year ended December 31, 1997 of
$2,906,000, after costs of $211,000. Furthermore, the Offer 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 is still significant.
DVL entered into a financing arrangement with Blackacre Bridge Capital,
LLC, an unaffiliated entity (the "Lender"), permitting DVL to borrow up to
$1,760,000 (the amount actually borrowed being referred to herein as the "BC
Loan"), 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 subsequently through March 31, 1998. The financing
arrangement was implemented pursuant to an agreement dated as of October 20,
1997 (the "Fourth Amendment") among DVL, the Lender, and the NPM Parties (as
defined below), which amends the Amended and Restated Loan Agreement dated as
of March 27, 1996, as amended, between DVL and NPM Capital LLC (as amended by
the Fourth Amendment, the "Amended Loan Agreement").
Pursuant to the Fourth Amendment, DVL's obligations under the BC Loan are
secured by all of the assets of DVL currently pledged to NPM Capital LLC ("NPM")
and NPO Management LLC ("NPO") under the Amended Loan Agreement and the other
documents executed in connection therewith (NPM and NPO are collectively
referred to as the "NPM Parties"). The BC Loan is senior to all indebtedness
of DVL other than indebtedness owing to the NPM Parties and, with respect to
individual assets, the related secured lender. The 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 (see
below) 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 the NPM Parties. Thereafter, interest
and principal will be paid from 100% of the proceeds then available to DVL from
the mortgage collateral held as security for the BC Loan.
2
As further consideration for the Lender's providing DVL with the BC Loan,
DVL (i) upon the execution of the Fourth Amendment issued to the Lender 325,000
shares of Common Stock and (ii) issued to the Lender, at the Expiration Date of
the Offer, 328,000 additional shares of Common Stock, based on a formula
contained in the Fourth Amendment. For the year ended December 31, 1997, the
Company recorded a cost of $29,000 for the 325,000 shares and accrued a cost of
$52,000 for the 328,000 shares, 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" under applicable regulations.
2. OPPORTUNITY FUND
------------------
The Company, an affiliate of the Lender (the "BC Party") and certain
affiliates of the NPM Parties (the "NPM Affiliates") have agreed in principle
to form a joint venture (the "Opportunity Fund") under the following terms: With
respect to the Company's existing portfolio assets only (the "Existing Assets"),
if the Company, due to then existing financial constraints, is unable to pursue
a favorable business opportunity (an "Opportunity") as to any Existing Asset (as
determined by the Board of Directors of the Company), then the Opportunity Fund
would have the right of first refusal to finance such Opportunity. The
necessary capital contributions would be provided by the BC Party and NPM
Affiliates, who would be entitled to receive, from the proceeds generated from
the Opportunity, a complete return of their investment plus a preferred return
ranging from 12 % to 20% per annum. It is currently anticipated that the BC
Party, the NPM Affiliates and the Company would receive, after the preferred
return, 60%, 20% and 20%, respectively, of any profits from the Opportunity.
The NPM Affiliates would receive from the Fund, out of the proceeds generated
from Opportunities, an aggregate annual fee of $100,000 in consideration for
management services, of which $20,000 would be credited against the annual
servicing fee payable by the Company to NPO pursuant to the Servicing Agreement
(see below).
The transactions in which the Opportunity Fund might engage include, for
example, acquisition of partnership interests from existing limited partners of
affiliated partners, and investment in certain properties, owned by the Company
or said partnerships, where capital may be required to enhance value. There can
be no assurance that the Fund's activities would generate profit distributions
to the Company.
C. NPM AND NPO TRANSACTIONS
------------------------
As previously reported in the Report on Form 10-K for the fiscal year ended
December 31, 1996, to better enable DVL to resolve its liquidity problems and
to meet certain mandatory debt repayment requirements, on September 27, 1996,
DVL and NPM closed a loan transaction under a certain Amended and Restated Loan
Agreement dated as of March 27, 1996 (the "Original Loan Agreement"), pursuant
to which NPM purchased three loans from three creditors, and agreed to make
principal installment payments of up to $600,000 on DVL's obligation to two
additional creditors. NPM has fulfilled this additional funding obligation.
The original principal amount of the Loan was $8,382,000 (the "Original Loan").
For financial reporting purposes, DVL recognized an extraordinary loss of
$880,000 on this transaction in 1996.
In March and April 1997, NPM advanced DVL an aggregate of $200,000 (the
"Additional Advances"). These advances, which were not required under the
Original Loan Agreement, bear interest at 15% per annum and will be paid pari
passu with said loan. The Original Loan and the Additional Advances are
referred to in the aggregate herein as the "NPM Loan".
3
Under the terms of the NPM Loan, the principal balance is payable over six
years with interest at the rate of 10.25%. DVL is required to make certain
mandatory payments towards the principal balance over the term of the loan. The
first such payment (when combined with all prior principal reductions) must be
sufficient to reduce the principal balance of the NPM Loan by 15%, and is due
by March 31, 1998. The next such payment, which must be sufficient to cause
cumulative principal reductions to aggregate 33% of the principal balance, is
due by December 31, 1998. DVL's principal payments to date have exceeded these
requirements; from September 27, 1996 through March 15, 1998, DVL made principal
payments from the liquidation of collateral, refinancing activities and other
sources totaling $4,025,000 which represents approximately 44% of the principal
balance of the NPM Loan. DVL is required to pay NPM 100% of the cash flow
generated from certain of NPM's collateral, but in no event less than accrued
interest at a rate of 5% per annum.
The internal rate of return to NPM on the NPM Loan, as currently computed,
is approximately 34%. The effective interest rate to DVL for financial
reporting purposes, as currently computed, including DVL's costs associated with
the Loan and the value of the Warrants (described below) is 15%. These rates
are based on payments made through March 15, 1998, and assume that remaining
payments will be made according to the original payment terms of the Loan. In
the event of prepayment, or of delays in payment or additional fundings under
the Loan, the internal rate of return and the effective interest rate will
increase or decrease, respectively.
In connection with the transactions contemplated by the Original Loan
Agreement, in March 1996 DVL and NPO (an affiliate of NPM) entered into an Asset
Servicing Agreement, pursuant to which NPO is providing DVL with administrative
and advisory services relating to the assets of DVL and its affiliated
partnerships. In consideration for such services, DVL is required to pay NPO
$600,000 per year (with cost of living increases beginning in 1999) over the
seven (7) year term of the agreement, subject to early termination under certain
conditions. DVL has the right to defer up to $600,000 of such fees, with
interest at 15% per annum, during the first two years and to defer reduced
amounts during the third year. DVL had accrued service fees of $925,000 as of
December 31, 1997. NPO has waived any Event of Default which may exist under
the Asset Servicing Agreement during the period through December 31, 1998, based
on the fact that the amount of accrued service fees has exceeded the operative
limitations since mid-1997, and may continue to do so. The waiver does not
affect NPO's right to receive payment of all deferred service fees, and interest
thereon, which are currently outstanding or which may become outstanding through
December 31, 1998.
In connection with the Original Loan, affiliates of NPM acquired 1,000,000
shares (the "Base Shares") of DVL Common Stock for $200,000. The Base Shares
currently represent approximately 6% of the outstanding common stock of DVL.
An affiliate of NPM also acquired 100 shares of preferred stock for $1,000. DVL
issued to affiliates of NPM and NPO warrants (the "Warrants") to purchase such
number of shares of Common Stock as, when added to the Base Shares, represent
rights to acquire up to 49% of the outstanding Common Stock of DVL on a fully
diluted basis. The original exercise price of the Warrants was $.16 per share,
subject to applicable anti-dilution provisions. The Warrants expire on December
31, 2007. Except under certain circumstances, they are not exercisable prior
to January 1, 1999 without the prior consent of the Board of Directors of the
Company. The Warrants were valued for financial statement purposes at $516,000
at the date of issuance and such value resulted in a debt discount to be
amortized using the effective interest rate method.
4
The possibility that some or all of the Warrants may be exercised creates
the potential for significant dilution of the current stockholders. The actual
dilutive effect cannot be currently ascertained, since it depends on whether,
and if so to what extent, the Warrants are exercised.
Even after the NPO and NPM transactions described above, DVL continues to
experience liquidity problems. DVL's ability to continue as a going concern is
dependent upon (1) the sale or refinancing of certain assets to improve its cash
position to meet operating expenses and mandatory debt payments; (2) the
realization of the estimated value of the assets collateralizing its loan
portfolio over an extended period of time rather than the value of the assets
on a liquidation basis; (3) the return to profitable operations and (4)
availability of additional borrowings.
D. BUSINESS ACTIVITIES.
-------------------
DVL has been engaged in one line of business, finance (including the
management of the assets which secure its loans), during the past three years.
Its activities in this area are as follows:
1. OVERVIEW
--------
a. MORTGAGE LOANS AND LOANS SECURED BY LIMITED PARTNER INTERESTS.
-------------------------------------------------------------
At December 31, 1997, DVL had investments in long-term mortgage loans to
affiliated partnerships totaling $22,465,000 all of which are pledged to secure
indebtedness of DVL. The mortgage debt service is currently used to pay liens
senior to DVL's, and any excess is used to fund principal and interest payments
on the NPM Loan, based on NPM's collateral interest in the mortgages. In
addition, as part of the limited partnership settlement most of the mortgages
were modified to reduce the payments and/or interest rates. The balance of
DVL's long-term mortgage loans to affiliated partnerships were previously funded
by DVL and bear interest at effective rates of up to 15% per annum. At December
31, 1997, $2,711,000 of DVL's mortgage loans were non- performing. DVL has
established a loan loss reserve of approximately $8,802,000 in connection with
its mortgage loan portfolio.
The properties owned by affiliated partnerships provide the security for
DVL's loans and are leased, typically on a long-term basis, to unaffiliated
national tenants. For virtually all properties, the leases are current and the
mortgages are being paid on a timely basis.
In addition, DVL holds loans due from individual limited partners secured
by limited partnership interests, aggregating $1,690,000 of which all were non-
performing at December 31, 1997. Consequently, DVL has established a loan loss
reserve of approximately $1,340,000 in connection with these loans. NPO on
behalf of DVL has been aggressively attempting to collect these loans.
b. INVESTMENTS IN AFFILIATED PARTNERSHIPS.
--------------------------------------
DVL has acquired various interests in affiliated partnerships pursuant to
the terms of certain settlement agreements. Management originally valued all
of these investments at 33% of the original investment amount (the expected
recovery for such investments) except for interests acquired in one partnership
with an original investment aggregating $2,450,000 which were assigned to one
5
of DVL's creditors and were valued at 40% of their original investment amount
based upon the anticipated proceeds through the future sale of the partnership's
property. In 1994 and 1996, management provided for a general reserve on these
investments to bring the net carrying value down to 25.2% and 14.5%,
respectively, of the original investment amount, exclusive of the $2,450,000
discussed above, due to potential anticipated losses upon liquidation of these
investments. During 1997, DVL recorded income of $360,000 from distributions
received from these investments, including $270,000 of excess proceeds over the
net carrying value on the one partnership investment, discussed above, carried
at 40%.
c. PARTNERSHIP AND PROPERTY MANAGEMENT.
------------------------------------
As part of the limited partner settlement, DVL became general partner of
more than 100 affiliated partnerships for which DVL has received management and
other fees. As part of another settlement agreement, PSC acquired master lease
positions for two industrial properties located in New Jersey, as to which it
performs property management services.
2. DETAIL
------
A more detailed description of DVL's business follows. Certain information
in the description is incorporated herein by reference to the Notes to the
Consolidated Financial Statements of DVL (the "Notes") included in Item 8
hereof.
a. LOAN PORTFOLIO
--------------
DVL's mortgage loan portfolio consists primarily of long term wrap-around
and other mortgage loans due from affiliated partnerships secured by income-
producing commercial, office and industrial properties. In addition, DVL
maintains a portfolio of loans to limited partners secured by their interests
in affiliated partnerships. DVL does not anticipate making any substantial
loans to affiliated partnerships or any loans to limited partners.
Virtually all of DVL's mortgage loans receivable arose out of transactions
arranged by Kenbee in which affiliated partnerships purchased commercial, office
and industrial properties typically leased on a long-term basis to unaffiliated,
creditworthy tenants. Each of DVL's mortgage loans is collateralized by a lien,
primarily subordinate to senior liens in favor of an unaffiliated party, on real
estate owned by the affiliated partnership.
The following table sets forth the number of loans outstanding, aggregate
loan balances, including accrued interest, and the allowances for loan losses,
of the above investments at December 31, 1997. See Tables 1 and 2 of Appendix
"A" to this Form 10-K for detailed information as to each such loan. Following
the table is a brief description of each type of loan.
6
Number Aggregate Allowance
of Loan for Loan
Type of Loan Loans Amount Losses
------------ ------ --------- ---------
(dollars in thousands)
Long-term mortgages due from affiliated
partnerships previously funded by DVL, net
of underlying liens totaling $9,278,000 $15,521
Less unearned interest (1) 8,350
-------
Net long-term mortgages due from affiliated
partnerships previously funded by DVL 14 7,171 $ 1,571
Long-term mortgages due from affiliated partnerships
acquired pursuant to the Limited Partner Settlement,
net of underlying liens totaling $36,028,000 32 15,294 7,231
--- ------- -------
Total loans collateralized by mortgages 46 22,465 8,802
--- ------- -------
Loans collateralized by limited partnership
interests 82 1,690 1,340
--- ------- -------
Total loans 128 $24,155 $10,142
=== ======= =======
- ------------
(1) Unearned interest represents the unamortized balance of discounts
on previously funded loans.
DVL's loans to affiliated partnerships are secured by mortgages on
properties leased to various tenants. For a list of these tenants see Tables
1 and 2. The number of properties leased by any one company from affiliated
partnerships in which DVL holds a mortgage loan does not exceed three except for
Wal-Mart, which is the tenant of 35 properties.
Generally, the tenants of single asset partnerships executed "triple-net"
leases under which they are responsible for the payment of all taxes, insurance
and other property costs. In certain instances, the partnership is required to
maintain the roof and structure of the premises. In addition to base rent, most
leases also require the tenant to pay additional rent equal to a percentage of
gross receipts from the tenant's operation of a property above a specified
amount ("Percentage Rent"). In virtually all cases where the partnership is
entitled to receive Percentage Rent, a portion of such rent is required to be
paid to DVL as additional interest or additional debt service on the long-term
mortgage.
i. LONG-TERM MORTGAGES DUE FROM AFFILIATED PARTNERSHIPS.
-----------------------------------------------------
DVL's long-term wrap-around and other mortgage loans due from affiliated
partnerships consist of (1) loans purchased primarily from Kenbee under prior
commitments made by DVL to affiliated partnerships on which DVL yields up to 15%
per annum or (2) loans to affiliated partnerships acquired pursuant to the
Limited Partner Settlement, the principal amount of which equals DVL's net
investment in the related loan previously due from Kenbee or its affiliates;
less specific write-downs on certain of these loans based on the anticipated
cash flow to be generated by each loan. Interest on these loans, if any, is
imputed based on anticipated cash flow.
Substantially, all of DVL's long-term mortgages due from affiliated
partnerships are self-amortizing.
7
DVL's wrap-around mortgages are all collateralized by second or third
mortgages on commercial and industrial properties located in various states and
mature through June 2031. DVL is obligated to make principal and interest
payments on the underlying mortgage loan or loans to the extent proceeds are
received from the borrower and, in certain instances, has the right to refinance
or pay off the underlying mortgage loans. Some of the underlying mortgages
require that the tenants make their rental payments directly to the respective
underlying lenders and DVL is crediting such payments to its wrap-around
mortgage loans. To the extent that the underlying mortgage payment is less than
the wrap-around mortgage payment, the partnership is obligated to pay DVL the
difference. The Company ceased accruing interest on these loans for the year
ended December 31, 1997.
ii. LOANS COLLATERALIZED BY LIMITED PARTNERSHIP INTERESTS.
------------------------------------------------------
DVL made loans directly to limited partners to finance their partnership
investments. As a result of the Limited Partner Settlement, DVL received
additional limited partner loans from Kenbee in satisfaction of loans due from
Kenbee collateralized by such limited partner loans. All of such loans due from
limited partners ("Partners Notes") matured at various dates through December
1995 and bear interest at fixed rates of 15% to 16% and at variable rates of up
to 2 1/2% over prime. Certain of the variable rate loans were payable at fixed
interest rates, with interest accruing at variable rates subject to minimum and
maximum levels, payable upon the maturity of the loan. All of the loans are
non-performing. DVL is attempting to collect these loans either through
negotiation or litigation with borrowers.
b. REFINANCING RIGHTS
------------------
DVL has the right to refinance certain of the presently outstanding
mortgage loans underlying its wrap-around mortgage loans due from affiliated
partnerships, subject to any prepayment penalties, provided that the debt
service and principal amount of a refinanced loan are no greater than that of
the existing wrap-around loan. DVL also has the right to arrange senior
financing secured by properties on which it holds first or second mortgage loans
by subordinating its mortgage loan subject to the same such limitations.
In 1997, DVL refinanced five mortgages which generated approximately
$957,000 in excess of the existing underlying mortgage loans. The excess funds
were used to pay the expenses of the refinancings, and to repay the NPM Loan,
as required by the applicable loan agreements. The amounts obtained from these
refinancings were primarily based on the value of the base rents due from
tenants during the period of the base lease term subsequent to the payoff of the
existing first mortgages. As a result of these refinancings, DVL's asset base
available for future refinancings has diminished.
c. REAL ESTATE
-----------
DVL currently owns two properties located in Kearny, New Jersey. The
parcels are leased under long-term leases to affiliated partnerships which own
the buildings and improvements on the properties.
The properties include 8.2 acres of land underlying approximately 134,800
square feet of manufacturing, warehousing and commercial buildings leased to (a)
Toch Associates (2.6 acres) for an annual rent of $7,000 until 2074; and (b) 5.6
acres of land underlying a shopping center leased to Kearny Associates for an
annual rent of $30,000 until 2079. DVL currently maintains a reserve of
$208,000 on the value of the land.
8
Toch has defaulted on its mortgage to DVL, encumbering the Toch property,
and DVL has brought an action to foreclose on the mortgage.
d. EMPLOYEES
---------
On March 31, 1998, DVL had fourteen (14) employees.
e. FOREIGN ACTIVITY
----------------
DVL or its subsidiaries have not engaged in any business activity outside
of the United States.
ITEM 2. PROPERTIES
A description of the properties owned by DVL, appears in "Real Estate"
above.
ITEM 3. LEGAL AND ADMINISTRATIVE PROCEEDINGS
The following is a summary of the status of the sole material case which
is currently outstanding, as well as cases settled in 1997.
A. CONTINUING LITIGATION
---------------------
DVL was named in an action entitled VANGUARD CAPITAL V. KENBEE MANAGEMENT,
INC. ET AL. ("VANGUARD"), which was filed in 1994 in the Superior Court of the
State of California, in which Vanguard sought to be indemnified for an
investor's claim filed against it in said Court. The investor made a $350,000
investment in an affiliated limited partnership and alleged that her broker
sold her unsuitable investments. DVL defended the case and Vanguard
voluntarily dismissed its action without prejudice. On March 22, 1996, the
investor in the underlying matter against VANGUARD filed, in the Superior Court
of Los Angeles, a motion to vacate an NASD Arbitration award made in July 1995
in favor of VANGUARD and has named DVL as an additional respondent in that
Petition. There has been no further activity in this case since March 1996,
and no determination can be made at this time as to the outcome.
B. SETTLED LITIGATION
------------------
1. DONALD LEVY, ET AL. V. ROGER D. STERN, ET AL. ("LEVY"), filed in New
Castle County, Delaware in February 1991, on behalf of certain individual
shareholders, alleged breaches of fiduciary duty of care and candor. As of June
1997, the parties to the action agreed to the terms of a settlement, and the
implementing documents were executed in September 1997. Pursuant to the
settlement, DVL issued 500,000 shares of Common Stock to the plaintiffs and
their attorneys in October 1997. For the year ended December 31, 1997, the
Company recorded a cost of $50,000 for said shares, based on the market value
as of the date of issuance, discounted to reflect the fact that they constitute
"restricted securities" within the meaning of applicable regulations.
9
2. Federal Insurance Company ("Federal"), which carried DVL's directors
and officers insurance policy, declined to cover DVL for any legal costs or
liability. DVL commenced an action against its insurance broker and Federal
entitled DEL-VAL FINANCIAL CORPORATION, ET AL. V. FEDERAL INSURANCE COMPANY
ETAL. ("FEDERAL INSURANCE") on September 23, 1991 in the Supreme Court of the
State of New York, County of New York in which DVL alleged negligence against
its broker and sought declaratory and injunctive relief against Federal. The
New York Court in this matter held that the Settling Defendants' insurance
excluded coverage of these matters. DVL filed a notice of appeal of that
decision. DVL and the broker have agreed to the terms of a settlement pursuant
to which DVL will receive approximately $24,000, after (i) legal fees and other
costs, and (ii) a distribution required pursuant to the 1993 limited
partnership settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
PART II
ITEM 5. MARKET FOR DVL'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Common Stock of DVL is traded on the over-the- counter market and is
quoted on the OTC Bulletin Board maintained by the NASD under the symbol
"DVLN". As of March 25, 1998, DVL stock was trading at $.185 based on the last
sale price. The following table sets forth, for the calendar periods
indicated, the high and low bid prices of the Common Stock as reported by the
NASD for 1997 and 1996. Such prices are inter-dealer prices without retail
mark-up, mark-down or commission, and do not represent actual transactions.
1997 High Low
- ---- ------ -----
First Quarter . . . . . . . . . . . . $ .23 $ .19
Second Quarter . . . . . . . . . . . .19 .15
Third Quarter . . . . . . . . . . . . .16 .08
Fourth Quarter . . . . . . . . . . . .11 .05
1996 High Low
- ---- ------ -----
First Quarter . . . . . . . . . . . . $ 1/2 $ 1/16
Second Quarter . . . . . . . . . . . 6/16 3/16
Third Quarter . . . . . . . . . . . . 9/32 5/32
Fourth Quarter . . . . . . . . . . . 5/16 6/32
At March 25, 1998, there were 3,916 holders of record of Common Stock of
DVL. No dividends have been paid since October 1990. At this time, DVL does not
anticipate paying any dividends in the foreseeable future.
11
ITEM 6. SELECTED FINANCIAL DATA
The data set forth below should be read in conjunction with other financial information of DVL, including
its consolidated financial statements and accountants' report thereon included elsewhere herein and
"Management's Discussion and Analysis of Financial Condition and Results of Operations."
Consolidated Statements of Operations Data
(In thousands except for per share data)
Year Ended December 31
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Revenues
Affiliates $ 2,652 $ 3,450 $ 2,868 $ 2,037 $ 2,171
Other 414 334 369 399 70
-------- -------- -------- -------- --------
Total $ 3,066 $ 3,784 $ 3,237 $ 2,436 2,241
======== ======== ======== ======== ========
Loss from continuing operations $ (6,163) $(12,887) $ (5,780) $ (4,471) $ (2,415)
Loss from discontinued operations (367) (223) - - -
-------- -------- -------- -------- --------
Loss before extraordinary gain (6,530) (13,110) (5,780) (4,471) (2,415)
Extraordinary gain on the settlement of 7,991 1,935 7,900 8,349 4,011
indebtedness -------- -------- -------- -------- --------
Net Income (loss) $ 1,461 $(11,175) $ 2,120 $ 3,878 $ 1,596
======== ======== ======== ======== ========
Earnings (loss) per share - basic and diluted
Loss from continuing operations $ (.83) $ (1.54) $ (.58) $ (.31) $ (.15)
Loss from discontinued operations (.05) (.03) - - -
-------- -------- -------- -------- --------
Loss before extraordinary gain (.88) (1.57) (.58) (.31) (.15)
Extraordinary gain on the settlement of 1.08 .23 .79 .58 .25
indebtedness -------- -------- -------- -------- --------
Net Income (loss) $ .20 $ (1.34) $ .21 $ .27 $ .10
======== ======== ======== ======== ========
12
Consolidated Balance Sheet Data
(In thousands)
As at December 31
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Total assets $72,048 $54,085 $41,499 $26,634 $19,636
======= ======= ======= ======= =======
Long-term debt and notes payable $37,270 $32,018 $32,290 $20,340 $12,143
======= ======= ======= ======= =======
Short-term debt $12,564 $ 9,657 $ 1,060 $ - $ -
======= ======= ======= ======= =======
Shareholders' equity (capital
deficiency) $ 5,660 $(5,131) $(1,330) $ 3,582 $ 5,279
======= ======= ======= ======= =======
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
DVL realized net income of $1,596,000 for the year ended December 31, 1997,
compared to net income of $3,878,000 in 1996 and $2,120,000 in 1995. The net
income in all three years was attributable to extraordinary gains realized upon
settlements of indebtedness. In 1997, the extraordinary gains of $4,011,000
arose principally from gains realized upon DVL's purchase of promissory notes
which were issued in connection with the 1995 settlement of the shareholder
litigation ($2,906,000) and discounted pay-offs to two creditors.
As a result of the factors described below, DVL continued to have operating
losses in 1997 ($2,415,000), but at a reduced level from 1996 ($4,471,000) and
1995 ($5,780,000).
Interest on mortgage loans from affiliates and partnership management fees
decreased in 1997 and 1996 (in each case as compared to the prior year) due to
a reduction in the size of the loan portfolio resulting from the repayment of
DVL's mortgages by various partnerships which sold their real property. In
connection with such sales, DVL receives transaction and other fees from
partnerships. The relative levels of sale activity during the three year period
resulted in a decrease in transaction and other fees in 1997 and 1996.
In 1997, DVL recorded income of $360,000 from distributions received on
unit investments, representing the excess proceeds over the net carrying value.
No such income was recorded in prior years because distributions were applied
to reduce carrying value. In 1997, the Company determined that no further
reductions in carrying value were appropriate. Therefore, future cash
distributions will also result in income.
Other income decreased significantly from 1996 to 1997 because during 1996
DVL received the final amounts due on the sale of FMF.
General and administrative expense ("G&A") combined with the NPO asset
servicing fees decreased in 1997 as compared to 1996 primarily due to reductions
in payroll and operating expenses. The 1996 combined amount was slightly higher
than 1995 G&A. Legal and professional fees in 1997 were slightly lower than the
amount for 1996, which was significantly reduced from 1995 as a result of the
settlement of substantially all of DVL's litigation.
Interest expense in 1997 and 1996 (exclusive of interest on notes issued
in settlement of the shareholder litigation) declined due to the refinancing and
restructuring of existing debt, which resulted in substantial reductions in
long-term debt obligations. However, these reductions were partially offset by
amortization expenses on the long-term debt that arose from the issuance of the
NPM Warrants in connection with the September 1996 restructuring. 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
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
DVL's cash flow for 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 for operations because the cash received from the
mortgages is used to pay the debt service on liens on the properties senior to
those held by DVL, with any excess being used to pay principal and interest on
the NPM Loan based on the collateral interest in said mortgages held by NPM
Capital LLC ("NPM"), and by certain other creditors.
As a result of the above factors, DVL continues to experience liquidity
problems. To enable DVL to meet its short-term operating needs, DVL must
continue to augment its cash flow with the proceeds from the sale or refinancing
of assets and borrowings. There still remains some risk that DVL may not be
able to raise the necessary funds with which to continue operations. Thus,
DVL's ability to continue as a going concern is dependent upon (1) the sales and
refinancings described above to meet operating expenses and mandatory debt
payments; (2) the realization of the estimated value of the assets
collateralizing its loan portfolio over an extended period of time rather than
the value of the assets on a liquidation basis; (3) the return to profitable
operations; and (4) availability of additional borrowings.
Under the restructured terms of the major portion of DVL's long-term debt
which were implemented in the fourth quarter of 1996, DVL was able to meet and
exceed its mandatory principal payments to NPM in 1997, thereby reducing such
debt from $7,995,000 to $5,648,000 exclusive of the debt discount. Payments
were made from funds obtained from (1) the repayment of affiliated partnerships'
indebtedness upon the sale of partnership properties, (2) refinancings of the
underlying mortgages on the partnership properties, (3) refinancings of certain
DVL indebtedness and (4) other cash sources. DVL was also able to reduce its
other long-term debt from $6,203,000 to $2,773,000 from distributions it
received as a limited partner upon the sale of property of affiliated
partnerships, and from the repayment of partnership mortgage debt.
IMPACT OF INFLATION AND CHANGES IN INTEREST RATES
- -------------------------------------------------
DVL's mortgage loan portfolio due from affiliated partnerships is primarily
at fixed rates. Management has restructured most of DVL's indebtedness to fixed
rates. Therefore, increases or decreases in interest rates are generally not
expected to have an effect on DVL's earnings. See Item 1 (c), "Business - NPM
and NPO Transactions". Other than as manifested in interest rates, inflation
has not had a significant effect on DVL's net income for the past three years.
YEAR 2000 ISSUE
- ---------------
The Company does not anticipate that the cost of addressing the "Year 2000"
issue will be material to its future operating results or financial condition.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto, together with the accountants'
report thereon of Richard A. Eisner & Company, LLP, are set forth on pages F-1
through F-30, which follow. The financial statements are listed in Item
14(a)(1) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF DVL
A. The following table sets forth the name of each director and executive
office of the Company, and the nature of all positions and offices with the
Company held by him at present. The term of all directors (other than the
special purpose director) expires at the Company's next annual meeting of
stockholders, which will be held later in 1998 on a date to be scheduled. The
term of all executive officers expires at the next annual meeting of directors,
to be held immediately thereafter.
NAME POSITION
---- --------
Frederick E. Smithline Chairman of the Board & Director
Myron Rosenberg Director
Allen Yudell Director
Alan E. Casnoff President and Chief Executive Officer
Gary Flicker Vice President and Chief Financial Officer
Daniel Baldwin Vice President, Secretary and General Counsel
Keith B. Stein Special Purpose Director
In addition to three regular directors, who were elected by the holders of
Common Stock and who have all of the powers normally granted to corporate
directors, the Company has one special purpose director, who was elected in 1996
by the holder of the Class A Preferred Stock. The special purpose director has
no right to vote at meetings of the Board, except as to Bankruptcy Matters (as
such term is defined in the Certificate of Incorporation).
B. The following is a brief account of the recent business experience of
each director and executive officer and directorships held with other companies
which file reports with the Securities and Exchange Commission:
FREDERICK E. SMITHLINE (age 66) has served as Chairman of the Board of the
Company since 1990 and as a director since 1982. From September 1989 to May
1996, Mr. Smithline was of counsel to the law firm of Epstein, Becker & Green,
P.C., New York, New York. He is currently in private practice as an attorney.
Mr. Smithline also serves as a director of the Hungarian Broadcasting
Corporation.
MYRON ROSENBERG (age 69) has served as a director of the Company since
1973. Mr. Rosenberg is currently a financial consultant. Through December
1996, Mr. Rosenberg served as Executive Vice President of Rosenthal & Rosenthal,
Inc., New York, New York, a commercial finance concern, where he had been
employed since 1961. He is currently also a director of Deotexis, Inc. and
Magna-Lab, Inc.
ALLEN YUDELL (age 59) has served as a director of the Company since
September 1996. From 1967 to 1991, Mr. Yudell was President of Delco
Development Corporation. From 1992 to 1996, Mr. Yudell was a Vice President of
Unidell Realty Corp., and he is currently a consultant to Unidell. Delco and
Unidell are shopping center development companies based in Boca Raton, Florida.
Mr. Yudell is also a member of the International Council of Shopping Centers.
ALAN E. CASNOFF (age 54) has served as President of the Company since
November 1994, and was a director from October 1991 to September 1996. Mr.
Casnoff served as Executive Vice President of the Company from October 1991 to
17
November 1994. From June 1992 to June 1997, Mr. Casnoff had also been of
counsel to the Philadelphia, Pennsylvania law firm of Fox, Rothschild, O'Brien
& Frankel. From November 1990 to October 1991, Mr. Casnoff served as a
consultant to the Company and from 1971 to October 1991, as Secretary of the
Company. Since May 1991, Mr. Casnoff has also served as a director of Kenbee
Management, Inc. ("Kenbee"), an affiliate of the Company, and as President of
Kenbee since November 1994. Since 1977, Mr. Casnoff has also been a partner of
P&A Associates, a private real estate development firm headquartered in
Philadelphia, Pennsylvania. From 1969 to October 1990, Mr. Casnoff was
associated with the Philadelphia, Pennsylvania law firm of Saul, Ewing, Remick
& Saul, previous legal counsel to the Company and Kenbee. In July 1997, Mr.
Casnoff became of counsel to said law firm.
GARY FLICKER (age 39) became Vice President and Chief Financial Officer of
the Company in April 1997. Mr. Flicker is a Certified Public Accountant. From
January 1996 to April 1997, he was a financial consultant, performing
acquisition analysis and financial reporting consulting services. From November
1985 to November 1994, he was Vice President - Director of Real Estate
Accounting and Financial Analysis with Integrated Resources, Inc.
("Integrated"), a publicly-held real estate investment company. In February
1990, Integrated filed for bankruptcy protection under Chapter 11 of Title 11
of the United States Code, and the proceeding was concluded in November 1994.
Thereafter, until December 1995, Mr. Flicker served as Senior Real Estate
Controller for Concurrency Management, Inc. which was engaged by Integrated's
successor to perform management services. Mr. Flicker's principal
responsibilities for Integrated involved the performance of accounting, tax and
financial reporting services, as well as financial analysis for limited
partnerships in which a subsidiary of Integrated was the general partner. From
November 1983 to November 1985, Mr. Flicker was a Supervising Senior Accountant
at Kenneth Leventhal & Company, C.P.A.s, and from September 1980 to November
1983 he was a Senior Accountant at Garnick, Mansfield, et al., C.P.A.s (formerly
Lester Witte & Company).
DANIEL BALDWIN (age 45) became Vice President, Secretary and General
Counsel of the Company in April 1997. Prior thereto, Mr. Baldwin was a partner
with Bressler, Amery & Ross, P.C., a law firm with offices in New York, New York
and Morristown, New Jersey. Mr. Baldwin was an associate with the firm
beginning in 1977, and became a partner in 1984. His practice was in the areas
of commercial real estate, mergers and acquisitions, and securities, and
involved the representation of public and privately held companies.
KEITH B. STEIN (age 40) has been a special purpose director of the Company
since September 1996. Mr. Stein has served as a Managing Director of National
Financial Companies LLC since January 1995. Mr. Stein is also the Vice Chairman,
Chief Financial Officer, Treasurer and a director of National Auto Finance
Company, Inc. (NASDAQ/NMS: NAFI), a specialty automobile finance company. From
March 1993 to September 1994, he served as Senior Vice President, Secretary and
General Counsel of WestPoint Stevens, Inc., a textile company, after having
served the same company from October 1992 to February 1993 in the capacity of
Acting General Counsel and Secretary. From May 1989 to February 1993, Mr. Stein
was associated with the law firm of Weil, Gotshal & Manges LLP.
NFC is an affiliate of NPM Capital LLC ("NPM") and NPO Management LLC
("NPO"). NPM, NPO and certain parties affiliated with said entities consummated
a multi-faceted transaction with the Company in September 1996; for information
regarding this transaction, see Item 1(C), "Business - NPO and NPM
Transactions."
18
(c) Compliance with Section 16 (a) Beneficial Ownership Reporting Compliance
------------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who are beneficial owners of more
than 10% of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Commission. Officers,
directors, and greater than 10% beneficial owners are required by Commission
regulations to furnish the Company with copies of all Section 16(a) forms they
file. To the Company's knowledge, based solely on review of such reports
furnished to the Company, and written representations that no other reports were
required during or with respect to the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements applicable to such persons were satisfied
except that the Annual Statement of Beneficial Ownership on Form 5 for Allen
Yudell, to report the grant to him on September 17, 1997, of an option to
Purchase Common Stock, was filed late.
19
ITEM 11. EXECUTIVE COMPENSATION
A. SUMMARY COMPENSATION TABLE
--------------------------
The following table sets forth all compensation awarded to, earned by or paid to the following persons
for services rendered to the Company in 1997 and (if applicable) in 1996 and 1995: (1) the person serving as
the Company's chief executive officer during 1997; (2) those other persons who were serving as executive
officers as of the end of 1997:
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation Long-Term Compensation Awards
--------------------------------------- -------------------------------
Securities
Other Annual Underlying LTIP
Name Year Salary Bonus Compensation Options/SAR Payouts
---- ---- ----------- ------- --------------- -------------- -----------
Alan E. Casnoff 1997 $186,500 - - 75,000(5) -
President and Chief 1996 300,000 - - 300,000(6) -
Executive Officer 1995 314,002 - $15,000(3) -- $7,500(7)
Gary Flicker 1997 84,549 $15,000 27,123(4) 75,000(5) -
Vice President and
Chief Financial
Officer(1)
Daniel Baldwin 1997 87,437 15,000 - 50,000(5) -
Vice President,
Secretary and
General Counsel(2)
- ----------------------
(1) Mr. Flicker became Vice President and Chief Financial Officer of the Company on April 16, 1997. The amounts
shown as his salary and bonus for 1997 represent the amounts paid to him for services rendered from April 16,
1997 through December 31, 1997.
(2) Mr. Baldwin became Vice President, Secretary and General Counsel of the Company on April 7, 1997. The amounts
shown as his salary and bonus for 1997 represent amounts paid to him for services rendered from April 7, 1997
through December 31, 1997.
(3) Represents the value of 100,000 shares of Common stock issued to Mr. Casnoff in 1995.
(4) Represents consulting fees paid by the Company to Mr. Flicker for services during the period February 18, 1997
through April 15, 1997.
(5) Consists of options to purchase shares of Common Stock under the 1996 Stock Options Plan, granted to Messrs.
Casnoff and Baldwin on April 9, 1997 and Mr. Flicker on April 17, 1997 (50,000, 25,000 and 50,000, respectively),
and options to purchase 25,000 shares granted to each of such persons on January 9, 1998 as a bonus in respect
of services rendered in 1997.
(6) Represents options to purchase shares of Common Stock, granted on September 17, 1996, in exchange for performance
units (considered to be stock appreciation rights) previously granted under the Performance Plan, which was
terminated concurrently with the ratification and approval of the 1996 Stock Option Plan on said date.
(7) Mr. Casnoff surrendered 50,000 performance units in 1995 in consideration of the issuance to him of 50,000 shares
of Common Stock, which shares the Company valued at $7,500.
20
B. OPTION GRANTS IN LAST FISCAL YEAR
---------------------------------
The following table sets forth information as to options granted in 1997
under the DVL, Inc. 1996 Stock Option Plan to the executive officers named in
the Summary Compensation Table. The Plan provides for the grant of options to
purchase up to 1,500,000 shares of Common Stock, to Employees and Non-Employee
Directors (in each case as defined in the Plan).
The plan provides that any Employee wishing to exercise an option must give
prior notice to the Board. If the Board determines, in its reasonable
discretion, that such exercise will cause an "ownership change" (as defined in
Section 382 of the Internal Revenue Code of 1986, as amended) in the Company
which would have an adverse effect on the Company's use of its "net operating
loss carryforwards" (as defined in Section 382) (an "Adverse Ownership Change"),
the Board shall deny approval of the exercise. If the Board determines that
such exercise would not cause an Adverse Ownership change, it shall approve the
exercise. The conditions described in this paragraph are referred to below as
the "Section 382 Restrictions".
Currently, options to purchase 975,131 shares are outstanding under the
Plan and 524,869 shares are available for issuance upon exercise of options
which may be granted in the future.
21
Individual Grants Grant Date Value
------------------------------------------------------------- -------------------
Percentage of
Total Options
Number of Securities Granted to Exercise
Underlying Options Employees in Price Expiration Grant Date
Name(1) Granted(1) Fiscal Year(2) ($/Sh)(3) Date Present Value (4)
- ------------------- -------------------- -------------- --------- ---------- -------------------
Alan E. Casnoff 50,000 34.7 0.16 04/08/07 $7,000
Gary Flicker 50,000 34.7 0.16 04/16/07 7,000
Daniel Baldwin 25,000 17.4 0.16 04/08/07 3,500
(1) Individual grants to employees become exercisable in whole or in installments, and at such times,
and subject to the fulfillment of any conditions on exercisability (in addition to the Section 382
Restrictions) as may be determined by the Compensation Committee of the Board of Directors (the
"Committee") at the time of grant. All options listed in the above table became exercisable upon
grant, subject only to the Section 382 Restrictions. The Committee also has the discretion to
establish provisions relating to the forfeiture of an option in connection with the employee's
termination of employment with the Company, or to grant any option without a forfeiture provision.
Each of the options listed in the above table provides that the option will be forfeited upon
termination of employment for "cause" (as therein defined). In addition, the options granted to
Messrs. Baldwin and Flicker limit the period of exercise after termination under other circumstances
(except death or disability).
(2) Total options granted to employees in fiscal year was 144,000.
(3) Represents the fair market value of the underlying shares on the date of grant (determined in
accordance with the Plan as the closing price of the Common Stock on the OTC Bulletin Board).
(4) The Black-Scholes option pricing model was chosen to estimate the grant date present value of the
options set forth in this table. The Company does not believe that the Black-Scholes model, or any
other model, can accurately determine the value of an option. Accordingly, there is no assurance
that the value, if any, realized by an option holder will be at or near the value estimated by the
Black-Scholes model. Future compensation resulting from option grants is based solely on the per-
formance of the Company's stock price. The Black-Scholes ratio of .14 was determined using the
following assumptions: a volatility of 80%, an historic average dividend yield of 0%, a risk
free interest rate of 6.9% and a 10 year projected exercise period.
22
C. FISCAL YEAR-END OPTION VALUES
-----------------------------
The following table sets forth information as to options held as of the end
of 1997 by the executive offices named in the Summary Compensation Table. No
options were exercised by said officers in 1997. All options held by said
officers at fiscal year-end were immediately exercisable. None of such options
was in the money at December 31, 1997.
Number of Securities Underlying
Unexercised Options At Fiscal
Name Year End
---- -------------------------------
Alan E. Casnoff 350,000
Gary Flicker 50,000
Daniel Baldwin 25,000
D. COMPENSATION OF DIRECTORS
-------------------------
Regular directors who are not officers or employees of the Company ("Non-
Employee Directors") presently receive a director's fee of $1,500 per month,
plus $500 for each Audit Committee meeting of the Board of Directors attended.
Directors who are officers or employees of the Company receive no compensation
for their services as directors or attendance at any Board of Directors or
committee meetings. None of the current directors is an officer or employee.
The special purpose director receives no compensation for his service as a
director or attendance at any Board of Directors or committee meetings.
On September 17, 1997, options to purchase 15,000 shares of Common Stock
at a price of $.08 per share were granted to each of the three directors
(Messrs. Rosenberg, Smithline and Yudell). The options were granted under the
1996 Stock Option Plan, which provides for automatic grants of options for
15,000 shares to each incumbent regular director on each anniversary of the
adoption of the Plan. The options vested immediately and are exercisable for
a term of ten (10) years from the date of grant. The exercise price is equal
to the fair market value on the date of grant.
E. EMPLOYMENT CONTRACTS AND ARRANGEMENTS
-------------------------------------
Alan E. Casnoff has agreed to serve as President of the Company through at
least December 31, 1998, at a compensation level of $120,000.
Daniel Baldwin entered into an Employment Agreement with the Company,
effective as of April 7, 1997, providing for his employment as Vice President,
Secretary and General Counsel for a one-year term at an annual salary of
$125,000, and for the grant of 25,000 stock options under the 1996 Stock Option
Plan upon commencement of employment.
Gary Flicker entered into an Employment Agreement with the Company,
effective as of April 16, 1997, providing for his employment as Vice President
and Chief Financial Officer for a one-year term at an annual salary of $120,000,
and for the grant of 50,000 stock options under the 1996 Stock Option Plan upon
commencement of employment.
Effective January 1, 1998, Mr. Baldwin's annual salary was increased to
$130,000 and Mr. Flicker's annual salary was increased to $125,000.
23
The Company also entered into Indemnification Agreements with Messrs.
Baldwin and Flicker, effective upon commencement of their employment,
contractually obligating the Company to indemnify each of them, to the fullest
extent permitted by applicable law, in connection with claims arising from
their service to, and activities on behalf of, the company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
A. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
-----------------------------------------------
Set forth below is information concerning persons known to the Company to
be beneficial owners of more than 5% of the Common Stock as of March 25, 1998.
Name and Address of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class
---------------------- -------------------- ----------
The Shapiro Group 1,000,000 (1) 6.0%
c/o Gary Shapiro
700 S. Federal Highway
Suite 200
Boca Raton, FL 33432
The Cohen Group 1,000,000 (2) 6.0%
c/o Lawrence J. Cohen
1325 Avenue of the Americas
Suite 1200
New York, NY 10019
NOTES TO TABLE
- --------------
(1) As set forth in a joint schedule 13D filed with the Securities and Exchange
Commission (the "Commission"), (a) the persons listed below are members of a
group (the "Shapiro Group"), and said persons share dispositive power with each
other and with the members of the Cohen Group (see footnote 2 to this table),
as to 1,000,000 shares of the Company's Common Stock, and (b) each of the
members of the Shapiro Group has sole voting power with respect to the number
of shares (out of the total of 1,000,000 shares) set forth below opposite his
name.
The members of the Shapiro Group, and the number of shares as to which each
of said persons has sole voting power, are as follows:
24
Name of Person Number of Shares
-------------- ----------------
The SIII Associates Limited Partnership, 201,854
Third Addison Park Corporation,
and Gary L. Shapiro*
Keith B. Stein 68,343
Robert W. Barron 37,120
Adam Frieman 11,642
Stephen L. Gurba 90,712
Peter Offermann 11,642
Joseph Huston 7,761
Jan Sirota 11,642
Neal Polan 11,642
Michael Zarriello 11,642
(*) The SIII Associates Limited Partnership has the sole power to vote
201,854 shares of Common Stock. Third Addison Park Corporation is the general
partner of said partnership, and Gary L. Shapiro is the chief executive officer
of said Corporation.
(2) As set forth in joint Schedule 13D filed with the Commission, (a) the
persons listed below are members of a group (the "Cohen Group"), and said
persons share dispositive power with each other and with the members of the
Shapiro Group (see footnote 1 to this table), as to 1,000,000 shares of the
Company's Common Stock, and (b) each of the members of the Cohen Group has sole
voting power with respect to the number of shares (out of the total of 1,000,000
shares) set forth below opposite his name.
The members of the Cohen Group, and the number of shares as to which each
of said persons has sole voting power, are as follows;
Name of Person Number of Shares
-------------- ----------------
Lawrence J. Cohen 188,000
Milton Neustadter 38,500
Jay Chazanoff 121,300
Ron Jacobs 94,100
Stephen Simms 94,100
B. SECURITY OWNERSHIP OF MANAGEMENT
--------------------------------
The following table sets forth the beneficial ownership of Common Stock by
each director, each of the executive officers named in the Summary Compensation
Table set forth in Item 11(A), above, and all executive officers and directors
as a group (7 persons), as of March 25, 1998.
25
Name of Amount and Nature of Percentage
Beneficial Owner(1) Beneficial Ownership of Class*
---------------------- -------------------- ----------
Daniel Baldwin 50,000(2) **
Alan E. Casnoff 585,000(3) 3.5%
Gary Flicker 75,000(4) **
Myron Rosenberg 203,854(5) 1.2%
Frederick E. Smithline 72,550(6) **
Keith B. Stein 1,000,000(7) 6.0%
Allen Yudell 30,000(8) **
All current directors
and executive officers
as a group (7 persons) 2,016,404(9) 11.8%
* In each instance where a named individual is listed as the holder of a
currently exercisable option, the shares which may be acquired upon exercise
thereof have been deemed outstanding for the purpose of computing the percentage
owned by such person, but not for the purpose of computing the percentage owned
by any other person, except the group referred to in note 9. An option is
deemed to be currently exercisable if it may be exercised within 60 days.
** Less than 1%
(1) Messrs. Baldwin, Casnoff and Flicker are executive officers of the
Company. Messrs. Rosenberg, Smithline and Yudell are the regular directors, and
Mr. Stein is the special purpose director.
(2) Represents 50,000 shares which may be acquired upon the exercise of
currently exercisable options.
(3) Excludes 480 shares held by Mr. Casnoff's adult son, as to which shares
Mr. Casnoff disclaims beneficial ownership. Includes 26,000 shares owned by a
corporation, partially owned and controlled by Mr. Casnoff, and 375,000 shares
which may be acquired upon the exercise of currently exercisable options.
(4) Represents 75,000 shares which may be acquired upon the exercise of
currently exercisable options.
(5) Includes 4,300 shares held by Mr. Rosenberg's wife, of which 4,300 shares
he disclaims beneficial ownership, and 15,000 shares which may be acquired upon
the exercise of currently exercisable options.
(6) Includes 550 shares held by Mr. Smithline and his brother as tenants-in-
common and 6,000 shares held by Mr. Smithline's wife, of which 6,000 shares Mr.
Smithline disclaims beneficial ownership. Also includes 15,000 shares which may
be acquired upon the exercise of currently exercisable options.
(7) Mr. Stein is a member of the Shapiro Group and shares dispositive power
as to 1,000,000 shares with the members of said group, and with the members of
the Cohen Group. Mr. Stein has sole voting power as to 68,343 of said shares.
(8) Represents 30,000 shares which may be acquired upon the exercise of
currently exercisable options.
(9) Number of shares and percentage owned includes 560,000 shares which may
be acquired through exercise of currently exercisable options held by certain
of the named persons. Number of outstanding shares for purpose of computation
of percentage of ownership by the group includes such shares.
26
C. CHANGES IN CONTROL
------------------
As set forth in Item 1(C) above, in connection with the Original Loan by
NPM Capital LLC ("NPM") in September 1996, the Company issued to, or for the
benefit of, the members of the Shapiro Group and the Cohen Group (who are
affiliates of NPM, and of NPO Management LLC), warrants (the "Warrants") to
purchase such number of shares of Common Stock as, when added to the 1,000,000
shares listed in the table in Item 12(A) above, represent rights to acquire up
to 49% of the outstanding Common Stock on a full diluted basis. Except under
certain circumstances, the Warrants are not exercisable prior to January 1, 1999
without the prior consent of the Company's Board of Directors. If and at such
time as any or all of the Warrants are exercised, it is possible that a "change
in control" of the Company, within the meaning of applicable rules and
regulations under the Securities and Exchange Act of 1934, may be deemed to
occur, depending upon the extent of exercise.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A. As described in Item 1(C) above, the Company consummated a multi-
faceted transaction on September 27, 1996, pursuant to which: (i) certain
existing indebtedness of the Company was acquired by NPM Capital LLC ("NPM"),
under an Amended and Restated Loan Agreement dated as of March 27, 1996 (the
"Original Loan Agreement") pursuant to which the Company became indebted to NPM
in the original principal amount of $8,382,000; (ii) 1,000,000 shares of Common
Stock (representing 6.0% of the Common Stock now outstanding) were issued to,
and purchased by, the members of the Shapiro Group and the Cohen Group (see Item
12(A) above), who are affiliates of NPM and NPO; (iii) the Certificate of
Incorporation of the Company was amended to permit the issuance of warrants, to
limit change of ownership of capital stock of the Company and to designate
Preferred Stock together with rights, powers and preferences (including the
appointment of a special purpose director); (iv) warrants to purchase additional
shares of Common Stock (which, when added to the 1,000,000 shares acquired,
represent rights to acquire up to 49% of the outstanding Common Stock, on a
fully diluted basis) were issued to, or for the benefit of, the members of the
Shapiro Group and the Cohen Group; (v) 100 shares of Preferred Stock were issued
to an affiliate of NPM; (vi) most, but not all, convertible securities and
warrants existing and outstanding prior to the transaction were converted into
Common Stock; and (vii) the Company continued the engagement of NPO Management
LLC ("NPO"), an affiliate of NPM, to perform administrative and advisory
services relating to the assets of the Company and its affiliated partnerships,
pursuant to an Asset Servicing Agreement dated March 27, 1996.
In March and April 1997, NPM advanced the Company an additional $200,000.
These advances were not required under the Original Loan Documents. As of March
15, 1998, the amount of the Company's indebtedness to NPM was approximately
$5,200,000, and the Company had accrued service fees to NPO in the amount of
approximately $1,050,000 (in each case net of payments made from the inception
of these arrangements through March 15, 1998).
The members of the Shapiro Group and of the Cohen Group are affiliates of
NPM and NPO, and therefore have a material interest in the transactions between
the Company and NPM, and between the Company and NPO, described in the preceding
paragraphs. Keith B. Stein, the special purpose director of the Company and a
member of the Shapiro Group, is an affiliate of NPM and NPO, and therefore has
a material interest in said transactions.
27
B. Alan E. Casnoff (President of the Company, and a director until
September 1996) became President and the sole director of Kenbee Management,
Inc. by virtue of certain voting trust agreements which were entered into
because Kenbee was the Company's largest debtor, and the Company needed to
obtain control of Kenbee. Mr. Casnoff acquired sole voting power over the
shares of capital stock of R&M Holding, a Delaware corporation and the sole
stockholder of Kenbee, pursuant to the terms of a Voting Trust Agreement dated
May 15, 1991, between R&M Holding and Mr. Casnoff, as trustee. The shares
subject to the Agreement are owned by Roger D. Stern and Martin Wright, each a
50% owner of the shares of capital stock of R&M Holding, and each a former
officer and director of the Company. The term of the Voting Trust Agreement
expires on January 1, 2000 as to 50% of the shares of capital stock owned by Mr.
Stern and on February 28, 2001 as to 50% of the shares of capital stock owned
by Mr. Wright.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this report:
(1) The Financial Statements required by Item 8 of this
report are listed below:
Item 8
Page No.
--------
Independent Auditors' Report F- 1
Consolidated Balance Sheets -
December 31, 1997 and 1996 F- 2
Consolidated Statements of Operations
for each of the years in the three year period
ended December 31, 1997 F- 4
Consolidated Statements of Shareholders'
Equity (Deficiency) for each of the years
in the three year period ended December
31, 1997 F- 5
Consolidated Statements of Cash Flows for
each of the years in the three year period
ended December 31, 1997 F- 6
Notes to Consolidated Financial Statements F- 9
(2) The Financial Statement Schedules required
by Item 8 of this report are listed below:
None
Other schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the financial
statements or notes thereto.
(3) INDEX OF EXHIBITS
The following is a list of the Exhibits filed as a part of this report
(those marked * are filed herewith):
29
3. ARTICLES OF INCORPORATION AND BY-LAWS.
(a) DVL's Certificate of Incorporation, filed March 28, 1977 (Incorpo-
rated by reference to Exhibit 6(d) to DVL's Form S-1. Registra-
tion Statement No. 2-58847 dated April 28, l977.)
(b) DVL's Certificate of Amendment to Certificate of Incorporation,
filed July 13, 1977 (Incorporated by reference to Exhibit 6(e) to
Amendment No. 1. to DVL's Form S-1. Registration Statement No.
2-58847 dated August 25, l977.)
(c) DVL's Certificate of Amendment to Certificate of Incorporation,
filed August 3, 1982. (Incorporated by reference to Exhibit 3(c)
to DVL's Form 10-K for the fiscal year ended December 31, 1982.)
(d) DVL's Certificate of Amendment to Certificate of Incorporation,
filed May 27, 1983. (Incorporated by reference to Exhibit 3(d)
to DVL's Form 10-K for the fiscal year ended December 31, 1983.)
(e) DVL's Certificate of Amendment to Certificate of Incorporation,
filed July 24, 1987. (Incorporated by reference to Exhibit 3(e) to
DVL's Form 10-K for the fiscal year ended December 31, 1987).
(f) DVL's Certificate of Amendment to Certificate of Incorporation,
filed December 20, 1993. (Incorporated by reference to DVL's Form
10-K for fiscal year ended December 31, 1993.)
(g) DVL's Certificate of Amendment to Certificate of Incorporation,
filed December 4, 1995 (Incorporated by reference to DVL's proxy
statement dated October 13, 1995 - Exhibit A).
(h) DVL's Certificate of Amendment to Certificate of Incorporation
adding new Articles Fourth and Eleventh, filed September 17, 1996.
(Incorporated by reference to DVL's proxy statement dated July 31,
1996 - Exhibit I.)
(i) DVL's By-Laws, as in full force and effect at all times since March
28, l977. (Incorporated by reference to Exhibit 3(c) to DVL's Form
10-K for the fiscal year ended December 31, 1980.)
(j) DVL's First Amendment to By-Laws dated as of January 1, 1994. (In-
corporated by reference to Exhibit 3(d) to DVL's Form 10-K for the
fiscal year ended December 31, 1995.)
(k) DVL's Second Amendment to By-Laws, effective September 17, 1996
(Incorporated by reference to DVL's proxy statement dated July 31,
1996 - Exhibit J.)
10. MATERIAL CONTRACTS.
10.1 Voting Trust Agreement between R&M Holding Company and Alan Casnoff
dated May 15, 1991. (Incorporated by reference to Exhibit 10(a)(18)
to DVL's Form 10-K for the fiscal year ended December 31, 1991.)
10.2 Stipulation of Settlement of IN RE KENBEE LIMITED PARTNERSHIP
LITIGATION dated August 12, 1992. (Incorporated by reference to
Exhibit 10(b)(25) to DVL's Form 10-K for the fiscal year ended
December 31, 1995.)
30
10.3 Stipulation of Partial Settlement and Order in IN RE DEL-VAL
FINANCIAL CORPORATION SECURITIES LITIGATION Master File #MDL872.
(Incorporated by reference to Exhibit 10(b)(28) to DVL's Form 10-K
for the fiscal year ended December 31, 1995.)
10.4 Amended and Restated Loan Agreement between DVL and NPM Capital LLC,
dated as of March 27, 1996. (Incorporated by reference to Exhibit
10(b)(33) to DVL's Form 10-K for the fiscal year ended December 31,
1995.)
10.5 Asset Servicing Agreement between DVL, PSC, Kenbee Realty and NPO
Management LLC dated as of March 27, 1996. (Incorporated by
reference to Exhibit 10(b)(34) to DVL's Form 10-K for the fiscal
year ended December 31, 1995.)
10.6 Third Voting Trust Extension between R&M Holding Company and Alan
Casnoff dated March 7, 1996. (Incorporated by reference to Exhibit
10(b)(35) to DVL's Form 10-K for the fiscal year ended December 31,
1995.)
10.7 Amended and Restated Loan Agreement between DVL, Inc and NPM Capital
LLC, dated March 27, 1996 (Incorporated by reference to Proxy
Statement dated July 31, 1996 - Exhibit A.)
10.8 Amended and Restated Negotiable Promissory Note from DVL, Inc.
to NPM Capital LLC (Incorporated by reference to DVL's Proxy
Statement dated July 31, 1996 - Exhibit B.)
10.9 Asset Servicing Agreement between DVL, Inc. and NPO Management LLC
(Incorporated by Reference to DVL's Proxy Statement dated July 31,
1996 - Exhibit C.)
10.10 Stock Purchase Agreement between DVL, Inc and NPM Capital LLC
(Incorporated by Reference to DVL's Proxy Statement dated July
31, 1996 - Exhibit D.)
10.11 Securities Purchase Agreement between DVL, Inc. and NPM Capital LLC
(Incorporated by Reference to DVL's Proxy Statement dated July 31,
1996 - Exhibit E.)
10.12 Common Stock Warrant issued by DVL, Inc. to NPO Holdings LLC
(Incorporated by Reference to DVL's Proxy Statement dated July
31, 1996 - Exhibit F.)
10.13 DVL, Inc. 1996 Stock Option Plan (Incorporated by Reference to DVL's
Proxy Statement dated July 31, 1996 - Exhibit K.)
10.14 Employment Agreement and Indemnification Agreement comprising
Exhibit A thereto, between DVL and Daniel Baldwin, dated March 14,
1997 (effective as of April 7, 1997) (Incorporated by reference
to Exhibit 10.1 to DVL's Form 10-Q for the quarter ended June 30,
1997).
10.15 Employment Agreement and Indemnification Agreement comprising
Exhibit A thereto, between DVL and Gary Flicker, dated April 16,
1997 (effective as of said date) (Incorporated by reference to
to Exhibit 10.2 to DVL's Form 10-Q for the quarter ended June 30,
1997).
31
10.16 Amendment dated as a July 10, 1996, to Amended and Restated Loan
Agreement dated as of March 27, 1996 between DVL, Inc. and NPM
Capital LLC. (Incorporated by reference to Exhibit 10.3.1 to DVL's
Form 10-Q for the quarter ended June 30, 1997.)
10.17 Second Amendment dated as of September 27, 1996, to Amended and
Restated Loan Agreement dated as of March 27, 1996 between DVL, Inc.
and NPM Capital LLC. (Incorporated by reference to Exhibit 10.3.2
to DVL's Form 10-Q for the quarter ended June 30, 1997.)
10.18 Third Amendment dated as of March 6, 1997, to Amended and Restated
Loan Agreement dated as of March 27, 1996 between DVL, Inc. and NPM
Capital LLC and Promissory Note dated as of March 6, 1997, com-
prising Exhibit A-1 thereto. (Incorporated by reference to Exhibit
10.3.3 to DVL's Form 10-Q for the quarter ended June 30, 1997.)
10.19 Fourth Amendment dated as of October 20, 1997, among DVL, Blackacre
Bridge Capital, LLC (the "Lender"), NPM Capital LLC and NPO Manage-
ment LLC, to Amended and Restated Loan Agreement, dated as of March
27, 1997, as amended, between DVL and NPM. (Incorporated by
reference to Exhibit 10.1 to DVL's Form 10-Q for the quarter ended
September 30, 1997.)
10.20 Promissory Note dated as of October 20, 1997, in the original
principal amount of $1,760,000 from DVL to Lender. (Incorporated by
reference to Exhibit 10.2 to DVL's Form 10-Q for the quarter ended
September 30, 1997.)
10.21 Subordination Agreement, dated as of October 20, 1997, among DVL,
the Lender, NPM and NPO. (Incorporated by reference to Exhibit 10.3
to DVL's Form 10-Q for the quarter ended September 30, 1997).
15. SUBSIDIARIES OF DVL.
The Company's only significant subsidiary is Professional Service
Corporation (a Delaware corporation).
*27. FINANCIAL DATA SCHEDULE
(b) No reports on Form 8-K were filed during the quarter ended December
31, 1997.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, DVL has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DVL, INC.
Date: March 31, 1998 By: Alan E. Casnoff
___________________________
Alan E. Casnoff, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of DVL and in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
Alan E. Casnoff
______________________
Alan E. Casnoff President and Chief Executive March 31, 1998
Officer (Principal Executive
Officer)
Gary Flicker
______________________
Gary Flicker Vice President and Chief March 31, 1998
Financial Officer (Principal
Financial and Accounting
Officer)
Frederick E. Smithline
______________________
Frederick E. Smithline Director March 31, 1998
Allen Yudell
______________________
Allen Yudell Director March 31, 1998
Myron Rosenberg
______________________
Myron Rosenberg Director March 31, 1998
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, DVL has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DVL, INC.
Date: March 31, 1998 By: /s/ Alan E. Casnoff
___________________________
Alan E. Casnoff, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of DVL and in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Alan E. Casnoff
__________________________
Alan E. Casnoff President and Chief Executive March 31, 1998
Officer (Principal Executive
Officer)
/s/ Gary Flicker
__________________________
Gary Flicker Vice President and Chief March 31, 1998
Financial Officer (Principal
Financial and Accounting
Officer)
/s/ Frederick E. Smithline
__________________________
Frederick E. Smithline Director March 31, 1998
/s/ Allen Yudell
__________________________
Allen Yudell Director March 31, 1998
/s/ Myron Rosenberg
__________________________
Myron Rosenberg Director March 31, 1998
34
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Consolidated Financial Statements of DVL, Inc.
and Subsidiaries and Independent Auditors Report
Page
----
Independent Auditors' Report F- 1
Consolidated Balance Sheets-December 31, 1997 and 1996 F- 2
Consolidated Statements of Operations for each of the
years in the three year period ended December 31, 1997 F- 4
Consolidated Statements of Shareholders' Equity
(Deficiency) for each of the years in the three year
period ended December 31, 1997 F- 5
Consolidated Statements of Cash Flows for each of the
years in the three year period ended December 31, 1997 F- 6
Notes to Consolidated Financial Statements F- 9
RICHARD A. EISNER & COMPANY, LLP
575 Madison Avenue
New York, NY 10022-2597
- -------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
DVL, Inc.
Bogota, New Jersey
We have audited the accompanying consolidated balance sheets of DVL, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity (deficiency), and cash flows for
each of the years in the three year period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of DVL, Inc. and
subsidiaries as at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
has suffered significant losses from operations in each of the last three years
and is continuing to have liquidity problems. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
RICHARD A. EISNER & COMPANY, LLP
New York, New York
March 19, 1998
F-1
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
----------------------
1997 1996
ASSETS ---------- ----------
------
Loans receivable, including amounts maturing after one
year - principally pledged
Affiliates:
Wrap-around and other mortgages due from affiliated
partnerships (net of underlying liens of $45,306
and $49,749, respectively) $ 30,815 $ 42,163
Unearned interest (8,350) (12,325)
-------- --------
Net mortgage loans receivable from affiliated
partnerships (including $2,711 and $5,104 of
non-performing loans, respectively) 22,465 29,838
Others:
Non-performing loans collateralized by limited
partnership interests due from limited partners 1,690 3,066
-------- --------
Total loans receivable 24,155 32,904
Allowance for loan losses 10,142 12,854
-------- --------
Net loans receivable 14,013 20,050
Cash (including restricted cash of $77 for 1997 and 1996) 496 355
Due from affiliated partnerships (net of an allowance
for loss of $1,727 for 1997 and 1996) 142 114
Investments
Real estate at cost - pledged (net of an allowance for
loss of $208 for 1997 and 1996) 289 289
Real estate lease interests 1,621 1,965
Affiliated limited partnerships (net of an allowance for
loss of $1,246 and $1,342, respectively) 1,461 2,221
Other investments (net of an allowance for loss of $400
for 1997 and 1996) 648 667
Other assets 966 973
-------- --------
Total assets $ 19,636 $ 26,634
======== ========
See accompanying accountants' report and notes to consolidated financial statements.
F-2
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
December 31,
----------------------
1997 1996
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Long-term debt - NPM Capital LLC $ 5,310 $ 7,502
Long-term debt - Other 2,773 6,203
Notes payable - litigation settlement 4,060 6,635
Convertible subordinated debentures - 334
Accrued liability for indebtedness of Kenbee
Management, Inc. and affiliates - 115
Accounts payable and accrued liabilities 1,918 1,942
-------- --------
Total liabilities 14,061 22,731
-------- --------
Deferred credits 296 321
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock $10.00 par value, authorized - 100
shares, issued - 100 shares at December 31, 1997 1 1
Common stock, $.01 par value authorized - 40,000,000
shares at 1997 and 1996, issued - 16,232,450 shares
and 15,479,450 shares at December 31, 1997 and 1996,
respectively 162 155
Additional paid-in capital 95,240 95,146
Deficit (90,124) (91,720)
-------- --------
Total shareholders' equity 5,279 3,582
-------- --------
Total liabilities and shareholders' equity $ 19,636 $ 26,634
======== ========
See accompanying accountants' report and notes to consolidated financial statements.
F-3
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
Income from affiliates:
Interest on mortgage loans $ 900 $ 962 $ 1,287
Partnership management fees 411 449 484
Transaction and other fees from
partnerships 435 561 881
Distributions from investments 360 - -
Rent income 59 35 30
Other income 6 30 52
Income from others:
Interest on mortgage loans - 109 134
Interest on loans to limited partners
collateralized by limited partnership
interests - 15 210
Other interest 4 15 30
Other income 66 260 129
---------- ---------- ----------
2,241 2,436 3,237
---------- ---------- ----------
Operating expenses:
Provision for losses - 1,810 2,222
General and administrative 1,459 1,877 2,234
Asset Servicing Fee - NPO Management LLC 600 464 -
Legal and professional fees 184 195 810
Interest expense
NPM Capital LLC 849 242 -
Litigation Settlement 1,010 993 224
Others 554 1,326 3,492
Claim settlement and other litigation
losses - - 35
---------- ---------- ----------
4,656 6,907 9,017
---------- ---------- ----------
Loss before extraordinary gain (2,415) (4,471) (5,780)
Extraordinary gain on the settlements
of indebtedness 4,011 8,349 7,900
---------- --------- ----------
Net income $ 1,596 $ 3,878 $ 2,120
========== ========== ==========
Earnings per share - basic and diluted:
(Loss) before extraordinary gain $ (.15) $ (.31) $ (.58)
Extraordinary gain on the settlements
of indebtedness .25 .58 .79
---------- ---------- ----------
Net income $ .10 $ .27 $ .21
========== ========== ==========
Weighted average shares outstanding 15,788,535 14,339,905 9,980,565
========== ========== ==========
See accompanying accountants' report and notes to consolidated financial statements.
F-4
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(in thousands except share data)
Preferred Stock Common Stock Additional
--------------- -------------------- paid-in
Shares Amount Shares Amount capital Deficit Total
-------- ------ ----------- -------- ---------- --------- --------
Balance-January 1, 1995 - $ - 8,513,200 $ 8,513 $84,074 $(97,718) $(5,131)
Issuance of common stock in payment of accounts payable - - 5,068 5 2 - 7
Issuance of common stock to directors, employees and
consultants - - 725,000 725 (531) - 194
Recapitalization of $1 par common stock for $.01 par common
stock - - - (9,150) 9,150 - -
Issuance of common stock in connection with a settlement of
shareholder litigation - - 4,017,582 40 1,440 - 1,480
Net income - - - 2,120 2,120
------- ----- ---------- -------- ------- -------- -------
Balance-December 31, 1995 - - 13,260,850 133 94,135 (95,598) (1,330)
Issuance of common stock in satisfaction of certain claims - - 290,000 3 46 - 49
Issuance of common stock in connection with the modification
of the convertible subordinated debentures - - 728,600 7 151 - 158
Issuance of common stock in connection with creditor settlement - - 200,000 2 48 - 50
Issuance of common stock in connection with the Loan from
NPM Capital LLC - - 1,000,000 10 190 - 200
Issuance of preferred stock in connection with the Loan
from NPM Capital LLC 100 1 - - - - 1
Issuance of warrants in connection with the Loan from
NPM Capital LLC - - - - 516 - 516
Issuance of compensatory stock options - - - - 60 - 60
Net income - - - - - 3,878 3,878
------- ----- ---------- -------- ------- -------- -------
Balance-December 31, 1996 100 1 15,479,450 155 95,146 (91,720) 3,582
Issuance of common stock in satisfaction of certain claims - - 550,000 6 44 - 50
Issuance of common stock in connection with the loan from
NPM Capital LLC - - 150,000 1 21 - 22
Issuance of common stock in connection with the loan from
Blackacre Bridge Capital, LLC - - 325,000 3 26 - 29
Retirement of Shares of Common Stock - - (272,000) (3) 3 - -
Net income - - - - - 1,596 1,596
------- ----- ---------- -------- ------- -------- -------
Balance-December 31, 1997 100 $ 1 16,232,450 $ 162 $95,240 $(90,124) $ 5,279
======= ===== ========== ======== ======= ======== =======
See accompanying accountants' report and notes to consolidated financial statements.
F-5
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
Cash flows from operating activities:
Net loss before extraordinary gain $ (2,415) $ (4,471) $ (5,780)
Adjustments to reconcile net loss to net
cash (used in) operating activities
Provision for losses - 1,810 2,222
Accrued interest added to indebtedness 394 885 1,711
Cancellation of subordinated debentures - (133) -
Claim settlement losses added to accrued
expenses - - 35
Amortization of unearned interest on loans
receivable (57) 63 (58)
Amortization of debt discount 154 24 -
Amortization of deferred charges 217 357 84
Stock issued for services and settlements 101 - 194
Issuance of compensatory stock options - 60 -
Imputed interest on notes and debentures 1,010 1,002 888
Amortization of deferred credits (25) - -
Net (increase) decrease in other assets (210) (650) 335
Net (decrease) in accounts payable and
accrued liabilities (2) (617) (191)
Net (increase) in due from affiliated
partnerships (28) - -
-------- -------- --------
Net cash (used in) operating activities (861) (1,670) (560)
-------- -------- --------
Cash flows from investing activities:
Collections on loans receivable (net of
payments on underlying loans)
Affiliates 6,094 9,924 5,104
Others