SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________________ to_________________________
Commission file number: 1-8356
DVL, Inc.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2892858
- - -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
24 River Road, Bogota, New Jersey 07603
- - -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (201) 487-1300
--------------
- - -------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes: X No:
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes: No:
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at November 16, 1994
- - ----------------------------- --------------------------------
Common Stock, $1.00 par value 8,513,200
DVL, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
--------
Consolidated Balance Sheets -
September 30, 1994 and December 31, 1993 1
Consolidated Statements of Operations -
Three Months Ended September 30, 1994 and 1993 3
Nine Months Ended September 30, 1994 and 1993 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1994 and 1993 7
Notes to Consolidated Financial Statements 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Part II. Other Information:
Legal Proceedings 17
Defaults upon Senior Securities 20
Exhibits and Reports on Form 8-K 20
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
------
September 30, December 31,
1994 1993
------------ ------------
(unaudited)
<S> <C> <C>
Loans receivable, including amounts maturing
after one year - principally pledged (B)
Affiliates:
Wrap around and other mortgages due from
affiliated partnerships (net of underlying
liens of $53,682 and $52,022, respectively) $ 68,967 $ 80,767
Unearned interest (18,186) (20,426)
-------- --------
Net mortgage loans receivable from affiliated
partnerships (including non-performing loans
of $4,227 and $4,546, respectively) 50,781 60,341
Others:
Other mortgage loans 1,407 1,459
Loans collateralized by limited partnership
interests due from limited partners (including
$4,560 and $5,226 of non-performing loans,
respectively) 4,861 6,031
-------- --------
Total loans receivable 57,049 67,831
Allowance for loan losses (E) 9,196 7,034
-------- --------
Net loans receivable 47,853 60,797
Cash (including restricted cash of $1,087 and
$185, respectively) (B) 1,273 541
Due from affiliated partnerships (net of an
allowance for loss of $2,444 and $2,490,
respectively) 200 266
Investments
Real estate at cost - pledged 497 497
Real estate lease interests 2,611 2,623
Affiliated limited partnerships 4,508 4,497
Other investments 923 949
Other assets 555 632
Net assets of discontinued operations (C) 748 1,246
-------- --------
Total assets $ 59,168 $ 72,048
======== ========
</TABLE>
[FN]
See accompanying to consolidated financial statements.
1
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
September 30, December 31,
1994 1993
------------ -----------
(unaudited)
<S> <C> <C>
Liabilities:
Debt in default for non-payment - partially
collateralized (B) $ 12,202 $ 13,507
Accrued interest on debt in default for
non-payment (B) 5,015 4,272
Short-term debt (H) 215 2,613
Long-term debt 28,911 33,714
Notes to be issued pursuant to shareholder
litigation settlement (G) 4,235 3,690
Convertible subordinated debentures 445 438
Accrued liability for shareholder litigation
settlement (G) 1,810 1,810
Accrued liability for indebtedness of Kenbee
Management, Inc. and affiliates 487 1,171
Accounts payable and accrued liabilities 2,981 3,768
-------- --------
Total liabilities 56,301 64,983
-------- --------
Deferred credits 1,461 1,405
-------- --------
Commitments and contingent liabilities (F)
Shareholders' equity:
Common stock, $1 par value, authorized -
16,000,000 shares, issued and to be issued -
8,513,200 and 8,103,043, respectively 8,513 8,103
Additional paid-in capital 84,074 84,100
Deficit (91,181) (86,543)
-------- --------
Total shareholders' equity 1,406 5,660
-------- --------
Total liabilities and
shareholders' equity $ 59,168 $ 72,048
======== ========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
2
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
(unaudited)
Three Months Ended
September 30,
---------------------
1994* 1993
--------- ---------
<S> <C> <C>
Income from affiliates (B)
Interest on mortgage loans $ 491 $ 532
Management fees from partnerships 119 -
Transaction and other fees from partnerships 8 -
Rent income 8 7
Income from others
Interest on loans to limited partners 102 61
Other interest 8 1
--------- ---------
736 601
Operating expenses --------- ---------
General and administrative 368 398
Legal and professional fees 120 202
Net provision for losses 2,026 364
Interest expense 959 1,017
Loss on investment in First Mechanics
Finance Company (D) 851 -
Claim settlement and other litigation losses 22 530
--------- ---------
4,346 2,511
--------- ---------
Loss before gain on sales of real estate (3,610) (1,910)
Gain on sales of real estate to affiliates 2 3
--------- ----------
Loss from continuing operations (3,608) (1,907)
Loss from discontinued operations (C) (80) (228)
--------- ---------
Loss before extraordinary gain (3,688) (2,135)
Extraordinary gain on the settlement
of indebtedness (H) - 3,435
--------- ---------
Net income (loss) $ (3,688) $ 1,300
========= =========
</TABLE>
[FN]
* - Reflects reclassification of expenses for loss on investment in First
Mechanics Finance Company.
See accompanying notes to consolidated financial statements.
3
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
(continued)
(unaudited)
Three Months Ended
September 30,
---------------------
1994 1993
--------- ---------
<S> <C> <C>
Earnings (loss) per share (J):
Primary
Loss from continuing operations $ (.43) $ (.26)
Loss from discontinued operations (.01) (.03)
--------- ---------
Loss before extraordinary gain (.44) (.29)
Extraordinary gain on the settlement of
indebtedness - .47
--------- ---------
Net income (loss) $ (.44) $ .18
========= =========
Fully diluted:
Loss from continuing operations $ (.43) $ (.23)
Loss from discontinued operations (.01) (.03)
--------- ---------
Loss before extraordinary gain (.44) (.26)
Extraordinary gain on the settlement of
indebtedness - .42
--------- ---------
Net income (loss) $ (.44) $ .16
========= =========
Weighted average shares outstanding
Primary 8,472,450 7,396,005
========= =========
Fully diluted 8,472,450 8,087,150
========= =========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
4
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
(unaudited)
Nine Months Ended
September 30,
---------------------
1994 1993
--------- ---------
<S> <C> <C>
Income from affiliates (B)
Interest on mortgage loans (including $354
realized upon the early satisfaction of
certain loans in 1994) $ 1,783 $ 1,890
Management fees from partnerships 384 118
Transaction and other fees from partnerships 445 -
Rent income 23 77
Income from others
Interest on loans to limited partners 267 209
Other interest 27 4
--------- ---------
2,929 2,298
--------- ---------
Operating expenses
General and administrative 1,607 2,238
Legal and professional fees 346 514
Depreciation of real estate assets - 4
Net provision for losses 2,753 141
Interest expense 2,912 3,341
Loss on investment in First Mechanics
Finance Company (D) 1,234 -
Claim settlement and other litigation losses 592 562
--------- ---------
9,444 6,800
--------- ---------
Loss before gain on sales of real estate (6,515) (4,502)
Gain on sales of real estate to affiliates 7 13
--------- ---------
Loss from continuing operations (6,508) (4,489)
Loss from discontinued operations (C) (65) (315)
--------- ---------
Loss before extraordinary gain (6,573) (4,804)
Extraordinary gain on the settlement
of indebtedness (H) 1,935 5,945
--------- ---------
Net income (loss) $ (4,638) $ 1,141
========= =========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
5
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
(unaudited)
Nine Months Ended
September 30,
---------------------
1994 1993
--------- ---------
<S> <C> <C>
Earnings (loss) per share (J):
Primary
Loss from continuing operations $ (.78) $ (.61)
Loss from discontinued operations (.01) (.04)
--------- ---------
Loss before extraordinary gain (.79) (.65)
Extraordinary gain on the settlement of
indebtedness .23 .81
--------- ---------
Net income (loss) $ (.56) $ .16
========= =========
Fully diluted
Loss from continuing operations $ (.78) $ (.56)
Loss from discontinued operations (.01) (.04)
--------- ---------
Loss before extraordinary gain (.79) (.60)
Extraordinary gain on the settlement of
indebtedness .23 .75
--------- ---------
Net income (loss) $ (.56) $ .15
========= =========
Weighted average shares outstanding
Primary 8,292,970 7,308,571
========= =========
Fully diluted 8,292,970 7,957,314
========= =========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
6
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
-----------------------
1994 1993
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Loss from continuing operations $ (6,508) $ (4,489)
Adjustments to reconcile net cash provided
by operating activities
Net provision for losses 2,753 141
Loss from investment in First Mechanics
Finance Company 1,234 -
Claim settlement and other litigation
losses 592 362
Depreciation and amortization 79 169
Decrease in unearned interest on loans
receivable (369) (366)
Net increase in payables 320 2,372
Imputed interest on notes to be issued 545 -
Amortization of deferred credits (7) (13)
Increase in deferred credits 63 -
Net increase in other assets (47) (128)
Net cash provided by (used in)
discontinued operations 12 (558)
-------- --------
Net cash used in
operating activities (1,333) (2,510)
-------- --------
Cash flows from investing activities
Collections on loans receivable (net of
payments on underlying loans) 8,919 4,823
Fundings of other loans receivable - (108)
Proceeds from sale of real estate acquired
for resale - 76
Net collections on amounts due from
affiliated partnerships 66 23
Distributions received on limited
partnership and other investments 219 96
Net collections on real estate lease
interests - 53
Acquisition of limited partnership
interests (113) -
Loss from investment in First Mechanics
Finance Company (1,234) -
Net cash provided by discontinued
investing activities 503 5,432
-------- --------
Net cash provided by
investing activities 8,360 10,395
-------- --------
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
7
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(in thousands)
(unaudited)
Nine Months Ended
September 30,
----------------------
1994 1993
--------- --------
<S> <C> <C>
Cash flows from financing activities
Proceeds from issuance of subordinated
debentures - 16
Decrease in amounts due from
Kenbee Management, Inc. - 275
Increase in indebtedness 640 -
Repayment of indebtedness (6,551) (3,539)
Repayment of guaranteed indebtedness (384) -
Net cash used in discontinued
financing activities - (4,525)
-------- --------
Net cash used in financing activities (6,295) (7,773)
-------- --------
Net increase in cash 732 112
Cash - beginning 541 149
-------- --------
Cash - end $ 1,273 $ 261
======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest
(excluding amounts paid on underlying
mortgages) $ 732 $ 1,682
======== ========
Supplemental disclosure of non-cash
investing and financing activities:
Net effect of sale of real estate
acquired for resale $ - $ 381
======== ========
Net reduction in indebtedness upon
transfer of assets to creditor $ - $ 10,209
======== ========
Net reduction in indebtedness pursuant
to creditor settlements $ 1,935 $ 5,945
======== ========
Increase in long-term debt upon
capitalization of accrued interest
and other payables $ 784 $ 804
======== ========
Reduction in indebtedness upon
issuance of common stock $ 382 $ 79
======== ========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
8
DVL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) In the opinion of DVL, Inc. ("DVL"), the accompanying financial
statements contain all adjustments (consisting of only normal accruals)
necessary for a fair presentation of financial position and the results of
operations for the periods presented. The results of operations for the nine
months ended September 30, 1994 should not be regarded as necessarily indicative
of the results that may be expected for the full year.
(B) DVL continues to experience severe liquidity problems principally as a
result of the reduced cash flow received on the restructured and non-performing
portions of its loan portfolio. The majority of DVL's assets consist of
mortgage loans to affiliated partnerships. Although only a small portion of
DVL's mortgage loan portfolio is non-performing, a substantial portion of the
portfolio does not generate significant income or cash flow as the restructured
terms of such mortgages require the mortgage debt service to be used to pay
liens senior to DVL's. Although DVL has completed settlements with the majority
of its creditors, it remains in default for non-payment of principal and
interest on $17 million of its indebtedness. DVL has made significant progress
in its negotiations with its two remaining unsettled creditors to restructure
the payment terms of such loans and has placed $1 million in escrow in
connection with proposed settlements with such creditors.
DVL's cash flow provided by current operations is insufficient to meet
its current cash requirements. As a result, DVL is liquidating and refinancing
certain assets and is seeking equity based financings in order to satisfy
indebtedness and meet its operating cash flow deficiency. In 1994, DVL
refinanced a portion of its mortgage portfolio which generated cash proceeds of
approximately $5.9 million, of which approximately $4.6 million was used to
satisfy existing indebtedness and approximately $1 million was placed in escrow
in connection with proposed settlements with DVL's two remaining unsettled
creditors. DVL also received $.2 million in fees for arranging similar
financings for partnerships where DVL did not hold a mortgage. As a result of
DVL's prior and current asset liquidations and refinancings, DVL's asset base
available for future liquidations and refinancings has diminished considerably.
There can be no assurance that the cash flow generated by potential asset
liquidations or refinancings will be sufficient to meet DVL's current operating
cash flow deficiencies or mandatory debt payments.
During 1993 and 1994, DVL began to pursue two new business ventures
which involved the acquisition, development and resale of residential real
estate, and the commercial financing of tool purchases by automobile mechanics.
The sales and development of DVL's real estate projects progressed more slowly
than originally projected and DVL is currently attempting to wholesale all its
remaining properties to satisfy indebtedness and generate cash flow to offset
its operating deficiency (see Note C). Furthermore, the start-up costs and
initial operating losses of the commercial tool financing business were
significantly greater than originally anticipated. As DVL could not continue
to fund such costs, DVL entered into an agreement giving the president of this
subsidiary the option to purchase the business, whereby DVL may recoup a portion
of its investment (see Note D). By divesting itself of these new business
ventures, DVL is focusing on its existing business of real estate management and
finance in an effort to maximize the value of its remaining assets.
In October 1994, Alan E. Casnoff assumed the position of President and
Chief Executive Officer of DVL. Ben S. Read, Jr., DVL's former President,
subsequently resigned from all positions with DVL, its affiliates and
subsidiaries.
9
DVL's ability to continue as a going concern is dependent upon (1) the
success of the negotiations to restructure the payment terms of its remaining
unsettled indebtedness, (2) the sale or refinancing of certain assets to improve
its cash position in order to meet operating expenses and make payments to its
creditors, (3) the realization of the estimated value of its loan portfolio over
an extended period of time rather than the value of the assets on a liquidation
basis, and (4) the return to profitable operations in the future. If DVL is
unsuccessful in achieving a short-term solution to its liquidity problems, and,
moreover, solutions to cure its remaining loan defaults and return it to
profitable operations, then it may not be able to continue as a going concern
and may be forced to file for protection from creditors under Chapter 11 of the
United States Bankruptcy Code. These interim financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
(C) As DVL has ceased the acquisition of real estate development projects
and is attempting to liquidate its remaining projects, these activities are
accounted for as a discontinued operation in these financial statements with the
assets presented net of non-recourse indebtedness of $3,317,000 at September 30,
1994.
DVL acquired interests in four real estate projects, three of which were
acquired on January 1, 1994 through DVL's acquisition of RH Interests, Inc.
("RH") from Kenbee Management, Inc. ("Kenbee"), which was formerly DVL's manager
and its largest debtor. RH was formed in April 1993 as a wholly-owned
subsidiary of Kenbee to temporarily provide administrative and managerial
services for partnerships where DVL is the general partner, and to temporarily
develop new business opportunities in the residential real estate development
business pending DVL's election not to be taxed as a real estate investment
trust ("REIT"). RH's only assets are its interests in three residential real
estate projects.
In October 1994 and November 1994, DVL liquidated its interests in two
of its real estate projects at no gain or loss. DVL has been unable to attract
a buyer for its third project and expects to lose this property through a
foreclosure in the future, for which it fully reserved a loss of $67,000. DVL
has entered into a non-binding agreement to sell its final real estate project
and management does not anticipate a loss upon the final liquidation of this
project.
Furthermore, DVL continues to liquidate Del-Val Capital Corp.'s ("DVCC")
assets and therefore, DVCC is also accounted for as a discontinued operation in
these financial statements. In May 1994, DVCC sold one loan at its carrying
value and pledged one of its remaining loans as collateral for a DVL loan. No
material loss is anticipated on the ultimate liquidation of the remaining loans.
(D) In April 1994, DVL formed First Mechanics Finance Company ("FMF") as a
wholly-owned subsidiary to purchase loan contracts from local tool dealers made
to finance tool purchases by automobile mechanics. In May 1994, FMF entered
into a $2 million revolving credit agreement with an unaffiliated financial
institution to finance its lending activities. In October 1994, DVL entered
into an agreement giving FMF's president an option to purchase this subsidiary
in order to eliminate the funding of FMF's operating cash flow deficiency and
to potentially recoup a portion of DVL's investment. Although the terms of the
option call for DVL to receive $850,000 in varying installments over a three
year period, no value was assigned to the potential receivable of the option
agreement. If the option is not exercised, DVL intends to cease FMF's
operations. The results of FMF's operations were not consolidated in these
financial statements as FMF is reflected as a temporary investment.
10
(E) Management's evaluations of the collateral underlying each loan in DVL's
portfolio previously resulted in substantial loan write-offs and a substantial
allowance for loan losses. The current evaluation considered the non-performing
portion of DVL's loan portfolio, internally generated appraisals of certain
properties, updated information on certain properties and DVL's anticipated
liquidation of loans to meet its operating cash flow deficiency and its
mandatory payment obligations on certain indebtedness. To date, DVL has been
unable to liquidate assets to meet two mandatory payment obligations due on
December 31, 1994 totalling approximately $1.4 million. If DVL is unable to
meet one of such obligations of approximately $1.2 million, the lender may
liquidate two of the six DVL mortgages which collateralize this debt. For DVL's
other mandatory payment obligation of approximately $200,000, the lender has
full recourse against DVL. DVL provided for an additional loss of $1,750,000
during the three months ended September 30, 1994 as a result of the potential
forced asset liquidations to meet such obligations.
(F) In April 1994, DVL completed a settlement with a creditor to whom DVL
was obligated as a guarantor of an affiliate's indebtedness of approximately $5
million. Pursuant to the settlement, DVL issued 320,000 shares of common stock
with a future guaranteed value of $1.50 per share, and paid $275,000 in full
satisfaction of the guarantee. The settlement was fully reserved for in 1993.
(G) In December 1993, DVL reached a settlement in the shareholder class
action litigation which calls for DVL to issue 900,000 shares of DVL common
stock at a guaranteed value of $1.50 per share and notes with a face value of
$9 million and to make a payment of cash or common stock of $1.4 million. At
September 30, 1994 and December 31, 1993, management reflected the common stock
and notes as to be issued and a reserve of $1.81 million for the future $1.4
million payment due and for any deficiency in the minimum price of the 900,000
shares to be issued. The $9 million face value notes are due in ten years, bear
interest at 10% per annum payable in kind for five years, are callable after the
third year, are payable in cash or common stock at DVL's option and were valued
at $3.69 million by an independent investment banker. Commencing January 1994,
interest on such notes is imputed based upon an effective interest rate of
approximately 19%. The settlement is expected to result in a loss of $6.4
million which was fully provided for in 1992.
Certain shareholder and limited partner litigation was not consolidated
with the respective class actions and DVL continues to defend itself against
such litigation. In addition, DVL remains a defendant in certain other
litigation. Although it is too early to predict the final outcome of such
pending litigation, management accrued a reserve of $650,000 as its estimate of
DVL's potential loss to be realized upon the settlement of these suits.
(H) In February 1994 and June 1994, DVL made the final installment payments
due under a settlement agreement with one of its creditors aggregating $674,000,
which resulted in an extraordinary gain on the settlement of indebtedness of
$1,729,000.
In May 1994, a DVL creditor agreed to accept $250,000 in full
satisfaction of DVL's indebtedness, which resulted in an extraordinary gain on
the settlement of indebtedness of $106,000.
In June 1994, DVL agreed to refinance collateral which was previously
pledged to one of DVL's creditors in connection with the restructuring of DVL's
indebtedness. As a result of this refinancing, DVL obtained the residual
interest in this collateral and a reduction of its indebtedness of $450,000 in
exchange for a payment of $350,000, which resulted in an extraordinary gain on
the settlement of indebtedness of $100,000.
11
(I) The company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109 ("FAS 109"), which requires the
Company to recognize deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. In addition, FAS 109 requires the recognition of future tax benefits
such as net operating loss carryforwards, to the extent that realization of such
benefits is more likely than not. At December 31, 1993, DVL had approximately
$66 million of net operating loss carryforwards available to offset future
taxable income, if any, expiring through 2008. Until management anticipates the
realization of such future tax benefits, DVL's deferred tax asset of
approximately $26 million will be fully reserved for.
(J) Primary earnings per share amounts are based upon the weighted average
number of common shares and equivalents outstanding. The dilutive effect of
outstanding options and warrants is computed using the treasury stock method.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS Of
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DVL continues to experience severe liquidity problems principally as a
result of the reduced cash flow received on the restructured and non-performing
portions of its loan portfolio. Although only a small portion of DVL's mortgage
loan portfolio is non-performing, a substantial portion of the portfolio does
not generate significant income or cash flow as the restructured terms of such
mortgages require the mortgage debt service to be used to pay liens senior to
DVL's. DVL is also a defendant in certain remaining litigation. See "Legal
Proceedings". Although DVL has made significant progress in its negotiations
with its two remaining unsettled creditors, DVL remains in default on principal
and interest payments on approximately $17 million of its indebtedness.
Furthermore, DVL has been unable to liquidate assets to meet mandatory payment
obligations due December 31, 1994 totalling approximately $1.4 million on two
of its previously restructured debts.
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 equity borrowings. There is a risk that DVL may not be able to raise
the necessary funds with which to continue operations. If DVL is unable to
raise the necessary funds to continue operating, it may be forced to file for
protection from creditors in accordance with Chapter 11 of the United States
Bankruptcy Code.
DVL's ability to continue as a going concern is dependent upon (1) the
success of the negotiations to restructure the payment terms of its remaining
unsettled indebtedness, (2) the sale or refinancing of certain assets to improve
its cash position in order to meet operating expenses and make payments to its
creditors, (3) the realization of the estimated value of its loan portfolio over
an extended period of time rather than the value of the assets on a liquidation
basis, and (4) the return to profitable operations in the future. If DVL is
unsuccessful in achieving a short-term solution to its liquidity problems, and
moreover, solutions to cure remaining loan defaults and return it to profitable
operations, then it may not be able to continue as a going concern.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1993
DVL realized a net loss of $3,688,000 for the three months ended
September 30, 1994, as compared to net income of $1,300,000 for the
corresponding 1993 period, a change of $4,988,000. The change was primarily a
result of decreased extraordinary gains realized upon creditor settlements,
additional loss provisions for potential forced asset liquidations and the loss
incurred on the investment in FMF. The effects of these items and the other
factors contributing to DVL's operating results are as follows:
Interest income on mortgage loans due from affiliates decreased by
$41,000 primarily as a result of a reduction in the amount of such loans to
affiliated partnerships due to the transfer of certain loans pursuant to
creditor settlements and from the satisfaction of certain loans upon the sale
of the partnership properties.
Management fees from partnerships increased by $119,000 as a result of
DVL's management of its affiliated partnerships for all of 1994 after the
termination of its management agreement with RH effective January 1, 1994.
13
Transaction and other fees from partnerships aggregating $8,000 in 1994
represent the fees received upon the refinancing or sale of certain partnership
properties.
Interest income on loans to limited partners increased by $41,000 due
to better than expected collections on the non-performing portion of this
portfolio, partially offset by a decrease in the average outstanding balances
of the performing portion of this portfolio.
Other interest income increased by $7,000 primarily as a result of the
earnings on DVL's restricted cash balances in 1994.
General and administrative expenses decreased by $30,000 primarily as
a result of a decrease in the value of performance units granted to certain
officers and the allocation of overhead to FMF, partially offset by an increase
in shareholder and other operating expenses.
Legal and professional fees decreased by $82,000 primarily as a result
of a decrease in activity in certain legal matters in 1994. Although such fees
are expected to continue until DVL settles its remaining litigation and
restructures its remaining unsettled indebtedness, management anticipates a
reduction in such fees in the future.
Management provided for a loss $2,026,000 during the three months ended
September 30, 1994, which was primarily a result of potential losses to be
incurred upon the forced liquidation of assets to meet December 31, 1994
mandatory payment obligations on certain indebtedness and for the liquidation
of assets to fund DVL's operating cash flow deficiency.
Interest expense decreased by $58,000 primarily as a result of a
decrease in indebtedness, partially offset by $190,000 of imputed interest on
the notes to be issued in connection with the settlement of the shareholder
litigation and by an increase in the prime rate. The decrease in indebtedness
is primarily the result of the refinancing of assets collateralizing certain
indebtedness in 1994 and the principal payments made from collections on the
collateral pledged to secure the related indebtedness. Management anticipates
that such interest expense will decline in the future as a result of the
completed and proposed settlements and restructuring agreements with DVL's
remaining unsettled creditors, however, this decline will be partially offset
in the future by the increasing interest, including accreted interest, on the
$9 million of notes to be issued in connection with the settlement of the
shareholder litigation.
The loss on the investment in FMF in 1994 represents DVL's investment
to fund FMF's initial operations, before any potential recoupment due to the
potential sale of FMF. The loss included $188,000 of overhead allocated to FMF
by DVL.
Claim settlement and other litigation losses represent provisions for
potential losses to be realized in connection with claims originating from
Kenbee's indebtedness to certain creditors and the settlement of certain
litigation matters.
DVL's discontinued operations resulted in a net loss of $80,000 in 1994
and a net loss of $228,000 in 1993. The loss in 1994 resulted primarily from
a provision for loss on one of DVL's real estate projects, while the loss in
1993 represents the losses incurred upon the liquidation of DVCC's loan
portfolio. No material loss is anticipated on the liquidation of the remaining
real estate projects or DVCC loans.
14
NINE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1993
DVL realized a net loss of $4,638,000 for the nine months ended
September 30, 1994, as compared to net income of $1,141,000 for the
corresponding 1993 period, a change of $5,779,000. The increase in the loss was
primarily a result of additional provisions for loan and other losses, the loss
incurred on the investment in FMF and decreased extraordinary gains realized
upon creditor settlements, which were partially offset by an increase in fees
received from partnerships and a reduction in the value of performance units
granted to certain officers. The effects of these items and the other factors
contributing to the net losses are as follows:
Interest income on mortgage loans due from affiliates decreased by
$107,000 primarily as a result of a reduction in the amount of such loans to
affiliated partnerships due to the transfer of certain loans pursuant to
creditor settlements and from the satisfaction of certain loans upon the sale
of the partnership properties, partially offset by the income realized upon the
satisfaction of certain loans from the sale of the partnership properties.
Management fees from partnerships increased by $266,000 as a result of
DVL's management of its affiliated partnerships for all of 1994 after the
termination of its management agreement with RH effective January 1, 1994.
Transaction and other fees from partnerships aggregating $445,000 in 1994
represent the fees received upon the refinancing or sale of certain partnership
properties.
Rent income from affiliated partnerships decreased by $54,000 as a
result of the settlement of litigation and the restructuring of one of DVL's
loans whereby DVL transferred its economic interest in three of its properties
to affiliated partnerships in 1993.
Interest income on loans to limited partners increased by $58,000 due
to better than expected collections on the non-performing portion of this
portfolio, partially offset by a decrease in the average outstanding balances
of the performing portion of this portfolio.
Other interest income increased by $23,000 primarily as a result of the
earnings on DVL's restricted cash balances in 1994.
General and administrative expenses decreased by $631,000 primarily as
a result of a decrease in the value of performance units granted to certain
officers of $264,000 in 1994 as opposed to the accrual of $570,000 for the value
of such units in 1993, and due to the allocation of overhead to FMF. These
decreases were partially offset by an increase in employee compensation.
Legal and professional fees decreased by $168,000 primarily as a result
of a decrease in activity in certain legal matters in 1994. Although such fees
are expected to continue until DVL settles its remaining litigation and
restructures its remaining unsettled indebtedness, management anticipates a
reduction in such fees in the future.
Management provided for a loss of $2,753,000 during the nine months
ended September 30, 1994, which was primarily a result of potential losses to
be incurred upon the forced liquidation of assets to meet December 31, 1994
mandatory payment obligations on certain indebtedness and for losses incurred
upon the liquidation of assets to fund DVL's operating cash flow deficiency.
Furthermore, DVL provided for losses based upon updated information on certain
properties.
15
Interest expense decreased by $429,000 primarily as a result of a
decrease in indebtedness and decreases in interest rates due to the
restructuring of certain indebtedness, which were partially offset by $544,000
of imputed interest on the notes to be issued in connection with the settlement
of the shareholder litigation and by an increase in the prime rate. The
decrease in indebtedness is primarily the result of the full satisfaction of
certain indebtedness pursuant to debt restructurings in 1993, as well as the
principal payments made from the refinancing of and collections on the
collateral pledged to secure the related indebtedness. Management anticipates
that such interest expense will decline in the future as a result of the
completed and proposed settlements and restructuring agreements with DVL's
remaining unsettled creditors, however, this decline will be partially offset
in the future by the increasing interest, including accreted interest, on the
$9 million of notes to be issued in connection with the settlement of the
shareholder litigation.
Claim settlement and other litigation losses represent additional
provisions for the potential losses to be realized in connection with claims
originating from Kenbee's indebtedness to certain creditors and the settlement
of certain litigation matters.
The loss on the investment in FMF in 1994 represents DVL's cash
investment to fund FMF's initial operations, before any potential recoupment due
to the potential sale of FMF. The loss included $323,000 of overhead allocated
to FMF by DVL.
DVL's discontinued operations resulted in a net loss of $65,000 in 1994
and a net loss of $315,000 in 1993. The loss in 1994 resulted primarily from
a provision for loss on one of DVL's real estate projects, while the loss in
1993 represents the losses incurred upon the liquidation of DVCC's loan
portfolio. No material loss is anticipated on the liquidation of the remaining
real estate projects or DVCC loans.
LIQUIDITY AND CAPITAL RESOURCES
DVL continues to experience severe liquidity problems and its cash flow
provided by operations is not sufficient to meet its operating needs. DVL is
attempting to augment its cash flow with the proceeds from the sale or
refinancing of assets and equity financings. There is risk that DVL may not be
able to raise the necessary funds with which to continue operations.
DVL's revocation of its election to be taxed as a REIT effective January
1, 1994 eliminated the requirement that DVL distribute at least 95% of its
taxable income and will allow DVL to enter into new business ventures that were
not permitted or were subject to taxation at a rate of 100% for a REIT. DVL
does not anticipate making distributions to its shareholders in the foreseeable
future. DVL currently has net operating loss carryforwards of approximately $66
million which it may use as a "C" Corporation to offset future taxable income,
if any, and, subject to certain limitations, from federal income taxes.
DVL has the right to refinance a number of mortgage loans underlying its
wrap around mortgages due from affiliated partnerships and arrange senior
financing secured by properties on which it holds first or second mortgage loans
by subordinating its mortgage position. In 1994, DVL refinanced a portion of
its mortgage portfolio which generated cash proceeds of approximately $5.9
million, of which approximately $4.6 million was used to satisfy existing
indebtedness and approximately $1 million was placed in escrow in connection
with proposed settlements with DVL's two remaining unsettled creditors. As a
result of DVL's prior and current asset liquidations and refinancings, DVL's
asset base available for future liquidations has diminished considerably.
16
At September 30, 1994, DVL continued to be in default for non-payment
of scheduled interest and/or principal payments on approximately $18 million of
indebtedness, however, DVL has made significant progress in its negotiations to
restructure payment terms with its remaining unsettled creditors. The goal of
such restructuring is twofold; to obtain a reduction of the total indebtedness
and to establish an acceptable payment schedule with such creditors. DVL has
placed approximately $1 million in escrow in connection with proposed
settlements with these creditors. There can be no assurance that these
negotiations or settlements will be finalized as described above. The proposed
settlements require DVL to make significant cash payments in the future and
there can be no assurance that DVL will be able to meet such payment
obligations. If the above settlements are finalized as proposed and DVL is able
to meet its future payment obligations, DVL would recognize substantial gains
on such settlements. If DVL does not meet its previously settled mandatory
repayment requirements to certain creditors, it will be in default of these
loans and is at risk of losing all or a portion of the related collateral.
DVL may not be able to meet the mandatory repayments due on December 31,
1994 on two of its previously restructured debts. DVL is currently negotiating
with one of such creditors in an attempt to obtain a waiver of the requirement
to pay the remaining portion of a mandatory payment due by December 31, 1994 of
approximately $200,000. DVL is also attempting to liquidate certain assets to
meet its other December 31, 1994 mandatory payment obligation of approximately
$1,200,000. If DVL is unable to meet this obligation, the lender may liquidate
two of the six DVL mortgages collateralizing this debt at a price which my be
substantially below DVL's carrying value in such mortgages.
In July 1994, DVL liquidated a loan for $1,069,000, of which $645,000 was
used to satisfy indebtedness and the balance was used in operations. A
partnership mortgage also collateralizing the satisfied indebtedness was
returned to DVL. DVL realized a loss of $128,000 as a result of this
liquidation.
DVL ceased pursuing two new business ventures involving the acquisition,
development and resale of residential real estate, and the commercial financing
of tool purchases by automobile mechanics. DVL is currently focusing on it core
business of real estate management and finance in an effort to reduce costs and
maximize the value of its remaining assets.
IMPACT OF INFLATION AND CHANGES IN INTEREST RATES
DVL's mortgage loan portfolio due from affiliated partnerships is
primarily at fixed rates. Although management has restructured certain
indebtedness and is negotiating to restructure its remaining unsettled
indebtedness to fixed rates, DVL's indebtedness continues to be primarily at
variable rates. Therefore, currently, decreases in interest rates are generally
expected to have a positive effect on DVL's earnings while increases in interest
rates are generally expected to have a negative effect on DVL's earnings. Other
than as manifested in interest rates, inflation has not had a significant effect
on DVL's net income for the past five years.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Substantial progress has been made in settling various litigation
brought against DVL, its Board members and certain current and former officers
and affiliates by shareholders, banks and others. The following is a summary
of the status of all material outstanding cases.
17
Numerous shareholder class action suits commenced since 1990 were filed
in various jurisdictions and consolidated in the United States District Court,
Southern District of New York on February 28, 1991, in one consolidated action
entitled In Re: Del-Val Financial Corp. Securities Litigation Master File No.
MDL 872 ("In Re Del-Val").
In In Re Del-Val, a settlement has been approved by the court in which
DVL would issue to plaintiffs (1) 900,000 shares of DVL common stock at a
minimum price of $1.50 per share (or notes to cover any deficiency in the event
the aggregate value is less than $1,340,000); (ii) $9 million of notes due in
ten (10) years with interest at 10% payable in kind for five (5) years, callable
after the third year and payable on the tenth year with cash or DVL common stock
equal to 110% of the face value of the notes; and (iii) the greater of $1.4
million or 40% of the net proceeds from Federal Insurance, described below. At
June 30, 1994, management reflected the common stock and notes as to be issued
and a reserve of $1.81 million for the future $1.4 million payment due and for
any deficiency in the minimum price of the 900,000 shares to be issued. The $9
million face value notes to be issued were valued at $3,690,000 by an
independent investment banker. The settlement is expected to result in a loss
of $6.4 million which was fully provided for in 1992. DVL and related
defendants have cross claimed against Deloitte and Touche ("Deloitte"), DVL's
former accountant, and have demanded indemnification or contribution from
Deloitte. Deloitte has cross-claimed against DVL and related defendants in In
Re Del-Val. The court has issued an opinion and order in connection with cross
motions for summary judgement filed by DVL and Deloitte. In that opinion and
order, the court ruled that Deloitte was not entitled to indemnification or
contribution on the state law claims, that Deloitte's cross claims for
indemnification or contribution against DVL are dismissed and that DVL has a
right to contribution by Deloitte on the settlement.
A suit entitled Donald Levy, et al. v. Roger D. Stern, et al. ("Levy"),
originally filed as a class action suit against current and former directors of
DVL in the Court of Chancery in New Castle County, Delaware on February 13,
1991, has not been consolidated with the other class action suits and plaintiffs
have revised their complaint to proceed on behalf of certain individuals as
opposed to a class action. The revised complaint was filed on or about May 4,
1994 against the same current and former directors of DVL and alleges breaches
of fiduciary duty of care and candor. Extensive discovery is continuing in this
litigation. It is too early to predict a likely outcome.
DVL is subject to three shareholder derivative suits. The first is
Phyllis Rye, on Behalf of Herself In The Right of Del-Val Financial Corporation
v. Roger Stern, et al. ("Rye"), filed in the United States District Court,
Southern District of New York on May 13, 1991 and is scheduled for trial in late
1994. The other two derivative suits are entitled Del-Val Financial Corp.
derivatively by Hilda Weigart v. Roger D. Stern, et al. ("Weigart"), and Del-Val
Financial Corp. derivatively by Miriam Feinberg v. Roger D. Stern, et al.
("Feinberg"), and were filed in the Superior Court of New Jersey-Law Division-
Bergen County on October 31, 1990 and December 3, 1990, respectively, and
consolidated by court order dated February 8, 1991. Pursuant to court order DVL
and related defendants filed a third party complaint in this consolidated action
against their insurance carriers. The Appellate Court in New Jersey and the
Superior Court for Bergen County, New Jersey have stayed all proceedings in the
New Jersey cases.
Plaintiffs and all Defendants except Deloitte & Touche (the "Settling
Defendants") have reached a proposed settlement of Weigart and Feinberg pursuant
to a Settlement Agreement dated September 12, 1994 (the "Settlement
Agreement").
Under the Settlement Agreement, any claims against the Settling Defendants have
18
been settled such that all amounts are to be recovered by Plaintiffs exclusively
against certain insurance policies held by the Settling Defendants. The matter
of approval of the proposed settlement will be heard by the Court in the near
future.
Several limited partners who elected to opt out of the 1992 settlement
of the limited partner class action, In Re Kenbee Limited Partnerships
Litigation, have named DVL in a case entitled Faye Crawford, et al. v. Roger
Stern, et al. ("Crawford"), filed in the Court of Common Pleas in the State of
South Carolina on September 23, 1993, in which plaintiffs allege violations of
RICO, common law fraud and civil conspiracy in fiduciary securities
transactions, common law fraud including negligent deception, breach of
fiduciary duty and negligence by certain defendants and aiding and abetting
other's breaches of fiduciary duty and seek damages of $425,000 plus attorney
fees, expenses and interest. The case was removed to Federal Court and the
defendants have answered plaintiff's amended complaint.
DVL, its former President, Ben S. Read, Jr., and a Senior Vice President
have been named as defendants in an action brought by a former employee of
Kenbee entitled Michael A. Becker v. Kenbee Management, Inc. et al. ("Becker"),
and filed in the Superior Court of New Jersey, Bergen County Law Division on
September 22, 1993. In Becker, plaintiff alleges violations of the New Jersey
Law Against Discrimination by Reason of Religious Discrimination, of oral
contract not to terminate plaintiff, of an implied promise not to terminate
employee for reasons violative of public policy, and for intentional infliction
of emotional distress, intentional interference with contractual relations and
slander and slander per se. Defendants have answered the complaint,
successfully moved to dismiss certain counts and commenced limited discovery.
Plaintiff was then given leave to amend and filed an amended complaint, which
Defendants have answered. More extensive discovery is ongoing.
In November 1993, the Securities and Exchange Commission (the
"Commission") commenced an administrative proceeding against DVL's Treasurer in
connection with certain events related to the 1990 stock offering and price
decline. Without admitting or denying the allegations of the complaint, the
Treasurer has agreed and the Commission has consented to the issuance of a cease
and desist order. Such order will not affect the ability of the Treasurer to
perform his duties for DVL.
DVL has incurred significant legal costs, and continues to incur such
costs at a reduced amount, for the aforementioned litigation and
investigations.
Federal Insurance Company ("Federal"), which carried DVL's directors and
officers insurance policy, has declined to cover DVL for these legal costs and
any liability. DVL commenced an action against its insurance broker and Federal
entitled Del-Val Financial Corporation, et al. v. Federal Insurance Company et
al. ("Federal Insurance") on September 23, 1991 in the Supreme Court of the
State of New York, County of New York in which DVL alleges negligence against
its broker and seeks declaratory and injunctive relief against Federal. DVL has
also named Federal as a third party defendant in the consolidated Weigart and
Feinberg cases, which have been stayed.
DVL has been named in an action for contractual indemnity, equitable
indemnity and declaratory relief in a matter entitled Vanguard Capital v. Kenbee
Management, Inc. et. al. filed in the Superior Court in the State of California
on March 21, 1994. This action is based on a complaint by an investor in an
affiliated limited partnership that the investor's broker sold her an unsuitable
investment. The broker is seeking indemnity against DVL and others. DVL has
answered this complaint and intends to vigorously defend against this claim.
19
DVL is a counterclaim defendant in an action entitled Kearny Associates,
et al. v. Planning Board of Kearny, et al., pending in the Superior Court of New
Jersey, Law Division, Hudson County, Docket Nos. L-5436-92 and L-5978-92. In
that case, an action was commenced in the name of Del-Val Financial Corp., as
well as Kearny Associates and American Independent Warehouses, Inc., seeking to
overturn zoning approvals granted to an adjacent property owner. The Answer
filed by Pathmark's corporate entity and the property owner interposed a
counterclaim for tortious interference with prospective economic advantage. DVL
filed an Answer to the counterclaim denying any liability and raising other
defenses. The action was consolidated with a similar action commenced by an
adjacent property owner and its tenant entitled LJP Associates v. Planning Board
of Kearny, et al..
The main claims in both actions have been dismissed, leaving the
counterclaims which are being pursued. The counterclaim plaintiffs have moved
the Court to amend the counterclaims to add as counterclaim defendants Foodtown
of Kearny, Inc. and its principal, Martin Vitale, and Kearny ShopRite, Inc. and
its principal, Richard Tully, as well as to name DVL as successor to Del-Val
Financial Corp. Discovery has proceeded on the counterclaims and is
continuing.
DVL intends to vigorously defend against the counterclaim; however, it is too
early to predict an outcome.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At September 30, 1994, DVL had approximately $17 million of indebtedness
in default for non-payment of scheduled interest and/or principal payments, as
well as failure to comply with certain other loan covenants. DVL is currently
negotiating to restructure the payment terms with its two remaining unsettled
creditors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
DVL filed a report of Form 8-K dated October 1, 1994, which disclosed
that Alan E. Casnoff was appointed President and Chief Executive Officer of DVL,
Joel Zbar assumed the position of Chief Operating Officer of DVL in addition to
his responsibilities as Chief Financial Officer and Ben S. Read, Jr., the former
President and Chief Executive Officer of DVL, assumed the position of Chairman
of the Board and Chief Executive Officer of FMF.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DVL, INC.
By:
------------------------
Joel Zbar, Treasurer and
Chief Financial Officer
November 17, 1994
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