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, 1995
------------------------------------------------
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 9, 1995
- ----------------------------- -------------------------------
Common Stock, $1.00 par value 13,185,850
DVL, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
--------
Consolidated Balance Sheets -
September 30, 1995 and December 31, 1994 1
Consolidated Statements of Operations -
Three Months Ended September 30, 1995 and 1994 3
Nine Months Ended September 30, 1995 and 1994 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1995 and 1994 7
Notes to Consolidated Financial Statements 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
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 (Note A)
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
------
September 30, December 31,
1995 1994
------------- ------------
(unaudited)
<S> <C> <C>
Loans receivable, including amounts maturing
after one year - principally pledged (Note B)
Affiliates:
Wrap around and other mortgages due from
affiliated partnerships (net of underlying
liens of $47,824 and $52,840, respectively) $ 58,206 $ 68,851
Unearned interest (14,880) (18,028)
-------- --------
Net mortgage loans receivable from affiliated
partnerships (including non-performing loans
of $4,864 and $5,261, respectively) 43,326 50,823
Others:
Other mortgage loans 1,307 1,383
Loans collateralized by limited partnership
interests due from limited partners (including
$4,100 and $4,540 of non-performing loans,
respectively) 4,126 4,606
-------- --------
Total loans receivable 48,759 56,812
Allowance for loan losses (Note D) 12,493 12,762
-------- --------
Net loans receivable 36,266 44,050
Cash (including restricted cash of $327 and
$1,022, respectively) 737 1,350
Due from affiliated partnerships (net of an allowance
for loss of $1,727 and $2,444, respectively) 113 200
Investments
Real estate at cost - pledged (net of an allowance
for loss of $208) 289 289
Real estate lease interests 2,385 2,557
Affiliated limited partnerships (net of an allowance
for loss of $601 and $750, respectively) 3,392 3,803
Other investments (net of an allowance for loss
of $400) 697 723
Other assets 551 1,113
-------- --------
Total assets $ 44,430 $ 54,085
======== ========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
1
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
LIABILITIES AND SHAREHOLDERS' CAPITAL DEFICIENCY
------------------------------------------------
September 30, December 31,
1995 1994
------------- -----------
(unaudited)
<S> <C> <C>
Liabilities:
Debt in default for non-payment including accrued
interest - partially collateralized (Note B) $ 14,329 $ 13,804
Short-term debt - 215
Long-term debt (Note G) 25,415 32,018
Notes to be issued pursuant to shareholder
litigation settlement (Note F) 5,418 4,434
Convertible subordinated debentures 455 448
Accrued liability for shareholder litigation
settlement (Note F) - 1,810
Accrued liability for indebtedness of
affiliates (Note E) 400 708
Accounts payable and accrued liabilities 3,242 4,383
-------- --------
Total liabilities 49,259 57,820
-------- --------
Deferred credits (Note G) 321 1,396
-------- --------
Commitments and contingent liabilities
Shareholders' capital deficiency (Note F)
Common stock, $1 par value, authorized -
16,000,000 shares, issued and to be issued
13,185,850 and 8,513,200, respectively 13,186 8,513
Additional paid-in capital 81,072 84,074
Deficit (99,408) (97,718)
-------- --------
Total shareholders' capital deficiency (5,150) (5,131)
-------- --------
Total liabilities and shareholders'
capital deficiency $ 44,430 $ 54,085
======== ========
</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,
---------------------
1995 1994*
--------- ---------
<S> <C> <C>
Income from affiliates (Note B)
Interest on mortgage loans $ 306 $ 463
Management fees from partnerships 134 119
Transaction and other fees from partnerships 135 8
Rent income 5 8
Income from others
Interest on mortgage loans 30 28
Interest on loans to limited partners 54 102
Other interest 33 8
Other income (Note C) 35 -
--------- ---------
732 736
--------- ---------
Operating expenses
General and administrative 292 368
Legal and professional fees 170 120
Net provision for losses 640 2,026
Interest expense 1,017 959
Loss on investment in First Mechanics Finance
Company (Note C) - 851
Claim settlement and other litigation losses - 22
--------- ---------
2,119 4,346
--------- ---------
Loss before gain on sales of real estate (1,387) (3,610)
Gain on sales of real estate to affiliates - 2
--------- ---------
Loss from continuing operations (1,387) (3,608)
Loss from discontinued operations - (80)
--------- ---------
Net Loss $ (1,387) $ (3,688)
========= =========
</TABLE>
[FN]
* Reclassified for comparative purposes.
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,
----------------------
1995 1994
---------- ---------
<S> <C> <C>
Loss per share (Note I):
Primary
Loss from continuing operations $ (.15) $ (.43)
Loss from discontinued operations - (.01)
---------- ---------
Net loss $ (.15) $ (.44)
========== =========
Fully diluted:
Loss from continuing operations $ (.15) $ (.43)
Loss from discontinued operations - (.01)
---------- ---------
Net loss $ (.15) $ (.44)
========== =========
Weighted average shares outstanding
Primary 9,210,661 8,472,450
========== =========
Fully diluted 9,210,661 8,472,450
========== =========
</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,
-------------------
1995 1994*
-------- --------
<S> <C> <C>
Income from affiliates (Note B)
Interest on mortgage loans (including $354
realized upon the early satisfaction of
certain loans in 1994) $ 1,047 $ 1,696
Management fees from partnerships 373 384
Transaction and other fees from partnerships 576 445
Rent income 5 23
Income from others
Interest on mortgage loans 90 87
Interest on loans to limited partners 170 267
Other interest 74 27
Other income (Note C) 120 -
-------- --------
2,455 2,929
-------- --------
Operating expenses
General and administrative 1,694 1,607
Legal and professional fees 531 346
Net provision for losses 814 2,753
Interest expense 2,905 2,912
Loss on investment in First Mechanics Finance
Company (Note C) - 1,234
Claim settlement and other litigation losses 10 592
-------- --------
5,954 9,444
-------- --------
Loss before gain on sales of real estate (3,499) (6,515)
Gain on sales of real estate to affiliates - 7
-------- --------
Loss from continuing operations (3,499) (6,508)
Loss from discontinued operations - (65)
-------- --------
Loss before extraordinary gain (3,499) (6,573)
Extraordinary gain on the settlement
of indebtedness (Note H) 1,809 1,935
-------- --------
Net loss $ (1,690) $ (4,638)
======== ========
</TABLE>
[FN]
* Reclassified for comparative purposes.
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,
---------------------
1995 1994
--------- ---------
<S> <C> <C>
Earnings (loss) per share (Note I):
Primary
Loss from continuing operations $ (.39) $ (.78)
Loss from discontinued operations - (.01)
--------- ---------
Loss before extraordinary gain (.39) (.79)
Extraordinary gain on the settlement of
indebtedness .20 .23
--------- ---------
Net loss $ (.19) $ (.56)
========= =========
Fully diluted
Loss from continuing operations $ (.39) $ (.78)
Loss from discontinued operations - (.01)
--------- ---------
Loss before extraordinary gain (.39) (.79)
Extraordinary gain on the settlement of
indebtedness .20 .23
--------- ---------
Net loss $ (.19) $ (.56)
========= =========
Weighted average shares outstanding
Primary 8,907,825 8,292,970
========= =========
Fully diluted 8,907,825 8,292,970
========= =========
</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,
-----------------------
1995 1994*
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Loss from continuing operations $ (3,499) $ (6,508)
Adjustments to reconcile net cash provided
by operating activities
Net provision for losses 814 2,753
Accrued interest added to indebtedness 1,705 1,527
Loss from investment in First Mechanics
Finance Company - 1,234
Claim settlement and other litigation
losses 10 592
Depreciation and amortization 63 79
Decrease in unearned interest on loans
receivable (60) (369)
Net decrease in payables (78) (1,207)
Consideration paid in common stock 184 -
Imputed interest on notes to be issued 654 545
Amortization of deferred credits - (7)
Increase in deferred credits - 63
Net (increase) decrease in other assets 487 (47)
Net cash provided by discontinued
operations - 12
--------- ---------
Net cash provided by (used in)
operating activities 280 (1,333)
--------- ---------
Cash flows from investing activities
Collections on loans receivable (net of
payments on underlying loans) 4,212 8,919
Net collections on amounts due from
affiliated partnerships 83 66
Distributions received on limited
partnership and other investments 455 219
Net collections on real estate lease
interests 172 -
Acquisition of limited partnership
interests - (113)
Loss from investment in First Mechanics
Finance Company - (1,234)
Net cash provided by discontinued
investing activities - 503
--------- ---------
Net cash provided by
investing activities 4,922 8,360
</TABLE> --------- ---------
[FN]
* Reclassified for comparative purposes.
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,
----------------------
1995 1994*
--------- --------
<S> <C> <C>
Cash flows from financing activities
Increase in indebtedness - 640
Repayment of indebtedness (5,630) (6,551)
Repayment of guaranteed indebtedness (185) (384)
-------- --------
Net cash used in financing activities (5,815) (6,295)
-------- --------
Net increase (decrease) in cash (613) 732
Cash - beginning 1,350 541
-------- --------
Cash - end $ 737 $ 1,273
======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest
(excluding amounts paid on underlying
mortgages) $ 540 $ 732
======== ========
Supplemental disclosure of non-cash
investing and financing activities:
Net asset transferred to satisfy
indebtedness $ 1,379 $ -
======== ========
Net reduction in indebtedness pursuant
to creditor settlements including
accrued interest $ 1,809 $ 1,935
======== ========
Reduction in indebtedness upon
common stock issued or to be issued $ 1,487 $ 382
======== ========
</TABLE>
[FN]
* Reclassified for comparative purposes.
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 the financial position and the results of operations for the
periods
presented. The results of operations for the nine months ended September 30,
1995
should not be regarded as necessarily indicative of the results that may be
expected
for the full year.
(B) DVL continues to experience 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 approximately $14.3 million of indebtedness with
one
creditor.
DVL's cash flow provided by current operations is insufficient to meet
its
current cash requirements for operations and to meet its mandatory repayment
requirements. As a result, DVL is liquidating and refinancing certain assets
and is
seeking equity based financings to meet such obligations. DVL is currently
working
with an interested party in connection with the refinancing of certain assets
pursuant
to which the lender would replace certain existing lenders and in consideration
of
such loans would receive equity and rights to acquire equity in DVL. 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.
DVL
has significant mandatory repayment requirements by December 31, 1995 and in
addition
to the steps discussed above, DVL is requesting extensions of the mandatory
repayment
requirements from its creditors. 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 repayments.
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 to meet operating expenses and make mandatory repayment requirements
to its
creditors; (3) the settlement of its remaining litigation; (4) 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; and
(5) the
return to profitable operations, which will primarily depend on the outcome of
the
negotiations with its existing creditors to reduce its interest expense burden.
If
DVL is unsuccessful in achieving a short term solution to its liquidity
problems, and
moreover, long-term solutions to cure its remaining loan default, meet its
mandatory
repayment requirements 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.
The New York Stock Exchange ("NYSE") advised DVL of its intention to
delist
DVL and on August 3, 1995 the common stock of DVL ceased trading on the NYSE.
Effective on that date, the common stock of DVL commenced trading on the
National
Association of Securities Dealers Inc.'s over the counter bulletin board under
the
symbol "DVLN". The NYSE advised DVL that its decision to delist was reached in
view
of the fact that DVL has fallen below the NYSE's continuing listing criteria
related
to net tangible assets available to common stock and average net income for the
last
three years; aggregate market value of all outstanding shares of the common
stock and
average net income for the last three years; and aggregate market value of
publicly
held shares. DVL has decided not to challenge such decision to delist.
9
(C) In April 1994, DVL formed First Mechanics Finance Company ("FMF") as a
wholly-owned subsidiary to purchase from local tool dealers loan contracts made
to finance tool purchases by automobile mechanics. DVL was unable to fund the
continued expansion of FMF and was forced to sell FMF in December 1994. DVL had
invested or loaned approximately $1,181,000 to FMF, net of $58,000 received
through March 30, 1995 from the sale of FMF, (including $353,000 of allocated
overhead) for start-up costs and to fund loan acquisitions. DVL was paid
$12,000
in cash at closing from the sale, received a promissory note for $275,000
payable
through January 1997, bearing interest at 8% per annum and a subordinated
debenture in the amount of $550,000 due December 1997 and bearing interest based
upon the sales volume of FMF. DVL has fully reserved for such remaining
obligations since their collectibility is uncertain at this time. If and when
DVL collects on the remainder of its note and subordinated debenture it will
recognize income as received. DVL has received $120,000 from the sale of FMF
subsequent to March 30, 1995, which has been recorded as income.
(D) Management's evaluation 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 certain loans to meet its operating cash flow deficiency and its
mandatory repayment requirements on certain indebtedness.
(E) 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 original guarantee. The creditor had the right to put the
shares back to DVL and DVL was required to pay the creditor the guaranteed value
in installments over twelve months, including a $90,000 payment due in July
1995.
This agreement was modified to provide for lower payments through November 1995
at which point the remaining balance of approximately $390,000 will be due. DVL
is currently negotiating an extension of that payment. DVL has provided for a
reserve of $400,000 at September 30, 1995, based upon the amount due to such
creditor, including projected interest payments, less DVL's valuation of the
shares held by the creditor.
(F) In December 1993, DVL reached a settlement in the shareholder class
action litigation which requires 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 plus
interest and expenses. At September 30, 1995 and December 31, 1994, management
reflected the common stock and notes as "to be issued" and at December 31, 1994
reserved $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
deficiency in the stock value resulted in additional notes of $1,386,851 to be
issued to meet the shortfall. At September 30, 1995 when the actual number of
shares to be issued for the $1.4 million payment plus interest and expenses was
determined, these shares were reflected as "to be issued". The $10,386,851 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 and are payable in cash or
common stock at DVL's option. The initial $9 million of notes were valued at
$3.69 million by an independent investment banker and the additional $1,386,851
were valued at $330,000 by DVL. Commencing January 1994, interest on the
initial
$9 million of notes was imputed based upon an effective interest rate of
approximately 19%. Beginning October 1, 1995, interest on all of the notes will
be imputed based upon an effective interest rate of approximately 16%. The
settlement resulted in a loss of $6.4 million which was fully provided for in
1992.
In addition, DVL has settled certain litigation and remains a defendant
in other litigation. Based upon completed and pending settlements, management
accrued a reserve of $650,000 as its estimate of DVL's potential loss to be
realized upon the final settlement of these suits (see "Legal Proceedings").
10
(G) During 1994, DVL reduced the portion of its indebtedness which was in
default for non-payment of scheduled interest and/or principal by approximately
$3.6 million. This reduction resulted from the restructuring of the principal
balance, payment terms and interest rate with one creditor. The restructuring
agreement was signed in the first quarter of 1995 and closed in the second
quarter of 1995. Such restructuring resulted in a gain on the settlement of
indebtedness of approximately $1.8 million in the first quarter of 1995.
(H) DVL 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, 1994, DVL had approximately $67 million of net
operating loss carryforwards available to offset future taxable income, if any,
expiring through 2009. Until management anticipates the realization of such
future tax benefits, DVL's deferred tax asset of approximately $37 million will
be fully reserved for.
(I) 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.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DVL continues to experience liquidity problems principally as a result
of the reduced cash flow received on the restructured and non-performing
portions
of its loan portfolio. Although the 1992 settlement of the limited partner class
action substantially reduced the non-performing portion of DVL's loan portfolio,
this reclassification has not resulted, nor is it expected to result, in
significant income or cash flow on the majority of the restructured mortgages,
as the mortgage debt service is used to pay liens senior to DVL's. DVL remains
in default on principal and interest payments on approximately $14,329,000 of
its
indebtedness. DVL is also a defendant in certain remaining litigation.
To enable DVL to meet its short-term operating needs, DVL must continue
to augment its cash flow with proceeds from the sale or refinancing of assets.
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 to meet operating expenses and make its mandatory repayment
requirements to its creditors; (3) the settlement of its remaining litigation;
(4) 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; and (5) the return to profitable operations, which will
primarily depend on the outcome of the negotiations with its existing creditors
to reduce its interest expense burden. If DVL is unsuccessful in achieving a
short term solution to its liquidity problems, and moreover, long-term solutions
to cure its remaining loan default, meet its mandatory repayment requirements
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, 1995 Compared to Three Months Ended September
30, 1994
- -------------------------------------------------------------------------------
DVL realized a net loss of $1,387,000 for the three months ended
September 30, 1995, compared to a net loss of $3,668,000 for the corresponding
1994 period, a change of $2,281,000. The loss in 1995 was primarily a result of
DVL's continued operating losses and additional provisions for loan losses. The
loss in 1994 was primarily a result of additional provisions for loan and other
losses and the initial operating costs incurred by FMF. The effects of these
items and the other factors contributing to the net loss are as follows:
Interest income on mortgage loans due from affiliates decreased by
$157,000 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
partnership properties and an increase in the non performing portion of such
mortgage loans.
Management fees from partnerships increased by $15,000 as a result of
the
payment of past due fees by two properties which fees had not been previously
accrued in 1995. This increase was offset by the reduction in fees due to the
liquidation of certain partnerships during 1994 and 1995.
12
Transaction and other fees from partnerships aggregating $135,000 in
1995
and $8,000 in 1994 principally represent the fees received upon the sale or
refinancing of certain partnership properties.
Interest income on loans to limited partners decreased by $48,000 due
to a
decrease in the average outstanding balances of this loan portfolio.
Other income represents collections on the note obtained by DVL from the
sale of FMF.
General and administrative expenses decreased by $76,000 primarily as a
result of a decrease in payroll and operating costs incurred in 1995. Such
decrease
was offset by $188,000 of overhead allocated to the operations of FMF in 1994 as
compared to no overhead allocated in 1995.
Legal and professional fees increased by $50,000 primarily as a result
of
the increased activity in finalizing certain litigation settlements and the
expenses
incurred in retaining an investment advisor to assist in raising debt or equity
financings in late 1994. Legal fees are expected to decline since DVL has
settled
most of its remaining litigation. DVL has been unable to pay its professional
fees
on a current basis and is at risk of losing its representation if significant
payments are not made by November 30, 1995.
Interest expense increased by $58,000 primarily as a result of
increases in
the imputed interest in the notes to be issued in connection with the
settlement of
the shareholder litigation and additional interest accrued pursuant to a certain
debt agreement resulting from DVL's inability to reduce the outstanding balance
to
a specified amount, partially offset by a reduction in the average outstanding
indebtedness. The decrease in indebtedness is primarily the result of the
satisfaction of certain indebtedness pursuant to debt restructurings as well as
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 proposed settlement with DVL's
remaining
unsettled creditor, however this decline may be more than offset in the future
by
the interest, including accreted interest, on the $10.3 million face value of
notes
to be issued in connection with the settlement of the shareholder litigation.
Claim settlement and other litigation losses represent additional
provisions
for potential losses to be realized in connection with claims originating from
indebtedness of affiliates to certain creditors and the settlement of certain
litigation matters.
Management's re-evaluation of the collateral underlying each loan
resulted
in a provision for losses aggregating $640,000 during the three months ended
September 30, 1995. 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
certain loans to meet its operating cash flow deficiency and its mandatory
repayment
obligations on certain indebtedness.
Nine Months Ended September 30, 1995 Compared to Nine Months Ended September 30,
1994
- -------------------------------------------------------------------------------
DVL realized a net loss of $1,690,000 for the nine months ended
September
30, 1995, as compared to a net loss of $4,638,000 for the corresponding 1994
period,
a change of $2,948,000. The loss in 1995 was primarily a result of DVL's
continued
operating losses partially offset by the extraordinary gain realized upon the
restructuring of indebtedness with one creditor. The loss in 1994 was
primarily a
result of additional provisions for loan and other losses and the initial
operating
costs incurred by FMF, partially offset by the extraordinary gain realized upon
the
prepayment of installments due under a creditor settlement and the income
realized
upon the early satisfaction of certain loans. The effects of these items and
the
other factors contributing to the net loss are as follows:
13
Interest income on mortgage loans due from affiliates decreased by
$649,000 primarily as a result of $354,000 of income realized in 1994 upon the
early satisfaction of certain loans and 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
partnership properties and an increase in the non performing portion of such
mortgage loans.
Management fees from partnerships decreased by $11,000 as a result of
the
liquidation of certain partnerships during 1995 and 1994.
Transaction and other fees from partnerships aggregating $576,000 in
1995
and $445,000 in 1994 principally represent the fees received upon the sale or
refinancing of certain partnership properties.
Rent income from affiliated partnerships decreased by $18,000 as a
result
of the remaining two land leases held by DVL having been in default. One of the
leases is now paying on a current basis due to the settlement of certain
litigation.
Interest income on loans to limited partners decreased by $97,000 due to
a decrease in the average outstanding balances of this loan portfolio.
Other income represents collections on the note obtained by DVL from the
sale of FMF.
General and administrative expenses increased by $87,000 primarily as a
result of a $30,000 accrual required for the value of performance units granted
to certain officers in 1995, as compared to the reduction of $264,000 of such
expense in 1994 and $353,000 of overhead allocated to FMF in 1994 as compared to
no overhead allocated in 1995. These items were partially offset by a
significant decrease in payroll and operating costs incurred in 1995.
Legal and professional fees increased by $185,000 primarily as a result
of the increased activity in finalizing certain litigation settlements and the
expenses incurred in retaining an investment advisor to assist in raising debt
or equity financings in late 1994. Legal fees are expected to decline since DVL
has settled most of its remaining litigation. DVL has been unable to pay its
professional fees on a current basis and is at risk of losing its representation
if significant payments are not made by November 30, 1995.
Interest expense decreased by $7,000 primarily as a result of a
reduction
in the average outstanding indebtedness partially offset by increases in the
additional accrual of interest pursuant to a certain debt agreement resulting
from DVL's inability to reduce the outstanding balance to a specified amount and
the imputed interest on the notes to be issued in connection with the settlement
of the shareholder litigation. The decrease in indebtedness is primarily the
result of the satisfaction of certain indebtedness pursuant to debt
restructurings as well as 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
proposed
settlement with DVL's remaining unsettled creditor, however this decline may be
more than offset in the future by the interest, including accreted interest, on
the $10.3 million face value of notes to be issued in connection with the
settlement of the shareholder litigation.
Management's re-evaluation of the collateral underlying each loan
resulted in a provision for losses aggregating $814,000 during the nine months
ended September 30, 1995 which was primarily a result of updated information on
certain properties. 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
certain loans to meet its operating cash flow deficiency and its mandatory
repayment requirements on certain indebtedness.
14
Liquidity and Capital Resources
- -------------------------------
DVL continues to experience 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 proceeds from the sale or refinancing of assets
and
equity financings. DVL is currently working with an interested party in
connection with the refinancing of certain assets pursuant to which the lender
would replace certain existing lenders and in consideration of such loans would
receive equity and rights to acquire equity in DVL. There is a 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 to shareholders and allowed 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 $67,000,000 which it may use as a "C" Corporation to offset future
taxable income, if any, subject to certain limitations.
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.
As a result of DVL's prior and current asset liquidations and refinancings,
DVL's
asset base available for future liquidations has diminished considerably. DVL
is currently working on a similar refinancing, which if completed, would be used
to pay down an existing creditor.
During 1994, DVL reduced the portion of its indebtedness which was in
default for non-payment of scheduled interest and/or principal by approximately
$3.6 million. This reduction resulted from the restructuring of the principal
balance, payment terms and interest rate with one creditor. The restructuring
agreement was signed in the first quarter of 1995 and closed in the second
quarter of 1995. Such restructuring resulted in a gain on the settlement of
indebtedness of approximately $1.8 million in the first quarter of 1995.
At September 30, 1995, DVL continued to be in default for non-payment of
scheduled interest and principal payments on approximately $14.3 million of its
indebtedness and is currently negotiating to settle or restructure payment terms
with its remaining unsettled creditor. The goal of such restructuring is to
obtain a reduction of the total indebtedness and to establish an acceptable
payment schedule with such creditor. This negotiation includes a proposal for
curing the default and restructuring the indebtedness by offering cash payments
over time at a negotiated discount to the creditor. If the above settlement is
finalized as proposed, DVL would recognize a substantial gain on such
settlement.
There can be no assurance that these negotiations will continue or that a
settlement will be finalized as described above. In addition, if DVL does not
meet its previously settled mandatory repayment requirements to other creditors,
it would be in default on these loans and at risk of losing all of the related
collateral.
As previously discussed, DVL is seeking replacement financing to meet
its
mandatory repayment requirements and its other cash needs. DVL is also
requesting extensions of the mandatory repayment requirements from its
creditors.
There can be no assurance that DVL will be able to obtain such borrowings or
that
the borrowings will be sufficient to meet mandatory repayment requirements and
any future cash flow deficiencies.
15
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.
16
Part II - Other Information
Item 1. Legal Proceedings
Substantial progress continues to be made in settling various litigation
brought against DVL, its Board members and certain current and former officers
and affiliates by shareholders, banks and others. However, several cases are
still being litigated or are pending final disposition including the original
shareholder class action. The following is a summary of the status of all
material outstanding cases.
Numerous class action suits commenced beginning in 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 (I) 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 fair market value is less than $1,340,000); (ii) $9 million of notes
due 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 in cash or with DVL
common stock equal to 110% of the face value of the notes; and (iii) $1.4
million
plus interest from August 16, 1993 and expenses in cash or stock. At September
30, 1995, management reflected the common stock and notes as "to be issued" and
at December 31, 1994 reserved $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 deficiency in the stock value of the
900,000 shares resulted in additional face value notes of $1,386,351 to be
issued
to meet the shortfall. Plaintiff's counsel has agreed to accept 4,017,582
shares
of common stock in satisfaction of DVL's obligation discussed in (iii) above.
The settlement is expected to be finalized in 1995 pending Plaintiff counsel's
providing DVL with a list of class members. The settlement has resulted in a
loss of $6.4 million which was fully provided for in 1992. DVL and Deloitte and
Touche ("Deloitte"), DVL's former accountant, have cross-claimed against each
other and have each filed summary judgment motions. DVL and Deloitte have
entered into a Stipulation of Dismissal effective on the effective date of the
settlement with Plaintiff's in IN RE DEL-VAL which Stipulation has been
submitted
to the Court and an order thereon is expected shortly.
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,
was not consolidated with the other class action suits and plaintiffs 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. Based upon a recent Delaware Supreme Court decision which
counsel believes supports the directors' position in this matter, defendants
have
filed a motion for summary judgement which has been fully briefed. The Court
has
not yet set a date to hear this motion. Plaintiffs in IN RE DEL-VAL have
permitted the Plaintiff's in LEVY to participate in their settlement with
Deloitte and Interstate Johnson Lane, third party defendants in IN RE DEL-VAL.
DVL was subject to two shareholder derivative suits 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"), 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.
17
Plaintiffs and all Defendants except Deloitte & Touche (the "Settling
Defendants") 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 were
settled
and all amounts to be recovered by Plaintiffs were to be recovered exclusively
against certain insurance policies held by the Settling Defendants. Plaintiffs
withdrew from that settlement after the New York Court ruling in FEDERAL
INSURANCE,
discussed below. Plaintiffs and Settling Defendants have reached a new
settlement
agreement in WEIGART and FEINBERG which has been approved by the New Jersey
Court.
In this settlement, DVL will reimburse up to $150,000 of costs incurred by
Plaintiff's counsel and Plaintiff's have the right to pursue DVL's claim against
Federal Insurance Company ("Federal") discussed below. With the concurrence of
the
derivative Plaintiffs, the Settling Defendants agreed to dismiss the New Jersey
Third
Party Action only against without prejudice and on August 5, 1995 the court
signed
an order to that effect. A summary judgment motion to dismiss the third party
action
against Deloitte is pending. DVL is not opposing this motion.
Several limited partners who elected to opt out of the 1992 settlement
of
the limited partner class action, IN RE KENBEE LIMITED PARTNERSHIPS LITIGATION,
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 alleged 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 sought damages of $625,000
plus
attorney fees, expenses and interest. The case was removed to Federal Court.
Settlement has been reached and a Stipulation of Settlement has been executed by
Plaintiffs. This case has been dismissed subject to fulfillment of settlement
terms.
DVL and certain former officers 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. A settlement has been reached in this matter
but
is subject to satisfactory appraisals of certain assets.
Federal, which carried DVL's directors and officers insurance policy,
has
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 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
alleged negligence against its broker and sought declaratory and injunctive
relief
against Federal. The New York Court in this matter has held that the Settling
Defendants' insurance excluded coverage of these matters. DVL has filed a
notice
of appeal of that decision.
DVL was named in an action entitled VANGUARD CAPITAL V. KENBEE
MANAGEMENT, INC. ET AL. ("VANGUARD") which was filed on March 21, 1994 in the
Superior Court of the State of California, for the County of Riverside, Palm
Springs Branch, Civil Case No. 74197 in which plaintiff seeks contractual
indemnity, equitable indemnity and declaratory relief on certain matters filed
against Vanguard Capital, Inc. in the Superior Court, State of California. This
action is based on complaints by an investor with a $350,000 investment in an
affiliated limited partnership alleging that the investor's broker sold to her
unsuitable investments. DVL has answered this complaint and this case has been
stayed.
18
DVL is named as a defendant in a class action entitled PHILLIP AND
SHERYL
WEISS V. WINNER'S CIRCLE OF CHICAGO, INC. ET AL. which was filed in the United
States District Court for the Northern District of Illinois on April 14, 1995 in
which Plaintiffs allege that DVL, as a holder of certain consumer credit
contracts issued by Del-Val Capital Corp., a subsidiary of DVL, is subject to
claims and defenses against the consumer credit contracts and that DVL aided and
abetted violations of the Illinois Consumer Fraud Act. DVL believes this case
has no merit and intends to defend vigorously. DVL has joined with other
lenders
in this case in filing a motion to dismiss.
DVL was 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 Industrial 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.. These actions have been settled and all claims in both
actions have been dismissed with prejudice.
19
Item 3. Defaults Upon Senior Securities
-------------------------------
At September 30, 1995, DVL had approximately $14.3 million of
indebtedness in default for non-payment of scheduled interest and principal
payments, as well as failure to comply with certain other loan covenants. DVL
is currently negotiating to settle or restructure the payment terms with its
remaining unsettled creditor.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
There was one report on Form 8-K filed during the three months ended
September 30, 1995.
EXHIBIT 27 - Financial Data Schedule
-----------------------
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 Accounting Officer
November 9, 1995
20
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 737
<SECURITIES> 0
<RECEIVABLES> 48,759
<ALLOWANCES> 12,493
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 44,430
<CURRENT-LIABILITIES> 0
<BONDS> 42,986
<COMMON> 13,186
0
0
<OTHER-SE> (18,336)
<TOTAL-LIABILITY-AND-EQUITY> 44,430
<SALES> 0
<TOTAL-REVENUES> 2,455
<CGS> 0
<TOTAL-COSTS> 2,225
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 814
<INTEREST-EXPENSE> 2,905
<INCOME-PRETAX> (3,499)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,499)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,809
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<NET-INCOME> (1,690)
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