SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 11, 1995
- - ----------------------------- ---------------------------
Common Stock, $1.00 par value 8,668,268
DVL, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
Consolidated Balance Sheets -
March 31, 1995 and December 31, 1994 1
Consolidated Statements of Operations -
Three Months Ended March 31, 1995 and 1994 3
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1995 and 1994 5
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information:
Legal Proceedings 14
Defaults upon Senior Securities 17
Exhibits and Reports on Form 8-K 17
Exhibit 11 18
Part I - Financial Information (Note A)
Item 1. Financial Statements
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
------
March 31, 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 $52,387 and $52,840, respectively) $ 66,258 $ 68,851
Unearned interest (18,044) (18,028)
-------- --------
Net mortgage loans receivable from affiliated
partnerships (including non-performing loans
of $5,136 and $5,261, respectively) 48,214 50,823
Others:
Other mortgage loans 1,358 1,383
Loans collateralized by limited partnership
interests due from limited partners (including
$4,289 and $4,540 of non-performing loans,
respectively) 4,322 4,606
-------- --------
Total loans receivable 53,894 56,812
Allowance for loan losses (Note D) 12,767 12,762
-------- --------
Net loans receivable 41,127 44,050
Cash (including restricted cash of $856 and
$1,022, respectively) 1,016 1,350
Due from affiliated partnerships (net of an allowance
for loss of $2,414 and $2,444, respectively) 230 200
Investments
Real estate at cost (net of accumulated
depreciation) - pledged (net of an allowance for
loss of $208) 289 289
Real estate lease interests 2,480 2,557
Affiliated limited partnerships (net of an allowance
for loss of $750) 3,758 3,803
Other investments (net of an allowance for loss
of $400) 723 723
Other assets 1,035 1,113
-------- --------
Total assets $ 50,658 $ 54,085
======== ========
</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' CAPITAL DEFICIENCY
------------------------------------------------
March 31, December 31,
1995 1994
----------- -------------
(unaudited)
<S> <C> <C>
Liabilities:
Debt in default, including accrued interest -
partially collateralized (Note B) $ 13,911 $ 13,804
Short-term debt 215 215
Long-term debt (Note G) 29,469 32,018
Notes to be issued pursuant to litigation
settlement (Note F) 4,642 4,434
Convertible subordinated debentures 450 448
Accrued liability for litigation settlement
(Note F) 1,810 1,810
Accrued liability for indebtedness of Kenbee
Management, Inc. and affiliates (Note E) 713 708
Accounts payable and accrued liabilities 3,492 4,383
-------- --------
Total liabilities 54,702 57,820
-------- --------
Deferred credits (Note G) 321 1,396
-------- --------
Commitments and contingent liabilities
Shareholders' capital deficiency:
Common stock, $1 par value, authorized -
16,000,000 shares, issued and to be issued -
8,593,268 and 8,513,200, respectively 8,593 8,513
Additional paid-in capital 84,029 84,074
Deficit (96,987) (97,718)
-------- --------
Total shareholders' capital deficiency (4,365) (5,131)
-------- --------
Total liabilities and shareholders'
capital deficiency $ 50,658 $ 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
March 31,
-------------------
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) $ 364 $ 823
Management fees from partnerships 115 127
Transaction and other fees from partnerships 134 174
Rent income - 8
Income from others
Interest on loans to limited partners 47 62
Other interest 10 17
Other income (Note C) 50 -
-------- --------
720 1,211
-------- --------
Operating expenses
General and administrative 577 793
Legal and professional fees 170 105
Net provision for losses 89 121
Interest expense 955 933
-------- --------
1,791 1,952
-------- --------
Loss before gain on sales of real estate (1,071) (741)
Gain on sales of real estate to affiliates - 2
-------- --------
Loss from continuing operations (1,071) (739)
Income from discontinued operations - 11
-------- --------
Loss before extraordinary gain (1,071) (728)
Extraordinary gain on the settlement
of indebtedness (Note G) 1,802 1,110
-------- --------
Net income $ 731 $ 382
======== ========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
3
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
(unaudited)
Three Months Ended
March 31,
-------------------
1995 1994
-------- --------
<S> <C> <C>
Earnings per share (Note I):
Primary
Loss from continuing operations $ (.12) $ (.08)
Income from discontinued operations - -
--------- --------
Loss before extraordinary gain (.12) (.08)
Extraordinary gain on the settlement of
indebtedness .21 .13
--------- --------
Net income $ .09 $ .05
========= ========
Fully diluted
Loss from continuing operations $ (.11) $ (.08)
Income from discontinued operations - -
--------- --------
Loss before extraordinary gain (.11) (.08)
Extraordinary gain on the settlement of
indebtedness .19 .12
--------- --------
Net income $ .08 $ .04
========= ========
Weighted average shares outstanding
Primary 8,551,967 8,411,843
========= =========
Fully diluted 9,485,364 9,095,895
========= =========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
4
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Loss from continuing operations $ (1,071) $ (739)
Adjustments to reconcile net cash provided
by operating activities
Net provision for losses 89 121
Depreciation and amortization 17 32
Income from mortgage satisfaction - (188)
Increase (decrease) in unearned interest
on loans receivable 16 (52)
Net increase in accounts payable and
accrued liabilities 623 550
Imputed interest on notes to be issued 208 173
Amortization of deferred credits - (2)
Net increase (decrease) in other assets 47 (191)
Net cash provided by
discontinued operations - 11
------- ------
Net cash used in
operating activities (71) (285)
------- ------
Cash flows from investing activities
Collections on loans receivable (net of
payments on underlying loans) 247 1,319
Net increase in real estate acquired
for resale - (136)
Net reductions in real estate lease
interests 77 -
Net (increase) decrease in amounts
due from affiliated partnerships (30) 71
Distributions received on limited
partnership interests 51 99
Net cash provided by discontinued lending
activities of Del-Val Capital Corp. - 115
------- ------
Net cash provided by
investing activities 345 1,468
------- ------
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
5
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(in thousands)
(unaudited)
Three Months Ended
March 31,
----------------------
1995 1994
--------- --------
<S> <C> <C>
Cash flows from financing activities
Increase in indebtedness - 474
Repayment of indebtedness (608) (1,643)
-------- --------
Net cash used in financing activities (608) (1,169)
-------- --------
Net increase (decrease) in cash (334) 14
Cash - beginning 1,350 541
-------- --------
Cash - end $ 1,016 $ 555
======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest
(excluding amounts paid on underlying
mortgages) $ 208 $ 733
======== =========
Supplemental disclosure of non-cash
investing and financing activities:
Increase in indebtedness upon acquisition
of real estate for resale $ - $ 2,029
======== =========
Net assets transferred to satisfy
indebtedness $ 1,379 $ -
======== =========
Net reduction in indebtedness pursuant
to creditor settlements including
accrued interest $ 1,802 $ 1,110
======== =========
Increase in long-term debt upon
capitalization of accrued interest
and other payables $ 290 $ 254
======== =========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
6
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 three
months ended March 31, 1995 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 approximately $13.9 million of indebtedness with one
creditor.
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. DVL is
currently negotiating with a number of interested parties in connection with
the refinancing of certain assets pursuant to which a lender would replace
certain existing lenders and in consideration of such loans would receive
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. 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 defaults, 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.
(C) 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. DVL was unable to
fund the continued expansion of FMF and was forced to sell the company in
7
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 and
received a promissory note for $275,000 payable over 15 months, bearing
interest at 8% per annum and a subordinated debenture in the amount of $550,000
due in three years and bearing interest based upon the sales volume of FMF. DVL
has received $50,000 from the sale of FMF subsequent to March 30, 1995. DVL
has fully reserved 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.
(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 loans to meet its operating cash flow deficiency and
its mandatory repayment obligations 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 may put the shares
back to DVL and DVL shall pay the creditor the guaranteed value in installments
over twelve months. DVL has provided for a reserve of $400,000 at March 31,
1995, based upon the shortfall in the guaranteed value.
(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 March 31, 1995 and December 31, 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 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 all 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 (see
"Legal Proceedings").
(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 is expected to close by
the end of 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.
8
(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.
9
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 the 1992 settlement of the
limited partner class action substantially reduced the non-performing portion
of DVL's loan portfolio, this reclassification has not, 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
$13,911,000 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 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 defaults, 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 March 31, 1995 Compared to Three Months Ended March 31,
1994
DVL realized net income of $731,000 for the three months ended March
31, 1995, as compared to net income of $382,000 for the corresponding 1994
period, a change of $349,000. The income in 1995 was primarily a result of
the extraordinary gain realized upon the restructuring of indebtedness with
one creditor which was partially offset by DVL's operating losses. The income
in 1994 was primarily a result of 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, which were partially
offset by DVL's operating losses. The effects of these items and the other
factors contributing to the net income are as follows:
Interest income on mortgage loans due from affiliates decreased by
$459,000 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 the partnership properties and an increase in the non performing
portion of such mortgage loans.
10
Management fees from partnerships decreased by $12,000 as a result of
the liquidation of certain partnerships during 1994 and the non payment of
fees in 1995 on one operating property pending the outcome of certain
litigation.
Transaction and other fees from partnerships aggregating $134,000 in
1995 and $174,000 in 1994 principally represent the fees received upon the
sale or refinancing of certain partnership properties.
Rent income from affiliated partnerships decreased by $8,000 as a
result of the remaining two land leases held by DVL being in default.
Interest income on loans to limited partners decreased by $15,000 due
to a decrease in the average outstanding balances of the performing portion
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 $216,000 primarily
as a result of a decrease in payroll and operating costs incurred in 1995 and
the accrual of $36,000 in 1994 for the value of performance units granted to
certain officers.
Legal and professional fees increased by $65,000 primarily as a result
of an increase in activity in certain legal matters in 1995. Such fees are
expected to continue on a slightly reduced basis until DVL settles its
remaining litigation and restructures its remaining unsettled indebtedness.
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 during
the second quarter of 1995.
Interest expense increased by $22,000 primarily as a result of an
increase in interest rates on certain restructured indebtedness, increases in
the prime rate and by increases in the imputed interest on the notes to be
issued in connection with the settlement of the shareholder litigation
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 completed and proposed settlements and
restructuring agreements 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 $9 million 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 $89,000 during the three months
ended March 31, 1995 which was primarily a result of an agreement to sell a
mortgage at a discount and updated information on certain properties partially
offset by a decrease in the provision for losses on limited partner notes.
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 proceeds from the sale or
refinancing of assets and equity financings. DVL is currently negotiating
with a number of interested parties in connection with the refinancing of
11
certain assets pursuant to which a lender would replace certain existing
lenders and in consideration of such loans would receive 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 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 $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 and approximately $1 million was placed in
escrow in connection with proposed settlements with DVL's 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.
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 is
expected to close by the end of 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 December 31, 1994, DVL continued to be in default for non-payment
of scheduled interest and/or principal payments on approximately $13.9 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. 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.
12
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.
13
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. However, several cases are
still being litigated or are pending final disposition including the original
shareholder class and derivative actions. The following is a summary of the
status of all material outstanding cases.
Numerous 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 (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 December 31, 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 judgment 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 may have 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. Based upon a recent
Delaware Supreme Court decision which we believe supports their position in
this matter, defendants have filed a motion for summary judgement.
DVL was 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. The RYE action
has been dismissed with prejudice. The other two derivative suits are
14
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") 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. The parties are currently negotiating a
new settlement which, if finalized, will be presented to the New Jersey Court
for approval. The New York Court in FEDERAL INSURANCE, held that the Settling
Defendants' insurance excluded coverage of these matters and Federal has sought
dismissal of the New Jersey cases based on that ruling.
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 $625,000 plus attorney
fees, expenses and interest. The case was removed to Federal Court.
Defendants have answered plaintiffs' amended complaint and have filed motions
for summary judgement against Defendants. Settlement discussions are underway
and management has reserved for its estimation of settling or defending the
case.
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. Defendants have answered the complaint, successfully moved to
dismiss certain counts and commenced discovery. Plaintiff was then given leave
to amend and filed an amended complaint, which Defendants have answered. More
extensive discovery is ongoing. It is expected that this case will not settle
and will proceed to trial and management has reserved for its estimation of
settling or defending the case.
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.
15
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 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 has also named Federal as a third
party defendant in the consolidated WEIGART and FEINBERG cases, which have
been stayed. Federal is seeking an order dismissing the third party complaint
on the New York Court's ruling in FEDERAL INSURANCE.
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 in certain matters filed
by Vanguard Capital, Inc. in the Superior Court, State of California. This
action is based on complaints by an investor in an affiliated limited
partnership alleging that the investor's broker sold to her unsuitable
investments. The broker is seeking indemnity against DVL and others. DVL has
answered this complaint.
DVL, Inc. was recently 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 Plaintiff alleged that DVL, as a holder
of certain consumer credit contracts issued by a debtor of DVL's subsidiary,
Del-Val Capital Corp., 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
vigorously defend against it.
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..
The main claims in both actions have been dismissed, leaving the
counterclaims which are being pursued. The counterclaims have been amended
to add as counterclaim defendants Foodtown of Kearny, Inc. and its principal,
Martin Vitale ("Foodtown"), and Kearny ShopRite, Inc. and its principal,
Richard Tully, as well as to name DVL as successor to Del-Val Financial Corp.
Foodtown has asserted crossclaims against INTER ALIA DVL, counterclaims
against Pathmark and its property owner and third-party claims. DVL has
settled this case as asserted by Pathmark and the property owner, without
admitting liability and the parties are in the process of finalizing
settlement documents. Foodtown's crossclaims against DVL remain pending.
16
Item 3. Defaults Upon Senior Securities
At March 31, 1995, DVL had approximately $13.9 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 settle or restructure the payment terms with its
remaining unsettled creditor.
Item 6. Exhibits and Reports on Form 8-K
EXHIBIT 11 - Computation of per share data (see schedule on pages 17
through 18)
There were no reports on Form 8-K filed during the three months ended
March 31, 1995.
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
May 11, 1995
17
<TABLE>
<CAPTION>
EXHIBIT 11
DVL, INC. and Subsidiaries
Computation of Per Share Data
(in thousands except share data)
(unaudited)
Three Months Ended
March 31,
------------------------
1995 1994
--------- ---------
<S> <C> <C>
Primary:
Loss before gain on sale of real estate $ (1,071) $ (741)
Gain on sales of real estate to affiliates - 2
--------- ---------
Income from continuing operations (1,071) (739)
Loss from discontinued operations - 11
Extraordinary gain on the settlement of
indebtedness 1,802 1,110
--------- ---------
Net income $ 731 $ 382
========= =========
Weighted average number of common shares
outstanding issued and to be issued 8,551,967 8,103,043
Shares issuable upon exercise of dilutive stock
options and warrants - net of shares assumed
to be repurchased (at the average market
price for the period) from exercise proceeds - 308,800
--------- ---------
Shares used for computation 8,551,967 8,411,843
========= =========
Earnings per share of Common Stock:
Loss before gain on sale of real estate $ (.12) $ (.08)
Gain on sales of real estate to affiliates - -
--------- ---------
Loss from continuing operations (.12) (.08)
Income from discontinued operations - -
Extraordinary gain on the settlement of
indebtedness .21 .13
--------- ---------
Net income $ .09 $ .05
========= =========
</TABLE>
18
<TABLE>
<CAPTION>
EXHIBIT 11 (continued)
DVL, INC. and Subsidiaries
Computation of Per Share Data
(in thousands except share data)
(unaudited)
Three Months Ended
March 31,
------------------------
1995 1994
--------- ---------
<S> <C> <C>
Assuming Full dilution:
Loss before gain on sales of real estate $ (1,071) $ (741)
Adjustment for reduction in interest on
assumed payment of indebtedness 42 -
Adjustment for reduction in interest on
assumed conversion of debentures 21 16
--------- ---------
Adjusted loss before gain on sale of real estate (1,008) (725)
Gain on sale of real estate - 2
--------- ---------
Adjusted loss from continuing operations (1,008) (723)
Loss from discontinued operations - 11
Extraordinary gain on the settlement of
indebtedness 1,802 1,110
--------- ---------
Adjusted net income $ 794 $ 398
========= =========
Weighted average number of common shares
outstanding issued and to be issued 8,551,967 8,103,043
Shares issuable upon conversion of subordinated
debentures 607,051 494,252
Shares issuable upon conversion of contingent
debentures 107,000 107,000
Shares issuable upon exercise of dilutive stock
options and warrants - net of shares assumed
to be repurchased (at the higher of period-end
market price or the average market price for
the period) from exercise proceeds 219,346 391,600
--------- ---------
Shares used for computation 9,485,364 9,095,895
========= =========
Earnings per share of Common Stock:
Loss before gain on sale of real estate $ (.11) $ (.08)
Gain on sale of real estate - -
--------- ---------
Loss from continuing operations (.11) (.08)
Income from discontinued operations - -
Extraordinary gain on the settlement of
indebtedness .19 .12
--------- ---------
Net income $ .08 $ .04
========= =========
</TABLE>
19
