SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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 June 30, 1995
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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.
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(Exact name of registrant as specified in its charter)
Delaware 13-2892858
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
24 River Road, Bogota, New Jersey 07603
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (201) 487-1300
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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 August 14, 1995
----------------------------- ------------------------------
Common Stock, $1.00 par value 9,168,268
DVL, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
--------
Consolidated Balance Sheets -
June 30, 1995 and December 31, 1994 1
Consolidated Statements of Operations -
Three Months Ended June 30, 1995 and 1994 3
Six Months Ended June 30, 1995 and 1994 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1995 and 1994 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information:
Legal Proceedings 16
Defaults upon Senior Securities 19
Exhibits and Reports on Form 8-K 19
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
------
June 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 $50,752 and $52,840, respectively) $ 63,101 $ 68,851
Unearned interest (17,165) (18,028)
-------- --------
Net mortgage loans receivable from affiliated
partnerships (including non-performing loans
of $5,148 and $5,261, respectively) 45,936 50,823
Others:
Other mortgage loans 1,333 1,383
Loans collateralized by limited partnership
interests due from limited partners (including
$4,197 and $4,540 of non-performing loans,
respectively) 4,231 4,606
-------- --------
Total loans receivable 51,500 56,812
Allowance for loan losses (Note D) 12,685 12,762
-------- --------
Net loans receivable 38,815 44,050
Cash (including restricted cash of $223 and
$1,022, respectively) 531 1,350
Due from affiliated partnerships (net of an allowance
for loss of $1,752 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 2,469 2,557
Affiliated limited partnerships (net of an allowance
for loss of $750) 3,515 3,803
Other investments (net of an allowance for loss
of $400) 706 723
Other assets 564 1,113
-------- --------
Total assets $ 47,002 $ 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
------------------------------------------------
June 30, December 31,
1995 1994
----------- -----------
(unaudited)
<S> <C> <C>
Liabilities:
Debt in default for non-payment including accrued
interest - partially collateralized (Note B) $ 14,090 $ 13,804
Short-term debt - 215
Long-term debt (Note G) 26,572 32,018
Notes to be issued pursuant to shareholder
litigation settlement (Note F) 4,860 4,434
Convertible subordinated debentures 453 448
Accrued liability for shareholder litigation
settlement (Note F) 1,810 1,810
Accrued liability for indebtedness of
affiliates (Note E) 657 708
Accounts payable and accrued liabilities 3,503 4,383
-------- --------
Total liabilities 51,945 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
9,093,268 and 8,513,200, respectively 9,093 8,513
Additional paid-in capital 83,664 84,074
Deficit (98,021) (97,718)
-------- --------
Total shareholders' capital deficiency (5,264) (5,131)
-------- --------
Total liabilities and shareholders'
capital deficiency $ 47,002 $ 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
June 30,
-------------------
1995 1994
-------- --------
<S> <C> <C>
Income from affiliates (Note B)
Interest on mortgage loans $ 446 $ 469
Management fees from partnerships 124 138
Transaction and other fees from partnerships 307 263
Rent income - 7
Income from others
Interest on loans to limited partners 69 103
Other interest 22 6
Other income (Note C) 35 -
--------- ---------
1,003 986
--------- ---------
Operating expenses
General and administrative 825 816
Legal and professional fees 191 138
Net provision for losses 85 606
Interest expense 933 1,020
Claim settlement and other litigation losses 10 570
--------- ---------
2,044 3,150
--------- ---------
Loss before gain on sales of real estate (1,041) (2,164)
Gain on sales of real estate to affiliates - 3
--------- ---------
Loss from continuing operations (1,041) (2,161)
Income from discontinued operations - 4
--------- ---------
Loss before extraordinary gain (1,041) (2,157)
Extraordinary gain on the settlement
of indebtedness (Note G) 7 825
--------- ---------
Net loss $ (1,034) $ (1,332)
========= =========
Loss per share (Note I):
Loss from continuing operations $ (.12) $ (.26)
Income from discontinued operations - -
--------- ---------
Loss before extraordinary gain (.12) (.26)
Extraordinary gain on the settlement of
indebtedness - .10
--------- ---------
Net loss $ (.12) $ (.16)
========= =========
Weighted average shares outstanding 8,855,768 8,267,366
========= =========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
3
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
(unaudited)
Six Months Ended
June 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) $ 810 $ 1,292
Management fees from partnerships 239 265
Transaction and other fees from partnerships 441 437
Rent income - 15
Income from others
Interest on loans to limited partners 116 165
Other interest 32 23
Other income (Note C) 85 -
-------- --------
1,723 2,197
-------- --------
Operating expenses
General and administrative 1,402 1,609
Legal and professional fees 361 243
Net provision for losses 174 727
Interest expense 1,888 1,953
Claim settlement and other litigation losses 10 570
-------- --------
3,835 5,102
-------- --------
Loss before gain on sales of real estate (2,112) (2,905)
Gain on sales of real estate to affiliates - 5
-------- --------
Loss from continuing operations (2,112) (2,900)
Income from discontinued operations - 15
-------- --------
Loss before extraordinary gain (2,112) (2,885)
Extraordinary gain on the settlement
of indebtedness (Note H) 1,809 1,935
-------- --------
Net loss $ (303) $ (950)
======== ========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
4
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
(unaudited)
Six Months Ended
June 30,
---------------------
1995 1994
--------- ---------
<S> <C> <C>
Loss per share (Note I):
Loss from continuing operations $ (.24) $ (.35)
Income from discontinued operations - -
--------- ---------
Loss before extraordinary gain (.24) (.35)
Extraordinary gain on the settlement of
indebtedness .21 .23
--------- ---------
Net loss $ (.03) $ (.12)
========= =========
Weighted average shares outstanding 8,719,667 8,196,942
========= =========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
5
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Loss from continuing operations $ (2,112) $ (2,900)
Adjustments to reconcile net cash provided
by operating activities
Net provision for losses 174 727
Claim settlement and other litigation
losses 10 570
Depreciation and amortization 36 60
Decrease in unearned interest on loans
receivable (63) (305)
Net (increase) decrease in payables 700 (130)
Consideration paid in common stock 163 -
Imputed interest on notes to be issued 426 354
Amortization of deferred credits - (4)
Increase in deferred credits - 126
Net (increase) decrease in other assets 499 (425)
Net cash provided by discontinued
operations - 9
------- ------
Net cash used in
operating activities (167) (1,918)
------- ------
Cash flows from investing activities
Collections on loans receivable (net of
payments on underlying loans) 2,528 8,476
Net increase in real estate acquired
for resale - (318)
Net reduction in real estate lease
interests 88 -
Net collections on amounts due from
affiliated partnerships 84 68
Distributions received on affiliated limited
partnerships and other investments 311 206
Acquisition of limited partnership
interests - (113)
Net cash provided by discontinued lending
activities of Del-Val Capital Corp. - 497
------- ------
Net cash provided by
investing activities 3,011 8,816
------- ------
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
6
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(in thousands)
(unaudited)
Six Months Ended
June 30,
----------------------
1995 1994
--------- --------
<S> <C> <C>
Cash flows from financing activities
Increase in indebtedness 448 1,039
Repayment of indebtedness (4,083) (6,272)
Repayment of guaranteed indebtedness (28) (384)
-------- --------
Net cash used in financing activities (3,663) (5,617)
-------- --------
Net increase (decrease) in cash (819) 1,281
Cash - beginning 1,350 541
-------- --------
Cash - end $ 531 $ 1,822
======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest
(excluding amounts paid on underlying
mortgages) $ 384 $ 518
======== ========
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 $ 1,809 $ 1,935
======== ========
Increase in long-term debt upon
capitalization of accrued interest
and other payables $ 590 $ 520
======== ========
Reduction in indebtedness upon
issuance of common stock $ 7 $ 311
======== ========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
7
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 six
months ended June 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 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 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 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. 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.
The New York Stock Exchange ("NYSE") has 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
considered its rights to challenge such decision to delist and has requested an
appeal.
8
(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 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 $85,000 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 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 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
has provided for a reserve of $349,000 at June 30, 1995, based upon the amount
due to such creditor 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 June 30, 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 anticipated shortfall in
the value of the 900,000 shares are expected to result in the issuance of an
additional $1,386,851 face value of notes. 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 and 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 was 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.
The derivative shareholder litigation was not consolidated with the
respective class actions and DVL continues to defend itself against such
litigation. 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").
9
(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.
10
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
$14,090,000 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 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 June 30, 1995 Compared to Three Months Ended June 30, 1994
-----------------------------------------------------------------------------
DVL realized a net loss of $1,034,000 for the three months ended June
30, 1995, compared to a net loss of $1,332,000 for the corresponding 1994
period, a change of $298,000. The loss in 1995 was primarily a result of DVL's
continued operating losses. The loss in 1994 was primarily a result of
additional provisions for loan and other losses, 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:
Interest income on mortgage loans due from affiliates decreased by
$23,000 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 decreased by $14,000 as a result of
the liquidation of certain partnerships during 1994 and 1995 and the non payment
of fees in 1995 on one operating property pending the outcome of certain
litigation.
11
Transaction and other fees from partnerships aggregating $307,000 in
1995 and $263,000 in 1994 principally represent the fees received upon the sale
or refinancing of certain partnership properties.
Rent income from affiliated partnerships decreased by $7,000 as a result
of the remaining two land leases held by DVL being in default.
Interest income on loans to limited partners decreased by $34,000 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 increased by $9,000 primarily as a
result of the accrual of $186,000 in 1995 for the value of performance units
granted to certain officers as compared to a reduction of $161,000 of such
expense in 1994, partially offset by a decrease in payroll and operating costs
incurred in 1995.
Legal and professional fees increased by $53,000 primarily as a result
of the expenses incurred in retaining an investment advisor to assist in raising
debt or equity financings in late 1994. Legal fees are expected to continue on
a reduced basis until DVL settles its remaining litigation.
Interest expense decreased by $87,000 primarily as a result of a
reduction in the average outstanding indebtedness, partially offset by increases
in the imputed interest in 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 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 $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 Kenbee's indebtedness 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 $85,000 during the three months
ended June 30, 1995 which was primarily a result of an agreement to sell a
mortgage at a discount and updated information on certain properties.
Six Months Ended June 30, 1995 Compared to Six Months Ended June 30, 1994
-------------------------------------------------------------------------
DVL realized a net loss of $303,000 for the six months ended June 30,
1995, as compared to a net loss of $950,000 for the corresponding 1994 period,
a change of $647,000. 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:
12
Interest income on mortgage loans due from affiliates decreased by
$482,000 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 $26,000 as a result of
the liquidation of certain partnerships during 1995 and 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 $441,000 in
1995 and $437,000 in 1994 principally represent the fees received upon the sale
or refinancing of certain partnership properties.
Rent income from affiliated partnerships decreased by $15,000 as a
result of the remaining two land leases held by DVL being in default.
Interest income on loans to limited partners decreased by $49,000 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 $207,000 primarily as
a result of a decrease in payroll and operating costs incurred in 1995 which was
partially offset by an increase in the accrual for the value of performance
units granted to certain officers of $185,000 in 1995, as compared to the
reduction in the accrual of $124,000 in 1994.
Legal and professional fees increased by $118,000 primarily as a result
of the expenses incurred in retaining an investment advisor to assist in raising
debt or equity financings in late 1994. Legal fees are expected to continue on
a reduced basis until DVL settles its remaining litigation.
Interest expense decreased by $65,000 primarily as a result of a
reduction in the average outstanding indebtedness partially offset by increases
in 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 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 $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 $174,000 during the six months
ended June 30, 1995 which was primarily a result of an agreement to sell certain
mortgages at a discount and updated information on certain properties partially
offset by a decrease in the provision for losses on limited partner notes.
13
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 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 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 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. 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 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 June 30, 1995, DVL continued to be in default for non-payment of
scheduled interest and/or principal payments on approximately $14 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.
14
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.
15
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 and derivative actions. 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 June 30, 1995, 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 anticipated shortfall in the value of the
900,000 shares are expected to result in the issuance of an additional
$1,386,351 face value of notes. The settlement is expected to result 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.
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.
On July 21, 1995, the court in IN RE DEL-VAL entered an order which
permitted the plaintiffs who earlier requested exclusion from the class and who
commenced their own action (see discussion of LEVY action above) to re-enter
that case for all purposes. As of the last date permitting such re-entry, no
plaintiff's have re-entered IN RE DEL-VAL, and the pending summary judgement in
LEVY will be heard.
16
DVL is 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"), 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. Plaintiffs and Settling Defendants have reached a
new
settlement agreement in WEIGART and FEINBERG which has been preliminarily
approved
by the New Jersey Court. With the concurrence of the derivative Plaintiffs, the
Settling Defendants agreed to dismiss the New Jersey Third Party Action only
against Federal Insurance Company ("Federal") without prejudice and on August 5,
1995 the court signed an order to that effect.
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.
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. Settlement has been
reached
in this matter and counsel is preparing a Stipulation of Settlement to be
executed
by all parties.
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.
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.
17
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 in an affiliated limited
partnership alleging that the investor's broker sold to her unsuitable
investments. DVL has answered this complaint.
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 Captial 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 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 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 and 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. Foodtown's crossclaims against DVL
remain pending.
18
Item 3. Defaults Upon Senior Securities
-------------------------------
At June 30, 1995, DVL had approximately $14 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
--------------------------------
There were two reports on Form 8-K filed during the three months ended
June 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
-------------------------
Joel Zbar, Treasurer and
Chief Accounting Officer
August 14, 1995
19
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
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<SECURITIES> 0
<RECEIVABLES> 51,500
<ALLOWANCES> 12,685
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0
0
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<INCOME-PRETAX> (2,112)
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