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 March 31, 1996
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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 May 17, 1996
----------------------------- ---------------------------
Common Stock, $.01 par value 14,279,450
DVL, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995 1
Consolidated Statements of Operations -
Three Months Ended March 31, 1996 and 1995 3
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information:
Legal Proceedings 13
Defaults upon Senior Securities 14
Exhibits and Reports on Form 8-K 14
Exhibit 11 16
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,
1996 1995
--------- ------------
(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 $49,795 and $44,300, respectively) $ 48,785 $ 54,501
Unearned interest (14,302) (14,411)
-------- --------
Net mortgage loans receivable from affiliated
partnerships (including non-performing loans
of $5,630 and $5,640, respectively) 34,483 40,090
Others:
Other mortgage loans 1,254 1,281
Loans collateralized by limited partnership
interests due from limited partners (all of
which are non-performing loans) 3,848 3,921
--------- ---------
Total loans receivable 39,585 45,292
Allowance for loan losses (Note D) 12,026 12,225
-------- --------
Net loans receivable 27,559 33,067
Cash (including restricted cash of $286 and
$602, respectively) 576 1,042
Due from affiliated partnerships (net of an allowance
for loss of $1,727) 114 114
Investments
Real estate at cost (net of accumulated
depreciation) - pledged (net of an allowance for
loss of $208) 289 289
Real estate lease interests (Note G) 2,214 2,300
Affiliated limited partnerships (net of an allowance
for loss of $538 and $583, respectively) 3,173 3,310
Other investments (net of an allowance for loss
of $400) 697 697
Other assets 780 680
-------- --------
Total assets $ 35,402 $ 41,499
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
1
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
LIABILITIES AND SHAREHOLDERS' CAPITAL DEFICIENCY
------------------------------------------------
March 31, December 31,
1996 1995
----------- ------------
(unaudited)
<S> <C> <C>
Liabilities:
Short-term debt $ - $ 1,060
Long-term debt (Notes B and G) 26,898 32,290
Notes payable - litigation settlement
(Note F) 5,875 5,642
Convertible subordinated debentures 460 458
Accrued liability for indebtedness of Kenbee
Management, Inc. and affiliates (Note E) 313 353
Accounts payable and accrued liabilities
(Note E) 2,316 2,705
-------- --------
Total liabilities 35,862 42,508
-------- --------
Deferred credits (Note G) 321 321
-------- --------
Commitments and contingent liabilities
Shareholders' capital deficiency (Note F):
Common stock, $.01 par value, authorized -
40,000,000 shares, issued and to be issued -
14,264,450 and 13,260,850, respectively 143 133
Additional paid-in capital 94,326 94,135
Deficit (95,250) (95,598)
-------- --------
Total shareholders' capital deficiency (781) (1,330)
-------- --------
Total liabilities and shareholders'
capital deficiency $ 35,402 $ 41,499
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
2
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
(unaudited)
Three Months Ended
March 31,
-------------------
1996 1995*
-------- --------
<S> <C> <C>
Income from affiliates (Note B)
Interest on mortgage loans $ 277 $ 328
Partnership management fees 113 115
Transaction and other fees from partnerships 94 134
Rent income 9 -
Other Income 2 2
Income from others
Interest on mortgage loans 31 36
Interest on loans to limited partners 4 47
Other interest 3 8
Other income (Note C) 10 50
-------- --------
543 720
-------- --------
Operating expenses
General and administrative 437 577
Legal and professional fees 39 170
Net provision for losses 56 89
Interest expense 709 955
-------- --------
1,241 1,791
-------- --------
Loss before extraordinary gain (698) (1,071)
Extraordinary gain on the settlement
of indebtedness (Note G) 1,046 1,802
-------- --------
Net income (Note H) $ 348 $ 731
======== ========
<FN>
* Reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
3
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
(unaudited)
Three Months Ended
March 31,
---------------------
1996 1995
---------- --------
<S> <C> <C>
Earnings per share (Note I):
Primary
Loss before extraordinary gain $ (.05) $ (.12)
Extraordinary gain on the settlement of
indebtedness .08 .21
---------- --------
Net income $ .03 $ .09
========== ========
Fully diluted
Loss before extraordinary gain $ (.05) $ (.11)
Extraordinary gain on the settlement of
indebtedness .08 .19
---------- --------
Net income $ .03 $ .08
========== ========
Weighted average shares outstanding
Primary 13,764,824 8,551,967
========== =========
Fully diluted 13,764,824 9,485,364
========== =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
4
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
-----------------------
1996 1995*
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Loss from continuing operations $ (698) $ (1,071)
Adjustments to reconcile net cash provided
by operating activities
Net provision for losses 56 89
Accrued interest added to indebtedness 151 202
Depreciation and amortization 90 17
Increase (decrease) in unearned interest
on loans receivable (30) 16
Net increase (decrease) in accounts payable
and accrued liabilities (157) 333
Imputed interest on notes and debentures 235 208
Net (increase) decrease in other assets (44) 47
------- ------
Net cash used in
operating activities (397) (159)
------- ------
Cash flows from investing activities
Collections on loans receivable (net of
payments on underlying loans) 5,482 247
Net reductions in real estate lease
interests 86 77
Net increase in amounts due from
affiliated partnerships - (30)
Distributions received on limited
partnership interests 60 51
------- ------
Net cash provided by
investing activities 5,628 345
------- ------
<FN>
* Reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
5
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(in thousands)
(unaudited)
Three Months Ended
March 31,
----------------------
1996 1995*
--------- --------
<S> <C> <C>
Cash flows from financing activities
Repayment of guaranteed indebtedness $ (40) $ -
Repayment of indebtedness (5,657) (520)
-------- --------
Net cash used in financing activities (5,697) (520)
-------- --------
Net decrease in cash (466) (334)
Cash - beginning 1,042 1,350
-------- --------
Cash - end $ 576 $ 1,016
======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest
(excluding amounts paid on underlying
mortgages) $ 269 $ 296
======== =========
Supplemental disclosure of non-cash
investing and financing activities:
Net loans and other assets transferred
to settle indebtedness and litigation
claims $ 77 $ 1,379
======== =========
Net reduction in indebtedness pursuant
to creditor settlements and prepayment
discounts including accrued interest $ 1,046 $ 1,802
======== =========
Reduction in accounts payable and
accrued liabilities upon issuance of
common stock $ 155 $ -
======== =========
Increase in other assets upon issuance
of common stock $ 46 $ -
======== =========
Prepaid extension fee added to
indebtedness $ 100 $ -
======== =========
<FN>
* Reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
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 the financial position and the results of operations
for the periods presented. The results of operations for the three months ended
March 31, 1996 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.
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
had been seeking equity based financings to meet such obligations. DVL has
entered into a loan agreement with NPM Capital LLC ("NPM") as discussed below.
As a result of DVL's prior and current asset liquidations and refinancings,
DVL's
asset base available for future liquidations and refinancings has diminished
considerably. DVL has mandatory repayment requirements by June 30, 1996 of
$2,770,000 and in addition to the steps discussed above, DVL is requesting
extensions of the mandatory repayment requirements from its creditors. There
can
be no assurance that the cash flow generated by potential asset liquidations or
refinancings will be sufficient to meet DVL's current operating cash flow
deficiencies or mandatory debt repayments.
DVL's ability to continue as a going concern is dependent upon (1) the
sale or refinancing of certain assets to improve its cash position to meet
operating expenses and make mandatory repayment requirements to its creditors;
(2) the settlement of its remaining litigation; (3) 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
(4) the return to profitable operations. If DVL is unsuccessful in achieving a
short term solution to its liquidity problems and is unable to meet its
mandatory
repayment requirements or obtain further extensions and does not return 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.
On March 27, 1996, DVL and NPM entered into a Loan Agreement (the "Loan
Agreement") pursuant to which NPM agreed to lend DVL funds which would be used
to satisfy the remaining balances at closing of four existing loans to various
creditors and to make principal installment payments of $600,000 on DVL's
obligation to another creditor (the "Loan"). These five loans had an aggregate
balance at May 15, 1996 of approximately $9,225,000. Three of these loans,
which
had aggregate outstanding balances at May 15, 1996 of approximately $2,770,000
mature by June 30, 1996. DVL will use the proceeds of the NPM Loan to prepay
two
of the five loans to avail itself of its negotiated discounts of approximately
$2,800,000. Based upon the May 15, 1996 balances due to such creditors plus
accrued interest through the date of closing (estimated at August 31, 1996) less
the expected discounts of approximately $2,800,000, DVL expects the amount to be
loaned by NPM at closing, including costs discussed below, to be approximately
$5,200,000. The Loan will be payable over six years with interest at the rate
of 10.25% per year. DVL is only required to pay to NPM the cash flow generated
7
from NPM's primary collateral, but in no event less than 5.25% per annum. In
consideration for NPM's loan, which will enable DVL to avail itself of all such
discounts, and for providing DVL with the extended payment schedule, the
principal amount of the Loan will be increased by $3,150,000 to approximately
$8,350,000. Moreover, the principal amount of the Loan will be further
increased
by the additional $600,000 to be loaned for payments to another creditor.
Included in the Loan balance are NPM's costs incurred in connection with this
transaction in excess of $175,000, estimated to be $500,000. The internal rate
of return to NPM on this loan will be approximately 27.5% assuming that payments
are made at the required repayment dates pursuant to the terms of the Loan. For
financial reporting purposes, the Company will not recognize a gain or a loss on
this transaction. The negotiated discounts of approximately $2,800,000 will be
amortized over the life of the Loan resulting in an effective interest rate for
financial reporting purposes of 11.7% exclusive of any amortization of debt
discount in connection with the issuance of the warrants described below.
In connection with the transactions contemplated by the Loan Agreement, DVL
and NPO Management LLC ("NPO"), an affiliate of NPM, have entered into an Asset
Servicing Agreement, subject to shareholder ratification, pursuant to which NPO
is providing DVL with administrative and advisory services relating to the
assets
of DVL and its affiliated partnerships. In consideration for such services, DVL
is paying NPO $600,000 per year (with cost of living increases beginning in
1998)
over the seven (7) year term of the agreement, subject to early termination
under
certain conditions. DVL has the right to defer up to $600,000 of such fees for
two years and to defer a reduced amount through the third year. DVL anticipates
that by outsourcing such services it will be able to reduce its overhead in the
future, thereby offsetting the costs of such services.
In connection with the Loan, affiliates of NPM have agreed, upon consummation
of the Loan, to acquire 1,000,000 shares (the "Shares") of DVL common stock for
$200,000 representing approximately 7% of the current outstanding common stock
of DVL. In addition, DVL has agreed, upon consummation of the Loan, to issue to
affiliates of NPM an amount of warrants (the "Warrants") which when added to the
1,000,000 shares to be acquired will equal 49% of the outstanding common stock
of DVL on a fully diluted basis. The Warrants will be exercisable at a price of
$.16 per share. The Warrants will be valued at the date of issuance and such
value will result in a debt discount to be amortized over the life of the Loan.
Consummation of the transactions contemplated by the Loan Agreement,
including
the Loan and the issuance of the Shares and the Warrants are subject to certain
conditions, including shareholder approval. If approved, DVL anticipates
closing
these transactions during the third quarter of fiscal 1996.
(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. In January 1996, DVL issued 250,000 shares of DVL common stock
(valued at $31,000) to the prior president of FMF in consideration for his
assignment to DVL of loans to FMF of approximately $112,000 and his release of
all
potential claims against DVL. DVL has fully reserved for such remaining
obligations since their collectibility is uncertain at this time. If and when
DVL
collects on the remainder of its notes and subordinated debenture it will
recognize
income as received. DVL has received $170,000 from the sale of FMF from March
30,
1995 through May 15, 1996, which has been recorded as income.
8
(D) Management's evaluation of the collateral underlying each loan in DVL's
portfolio previously resulted in substantial loan write-offs and a substantial
allowance for loan losses. The current evaluation considered the non-performing
portion of DVL's loan portfolio, internally generated appraisals of certain
properties, updated information on certain properties and DVL's anticipated
liquidation of certain loans to meet its operating cash flow deficiency and its
mandatory repayment requirements on certain indebtedness.
(E) In April 1994, DVL completed a settlement with a creditor, to whom DVL
was
obligated as 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 twice to provide for lower payments through May 1996 at which point the
remaining balance of approximately $327,000 will be due. DVL has provided for a
reserve of $313,000 at March 31, 1996, based upon the amount due to such
creditor,
including projected interest payments, less DVL's valuation of the remaining
272,000 shares held by the creditor.
(F) In December 1995, DVL completed its obligations under a 1993 settlement
("Shareholder Settlement") of its class action litigation. The Shareholder
Settlement, which was approved by the court in 1993, provided that DVL would
issue
the plaintiffs (1) 900,000 shares of DVL common stock at a minimum price of
$1.50
per share (or notes to cover any deficiency in the event that aggregate market
value was less than $1,340,000); (2) $9,000,000 face value of notes due in ten
years, with interest at 10% payable in kind for five 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 (valued in 1993 at $3,690,000 by an
independent
investment banker) and (3) $1,400,000 plus interest at 3% from August 16, 1993
and
expenses, payable in cash or common stock. In December 1995, DVL issued the
900,000 shares of common stock and as a result of the deficiency in its market
value, issued additional notes with the same terms, in the face amount of
$1,386,351 (valued at $330,000 by DVL). In payment of the $1.4 million plus
interest and expenses, DVL issued 4,017,582 shares of common stock in December
1995.
In the aggregate, DVL issued notes with a face value of $10,386,851.
Commencing January 1994, interest on the initial $9,000,000 of notes was imputed
based upon DVL's carrying costs of such notes resulting in an effective interest
rate of approximately 19%. Since October 1, 1995, interest on all of the notes
is
being imputed based upon an effective interest rate of approximately 16.325%.
The
Shareholder Settlement resulted in a loss of $6,400,000 which was fully provided
for in 1992.
In addition, DVL has settled virtually all of its remaining litigation
but
remains a defendant in certain litigation. Based upon pending litigation,
management accrued a reserve of $154,000 at March 31, 1996 (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 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.
9
In December 1995, DVL reached a settlement with its final unsettled
creditor
and recognized a gain on the settlement of indebtedness of $6.1 million. The
restructured indebtedness required a $400,000 payment at closing and requires
five
quarterly payments totaling $600,000 commencing June 30, 1996. If such
remaining
payments are made, DVL would recognize additional gains of approximately $7.4
million.
In March 1996, DVL was able to make prepayments to a creditor from the
proceeds of a refinancing of first mortgages of approximately $2,652,000.
Pursuant
to a previously negotiated discount agreement, the amount due to such creditor
was
reduced by an additional $604,000 which, was recognized as an extraordinary gain
on the settlement of indebtedness in the first quarter of 1996. In addition, in
April and May 1996 DVL made additional prepayments to the same creditor of
$987,000
from additional refinancings. Such payments resulted in additional reductions
of
$785,000 which will be recognized as an extraordinary gain on the settlement of
indebtedness in the second quarter of 1996.
In March 1996, pursuant to a previously arranged discount agreement, DVL
paid
one of its creditors $690,000 in full satisfaction of a loan which had the
effect
of releasing back to DVL certain limited partner investor notes and units and a
collateral assignment of all of its interest in certain master lease positions.
The release of the above collateral will help reduce DVL's operating cash flow
deficiency. In connection with this transaction, DVL recognized an
extraordinary
gain on the settlement of indebtedness of $442,000 in the first quarter of 1996.
(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, 1995, DVL had approximately $65 million of net operating
loss
carryforwards available to offset future taxable income, if any, expiring
through
2010. Until management anticipates the realization of such future tax benefits,
DVL's deferred tax asset of approximately $36 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.
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
sale
or refinancing of certain assets to improve its cash position to meet operating
expenses and make its mandatory repayment requirements to its creditors; (2) the
settlement of its remaining litigation; (3) 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 (4) the return
to
profitable operations. If DVL is unsuccessful in achieving a short term
solution
to its liquidity problems, and continue to meet its mandatory repayment
requirements or obtain further extensions and return to profitable operations,
then
it may not be able to continue as a going concern.
Results of Operations
---------------------
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995
-------------------------------------------------------------------------------
DVL realized net income of $348,000 for the three months ended March 31,
1996, compared to net income of $731,000 for the corresponding 1995 period, a
change of $383,000. The income in 1996 was primarily a result of the
extraordinary
gains realized upon DVL's prepayments to a creditor and the discount received
upon
the payoff of indebtedness to another creditor. The income in 1995 was
primarily
a result of the extraordinary gains realized upon the restructuring of
indebtedness
with one creditor. DVL's operating losses partially offset the extraordinary
gains
recognized in 1996 and 1995. The operating loss decreased by $373,000 in 1996.
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
$51,000
primarily as a result of a reduction in the amount of such loans to affiliated
partnerships due to the satisfaction of certain loans upon the sale of
partnership
properties.
Management fees from partnerships decreased by $2,000. This reduction
in
fees is due to the liquidation of certain partnerships during 1995 and 1996.
This
reduction was partially offset by a 4% increase in the fees from the remaining
partnerships and by the collection of fees in 1996 by partnerships which were in
default in 1995.
Transaction and other fees from partnerships aggregating $94,000 in 1996
and $134,000 in 1995 principally represent the fees received upon the sale of
certain partnership properties.
Rent income from affiliated partnerships increased by $9,000 in 1996 due
to the receipt of rent from partnerships previously in default.
11
Interest income on loans to limited partners decreased by $43,000 due to
the fact that as of December 31, 1995 all remaining partner loans were deemed
non-performing. The $4,000 of interest income in 1996 represents collections
in excess
of the carrying value for certain loans.
Other income represents collections on the note obtained by DVL from the
sale of FMF.
General and administrative expenses decreased by $140,000 primarily as a
result of a decrease in payroll and related costs incurred in 1996. Based upon
the
Asset Servicing Agreement entered into with NPO, general and administrative
expenses are expected to increase during the remainder of 1996. The expenses
incurred in connection with the Asset Servicing Agreement are expected to be
offset
by reductions in compensation paid to DVL employees upon consummation of the
Loan
Agreement.
Legal and professional fees decreased by $131,000 primarily as a result
of
the decreased legal activity after the finalization of certain litigation
settlements. In addition, in 1995 DVL incurred costs relating to an investment
advisor to assist in raising debt or equity financings.
Interest expense decreased by $246,000 in 1996 primarily as a result of
a
decrease in indebtedness and decreases in interest rates on certain restructured
indebtedness. These decreases were partially offset by an increase of $25,000
of
imputed interest on the notes issued in connection with the Shareholder
Settlement.
The decrease in indebtedness is primarily the result of DVL reaching an
agreement
with its final unsettled creditor in 1995, as well as from significant payments
made to creditors from collections on the collateral pledged to secure such
indebtedness. Such collections were principally obtained from the satisfaction
of
certain loans upon the sale of partnership properties and from the refinancing
of
first mortgages (See "Liquidity and Capital Resources"). Management anticipates
that such interest expense will continue to decline in 1996 as a result of the
completed settlement with DVL's final unsettled creditor, as well as from
significant principal payments made to other creditors. However, this decline
will
be partially offset by an increase in interest expense on the $10.3 million of
notes issued in connection with the Shareholder Settlement and from interest
expense on the Loan Agreement in excess of interest expense on the existing
indebtedness to be satisfied, if consummated (see Note B).
Management's re-evaluation of the collateral underlying each loan
resulted
in a provision for losses aggregating $56,000 during the three months ended
March
31, 1996. The current evaluation considered the non-performing portion of DVL's
loan portfolio, internally generated appraisals of certain properties, updated
information on certain properties and DVL's anticipated liquidation of certain
loans to meet its operating cash flow deficiency and its mandatory repayment
obligations on certain indebtedness.
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 (see Note B). There is a risk that DVL may not be able to
raise
the necessary funds with which to continue operations.
DVL's revocation of its election to be taxed as a REIT effective January
1, 1994 eliminated the requirement that DVL distribute at least 95% of its
taxable
income to shareholders and allowed DVL to enter into new business ventures that
were not permitted or were subject to taxation at a rate of 100% for a REIT.
DVL
12
does not anticipate making distributions to its shareholders in the foreseeable
future. DVL currently has net operating loss carryforwards of approximately
$65,000,000 which it may use as a "C" Corporation to offset future taxable
income,
if any, subject to certain limitations, from federal income taxes.
DVL has the right to refinance a number of mortgage loans underlying its
wrap around mortgages due from affiliated partnerships and arrange senior
financing
secured by properties on which it holds first or second mortgage loans by
subordinating its mortgage position. In 1994, DVL refinanced a portion of its
mortgage portfolio which generated cash proceeds of approximately $5.9 million,
which was used to satisfy indebtedness. In 1996, DVL refinanced 19 mortgages
which
have generated approximately $6 million which has also been used to satisfy
indebtedness. The amounts obtained from these refinancings were primarily based
on the value of the base rents during the period of the base lease term
subsequent
to the payoff of the existing first mortgages. As a result of DVL's prior and
current refinancings, DVL's asset base available for future refinancings has
diminished considerably.
During 1994 and 1995, DVL reached settlements with its remaining
unsettled
creditors. The settlements resulted in a reduction in indebtedness and a
restructuring of the remaining repayment requirements (see Note G).
As previously discussed, DVL is seeking replacement financing to meet
its
mandatory repayment requirements and its other cash needs. DVL is also
requesting
extensions of the mandatory repayment requirements from its creditors. Although,
if consummated, the proposed loan transaction discussed in Note B will extend
DVL's
mandatory repayment requirements to certain creditors, there can be no assurance
that DVL will be able to meet the new lenders' and other existing lenders
mandatory
repayment requirements. In addition, DVL will still have to raise funds to meet
its current operating cash flow deficiencies.
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 other indebtedness to fixed rates, DVL's indebtedness
continues to be primarily at variable rates. Therefore, decreases in interest
rates are generally expected to have a positive effect on DVL's earnings while
increases in interest rates are generally expected to have a negative effect on
DVL's earnings. Other than as manifested in interest rates, inflation has not
had
a significant effect on DVL's net income for the past five years.
Part II - Other Information
Item 1. Legal Proceedings
Substantial progress has been made in resolving various litigation brought
against DVL and/or its Board members and certain current and former officers and
affiliates by shareholders, banks and others. The following is a summary of the
status of all material outstanding cases, as well as cases settled in 1996.
A suit entitled DONALD LEVY, ET AL. V. ROGER D. STERN, ET AL. ("LEVY"),
originally filed in New Castle County, Delaware on February 13, 1991, on behalf
of
certain individual shareholders alleged breaches of fiduciary duty of care and
candor. The defendants recently prevailed on a motion for summary judgment in
this
case and have defeated plaintiffs' motion for reconsideration. Plaintiffs have
filed a notice of appeal in the Supreme Court of the State of Delaware.
Plaintiffs
in IN RE DEL-VAL have permitted the Plaintiffs in LEVY to participate in their
settlement with certain third party defendants in IN RE DEL-VAL.
13
DVL and certain former officers were 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 alleged
violations of the New Jersey Law Against Discrimination by Reason of Religious
Discrimination, of oral contract not to terminate plaintiff, of an implied
promise
not to terminate employee for reasons violative of public policy, and for
intentional infliction of emotional distress, intentional interference with
contractual relations and slander and slander PER SE. A settlement in this
matter
was completed in March 1996.
Federal Insurance Company ("Federal"), which carried DVL's directors and
officers insurance policy, declined to cover DVL for any legal costs or
liability.
DVL commenced an action against its insurance broker and Federal entitled
DEL-VAL
FINANCIAL CORPORATION, ET AL. V. FEDERAL INSURANCE COMPANY 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 and as part of a
settlement in certain shareholder derivative actions in the Superior Court of
New
Jersey, DVL assigned its rights to pursue Federal to those derivative
plaintiffs.
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 sought contractual indemnity, equitable
indemnity
and declaratory relief on certain matters filed against Vanguard Capital, Inc.
in
the Superior Court, State of California. This action is based on complaints by
an
investor with a $350,000 investment in an affiliated limited partnership
alleging
that the investor's broker sold to her unsuitable investments. DVL defended the
case and Plaintiff has voluntarily dismissed the action without prejudice. On
March 22, 1996, the petitioner in the underlying matter against Vanguard Capital
and other parties, in the Superior Court of Los Angeles as case no. BS036316,
filed
a motion to vacate a NASD arbitration award made in July 1995 against Vanguard
Capital and other parties, naming DVL as a respondent. On April 4, 1996, the
Court
denied Plaintiff's petition and no further action has been taken in VANGUARD.
DVL is named as a defendant in a class action entitled PHILLIP AND CHERYL
WEISS V. WINNER'S CIRCLE OF CHICAGO, INC. ET AL. which was filed in the United
States District Court for the Northern District of Illinois on April 14, 1995 in
which Plaintiffs allege that DVL, as a holder of certain consumer credit
contracts
issued by Del-Val Capital Corp., a subsidiary of DVL, is subject to claims and
defenses against the consumer credit contracts and that DVL aided and abetted
violations of the Illinois Consumer Fraud Act. DVL believes this case has no
merit
and continues to defend vigorously.
Item 3. Defaults Upon Senior Securities
-------------------------------
There are currently no defaults by DVL upon senior securities.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
There were no reports on Form 8-K filed during the three months ended
March
31, 1996.
14
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
May 17, 1996
15
<TABLE>
<CAPTION>
EXHIBIT 11
DVL, INC. and Subsidiaries
Computation of Per Share Data
(in thousands except share data)
(unaudited)
Three Months Ended
March 31,
-------------------------
1996 1995
---------- ---------
<S> <C> <C>
Primary:
Loss before extraordinary gain $ (698) $ (1,071)
Extraordinary gain on the settlement of
indebtedness 1,046 1,802
---------- ---------
Net income $ 348 $ 731
========== =========
Weighted average number of common shares
outstanding issued and to be issued 13,764,824 8,551,967
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 - -
---------- ---------
Shares used for computation 13,764,824 8,551,967
========== =========
Earnings per share of Common Stock:
Loss before extraordinary gain $ (.05) $ (.12)
Extraordinary gain on the settlement of
indebtedness .08 .21
---------- ---------
Net income $ .03 $ .09
========== =========
</TABLE>
16
<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,
-------------------------
1996 1995
---------- ---------
<S> <C> <C>
Assumming full dilution:
Loss before extraordinary gain $ (698) $ (1,071)
Adjustment for reduction in interest on
assumed payment of indebtedness - 42
Adjustment for reduction in interest on
assumed conversion of debentures - 21
---------- ---------
Adjusted loss before extraordinary gain (698) (1,008)
Extraordinary gain on the settlement of
indebtedness 1,046 1,802
---------- ---------
Adjusted net income $ 358 $ 794
========== =========
Weighted average number of common shares
outstanding issued and to be issued 13,764,824 8,551,967
Shares issuable upon conversion of subordinated
debentures - 607,051
Shares issuable upon conversion of contingent
debentures - 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
---------- ---------
Shares used for computation 13,764,824 9,485,364
========== =========
Earnings per share of Common Stock:
Loss before extraordinary gain $ (.05) $ (.11)
Extraordinary gain on the settlement of
indebtedness .08 .19
---------- ---------
Net income $ .03 $ .08
========== =========
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 576
<SECURITIES> 0
<RECEIVABLES> 39,585
<ALLOWANCES> 12,026
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 35,402
<CURRENT-LIABILITIES> 0
<BONDS> 33,233
<COMMON> 143
0
0
<OTHER-SE> (924)
<TOTAL-LIABILITY-AND-EQUITY> 35,402
<SALES> 0
<TOTAL-REVENUES> 543
<CGS> 0
<TOTAL-COSTS> 476
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 56
<INTEREST-EXPENSE> 709
<INCOME-PRETAX> (698)
<INCOME-TAX> 0
<INCOME-CONTINUING> (698)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,046
<CHANGES> 0
<NET-INCOME> 348
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
