SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________________ to_________________________
Commission file number: 1-8356
DVL, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2892858
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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
---------------
Del-Val Financial Corporation
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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 12, 1994
- ----------------------------- ---------------------------
Common Stock, $1.00 par value 7,511,700
DVL, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
Consolidated Balance Sheets -
March 31, 1994 and December 31, 1993 1
Consolidated Statements of Operations -
Three Months Ended March 31, 1994 and 1993 3
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1994 and 1993 5
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information:
Legal Proceedings 13
Defaults upon Senior Securities 15
Exhibits and Reports on Form 8-K 15
Exhibit 11 16
Part I - Financial Information (A)
Item 1. Financial Statements
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
------
March 31, December
31,
1994 1993
--------- -----------
(unaudited)
<S> <C> <C>
Loans receivable, including amounts maturing
after one year - principally pledged (B)
Affiliates:
Wrap around and other mortgages due from
affiliated partnerships (net of underlying
liens of $50,475 and $52,022, respectively) $ 77,153 $ 80,767
Unearned interest (19,085) (20,426)
-------- --------
Net mortgage loans receivable from affiliated
partnerships (including non-performing loans
of $4,623 and $4,546, respectively) 58,068 60,341
Others:
Other mortgage loans 2,783 1,459
Loans collateralized by limited partnership
interests due from limited partners (including
$5,046 and $5,226 of non-performing loans,
respectively) 5,476 6,031
-------- --------
Total loans receivable 66,327 67,831
Allowance for loan losses (E) 6,998 7,034
-------- --------
Net loans receivable 59,329 60,797
Cash (including restricted cash of $445 in 1994) 555 541
Due from affiliated partnerships (net of an allowance
for loss of $2,444 and $2,490, respectively) 195 266
Investments
Real estate acquired for resale (D) 3,071 -
Real estate at cost (net of accumulated
depreciation) - pledged 497 497
Real estate lease interests 2,636 2,623
Affiliated limited partnerships 4,398 4,497
Other investments 949 949
Other assets 690 632
Assets of discontinued operations (C) 1,131 1,246
-------- --------
Total assets $ 73,451 $ 72,048
======== ========
</TABLE>
[FN]
See accompanying to consolidated financial statements.
1
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
March 31, December 31,
1994 1993
----------- -------------
(unaudited)
<S> <C> <C>
Liabilities:
Debt in default for non-payment - partially
collateralized (B) $ 12,868 $ 13,507
Accrued interest on debt in default for
non-payment (B) 4,513 4,272
Short-term debt (H) 1,077 2,613
Long-term debt 36,287 33,714
Notes to be issued pursuant to litigation
settlement (G) 3,863 3,690
Convertible subordinated debentures 441 438
Accrued liability for litigation settlement (G) 1,810 1,810
Accrued liability for indebtedness of Kenbee
Management, Inc. and affiliates 1,155 1,171
Accounts payable and accrued liabilities 3,992 3,768
-------- --------
Total liabilities 66,006 64,983
-------- --------
Deferred credits 1,403 1,405
-------- --------
Commitments and contingent liabilities (F)
Shareholders' equity:
Common stock, $1 par value, authorized -
16,000,000 shares, issued and to be
issued - 8,103,043 (G) 8,103 8,103
Additional paid-in capital 84,100 84,100
Deficit (86,161) (86,543)
-------- --------
Total shareholders' equity 6,042 5,660
-------- --------
Total liabilities and
shareholders' equity $ 73,451 $ 72,048
======== ========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
2
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
(unaudited)
Three Months Ended
March 31,
-------------------
1994 1993
-------- --------
<S> <C> <C>
Income from affiliates (B)
Interest on mortgage loans (including $354
realized upon the early satisfaction of
certain loans in 1994) $ 823 $ 600
Management fees from partnerships 127 115
Transaction and other fees from partnerships 174 -
Rent income 8 35
Income from others
Interest on loans to limited partners 62 87
Other interest 17 2
-------- --------
1,211 839
-------- --------
Operating expenses
General and administrative 793 1,350
Legal and professional fees 105 125
Depreciation of real estate assets - 2
Net provision for (reduction in) losses 121 (63)
Interest expense 933 1,180
Claim settlement losses - 32
-------- --------
1,952 2,626
-------- --------
Loss before gain on sales of real estate (741) (1,787)
Gain on sales of real estate to affiliates 2 5
-------- --------
Loss from continuing operations (739) (1,782)
Income (loss) from discontinued operations (C) 11 (52)
-------- --------
Loss before extraordinary gain (728) (1,834)
Extraordinary gain on the settlement
of indebtedness (H) 1,110 918
-------- --------
Net income (loss) $ 382 $ (916)
======== ========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
3
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
(unaudited)
Three Months Ended
March 31,
-------------------
1994 1993
-------- --------
<S> <C> <C>
Earnings (loss) per share (J):
Primary
Loss from continuing operations $ (.08) $ (.26)
Income (loss) from discontinued operations - -
--------- --------
Loss before extraordinary gain (.08) (.26)
Extraordinary gain on the settlement of
indebtedness .13 .13
--------- --------
Net income (loss) $ .05 $ (.13)
========= ========
Fully diluted
Loss from continuing operations $ (.08) $ (.26)
Income (loss) from discontinued operations - -
--------- --------
Loss before extraordinary gain (.08) (.26)
Extraordinary gain on the settlement of
indebtedness .12 .13
--------- --------
Net income (loss) $ .04 $ (.13)
========= ========
Weighted average shares outstanding
Primary 8,411,843 6,911,571
========= =========
Fully diluted 9,095,895 6,911.571
========= =========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
4
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
-----------------------
1994 1993
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Loss from continuing operations $ (739) $ (1,782)
Adjustments to reconcile net cash provided
by operating activities
Net provision for (reduction in) losses 121 (63)
Claim settlement losses - 32
Depreciation and amortization 32 59
Income from mortgage satisfaction (188) -
Decrease in unearned interest on loans
receivable (52) (102)
Net increase in payables (566) 814
Imputed interest on notes to be issued 173 -
Amortization of deferred credits (2) (5)
Net increase in other assets (191) (150)
Net cash provided by (used in)
discontinued operations 11 (86)
------- ------
Net cash used in
operating activities (269) (1,283)
------- ------
Cash flows from investing activities
Collections on loans receivable (net of
payments on underlying loans) 1,319 2,891
Net increase in real estate acquired
for resale (136) -
Proceeds from sale of real estate acquired
for resale - 76
Net collections on amounts due from
affiliated Partnerships 71 1
Distributions received on limited
partnership interests 99 41
Net cash provided by discontinued lending
activities of Del-Val Capital Corp. 115 786
------- ------
Net cash provided by
investing activities 1,468 3,794
------- ------
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
5
<TABLE>
<CAPTION>
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(in thousands)
(unaudited)
Three Months Ended
March 31,
----------------------
1994 1993
--------- --------
<S> <C> <C>
Cash flows from financing activites
Proceeds from issuance of subordinated
debentures - 16
Decrease in amounts due from
Kenbee Management, Inc. - 31
Increase in indebtedness 474 -
Repayment of indebtedness (1,643) (1,903)
Repayment of guaranteed indebtedness (16) -
Net cash used in discontinued financing
activities of Del-Val Capital Corp. - (650)
-------- --------
Net cash used in financing activities (1,185) (2,506)
-------- --------
Net increase in cash 14 5
Cash - beginning 541 149
-------- --------
Cash - end $ 555 $ 154
======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest
(excluding amounts paid on underlying
mortgages) $ 773 $ 885
======== =========
Supplemental disclosure of non-cash
investing and financing activities:
Net effect of sale of real estate
acquired for resale $ - $ 381
======== =========
Increase in indebtedness upon acquisition
of real estate for resale $ 2,029 $ -
======== =========
Net reduction in indebtedness upon
transfer of assets to creditor $ - $ 7,043
======== =========
Net reduction in indebtedness pursuant
to creditor settlements $ 1,110 $ 918
======== =========
Increase in long-term debt upon
capitalization of accrued interest
and other payables $ 254 $ 266
======== =========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
6
DVL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) In the opinion of DVL, Inc. ("DVL"), the accompanying financial
statements contain all adjustments (consisting of only normal accruals)
necessary for a fair presentation of financial position and the results of
operations for the periods presented. The results of operations for the three
months ended March 31, 1994 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 call for the mortgage debt service to be
used to pay liens senior to DVL's. DVL remains in default for non-payment of
principal and interest on $17 million of its indebtedness. Though DVL has
completed settlements with the limited partners and the majority of its
creditors, it continues to negotiate two remaining unsettled creditors to
satisfy or restructure the payment terms of such loans.
DVL's cash flow provided by current operations is insufficient to meet
its current cash requirements. As a result, DVL is liquidating and
refinancing certain assets and is seeking equity based financings in order to
satisfy indebtedness and meet its operating cash flow deficiency. In May
1994, DVL completed the first stage of a refinancing of a portion of its
mortgage portfolio which generated cash proceeds of approximately $2.9
million, of which approximately $2.8 million was used to satisfy existing
indebtedness. Management anticipates the completion of the refinancing in the
near future, which is expected to generate additional cash proceeds of
approximately $2 million, of which $1.4 million will be used to satisfy
existing indebtedness. In addition, DVL is pursuing two new business ventures
in an effort to reduce or eliminate its operating cash flow deficiency in the
future. The new business ventures involve the acquisition, development and
resale of residential real estate, and the commercial financing of tool
purchases by automobile mechanics. There can be no assurance that the cash
flow generated by potential asset liquidations or refinancings will be
sufficient to meet DVL's current operating cash flow deficiencies or mandatory
debt payments, and that the cash flow generated by DVL's new business
ventures, if any, will be sufficient to meet any future operating cash flow
deficiencies.
DVL's ability to continue as a going concern is dependent upon (1) the
success of the negotiations to restructure the payment terms of its remaining
unsettled indebtedness, (2) the sale or refinancing of certain assets to
improve its cash position in order to meet operating expenses and make
payments to its creditors, (3) the return to profitable operations in the
future, which will primarily depend on the success of its new business
ventures, and (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. 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 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.
7
(C) As a result of DVL's liquidity problems, DVL is liquidating Del-Val
Capital Corp.'s ("DVCC") assets and therefore, DVCC is accounted for as a
discontinued operation in these financial statements. The liquidation of
DVCC's assets is taking longer than management originally anticipated and
resulted in losses from discontinued operations in 1993. In May 1994, DVCC
sold one loan at its carrying value and pledged one of its remaining loans as
collateral for a DVL loan. No material loss is anticipated on the ultimate
liquidation of the remaining loans.
(D) On January 1, 1994, DVL acquired RH Interests, Inc. ("RH") from Kenbee
Management, Inc. ("Kenbee"), DVL's former manager and largest debtor. RH was
formed in April 1993 as a wholly-owned subsidiary of Kenbee in order to
temporarily provide administrative and managerial services for partnerships
where DVL is the general partner, and to temporarily develop new business
opportunities in the residential real estate development business pending
DVL's electing not to be taxed as a real estate investment trust ("REIT").
RH's only assets are its interests in three residential real estate projects.
(E) As a result of Kenbee's liquidity problems, DVL was forced to look
solely to its collateral for repayment of each loan. Management's previous
evaluations of the collateral underlying each loan in DVL's portfolio resulted
in substantial loan write-offs and a substantial allowance for loan losses.
The evaluation considered the non-performing portion of DVL's loan portfolio,
internally generated appraisals of certain properties, updated information on
certain properties and a generally depressed real estate market.
(F) In 1994, DVL reached a settlement with a creditor which DVL was
obligated to as a guarantor of an affiliate's indebtedness of approximately
$5 million. Pursuant to the settlement, DVL issued 300,000 shares of common
stock and agreed to issue an additional 20,000 shares of common stock, all
with a guaranteed value of $1.50 per share, and paid $275,000 in full
satisfaction of the guarantee. The settlement was fully reserved for in 1993.
(G) In December 1993, DVL reached a settlement in the shareholder class
action litigation which calls for DVL to issue 900,000 shares of DVL common
stock at a guaranteed value of $1.50 per share and notes with a face value of
$9 million and to make payment of cash or common stock of $1.4 million. At
March 31, 1994 and December 31, 1993, management reflected the common stock
and notes as to be issued and a reserve of $1.81 million for the future $1.4
million payment due and for any deficiency in the minimum price of the 900,000
shares to be issued. The $9 million face value notes are due in ten years,
bear interest at 10% per annum payable in kind for five years, are callable
after the third year, are payable in cash or common stock at DVL's option and
were valued at $3.69 million by an independent investment banker. Commencing
in January 1994, interest on such notes is imputed based upon an effective
interest rate of approximately 19%. The settlement is expected to result in
a loss of $6.4 million which was fully provided for in 1992.
(H) In February 1994, DVL made prepayments of the installments due under
a settlement agreement with one of its creditors aggregating $427,000, which
resulted in an extraordinary gain on the settlement of indebtedness of
$1,110,000.
(I) The company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109 ("FAS 109"), which
requires the Company to recognize deferred tax assets and liabilities for the
future tax consequences attributable to differences between the financial
8
statement carrying amounts of existing assets and liabilities and their
respective tax bases. In addition, FAS 109 requires the recognition of future
tax benefits such as net operating loss carryforwards, to the extent that
realization of such benefits is more likely than not. At December 31, 1993,
DVL had approximately $66 million of net operating loss carryforwards
available to offset future taxable income, if any, expiring through 2008.
Until management anticipates the realization of such future tax benefits,
DVL's deferred tax asset of approximately $26 million will be fully reserved
for. If DVL reaches settlements with its two remaining unsettled creditors
on the terms currently proposed (see Note B), DVL anticipates realizing a
portion of its deferred tax benefit.
(J) Primary earnings per share amounts are based upon the weighted average
number of common shares and equivalents outstanding. The dilutive effect of
outstanding options and warrants is computed using the treasury stock method.
Fully diluted earnings per share amounts are based upon the increased
number of shares that would be outstanding assuming the conversion of existing
and contingent debentures and the exercise of contingent warrants. Net income
has been adjusted for the interest expense on convertible debentures.
9
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 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 call for the mortgage debt service to be
used to pay liens senior to DVL's. DVL is also a defendant in certain
remaining litigation. See "Legal Proceedings". DVL remains in default on
principal and interest payments on approximately $17 million of its
indebtedness.
To enable DVL to meet its short-term operating needs, DVL must
continue to augment its cash flow with the proceeds from the sale or
refinancing of assets, additional borrowings and potential profits from new
business ventures. There is a risk that DVL may not be able to raise the
necessary funds with which to continue operations. If DVL is unable to raise
the necessary funds to continue operating, it may be forced to file for
protection from creditors in accordance with Chapter 11 of the United States
Bankruptcy Code.
DVL's ability to continue as a going concern is dependent upon (1) the
success of the negotiations to restructure the payment terms of its remaining
unsettled indebtedness, (2) the sale or refinancing of certain assets to
improve its cash position in order to meet operating expenses and make
payments to its creditors, (3) the return to profitable operations, which
primarily depend on the success of its new business ventures, and (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. If DVL is unsuccessful in achieving a short-term
solution to its liquidity problems, and moreover, long-term solutions to cure
remaining loan defaults and return it to profitable operations, then it may
not be able to continue as a going concern.
Results of Operations
Three Months Ended March 31, 1994 Compared to Three Months Ended March 31,
1993
DVL realized net income of $382,000 for the three months ended March
31, 1994, as compared to a net loss of $916,000 for the corresponding 1993
period, a change of $1,298,000. The income in 1994 was primarily a result of
the extraordinary gain realized upon the prepayment of installments due under
a creditor settlement and the income realized upon the early satisfaction of
certain loans, which were partially offset by DVL's operating losses. The net
loss in 1993 was primarily a result of DVL's operating losses, including an
increase in the value of performance units, partially offset by an
extraordinary gain on the settlement with one of DVL's creditors. The effects
of these items and the other factors contributing to the net losses are as
follows:
Interest income on mortgage loans due from affiliates increased by
$223,000 primarily as a result of the income realized upon the satisfaction
of certain loans from the sale of the partnership properties, partially offset
by a reduction in the amount of such loans to affiliated partnerships due to
the transfer of certain loans and from the satisfaction of certain loans upon
the sale of the partnership properties.
10
Transaction and other fees from partnerships aggregating $174,000 in
1994 represent the fees received upon the sale of certain partnership
properties.
Rent income from affiliated partnerships decreased by $27,000 as a
result of the settlement of litigation and the restructuring of one of DVL's
loans whereby DVL transferred its economic interest in three of its properties
to affiliated partnerships in 1993.
Interest income on loans to limited partners decreased by $25,000 due
to a decrease in the average outstanding balances of the performing portion
of this loan portfolio.
General and administrative expenses decreased by $557,000 primarily
as a result of the accrual of $717,000 in 1993 for the value of performance
units granted to certain officers, partially offset by an increase in payroll
and operating costs incurred in 1994.
Legal and professional fees decreased by $20,000 primarily as a result
of a decrease in activity in certain legal matters in 1994. Although such
fees are expected to continue until DVL settles its remaining litigation and
restructures its remaining unsettled indebtedness, management anticipates a
reduction in such fees in the future.
Interest expense decreased by $247,000 primarily as a result of a
decrease in indebtedness and decreases in interest rates due to the
restructuring of certain indebtedness, which were partially offset by 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 full 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 creditors, however, this decline may be more than offset
in the future by the interest, including accreted interest, on the $9 million
of notes to be issued in connection with the settlement of the shareholder
litigation.
Management's re-evaluation of the collateral underlying each loan and
its guarantees of indebtedness of affiliates resulted in a provision for
losses aggregating $121,000 during the three months ended March 31, 1994 which
was primarily a result of updated information on certain properties.
Claim and litigation settlement losses decreased to zero in 1994 as
a result of management's provision for the potential losses to be realized in
connection with claims originating from Kenbee's indebtedness to certain
creditors and for certain other litigation matters in 1993.
DVL's discontinued operations resulted in net income of $11,000 in
1994 and a net loss of $52,000 in 1993. The increase resulted from a decrease
in the costs incurred to service and liquidate DVCC's remaining portfolio.
No material additional loss is anticipated on the liquidation of the remaining
loans.
11
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 the proceeds from the sale or
refinancing of assets, equity financings and potential profits from new
business ventures. There is risk that DVL may not be able to raise the
necessary funds with which to continue operations.
DVL's revocation of its election to be taxed as a REIT effective
January 1, 1994 eliminated the requirement that DVL distribute at least 95%
of its taxable income and will allow DVL to enter into new business ventures
that were not permitted or were subject to taxation at a rate of 100% for a
REIT. DVL does not anticipate making distributions to its shareholders in the
foreseeable future. DVL currently has net operating loss carryforwards of
approximately $66,000,000 which it may use as a "C" Corporation to offset
future taxable income, if any, and subject to certain limitations, from
federal income taxes.
DVL has the right to refinance a number of mortgage loans underlying
its wrap around mortgages due from affiliated partnerships and arrange senior
financing secured by properties on which it holds first or second mortgage
loans by subordinating its mortgage position. In May 1994, DVL completed the
first stage of a refinancing of a portion of its mortgage portfolio which
generated cash proceeds of approximately $2.9 million, of which approximately
$2.8 million was used to satisfy existing indebtedness. Management
anticipates the completion of the financing in the near future, which is
expected to generate additional cash proceeds of approximately $2 million, of
which approximately $1.4 million will be used to satisfy existing
indebtedness.
In February 1994, a creditor provided DVL with $1.3 million of non-
recourse second mortgage financing in connection with DVL's acquisition of a
residential development of improved and unimproved land in Beaufort, South
Carolina. Under the terms of this financing, the creditor is entitled to
receive interest at prime plus 2%, as well as from 25% to 45% of the profit
from the sale of such land parcels based upon the date of the full repayment
of the loan.
At March 31, 1994, DVL continued to be in default for non-payment of
scheduled interest and/or principal payments on approximately $17 million of
indebtedness and is currently negotiating to settle or restructure payment
terms with its remaining unsettled creditors. The goal of such restructuring
is twofold; to obtain a reduction of the total indebtedness and to establish
an acceptable payment schedule with such creditors. These negotiations
include proposals for curing the defaults and settling or restructuring the
remaining unsettled indebtedness by offering existing and replacement
collateral in complete satisfaction of one debt and offering cash payments
over time at a negotiated discount for another. If the above settlements are
finalized as proposed, DVL would recognize gains on such settlements. There
can be no assurance that these negotiations or settlements will be finalized
as described above. In addition, if DVL does not meet its previously settled
mandatory repayment requirements to creditors, it will be in default of these
loans and is at risk of losing all of the related collateral.
In addition, DVL is pursuing new business activities in an attempt to
reduce its operating cash flow deficiency. In April 1994, DVL formed the
First Mechanics Finance Company ("FMF") as a wholly-owned subsidiary to
purchase loan contracts from local tool dealers made to finance tool purchases
12
by automobile mechanics. Management anticipates that the start-up costs and
initial operating losses of FMF may be significant and there can be no
assurance that FMF will be able to obtain the financing necessary to generate
the loan volume needed to operate at a profitable level. In addition, there
can be no assurance that such potential profits, if realized, will be
sufficient to meet any future DVL 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, has satisfied and is negotiating to satisfy certain indebtedness
by transferring assets to its creditors and is attempting to convert certain
other 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. In addition, DVL's new business ventures may be affected
by interest rates. FMF's cost of financing its fixed rate loans is expected
to be inversely affected by changes in interest rates. The value of DVL's
residential real estate held for resale may also be affected by changes in
interest rates, as well as by inflation. Other than as manifested in interest
rates inflation has not had a significant effect on DVL's net income for the
past five years.
Part II - Other Information
Item 1. Legal Proceedings
Substantial progress has been made in settling various litigation
brought against DVL, its Board members and certain current and former officers
and affiliates by shareholders, banks and others. The following is a summary
of the status of all material outstanding cases.
Numerous shareholder class action suits commenced since 1990 were
filed in various jurisdictions and consolidated in the United States District
Court, Southern District of New York on February 28, 1991, in one consolidated
action entitled in In Re: Del-Val Financial Corp. Securities Litigation
Master File No. MDL 872 ("In Re Del-Val").
In In Re Del-Val, a settlement has been approved by the court in which
DVL would issue to plaintiffs (1) 900,000 shares of DVL common stock at a
minimum price of $1.50 per share (or notes to cover any deficiency in the
event the aggregate value is less than $1,340,000); (ii) $9 million of notes
due ten (10) years with interest at 10% payable in kind for five (5) years,
callable after the third year and payable on the tenth year with cash or DVL
common stock equal to 110% of the face value of the notes; and (iii) the
greater of $1.4 million or 40% of the net proceeds from Federal Insurance,
described below. At March 31, 1994, management reflected the common stock and
notes as to be issued and a reserve of $1.81 million for the future $1.4
million payment due and for any deficiency in the minimum price of the 900,000
shares to be issued. The $9 million face value notes to be issued were valued
at $3,690,000 by an independent investment banker. The settlement is expected
to result in a loss of $6.4 million which was fully provided for in 1992.
There can be no assurance that all the remaining shareholder litigation
discussed below will be consolidated and settled pursuant to these
negotiations. DVL and related defendants have cross claimed against Deloitte
and Touche ("Deloitte"), DVL's former accountant, and have demanded
indemnification or contribution from Deloitte. Deloitte has also cross-
claimed against DVL and related defendants in In Re Del-Val.
13
A second class action suit entitled Donald Levy, et al. v. Roger D.
Stern, et al. ("Levy"), was filed against current and former directors of DVL
in the Court of Chancery in New Castle County, Delaware on February 13, 1991,
and has not been consolidated with the other class action suits. The Court
in Levy has recently partially granted DVL's motion to dismiss the derivative
claims and has conditioned the dismissal of the disclosure claim on
plaintiff's revising their complaint to properly allege the existence of a
class. The plaintiffs in Levy have recently moved for permission to proceed
on behalf of certain individuals as opposed to a class action.
DVL is subject to three shareholder derivative suits. The first is
Phyllis Rye, on Behalf of Herself In The Right of Del-Val Financial
Corporation v. Roger Stern, et al. ("Rye"), filed in the United States
District Court, Southern District of New York on May 13, 1991 and is scheduled
for trial in September 1994. The other two derivative suits are entitled Del-
Val Financial Corp. derivatively by Hilda Weigart v. Roger D. Stern, et al.
("Weigart"), and Del-Val Financial Corp. derivatively by Miriam Feinberg v.
Roger D. Stern, et al. ("Feinberg"), and were filed in the Superior Court of
New Jersey-Law Division-Bergen County on October 31, 1990 and December 3,
1990, respectively, and consolidated by court order dated February 8, 1991.
Pursuant to court order DVL and related defendants filed a third party
complaint in this consolidated action against their insurance carriers. The
Appellate Court in New Jersey and the Superior Court for Bergen County, New
Jersey have stayed all proceedings in the New Jersey cases.
Several limited partners who elected to opt out of the 1992 settlement
of the limited partner class action, In Re Kenbee Limited Partnerships
Litigation, have named DVL in a case entitled Faye Crawford, et al. v. Roger
Stern, et al. ("Crawford"), filed in the Court of Common Pleas in the State
of South Carolina on September 23, 1993, in which plaintiffs allege violations
of RICO, common law fraud and civil conspiracy in fiduciary securities
transactions, common law fraud including negligent deception, breach of
fiduciary duty and negligence by certain defendants and aiding and abetting
other's breaches of fiduciary duty and seek damages of $425,000 plus attorney
fees, expenses and interest. The case was removed to Federal Court and
defendants moved to dismiss the complaint as legally insufficient. The Court
granted the motion but permitted plaintiff's leave to file an amended
complaint.
DVL, its President and a Senior Vice President have been named as
defendants in an action brought by a former employee of Kenbee entitled
Michael A. Becker v. Kenbee Management, Inc. et al. ("Becker"), and filed in
the Superior Court of New Jersey, Bergen County Law Division on September 22,
1993. In Becker, plaintiff alleges violations of the New Jersey Law Against
Discrimination by Reason of Religious Discrimination, of oral contract not to
terminate plaintiff, of an implied promise not to terminate employees for
reasons violative of public policy, and for intentional infliction of
emotional distress, intentional interference with contractual relations and
slander and slander per se. Defendants have answered the complaint,
successfully moved to dismiss certain counts and commenced limited discovery.
Plaintiff has been given leave to amend but has not yet amended his complaint.
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
14
Treasurer has agreed and the Commission has consented to the issuance of a
cease and desist order. Such order will not affect the ability of the
Treasurer to perform his duties for DVL.
DVL has incurred significant legal costs, and continues to incur such
costs at a reduced amount, for the aforementioned litigation and
investigations. Federal Insurance Company ("Federal"), which carried DVL's
directors and officers insurance policy, has declined to cover DVL for these
legal costs and any liability. DVL commenced an action against its insurance
broker and Federal entitled Del-Val Financial Corporation, et al. v. Federal
Insurance Company et al. ("Federal Insurance") on September 23, 1991 in the
Supreme Court of the State of New York, County of New York in which DVL
alleges negligence against its broker and seeks declaratory and injunctive
relief against Federal. DVL has also named Federal as a third party defendant
in Weigart and Feinberg. This latter action has been stayed.
Item 3. Defaults Upon Senior Securities
At March 31, 1994, DVL had approximately $17 million of indebtedness
in default for non-payment of scheduled interest and/or principal payments,
as well as failure to comply with certain other loan covenants. DVL is
currently negotiating to settle or restructure the payment terms with its two
remaining unsettled creditors.
Item 6. Exhibits and Reports on Form 8-K
EXHIBIT 11 - Computation of per share data (see schedule on pages 16
through 17)
There were no reports on Form 8-K filed during the three months ended
March 31, 1994.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DVL, INC.
By:
Joel Zbar, Treasurer and
Chief Accounting Officer
May 13, 1994
15
<TABLE>
<CAPTION>
EXHIBIT 11
DVL, INC. and Subsidiaries
Computation of Per Share Data
(in thousands except share data)
(unaudited)
For the Three Months Ended March 31, 1994
<S> <C>
Primary:
Loss before gain on sales of real estate $ (741)
Gain on sales of real estate to affiliates 2
---------
Loss from continuing operations (739)
Income from discontinued operations 11
Extraordinary gain on the settlement of
indebtedness 1,110
---------
Net income $ 382
=========
Weighted average number of common shares
outstanding issued and to be issued 8,103,043
Shares issuable upon exercise of dilutive stock
options and warrants - net of shares assumed
to be repurchased (at the average market
price for the period) from exercise proceeds 308,800
---------
Shares used for computation 8,411,843
=========
Earnings per share of Common Stock:
Loss before gain on sale of real estate $ (.08)
Gain on sales of real estate to affiliates -
---------
Loss from continuing operations (.08)
Income from discontinued operations -
Extraordinary gain on the settlement of
indebtedness .13
---------
Net income $ .05
=========
</TABLE>
16
<TABLE>
<CAPTION>
EXHIBIT 11 (continued)
DVL, INC. and Subsidiaries
Computation of Per Share Data
(in thousands except share data)
(unaudited)
For the Three Months Ended March 31, 1994
<S> <C>
Assuming full dilution:
Loss before gain on sale of real estate $ (741)
Adjustment for reduction in interest on
assumed conversion of debentures 16
---------
Adjusted loss before gain on sale of real estate (725)
Gain on sale of real estate 2
---------
Adjusted loss from continuing operations (723)
Income from discontinued operations 11
Extraordinary gain on the settlement of
indebtedness 1,110
---------
Adjusted net income $ 398
=========
Weighted average number of common shares
outstanding issued and to be issued 8,103,043
Shares issuable upon conversion of subordinated
debentures 494,252
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 391,600
---------
Shares used for computation 9,095,895
=========
Earnings per share of Common Stock:
Loss before gain on sale of real estate $ (.08)
Gain on sale of real estate -
--------
Loss from continuing operations (.08)
Income from discontinued operations -
Extraordinary gain on the settlement of
indebtedness .12
--------
Net income $ .04
========
</TABLE>
17
