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, 1994
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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:
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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
11, 1994
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Common Stock, $1.00 par value 7,531,700
DVL, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information:
Page No.
--------
Consolidated Balance Sheets -
June 30, 1994 and December 31, 1993
1
Consolidated Statements of Operations -
Three Months Ended June 30, 1994 and 1993
3
Six Months Ended June 30, 1994 and 1993
4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 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
14
Defaults upon Senior Securities
16
Exhibits and Reports on Form 8-K
16
Part I - Financial Information
Item 1. Financial Statements
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
------
June 30,
December 31,
1994
1993
---------
------------
(unaudited)
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 $54,511 and $52,022, respectively) $ 70,215
$ 80,767
Unearned interest (18,863)
(20,426)
--------
--------
Net mortgage loans receivable from affiliated
partnerships (including non-performing loans
of $4,821 and $4,546, respectively) 51,352
60,341
Others:
Other mortgage loans 2,660
1,459
Loans collateralized by limited partnership
interests due from limited partners (including
$4,668 and $5,226 of non-performing loans,
respectively) 4,998
6,031
Mechanic tool loans (net of unamortized
discount) (B and D) 99
-
--------
--------
Total loans receivable 59,109
67,831
Allowance for loan losses (E) 7,372
7,034
--------
--------
Net loans receivable 51,737
60,797
Cash (including restricted cash of $1,240 and
$185, respectively) (B) 1,822
541
Due from affiliated partnerships (net of an allowance
for loss of $2,444 and $2,490, respectively) 198
266
Investments
Real estate acquired for resale (net of an
allowance for loss of $67 in 1994) (D) 3,206
-
Real estate at cost - pledged 497
497
Real estate lease interests 2,630
2,623
Affiliated limited partnerships 4,430
4,497
Other investments 923
949
Other assets 797
632
Assets of discontinued operations (C) 755
1,246
--------
--------
Total assets $ 66,995
$ 72,048
========
========
[FN]
See accompanying to consolidated financial statements.
1
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
June 30,
December 31,
1994
1993
-----------
- -----------
(unaudited)
Liabilities:
Debt in default for non-payment - partially
collateralized (B) $ 12,735 $
13,507
Accrued interest on debt in default for
non-payment (B) 4,774
4,272
Short-term debt (H) 262
2,613
Long-term debt 32,613
33,714
Notes to be issued pursuant to shareholder
litigation settlement (G) 4,044
3,690
Convertible subordinated debentures 442
438
Accrued liability for shareholder litigation
settlement (G) 1,810
1,810
Accrued liability for indebtedness of Kenbee
Management, Inc. and affiliates 487
1,171
Accounts payable and accrued liabilities 3,280
3,768
--------
- --------
Total liabilities 60,447
64,983
--------
- --------
Deferred credits 1,527
1,405
--------
- --------
Commitments and contingent liabilities (F)
Shareholders' equity:
Common stock, $1 par value, authorized -
16,000,000 shares, issued and to be
issued - 8,431,700 (G) 8,432
8,103
Additional paid-in capital 84,082
84,100
Deficit (87,493)
(86,543)
--------
- --------
Total shareholders' equity 5,021
5,660
--------
- --------
Total liabilities and
shareholders' equity $ 66,995 $
72,048
========
========
[FN]
See accompanying notes to consolidated financial statements.
2
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
(unaudited)
Three
Months Ended
June
30,
- ---------------------
1994
1993
---------
- ---------
Income from affiliates (B)
Interest on mortgage loans $ 469
$ 758
Management fees from partnerships 138
2
Transaction and other fees from partnerships 263
-
Rent income 7
35
Income from others
Interest on loans to limited partners 103
61
Interest on mechanic loans 4
-
Other interest 2
2
---------
- ---------
986
858
---------
- ---------
Operating expenses
General and administrative 816
490
Legal and professional fees 138
187
Depreciation of real estate assets -
2
Net provision for (reduction in) losses 606
(160)
Interest expense 1,020
1,144
Claim settlement and other litigation losses 570
-
---------
- ---------
3,150
1,663
---------
- ---------
Loss before gain on sales of real estate (2,164)
(805)
Gain on sales of real estate to affiliates 3
5
---------
- ---------
Loss from continuing operations (2,161)
(800)
Income (loss) from discontinued operations (C) 4
(35)
---------
- ---------
Loss before extraordinary gain (2,157)
(835)
Extraordinary gain on the settlement
of indebtedness (H) 825
1,592
---------
- ---------
Net income (loss) $ (1,332)
$ 757
=========
=========
Earnings (loss) per share (J):
Loss from continuing operations $ (.26)
$ (.11)
Income (loss) from discontinued operations -
-
---------
- ---------
Loss before extraordinary gain (.26)
(.11)
Extraordinary gain on the settlement of
indebtedness .10
.21
---------
- ---------
Net income (loss) $ (.16)
$ .10
=========
=========
Weighted average shares outstanding 8,267,366
7,375,269
=========
=========
[FN]
See accompanying notes to consolidated financial statements.
3
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
(unaudited) Six Months
Ended
June
30,
- ---------------------
1994
1993
---------
- ---------
Income from affiliates (B)
Interest on mortgage loans (including $354
realized upon the early satisfaction of
certain loans in 1994) $ 1,292
$ 1,358
Management fees from partnerships 265
117
Transaction and other fees from partnerships 437
-
Rent income 15
70
Income from others
Interest on loans to limited partners 165
148
Interest on mechanic loans 4
-
Other interest 19
4
---------
- ---------
2,197
1,697
Operating expenses ---------
- ---------
General and administrative 1,609
1,840
Legal and professional fees 243
312
Depreciation of real estate assets -
4
Net provision for (reduction in) losses 727
(223)
Interest expense 1,953
2,324
Claim settlement and other litigation losses 570
32
---------
- ---------
5,102
4,289
---------
- ---------
Loss before gain on sales of real estate (2,905)
(2,592)
Gain on sales of real estate to affiliates 5
10
---------
- ---------
Loss from continuing operations (2,900)
(2,582)
Income (loss) from discontinued operations (C) 15
(87)
---------
- ---------
Loss before extraordinary gain (2,885)
(2,669)
Extraordinary gain on the settlement
of indebtedness (H) 1,935
2,510
---------
- ---------
Net loss $ (950)
$ (159)
=========
=========
Loss per share (J):
Loss from continuing operations $ (.35)
$ (.37)
Income (loss) from discontinued operations -
(.01)
---------
- ---------
Loss before extraordinary gain (.35)
(.38)
Extraordinary gain on the settlement of
indebtedness .23
.36
---------
- ---------
Net loss $ (.12)
$ (.02)
=========
=========
Weighted average shares outstanding 8,196,942
6,923,420
=========
=========
[FN]
See accompanying notes to consolidated financial statements.
4
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
- -----------------------
1994 1993
---------
- ---------
Cash flows from operating activities
Loss from continuing operations $ (2,900) $
(2,582)
Adjustments to reconcile net cash provided
by operating activities
Net provision for (reduction in) losses 727
(223)
Claim settlement and other litigation
losses 570
32
Depreciation and amortization 60
117
Decrease in unearned interest on loans
receivable (305)
(280)
Net increase (decrease) in payables (130)
1,509
Imputed interest on notes to be issued 354
- -
Amortization of deferred credits (4)
(10)
Increase in deferred credits 126
- -
Net increase in other assets (325)
(129)
Net cash provided by (used in)
discontinued operations 9
(182)
-------
- ------
Net cash used in
operating activities (1,818)
(1,748)
-------
- ------
Cash flows from investing activities
Collections on loans receivable (net of
payments on underlying loans) 8,476
4,130
Fundings of mechanic loans (100)
- -
Fundings of other loans receivable -
(108)
Net increase in real estate acquired
for resale (348)
- -
Proceeds from sale of real estate acquired
for resale 30
76
Net collections on amounts due from
affiliated partnerships 68
23
Distributions received on limited
partnership and other investments 206
71
Acquisition of limited partnership
interests (113)
- -
Net cash provided by discontinued lending
activities of Del-Val Capital Corp. 497
3,459
-------
- ------
Net cash provided by
investing activities 8,716
7,651
-------
- ------
[FN]
See accompanying notes to consolidated financial statements.
5
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(in thousands)
(unaudited)
Six Months Ended
June 30,
- ----------------------
1994 1993
---------
- --------
Cash flows from financing activities
Proceeds from issuance of subordinated
debentures -
16
Decrease in amounts due from
Kenbee Management, Inc. -
275
Increase in indebtedness 1,039
- -
Repayment of indebtedness (6,272)
(2,983)
Repayment of guaranteed indebtedness (384)
- -
Net cash used in discontinued financing
activities of Del-Val Capital Corp. -
(3,042)
--------
- --------
Net cash used in financing activities (5,617)
(5,734)
--------
- --------
Net increase in cash 1,281
169
Cash - beginning 541
149
--------
- --------
Cash - end $ 1,822 $
318
========
========
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest
(excluding amounts paid on underlying
mortgages) $ 518 $
1,345
========
========
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 $ - $
10,209
========
========
Net reduction in indebtedness pursuant
to creditor settlements $ 1,935 $
2,510
========
========
Increase in long-term debt upon
capitalization of accrued interest
and other payables $ 520 $
804
========
========
Reduction in indebtedness upon
issuance of common stock $ 311 $
79
========
========
[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 six
months ended June 30, 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 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 $17 million of its indebtedness. DVL has made
significant progress
in its negotiations with its two remaining unsettled creditors to
restructure
the payment terms of such loans and has placed $1 million in escrow
in
connection with proposed settlements with such creditors.
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 1994,
DVL
refinanced a portion of its mortgage portfolio which generated cash
proceeds of
approximately $5.9 million, of which approximately $4.6 million was
used to
satisfy existing indebtedness and approximately $1 million was
placed in escrow
in connection with proposed settlements with DVL's two remaining
unsettled
creditors. DVL also received $.2 million in fees for arranging
similar
financings for partnerships where DVL did not hold a mortgage. 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.
The commercial
tool financing business has incurred significant start-up costs and
DVL has
funded its initial operating cash flow deficiency. 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 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 has been
liquidating Del-
Val Capital Corp.'s ("DVCC") assets and therefore, DVCC is
accounted for as a
discontinued operation in these financial statements. 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") which was formerly DVL's manager and
its largest
debtor. RH was formed in April 1993 as a wholly-owned subsidiary
of Kenbee 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
election not to be taxed as a real estate investment trust
("REIT"). RH's only
assets are its interests in three residential real estate projects.
In April 1994, DVL formed First Mechanics Finance Company
("FMF") as a
wholly-owned subsidiary to purchase loan contracts from local tool
dealers made
to finance tool purchases by automobile mechanics. In May 1994,
FMF entered
into a $2 million revolving credit agreement with an unaffiliated
financial
institution to finance its lending activities.
(E) Management's evaluations 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 payment obligations on certain indebtedness.
(F) 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 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 June
30, 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
January 1994,
interest on such notes is imputed based upon an effective interest
rate of
approximately 19%. The settlement is expected to result in a loss
of $6.4
million which was fully provided for in 1992.
Certain shareholder and limited partner litigation was not
consolidated
with the respective class actions and DVL continues to defend
itself against
such litigation. In addition, DVL remains a defendant in certain
other
litigation. Although it is too early to predict the final outcome
of such
pending litigation, management accrued a reserve of $650,000 as its
estimate of
DVL's potential loss to be realized upon the settlement of these
suits.
8
(H) In February 1994 and June 1994, DVL made the final
installment payments
due under a settlement agreement with one of its creditors
aggregating $674,000,
which resulted in an extraordinary gain on the settlement of
indebtedness of
$1,729,000.
In May 1994, a DVL creditor agreed to accept $250,000 in
full
satisfaction of DVL's indebtedness, which resulted in an
extraordinary gain on
the settlement of indebtedness of $106,000.
In June 1994, DVL agreed to refinance collateral which was
previously
pledged to one of DVL's creditors in connection with the
restructuring of DVL's
indebtedness. As a result of this refinancing, DVL obtained the
residual
interest in this collateral and a reduction of its indebtedness of
$450,000 in
exchange for a payment of $350,000, which resulted in an
extraordinary gain on
the settlement of indebtedness of $100,000.
(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
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.
(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.
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 require 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". Although DVL has made significant progress in its
negotiations
with its two remaining unsettled creditors, 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
depends on
the success of its new business ventures, and (4) the realization
of the
estimated value of 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 JUNE 30, 1994 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1993
DVL realized a net loss of $1,332,000 for the three months
ended June
30, 1994, as compared to net income of $757,000 for the
corresponding 1993
period, a change of $2,089,000. The change was primarily a result
of additional
provisions for loan and other losses, the initial operating costs
incurred by
FMF and decreased extraordinary gains realized upon creditor
settlements. The
effects of these items and the other factors contributing to DVL's
operating
results are as follows:
Interest income on mortgage loans due from affiliates
decreased by
$289,000 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 the partnership properties.
Management fees from partnerships increased by $136,000 as
a result of
DVL's management of its affiliated partnerships for all of 1994
after the
termination of its management agreement with RH effective January
1, 1994.
Transaction and other fees from partnerships aggregating
$263,000 in
1994 represent the fees received upon the refinancing or sale of
certain
partnership properties.
10
Rent income from affiliated partnerships decreased by
$28,000 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 increased by
$42,000 due
to better than expected collections on the non-performing portion
of this
portfolio, partially offset by a decrease in the average
outstanding balances
of the performing portion of this portfolio.
Interest income on mechanic loans aggregating $4,000 in
1994 represents
the earnings from the initial lending activities of FMF.
General and administrative expenses increased by $326,000
primarily as
a result of the payroll and other costs incurred in the initial
operations of
FMF of $387,000, including $135,000 of overhead allocated to FMF by
DVL. Such
costs were partially offset by a decrease in the value of
performance units
granted to certain officers.
Legal and professional fees decreased by $49,000 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.
Management's re-evaluation of the collateral underlying
each loan and
its guarantees of indebtedness of affiliates resulted in a
provision for losses
aggregating $606,000 during the three months ended June 30, 1994.
This
additional provision was primarily a result of updated information
on certain
properties, anticipated losses to be incurred upon the liquidation
of assets to
fund DVL's operating cash flow deficiency and to meet mandatory
payment
obligations on certain indebtedness and for a potential loss on one
of its real
estate development projects.
Interest expense decreased by $124,000 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 and an increase in the prime rate. 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 will be partially offset in the future by the increasing
interest,
including accreted interest, on the $9 million 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.
DVL's discontinued operations resulted in net income of
$4,000 in 1994
and a net loss of $35,000 in 1993. The increase resulted from a
decrease in the
costs incurred to service and liquidate DVCC's remaining portfolio.
No material
loss is anticipated on the liquidation of the remaining loans.
11
SIX MONTHS ENDED JUNE 30, 1994 COMPARED TO SIX MONTHS ENDED JUNE
30, 1993
DVL realized a net loss of $950,000 for the six months
ended June 30,
1994, as compared to a net loss of $159,000 for the corresponding
1993 period,
a change of $791,000. The increase in the loss was primarily a
result of
additional provisions for loan and other losses, the initial
operating costs
incurred by FMF and decreased extraordinary gains realized upon
creditor
settlements, which were partially offset by an increase in fees
received from
partnerships and a reduction in the value of performance units
granted to
certain officers. 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
decreased by
$66,000 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 the partnership properties, partially offset by the income
realized upon the
satisfaction of certain loans from the sale of the partnership
properties.
Management fees from partnerships increased by $148,000 as
a result of
DVL's management of its affiliated partnerships for all of 1994
after the
termination of its management agreement with RH effective January
1, 1994.
Transaction and other fees from partnerships aggregating
$437,000 in 1994
represent the fees received upon the refinancing or sale of certain
partnership
properties.
Rent income from affiliated partnerships decreased by
$55,000 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 increased by
$17,000 due
to better than expected collections on the non-performing portion
of this
portfolio, partially offset by a decrease in the average
outstanding balances
of the performing portion of this portfolio.
Interest income on mechanic loans aggregating $4,000 in
1994 represents
the earnings from the initial lending activities of FMF.
General and administrative expenses decreased by $231,000
primarily as
a result of a decrease in the value of performance units granted to
certain
officers of $124,000 in 1994 as opposed to the accrual of $646,000
for the value
of such units in 1993, partially offset by the payroll and other
costs incurred
in the initial operations of FMF of $387,000, which includes
$135,000 of
overhead allocated to FMF by DVL.
Legal and professional fees decreased by $69,000 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.
Management's re-evaluation of the collateral underlying
each loan and
its guarantees of indebtedness of affiliates resulted in a
provision for losses
aggregating $727,000 during the six months ended June 30, 1994.
This additional
provision was primarily a result of updated information on certain
properties,
anticipated losses to be incurred upon the liquidation of assets to
fund DVL's
operating cash flow deficiency and to meet mandatory payment
obligations on
certain indebtedness and for a potential loss on one of its real
estate
development projects.
12
Interest expense decreased by $371,000 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 and an increase in the prime rate. 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 will be partially offset in the future by the increasing
interest,
including accreted interest, on the $9 million of notes to be
issued in
connection with the settlement of the shareholder litigation.
Claim settlement and other litigation losses represent
additional
provisions for the potential losses to be realized in connection
with claims
originating from Kenbee's indebtedness to certain creditors and the
settlement
of certain litigation matters.
DVL's discontinued operations resulted in net income of
$15,000 in 1994
and a net loss of $87,000 in 1993. The increase resulted from a
decrease in the
costs incurred to service and liquidate DVCC's remaining portfolio.
No material
loss is anticipated on the liquidation of the remaining loans.
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
million 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 1994, DVL refinanced a
portion of
its mortgage portfolio which generated cash proceeds of
approximately $5.9
million, of which approximately $4.6 million was used to satisfy
existing
indebtedness and approximately $1 million was placed in escrow in
connection
with proposed settlements with DVL's two remaining unsettled
creditors.
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.
In May 1994, a creditor provided FMF a $2 million revolving
credit
facility enabling FMF to finance its lending activities.
Management is
currently attempting to expand this facility to meet the
anticipated loan volume
in the future.
13
In July 1994, DVL liquidated a loan for $1,069,000, of which
$645,000 was
used to satisfy indebtedness and the balance is expected to be used
in
operations. A partnership mortgage also collateralizing the
satisfied
indebtedness was returned to DVL. DVL realized a loss of $128,000
as a result
of this liquidation which was fully provided for at June 30, 1994.
At June 30, 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 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. DVL has placed $1 million in
escrow in
connection with proposed settlements with these creditors. If the
above
settlements are finalized as proposed, DVL would recognize
substantial gains on
such settlements. There can be no assurance that these
negotiations or
settlements will be finalized as described above. The proposed
settlements call
for DVL to make significant cash payments in the future and there
can be no
assurance that DVL will be able to meet such payment obligations if
the
settlements are finalized as currently proposed. In addition, if
DVL does not
meet its previously settled mandatory repayment requirements to
certain
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. The start-up costs and
initial
operating losses of FMF have been 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. Furthermore, the sales
and development
of DVL's real estate projects have progressed more slowly than
originally
projected and management is considering wholesaling all or a
portion of its
projects instead of further development. There can be no assurance
that any
potential profits from DVL's new business ventures, 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 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. 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 Re: Del-Val Financial Corp. Securities Litigation
Master File No.
MDL 872 ("In Re Del-Val").
14
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 in
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
June 30, 1994, management reflected the common stock and notes as
to be issued
and a reserve of $1.81 million for the future $1.4 million payment
due and for
any deficiency in the minimum price of the 900,000 shares to be
issued. The $9
million face value notes to be issued were valued at $3,690,000 by
an
independent investment banker. The settlement is expected to
result in a loss
of $6.4 million which was fully provided for in 1992. DVL and
related
defendants have cross claimed against Deloitte and Touche
("Deloitte"), DVL's
former accountant, and have demanded indemnification or
contribution from
Deloitte. Deloitte has also cross-claimed against DVL and related
defendants
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, has not been consolidated with the other class action suits
and plaintiffs
have revised their complaint to proceed on behalf of certain
individuals as
opposed to a class action. The revised complaint was filed on or
about May 4,
1994 against the same current and former directors of DVL and
alleges breaches
of fiduciary duty of care and candor. This action is in the
discovery stage and
it is too early to predict a likely outcome.
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 late
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
where
plaintiff's filed 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
15
terminate plaintiff, of an implied promise not to terminate
employee for reasons
violative of public policy, and for intentional infliction of
emotional distress,
intentional interference with contractual relations and slander
and slander per se.
Defendants have answered the complaint, successfully moved to
dismiss certain counts
and commenced limited discovery. Plaintiff was then given leave to
amend and filed
an amended complaint, which Defendants have answered. More
extensive discovery is
ongoing.
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.
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 the consolidated Weigart and Feinberg
cases, which have
been stayed.
DVL has been named in an action for contractual indemnity,
equitable
indemnity and declaratory relief in a matter entitled Vanguard
Capital v. Kenbee
Management, Inc. et. al. filed in the Superior Court in the State
of California on
March 21, 1994. This action is based on a complaint by an investor
in an affiliated
limited partnership that the investor's broker sold her an
unsuitable investment.
The broker is seeking indemnity against DVL and others. DVL
intends to vigorously
defend against this claim.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At June 30, 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 restructure the payment terms with its two remaining unsettled
creditors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the three
months ended June
30, 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
August 12, 1994
16