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, 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 August 13, 1996
- ----------------------------- ------------------------------
Common Stock, $.01 par value 14,279,450
DVL, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 1
Consolidated Statements of Operations -
Three Months Ended June 30, 1996 and 1995 3
Six Months Ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 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 15
Defaults upon Senior Securities 16
Exhibits and Reports on Form 8-K 16
Part I - Financial Information (Note A)
Item 1. Financial Statements
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
------
June 30, December 31,
1996 1995
--------- ------------
(unaudited)
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 $54,669 and $44,300, respectively) $ 45,607 $ 54,501
Unearned interest (13,682) (14,411)
-------- --------
Net mortgage loans receivable from affiliated
partnerships (including non-performing loans
of $5,378 and $5,640, respectively) 31,925 40,090
Others:
Other mortgage loans 1,226 1,281
Loans collateralized by limited partnership
interests due from limited partners (all of
which are non-performing loans) 3,522 3,921
--------- ---------
Total loans receivable 36,673 45,292
Allowance for loan losses (Note D) 11,961 12,225
-------- --------
Net loans receivable 24,712 33,067
Cash (including restricted cash of $800 and
$602, respectively) 1,053 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) 2,140 2,300
Affiliated limited partnerships (net of an allowance
for loss of $531 and $583, respectively) 3,052 3,310
Other investments (net of an allowance for loss
of $400) 667 697
Other assets 689 680
-------- --------
Total assets $ 32,716 $ 41,499
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
1
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
LIABILITIES AND SHAREHOLDERS' CAPITAL DEFICIENCY
------------------------------------------------
June 30, December 31,
1996 1995
----------- ------------
(unaudited)
Liabilities:
Short-term debt $ - $ 1,060
Long-term debt (Notes B and G) 23,896 32,290
Notes payable - litigation settlement
(Note F) 6,119 5,642
Convertible subordinated debentures 462 458
Accrued liability for indebtedness of Kenbee
Management, Inc. and affiliates (Note E) 287 353
Accounts payable and accrued liabilities
(Note F) 2,364 2,705
-------- --------
Total liabilities 33,128 42,508
-------- --------
Deferred credits 321 321
-------- --------
Commitments and contingent liabilities
Shareholders' capital deficiency (Note F):
Common stock, $.01 par value, authorized -
40,000,000 shares, issued - 14,279,450
and 13,260,850, respectively 143 133
Additional paid-in capital 94,330 94,135
Deficit (95,206) (95,598)
-------- --------
Total shareholders' capital deficiency (733) (1,330)
-------- --------
Total liabilities and shareholders'
capital deficiency $ 32,716 $ 41,499
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
2
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
(unaudited)
Three Months Ended
June 30,
-------------------
1996 1995*
-------- --------
Income from affiliates (Note B):
Interest on mortgage loans $ 265 $ 413
Partnership management fees 104 124
Transaction and other fees from partnerships 75 307
Rent income 9 -
Other income 24 19
Income from others:
Interest on mortgage loans 25 33
Interest on loans to limited partners 10 69
Other interest 5 3
Other income (Note C) 30 35
-------- --------
547 1,003
-------- --------
Operating expenses:
General and administrative 607 797
Legal and professional fees 97 219
Net provision for losses - 85
Interest expense 608 933
Claim settlement and other litigation losses - 10
-------- --------
1,312 2,044
-------- --------
Loss before extraordinary gain (765) (1,041)
Extraordinary gain on the settlement
of indebtedness (Note G) 809 7
-------- --------
Net income (loss) (Note H) $ 44 $(1,034)
======== ========
Earnings per share (Note I):
Primary
Loss before extraordinary gain $ (.05) $ (.12)
Extraordinary gain on the settlement of
indebtedness .06 -
---------- ---------
Net income (loss) $ .01 $ (.12)
========== =========
Weighted average shares outstanding 14,279,287 8,855,768
========== =========
<FN>
* Reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
</FN>
3
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
(unaudited)
Six Months Ended
June 30,
-------------------
1996 1995*
-------- --------
Income from affiliates (Note B):
Interest on mortgage loans $ 542 $ 741
Management fees from partnerships 217 239
Transaction and other fees from partnerships 169 441
Rent income 18 -
Other income 26 21
Income from others:
Interest on mortgage loans 56 69
Interest on loans to limited partners 14 116
Other interest 8 11
Other income (Note C) 40 85
-------- --------
1,090 1,723
-------- --------
Operating expenses:
General and administrative 1,044 1,374
Legal and professional fees 136 389
Net provision for losses 56 174
Interest expense 1,317 1,888
Claim settlement and other litigation losses - 10
-------- --------
2,553 3,835
-------- --------
Loss before extraordinary gain (1,463) (2,112)
Extraordinary gain on the settlement
of indebtedness (Note G) 1,855 1,809
-------- --------
Net income (loss) (Note H) $ 392 $ (303)
======== ========
Earnings per share (Note I):
Primary
Loss before extraordinary gain $ (.10) $ (.24)
Extraordinary gain on the settlement of
indebtedness .13 .21
---------- ---------
Net income (loss) $ .03 $ (.03)
========== =========
Weighted average shares outstanding 14,022,137 8,719,667
========== =========
<FN>
* Reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
</FN>
4
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
-----------------------
1996 1995*
--------- ---------
Cash flows from operating activities:
Income (Loss) from continuing operations $ (1,463) $ (2,112)
Adjustments to reconcile net cash provided
by operating activities
Net provision for losses 55 174
Claim settlement and other litigation losses - 10
Accrued interest added to indebtedness 198 339
Depreciation and amortization 227 36
Decrease in unearned interest
on loans receivable (29) (63)
Net increase (decrease) in accounts payable
and accrued liabilities (68) 361
Consideration paid in common stock - 163
Imputed interest on notes and debentures 481 426
Net (increase) decrease in other assets (123) 499
------- ------
Net cash used in
operating activities (722) (167)
------- ------
Cash flows from investing activities:
Collections on loans receivable (net of
payments on underlying loans) 8,350 2,528
Net reductions in real estate lease
interests 160 88
Net collections on amounts due from
affiliated partnerships - 84
Distributions received on affiliated limited
partnerships and other investments 186 311
------- ------
Net cash provided by
investing activities 8,696 3,011
------- ------
<FN>
* Reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
</FN>
5
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(in thousands)
(unaudited)
Six Months Ended
June 30,
----------------------
1996 1995*
--------- --------
Cash flows from financing activities:
Increase in indebtedness $ - $ 448
Repayment of guaranteed indebtedness (66) (28)
Repayment of indebtedness (7,897) (4,083)
-------- --------
Net cash used in financing activities (7,963) (3,663)
-------- --------
Net increase (decrease) in cash 11 (819)
Cash - beginning 1,042 1,350
-------- --------
Cash - end $ 1,053 $ 531
======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest
(excluding amounts paid on underlying
mortgages) $ 529 $ 635
======== ========
Supplemental disclosure of non-cash
investing and financing activities:
Net loans transferred to settle
indebtedness $ - $ 1,379
======== ========
Investments in affiliated partnerships
transferred to settle litigation claims $ 108 $ -
======== ========
Net reduction in indebtedness pursuant
to creditor settlements and prepayment
discounts including accrued interest $ 1,855 $ 1,809
======== ========
Reduction in accounts payable and
accrued liabilities upon issuance of
common stock $ 160 $ 7
======== ========
Increase in other assets upon issuance
of common stock $ 46 $ -
======== ========
Prepaid extension fee added to
indebtedness $ 100 $ -
======== ========
Reduction in loans due from limited
partners upon receipt of investments
in affiliated partnership $ 6 $ -
======== ========
<FN>
* Reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
</FN>
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
six months ended June 30, 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 September 30, 1996 of approximately
$2,780,000 which are expected to be paid from the loan with NPM, if
consummated. 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 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 (3) 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 purchase three loans from
various creditors and to lend DVL funds which would be used to satisfy
another creditor and to make principal installment payments of $600,000 on
DVL's obligation to an additional creditor. All such funds will be
consolidated into a single note with NPM (the "Loan"). These five loans had
an aggregate balance at June 30, 1996 of approximately $9,090,000. Three of
these loans, which had aggregate outstanding balances at June 30, 1996 of
approximately $2,780,000 mature by September 30, 1996. DVL will use the
proceeds of the NPM Loan to prepay two of the five loans with negotiated
discounts of approximately $2,800,000. Based upon the June 30, 1996
balances due to such creditors plus accrued interest through the date of
closing (estimated at September 30, 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%
7
per year. DVL is only required to pay to NPM the cash flow generated 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 required to pay 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, with
interest at 15% per annum, for two years and to defer a reduced amount
through the third year. DVL had accrued service fees, including interest,
of $104,000 as of June 30, 1996. DVL anticipates that by outsourcing such
services it will be able to reduce its overhead in the future, thereby, at
least partially 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 by September 30, 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
8
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 $200,000 from the sale of FMF from March 30, 1995 through August 13,
1996, which has been recorded as income.
(D) Management's evaluation of the collateral underlying each loan in DVL's
portfolio previously resulted in substantial loan write-offs and a substantial
allowance for loan losses. The current evaluation considered the non-performing
portion of DVL's loan portfolio, internally generated appraisals of certain
properties, updated information on certain properties and DVL's anticipated
liquidation of 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 was due.
DVL is currently negotiating an additional extension with this creditor. DVL has
provided for a reserve of $287,000 at June 30, 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 $148,000 at June 30, 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. DVL has already paid the June 30th and September 30th installments
pursuant to this settlement. If the remaining payments are made, DVL would
recognize an additional gain 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 $788,000 which were 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.
In May 1996, DVL made a payment of $329,000 to a creditor which resulted
in a extraordinary gain on the settlement of indebtedness of $21,000 pursuant
to a previously negotiated discount.
(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 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 (3) 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 return to profitable
operations, then it may not be able to continue as a going concern.
Results of Operations
- ---------------------
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995
- ----------------------------------------------------------------------------
DVL realized net income of $44,000 for the three months ended June
1996, compared to a net loss of $1,034,000 for the corresponding 1995 period,
a change of $1,078,000. The income in 1996 was primarily a result of the
extraordinary gains realized upon DVL's prepayments to a creditor principally
offset by DVL's continued operating losses including a reduction in
transaction fees. The loss in 1995 was primarily a result of DVL's continued
operating losses. The operating loss decreased by $276,000 in 1996. The
effects of these items and the other factors contributing to net income are
as follows:
Interest income on mortgage loans due from affiliates decreased by
$148,000 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 $20,000. 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 $75,000 in
1996 and $307,000 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.
Interest income on loans to limited partners decreased by $59,000 due
11
to the fact that as of December 31, 1995 all remaining partner loans were
deemed non-performing. The $10,000 of interest income in 1996 represents
collections in excess of the carrying value for certain loans.
Other income from others represents collections on the note obtained
by DVL from the sale of FMF.
General and administrative expenses decreased by $190,000 primarily
as a result of a decrease in payroll and related costs incurred in 1996, and
the accrual of $186,000 in 1995 for the value of performance units granted
to certain officers partially offset by the fees earned by NPO pursuant to
the Asset Servicing Agreement. Based upon the Asset Servicing Agreement
entered into with NPO, general and administrative expenses are expected to
increase until existing compensation can be reduced. The expenses incurred
in connection with the Asset Servicing Agreement are expected to be at least
partially offset by reductions in compensation paid to DVL employees after
consummation of the Loan Agreement.
Legal and professional fees decreased by $122,000 primarily as a
result of the decreased legal activity after the finalization of certain
litigation settlements. In addition, in 1995 DVL incurred costs of $21,000
relating to an investment advisor to assist in raising debt or equity
financings.
Interest expense decreased by $325,000 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 $244,000 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 did
not result in any net additional provision for losses during the three months
ended June 30, 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.
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
- ----------------------------------------------------------------------------
DVL realized net income of $392,000 for the six months ended June 30,
1996, as compared to a net loss of $303,000 for the corresponding 1995
period, a change of $695,000. 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
partially offset by DVL's continued operating losses including a reduction
in transaction fees. The loss in 1995 was primarily a result of DVL's
continued operating losses partially offset by the extraordinary gain
realized upon the restructuring of indebtedness with one creditor. The
operating loss decreased by $649,000 in 1996. The effects of these items
and the other factors contributing to the income are as follows:
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Interest income on mortgage loans due from affiliates decreased by
$199,000 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 $22,000 as a result
of 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 $169,000 in
1996 and $441,000 in 1995 principally represent the fees received upon the
sale of certain partnership properties.
Rent income from affiliated partnerships increased by $18,000 due to
the receipt of rent from partnerships previously in default.
Interest income on loans to limited partners decreased by $102,000 due
to the fact that as of December 31, 1995 all remaining partner loans were
deemed non-performing. The $14,000 of interest income in 1996 represents
collections in excess of carrying value for certain loans.
Other income from others represents collections on the note obtained
by DVL from the sale of FMF.
General and administrative expenses decreased by $330,000 primarily
as a result of a decrease in payroll and related costs incurred in 1996 and
the accrual for the value of performance units granted to certain officers
of $186,000 in 1995 partially offset by the fees earned by NPO pursuant to
the Asset Servicing Agreement.
Legal and professional fees decreased by $153,000 primarily as a
result of the decreased legal activity after the finalization of certain
litigation settlements. In addition, in 1995 DVL incurred costs of $49,000
relating to an investment advisor to assist in raising debt or equity
financings.
Interest expense decreased by $571,000 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 $477,000 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 six months
ended June 30, 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.
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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
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. 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 lender's 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.
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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.
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 an appeal in the Supreme Court of the
State of Delaware. Plaintiffs in IN RE DEL-VAL SECURITIES LITIGATION ("IN
RE DEL-VAL"), the stockholder class action settled in 1993, have permitted
the Plaintiffs in LEVY to participate in their settlement with certain third
party defendants in IN RE DEL-VAL.
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. On January 13, 1995, the New York Court in this matter, decided
that the plaintiffs' insurance excluded coverage of these matters. Further,
as part of a settlement in certain shareholder derivative actions in the
Superior Court of New Jersey, DVL assigned its rights to pursue Federal and
DVL's broker to those derivative plaintiffs and on March 18, 1996, plaintiffs
in the derivative actions filed an appeal of the January 13, 1995 Order.
Oral argument was heard on the appeal by the New York Appellate Division,
First Department on June 6, 1996. The New York Appellate Division rendered
a decision, which was entered on July 2, 1996, denying plaintiffs' appeal.
Plaintiffs subsequently, on August 1, 1996, filed a motion for leave to
appeal the New York Appellate Division's decision to the New York Court of
Appeals. Plaintiffs await the New York Appellate Division's decision on the
latter application.
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.
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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
June 30, 1996.
EXHIBIT 27 - Financial Data Schedule
-----------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DVL, INC.
By:JOEL ZBAR
Joel Zbar, Treasurer and
Chief Accounting Officer
August 13, 1996
16