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 September 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 November 14, 1996
---------------------------- --------------------------------
Common Stock, $.01 par value 15,479,450
DVL, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
--------
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 1
Consolidated Statements of Shareholder's
Equity/Capital Deficiency for the period
ended September 30, 1996 3
Consolidated Statements of Operations -
Three Months Ended September 30, 1996 and 1995 4
Nine Months Ended September 30, 1996 and 1995 6
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1995 8
Notes to Consolidated Financial Statements 10
Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Part II. Other Information:
Legal Proceedings 20
Defaults upon Senior Securities 22
Exhibits and Reports on Form 8-K 22
Part I - Financial Information (Note A)
Item 1. Financial Statements
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
------
September 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 $53,378 and $44,300, respectively) $ 44,599 $ 54,501
Unearned interest (12,976) (14,411)
-------- --------
Net mortgage loans receivable from affiliated
partnerships (including non-performing loans
of $5,373 and $5,640, respectively) 31,623 40,090
Others:
Other mortgage loans 1,198 1,281
Loans collateralized by limited partnership
interests due from limited partners (all
of which are non-performing loans) 3,202 3,921
-------- --------
Total loans receivable 36,023 45,292
Allowance for loan losses (Note D) 12,021 12,225
-------- --------
Net loans receivable 24,002 33,067
Cash (including restricted cash of $228 and
$602, respectively) 719 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) 2,023 2,300
Affiliated limited partnerships (net of an allowance
for loss of $538 and $583, respectively) 3,046 3,310
Other investments (net of an allowance for loss
of $400) 667 697
Other assets 961 680
-------- --------
Total assets $ 31,821 $ 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' EQUITY/CAPITAL DEFICIENCY
-------------------------------------------------------
September 30, December 31,
1996 1995
------------ ------------
(unaudited)
Liabilities:
Short-term debt $ - $ 1,060
Long-term debt (Notes B and G) 16,339 32,290
Notes payable - litigation settlement
(Note F) 6,372 5,642
Other liabilities (Note E) 200 353
Convertible subordinated debentures 333 458
Accounts payable and accrued liabilities
(Note F) 2,371 2,705
-------- --------
Total liabilities 25,615 42,508
-------- --------
Deferred credits 321 321
-------- --------
Commitments and contingent liabilities
Shareholders' equity/capital deficiency (Note F):
Preferred stock $10.00 par value, authorized -
100 shares, issued - 100 1 -
Common stock, $.01 par value, authorized -
40,000,000 shares, issued - 15,479,450
and 13,260,850, respectively 155 133
Additional paid-in capital 95,086 94,135
Deficit (89,357) (95,598)
-------- --------
Total shareholders' equity/capital deficiency 5,885 (1,330)
-------- --------
Total liabilities and shareholders'
equity/capital deficiency $ 31,821 $ 41,499
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
2
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands except share data)
Preferred Stock Common Stock Additional
------------------ ------------------ paid-in
Shares Amount Shares Amount capital Deficit Total
---------- ------ ---------- ------ ---------- --------- ---------
Balance-January 1, 1996 13,260,850 $ 133 $ 94,135 $ (95,598) $ (1,330)
Issuance of common stock in
satisfaction of certain claims 290,000 3 46 49
Issuance of common stock in
connection with the modification
of the convertible subordinated
debentures 728,600 7 151 158
Issuance of common stock in
connection with a creditor
settlement 200,000 2 48 50
Issuance of common stock in
connection with the Loan from
NPM Capital LLC (Note B) 1,000,000 10 190 200
Issuance of preferred stock in
connection with the Loan from
NPM Capital LLC (Note B) 100 $ 1 1
Issuance of warrants in connection
with the Loan from NPM Capital LLC
(Note B) 516 516
Net income 6,241 6,241
---------- ------ ---------- ------ ---------- --------- ---------
Balance-September 30, 1996 100 $ 1 15,479,450 $ 155 $ 95,086 $ (89,357) $ 5,885
========== ====== ========== ====== ========== ========= =========
<FN>
See accompanying accountants' report and notes to consolidated financial statements.
</FN>
3
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
(unaudited)
Three Months Ended
September 30,
-----------------------
1996 1995*
---------- ----------
Income from affiliates (Note B):
Interest on mortgage loans $ 239 $ 306
Partnership management fees 111 134
Transaction and other fees from partnerships 114 135
Rent income 10 5
Other income 2 13
Income from others:
Interest on mortgage loans 27 33
Interest on loans to limited partners - 54
Other interest 6 17
Other income (Note C) 220 35
---------- ----------
729 732
---------- ----------
Operating expenses:
General and administrative 604 292
Legal and professional fees 99 170
Net provision for losses 9 640
Interest expense 587 1,017
---------- ----------
1,299 2,119
---------- ----------
Loss before extraordinary gain (570) (1,387)
Extraordinary gain on the settlement of
indebtedness (net of income tax of $100 in 1996)
(Note G) 6,419 -
---------- ----------
Net income (loss) $ 5,849 $ (1,387)
========== ==========
<FN>
* Reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
</FN>
4
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
(continued)
(unaudited)
Three Months Ended
September 30,
-----------------------
1996 1995
---------- ----------
Primary earnings per share (Note I):
Loss before extraordinary gain $ (.04) $ (.15)
Extraordinary gain on the settlement
of indebtedness .45 -
---------- ----------
Net income (loss) $ .41 $ (.15)
========== ==========
Weighted average shares outstanding 14,386,977 9,210,661
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
5
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
(unaudited)
Nine Months Ended
September 30,
-----------------------
1996 1995*
---------- ----------
Income from affiliates (Note B):
Interest on mortgage loans $ 781 $ 1,047
Partnership management fees 328 373
Transaction and other fees from partnerships 283 576
Rent income 28 5
Other income 28 34
Income from others:
Interest on mortgage loans 83 102
Interest on loans to limited partners 14 170
Other interest 14 28
Other income (Note C) 260 120
---------- ----------
1,819 2,455
---------- ----------
Operating expenses:
General and administrative 1,648 1,694
Legal and professional fees 235 531
Net provision for losses 65 814
Interest expense 1,904 2,905
Claim settlement and other litigation losses - 10
---------- ----------
3,852 5,954
---------- ----------
Loss before extraordinary gain (2,033) (3,499)
Extraordinary gain on the settlement of
indebtedness (net of income tax of $100 in 1996)
(Note G) 8,274 1,809
---------- ----------
Net income (loss) $ 6,241 $ (1,690)
========== ==========
<FN>
* Reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
</FN>
6
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
(unaudited)
Nine Months Ended
September 30,
-----------------------
1996 1995
---------- ----------
Primary earnings per share (Note I):
Loss before extraordinary gain $ (.14) $ (.39)
Extraordinary gain on the settlement of
indebtedness .58 .20
---------- ----------
Net income (loss) $ .44 $ (.19)
========== ==========
Weighted average shares outstanding 14,126,052 8,907,825
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
7
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
-----------------------
1996 1995*
---------- ----------
Cash flows from operating activities:
Loss from continuing operations $ (2,033) $ (3,499)
Adjustments to reconcile net cash provided
by operating activities
Net provision for losses 65 814
Claim settlement and other litigation
losses - 10
Accrued interest added to indebtedness 289 1,380
Depreciation and amortization 299 63
Decrease in unearned interest on loans
receivable (10) (60)
Net increase (decrease) in accounts payable
and accrued liabilities 204 (78)
Consideration paid in common stock - 184
Imputed interest on notes and debentures 737 654
Net (increase) decrease in other assets (467) 487
---------- ----------
Net cash used in operating activities (916) (45)
---------- ----------
Cash flows from investing activities:
Collections on loans receivable (net of
payments on underlying loans) 8,572 4,212
Net reductions in real estate lease
interests 277 172
Net collections on amounts due from
affiliated partnerships - 83
Distributions received on affiliated limited
partnership and other investments 204 455
Proceeds for common stock and preferred stock
issues 201 -
---------- ----------
Net cash provided by
investing activities 9,254 4,922
---------- ----------
<FN>
* Reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
</FN>
8
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(in thousands)
(unaudited)
Nine Months Ended
September 30,
-----------------------
1996 1995*
---------- ----------
Cash flows from financing activities:
Repayment of guaranteed indebtedness $ (152) $ (185)
Repayment of indebtedness (8,509) (5,305)
---------- ----------
Net cash used in financing activities (8,661) (5,490)
---------- ----------
Net decrease in cash (323) (613)
Cash - beginning 1,042 1,350
---------- ----------
Cash - end $ 719 $ 737
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest
(excluding amounts paid on underlying
mortgages) $ 758 $ 540
========== ==========
Supplemental disclosure of non-cash investing
and financing activities:
Net loans transferred to settle indebtedness $ 250 $ 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 $ 8,374 $ 1,809
========== ==========
Reduction in accounts payable and accrued
liabilities upon issuance of common stock $ 49 $ 1,487
========== ==========
Increase in other assets upon issuance of
common stock $ 46 $ -
========== ==========
Reduction in loans due from limited partner
upon receipt of investments in affiliated
partnership $ 19 $ -
========== ==========
Common stock issued in connection with a
creditor settlement $ 50 $ -
========== ==========
<FN>
* Reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
</FN>
9
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 nine months ended
September 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. To meet such operating expenses, DVL is continuing to liquidate
and refinance certain assets, and in order to meet certain mandatory repayment
requirements, DVL 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. 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 payment 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 principal payment requirements 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.
To better enable DVL to resolve its liquidity problems and to meet its
certain mandatory repayment requirements, on September 27, 1996, DVL and NPM
closed a loan transaction under a certain Loan Agreement dated March 27, 1996,
pursuant to which NPM purchased three loans from various DVL creditors, and
agreed to lend to 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 (the "Loan"). As of the closing date, these five existing
loans had an aggregate balance of approximately $9,189,000. The three
purchased loans represented an aggregate outstanding balance of $7,501,000.
Proceeds from the transaction were used to prepay two of the five loans with
negotiated discounts of $2,773,000. The actual amount loaned by NPM at the
closing, which included the balances due to the above mentioned creditors, less
the realized discount, plus NPM's costs, equaled $5,232,000. Included in the
loan balance were NPM's costs (in excess of $175,000) incurred in connection
with this transaction, such excess totaled approximately $503,000. In
consideration of NPM's loan enabling DVL to avail itself of discounts to
existing lenders, and for providing DVL with the extended payment schedule, the
10
principal amount of the loan was increased by $3,150,000. All such funds
advanced at the closing were consolidated into a single note with NPM in the
amount of $8,382,000. For financial reporting purposes, DVL recognized an
extraordinary loss of $880,000 on this transaction.
Under the terms of the NPM loan, the principal balance is payable over six
years with interest at the rate of 10.25%. DVL is required to make certain
mandatory payments towards the principal balance over the term of the loan.
The first such principal reduction of 15% of the original loan is due by March
31, 1998. From September 27, 1996 through November 14, 1996, DVL made
principal payments from the liquidation of collateral totaling $303,500 which
represents approximately 4% of the original principal balance. DVL is required
to pay NPM the cash flow generated from certain of NPM's collateral, but in no
event less than accrued interest at a rate of 5% per annum. NPM is required
to fund an additional $600,000 to be loaned for payments to another creditor.
The initial internal rate of return to NPM on this loan was approximately
27.5%. This rate assumed that payments would be made according to the original
payment terms of the Loan. In the event of prepayments or additional fundings
under the loan, the internal rate of return will increase or decrease,
respectively. Negotiated discounts of $2,773,000 are being amortized over the
life of the loan resulting in an effective interest rate for financial
reporting purposes of approximately 16.5%, including DVL's costs associated
with the Loan and the amortization of debt (described below).
In connection with the transactions contemplated by the Loan Agreement in
March 1996, DVL and NPO Management LLC ("NPO"), an affiliate of NPM, entered
into an Asset Servicing Agreement, recently approved by shareholders, 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 $233,000 as of September 30,
1996.
In connection with the Loan, affiliates of NPM acquired 1,000,000 shares
(the "Shares") of DVL common stock for $200,000 representing approximately 7%
of the current outstanding common stock of DVL. NPM also acquired 100 shares
of preferred stock for $1,000. In addition, DVL issued to affiliates of NPM
12,911,628 warrants (the "Warrants") which when added to the 1,000,000 shares
acquired represented rights to acquire up to 49% of the outstanding common
stock of DVL on a fully diluted basis. The Warrants are exercisable through
December 31, 2007 at a price of $.16 per share. The Warrants were valued at
$516,000 at the date of issuance and such value resulted in a debt discount to
be amortized over the life of the Loan.
(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
11
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.
In September 1996 DVL received $220,000 in full satisfaction of FMF's note,
subordinated debenture and any and all obligations of FMF to DVL. In 1995 and
1996, DVL received a total of $420,000 from the sale of FMF which has been
recorded as other 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 evaluations 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 has negotiated an additional extension with this creditor through
June 1997 with equal monthly payments to pay off the balance of the debt. DVL
has provided for a reserve of $200,000 at September 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 September 30, 1996 (see "Legal
Proceedings").
12
(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.
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 principal 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.
In December 1995, DVL reached a settlement with its final unsettled
creditor and recognized an extraordinary gain on the settlement of indebtedness
of $6.1 million. The restructured indebtedness required a $400,000 payment at
closing and required five quarterly payments totaling $600,000 commencing June
30, 1996. In September 1996, DVL paid the balance of the obligation to this
creditor resulting in an additional extraordinary gain of $7.4 million in the
third quarter of 1996.
In September 1996, DVL issued 200,000 shares of common stock and
transferred a mortgage with a net carrying value of $250,000 to terminate its
Put Agreement to purchase mortgages from a creditor. In addition, such
creditor has surrendered to DVL its interests in certain 12% convertible
debentures with a carrying value of $192,000. DVL had reserved $300,000
relating to this Put agreement in 1993. This transaction resulted in a
reduction in the provision for losses of $191,000.
In September 1996, a previous creditor of DVL who was holding 620,000
warrants exercisable at $1 per share, as well as holding contingent debentures
and other put agreements with DVL, was issued 800,000 warrants with an exercise
price of $.50 per share exercisable between 1997 and 2000 in exchange for all
of its existing warrants, debentures, and rights in connection with DVL.
In September 1996, the current and former officers holding performance
units surrendered their performance units in consideration for an equal number
of options granted pursuant to a non-qualified stock option plan approved by
DVL's Board of Directors. In addition, under this plan, DVL issued 15,000
options to a member of the Board of Directors. DVL issued a total of 688,131
options and recorded a charge of $6,881 for the difference between the quoted
market price of the stock and the exercise price on the date of issuance.
13
(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 be 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 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.
14
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 payment 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
principal payment requirements and return to profitable operations, then it may
not be able to continue as a going concern.
Results of Operations
- ---------------------
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
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DVL realized net income of $5,849,000 for the three months ended September
1996, compared to a net loss of $1,387,000 for the corresponding 1995 period,
a change of $7,236,000. The income in 1996 was primarily a result of the net
extraordinary gains realized upon DVL's prepayments to creditors principally
offset by DVL's continued operating losses. The loss in 1995 was primarily a
result of DVL's continued operating losses and additional provisions for loan
losses. The operating loss decreased by $817,000 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 $67,000
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 $23,000. 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 $114,000 in 1996
and $135,000 in 1995 principally represent the fees received upon the sale of
certain partnership properties.
Rent income from affiliated partnerships increased by $5,000 in 1996 due
to the receipt of rent from partnerships previously in default.
15
Interest income on loans to limited partners decreased by $54,000 due to
the fact that as of December 31, 1995 all remaining partner loans were deemed
non-performing.
Other income represents collections on the note obtained by DVL from the
sale of FMF.
General and administrative expenses increased by $312,000. This increase
results from the reduction in the accrual of $186,000 in 1995 for the value of
performance units granted to certain officers. This increase also resulted
from the $150,000 in 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 in the fourth quarter.
Legal and professional fees decreased by $71,000 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 $430,000 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 $253,000 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 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 in excess of interest expense on the existing indebtedness
satisfied in conjunction with the Loan.
DVL increased its net provision for losses by $9,000. This increase
resulted from management's re-evaluation of the collateral underlying each loan
resulting in an additional provision for losses aggregating $200,000 during the
three months ended September 30, 1996. The current evaluation considered the
non-performing portion of DVL's loan portfolio, internally generated
evaluations 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. This increase was offset by $191,000 due to DVL's final
settlement with an existing creditor in which DVL issued stock and transferred
a mortgage in exchange for a Put agreement to purchase mortgages. DVL reserved
$300,000 relating to this creditor in 1993.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
- ------------------------------------------------------------------------------
DVL realized net income of $6,241,000 for the nine months ended September
30, 1996, as compared to a net loss of $1,690,000 for the corresponding 1995
period, a change of $7,931,000. 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
16
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 $1,466,000 in 1996. The effects of these items and the other factors
contributing to the income are as follows:
Interest income on mortgage loans due from affiliates decreased by
$266,000 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 $45,000 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 $283,000 in 1996
and $576,000 in 1995 principally represent the fees received upon the sale of
certain partnership properties.
Rent income from affiliated partnerships increased by $23,000 due to the
receipt of rent from partnerships previously in default.
Interest income on loans to limited partners decreased by $156,000 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 represents collections on the note obtained by DVL from the
sale of FMF.
General and administrative expenses decreased by $46.,000 primarily as a
result of a decrease in payroll and related costs incurred in 1996. This
reduction was partially offset by the $306,000 in fees earned by NPO pursuant
to the Asset Servicing Agreement.
Legal and professional fees decreased by $296,000 primarily as a result
of the decreased legal activity after the finalization of certain litigation
settlements. In addition, in 1995 DVL incurred costs of $70,000 relating to
an investment advisor to assist in raising debt or equity financings.
Interest expense decreased by $1,001,000 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 $729,000
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 satisfied in
conjunction with the loan (see Note B).
17
DVL increased its net provision for losses by $65,000. This increase
resulted from management's re-evaluation of the collateral underlying each loan
resulting in a provision for losses aggregating $256,000 during the nine months
ended September 30, 1996. The current evaluation considered the non-performing
portion of DVL's loan portfolio, internally generated evaluations 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. This increase was
offset by $191,000 reduction due to DVL's final settlement with an existing
creditor in which DVL issued stock and transferred a mortgage in exchange for
a Put agreement to purchase montages. DVL reserved $300,000 relating to this
creditor in 1993.
18
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. In October 1996, DVL received
commitments to refinance four mortgages which will generate approximately
$800,000 of net proceeds which is expected to be used to pay NPM as part of
DVL's required principal percentage payment requirement. 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).
To meet its mandatory repayment requirements, DVL completed the Loan
transaction discussed in Note B which extended DVL's mandatory principal
payment requirements to certain creditors. However, there can be no assurance
that DVL will be able to meet the new lender's and other existing lenders'
mandatory payment 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. On March 12, 1996, the trial court granted defendants' motion for
summary judgment in this case and thereafter, denied plaintiffs' motion to
reargue. The Supreme Court of the State of Delaware has not yet ruled on the
appeal Plaintiffs have taken from that judgement. 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 DVL's
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 their 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.
20
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. A permanent
injunction enjoining plaintiffs from pursing their claims in this matter is
contemplated as part of the reorganization plan of the developer of the
campsites which secured the consumer credit contracts. DVL has reached an
agreement to resolve the matter by participating in the permanent injunction
when the debtor's plan is approved.
21
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
September 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: Alan Casnoff
____________________________
Alan E. Casnoff, President
and Chief Executive Officer
November 14, 1996
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