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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001 OR
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to _____________
Commission File No. 1-8356
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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
incorporation or organization) Identification No.)
70 East 55th Street, 7th Floor, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 350-9900
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $.01 par value None
Securities registered pursuant to Section 12(g) of the Act: None
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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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy information statements
incorporated by reference in Part IV of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock of the Registrant held by non-
affiliates as of March 15, 2002 was $2,870,209.
The number of shares outstanding of Common Stock of the Registrant as of March
15, 2002 was 21,313,563.
DVL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED DECEMBER 31, 2001
ITEMS IN FORM 10-K
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Page
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PART I
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 9
Item 6. Selected Consolidated Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 25
PART III
Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management 34
Item 13. Certain Relationships and Related Transactions 42
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 45
PART I
This 2001 Annual Report on Form 10-K contains statements which constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Those statements include statements regarding the intent, belief or
current expectations of the Registrant and its management team. The Registrant's
stockholders and prospective investors are cautioned that any such forward-
looking statements are not guarantees of future performance and involve risks
and uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements. Such risks and uncertainties
include, among other things, general economic conditions, the ability of the
Registrant to obtain additional financings, the ability of the Registrant to
successfully implement its business strategy and other risks and uncertainties
that are discussed herein.
ITEM 1. BUSINESS.
OVERVIEW
DVL, Inc., a Delaware corporation incorporated in 1977 ("DVL" or the
"Company"), is a commercial finance company which is primarily engaged in the
ownership of residual interests in securitized portfolios, and the ownership and
servicing of a portfolio of secured commercial mortgage loans made to limited
partnerships in which the Company serves as general partner (each an "Affiliated
Limited Partnership"). In addition, the Company performs real estate asset
management and administrative services for third parties.
DVL is the 99.9% owner of two entities whose sole assets are the residual
interests in five securitized receivable pools. The securitized receivable pools
consist of receivables which are the obligations of various insurance companies
to pay money over a term of years. DVL receives the residual cash flow from the
five securitized receivable pools after payment to the securitized noteholders.
DVL is the general partner of approximately 70 Affiliated Limited
Partnerships which own income-producing commercial, office and industrial
properties comprising approximately 3.0 million square feet. A majority of the
properties are subject to long-term triple net leases with various tenants. The
principal tenant is Wal-Mart Stores, Inc. DVL does not consolidate any of the
various Partnerships in which it holds the general partner and limited partner
interest nor does DVL account for such interests on the equity method. The
remaining properties are shopping centers, industrial properties and other
commercial properties. The Company also performs real estate and partnership
management services for these partnerships, as well as, for third parties.
The mortgage loans held by the Company are primarily "wrap-around" mortgage
loans which are subject to non-recourse, underlying mortgages held by unrelated
institutional lenders. These underlying loans self-liquidate from the base rents
payable by the tenants over the primary term of their leases. The majority of
the mortgage payments from the Affiliated Limited Partnerships are used to pay
the underlying mortgage holders their required monthly principal and interest
payments. In addition, the Company receives a portion of the Affiliated Limited
Partnerships' percentage rent income as additional debt service. The Company's
other principal assets include (a) real estate interests held for development,
(b) a long term leasehold interest in a commercial property, and (c) Limited
Partnership interests in certain Affiliated Limited Partnerships.
The Company derives the majority of its income from the residual interests
in securitized receivables portfolios, wrap-around mortgages as a result of the
difference in the effective interest rates between the wrap around mortgage and
the underlying mortgages, percentage rents received from various tenants of the
Affiliated Limited Partnerships, rentals received as a result of its real
1
estate holdings and long-term leasehold interests, fees received as General
Partner of the Affiliated Limited Partnerships (including disposition and
management fees), distributions received as a limited partner in the Affiliated
Limited Partnerships, and the sale of partnership properties, and fees from
third-party management contracts.
At December 31, 2001, the Company had net operating loss carry-forwards
("NOLS") aggregating approximately $57 million, which expire in various years
through 2019, including $50 million which expire through 2007. If the Company
generates profits in the future, the Company may be subject to limitations on
the use of its NOLS pursuant to the Internal Revenue Code. It is anticipated
that the taxable income associated with the residual interests will utilize
significant NOLS. There can be no assurance that a significant amount of the
Company's existing NOLS will be available to the Company at such time as the
Company desires to use them.
DVL believes that its anticipated cash flow provided by operations is
sufficient to meet its current cash requirements through January 2003. The
Company has in the past and expects in the future to continue to augment its
cash flow with additional cash generated from either the sale or refinancing of
its assets and/or borrowings. See Management Discussion and Analysis of
Financial Condition and Results of Operations.
The Company's current strategy is to (i) maximize the value of its assets
and meet its short-term working capital needs by continuing to manage,
administer and service its existing portfolio,(ii) obtain investments through
the use of bank borrowings and (iii) expand through the acquisition of one or
more companies to generate income and positive cash flow. The Company
anticipates that it would finance any possible future acquisition through new
borrowing or the issuance of its common or preferred stock. There can be no
assurance that the Company will be able to identify or acquire businesses.
Each share of the stock of the Company includes a restriction prohibiting
sale, transfer, disposition or acquisition of any stock until September 30, 2009
without the prior consent of the Board of Directors of the Company by any person
or entity that owns or would own 5% or more of the issued and outstanding stock
of the Company if such sale, purchase or transfer would in the opinion of the
Board, jeopardize the Company's preservation of its federal income tax
attributes under Section 382 of the Internal Revenue Code. See the Changes in
Control section for a more detailed discussion.
The principal executive offices of the Company are located at 70 East 55th
Street, 7th Floor, New York, New York 10022. The Company's telephone number is
(212) 350-9900. The Company and its subsidiaries have not engaged in any
business activity outside of the United States.
2
BUSINESS ACTIVITIES
RESIDUAL INTERESTS IN SECURITIZED PORTFOLIOS
On March 30, 2001, the Company, through a consolidated subsidiary, acquired
a 99.9% Class B member interest in Receivables II-A LLC, a limited liability
company ("Receivables II-A"), from an unrelated party engaged in the acquisition
and management of periodic payment receivables. The Class B member interest
entitles the Company to be allocated 99.9% of all items of income, loss and
distribution of Receivables II-A. Receivables II-A solely receives the residual
cash flow from four securitized receivable pools after payment to the
securitized noteholders.
The Company purchased its interest in Receivables II-A for an aggregate
purchase price of $26,134,264, including costs of $809,264 including the
issuance of a warrant, valued at $74,000, for the purchase of 2 million shares
of the common stock of DVL, exercisable until February 15, 2011 at a price of
$.20 per share. The purchase price was paid by the issuance of limited recourse
promissory notes by the consolidated subsidiary in the aggregate amount of
$25,325,000. Principal and interest are payable from the future monthly cash
flow. The notes mature on December 31, 2021, bear interest at the rate of 8%
annually, and are secured by a pledge of the consolidated subsidiary's interest
in Receivables II-A and all proceeds and distributions related to such interest.
The principal amount of the notes and the purchase price are adjusted, from time
to time, based upon the performance of the underlying receivables. DVL also
issued its guaranty of up to $2,532,500 of the purchase price. The guaranty is
reduced by 10% of the principal paid. The amount of the guaranty at December 31,
2001 was $2,532,500. Payments, if any, due under this guaranty are payable after
December 31, 2021.
In accordance with the purchase agreement, through December 31, 2001, the
residual interests in securitized portfolios and the notes payable increased by
approximately $699,000 based on the performance of the underlying receivables.
On August 15, 2001, the Company, through a consolidated subsidiary,
acquired a 99.9% Class B member interest in Receivables II-B LLC, a limited
liability company ("Receivables II-B"), from the same party from which it
acquired Receivables II-A. The Class B member interest entitles the Company to
99.9% of all items of income, loss and distribution of Receivables II-B.
Receivables II-B receives the residual cash flow from a securitized receivable
pool after payment to the securitized noteholders.
The Company purchased its interest in Receivables II-B for an aggregate
purchase price of $9,657,000, including costs of $557,000 including the issuance
of a warrant, valued at $62,000, for the purchase of 1 million shares of the
common stock of DVL, exercisable until August 15, 2011 at a price of $.20 per
share. The purchase price was paid by the issuance of limited recourse
promissory notes by the consolidated subsidiary in the aggregate amount of a
$9,100,000. Principal and interest are payable from the future monthly residual
interest cash flow. The notes mature on August 15, 2020, bear interest at the
rate of 8% annually, and are secured by a pledge of the consolidated
subsidiary's interest in Receivables II-B and all proceeds and distributions
related to such interest. The principal amount of the notes and the purchase
price are adjusted from time to time, based upon the performance of the
underlying receivables. DVL also issued its guaranty of up to $910,000 of the
purchase price. The guaranty is reduced by 10% of the principal paid. The amount
of the guarantee at December 31, 2001 was $899,464. Payments, if any, due under
this guaranty are payable after August 15, 2020.
3
The purchase agreements contain annual minimum and maximum levels of cash
flow that will be retained by the Company, after the payment of interest and
principal on the notes payable, which are as follows:
March 30, 2001 Transaction August 15, 2001 Transaction
-------------------------- ---------------------------
Years Minimum Maximum Minimum Maximum
----- ------- ------- ------- -------
2001 to 2009 $462,500 $500,000 $280,000 $380,000
2010 to final payment 700,000 750,000 $350,000 $400,000
on notes payable*
* Final payment on the notes payable expected 2016 related to the March
transaction and 2018 for the August transaction.
The Company believes it will receive significant cash flow after final payment
of the notes payable.
In connection with the acquisitions of residual interests in Receivables II-A
and Receivables II-B affiliates of NPO Management, LLC ("NPO" the Company's
asset servicer) and the special director of the Company will be paid investment
banking fees of $900,000 for their services including the origination,
negotiation and structuring of the transactions. The total fees will be payable
without interest, over the next three years from a portion of the monthly cash
flow generated by the acquisitions.
MORTGAGE LOANS
The Company's mortgage loan portfolio consists primarily of long-term wrap-
around and other mortgage loans to its Affiliated Limited Partnerships secured
by the types of properties discussed above. Most of the loans are subordinated
obligations with the majority of the payments received being utilized to
amortize the related underlying mortgage loan over the primary term of the
related lease. The Company builds equity in the mortgage loans over time. At
December 31, 2001, the Company had investments in 34 mortgage loans to
Affiliated Limited Partnerships with a carrying value for financial reporting
purposes of $35,567,000 (prior to a loan loss reserve of approximately
$4,095,000). These mortgage loan receivables are subject to underlying mortgage
obligations of $22,218,000.
Generally, the tenants of the Affiliated Limited Partnerships executed
"triple-net" leases and, therefore, the tenants are responsible for the payment
of all taxes, insurance and other property costs. In certain instances, the
partnership is required to maintain the roof and structure of the premises.
DVL's mortgage portfolio included 23 and 26 loans with net carrying values
of $28,377,000 and $33,639,000 as of December 31, 2001 and 2000, respectively,
which are due from Affiliated Limited Partnerships that own properties leased to
Wal-Mart Stores, Inc. These mortgage loan receivables are subject to underlying
mortgage obligations of $19,546,000 and $22,971,000 as of December 31, 2001 and
2000, respectively. Wal-Mart is a public company subject to the reporting
requirements of the SEC. Wal-Mart has closed certain of its stores located on
the properties subject to the Company's mortgages. However, Wal-Mart continues
to pay the required rent with respect to such properties. Net carrying value
refers to the unpaid principal balance less any allowance for reserves, and any
amount which represents future interest based upon the purchase of the loan at a
discount.
4
In addition to base rent, most leases also require the tenant to pay
additional rent equal to a percentage of gross receipts from the tenant's
operation of a property above a specified amount ("Percentage Rent"). In
virtually all cases where the partnership is entitled to receive Percentage
Rent, a portion of such rent is required to be paid to the Company as additional
interest and/or additional debt service on the long-term mortgage.
The Company has the right to refinance the outstanding mortgage loans
underlying its wrap-around mortgage loans provided that the debt service and
principal amount of a refinanced loan are no greater than that of the existing
wrap-around loan. The Company also has the right to arrange senior financing
secured by properties on which it holds first or second mortgage loans by
subordinating such mortgage loans, subject to the limitations set forth above.
During 2001, DVL purchased two additional mortgage loans from an entity
that is part of the Opportunity Fund (see "Opportunity Fund", discussed below on
page 16) which are secured by real estate owned by Affiliated Limited
Partnerships in which DVL is the general partner. The loans were purchased for
an aggregate price of $325,000, paid in cash. In early 2002, DVL obtained bank
financing of $400,000, less closing costs, secured by the loans.
All of the Company's mortgage loans are pledged to secure the indebtedness
of the Company to NPO and Blackacre Capital Group, LLC ("BCG"), which are
entities engaged in real estate lending and management transactions and are
affiliated with certain stockholders and insiders of the Company. See Items 7
and 13 below for a description of certain related transactions involving NPO and
BCG.
LOAN PORTFOLIO
The following table sets forth the number of various loans owed to the
Company which are outstanding, the aggregate loan balances, including accrued
interest, and the allowances for loan losses, at December 31, 2001. See Tables 1
and 2 of Appendix "A" to this Form 10-K for detailed information as to each such
loan.
Number Aggregate Allowance
of Loan for Loan
Type of Loan Loans Amount Losses
----- --------- ---------
(dollars in thousands)
Long-term mortgages due from Affiliated
Limited Partnerships $ 51,475
Less: unearned interest (1) (15,908)
--------
Total loans collateralized by mortgages 34 35,567 $ 4,095
-- -------- ------
Loans collateralized by limited partnership
interests 21 355 277
-- -------- ------
Advances due from Affiliated Limited Partnerships 5 14 -
-- -------- ------
Total loans 60 $ 35,936 $ 4,372
== ======== =======
- ------------
(1) Unearned interest represents the unamortized balance of discounts on
previously funded loans.
5
INVESTMENTS IN AFFILIATED LIMITED PARTNERSHIPS
The Company over the years has acquired various limited partnership
interests in its Affiliated Limited Partnerships pursuant to the terms of
certain settlement agreements and through various purchases and foreclosures. At
December 31, 2001 and 2000 the Company's carrying value was $1,121,000 and
$1,157,000, respectively.
PARTNERSHIP AND PROPERTY MANAGEMENT
The Company is the general partner of approximately 70 Affiliated Limited
Partnerships from which it receives management, transaction and other fees. The
Company, through Professional Service Corporation ("PSC"), its wholly-owned
subsidiary, is engaged in the management of an industrial property located in
New Jersey pursuant to a master lease. This master lease permits PSC to
sub-lease the property to tenants and retain profits subject to the payment by
PSC of operating expenses and rent to the entity that owns the property. Prior
to December 2000, PSC managed a second industrial property in New Jersey
pursuant to a master lease. In December 2000, the Company purchased all of the
real estate assets that encompassed the second master lease, as discussed below.
In June 1998, the Company entered into a Management Services Agreement with
a limited partnership (in which certain of its partners are affiliates of NPO
and Blackacre) under which the Company renders services for a fee. This
agreement may be terminated with 30 days notice by either party. As
compensation, the Company received the following (a) a monthly fee of $5,000
through November 2000, and (b) after all the partners of the partnership have
earned a 20% internal rate of return, compounded quarterly, on their capital
contributions, an amount of cash equal to 25% of the profits, as defined in the
agreement. The Company received compensation under such agreement equal to
$442,900 in 2001 and $362,500 in 2000.
In addition, the Company provides services for a limited partnership (whose
general partner is an affiliate of NPO) to render certain accounting and
administrative services. As compensation, the Company receives expense
reimbursements of $4,000 per month. The Company received compensation under such
agreement of $48,000 during 2001 and 2000.
The Company has a property management agreement with an entity that is part
of the Opportunity Fund pursuant to which DVL provides property management
services. The Company received compensation, under such agreement of $27,000 in
each of 2001 and in 2000.
In November 1999, the Company entered into a management service agreement
with an entity whose partners are affiliates of NPO to render certain accounting
and administrative services. As compensation, the Company receives a monthly fee
of $2,000, a monthly deferred fee of $6,500 and an annual incentive fee if
certain levels of profitability are obtained. The Company recorded fees of
$152,000 and $102,000 in 2001 and 2000 which included incentive fees of $50,000
and $-0-, respectively.
6
REAL ESTATE HOLDINGS
The Company currently owns three contiguous properties located in Kearny,
New Jersey. These properties are:
(1) Two acres of land underlying approximately 80,000 square feet of
manufacturing, warehousing and commercial buildings. In November of 1998, the
Company foreclosed on its mortgage and now owns the land, buildings and
improvements.
(2) Seven buildings located in an industrial park in Kearny, NJ purchased for
$3,000,000, plus closing costs. Prior to the purchase, the Company had been
leasing all of these buildings, under a master lease agreement, and subletting
this property to various unrelated tenants. The acquisition was funded with bank
financing in the original principal amount of $3,000,000 and cash of
approximately $255,000. The bank financing accrues interest at the rate of 10%
per annum and requires monthly interest-only payments until June 30, 2002, at
which time the loan matures. The Company is currently negotiating an extension
of this loan.
(3) Fee title in a parcel of land in Kearny, NJ purchased from an unrelated
third party for a $365,000, plus closing costs. The acquisition was funded with
bank financing in the original principal amount of $200,000 and cash of
approximately $175,000. The financing accrues interest at the rate of 9.5% per
annum and requires monthly interest only payments until June 30, 2002, at which
time the loan matures. The Company is currently negotiating an extension of this
loan.
OPPORTUNITY FUND
The Company, BCG, an affiliate of Blackacre (as defined below), P.N.M.
Capital LLC, an affiliate of NPO ("PNM"), and Pemmil Management LLC, an
affiliate of NPO ("Pemmil"), and PNM (collectively the "NPO Affiliates") are
parties to a certain Agreement which is called the Opportunity Agreement (the
"Opportunity Agreement"). The Opportunity Agreement had a term of three years
and expired April 2001. The Opportunity Agreement provided for an arrangement
(the "Opportunity Fund") whereby the fund had the right of first refusal to
finance the acquisition of limited partnership interests or mortgage loans to
Affiliated Limited Partnerships in which the Company is general partner, or
which the Company already owns, if the Company was unable to pursue such
business opportunity with its own funds from its reserves or available from
operations, or by obtaining financing from a third party or issuing equity.
All of the required capital contributions were to be provided by the other
members. The Company was to receive up to 20% of the profits from an opportunity
after the other investors received a return of their investment plus preferred
annual returns ranging from 12% to 20.
The Opportunity Agreement has not been renewed or extended. While the
Opportunity Fund no longer has the right of first refusal with regard to
opportunities, the Company may continue to present opportunities to the fund.
As of March 1, 2002, the Opportunity Fund has purchased 15 wrap mortgages
of Affiliated Limited Partnerships from unaffiliated third parties (seven were
purchased in 1998, one was purchased in 1999 and seven were purchased in 2000),
acquired limited partnership units from unaffiliated individuals in three
Affiliated Limited Partnerships, and acquired an ownership interest in a
property of an Affiliated Limited Partnership. During 2000, DVL purchased three
of the mortgages owned by the Opportunity Fund and the Opportunity Fund was
fully satisfied on an additional four mortgage loans, as each of the properties
that
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secured these four mortgage loans was sold. During 2001, a newly formed, wholly-
owned subsidiary of DVL purchased two of mortgages owned by the Opportunity Fund
and the Opportunity Fund was fully satisfied on an additional two mortgage loans
as each of the properties that secured these two mortgage loans were sold. In
December 2001, the Opportunity Fund also sold its ownership interest in the
property located in Kearny, NJ to an entity in which certain partners are
affiliates of NPO. As of March 1, 2002, the Opportunity Fund owns four
mortgages. During 2001, DVL was paid approximately $280,000 from the investments
by the Opportunity Fund, of which $189,000 was used to pay amounts owed by DVL
under a note in favor of an entity that is part of the Opportunity Fund.
EMPLOYEES
As of March 2002, the Company had 11 employees all of whom were employed on
a full-time basis other than the President of the Company, who serves on a part-
time basis. The Company is not a party to any collective bargaining agreement
and the Company's employees are not represented by any labor union. The Company
considers its relationship with its employees to be good.
ITEM 2. PROPERTIES.
The Company maintains corporate headquarters in New York City in a leased
facility located at 70 E. 55th Street, New York, New York, which occupies
approximately 6,000 square feet of office space. The lease for such office space
is due to expire on February 7, 2003. The base rent is $227,160 per annum. A
description of the other properties owned by the Company appears in the
subsection captioned "Real Estate Holdings" in Item 1 above. The Company
believes that its existing facilities are adequate to meet its current operating
needs and that suitable additional space should be available to the Company on
reasonable terms should the Company require additional space to accommodate
future operations or expansion.
ITEM 3. LEGAL PROCEEDINGS.
The Company from time to time is a party in various lawsuits incidental to
its business operations. In the opinion of the Company, none of such litigation
in which it is currently a party, if adversely determined, will have a material
adverse effect on the Company's financial condition or its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
8
PART II
ITEM 5. MARKET FOR DVL'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock of DVL is traded on the over-the-counter market and is
quoted on the OTC Bulletin Board maintained by the NASD under the symbol "DVLN".
As of March 15, 2002, the last reported sale price of DVL common stock was $.20
per share. The following table sets forth, for the calendar periods indicated,
the high and low bid prices of the Common Stock as reported by the NASD for 2001
and 2000. Such prices are inter-dealer prices without retail mark-up, mark-down
or commission, and do not represent actual transactions.
2001 HIGH LOW
- ---- ---- ---
Fourth Quarter ....................................... $ .10 $ .07
Third Quarter ........................................ .09 .05
Second Quarter ....................................... .07 .05
First Quarter ........................................ .06 .05
2000 HIGH LOW
- ---- ---- ---
Fourth Quarter ....................................... $ .11 $ .05
Third Quarter ........................................ .13 .06
Second Quarter ....................................... .20 .06
First Quarter ........................................ .34 .13
At March 8, 2002, there were 3,510 holders of record of Common Stock of
DVL. No dividends have been paid since October 1990. At this time, DVL does not
anticipate paying any dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The data set forth below should be read in conjunction with other financial
information of DVL, including its consolidated financial statements and
accountants' report thereon included elsewhere herein and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Consolidated Statements of Operations Data
(In thousands except for per share data)
Year Ended December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Revenues
Affiliates $ 4,499 $ 4,812 $ 6,360 $ 5,794 $ 6,183
Other 5,056 1,251 1,375 528 70
-------- -------- -------- -------- --------
Total $ 9,555 $ 6,063 $ 7,735 $ 6,322 $ 6,253
======== ======== ======== ======= ========
Income (loss) before extraordinary gain $ 2,505 $ 199 $ 1,026 $ (758) $ (2,415)
Extraordinary gain on the settlement of 361 306 1,267 202 4,011
-------- -------- -------- -------- --------
indebtedness
Net Income (loss) $ 2,866 $ 505 $ 2,293 $ (556) $ 1,596
======== ======== ======== ======== ========
Basic earnings (loss) per share
Income (loss) before extraordinary gain $ .15 $ .01 $ .06 $ (.04) $ (.15)
Extraordinary gain .02 .02 .08 .01 .25
-------- -------- -------- ------- --------
Net Income (loss) $ .17 $ .03 $ .14 $ (.03) $ .10
======== ======== ======== ======= ========
Diluted earnings (loss) per share
Income (loss) before extraordinary gain .03 .01 .02 (.04) (.15)
Extraordinary gain .00 .00 .02 .01 .25
-------- -------- -------- ------- --------
Net Income (loss) $ .03 $ .01 $ .04 $ (.03) $ .10
======== ======== ======== ======= ========
10
Consolidated Balance Sheet Data
(In thousands)
As at December 31
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Total assets $79,690 $45,437 $41,858 $55,635 $64,942
======= ======= ======= ======= =======
Notes payable - residual interests $35,044 $ - $ - $ - $ -
======= ======= ======= ======= =======
Underlying mortgages payable $22,218 $26,019 $27,692 $38,644 $45,306
======= ======= ======= ======= =======
Long-term debt and notes payable $ 8,911 $10,781 $ 5,156 $ 9,937 $12,143
======= ======= ======= ======= =======
Shareholders' equity $10,955 $ 7,573 $ 7,068 $ 4,775 $ 5,279
======= ======= ======= ======= =======
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
INTRODUCTION
The Company is a commercial finance company which has been primarily
engaged in the ownership and servicing of a portfolio of secured commercial
mortgage loans, as well as managing numerous properties and the limited
partnerships which own such properties. During 2001, the Company purchased
ownership interests in residual interests in securitized receivables portfolios,
which should provide significant cash flow and income for the Company.
DVL believes that its anticipated cash flow provided by operations is
sufficient to meet its current cash requirements through January 2003. The
Company has in the past and expects in the future to continue to augment its
cash flow with additional cash generated from either the sale or refinancing of
its assets and/or borrowings.
The Company's current strategy is to (i) maximize the value of its assets
and meet its short-term working capital needs by continuing to manage,
administer and service its existing portfolio, (ii) obtain investments through
the use of bank borrowings, and (iii) expand through the acquisition of one or
more companies to generate positive income. There can be no assurance that the
Company will be able to identify or acquire businesses. While the Company
regularly evaluates and discusses potential acquisitions, the Company currently
has no understandings, commitments or agreements with respect to any
acquisitions. The Company anticipates that it would finance any possible future
acquisition through new borrowings or the issuance of its common or preferred
stock. During 2001, the Company purchased two new mortgage loans, purchased
securitized receivables portfolios, purchased a parcel of land and refinanced
other investments.
At December 31, 2001, the Company had net operating loss carryforward
("NOLS") aggregating approximately $57 million, which expire in various years
through 2019, including $50 million which expire through 2007. If the Company
generates taxable income in the future, the Company may be subject to
limitations on the use of its NOLS pursuant to the Internal Revenue Code. It is
anticipated that the taxable income associated with the residual interests will
utilize significant NOLS. There can be no assurance that a significant amount of
the Company's existing NOLS will be available to the Company at such time as the
Company desires to use them.
12
SIGNIFICANT EVENTS
ACQUISITION OF RESIDUAL INTERESTS IN SECURITIZED PORTFOLIOS
On March 30, 2001, the Company, through its consolidated subsidiary, S2,
acquired a 99.9% Class B member interest in Receivables II-A LLC, a limited
liability company ("Receivables II-A"), and on August 15, 2001 acquired a 99.9%
Class B member interest in Receivables II-B, LLC, a limited liability company
("Receivables II-B") from an unrelated party engaged in the acquisition and
management of periodic payment receivables. The Class B member interest entitles
the Company to be allocated 99.9% of all items of income, loss and distribution.
Receivables II-A and II-B solely receive the residual cash flow from five
securitized receivable pools after payment to the securitized noteholders.
The Company purchased its interest in Receivables II-A for an aggregate
purchase price of $26,134,264, including costs of $809,264 including the
issuance of a warrant, valued at $74,000, for the purchase of 2 million shares
of the common stock of DVL, exercisable until February 15, 2011 at a price of
$.20 per share. The purchase price was paid by the issuance of limited recourse
promissory notes by the consolidated subsidiary in the aggregate amount of
$25,325,000. Principal and interest are payable from the future monthly cash
flow. The notes mature on December 31, 2021, bear interest at the rate of 8%
annually, and are secured by a pledge of the consolidated subsidiary's interest
in Receivables II-A and all proceeds and distributions related to such interest.
The principal amount of the notes and the purchase price are adjusted, from time
to time, based upon the performance of the underlying receivables. DVL also
issued its guaranty of up to $2,532,500 of the purchase price. Payments, if any,
due under this guaranty are payable after December 31, 2021. The guaranty is
reduced by 10% of the principal paid. The amount of the guaranty at December 31,
2001 was $2,532,500.
In accordance with the purchase agreement, through December 31, 2001, the
residual interests in securitized portfolios and the notes payable to
Receivables II-A increased by approximately $699,000 based on the performance of
the underlying receivables.
The Company purchased its interest in Receivables II-B for an aggregate
purchase price of $9,657,000, including costs of $557,000 including the issuance
of a warrant, valued at $62,000, for the purchase of 1 million shares of the
common stock of DVL, exercisable until August 15, 2011 at a price of $.20 per
share. The purchase price was paid by the issuance of limited recourse
promissory notes by the consolidated subsidiary in the aggregate amount of a
$9,100,000. Principal and interest are payable from the future monthly residual
interest cash flow. The notes mature on August 15, 2020, bear interest at the
rate of 8% annually, and are secured by a pledge of the consolidated
subsidiary's interest in Receivables II-B and all proceeds and distributions
related to such interest. The principal amount of the notes and the purchase
price are adjusted from time to time, based upon the performance of the
underlying receivables. DVL also issued its guaranty of up to $910,000 of the
purchase price. The guaranty is reduced by 10% of the principal paid. The amount
of the guaranty at December 31,2001 was $899,464. Payments, if any, due under
this guaranty are payable after August 15, 2020.
In connection with the acquisitions of residual interests in Receivables
II-A and Receivables II-B an affiliate of NPO and the special director of the
Company will be paid investment banking fees of $900,000 for their services in
connection with the origination, negotiation and structuring of the
transactions. The total fees will be payable without interest, over the next
three years from a portion of the monthly cash flow generated by the
acquisitions.
13
The purchase agreements contain annual minimum and maximum levels of cash
flow that will be retained by the Company, after the payment of interest and
principal on the notes payable, which are as follows:
March 30, 2001 Transaction August 15, 2001 Transaction
-------------------------- ---------------------------
Years Minimum Maximum Minimum Maximum
----- ------- ------- ------- -------
2001 to 2009 $462,500 $500,000 $280,000 $380,000
2010 to final payment 700,000 750,000 $350,000 $400,000
on the notes*
* Final payment on the notes payable expected 2016 related to the March
transaction and 2018 for the August transaction.
The Company believes it will receive significant cash flow after final payment
of the notes payable.
BLACKACRE TRANSACTION
The Company had outstanding as of December 31, 2001 approximately
$2,400,000 aggregate principal amount of 10% redeemable notes due December 31,
2005. The notes are redeemable in cash, or at the option of DVL, for common
stock at a formula based upon the market price of the DVL common stock.
In an effort to reduce the potential future dilution to existing
shareholders resulting from a redemption of the notes for stock, in December
2001 the Company entered into an agreement with Blackacre Bridge Capital, LLC
("Blackacre") under which Blackacre exchanged $1,188,278 principal amount of
notes for 4,753,113 shares of DVL's common stock (the "Exchange Agreement").
This represents a conversion rate of $.25 per share.
The Exchange Agreement includes a provision which states that Blackacre
shall not sell or acquire any shares of the Company without the written consent
of the Board of Directors of the Company. The Board may withhold consent prior
to December 31, 2005, only if such transfer would, in the sole discretion of the
Board of Directors, jeopardize the Company's preservation of its Federal Income
Tax attributes under Section 382 of the Internal Revenue Code or in the case of
a transfer after December 31, 2005 would be materially adverse to the interest
of the Company.
If at any time after December 31, 2005, Blackacre is prevented from
disposing of any of its shares as a result of the Board of Directors
determination that the transfer would be materially adverse to the interest of
the Company, then Blackacre shall have the right to sell to the Company and the
Company shall be obligated to purchase up to the number of shares of common
stock which when added to all prior shares of common stock sold to the Company
by Blackacre would have an aggregate market value of not more than $1 million
dollars.
After the transaction, DVL had 21,313,563 shares of common stock issued and
outstanding.
The transaction resulted in an extraordinary gain of $482,000. As a result
of the exchange, Blackacre and its affiliates now own approximately 25% of DVL's
issued and outstanding common stock.
14
NPM AND NPO TRANSACTIONS
In an effort to alleviate its liquidity problems and to meet certain
mandatory debt repayment requirements, on September 27, 1996, the Company
entered into a loan transaction with NPM Capital, LLC ("NPM") under a certain
Amended and Restated Loan Agreement dated as of March 27, 1996 (the "Original
Loan Agreement"), pursuant to which NPM purchased certain loans from creditors
of the Company. The original principal loan amount from NPM was $8,382,000 (the
"Original Loan").
Under the terms of the original Loan, the principal balance was payable
over six years with interest accruing at the rate of 10.25% per annum. In May
1999, DVL repaid all amounts due under the NPM loan.
In connection with the transactions contemplated by the Original Loan
Agreement, in March 1996, the Company and NPO, an affiliate of certain
principals of NPM, entered into an Asset Servicing Agreement (the "Asset
Servicing Agreement"), pursuant to which NPO is providing the Company with
administrative and advisory services relating to the assets of the Company and
its Affiliated Limited Partnerships. In consideration for such services, the
Company pays NPO $600,000 per year (with cost of living increases) over the
seven-year term of the original agreement, subject to early termination under
certain conditions. During 2001 the agreement was extended under the same terms
and conditions for another five years to March 2008. The current annual fee is
$645,000. The Company paid to NPO $1,038,000 and $1,866,000 in 2001 and 2000,
respectively. As of December 31, 2001 and 2000 the Company owed accrued fees of
$28,000 and $373,000, respectively.
In connection with the Original Loan Agreement, certain affiliates of NPM
acquired an aggregate of 1,000,000 shares (the "Base Shares") of the Company's
Common Stock for $200,000. The Base Shares currently represent approximately
4.7% of the outstanding Common Stock of the Company. An affiliate of NPM also
acquired 100 shares of preferred stock of the Company for $1,000. The Company
issued to affiliates of NPM warrants (the "Warrants"), exercisable as of January
1999, to purchase such number of shares of Common Stock as, when added to the
Base Shares, represent an aggregate of 49% of the outstanding Common Stock of
the Company on a fully-diluted basis. The original exercise price of the
Warrants was $.16 per share, subject to applicable anti-dilution provisions and
subject to a maximum aggregate exercise price of approximately $1,900,000. The
Warrants expire on December 31, 2007. The Warrants were valued for financial
statement purposes at $516,000 at the date of issuance and such value resulted
in a debt discount which was amortized using the effective interest rate method.
Through March 2002, no Warrants have been exercised.
The possibility that some or all of the Warrants may be exercised creates
the potential for significant dilution of the current stockholders. The actual
dilutive effect cannot be currently ascertained, since it depends on whether,
and if so to what extent, the Warrants are exercised.
RECENT DEBT TENDER OFFERS AND REDEMPTIONS
During 2000 and 2001, the Company redeemed an aggregate of $721,000 of the
Company's 10% redeemable promissory notes due December 31, 2005 (the "Notes")
for cash at the face value plus accrued interest of approximately $37,000. As of
December 31, 2001, $162,000 has been paid and the remaining $596,000 to be paid
has been accrued, but will no longer accrue interest.
15
Since October 1997, the Company conducted three cash tender offers (the
"Offers") at a Tender Offer price of $0.12 per $1.00 principal amount of the
Notes. The first two Offers were financed with a loan from Blackacre discussed
below.
The results were as follows:
Principal Amount Principal Amount
of Notes of Notes Extraordinary
Purchased by Purchased by Gains to
DVL Blackacre DVL
---------------- ---------------- ------------
Offer # 1 $ 6,224,390 $ 392,750 $ 202,000
(1998)
$ 2,906,000
(1997)
Offer # 2 $ 2,413,652 $ 423,213 $ 1,267,000
(1999)
Offer # 3 $ 378,270 $ - 0 - $ 306,000
(2000)
The Company has the option to redeem the outstanding Notes by issuing
additional shares of Common Stock with a then current market value (determined
based on a formula set forth in the Notes), equal to 110% of the face value of
the Notes plus any accrued and unpaid interest thereon. Because the applicable
market value of the Common Stock will be determined at the time of redemption,
it is not possible currently to ascertain the precise number of shares of Common
Stock that may have to be issued to redeem the outstanding Notes. The redemption
of the Notes may cause significant dilution for current shareholders. The actual
dilutive effect cannot be currently ascertained since it depends on the number
of shares to be actually issued to satisfy the Notes. The Company currently
intends to exercise at some point in the future its redemption option to the
extent it does not buy back the outstanding Notes by means of cash tender offers
or cash redemptions.
Notes with an aggregate principal amount of approximately $2,400,000 remain
outstanding as of December 31, 2001. The Offers, redemptions and the exchange of
Notes for Common Stock by Blackacre have reduced the potential dilutive
effective on the Company's current stockholders that would result from
redemption of the notes for shares of Common Stock. However, given the aggregate
principal amount of Notes which remains outstanding, the potential dilutive
effect of such a redemption is still significant.
Opportunity Fund
- ----------------
In April 1998, DVL, an affiliate of Blackacre and affiliates of NPO entered
into an Opportunity Agreement providing for the Opportunity Fund, pursuant to
which entities would be formed, from time to time, to enter into certain
transactions involving the acquisition of limited partnership interests in the
assets of, or mortgage loans to, Affiliated Limited Partnerships or other assets
in which the Company has an interest. These investment opportunities were to be
presented to the Opportunity Fund on a first-refusal basis, if the Company, due
to financial constraints, was unable to pursue such business opportunities with
its own funds.
16
All of the required capital contributions were to be provided by the other
members. The Company was to receive up to 20% of the profits from an opportunity
after the other investors received a return of their investment plus preferred
annual returns ranging from 12% to 20%.
The Opportunity Agreement which expired, has not been renewed or extended.
While the fund no longer has the right of first refusal with regard to
opportunities, the Company may continue to present opportunities to the fund.
As of March 1, 2002, the Opportunity Fund has purchased 15 wrap mortgages
of Affiliated Limited Partnerships from unaffiliated third parties (seven in
1998, one in 1999 and seven mortgages in 2000), acquired limited partnership
units from unaffiliated individuals in three Affiliated Limited Partnerships,
and acquired an ownership of interest in a property of an Affiliated Limited
Partnership.
During 2000, DVL purchased three of the mortgages owned by the Opportunity
Fund and the Opportunity Fund was fully satisfied on an additional four mortgage
loans, when each of the properties that secured these four mortgage loans were
sold. During 2001, a newly formed, wholly-owned subsidiary of DVL purchased two
of mortgages owned by the Opportunity Fund and the Opportunity Fund was fully
satisfied on an additional two mortgage loans as each of the properties that
secured these two mortgage loans were sold. In December 2001, the Opportunity
Fund sold its ownership interest in the property in Kearny, NJ to an entity in
which certain partners are affiliates of NPO. As of March 1, 2002, the
Opportunity Fund owns four mortgages. During 2001, DVL was paid approximately
$280,000 from the investments by the Opportunity Fund, of which $189,000 was
used to pay amounts owed by DVL under a note in favor of an entity that is part
of the Opportunity Fund.
RESULTS OF OPERATIONS
DVL had income before extraordinary gain, net income after extraordinary
items, and extraordinary gains, as follows:
2001 2000 1999
---- ---- ----
Income before extraordinary gain $2,505,000 $ 199,000 $1,026,000
Net income $2,866,000 $ 505,000 $2,293,000
Extraordinary gains $ 361,000 $ 306,000 $1,267,000
Interest income on mortgage loans from affiliates and interest expense on
underlying mortgages decreased from 1999 through 2001, as a result of a
reduction in the size of DVL's mortgage portfolio. The decrease from 1999 to
2000 was partially offset by additional interest income and interest expense
from the purchase of eight new mortgage loans, some of which have underlying
mortgages.
Gains on satisfaction of mortgage loans were as follows:
2001 2000 1999
---- ---- ----
$ 615,000 $ 256,000 $1,639,000
These gains resulted from the Company collecting net proceeds on the
satisfaction of mortgage loans that were greater than the Company's carrying
value.
17
Transaction and other fees from Affiliated Limited Partnerships were as follows:
2001 2000 1999
---- ---- ----
$ 260,000 $ 413,000 $ 502,000
Transaction and other fees were earned in connection with the sales of
partnership properties and refinancings of underlying mortgages. The decrease
from 1999 through 2001 was the result of fewer transactions in 2000 and 2001.
Distributions from investments in affiliates decreased in 2001 compared to
2000 due to fewer sales of Affiliated Limited Partnerships in which DVL owns
limited partnership units. Distributions were higher in 1999 compared to 2000
due to the distribution of proceeds to limited partners resulting from the
refinancing of certain underlying mortgages. Distributions from investments in
2000 included approximately $77,000 distributed to the Company from an
Affiliated Limited Partnership that distributed excess cash to its limited
partners.
Interest income on residual interests and interest expense on the related
notes payable arose as DVL completed the acquisitions in March 2001 and August
2001.
Net rental income from others was as follows:
2001 2000 1999
---- ---- ----
$ 720,000 $ 523,000 $ 532,000
The primary reason for the increase in net rental income from 1999 to 2001
was the result of lower costs. The primary reason for the reduction in costs was
due to a reduction in lease obligations resulting from the purchase in December
2000 of certain real estate which the Company had previously leased. The
increase in net rental income was partially offset by a rent reduction granted
to a tenant and greater depreciation expense due to the purchase of the real
estate assets, as well as higher insurance costs.
The Company has one large tenant which has been experiencing financial
difficulties. As a result, the tenant has been paying rent equal to 70% of its
monthly rental and 100% of its share of monthly operating expenses. The Company
has not agreed to reduce the monthly rental and continues to invoice for the
full sum but has taken no other action as of this time. The monthly reduction in
rent being paid is approximately $30,000.
Management fees from others were as follows:
2001 2000 1999
---- ---- ----
$ 804,000 $ 500,000 $ 533,000
Included in management fees were incentive management fees of $442,900,
$312,500 and $420,000 received during 2001, 2000 and 1999, respectively, from
PBD Holdings, Inc. an entity that is owned by affiliates of NPO and BCG ("PBD").
Incentive management fees are earned when properties owned by PBD are sold;
therefore, the fees earned by the Company vary based on the sales proceeds. PBD
currently has one parcel of land remaining.
The Company also provided property management and administrative services
for which it received fees of $361,000, $138,000 and $36,000 for 2001, 2000 and
1999 respectively, which are included in management fees. The increases in
property management and administrative services from 1999 to 2001 were a result
of the Company obtaining new property management contracts. The fees for 2001
included non recurring fees of $174,000.
18
Distributions from investments from others increased in 2001 from 2000
primarily as a result of receiving $280,000 in distributions from investments in
the opportunity funds and $348,000 in distributions above the carrying value of
other investments.
Distribution from investments from others increased in 2000 from 1999
primarily as a result of the purchase by the Company of certain real estate
assets which the Company previously had been leasing under a master lease
agreement. The Company owned limited partnership units in the seller of the real
estate and as a result, the Company received approximately $121,000 from the
sale.
General and administrative expenses increased in 2001 from 2000 and
decreased in 2000 as compared to 1999. The primary reason for the increase in
2001 from 2000 was increased salaries and hiring costs as well as rent costs for
the Company's office headquarters due to escalation charges and lower rental
reimbursements. The primary reasons for the decrease in 2000 from 1999 were a
decrease in salaries and payroll related costs, as well as, a reduction in
stockholder communication costs. These decreases were partially offset by
greater franchise and tax costs.
The asset servicing fee to NPO increased in 2001 from 2000 and 1999 due to
an increase in the consumer price index, as provided for in the agreement.
Legal and professional fees increased in 2001 as compared to 2000 but were
less in 2000 than in 1999. Legal and professional fees increased in 2001 from
2000 primarily due to expenses incurred in evaluating a potential acquisition
that was not completed and the payment of fees for additional services provided
by NPO. The Company has not employed an in-house legal counsel since 1998 and;
therefore, legal fees vary depending on the number and sophistication of
transactions that are executed.
Legal and professional fees decreased slightly in 2000 from 1999 due to the
Company completing less transactions.
Interest expense on litigation settlement Notes would have increased in
each year from 1999 through 2001 because of compounding of interest; however,
the Company's efforts to reduce the principal amount of Notes outstanding
through tender offers, redemptions and the exchange of Notes for common stock by
Blackacre have resulted in the interest expense remaining fairly consistent. The
exchange of the Notes by Blackacre in December, 2001 should significantly reduce
the interest expense on the litigation settlement Notes in the future.
Interest expense to affiliates consists primarily of interest on the
accrued NPO asset servicing fees, interest on the loan from Blackacre, and
interest expense on the loan to NPM.
Interest expense on the loan from Blackacre increased from 1999 through
2001 as a result of compounding interest. The Company made payments on the loan
from Blackacre of approximately $390,000 during 2001. These payments
significantly reduced the amount of interest expense recorded for 2001.
Interest expense associated with the accrued NPO asset servicing fee
decreased from 1999 through 2001. Interest accrues on all amounts due to NPO and
during 1999 through 2001 the amount due was reduced significantly. As of
December 31, 2001 $28,000 remains due to NPO.
Interest expense on the loan to NPM decreased from $665,000 in 1999 to $-0-
in 2000 as a result of the repayment of this loan in 1999. The financing costs
of the NPM Loan, as well as the value of the warrants issued in connection with
obtaining such loan, were amortized proportionately as such loan was repaid. As
the loan was totally repaid in 1999, all remaining costs were amortized in 1999.
19
Interest expense relating to other debts increased from 1999 through 2001.
During 2000, the Company borrowed an aggregate of $6,425,000 to fund the
acquisition of eight new mortgage loans, the purchase of all the land,
buildings, and improvements from a limited partnership which owned seven
buildings in an industrial park in New Jersey, and refinanced three existing
mortgage receivables. The Company paid $700,000 towards the principal balance of
one of such loans during 2000 and re-borrowed the $700,000 to partially fund the
acquisition of additional mortgage loans. Also, during the first quarter of
2001, the Company borrowed $200,000 to purchase a parcel of land.
Extraordinary gains in 2001, 2000 and 1999 of $525,000, $306,000 and
$1,267,000 respectively were the result of tender offers and redemptions at less
than book value of the Notes. The Company also realized an extraordinary loss in
2001 of $164,000 resulting from the redemption of Notes at face value. The net
extraordinary gain for 2001 was $361,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance was $2,987,000 at December 31, 2001, compared
with $1,184,000 at December 31, 2000.
The Company's cash flow from operations is generated principally from
rental income from its leasehold interests and ownership of real estate,
distributions in connection with residual interests in securitized portfolios,
interest on its mortgage portfolio, management fees from third parties and
affiliates and transaction and other fees received as a result of the sale
and/or refinancing of partnership properties and mortgages.
The Company believes that its anticipated cash flow provided by operations
is sufficient to meet its current cash requirements through January 2003. DVL
believes that its current liquid assets and credit resources will be sufficient
to fund operations on a short-term basis as well as on a long-term basis.
The Company's acquisition in 2001 of its member interest in Receivables
II-A and Receivables II-B should provide significant liquidity to the Company.
The purchase agreements contain annual minimum and maximum levels of cash
flow that will be retained by the Company, after the payment of interest and
principal on the notes payable, which are as follows:
March 30, 2001 Transaction August 15, 2001 Transaction
-------------------------- ---------------------------
Years Minimum Maximum Minimum Maximum
----- ------- ------- ------- -------
2001 to 2009 $462,500 $500,000 $280,000 $380,000
2010 to final payment 700,000 750,000 $350,000 $400,000
on the notes*
* Final payment on the notes payable expected 2016 related to the March
transaction and 2018 for the August transaction.
The Company believes it will receive significant cash flow after final payment
of the notes payable.
20
Acquisitions and Financings
- ---------------------------
Loans payable which are scheduled to become due through 2006 are as follows:
Outstanding
Original Principal
Loan Balance at Due
Purpose Creditor Amount Dec. 31, 2001 Date
- ------- -------- ---------- -------------- ----
Repurchase of Notes
Issued by the Company Blackacre(1) $ 1,560,000 $ 1,942,000 09/30/03
Purchase of Mortgages Unaffiliated Bank(2)(3) $ 1,000,000 $ 820,000 05/01/06
Purchase of a Mortgage
and Refinancing of
Existing Mortgages Unaffiliated Bank(2)(3) $ 1,450,000 $ 1,035,000 04/01/05
Purchase of Real Estate
Assets Unaffiliated Bank(4) $ 3,000,000 $ 3,000,000 06/01/02
Purchase of Land Unaffiliated Bank(5) $ 200,000 $ 200,000 06/01/02
Purchase of Mortgages Unaffiliated Bank(6) $ 400,000 $ - 05/01/06
(1) Interest rate is 12% per annum, compounded monthly. Interest is added to
principal.
(2) This loan self-amortizes.
(3) Interest rate is prime plus 1.5% per annum.
(4) Interest rate is 10% per annum.
(5) Interest rate is 9.5% per annum.
(6) Interest rate is 8.25% per annum. This loan was originated in January of
2002.
The Company is currently negotiating an extension of the two loans which are due
June 1, 2002.
21
In early 2001, DVL purchased the fee title to a parcel of land in Kearny,
NJ from an unrelated third party for a purchase price of $365,000, plus closing
costs. The acquisition was funded with bank financing in the original principal
amount of $200,000 and cash of approximately $175,000. This bank financing
accrues interest at the rate of 9.5% per annum and requires monthly
interest-only payments. The Company extended the loan under the same terms until
June 1, 2002 by paying an extension fee of $750.
During 2001, DVL purchased two mortgage loans from an entity that is part
of the Opportunity Fund which are secured by real estate owned by Affiliated
Limited Partnerships in which DVL is the general partner. The loans were
purchased for an aggregate price of $400,000, paid in cash. The loans were
subsequently refinanced in 2002 and DVL realized approximately $380,000 from the
refinancing after closing costs.
The amounts obtained from the refinancings were primarily based on the
value of the base rents due from tenants during the period of the base lease
term subsequent to the payoff of the existing first mortgages. As a result of
the refinancings, the Company's asset base available for future refinancings has
diminished.
IMPACT OF INFLATION AND CHANGES IN INTEREST RATES
- -------------------------------------------------
The Company's portfolio of mortgage loans made to Affiliated Limited
Partnerships consists primarily of loans made at fixed rates of interest.
Therefore, increases or decreases in market interest rates are generally not
expected to have an effect on the Company's earnings. Other than as a factor in
determining market interest rates, inflation has not had a significant effect on
the Company's net income.
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DVL has no substantial cash flow exposure due to interest rate changes for
long-term debt obligations, because a majority of the long-term debt is at fixed
rates. DVL primarily enters into long-term debt for specific business purposes
such as the repurchase of debt at a discount or the acquisition of mortgage
loans.
DVL's ability to realize on its mortgage holdings is sensitive to interest
rate fluctuations in that the sales prices of real property and mortgages vary
with interest rates.
The table set forth below presents principal amounts and related weighted
average interest rates by year of maturity for DVL's investment portfolio and
debt obligations.
There-
In Thousands 2002 2003 2004 2005 2006 After Total
- ------------------------------------------------------------------------------------
ASSETS
Cash equivalents $2,987 $ 2,987
Variable rate
Average interest rate 1.3% 1.3%
LONG TERM DEBT
Fixed rate $7,377 $2,421 $2,037 $2,115 $2,786 $10,651 $27,387
Average interest rate 9.03% 9.03% 9.03% 9.03% 9.03% 9.03% 9.03%
Variable rate $ 466 $ 519 $ 707 $ 173 $ -0- $ -0- $ 1,865
Average interest rate 11% 11% 11% 11% -0- -0-
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUPPLEMENTARY DATA
------------------
Quarterly Data (Unaudited)
For the Year Ended December 31, 2001
(In Thousands Except Share and Per Share Data)
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
Total Revenue $ 1,546 $ 2,401 $ 2,436 $ 3,172 $ 9,555
Total Expenses 1,474 1,985 2,082 2,479 8,020
Income before
extraordinary gain 72 416 354 1,663 2,505
Extraordinary gain 14 - - 347 361
Net income 86 416 354 2,010 2,866
Basic earnings per
share:
Income before extra-
ordinary gain $ .01 $ .03 $ .02 $ .10 $ .15
Extraordinary gain $ .00 $ .00 $ .00 $ .02 $ .02
Net income $ .01 $ .03 $ .02 $ .12 $ .17
Diluted earnings per
share:
Income before extra-
ordinary gain $ .00 $ .00 $ .00 $ .02 $ .03
Extraordinary gain $ .00 $ .00 $ .00 $ .01 $ .00
Net income $ .00 $ .00 $ .00 $ .03 $ .03
Weighted average
shares outstanding:
Basic 16,560,450 16,560,450 16,560,450 17,020,429 16,599,517
Diluted 147,071,400 125,829,094 91,295,902 72,820,396 124,772,115
Quarterly Data (Unaudited)
For the Year Ended December 31, 2000
(In Thousands Except Share and Per Share Data)
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
Total Revenue $ 1,257 $ 1,523 $ 1,448 $ 1,835 $ 6,063
Total Expenses 1,383 1,504 1,405 1,572 5,864
Income (loss) before
extraordinary gain (126) 19 43 263 199
Extraordinary gain 23 126 107 50 306
Net income (loss) (103) 145 150 313 505
Basic earnings (loss)
per share:
Income (loss) before
extraordinary gain $ (0.01) $ 0.00 $ 0.00 $ 0.02 $ 0.01
Extraordinary gain $ 0.00 $ 0.01 $ 0.01 $ 0.00 $ 0.02
Net income (loss) $ (0.01) $ 0.01 $ 0.01 $ 0.02 $ 0.03
Diluted earnings (loss)
per share:
Income (loss) before
extraordinary gain $ (0.01) $ 0.00 $ 0.00 $ 0.00 $ 0.01
Extraordinary gain $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Net income (loss) $ (0.01) $ 0.00 $ 0.00 $ 0.00 $ 0.01
Weighted average
shares outstanding:
Basic 16,560,450 16,560,450 16,560,450 16,560,450 16,560,450
Diluted 16,560,450 87,278,971 107,114,914 96,337,586 96,337,586
Basic and diluted earnings per share are computed independently for each of the
periods. Accordingly the sum of the quarterly earnings per share amounts may not
agree to the total for the year.
The financial statements and notes thereto, together with the accountants'
report thereon of Richard A. Eisner & Company, LLP, are set forth on pages F-1
through F-32, which follow. The financial statements are listed in Item 14(a)(1)
hereof.
24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF DVL
A. The following table sets forth the name of each director and executive
officer of the Company, and the nature of all positions and offices with the
Company held by him at present. The term of all directors (other than the
special purpose director) expires at the Company's next annual meeting of
stockholders, which will be held on a date to be scheduled. The term of all
executive officers expires at the next annual meeting of directors, to be held
immediately thereafter.
NAME POSITION
Frederick E. Smithline Chairman of the Board
Myron Rosenberg Director
Alan E. Casnoff Director, President and Chief Executive Officer
Jay Thailer Executive Vice President and Chief Financial
Officer
Gary Flicker Executive Vice President
Keith B. Stein Special Purpose Director
In addition to three directors, who have all of the powers normally granted
to corporate directors, the Company has one special purpose director, who was
elected in 1996 by the holder of the Class A Preferred Stock. The special
purpose director has no right to vote at meetings of the Board, except as to
Bankruptcy Matters (as such term is defined in the Certificate of
Incorporation).
B. The following is a brief account of the recent business experience of
each director and executive officer and directorships held with other companies
which file reports with the Securities and Exchange Commission:
FREDERICK E. SMITHLINE (age 69) has served as Chairman of the Board of the
Company since 1990 and as a director since 1982. From September 1989 to May
1996, Mr. Smithline was of counsel to the law firm of Epstein, Becker & Green,
P.C., New York, New York. He is currently in private practice as an attorney.
MYRON ROSENBERG (age 73) has served as a director of the Company since
1973. Mr. Rosenberg is currently a financial consultant. Through December 1996,
Mr. Rosenberg served as Executive Vice President of Rosenthal & Rosenthal, Inc.,
New York, New York, a commercial finance concern, where he had been employed
since 1961.
ALLEN YUDELL (age 62) served as a director of the Company from September
1996 until November 2001 when he resigned for personal reasons.
25
ALAN E. CASNOFF (age 58) has served as President of the Company since
November 1994, and was appointed as a director in November 2001 upon the
resignation of Allen Yudell. Mr. Casnoff served as Executive Vice President of
the Company from October 1991 to November 1994. Mr. Casnoff has maintained his
other business interests during this period and thus has devoted less than full
time to the business affairs of DVL. From November 1990 to October 1991, Mr.
Casnoff served as a consultant to the Company and from 1971 to October 1991, as
Secretary of the Company. Since May 1991, Mr. Casnoff has also served as a
director of Kenbee Management, Inc. ("Kenbee"), an affiliate of the Company, and
as President of Kenbee since November 1994. Since 1977, Mr. Casnoff has also
been a partner of P&A Associates, a private real estate development firm
headquartered in Philadelphia, Pennsylvania. Since 1969, Mr. Casnoff was
associated with various Philadelphia, Pennsylvania law firms which have been
legal counsel to the Company and Kenbee. Since July 1999, he is of counsel to
Klehr, Harrision, Harvey, Brazenburg & Ellers ("Klehr").
JAY THAILER (age 33) has served as Chief Financial Officer and Executive
Vice President since November 2001. From August 1998 to November 2001, Mr.
Thailer served as Vice President and Secretary of the Company. Mr. Thailer is a
Certified Public Accountant. Prior to joining the Company in 1997, Mr. Thailer
was associated with the accounting firm of Sobel & Company, C.P.A.'s where his
clients included real estate development companies.
GARY FLICKER (age 42) was Chief Financial Officer of the Company from April
1997 through November 2001. Mr. Flicker continues to be employed by the Company
as Executive Vice President; however, Mr. Flicker has relocated out of New York
and will cease employment with the Company as of May 1, 2002.
KEITH B. STEIN (age 45) has been a special purpose director of the Company
since September 1996. Mr. Stein is the Chairman, Chief Executive Officer, and a
director of National Auto Receivables Liquidation, Inc. (NASDAQ/BB: NATA), a
specialty automobile finance company. From March 1993 to September 1994, he
served as Senior Vice President, Secretary and General Counsel of WestPoint
Stevens, Inc., a textile company, after having served the same company from
October 1992 to February 1993 in the capacity of Acting General Counsel and
Secretary. From May 1989 to February 1993, Mr. Stein was associated with the law
firm of Weil, Gotshal & Manges LLP. Mr. Stein is an affiliate of NPM.
(c) COMPLIANCE WITH SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who are beneficial owners of more
than 10% of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Commission. Officers,
directors, and greater than 10% beneficial owners are required by Commission
regulations to furnish the Company with copies of all Section 16(a) forms they
file. To the Company's knowledge, based solely on review of such reports
furnished to the Company, and written representations that no other reports were
required during or with respect to the fiscal year ended December 31, 2001, all
Section 16(a) filing requirements applicable to such persons were satisfied.
26
ITEM 11. EXECUTIVE COMPENSATION
A. SUMMARY COMPENSATION TABLE
The following table sets forth all compensation awarded to, earned by or
paid to the following persons for services rendered to the Company in 2001 and
(if applicable) in 2000 and 1999: (1) the person serving as the Company's chief
executive officer during 2001; (2) those other persons who were serving as
executive officers as of the end of 2001 whose compensation exceeded $100,000
during 2001:
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation Long-Term Compensation Awards
--------------------------------------- ------------------------------
Securities
Other Annual Underlying LTIP
Name Year Salary Bonus Compensation Options/SAR Payouts
---- ---- ---------- ------- ---------------- --------------- -------
Alan E. Casnoff 2001 $120,000 $ 10,000 - 100,000(3) -
President and 2000 120,000 - - - -
Chief Executive 1999 120,000 10,000 - - -
Officer
Jay Thailer 2001 $110,000 $ 15,000 - 15,000(3) -
Executive Vice
President and Chief
Financial Officer(2)
Gary Flicker 2001 $140,600 $ 20,000 - - -
Executive Vice 2000 136,000 17,500 - 25,000(3) -
President (1) 1999 132,500 17,500 - 25,000(3) -
- -------------------
(1) Mr. Flicker became Vice President and Chief Financial Officer of the
Company on April 16, 1997 and Executive Vice President in September 1998.
Mr. Flicker served as Chief Financial Officer until November 8, 2001.
(2) Mr. Thailer became Executive Vice President and Chief Financial Officer of
the Company on November 8, 2001.
(3) Consists of options to purchase shares of Common Stock under the 1996 Stock
Options Plan.
27
B. OPTION GRANTS IN LAST FISCAL YEAR
---------------------------------
The following table sets forth information as to options granted in 2001
under the DVL, Inc. 1996 Stock Option Plan (the "Plan") to the executive
officers named in the Summary Compensation Table. The Plan provides for the
grant of options to purchase up to 2,500,000 shares of Common Stock to Employees
and Non-Employee Directors (in each case as defined in the Plan).
The Plan provides that any one employee wishing to exercise an option must
give prior notice to the Board. If the Board determines, in its reasonable
discretion, that such exercise will cause an "ownership change" (as defined in
Section 382 of the Internal Revenue Code of 1986, as amended) in the Company
which would have an adverse effect on the Company's use of its NOLS (as defined
in Section 382) (an "Adverse Ownership Change"), the Board shall deny approval
of the exercise. If the Board determines that such exercise would not cause an
Adverse Ownership Change, it shall approve the exercise. The conditions
described in this paragraph are referred to below as the "Section 382
Restrictions".
As of December 31, 2001, options to purchase 1,473,131 shares were
outstanding under the Plan and 1,027,869 shares were available for issuance upon
exercise of options which may be granted in the future.
28
Individual Grants Grant Date Value
------------------------------------------------------------- -------------------
Percentage of
Total Options
Number of Securities Granted to Exercise
Underlying Options Employees in Price Expiration Grant Date
Name(1) Granted(1) Fiscal Year(2) ($/Sh)(3) Date Present Value (4)
- ------------------- -------------------- -------------- --------- ---------- -------------------
Alan Casnoff 100,000 80% .075 08/07/2011 $7,000
Jay Thailer 15,000 12% .075 08/07/2011 $1,050
(1) Individual grants to employees become exercisable in whole or in
installments, and at such times, and subject to the fulfillment of any
conditions on exercisability (in addition to the Section 382 Restrictions)
as may be determined by the Compensation Committee of the Board of
Directors (the "Committee") at the time of grant. All options listed in the
above table became exercisable upon grant, subject only to the Section 382
Restrictions. The Committee also has the discretion to establish provisions
relating to the forfeiture of an option in connection with the employee's
termination of employment with the Company, or to grant any option without
a forfeiture provision. Each of the options listed in the above table
provides that the option will be forfeited upon termination of employment
for "cause" (as therein defined).
(2) Total options granted to employees in fiscal year 2001 was 125,000.
(3) Represents the fair market value of the underlying shares on the date of
grant (determined in accordance with the Plan as the closing price of the
Common Stock on the OTC Bulletin Board).
(4) The Black-Scholes option pricing model was chosen to estimate the grant
date present value of the options set forth in this table. The Company does
not believe that the Black-Scholes model, or any other model, can
accurately determine the value of an option. Accordingly, there is no
assurance that the value, if any, realized by an option holder will be at
or near the value estimated by the Black-Scholes model. Future compensation
resulting from option grants is based solely on the performance of the
Company's stock price. The Black-Scholes ratio of .07 was determined using
the following assumptions: a volatility of 85%, an historic average
dividend yield of 0%, a risk free interest rate of 4.98% and a 10 year
projected exercise period.
29
C. FISCAL YEAR-END OPTION VALUES
-----------------------------
The following table sets forth information as to options held as of the end
of 2001 by the executive officers named in the Summary Compensation Table. No
options were exercised by said officers in 2001. All options held by said
officers at fiscal year-end were immediately exercisable.
Number of Securities Underlying Value of Unexercised
Unexercised Options At Fiscal In-The-Money Options
Name Year End At Fiscal Year End
---- ------------------------------- ---------------------
Alan E. Casnoff 475,000 none
Gary Flicker 125,000 none
Jay Thailer 42,000 none
D. COMPENSATION OF DIRECTORS
Regular directors who are not officers or employees of the Company ("Non-
Employee Directors") presently receive a director's fee of $1,500 per month,
plus $500 for each Audit Committee meeting of the Board of Directors attended.
Directors who are officers or employees of the Company receive no compensation
for their services as directors or attendance at any Board of Directors or
committee meetings. Mr. Casnoff, who is a director, is also President and Chief
Executive Officer of the Company. The special purpose director receives no
compensation for his service as a director or attendance at any Board of
Directors or committee meetings.
On September 17, 1999, 2000 and 2001, options to purchase 15,000 shares of
Common Stock were granted to each of the three directors (Messrs. Rosenberg,
Smithline and Yudell (who resigned as a director in November 2001)). The options
were granted under the Plan, which provides for automatic grants of options for
15,000 shares to each incumbent regular director on each anniversary of the
adoption of the Plan. The options vested immediately and are exercisable for a
term of ten (10) years from the date of grant. The exercise price is equal to
the fair market value on the date of grant.
E. EMPLOYMENT CONTRACTS AND ARRANGEMENTS
Gary Flicker entered into an Employment Agreement with the Company,
effective as of April 16, 1997, providing for his employment as Vice President
and Chief Financial Officer for a one-year term at an annual salary of $120,000,
and for the grant of 50,000 stock options under the Plan upon commencement of
employment. Effective January 1, 2002, 2001, and 2000, Mr. Flicker's annual
salary was $140,600, $140,600 and $136,500, respectively. The Employment
Agreement with Mr. Flicker expired on April 16, 1998 and was not renewed.
However, Mr. Flicker continues to be employed by the Company, without an
employment agreement, as Executive Vice President; however, Mr. Flicker has
relocated out of New York and will cease his employment with the Company as of
May 1, 2002.
The Company entered into an Indemnification Agreement with Mr. Flicker,
effective upon commencement of his employment, contractually obligating the
Company to indemnify him to the fullest extent permitted by applicable law, in
connection with claims arising from his service to, and activities on behalf of,
the Company.
Jay Thailer became a Vice President of the Company in August 1998 at which
time the Company entered into an Indemnification Agreement with Mr. Thailer
which is equivalent to agreement entered into with Mr. Flicker. Mr. Thailer
currently serves as Chief Financial Officer and Executive Vice President to the
Company.
30
F. BOARD OF DIRECTORS INTERLOCKS AND INSIDER PARTICIPATION
During 2001, no executive officer of the Company served as a director of or
a member of a compensation committee of any entity for which any of the persons
serving on the Board of Directors of the Company is an executive officer.
G. BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
The independent members of the Board of Directors of the Company, Messrs.
Rosenberg and Smithline act in the stead of a formal compensation committee. In
such capacity, the Board of Directors reviews compensation of the executive
officers of the Company to determine if such compensation is in line with
similar organizations and determine the compensation of the executive officers
of the Company.
The Company's executive compensation program is designed to attract and
retain qualified executives with competitive levels of compensation that are
related to performance goals and which recognize individual initiative and
accomplishments. The principal components of the Company's executive
compensation program are fixed compensation in the form of base salary, variable
compensation in the form of annual cash bonuses and stock options.
The Company is subject to Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"), which limits the deductibility of certain
compensation payments to its executive officers. The Company does not have a
policy requiring the Board to qualify all compensation for deductibility under
this provision. The Board, however, considers the net cost to the Company in
making all compensation decisions and will continue to evaluate the impact of
this provision on its executive compensation.
Base Salary: Any discretionary increases in base salary are based on an
annual evaluation by the Board of the performance of the Company and each
executive officer, and take into account any new responsibilities of the
executive, his or her experience and years of service with the Company and a
comparison of base salaries for comparable positions at similar companies.
Annual Bonus: The Board may decide to award a bonus to any executive
officer. Any awards of discretionary bonuses are based on an annual evaluation
by the Board of the performance of the Company and each executive officer, and
take into account any special contributions of the executive officer. Messrs.
Flicker, Casnoff and Thailer were awarded a discretionary bonus of $20,000,
$10,000 and $15,000, respectively in 2001.
Stock Options: The Stock Option Plan was adopted by the Board in April 1996
and ratified by the stockholders in September 1996. The Board believes that the
significant equity interests in the Company held by the Company's executive
officers have served to link the interest of the executive officers with those
of the stockholders. Under the Company's Stock Option Plan, options to purchase
shares of Common Stock may be granted to the executive officers of the Company.
The Board believes that the grant of stock options is, and will continue to be,
an important component of the Company's executive compensation program. During
2001, Mr. Thailer was granted an amount of stock options under the Stock Option
Plan as provided in the table set forth herein entitled "Option Grants in Last
Fiscal Year." In determining the size of such grants to executive officers, the
Board reviewed various factors, including the executives' total compensation
package and the performance of the Company and each executive officer. The
stockholdings of an executive officer were not a factor in determining the size
of such grants.
Chief Executive Officer Compensation: Mr. Casnoff, the Company's President
and Chief Executive Officer, is not party to an employment agreement with the
Company, and Mr. Casnoff's compensation is established in accordance with the
principles described above in connection with the compensation of executive
officers. The Board reviews Mr. Casnoff's performance and determines any base
salary adjustments, additional bonuses and stock option grants considering the
various factors described above with respect to executive officers.
31
Mr. Casnoff's base salary was $120,000 for fiscal 2001 which was the same
as 2000 and 1999. Mr. Casnoff received a discretionary bonus of $10,000, and a
Stock Option grant for 2001 of 100,000 shares.
Myron Rosenberg
Fred Smithline
H. PERFORMANCE COMPARISON
The following graph compares the yearly percentage change in the cumulative
total stockholder return on the Company's Common Stock for each of the last five
years with the cumulative return (assuming reinvestment of dividends) of the Dow
Jones Industrials Index and the S&P 1500 Diversified Financial Services Index.
Since August 1995, the Common Stock has been traded on the over-the-counter
market and has been quoted on the NASD OTC Bulletin Board under the symbol
"DVLN". Until August 3, 1995, the Common Stock was traded on the New York Stock
Exchange.
32
[GRAPHIC OMITTED]
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
A. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of December 31, 2001
regarding the ownership of common stock of the Company by each person who is
known to the management of the Company to have been the beneficial owner of more
than 5% of the outstanding shares of the Company's common stock.
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent of Class*
------------------- --------------------- -----------------
Lawrence J. Cohen 5,284,162 (1)(4) 17.1%
Milton Neustadter 3,170,437 (1)(5) 11.0%
Jay Chazanoff 5,003,245 (2)(6) 16.3%
Ron Jacobs 4,694,664 (2)(7) 15.5%
Stephen Simms 4,694,663 (2)(8) 15.5%
Keith B. Stein 4,870,788 (3)(9) 15.9%
Robert W. Barron 4,464,096 (3)(10) 14.8%
Adam Frieman 4,299,074 (3)(11) 14.3%
Peter Offerman 4,175,051 (3)(12) 13.9%
Joseph Huston 4,131,021 (3)(13) 13.8%
Jan Sirota 4,175,051 (3)(14) 13.9%
Neal Polan 4,175,051 (3)(15) 13.9%
Michael Zarriello 4,175,051 (3)(16) 13.9%
Mark Mahoney 4,163,409 (3)(17) 13.9%
The SIII Associates Limited 6,209,427 (3)(18) 19.5%
Partnership Third Addison
Park Corporation and
Gary L. Shapiro
J.G. Wentworth, S.S.C.
Limited Partnership 3,000,000 (19) 11.6%
Stephen Feinberg, 5,406,113 (20) 21.0%
34
NOTES TO TABLE
- --------------
In each instance where a named individual is listed as the holder of a
currently exercisable option or Warrant, the shares which may be acquired upon
exercise thereof have been deemed outstanding for the purpose of computing the
percentage owned by such person, but not for the purpose of computing the
percentage owned by any other person, except with respect to options or Warrants
held by other members of a Holder's Holder Group (as defined below). An option
or Warrant is deemed to be currently exercisable if it may be exercised within
60 days. The number of Warrants attributed to each Holder herein is based upon
the number of warrants that would be issued as of the date of this document, and
is subject to adjustment to eliminate any possible dilution, as described in
"Changes of Control" below.
(1) As described in detail below in "Changes of Control", such persons are
members of the Pembroke Group (as defined in "Changes of Control" below), and
said persons share dispositive power with each other as to 2,734,092 shares of
the Company's Common Stock issuable to the members of the Pembroke Group upon
the exercise of Warrants by such members, which shares constitute 50.1% of all
of the shares issuable to the members of the Pembroke Group upon the exercise of
Warrants. The address of each member of the Pembroke Group is c/o Lawrence J.
Cohen, 70 East 55th Street, Seventh Floor, New York, NY 10022. The members of
the Pembroke Group explicitly disclaim beneficial ownership of all of the shares
of Common Stock and Warrants (and shares of Common Stock issuable upon exercise
of Warrants) owned by the other members of the Pembroke Group.
(2) As described in detail below in "Changes of Control", such persons are
members of the Millennium Group (as defined in "Changes of Control" below), and
said persons share dispositive power with each other as to 3,515,091 shares of
the Company's Common Stock issuable to the members of the Millennium Group upon
the exercise of Warrants by such members, which shares constitute 50.1% of all
of the shares issuable to the members of the Millennium Group upon the exercise
of Warrants. The address of each member of the Millennium Group is c/o Lawrence
J. Cohen, 70 East 55th Street, Seventh Floor, New York, NY 10022. The members of
the Millennium Group explicitly disclaim beneficial ownership of all of the
shares of Common Stock and Warrants (and shares of Common Stock issuable upon
exercise of Warrants) owned by the other members of the Millennium Group.
(3) As described in detail below in "Changes of Control", such persons are
members of the Florida Group (as defined in "Changes in Control" below), and
said persons share dispositive power with each other as to 4,042,973 shares of
the Company's Common Stock issuable to the members of the Florida Group upon the
exercise of Warrants (as defined in "Changes in Control" below) by such members,
which shares constitute 50.1% of all of the shares issuable to the members of
the Florida Group upon the exercise of Warrants. The address of each member of
the Florida Group is c/o Keith Stein, 70 East 55th Street, Seventh Floor, New
York, NY 10022.
(4) Based upon a Schedule 13D, as amended, as filed with the Securities and
Exchange Commission (the "Commission") on November 18, 1999, Mr. Cohen
possesses: (i) the sole power to vote 4,884,722 shares of Common Stock, which
includes 4,659,984 shares of Common Stock issuable upon exercise of Warrants;
(ii) shared power to vote 0 shares of Common Stock; (iii) the sole power to
dispose of 2,550,070 shares of Common Stock, which includes 2,325,332 shares of
Common Stock issuable upon exercise of Warrants; and (iv) shared power with the
other member of the Pembroke Group to dispose of 2,734,092 shares of Common
Stock, which includes 2,334,652 shares of Common Stock issuable upon the
exercise of Warrants held by Mr. Cohen and 399,440 shares of Common Stock
issuable upon exercise of Warrants held by the other member of the Pembroke
Group. Mr. Cohen explicitly disclaims beneficial ownership of all of the shares
of Common Stock and Warrants (and shares of Common Stock issuable upon exercise
of Warrants) owned by the other member of the Pembroke Group.
35
(5) Based upon a Schedule 13D, as amended, as filed with the Commission on
November 18, 1999, Mr. Neustadter possesses: (i) the sole power to vote 835,784
shares of Common Stock, which includes 797,284 shares of Common Stock issuable
upon exercise of Warrants; (ii) shared power to vote 0 shares of Common Stock;
(iii) the sole power to dispose of 436,345 shares of Common Stock, which
includes 397,845 shares of Common Stock issuable upon exercise of Warrants; and
(iv) shared power with the other member of the Pembroke Group to dispose of
2,734,092 shares of Common Stock, which includes 399,440 shares of Common Stock
issuable upon the exercise of Warrants held by Mr. Neustadter and 2,334,652
shares of Common Stock issuable upon exercise of Warrants held by the other
member of the Pembroke Group. Mr. Neustadter explicitly disclaims beneficial
ownership of all of the shares of Common Stock and Warrants (and shares of
Common Stock issuable upon exercise of Warrants) owned by the other member of
the Pembroke Group.
(6) Based upon a Schedule 13D, as amended, as filed with the Commission on
November 18, 1999, Mr. Chazanoff possesses: (i) the sole power to vote 2,848,190
shares of Common Stock, which includes 2,714,644 shares of Common Stock issuable
upon exercise of Warrants; (ii) shared power to vote 0 shares of Common Stock;
(iii) the sole power to dispose of 1,488,153 shares of Common Stock, which
includes 1,354,607 shares of Common Stock issuable upon exercise of Warrants;
and (iv) shared power with the other members of the Millennium Group to dispose
of 3,515,091 shares of Common Stock, which includes 1,360,037 shares of Common
Stock issuable upon the exercise of Warrants held by Mr. Chazanoff and 2,155,054
shares of Common Stock issuable upon exercise of Warrants held by the other
members of the Millennium Group. Mr. Chazanoff explicitly disclaims beneficial
ownership of all of the shares of Common Stock and Warrants (and shares of
Common Stock issuable upon exercise of Warrants) owned by the other members of
the Millennium Group.
(7) Based upon a Schedule 13D, as amended, as filed with the Commission on
November 18, 1999, Mr. Jacobs possesses: (i) the sole power to vote 2,257,100
shares of Common Stock, which includes 2,150,753 shares of Common Stock issuable
upon exercise of Warrants; (ii) shared power to vote 0 shares of Common Stock;
(iii) the sole power to dispose of 1,179,573 shares of Common Stock, which
includes 1,073,226 shares of Common Stock issuable upon exercise of Warrants;
and (iv) shared power with the other members of the Millennium Group to dispose
of 3,515,091 shares of Common Stock, which includes 1,077,527 shares of Common
Stock issuable upon the exercise of Warrants held by Mr. Jacobs and 2,437,564
shares of common stock issuable upon exercise of Warrants held by the other
members of the Millennium Group. Mr. Jacobs explicitly disclaims beneficial
ownership of all of the shares of Common Stock and Warrants (and shares of
Common Stock issuable upon exercise of Warrants) owned by the other members of
the Millenium Group.
(8) Based upon a Schedule 13D, as amended, as filed with the Commission on
November 18, 1999, Mr. Simms possesses: (i) the sole power to vote 2,257,099
shares of Common Stock, which includes 2,150,752 shares of Common Stock issuable
upon exercise of Warrants; (ii) shared power to vote 0 shares of Common Stock;
(iii) the sole power to dispose of 1,179,572 shares of Common Stock, which
includes 1,073,226 shares of Common Stock issuable upon exercise of Warrants;
and (iv) shared power with the other members of the Millennium Group to dispose
of 3,515,091 shares of Common Stock, which includes 1,077,527 shares of Common
Stock issuable upon the exercise of Warrants held by Mr. Simms and 2,437,564
shares of Common Stock issuable upon exercise of Warrants held by the other
members of the Millennium Group. Mr. Simms explicitly disclaims beneficial
ownership of all of the shares of Common Stock and Warrants (and shares of
Common Stock issuable upon exercise of Warrants) owned by the other members of
the Millennium Group.
(9) Based upon a Schedule 13D, as amended, as filed with the Commission on
November 18, 1999, Mr. Stein possesses: (i) the sole power to vote 1,582,135
shares of Common Stock, which includes 1,505,628 shares of Common Stock issuable
upon exercise of Warrants; (ii) shared power to vote 0 shares of Common Stock;
(iii) the sole power to dispose of 827,815 shares of Common Stock, which
includes 751,308 shares of Common Stock issuable upon exercise of Warrants; and
(iv)
36
shared power with the other members of the Florida Group to dispose of 4,042,973
shares of Common Stock, which includes 754,320 shares of Common Stock issuable
upon the exercise of Warrants held by Mr. Stein and 3,288,653 shares of Common
Stock issuable upon exercise of Warrants held by the other members of the
Florida Group. Mr. Stein explicitly disclaims beneficial ownership of all of the
shares of Common Stock and Warrants (and shares of Common Stock issuable upon
exercise of Warrants) owned by the other members of the Florida Group.
(10) To the Company's knowledge, Mr. Barron possesses: (i) the sole power to
vote 806,664 shares of Common Stock, which includes 769,544 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 385,541 shares of Common Stock,
which includes 384,003 shares of Common Stock issuable upon exercise of
Warrants; and (iv) shared power with the other members of the Florida Group to
dispose of 4,042,973 shares of Common Stock, which includes 385,541 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Barron and
3,657,432 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group.
(11) To the Company's knowledge, Mr. Frieman possesses: (i) the sole power to
vote 501,539 shares of Common Stock, which includes 489,897 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 256,100 shares of Common Stock,
which includes 244,458 shares of Common Stock issuable upon exercise of
Warrants; and (iv) shared power with the other members of the Florida Group to
dispose of 4,042,973 shares of Common Stock, which includes 245,439 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Frieman and
3,797,534 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group.
(12) To the Company's knowledge, Mr. Offerman possesses: (i) the sole power to
vote 252,996 shares of Common Stock, which includes 241,354 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 132,077 shares of Common Stock,
which includes 120,435 shares of Common Stock issuable upon exercise of
Warrants; and (iv) shared power with the other members of the Florida Group to
dispose of 4,042,973 shares of Common Stock, which includes 120,919 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Offerman and
3,922,054 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group.
(13) To the Company's knowledge, Mr. Huston possesses: (i) the sole power to
vote 168,656 shares of Common Stock, which includes 160,895 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 88,048 shares of Common Stock,
which includes 80,287 shares of Common Stock issuable upon exercise of Warrants;
and (iv) shared power with the other members of the Florida Group to dispose of
4,042,973 shares of Common Stock, which includes 80,608 shares of Common Stock
issuable upon the exercise of Warrants held by Mr. Huston and 3,962,365 shares
of Common Stock issuable upon exercise of Warrants held by the other members of
the Florida Group.
(14) To the Company's knowledge, Mr. Sirota possesses: (i) the sole power to
vote 252,996 shares of Common Stock, which includes 241,354 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 132,077 shares of Common Stock,
which includes 120,435 shares of Common Stock issuable upon exercise of
Warrants; and (iv) shared power with the other members of the Florida Group to
dispose of 4,042,973 shares of Common Stock, which includes 120,919 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Sirota and
3,922,054 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group.
37
(15) To the Company's knowledge, Mr. Polan possesses: (i) the sole power to vote
252,996 shares of Common Stock, which includes 241,354 shares of Common Stock
issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of Common
Stock; (iii) the sole power to dispose of 132,077 shares of Common Stock, which
includes 120,435 shares of Common Stock issuable upon exercise of Warrants; and
(iv) shared power with the other members of the Florida Group to dispose of
4,042,973 shares of Common Stock, which includes 120,919 shares of Common Stock
issuable upon the exercise of Warrants held by Mr. Polan and 3,922,054 shares of
Common Stock issuable upon exercise of Warrants held by the other members of the
Florida Group.
(16) To the Company's knowledge, Mr. Zarriello possesses: (i) the sole power to
vote 252,996 shares of Common Stock, which includes 241,354 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 132,077 shares of Common Stock,
which includes 120,435 shares of Common Stock issuable upon exercise of
Warrants; and (iv) shared power with the other members of the Florida Group to
dispose of 4,042,973 shares of Common Stock, which includes 120,919 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Zarriello and
3,922,054 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group.
(17) To the Company's knowledge, Mr. Mahoney possesses: (i) the sole power to
vote 241,354 shares of Common Stock, which includes 241,354 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 120,435 shares of Common Stock,
which includes 120,435 shares of Common Stock issuable upon exercise of
Warrants; and (iv) shared power with the other members of the Florida Group to
dispose of 4,042,973 shares of Common Stock, which includes 120,919 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Mahoney and
3,922,054 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group.
(18) To the Company's knowledge, the SIII Associates Limited Partnership
possesses: (i) the sole power to vote 4,138,928 shares of Common Stock, which
includes 3,937,074 shares of Common Stock issuable upon exercise of Warrants;
(ii) shared power to vote 0 shares of Common Stock; (iii) the sole power to
dispose of 2,166,454 shares of Common Stock, which includes 1,964,600 shares of
Common Stock issuable upon exercise of Warrants; and (iv) shared power with the
other members of the Florida Group to dispose of 4,042,973 shares of Common
Stock, which includes 1,972,474 shares of Common Stock issuable upon the
exercise of Warrants held by the SIII Associates Limited Partnership and
2,070,499 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group. Third Addison Park Corporation is the
general partner of the SIII Associates Limited Partnership, and Gary L. Shapiro
is the chief executive officer of Third Addison Park Corporation.
(19) To the Company's knowledge, J.G. Wentworth, S.S.C. Limited Partnership
possesses: (i) the sole power to vote 3,000,000 shares of Common Stock, which
includes 3,000,000 shares of Common Stock issuable upon exercise of Warrants;
(ii) shared power to vote 0 shares of Common Stock; (iii) the sole power to
dispose of 3,000,000 shares of Common Stock, which includes 3,000,000 shares of
Common Stock issuable upon exercise of Warrants.
(20) Based upon a Schedule 13D, as filed with the Commission on January 20,
2002, Mr. Feinberg possesses: (i) the sole power to vote and direct the
disposition of the 4,753,113 shares of Common Stock, held by Blackacre Bridge
Capital, L.L.C. and the sole power to vote and direct the disposition of the
653,000 shares of Common Stock held by Blackacre Capital Group, L.P.
38
B. SECURITY OWNERSHIP OF MANAGEMENT
--------------------------------
The following table sets forth certain information as of December 31, 2001
regarding ownership of Common Stock by (i) each director and nominee for
director, (ii) each of the executive officers named in the Summary Compensation
Table contained herein, and (iii) all executive officers and directors as a
group (7 persons). Unless otherwise indicated, each stockholder listed below has
sole voting and investment power with respect to the shares set forth opposite
such stockholder's name. All persons listed below have an address c/o the
Company's principal executive offices in New York.
Name of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class
- ---------------- -------------------- ----------
Alan E. Casnoff 685,000 (2) 3.1%
Gary Flicker 125,000 (3) **
Jay Thailer 52,000 (4) **
Myron Rosenberg 363,854 (5) 1.7%
Frederick E. Smithline 132,550 (6) **
Keith B. Stein 4,870,788 (7) 15.9%
All current directors
and executive officers
as a group (6 persons) 6,229,192 (8) 23.22%
* In each instance where a named individual is listed as the holder of a
currently exercisable option or warrant, the shares which may be acquired upon
exercise thereof have been deemed outstanding for the purpose of computing the
percentage owned by such person, but not for the purpose of computing the
percentage owned by any other person, except the group referred to in note 8. An
option or warrant is deemed to be currently exercisable if it may be exercised
within 60 days.
** Less than 1%
(1) Messrs. Casnoff, Flicker and Thailer are executive officers of the Company.
Messrs. Rosenberg, and Smithline are the regular directors Mr. Casnoff was
appointed as a director upon the resignation of Mr. Yudell, and Mr. Stein is the
special purpose director.
(2) Excludes 480 shares held by Mr. Casnoff's adult son, as to which shares Mr.
Casnoff disclaims beneficial ownership. Includes 26,000 shares owned by a
corporation partially owned and controlled by Mr. Casnoff, and 475,000 shares
which may be acquired upon the exercise of currently exercisable options.
(3) Represents 125,000 shares which may be acquired upon the exercise of
currently exercisable options.
(4) Represents 42,000 shares which may be acquired upon the exercise of
currently exercisable options and 10,000 shares held by Mr. Thailer and his wife
as joint tenants.
(5) Includes 4,300 shares held by Mr. Rosenberg's wife, as to which shares he
disclaims beneficial ownership, and 75,000 shares which may be acquired upon the
exercise of currently exercisable options.
(6) Includes 550 shares held by Mr. Smithline and his brother as tenants-in-
common and 6,000 shares held by Mr. Smithline's wife, as to which 6,000 shares
Mr. Smithline disclaims beneficial ownership. Also includes 75,000 shares which
may be acquired upon the exercise of currently exercisable options.
(7) Based upon a Schedule 13D, as amended, as filed with the Commission on
November 18, 1999, Mr. Stein possesses: (i) the sole power to vote 1,006,963
shares of Common Stock, which includes 930,456 shares of Common Stock issuable
upon exercise of Warrants; (ii) shared power to vote 0 shares of Common Stock;
39
(iii) the sole power to dispose of 540,805 shares of Common Stock, which
includes 464,298 shares of Common Stock issuable upon exercise of Warrants; and
(iv) shared power with the other members of the Florida Group to dispose of
2,498,498 shares of Common Stock, which includes 466,158 shares of Common Stock
issuable upon the exercise of Warrants held by Mr. Stein and 2,032,340 shares of
Common Stock issuable upon exercise of Warrants held by the other members of the
Florida Group. Mr. Stein explicitly disclaims beneficial ownership of all of the
shares of Common Stock and Warrants (and shares of Common Stock issuable upon
exercise of Warrants) owned by the other members of the Florida Group.
(8) Number of shares and percentage owned includes 3,831,303 shares which may be
acquired through exercise of currently exercisable options and Warrants held by
certain of the named persons. The number of outstanding shares for the purpose
of computation of percentage of ownership by the group includes such shares.
C. CHANGES IN CONTROL
Each of the Certificate of Incorporation (the "Certificate") and the
By-laws (the "By-laws") of the Company contains restrictions prohibiting the
sale, transfer, disposition, purchase or acquisition of any capital stock until
September 30, 2009, without the prior authorization of the Board of Directors of
the Company, by or to any holder (a) who beneficially owns directly or through
attribution (as generally determined under Section 382 of the Internal Revenue
Code of 1986, as amended (the "Code")) five percent (5%) or more of the value of
the then issued and outstanding shares of capital stock of the Company or (b)
who, upon the sale, transfer disposition purchase or acquisition of any capital
stock of the Company would beneficially own directly or through attribution (as
generally determined under Section 382 of the Code) five percent (5%) or more of
the value of the then issued and outstanding capital stock of the Company, if
that sale, transfer, disposition, purchase or acquisition would, in the sole
discretion and judgment of the Board of Directors of the Company jeopardize the
Company's preservation of its federal income tax attributes pursuant to Section
382 of the Code. The Board of Directors has the right to void any such
transaction.
In connection with the Original Loan by NPM in September 1996, the Company
issued to, or for the benefit of, the members of the Florida Group (who are
affiliates of NPM) and the Pembroke and Millennium Groups (who are affiliates of
NPM and NPO, Warrants to purchase such number of shares of Common Stock as, when
added to the 1,000,000 shares issued to the members of the Holder Groups
contemporaneously with the Warrants, represent rights to acquire up to 49% of
the outstanding Common Stock on a fully diluted basis. In accordance with their
terms, the Warrants were originally exercisable commencing January 1999 and
expire after December 31, 2007. Pursuant to a stockholders agreement (the
"Agreement") entered into among each of the parties that acquired the Warrants
(each, a "Holder"), such parties agreed, among other things, that the Warrants
could not be exercised until September 27, 1999. If and at such time as any or
all of the Warrants are exercised, it is possible that a "change in control" of
the Company, within the meaning of applicable rules and regulations under the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), may be
deemed to occur, depending upon the extent of exercise.
Pursuant to the Agreement, the Holders have agreed to certain limitations
on the disposition of Common Stock and Warrants owned or held by them, which are
described below. The Holders presently have rights of first refusal/first offer
with respect to the disposition of shares of Common Stock and Warrants held by
other Holders (unless the disposition is made to certain specified affiliates of
a Holder). Subject to the above-mentioned rights of first refusal/first offer
and certain other limitations, (i) through September 27, 1999, a Holder may
dispose of up to one-half (or more subject to the consent of a majority of the
Holders in such Holder's Holder Group) of his shares of Common Stock and (ii)
after September 27, 1999, a Holder may dispose of all of his or its shares of
Common Stock (excluding shares issuable upon exercise of Warrants). A Holder may
40
not dispose of his Warrants (except to another Holder or certain specified
affiliates of a Holder) or convert, exercise or exchange any of such Warrants
until after September 27, 1999. After September 27, 1999, subject to the above-
mentioned rights of first refusal/first offer and certain other limitations, a
Holder may dispose of up to an aggregate of 49.9% (or more, subject to the
consent of a majority of the other Holders in such Holder's Holder Group) of his
shares of Common Stock issuable upon exercise of his Warrants after giving
effect to conversion, exercise or exchange of such Warrants. The "Holder Groups"
consist of the "Millennium Group", the "Pembroke Group" and the "Florida Group".
The members of the Millennium Group are Jay Chazanoff, Ron Jacobs and Stephen
Simms. The members of the Pembroke Group are Lawrence J. Cohen and Milton
Neustadter. The members of the Florida Group are Stephen L. Gurba, Peter
Offermann, Joseph Huston, Jan Sirota, Neal Polan, Michael Zarriello, Adam
Frieman, Mark Mahoney, Keith B. Stein, Robert W. Barron and Gary Shapiro
(through his holdings in The SIII Associates Limited Partnership and Third
Addison Park Corporation). For further information regarding the foregoing, see
"Certain Relationships and Related Transactions" below.
41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BLACKACRE TRANSACTION
---------------------
The Company had outstanding as of December 31, 2001 approximately $2,400,000
aggregate principal amount of 10% redeemable notes due December 31, 2005. The
notes are redeemable in cash, or at the option of DVL, for common stock at a
formula based upon the market price of the DVL common stock.
In an effort to reduce the potential future dilution to existing shareholders
resulting from a redemption of the notes for stock, in December 2001, the
Company entered into an agreement with Blackacre Bridge Capital, LLC
("Blackacre") under which Blackacre exchanged $1,188,278 principal amount of
notes for 4,753,113 shares of DVL's common stock (the "Exchange Agreement").
This represents a conversion rate of $.25 per share.
The Exchange Agreement includes a provision which states that Blackacre shall
not sell or acquire any shares of the Company without the written consent of the
Board of Directors of the Company. The Board may withhold consent prior to
December 31, 2005, only if such transfer would, in the sole discretion of the
Board of Directors, jeopardize the Company's preservation of its Federal Income
Tax attributes under Section 382 of the Internal Revenue Code or in the case of
a transfer after December 31, 2005 would be materially adverse to the interest
of the Company.
If at any time after December 31, 2005, Blackacre is prevented from disposing of
any of its shares as a result of the Board of Directors determination that the
transfer would be materially adverse to the interest of the Company, then
Blackacre shall have the right to sell to the Company and the Company shall be
obligated to purchase up to the number of shares of common stock which when
added to all prior shares of common stock sold to the Company by Blackacre would
have an aggregate market value of not more than $1 million dollars.
After the transaction, DVL had 21,313,563 shares of common stock issued and
outstanding.
The transaction resulted in an extraordinary gain of $482,000. As a result of
the exchange, Blackacre and its affiliates now own approximately 25% of DVL's
issued and outstanding common stock.
NPM AND NPO TRANSACTIONS
------------------------
The Company consummated a multi-faceted transaction on September 27, 1996,
pursuant to which: (i) certain existing indebtedness of the Company was acquired
by NPM, under an Amended and Restated Loan Agreement dated as of March 27, 1996
pursuant to which the Company became indebted to NPM in the original principal
amount of $8,382,000; (ii) 1,000,000 shares of Common Stock (representing 4.7%
of the Common Stock now outstanding) were issued to, and purchased by, the
Holders (see Item 12(C) above); (iii) the Certificate of Incorporation of the
Company was amended to permit the issuance of warrants, to limit change of
ownership of capital stock of the Company and to designate Preferred Stock
together with rights, powers and preferences (including the appointment of a
special purpose director); (iv) Warrants to purchase additional shares of Common
Stock (which, when added to the 1,000,000 shares acquired, represent rights to
acquire up to 49% of the outstanding Common Stock, on a fully diluted basis)
were issued to, or for the benefit of, the Holders; (v) 100 shares of Preferred
Stock were issued to an affiliate of NPM; (vi) most, but not all, convertible
securities and warrants existing and outstanding prior to the transaction were
converted into Common Stock; and (vii) the Company continued the engagement of
NPO to perform administrative and advisory services relating to the assets of
the Company and its affiliated partnerships, pursuant to an Asset Servicing
Agreement dated March 27, 1996. In consideration for such services, the Company
pays NPO $600,000 per year (with cost of living increases) over the seven-year
term of the original agreement, subject to early termination under certain
conditions.
42
During 2001 the agreement was extended under the same terms and conditions for
another five years to March 2008. The current annual fee is $645,000. The
Company paid to NPO $1,038,000 and $1,866,000 in 2001 and 2000 respectively. As
of December 31, 2001 and 2000 the Company had accrued service fees payable to
NPO of $28,000 and $373,000 respectively.
In 1997, NPM advanced the Company an additional $200,000. In addition, from
January 1998 through May 1999, NPM advanced additional amounts aggregating
$370,000 to DVL. These advances were not required under the Original Loan
Documents. In May 1999, the Company paid all remaining outstanding amounts due
on the loan to NPM.
The members of the Millenium Group, the Pembroke Group, and the Florida
Group are affiliates of NPM, and therefore have a material interest in the
transactions between the Company and NPM, described in the preceding paragraphs.
Keith B. Stein, the special purpose director of the Company is an affiliate of
NPM, and therefore has a material interest in said transactions. Mr. Stein is
also a beneficial owner of more than 5% of the outstanding shares of the
Company's Common Stock. The members of the Millenium Group and the Pembroke
Group are affiliates of NPO. The Pembroke Group is controlled by Lawrence J.
Cohen, who is a beneficial owner of more than 5% of the outstanding shares of
the Company's Common Stock. The Millienium Group is owned and controlled by Jay
Chazanoff, Stephen Simms, and Ron Jacobs, each beneficial owners of more than 5%
of the outstanding shares of the Company's Common Stock.
Since June 1998, the Company has received fees from a limited partnership
(in which certain of its partners are affiliates of NPO and Blackacre). This
agreement may be terminated with 30 days notice by either party. The Company
receives the following (a) a monthly fee of $5,000 through November 2000, and
(b) after all the partners of the partnership have earned a 20% internal rate of
return, compounded quarterly, on their capital contributions, an amount of cash
equal to 25% of the profits, as defined in the agreement. For 2001 and 2000 the
Company received compensation under such agreement equal to $442,900 and
$362,500, respectively.
The Company has received fees pursuant to a service agreement with another
limited partnership whose general partner is an affiliate of NPO, to render
certain accounting and administrative services. As compensation, the Company
receives expense reimbursements of $4,000 per month. The Company received
aggregate compensation under such agreement of $48,000 for 2001 and 2000.
The Company received fees from an entity that is part of the Opportunity
Fund in consideration for the Company providing property management services.
For 2001 and 2000, the Company received compensation equal to $27,000 and
$27,000, respectively.
The Company has received fees from an entity whose partners are affiliates
of NPO in consideration for the Company providing certain accounting and
administrative services. As compensation, the Company receives a monthly fee of
$2,000, a monthly deferred fee of $6,500 and an annual incentive fee if certain
levels of profitability are obtained. The Company recorded fees of $152,000 and
$102,000 in 2001 and 2000 which included incentive fees of $50,000 and $-0-,
respectively.
The Millenium Group, an affiliate of NPO, received approximately $67,000
and $90,000 for 2001, and 2000, respectively, representing compensation and
reimbursement of expenses for collection services on limited partner notes. In
addition, in 2001 and 2000 the Company paid or accrued fees of $150,000 and
$25,000 to the Millenium Group and $205,000 and $55,000 to the Pembroke Group
(another affiliate of NPO), respectively, and agreed in 2002 to issue a total of
400,000 shares of Common Stock to the Pembroke Group and the Millenium Group for
additional services rendered to the Company outside the scope of the Asset
Servicing Agreement.
43
In connection with sales of property owned by Affiliated Limited
Partnerships a licensed real estate brokerage affiliate of the Pembroke Group
was paid brokerage fees of $86,453 and $106,900 from various Affiliated Limited
Partnerships in 2001 and 2000, respectively.
OPPORTUNITY FUND
----------------
The Company, Blackacre, PNM, and Pemmil are parties to the Opportunity
Agreement. The Opportunity Agreement has a term of three years, subject to
earlier termination if certain maximum capital contributions have been reached.
The Opportunity Agreement provides for an arrangement (the "Opportunity Fund")
whereunder, with respect to certain transactions involving the acquisition of
limited partnership interests of, or mortgage loans to, Affiliated Limited
Partnerships in which the Company is general partner, or which the Company
already owns, if the Company, due to financial constraints, is unable to pursue
such business opportunity with its own funds from its reserves or available from
operations, or by obtaining financing from a third party or issuing equity (each
such opportunity, an "Opportunity"), then the Opportunity Fund has a right of
first refusal to finance such Opportunity.
PNM and Pemmil are owned and controlled by the Pembroke Group and the
Millenium Group.
All of the required capital contributions were to be provided by the other
members. The Company was to receive up to 20% of the profits from an opportunity
after the other investors received a return of their investment plus preferred
annual returns ranging from 12% to 20%.
The Opportunity Agreement has not been renewed or extended. While the
Opportunity Fund no longer has the right of first refusal with regard to
opportunities, the Company may continue to present opportunities to the fund.
As of March 1, 2002, the Opportunity Fund has purchased 15 wrap mortgages
of Affiliated Limited Partnerships from unaffiliated third parties (seven were
purchased in 1998, one was purchased in 1999 and seven mortgages were purchased
in 2000), acquired limited partnership units from unaffiliated individuals in
three Affiliated Limited Partnerships, and acquired the property of an
Affiliated Limited Partnership. In addition, during 1999, the Opportunity Fund
acquired a property of an Affiliated Limited Partnership and the land underlying
this property from DVL. During 2000, DVL purchased three of the mortgages owned
by the Opportunity Fund and the Opportunity Fund was fully satisfied on an
additional four mortgage loans, as each of the properties that secured these
four mortgage loans was sold. In December 2001, the Opportunity Fund also sold
its property located in Kearny, NJ to an entity in which certain partners are
affiliates of NPO. During 2001, a newly formed, wholly-owned subsidiary of DVL
purchased two of mortgages owned by the Opportunity Fund and the Opportunity
Fund was fully satisfied on an additional two mortgage loans as each of the
properties that secured these two mortgage loans were sold. As of March 1, 2002,
the Opportunity Fund owns four mortgages. During 2001, DVL was paid
approximately $280,000 from the investments by the Opportunity Fund, of which
$189,000 was used to pay amounts owed by DVL under a note in favor of an entity
that is part of the Opportunity Fund.
44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this report:
(1) The Financial Statements required by Item 8 of this
report are listed below:
Item 8
Page No.
--------
Independent Auditors' Report F - 1
Consolidated Balance Sheets -
December 31, 2001 and 2000 F - 2
Consolidated Statements of Operations
for each of the years in the three year period
ended December 31, 2001 F - 4
Consolidated Statements of Shareholders'
Equity for each of the years in the three
year period ended December 31, 2001 F - 6
Consolidated Statements of Cash Flows for
each of the years in the three year period
ended December 31, 2001 F - 7
Notes to Consolidated Financial Statements F - 10
(2) The Financial Statement Schedules required by
Item 8 of this report are listed below:
Schedule III - Real Estate and Accumulated
Depreciation
Other schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the financial
statements or notes thereto.
45
(3) INDEX OF EXHIBITS
The following is a list of the Exhibits filed as a part of this report
(those marked * are filed herewith):
3. ARTICLES OF INCORPORATION AND BY-LAWS.
(a) DVL's Certificate of Incorporation, filed March 28, 1977 (Incorpo-
rated by reference to Exhibit 6(d) to DVL's Form S-1 Registration
Statement No. 2-58847 dated April 28, l977.)
(b) DVL's Certificate of Amendment to Certificate of Incorporation, filed
July 13, 1977 (Incorporated by reference to Exhibit 6(e) to Amendment
No. 1. to DVL's Form S-1 Registration Statement No. 2-58847 dated
August 25, l977.)
(c) DVL's Certificate of Amendment to Certificate of Incorporation, filed
August 3, 1982. (Incorporated by reference to Exhibit 3(c) to DVL's
Form 10-K for the fiscal year ended December 31, 1982.)
(d) DVL's Certificate of Amendment to Certificate of Incorporation, filed
May 27, 1983. (Incorporated by reference to Exhibit 3(d) to DVL's Form
10-K for the fiscal year ended December 31, 1983.)
(e) DVL's Certificate of Amendment to Certificate of Incorporation, filed
July 24, 1987. (Incorporated by reference to Exhibit 3(e) to DVL's
Form 10-K for the fiscal year ended December 31, 1987.)
(f) DVL's Certificate of Amendment to Certificate of Incorporation, filed
December 20, 1993. (Incorporated by reference to DVL's Form 10-K for
fiscal year ended December 31, 1993.)
(g) DVL's Certificate of Amendment to Certificate of Incorporation, filed
December 4, 1995 (Incorporated by reference to DVL's proxy statement
dated October 13, 1995 - Exhibit A.)
(h) DVL's Certificate of Amendment to Certificate of Incorporation filed
September 17, 1996. (Incorporated by reference to DVL's proxy
statement dated July 31, 1996 - Exhibit I.)
(i) DVL's Certificate of Amendment of Certificate of Incorporation filed
February 7, 2000. (Incorporated by reference to DVL's Form 10-K for
the fiscal year ended December 31, 1999.)
(j) DVL's By-Laws, as in full force and effect at all times since March
28, l977. (Incorporated by reference to Exhibit 3(c) to DVL's Form
10-K for the fiscal year ended December 31, 1980.)
(k) DVL's First Amendment to By-Laws dated as of January 1, 1994.
(Incorporated by reference to Exhibit 3(d) to DVL's Form 10-K for the
fiscal year ended December 31, 1995.)
(l) DVL's Second Amendment to By-Laws, effective September 17, 1996.
(Incorporated by reference to DVL's proxy statement dated July 31,
1996 - Exhibit J.)
(m) DVL's Third Amendment to the By-Laws, effective February 1, 2000.
(Incorporated by reference to DVL's Form 10-K for the fiscal year
ended December 31, 1999.)
46
10. MATERIAL CONTRACTS.
10.1 Voting Trust Agreement between R&M Holding Company and Alan Casnoff
dated May 15, 1991. (Incorporated by reference to Exhibit 10(a)(18) to
DVL's Form 10-K for the fiscal year ended December 31, 1991.)
10.2 Stipulation of Settlement of IN RE KENBEE LIMITED PARTNERSHIP
LITIGATION dated August 12, 1992. (Incorporated by reference to
Exhibit 10(b)(25) to DVL's Form 10-K for the fiscal year ended
December 31, 1995.)
10.3 Stipulation of Partial Settlement and Order in IN RE DEL-VAL FINANCIAL
CORPORATION SECURITIES LITIGATION Master File #MDL872. (Incorporated
by reference to Exhibit 10(b)(28) to DVL's Form 10-K for the fiscal
year ended December 31, 1995.)
10.4 Amended and Restated Loan Agreement between DVL and NPM, dated as of
March 27, 1996. (Incorporated by reference to Exhibit 10(b)(33) to
DVL's Form 10-K for the fiscal year ended December 31, 1995.)
10.5 Asset Servicing Agreement between DVL, PSC, Kenbee Realty and NPO
dated as of March 27, 1996. (Incorporated by reference to Exhibit
10(b)(34) to DVL's Form 10-K for the fiscal year ended December 31,
1995.)
10.6 Third Voting Trust Extension between R&M Holding Company and Alan
Casnoff dated March 7, 1996. (Incorporated by reference to Exhibit
10(b)(35) to DVL's Form 10-K for the fiscal year ended December 31,
1995.)
10.7 Amended and Restated Loan Agreement between DVL, and NPM, dated dated
March 27, 1996. (Incorporated by reference to Proxy Statement dated
July 31, 1996 - Exhibit A.)
10.8 Amended and Restated Negotiable Promissory Note from DVL to NPM.
(Incorporated by reference to DVL's Proxy Statement dated July July
31, 1996 - Exhibit B.)
10.9 Asset Servicing Agreement between DVL and NPO. (Incorporated by
Reference to DVL's Proxy Statement dated July 31, 1996 - Exhibit C.)
10.10 Stock Purchase Agreement between DVL and NPM. (Incorporated by
Reference to DVL's Proxy Statement dated July 31, 1996 - Exhibit D.)
10.11 Securities Purchase Agreement between DVL and NPM. (Incorporated by
Reference to DVL's Proxy Statement dated July 31, 1996 - Exhibit E.)
10.12 Common Stock Warrant issued by DVL to NPO. (Incorporated by Reference
to DVL's Proxy Statement dated July 31, 1996 - Exhibit F.)
10.13 DVL 1996 Stock Option Plan. (Incorporated by Reference to DVL's Proxy
Statement dated July 31, 1996 - Exhibit K.)
47
10.14 Amendment to DVL 1996 Stock Option Plan effective February 1, 2000.
(Incorporated by reference to DVL's Form 10-K for fiscal year ended
December 31, 1999.)
10.15 Employment Agreement and Indemnification Agreement comprising Exhibit
A thereto, between DVL and Gary Flicker, dated April 16, 1997
(effective as of said date). (Incorporated by reference to Exhibit
10.2 to DVL's Form 10-Q for the quarter ended June 30, 1997).
10.16 Amendment dated as a July 10, 1996, to Amended and Restated Loan
Agreement dated as of March 27, 1996 between DVL and NPM. (In-
corporated by reference to Exhibit 10.3.1 to DVL's Form 10-Q for the
quarter ended June 30, 1997.)
10.17 Second Amendment dated as of September 27, 1996, to Amended and
Restated Loan Agreement dated as of March 27, 1996 between DVL and
NPM. (Incorporated by reference to Exhibit 10.3.2 to DVL's Form 10-Q
for the quarter ended June 30, 1997.)
10.18 Third Amendment dated as of March 6, 1997, to Amended and Restated
Loan Agreement dated as of March 27, 1996 between DVL and NPM and
Promissory Note dated as of March 6, 1997, comprising Exhibit A-1
thereto. (Incorporated by reference to Exhibit 10.3.3 to DVL's Form
10-Q for the quarter ended June 30, 1997.)
10.19 Fourth Amendment dated as of October 20, 1997, among DVL, Black-
acre, NPM and NPO, to Amended and Restated Loan Agreement, dated as
of March 27, 1997, as amended, between DVL and NPM. (Incorporated by
reference to Exhibit 10.1 to DVL's Form 10-Q for the quarter ended
September 30, 1997.)
10.20 Promissory Note dated as of October 20, 1997, in the original
principal amount of $1,760,000 from DVL to Blackacre. (Incorpo- rated
by reference to Exhibit 10.2 to DVL's Form 10-Q for the quarter ended
September 30, 1997.)
10.21 Subordination Agreement, dated as of October 20, 1997, among DVL,
Blackacre, NPM and NPO. (Incorporated by reference to Exhibit 10.3 to
DVL's Form 10-Q for the quarter ended September 30, 1997.)
10.22 Agreement Among Members dated April 10, 1998, by and among Black-
acre, PNM, Pem Mil, and DVL. (Incorporated by reference to DVL's Form
10-K for the fiscal year ended December 31, 1998.)
10.23 Management Services Agreement dated June 1, 1998, by and between DVL
and PBD Holdings, LP ("PBD"). (Incorporated by reference to DVL's Form
10-K for the fiscal year ended December 31, 1998.)
10.24 Waiver of Event of Default and Agreement regarding the Demand and
Payment of Fees dated March 1999 by NPO. (Incorporated by reference to
DVL's Form 10-K for the fiscal year ended December 31, 1998.)
10.25 Waiver of Event of Default and Agreement regarding the Demand and
Payment of Fees dated March 2000 by NPO. (Incorporated by reference to
DVL's Form 10-K for the fiscal year ended December 31, 1999.)
48
10.26 Loan Agreement, Promissory Note and Pledge, Collateral Assignment and
Security Agreement, each dated as of March, 2000, each relat- ing to a
loan from Pennsylvania Business Bank to DVL in the orig- inal
principal amount of $1,000,000. (Incorporated by reference to DVL's
Form 10-Q for the quarter ended June 30, 2000.)
10.27 Term Loan Note and Term Loan Agreement, each dated as of March, 2000,
each relating to a loan from Bankphiladelphia to DVL in the original
principal amount of $1,450,000. (Incorporated by reference to DVL's
Form 10-Q for the quarter ended June 30, 2000.)
10.28 First Amendment to Loan Agreement, Pledge Agreement, Promissory Note
and Other Documents dated August 2000, relating to a loan from
Pennsylvania Business Bank to DVL, Inc. in the original principal
amount of $1,000,000. (Incorporated by reference to DVL's Form 10-Q
for the quarter ended September 30, 2000.)
10.29 Mortgage Assignment Agreement dated August 2000, relating to an
assignment and sale of two mortgage loans from Rumson Mortgage
Holdings, LLC to DVL, Inc. for a total sale price of $900,000.
(Incorporated by reference to DVL's Form 10-Q for the quarter ended
September 30, 2000.)
10.30 Note in the original principal amount of $200,000, dated August 2000,
relating to the sale of two mortgage loans from Rumson Mortgage
Holdings, LLC to DVL, Inc. (Incorporated by reference to DVL's Form
10-Q for the quarter ended
September 30, 2000.)
10.31 Agreement of Purchase and Sale, dated as of October 2, 2000, relating
to the purchase of real estate assets by Del Toch, LLC from Passaic
Avenue South Associates.
10.32 Agreement of Purchase and Sale, dated as of October 12, 2000,
relating to the purchase of land by Delborne Land Company, LLC from
Mcany of Kearny, Inc.
10.33 Waiver of Event of Default and Agreement regarding demand and payment
of fees dated March 2001 by NPO.
10.34 Purchase Agreement, dated April 27, 2001, by and among J.G. Wentworth
Receivables II LLC, Receivables II-A LLC, Receivables II-A Holding
Company, LLC, J.G. Wentworth S.S.C., Limited Partnership, J.G.
Wentworth Management Company, Inc., S2 Holdings, Inc., and DVL, Inc.
for the purchase of residual interests in securitized portfolios.
(Incorporated by reference to DVL's Form 8-K dated May 9, 2001.)
10.35 Non-negotiable, Secured Purchase Money Promissory Note dated April
27, 2001 in the original principal amount of $22,073,270 payable to
the order of J.G. Wentworth S.S.C., Limited Partnership from S2
Holdings, Inc. (Incorporated by reference to DVL's Form 8-K dated May
9, 2001.)
10.36 Non-negotiable, Secured Purchase Money Promissory Note dated April
27, 2001 in the original principal amount of $3,252,730 payable to
the order of J.G. Wentworth S.S.C., Limited Partnership from S2
Holdings, Inc. (Incorporated by reference to DVL's Form 8-K dated May
9, 2001.)
10.37 Guaranty and Surety Agreement dated April 27, 2001 by and from DVL,
Inc. in favor or J.G. Wentworth S.S.C., Limited Partnership.
(Incorporated by reference to DVL's Form 8-K dated May 9, 2001.)
49
10.38 Common Stock Warrant dated April 27, 2001. (Incorporated by reference
to DVL's Form 8-K dated May 9, 2001.)
10.39 Purchase Agreement, dated as of August 20, 2001, by and among J.G.
Wentworth Receivables II LLC, Receivables II-B LLC, Receivables II-B
Holding Company LLC, J.G. Wentworth S.S.C. Limited Partnership, J.G.
Wentworth Management Company, Inc., S2 Holding, Inc. and DVL, Inc.
for the purchase of residual interests in securitized portfolios.
(Incorporated by reference to DVL's Form 8-K dated August 28, 2001.)
10.40 Non-Negotiable, Secured Purchase Money Promissory Note dated as of
August 15, 2001 in the original principal amount of $7,931,560.00
payable to the order of J.G. Wentworth S.S.C. Limited Partnership
from S2 Holdings, Inc. (Incorporated by reference to DVL's Form 8-K
dated August 28, 2001.)
10.41 Non-Negotiable, Secured Purchase Money Promissary Note dated as of
August 15, 2001 in the original principal amount of $1,168,440.00
payable to the order of J.G. Wentworth S.S.C. Limited Partnership
from S2 Holdings, Inc. (Incorporated by reference to DVL's Form 8-K
dated August 28, 2001.)
10.42 Guaranty & Surety Agreement dated as of August 20, 2001 by and from
DVL, Inc. in favor of J.G. Wentworth S.S.C. Limited Partnership.
(Incorporated by reference to DVL's Form 8-K dated August 28, 2001.)
10.43 Pledge Agreement, dated as of August 20, 2001 by S2 Holdings, Inc.
for the benefit of J.G. Wentworth S.S.C. Limited Partnership.
(Incorporated by reference to DVL's Form 8-K dated August 28, 2001.)
10.44 Common Stock Warrant dated as of August 15, 2001. (Incorporated by
reference to DVL's Form 8-K dated August 28, 2001.)
10.45 Exchange Agreement, dated as of December 28, 2001, by and between
DVL, Inc. and Blackacre Bridge Capital, L.L.C.
*11. Schedule of Computation of Net Earnings Per Share.
21. SUBSIDIARIES OF DVL.
The Company's only significant subsidiaries are Professional Service
Corporation (a Delaware Corporation), Del Toch, LLC (a Delaware
Limited Liability Corporation), Delborne Land Company, LLC (a Delaware
Limited Liability Corporation), S2 Holdings, Inc. (a Delaware Holding
Company), DVL Mortgage Holdings, LLC (a Delaware Limited Liability
Corporation), Receivables II-A, LLC (a Nevada Limited Liability
Corporation), Receivables II-B,LLC (a Nevada Limited Liability
Corporation).
(b) No reports on Form 8-K were filed during the quarter ended December 31,
2001.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, DVL has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DVL, INC.
Date: March , 2002 By:
--- ---------------------------
Alan E. Casnoff, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of DVL and in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
- --------------------------
Jay Thailer Executive Vice President and March , 2002
Chief Financial Officer --
(Principal Financial and
Accounting Officer)
- --------------------------
Alan E. Casnoff Director, President and Chief March , 2002
Executive Officer (Principal --
Executive Officer)
- --------------------------
Frederick E. Smithline Director March , 2002
--
- --------------------------
Myron Rosenberg Director March , 2002
--
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, DVL has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DVL, INC.
Date: March , 2002 By: /s/ Alan E. Casnoff
-- ---------------------------
Alan E. Casnoff, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of DVL and in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Jay Thailer
- --------------------------
Jay Thailer Executive Vice President and March , 2002
Chief Financial Officer --
(Principal Financial and
Accounting Officer)
/s/ Alan E. Casnoff
- --------------------------
Alan E. Casnoff Director, President and Chief March , 2002
Executive Officer (Principal --
Executive Officer)
/s/ Frederick E. Smithline
- --------------------------
Frederick E. Smithline Director March , 2002
--
/s/ Myron Rosenberg
- --------------------------
Myron Rosenberg Director March , 2002
--
52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Consolidated Financial Statements of DVL, Inc.
and Subsidiaries and Independent Auditors Report
Page
----
Independent Auditors' Report F - 1
Consolidated Balance Sheets-December 31, 2001 and 2000 F - 2
Consolidated Statements of Operations for each of the
years in the three year period ended December 31, 2001 F - 4
Consolidated Statements of Shareholders' Equity
for each of the years in the three year period
ended December 31, 2001 F - 6
Consolidated Statements of Cash Flows for each of the
years in the three year period ended December 31, 2001 F - 7
Notes to Consolidated Financial Statements F - 10
Schedule III - Real Estate and Accumulated Depreciation
Richard A. Eisner & Company, LLP
100 Campus Drive
Florham Park, New Jersey 07932
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
DVL, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of DVL, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above present
fairly, in all material respects, the consolidated financial position of DVL,
Inc. and subsidiaries as at December 31, 2001 and 2000, and the consolidated
results of their operations and their consolidated cash flows for each of the
years in the three-year period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
In connection with our audits of the consolidated financial statements referred
to above, we audited the accompanying financial schedule III. In our opinion,
this financial schedule, when considered in relation to the consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information stated therein.
RICHARD A. EISNER & COMPANY, LLP
Florham Park, New Jersey
March 5, 2002
F-1
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
----------------------
2001 2000
ASSETS ---------- ----------
- ------
Residual interests in securitized portfolios $ 36,906 $ -
-------- --------
Mortgage loans receivable from affiliated
partnerships (net of unearned interest of
$15,908 for 2001 and $12,340 for 2000) 35,567 41,639
Allowance for loan losses 4,095 5,250
-------- --------
Net mortgage loans receivable 31,472 36,389
-------- --------
Cash (including restricted cash of $215 and $213
for 2001 and 2000, respectively) 2,987 1,184
Investments
Real estate at cost (net of accumulated deprecia-
tion of $104 for 2001 and $26 for 2000) 4,142 3,737
Real estate lease interests 1,080 1,215
Affiliated limited partnerships (net of allow-
ance for losses of $540 and $647 for 2001 and
2000, respectively) 1,121 1,157
Other investments (net of allowance for losses
of $400 for 2000) - 648
Deferred income tax benefits 1,050 -
Prepaid financing and other assets 932 1,107
-------- --------
Total assets $ 79,690 $ 45,437
======== ========
See notes to consolidated financial statements.
(continued)
F-2
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(continued)
December 31,
----------------------
2001 2000
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Notes Payable - residual interests $ 35,044 $ -
Underlying mortgages payable 22,218 26,019
Long-term debt - affiliates 1,942 2,282
Long-term debt - other 5,067 5,577
Notes payable - litigation settlement 1,902 2,922
Redeemed notes payable - litigation settlement 596 106
Fees due to affiliates 928 373
Accounts payable, security deposits and accrued
liabilities (including deferred income of $17
for 2001 and $13 for 2000) 1,038 585
-------- --------
Total liabilities 68,735 37,864
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock $10.00 par value, authorized -
100 shares for 2001 and 2000, issued - 100 shares
for 2001 and 2000 1 1
Preferred stock, $.01 par value, authorized 5,000,000
shares for 2001 and 2000, issued - 0 shares for 2001
and 2000 - -
Common stock, $.01 par value, authorized -
90,000,000 shares, issued - 21,313,563 shares for
2001 and 16,560,450 shares for 2000 213 166
Additional paid-in capital 95,757 95,288
Deficit (85,016) (87,882)
-------- --------
Total shareholders' equity 10,955 7,573
-------- --------
Total liabilities and shareholders' equity $ 79,690 $ 45,437
======== ========
See notes to consolidated financial statements.
F-3
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
Year Ended December 31,
----------------------------------
2001 2000 1999
---------- ---------- ----------
Income from affiliates:
Interest on mortgage loans $ 3,118 $ 3,436 $ 3,549
Gain on satisfaction of mortgage loans 615 256 1,639
Partnership management fees 368 454 405
Transaction and other fees from
partnerships 260 413 502
Distributions from investments 138 253 265
Income from others:
Interest income - residual interests 2,802 - -
Net rental income (including depreciation
of $80 for 2001 and $10 for 2000) 720 523 532
Management fees 804 500 533
Distributions from investments 667 149 34
Other income and interest 63 79 276
---------- ---------- ----------
9,555 6,063 7,735
---------- ---------- ----------
Operating expenses:
Recovery of provision for losses (3) (37) (48)
General and administrative 1,541 1,309 1,327
Asset Servicing Fee - NPO Management LLC 640 623 600
Legal and professional fees 549 393 427
Interest expense:
Underlying mortgages 2,029 2,329 2,640
Notes payable - residual interests 1,840 - -
Litigation Settlement Notes 484 502 481
Affiliates 389 434 1,191
Others 551 311 91
---------- ---------- ----------
8,020 5,864 6,709
---------- ---------- ----------
Income before income tax benefit
and extraordinary gain 1,535 199 1,026
Income tax benefit (970) - -
---------- ---------- ----------
Income before extraordinary gain 2,505 199 1,026
Extraordinary gain on the settlements
of indebtedness 361 306 1,267
---------- ---------- ----------
Net income $ 2,866 $ 505 $ 2,293
========== ========== ==========
(continued)
F-4
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
(continued)
Year Ended December 31,
----------------------------------
2001 2000 1999
---------- ---------- ----------
Basic earnings per share:
Income before extraordinary gain $ .15 $ .01 $ .06
Extraordinary gain .02 .02 .08
---------- ---------- ----------
Net income $ .17 $ .03 $ .14
========== ========== ==========
Diluted earnings per share:
Income before extraordinary gain $ .03 $ .01 $ .02
Extraordinary gain .00 .00 .02
---------- ---------- ----------
Net income $ .03 $ .01 $ .04
========== ========== ==========
Weighted average shares outstanding -
basic 16,599,517 16,560,450 16,560,450
Effect of dilutive securities 108,172,598 79,777,136 50,422,788
----------- ---------- ----------
Weighted average shares outstanding -
diluted 124,772,115 96,337,586 66,983,238
=========== ========== ==========
See notes to consolidated financial statements.
F-5
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, 1999 100 $ 1 16,560,450 $ 166 $95,288 $(90,680) $ 4,775
Net income - - - - - 2,293 2,293
-------- ------ ----------- ------- ------- -------- -------
Balance - December 31, 1999 100 1 16,560,450 166 95,288 (88,387) 7,068
Net income - - - - - 505 505
-------- ------ ----------- ------- ------- -------- -------
Balance - December 31, 2000 100 1 16,560,450 166 95,288 (87,882) 7,573
-------- ------ ---------- ------- ------- -------- -------
Issuance of warrants in connection with
the purchase of residual interests in
securitized portfolios - - - - 136 - 136
Issuance of common stock in connection with
exchange of notes payable for stock - - 4,753,113 47 333 - 380
Net income - - - - - 2,866 2,866
-------- ------ ---------- ------- ------- -------- -------
Balance - December 31, 2001 100 $ 1 21,313,563 $ 213 $95,757 $(85,016) $10,955
======== ====== ========== ======== ======= ======== =======
See notes to consolidated financial statements.
F-6
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Income before extraordinary gain $ 2,505 $ 199 $ 1,026
Adjustments to reconcile income before extra-
ordinary gains to net cash provided by (used
in) operating activities
Income tax benefit (1,050) - -
Interest income accreted on residual interests (381) - -
Recovery of provision for losses (3) (37) (48)
Accrued interest added to indebtedness 294 273 247
Gain on satisfactions of mortgage loans (615) (256) (1,639)
Depreciation 80 10 -
Amortization of unearned interest on loans
receivable (115) (62) (67)
Amortization of real estate lease interests 135 136 138
Amortization of debt discount - - 234
Imputed interest on notes 484 502 481
Net decrease (increase) in prepaid financing
and other assets 303 (390) 997
Net increase (decrease) in accounts payable,
security deposits and accrued liabilities 447 132 (95)
Net (decrease) in fees due to affiliates (345) (1,094) (247)
Net increase (decrease) in deferred income 4 (22) 5
-------- -------- --------
Net cash provided by (used in) operating
activities 1,743 (609) 1,032
-------- -------- --------
Cash flows from investing activities:
Collections on loans receivable 7,872 4,949 14,851
Investments in loans receivable (325) (2,426) --
Real estate acquisitions and capital improvements (610) (3,391) --
Net decrease in affiliated limited partnership
interests and other investments 684 169 123
Proceeds on sale of real estate - - 300
-------- -------- --------
Net cash provided by (used in) investing
activities 7,621 (699) 15,274
-------- -------- --------
(continued)
F-7
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(continued)
Year Ended December 31,
------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from financing activities:
Proceeds from new borrowings $ 200 $ 6,425 $ 588
Repayment of indebtedness (1,288) (992) (4,707)
Payments on underlying mortgages payable (5,701) (4,040) (10,952)
Payments on notes payable - residual interests (105) - -
Payments related to debt tender offers and
redemptions (667) (171) (357)
-------- -------- --------
Net cash provided by (used in) financing
activities (7,561) 1,222 (15,428)
-------- -------- --------
Net (decrease) increase in cash 1,803 (86) 878
Cash, beginning of year 1,184 1,270 392
-------- -------- --------
Cash, end of year $ 2,987 $ 1,184 $ 1,270
======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the year for interest $ 4,601 $ 2,499 $ 2,382
======== ======== ========
Cash paid for income taxes $ 44 $ 35 $ 21
======== ======== ========
(continued)
F-8
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(continued)
Year Ended December 31,
---------------------------
2001 2000 1999
------- ------- -------
Supplemental disclosure of non-cash investing
and financing activities:
Net reduction of notes payable - debt
tender offer and redemptions $ 945 $ 306 $ 1,267
======= ======= =======
Residual interests in securitized portfolios $36,525 $ - $ -
======= ======= =======
Notes payable - residual interests $35,124 $ - $ -
======= ======= =======
See notes to consolidated financial statements.
F-9
DVL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
a. THE COMPANY: DVL, Inc. ("DVL or the "Company") is a Delaware corporation
headquartered in New York, New York. DVL's common stock is traded on the over-
the-counter market and is quoted on the OTC Bulletin Board maintained by the
NASD under the symbol "DVLN". DVL is a commercial finance company which manages
numerous real estate properties and partnerships, and holds and services
commercial mortgage loans. DVL's investments consist primarily of residual
interests in securitized portfolios, commercial mortgage loans due from
affiliated partnerships, limited partnership investments in affiliated
partnerships and other real estate interests. DVL has six 100% owned active
subsidiaries: Professional Service Corporation ("PSC"), Del Toch, LLC ("Del
Toch"), Delborne Land Company, LLC ("Delborne"), S2 Holdings, Inc. ("S2"), DVL
Mortgage Holdings, LLC ("DMH") and Delbrook Holdings, LLC ("Delbrook") all of
which are consolidated for accounting purposes. DVL does not consolidate any of
the various partnerships (the "Affiliated Limited Partnerships") in which it
holds the general partner and limited partner interests nor does DVL account for
such interests on the equity method due to the following: (i) DVL's interest in
the partnerships as the general partner is a 1% interest, (which 1% interest is
payable to the limited partnership settlement fund pursuant to the 1993
settlement of the class action between the limited partners and DVL); (ii) under
the terms of such settlement, the limited partners have the right to remove DVL
as the general partner upon the vote of 70% or more of the limited partners;
(iii) all major decisions must be approved by a limited partnership Oversight
Committee in which DVL is not a member, (iv) there are no operating policies or
decisions made by the partnership, due to the triple net lease arrangements for
the partnership properties and (v) there are no financing policies determined by
the partnerships as all mortgages were either in place prior to DVL's obtaining
its interest and all potential refinancings are reviewed by the Oversight
Committee. Accordingly, DVL accounts for its investments in the limited
partnerships, which are considered affiliates, on a cost basis with the cost
basis adjusted for impairments which took place in prior years. Accounting for
such investments on the equity method would not result in any material change to
the Company's financial position or results of operations.
Also, DVL has two inactive subsidiaries: Del-Val Capital Corp. ("DVCC") and
RH Interests, Inc. ("RH") which have been consolidated in these financial
statements. Additionally, S2 owns 99.9% Class B member interests in Receivables
II-A, LLC and Receivables II-B, LLC which are passive entities created solely to
receive the residual cash flow from the securitized receivable pools that each
entity owns. All material intercompany transactions and accounts are eliminated
in consolidation.
b. USE OF ESTIMATES: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
c. ALLOWANCE FOR LOSSES: Specific loss reserves are provided as required based
on management's evaluation of the underlying collateral on each loan or
investment.
F-10
d. DEPRECIATION: Depreciation is provided by charges to operations on either a
straight-line basis or accelerated basis at rates which will allocate the cost
of the assets over their estimated useful lives.
e. DEFERRED CHARGES: Deferred charges applicable to debt financing are amortized
over the term of the debt using the effective interest rate method.
f. RESIDUAL INTERESTS: Since these residual interests are not subject to
prepayment risk they are accounted for as investments held-to-maturity and are
carried at amortized cost using the effective yield method. Permanent
impairments are recorded immediately through earnings. Favorable changes in
future cash flows are recognized through earnings as interest over the remaining
life of the retained interest.
g. INCOME RECOGNITION: Interest income is not recognized on the non- performing
portion of DVL's loan portfolio. A loan is considered non-performing when
scheduled interest or principal payments are not received on a timely basis and,
in the opinion of management, the collection of such payments in the future
appears doubtful. DVL accounts for increases and decreases in the amount or
timing of expected future cash flows on its loan portfolio by adjusting the
valuation allowance, not to exceed the recorded investment in the loan. Cash
receipts on restructured loans are treated as interest income as a result of
previous write-downs of such loans due to prior impairments. DVL records
contingent rents in the period in which the contingency is resolved. Management
and transaction fees are recognized in income when earned. Distributions from
investments are recorded as income when the amount to be received can be
estimated and collection is probable. Rental income is recognized in income as
rent under the related leases becomes due.
h. IMPAIRMENT OF REAL ESTATE INVESTMENTS AND REAL ESTATE LEASE INTERESTS: DVL
does not have any impaired real estate investments and/or real estate lease
interests at December 31, 2001. All assets are analyzed annually based upon
prior appraised values, which are adjusted every year based on cash flow
assumptions set forth in such appraisals.
i. RESTRICTED CASH: As of December 31, 2001 and 2000, DVL had restricted cash of
$215,000 and $213,000, respectively. The restricted cash at December 31, 2001
and 2000, represents monies owed to the Settlement Fund.
j. UNEARNED INTEREST ON MORTGAGE LOANS AND LOAN ORIGINATION FEES AND COSTS:
Unearned interest on mortgage loans is recognized as income using the effective
interest method over the life of the corresponding loans. Presently, DVL does
not receive loan origination fees as the Company is not originating new loans
receivable.
k. FAIR VALUE OF FINANCIAL INSTRUMENTS: As disclosed in Note 3, DVL's loan
portfolio is valued based on the value of the underlying collateral. As all
loans are either receivables from affiliated limited partnerships or are
collateralized by interests in affiliated limited partnerships, it is not
practical to estimate fair value of the loans. Due to the nature of the
relationship between the limited partnerships and DVL's general partner interest
in the limited partnerships and the authority of the Oversight Committee, the
amount at which the loans could be exchanged with third parties is not
reasonably determinable, as any such estimate would have to consider the
intention of the Oversight Committee, the amounts owed, if any, to DVL for its
interests in the partnerships and any transaction fees to which DVL might be
entitled. See Note 2 for discussion on residual interests.
l. FEDERAL INCOME TAXES: DVCC, PSC, RH, Del Toch, S2, DMH, Delbrook and Delborne
are included in DVL's consolidated federal income tax return.
F-11
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("FAS 109"), which requires the Company
to recognize deferred tax assets and liabilities for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In addition, FAS
109 requires the recognition of future tax benefits such as net operating loss
carryforwards, to the extent that realization of such benefits is more likely
than not.
m. EARNINGS PER SHARE: All income is attributable to common stock. The preferred
stock issued by DVL at the present time total 100 shares with a par value of
$10.00 per share. There are no cumulative dividends or accretion. Diluted
earnings per share includes the dilutive effect of the outstanding litigation
settlement notes payable, the NPM warrants and stock options.
The Company reports a dual presentation of Basic Earnings per Share ("Basic
EPS") and Diluted Earnings per Share ("Diluted EPS"). Basic EPS excludes
dilution and is computed by dividing net income by the weighted average number
of common shares outstanding during the reported period. Diluted EPS reflects
the potential dilution that could occur if stock options and other commitments
to issue common stock were exercised using the treasury stock method.
n. RECENTLY ISSUED ACCOUNTING STANDARDS: Statement of Financial Accounting
Standards (SFAS) No. 141, BUSINESS COMBINATIONS, and SFAS 142, GOODWILL AND
OTHER INTANGIBLE ASSETS, were issued in June 2001. SFAS 141 was effective July
1, 2001 and SFAS 142 is effective beginning January 1, 2002. Under these new
standards, goodwill and intangible assets having indefinite lives will no longer
be amortized but will be subject to annual impairment tests. SFAS 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, was issued in
August 2001 and is effective beginning January 1, 2002. SFAS 144 provides a
single, comprehensive accounting model for impairment and disposal of long-lived
assets and discontinued operations. The Company does not expect the adoption of
those pronouncements to result in any material effects on the Company's
Consolidated Financial Statements.
2. Residual Interests In Securitized Portfolios
On March 30, 2001, the Company, through its consolidated subsidiary, S2,
acquired a 99.9% Class B member interest in Receivables II-A LLC, a limited
liability company ("Receivables II-A"), from an unrelated party engaged in the
acquisition and management of periodic payment receivables. The Class B member
interest entitles the Company to be allocated 99.9% of all items of income, loss
and distribution of Receivables II-A. Receivables II-A solely receives the
residual cash flow from four securitized receivable pools after payment to the
securitized noteholders.
The Company purchased its interest in Receivables II-A for an aggregate
purchase price of $26,134,264, including costs of $809,264 including the
issuance of a warrant, valued at $74,000, for the purchase of 2 million shares
of the common stock of DVL, exercisable until February 15, 2011 at a price of
$.20 per share. The purchase price was paid by the issuance of limited recourse
promissory notes by the consolidated subsidiary in the aggregate amount of
$25,325,000. Principal and interest are payable from the future monthly cash
F-12
flow. The notes mature on December 31, 2021, bear interest at the rate of 8%
annually, and are secured by a pledge of the consolidated subsidiary's interest
in Receivables II-A and all proceeds and distributions related to such interest.
The principal amount of the notes and the purchase price are adjusted, from time
to time, based upon the performance of the underlying receivables. DVL also
issued its guaranty of up to $2,532,500 of the purchase price. The guaranty is
reduced by 10% of the principal paid. The amount of the guaranty at December 31,
2001 was $2,532,500. Payments, if any, due under this guaranty are payable after
December 31, 2021.
In accordance with the purchase agreement, through December 31, 2001, the
residual interests in securitized portfolios and the notes payable increased by
approximately $699,000 based on the performance of the underlying receivables.
On August 15, 2001, the Company, through a consolidated subsidiary,
acquired a 99.9% Class B member interest in Receivables II-B LLC, a limited
liability company ("Receivables II-B"), from the same party from which it
acquired Receivables II-A. The Class B member interest entitles the Company to
99.9% of all items of income, loss and distribution of Receivables II-B.
Receivables II-B receives the residual cash flow from a securitized receivable
pool after payment to the securitized noteholders.
The Company purchased its interest in Receivables II-B for an aggregate
purchase price of $9,657,000, including costs of $557,000 including the issuance
of a warrant, valued at $62,000, for the purchase of 1 million shares of the
common stock of DVL, exercisable until August 15, 2011 at a price of $.20 per
share. The purchase price was paid by the issuance of limited recourse
promissory notes by the consolidated subsidiary in the aggregate amount of a
$9,100,000. Principal and interest are payable from the future monthly residual
interest cash flow. The notes mature on August 15, 2020, bear interest at the
rate of 8% annually, and are secured by a pledge of the consolidated
subsidiary's interest in Receivables II-B and all proceeds and distributions
related to such interest. The principal amount of the notes and the purchase
price are adjusted from time to time, based upon the performance of the
underlying receivables. DVL also issued its guaranty of up to $910,000 of the
purchase price. The guaranty is reduced by 10% of the principal paid. The amount
of the guarantee at December 31, 2001 was $899,464. Payments, if any, due under
this guaranty are payable after August 15, 2020.
The purchase agreements contain annual minimum and maximum levels of cash
flow that will be retained by the Company, after the payment of interest and
principal on the notes payable, which are as follows:
March 30, 2001 Transaction August 15, 2001 Transaction
-------------------------- ---------------------------
Years Minimum Maximum Minimum Maximum
----- ------- ------- ------- -------
2001 to 2009 $462,500 $500,000 $280,000 $380,000
2010 to final payment 700,000 750,000 $350,000 $400,000
on notes payable*
* Final payment on the notes payable expected 2016 related to the March
transaction and 2018 for the August transaction.
The Company expects to receive significant cash flows after final payment of the
notes payable.
F-13
The following table presents the key economic assumptions at December 31, 2001
and the sensitivity of the current fair value of residual cash flows to
immediate 10 percent and 20 percent adverse changes in those assumptions ($ in
thousands):
Carrying value of residual interests $ 36,906
Fair value of residual interests $ 37,597
Weighted-average life (in years) 11.1
Expected credit losses 5.39%
Impact on fair value of 10% adverse change $ 2,181
Impact on fair value of 20% adverse change $ 3,201
Discount rate 12.40%
Impact on fair value of 10% adverse change $ 3,007
Impact on fair value of 20% adverse change $ 5,675
Those sensitivities are hypothetical and should be used with caution. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the residual interest is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in another
which might magnify or counteract the sensitivities.
3. Mortgage Loans Receivable and Underlying Mortgages Payable
Virtually all of DVL's loans receivable arose out of transactions in which
Affiliated Limited Partnerships purchased commercial, office and industrial
properties typically leased on a long-term basis to unaffiliated, creditworthy
tenants. Each mortgage loan is collateralized by a lien, primarily subordinate
to senior liens, on real estate owned by an Affiliated Limited Partnership.
DVL's loan portfolio is comprised of long-term wrap-around and other mortgage
loans due from Affiliated Limited Partnerships; and loans due from limited
partners collateralized by their interests in Affiliated Limited Partnerships
("Partners' Notes") and were principally pledged to collateralize DVL's
indebtedness to NPM (Note 6), until May 1999, at which time, the loan was
repaid.
DVL's mortgage portfolio included 23 and 26 loans with net carrying values
of $28,377,000 and $33,639,000 as of December 31, 2001 and 2000, respectively,
which are due from Affiliated Limited Partnerships that own properties leased to
Wal-Mart Stores, Inc. Wal-Mart is a public company subject to the reporting
requirements of the SEC. Wal-Mart has closed certain of its stores located on
the properties subject to the Company's mortgages. However, Wal-Mart continues
to pay the required rent with respect to such leases. Net carrying value refers
to the unpaid principal balance less any allowance for reserves, and any amount
which represents future interest based upon the purchase of the loan at a
discount.
DVL is liable for underlying non-recourse first mortgages on a substantial
portion of its mortgage portfolio. The underlying mortgages are payable to
unrelated financial institutions and bear interest at rates of 6.66% to 14.0%
and require principal and interest payments solely from the proceeds of the wrap
mortgages receivable.
The Limited Partner Settlement, as well as the settlements with other
limited partnerships, resulted in the modification of terms of certain
performing mortgage loans receivable from Affiliated Limited Partnerships which
bore interest at effective rates of up to 15% per annum, aggregating net
carrying values of $5,101,000, and $5,353,000 subject to underlying mortgages of
$3,087,000 and $3,488,000 at December 31, 2001 and 2000, respectively, and
mature through 2027. The effect of the modification on these mortgages on DVL's
interest income for 2001 was not material.
F-14
In addition, at the time of the settlement, the terms of the loans to
Kenbee collateralized by similar loans were restructured and modified. The
restructured and modified loans due directly from the partnerships bear interest
at stated rates of up to 15.5% and mature through 2030. As of December 31, 2001
and 2000 the modified loans due directly from the partnerships aggregated net
carrying values of $19,160,000 and $24,224,000 and subject to underlying
mortgages of $14,594,000 and $18,905,000, respectively. DVL recognized interest
income on these restructured mortgage loans of approximately $251,000, $309,000
and $360,000 for 2001, 2000, and 1999, respectively. Had these loans not been in
default and had the terms not been modified, interest income relating to these
notes would have been approximately $2,000,000 in 2001, $2,500,000 in 2000, and
$3,000,000 in 1999.
F-15
DVL's mortgage and other loans due from Affiliated Limited Partnerships, an
unaffiliated entity and limited partners are as follows:
2001 2000
------------------------------------ ----------------------------------------
Accrued Accrued
Interest Allowance Interest Allowance
Number Included For Loan Number Included For Loan
Mortgage Loans Due From Affiliated Partnerships of Loan In Loan Losses of Loan In Loan Losses
(dollar amounts in thousands) Loans Balance Balance (Note 4) Loans Balance Balance (Note 4)
- ----------------------------------------------- ------ ------- -------- -------- ------- ------- -------- ---------
Long-term wrap-around mortgage loans ranging
from $376 to $3,107 in 2001 and from $393
to $2,625 in 2000 maturing at various dates
through May 2029 (a) 16 $ 27,264 $ 21 $ - 16 $ 23,127 $ 74 $ -
Other long-term mortgage loans ranging from
$1,329 to $1,433 in 2001 and from $1,363 to
$1,436 in 2000 maturing at various dates
through May 2029 (b) 2 2,762 - 945 2 2,799 - 545
Long-term wrap-around and other mortgage loans
acquired from Kenbee pursuant to the Limited
Partner Settlement ranging from $285 and $2,438
in 2001 and from $285 to $3,308 in 2000 maturing
at various dates through June 2031 (c) 16 21,449 - 3,150 20 28,053 - 4,705
-- -------- ----- ------- --- -------- ------ -------
Total mortgage loans 34 51,475 21 4,095 38 53,979 74 5,250
Loans Collateralized By Limited Partnership Interests
- -----------------------------------------------------
Loans ranging from $1 and $58 in 2001 and from $1
to $58 in 2000 in default (d) Included in
prepaid financing and other assets 21 355 - 278 24 389 - 284
Due from affiliated partnerships
- --------------------------------
Advances and Other - Included in prepaid
financing and other assets 5 14 - - 16 170 - -
-- -------- ----- ------- --- -------- ------ ------
Total loans receivable 60 51,844 $ 21 $ 4,373 78 54,538 $ 74 $ 5,534
Less unearned interest on partnership mortgage === ===== ======= === ====== =======
loans 15,908 12,340
-------- --------
Net loans receivable $ 35,936 $ 42,198
======== ========
Underlying mortgages ranging from $197 and
$2,424 in 2001 and from $30 to $2,836
in 2000 maturing at various dates through 2011 $ 22,218 $ 26,019
======== ========
F-16
Activity on all collateralized loans is as follows:
2001 2000 1999
-------- -------- --------
(in thousands)
Balance, beginning of year $ 54,368 $ 48,802 $ 65,861
Investments in loans receivables 6,109 13,584 -
Collections on loans to affiliates (7,872) (4,949) (14,851)
Unearned interest offset against loans
satisfied, sold and written off (775) (2,199) (2,066)
Loans written-off and written down - (870) (142)
-------- -------- --------
Balance, end of year $ 51,830 $ 54,368 $ 48,802
======== ======== ========
Unearned interest activity is as follows:
2001 2000 1999
-------- -------- --------
(in thousands)
Balance, beginning of year $ 12,340 $ 5,810 $ 7,944
Additional unearned interest in
connection with new loans receivable 4,458 8,791 -
Amortization to income (115) (62) (68)
Decrease in connection with the
satisfaction or write-off of loans (775) (2,199) (2,066)
-------- -------- --------
Balance, end of year $ 15,908 $ 12,340 $ 5,810
======== ======== ========
(a) DVL previously funded certain wrap-around mortgages due from Affiliated
Limited Partnerships, whereby the original principal of the wrap equaled the
outstanding balance of an underlying first mortgage loan plus the amount of
funds advanced by DVL to the partnership. These loans mature through May 2029,
bear interest at effective rates from 10% to 51% per annum and are
collateralized primarily by second mortgages on commercial and industrial
properties located in various states. DVL is responsible to make principal and
interest payments on the first mortgage loan to the extent received from the
borrower and, in certain instances, has the right to refinance or pay off the
first mortgage loan and succeed to its seniority. Currently, the partnerships or
the tenants are making the underlying mortgage payments directly and DVL is
applying such payments to its wrap-around mortgage loans. To the extent that the
underlying mortgage payment is less than the wrap- around mortgage payment, the
partnership is obligated to pay DVL the balance. These wrap- around loans are
subject to underlying mortgage loans of $7,624,000 in 2001 and $7,114,000 in
2000, which bear interest at rates ranging from 7.5% to 13.125% per annum, are
payable to unaffiliated lenders in monthly installments, mature on various dates
through August 2011 and are collateralized by liens senior to DVL's liens. See
Note 6 for the five year maturities of such underlying loans.
F-17
(b) DVL's other long-term mortgage loans, exclusive of its wrap-around
mortgages, are collateralized by two first mortgages aggregating $2,762,000 and
$2,799,000 at December 31, 2001 and 2000, respectively. These loans mature
through December 2029, bear interest at effective rates of up to 15% per annum
and are collateralized by first mortgages on commercial and industrial
properties located in various states. The scheduled principal maturities of
DVL's commercial mortgage loan portfolio, excluding wrap-around mortgages, in
each of the next five years are $44,000 in 2002, $47,000 in 2003, $51,000 in
2004, $55,000 in 2005 and $59,000 in 2006. All such commercial mortgage loans
and the wrap-around mortgages are collateralized by liens on commercial and
industrial properties located in various states. During 2001, the tenant who
leases one of DVL's commercial properties filed for bankruptcy protection under
Chapter 11 and and dissaffirmed its lease. DVL has not received mortgage
principal nor interest payments since April, 2001 and intends to foreclose on
the property that collateralizes the wrap around mortgage. As of December 31,
2001, the carrying value of this DVL wrap around mortgage is approximately
$415,000.
(c) DVL acquired long-term wrap-around and other mortgage loans to
Affiliated Limited Partnerships pursuant to the Limited Partner Settlement. The
principal balance of such loans when acquired in 1992 equaled DVL's net
investment in the related loan previously due from Kenbee less specific
write-downs of $18,223,000 on certain of these loans based upon the anticipated
cash flow to be generated by each loan (Note 4). Although these loans have
stated interest rates of up to 15.5% per annum, interest, if any, is imputed
based upon the anticipated cash flow to be generated by each loan. The loans are
collateralized by first, second and third mortgages on commercial and industrial
properties located in various states and mature through June 2031. The
wrap-around loans are subject to senior liens of $14,594,000 in 2001 and
$18,905,000 in 2000, which bear interest at rates ranging from 7.5% to 14% per
annum, are payable to unaffiliated lenders, mature on various dates through
January 2012 and are collateralized by liens senior to DVL's liens. The payment
of the underlying first mortgages are also being made by the partnerships or
tenants as discussed in (a) above. See Note 6 for the five year maturities of
such underlying loans.
(d) DVL made loans directly to limited partners to finance their
partnership investments. As a result of the Limited Partner Settlement, DVL
received loans due from limited partners in 1992 in replacement of loans due
from Kenbee collateralized by such Partners' Notes. The majority of these loans
were non-performing at December 31, 2001 and 2000. These assets are included in
prepaid financing and other assets on the Balance Sheet.
4. Allowance for Losses and Other Reserves
Allowance for loan loss activity is as follows:
2001 2000
-------- --------
(in thousands)
Balance, beginning of year $ 5,534 $ 6,697
Loans satisfied, written-off or written-down (1,161) (1,163)
------- --------
Balance, end of year $ 4,373 $ 5,534
======== ========
DVL's allowance for loan losses is based upon the value of the collateral
underlying each loan in its portfolio. Management's evaluation of such
collateral previously resulted in substantial loan write-offs and a substantial
allowance for loan losses. The evaluation considered the magnitude of DVL's
non-performing loan portfolio, updated internally generated appraisals of
certain properties and updated information on certain properties.
F-18
The allowance for losses on DVL's mortgage loan portfolio was calculated by
first comparing the appraised value of the property collateralizing a mortgage
loan, net of liens senior to DVL's liens, to DVL's net investment in the
mortgage loan. For those mortgages which were modified, further losses were
provided for by then comparing DVL's net investment in the mortgage loan, less
any allowance necessary based upon the appraised value of the property, to the
anticipated cash flow to be generated by the terms of the mortgage or the amount
anticipated to be received through the liquidation of the mortgage. The
partnership properties were valued based upon the cash flow generated by base
rents and anticipated percentage rents or base rent escalations to be received
by the partnership. The value of partnership properties which are not subject to
percentage rents was based upon historical appraisals. Management believes that,
generally, the values of such properties have not changed as the tenants, lease
terms and timely payment of rent have not changed. When any such changes have
occurred, management revalued the property as it reasonably believed
appropriate. The value of the partnership properties which are subject to
percentage rents was based upon internally generated appraisals. Such appraisals
valued the future percentage rents utilizing assumed sales growth percentages of
up to 3% annually, based upon each individual store's sales history through
January 31, 2001. Management evaluates and updates such appraisals,
periodically, and considers changes in the status of the existing tenancy in
such evaluations. Certain other properties were valued based upon management's
estimate of the current market value for each specific property using similar
procedures.
As of December 31, 2001 and 2000, the loans collateralized by limited
partnership interests deemed uncollectible were provided for based on
management's assessment of the estimated residual value of the related
partnership investment.
5. Investments
REAL ESTATE
-----------
The Company currently owns three contiguous properties located in Kearny,
New Jersey.
These properties are:
(1) Two acres of land underlying approximately 80,000 square feet of
manufacturing, warehousing and commercial buildings. In November of 1998, the
Company foreclosed on its mortgage and now owns the land, buildings and
improvements.
(2) Seven buildings located in an industrial park in Kearny, NJ purchased for
$3,000,000, plus closing costs. Prior to the purchase, the Company had been
leasing all of these buildings, under a master lease agreement, and subletting
this property to various unrelated tenants. The acquisition was funded with bank
financing in the original principal amount of $3,000,000 and cash of
approximately $255,000. The bank financing accrues interest at the rate of 10%
per annum and requires monthly interest-only payments until June 30, 2002, at
which time the loan matures. The Company is currently negotiating an extension
of this loan.
(3) Fee title in a parcel of land in Kearny, NJ purchased from an unrelated
third party for $365,000, plus closing costs. The acquisition was funded with
bank financing in the original principal amount of $200,000 and cash of
approximately $175,000. The financing accrues interest at the rate of 9.5% per
annum and requires monthly interest only payments until June 30, 2002, at which
time the loan matures. The Company is currently negotiating an extension of this
loan.
F-19
AFFILIATED LIMITED PARTNERSHIPS
-------------------------------
DVL acquired various interests in Affiliated Limited Partnerships pursuant
to the terms of certain settlement agreements and through purchases. Management
valued all of these investments at approximately 14% of the original investment
amount due to potential anticipated losses upon liquidation of these
investments. During 2001, 2000 and 1999, DVL recorded income of $138,000,
$253,000, and $265,000, respectively, from distributions received from these
investments.
The activity on DVL's investments in Affiliated Limited Partnerships is as
follows:
2001 2000
------ ------
(in thousands)
Balance, beginning of year $1,157 $1,326
Various interests acquired through
purchases and foreclosed partner notes 94 3
Distributions received from sales (328) (447)
Income from distributions 138 253
Change in reserves, net of write-offs 60 22
----- ------
Balance, end of year $1,121 $1,157
====== ======
At December 31, 2001, all of DVL's investments in Affiliated Limited
Partnerships are pledged to collateralize its indebtedness (Note 6).
OTHER INVESTMENTS
-----------------
In connection with a 1993 litigation settlement with three related
partnerships that did not participate in the Limited Partner Settlement, DVL
received limited partnership interests in three partnerships. These
partnerships' sole assets are the restructured partnership mortgage loans on the
properties leased to Wal-Mart Stores, Inc. by the three related partnerships.
These investments, which are carried on the equity basis, were valued based upon
the anticipated cash flow to be generated by the restructured mortgage loans.
Management had provided an allowance for losses of $400,000 as of December 31,
2000 primarily resulting from a decrease in the estimated fair value of the
underlying collateral of one of the three partnership mortgage loan. In December
2001, the partnerships refinanced the underlying loans collateralized by the
restructured mortgage loans and DVL received net proceeds of approximately
$1,400,000 which was approximately $348,000 in excess of the carrying value. The
$348,000 was recorded as income from distributions from investments - others.
F-20
6. Long-Term Debt and Loans Payable Underlying Wrap-around Mortgages
DVL's long-term debt is comprised of the following loans payable:
2001 2000
------- -------
(in thousands)
Indebtedness restructured in 1995 collateralized
by commercial mortgages which matured in 2001 $ - $ 198
Loan collateralized by commercial mortgage loans
and real estate bearing interest at prime plus
1.5% per annum maturing May, 2006 824 987
Loan collateralized by commercial mortgage loans
and real estate bearing interest at prime plus
1.5% per annum maturing April, 2005 1,041 1,317
Unsecured promissory note which matured
March 2001, without interest - 75
Loan collateralized by real estate bearing
interest at 9.5% per annum, maturing June, 2002 202 -
Loan collateralized by real estate bearing
interest at 10% per annum, maturing
December, 2001 (a) 3,000 3,000
------- --------
5,067 5,577
Loan collateralized by commercial mortgages
and real estate bearing interest at 12% per
annum, maturing September 2003 (b) 1,942 2,080
Loan collateralized by DVL's interest in the
Opportunity Fund bearing interest at 12% per
annum maturing August 2002 --- 202
Loan indebtedness due NPM bearing interest at
10.25% maturing in September 2002, collater-
alized by commercial mortgages and real estate
(loan repaid May 1999)(c) - -
------- --------
Total long-term debt $ 7,009 $ 7,859
======= ========
(a) See Investments-Real Estate (Note 5) for financing agreements.
(b) See Debt Tender Offer (Note 7) for description of financing agreement
with Blackacre Bridge Capital, LLC.
(c) Under the terms of the NPM Loan, the principal balance was payable over
six years with interest at the rate of 10.25%. DVL was required to make
certain mandatory payments towards the principal balance over the term of
the loan. DVL's principal payments exceeded these requirements from
September 27, 1996 through May 1999 when the entire loan was repaid.
The effective rate of interest on the NPM Loan was approximately 36%. The
effective annual interest rate to DVL for financial reporting purposes included
DVL's costs associated with the NPM Loan, as well as, the value of the Warrants
(described below) was 15%. These rates are based on payments made through May
1999.
F-21
In connection with NPM Loan which originated in 1996 the affiliates of NPM
acquired 1,000,000 shares (the "Base Shares") of DVL Common Stock for $200,000.
The Base Shares currently represent approximately 4.7% of the outstanding common
stock of DVL. An affiliate of NPM also acquired 100 shares of preferred stock
for $1,000. DVL also issued to affiliates of NPM and NPO warrants (the
"Warrants") to purchase such number of shares of Common Stock as, when added to
the Base Shares, represent rights to acquire up to 49% of the outstanding Common
Stock of DVL on a fully diluted basis. The original exercise price of the
Warrants was $.16 per share, subject to applicable anti-dilution provisions and
subject to a maximum aggregate exercise price of $1,900,000. The Warrants expire
on December 31, 2007. No warrants have been exercised through December 31, 2001.
The aggregate amount of long-term debt and loans payable underlying
wrap-around mortgages (Note 3) maturing during the next five years is as
follows:
Loans Payable
Long-term Underlying Wrap
Debt Around Mortgages
--------- ----------------
(in thousands)
2002 $ 5,610 $ 2,207
2003 519 2,421
2004 707 2,037
2005 173 2,115
2006 - 2,786
Thereafter - 10,652
--------- -------
$ 7,009 $22,218
========= =======
7. Notes Payable - Litigation Settlement/Debt Tender Offers and Redemptions
In December 1995, DVL completed its obligations under a 1993 settlement of
its class action litigation. The 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 million 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 in 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) $1.4 million plus interest at 3% from August 16, 1993 and expenses, payable
in cash or DVL 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 $1,386,851 (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 December 1995, DVL issued notes (the "Notes") in the aggregate principal
amount of $10,386,851 as a series in conjunction with the settlement agreed upon
in the DVL stockholder class action matter entitled IN RE DEL-VAL FINANCIAL
CORP. SECURITIES LITIGATION. The Notes, which are general unsecured obligations
of DVL, accrue interest at the rate of ten (10%) percent per annum, with
principal under the Notes, together with all accrued and unpaid interest
thereunder, due on December 31, 2005. Pursuant to the terms of the Notes,
accrued and unpaid interest payable on any of the first five anniversary dates
following the issuance of the Notes is payable, at the option of DVL, by the
issuance of similar additional Notes with a principal amount equal to the
accrued and unpaid interest obligation then due. On the five anniversary dates
following the issuance of the Notes, the Company satisfied its interest
obligations thereunder by issuing such additional Notes in lieu of payment of
any cash.
F-22
During 2000 and 2001, the Company sent redemption letters ("Redemptions")
to note holders who held Notes that aggregated approximately $721,000 offering
to pay the Notes in cash at the face value plus accrued interest of
approximately $37,000. As of December 31, 2001, $162,000 has been paid and the
remaining $596,000 to be paid has been accrued, but will no longer accrue
interest.
Additionally, the Company entered into an agreement in December 2001 with
Blackacre Bridge Capital, LLC ("Blackacre") under which Blackacre exchanged
$1,188,278 principal amount of Notes for 4,753,113 shares of DVL's common stock
valued at $380,000.
Since October 1997, the Company conducted three cash tender offers (the
"Offers") at a Tender Offer price of $0.12 per $1.00 principal amount of the
Company's 10% redeemable promissory notes due December 31, 2005 (the "Notes").
The first two Offers were financed with a loan from Blackacre discussed below.
The results were as follows:
Principal Amount Principal Amount
of Notes of Notes Extraordinary Date
Purchased by Purchased by Gains to Offer
DVL Blackacre DVL Terminated
--------------- ---------------- ------------- ----------
Offer # 1 $ 6,224,390 $ 392,750 $ 202,000 02/27/98
(1998)
$ 2,906,000
(1997)
Offer # 2 $ 2,413,652 $ 423,213 $ 1,267,000 05/14/99
(1999)
Offer # 3 $ 378,270 $ - 0 - $ 306,000 08/15/00
(2000)
Notes with an aggregate principal amount of approximately $2,400,000 remain
outstanding as of December 31, 2001 (discounted value $1,902,000). The Offers,
Redemptions and the exchange of Notes for Common Stock by Blackacre have reduced
the potential dilutive effective on the Company's current stockholders that
would result from redemption of the Notes for shares of Common Stock. However,
given the aggregate principal amount of Notes which remain outstanding, the
potential dilutive effect of such a redemption is still significant.
The Company has the option to redeem the outstanding Notes by issuing
additional shares of Common Stock with a then current market value (determined
based on a formula set forth in the Notes), equal to 110% of the face value of
the Notes plus any accrued and unpaid interest thereon. Because the applicable
market value of the Common Stock will be determined at the time of redemption,
it is not possible currently to ascertain the precise number of shares of Common
Stock that may have to be issued to redeem the outstanding Notes. The redemption
of the notes may cause significant dilution for current shareholders. The actual
dilutive effect cannot be currently ascertained since it depends on the number
of shares to be actually issued to satisfy the Notes. The Company currently
intends to exercise at some point in the future its redemption option to the
extent it does not buy back the outstanding Notes by means of cash tender offers
or cash redemptions.
F-23
In order to fund the acquisition of the Notes in the first and second
offers, the Company borrowed from Blackacre Capital Group, LLC ("Blackacre")
(the "BC Loan"). The BC Loan matures on September 30, 2003 and bears interest at
the rate of 12% per annum compounded monthly and payable at maturity. Total
borrowings under the BC Loan including accrued interest were $1,942,000 as of
December 31, 2001. In addition, Blackacre was entitled to acquire 15% of all
Notes acquired by the Company in excess of $3,998,000 in connection with the
first and second Offers under the same terms and conditions as the Company.
Blackacre acquired Notes aggregating $392,750 under these terms from the first
Offer in 1997 and 1998 and $423,213 from the second Offer in 1999. DVL funded
the third Offer with available cash. The Notes acquired by Blackacre accrued
interest of $372,315 through December 28, 2001 when the aggregate amount of
$1,188,278 of Notes was exchanged for Stock.
As further consideration for Blackacre's providing the Company with the BC
Loan, the Company issued to Blackacre 653,000 shares of Common Stock.
The Company's obligations under the BC Loan are secured by substantially
all of the assets of the Company. The BC Loan is senior to all indebtedness of
the Company other than indebtedness to NPO and, with respect to individual
assets, the related secured lender. The effective interest rate to the Company
for financial reporting purposes, including the Company's costs associated with
the BC Loan, and the value of the 653,000 shares issued to Blackacre in
connection therewith, is approximately 14% per annum. Interest payable in
connection with the BC Loan will be deferred until the Company satisfies all of
its obligations owing to NPO. However, the Company is required to pay principal
payments of 15% of all proceeds that would otherwise be remitted to NPO, to
Blackacre. Thereafter, interest and principal will be paid from 100% of the
proceeds then available to the Company from the mortgage collateral held as
security for the BC Loan.
8. Other Transactions with Affiliates
The members of the Millenium Group, the Pembroke Group, and the Florida
Group are affiliates of NPM. Keith B. Stein, the special purpose director of the
Company is an affiliate of NPM and a beneficial owner of more than 5% of the
outstanding shares of the Company's Common Stock. The members of the Millenium
Group and the Pembroke Group are affiliates of NPO. The Pembroke Group is owned
and controlled by Lawrence J. Cohen, who is a beneficial owner of more than 5%
of the outstanding shares of the Company's Common Stock. The Millienium Group is
owned and controlled by Jay Chazanoff, Stephen Simms, and Ron Jacobs, each
beneficial owners of more than 5% of the outstanding shares of the Company's
Common Stock. Blackacre and its affiliates are beneficial owners of more than 5%
of the outstanding shares of the Company's Common Stock.
A. OPPORTUNITY FUND
----------------
In April 1998, DVL, an affiliate of Blackacre and affiliates of NPO entered
into a certain Agreement Among Members (the "Opportunity Agreement"), providing
for an arrangement (the "Opportunity Fund"), pursuant to which entities would be
formed, from time to time, to enter into certain transactions involving the
acquisition of limited partnership interests in the assets of, or mortgage loans
to, affiliated limited partnerships or other assets in which the Company has an
interest.
As of March 1, 2002, the Opportunity Fund has purchased 15 wrap mortgages
of Affiliated Limited Partnerships from unaffiliated third parties (seven were
purchased in 1998, one was purchased in 1999 and seven mortgages were purchased
in 2000), acquired limited partnership units from unaffiliated individuals in
three Affiliated Limited Partnerships, and acquired an ownership interest in a
property of an Affiliated Limited Partnership. During 2000, DVL purchased three
of the mortgages owned by the Opportunity Fund and the Opportunity Fund was
fully satisfied on an additional four mortgage loans, as each of the properties
that secured these four mortgage loans was sold. During 2001, a newly formed,
wholly-owned subsidiary
F-24
of DVL purchased two of the mortgages owned by the Opportunity Fund and the
Opportunity Fund was fully satisfied on an additional two mortgage loans as each
of the properties that secured these two mortgage loans were sold. As of March
1, 2002, the Opportunity Fund owns four mortgages. In December 2001, the
Opportunity Fund sold its ownership interest in the property in Kearny, NJ to an
entity in which certain partners are affiliates of NPO. During 2001, DVL was
paid approximately $280,000 from the investments by the Opportunity Fund, of
which $189,000 was used to pay amounts owed by DVL under a note in favor of an
entity that is part of the Opportunity Fund.
B. Since June 1998, the Company has received fees from a limited partnership (in
which certain of its partners are affiliates of NPO and Blackacre). This
agreement may be terminated with 30 days notice by either party. The Company
receives the following (a) a monthly fee of $5,000 through November 2000, and
(b) after all the partners of the partnership have earned a specified return, an
incentive fee of 25% of the profits, as defined in the agreement. For 2001,
2000, and 1999 the Company received compensation under such agreement equal to
$442,900, $362,500, and $480,000, respectively.
C. The Company has received fees pursuant to a service agreement with another
limited partnership whose general partner is Lawrence J. Cohen, to render
certain accounting and administrative services. As compensation, the Company
receives expense reimbursements of $4,000 per month. For 2001, 2000, and 1999
the Company received aggregate annual compensation under such agreement of
$48,000.
D. The Company received fees from an entity that is part of the Opportunity Fund
in consideration for the Company providing property management services. For
2001, 2000 and 1999, the Company received compensation, under such agreement
equal to $27,000, $27,000 and $12,000, respectively.
E. The Company has received fees from an entity whose partners are affiliates of
NPO, Messrs. Cohen, Chazanoff, Simms and Jacobs, in consideration for the
Company providing certain accounting and administrative services. As
compensation, the Company receives a monthly fee of $2,000, a monthly deferred
fee of $6,500 and an annual incentive fee if certain levels of profitability are
attained. The Company recorded fees of $152,000 and $102,000 in 2001 and 2000
which included incentive fees of $50,000 and $-0-, respectively.
F. The Millenium Group, an affiliate of NPO, received approximately $67,000 and
$90,000 for 2001, and 2000, respectively, representing compensation and
reimbursement of expenses for collection services on limited partner notes. In
addition, in 2001 and 2000 the Company paid or accrued fees of $150,000 and
$25,000 to the Millenium Group and $205,000 and $55,000 to the Pembroke Group
(another affiliate of NPO), respectively, and agreed in 2002 to issue a total of
400,000 shares of Common Stock to the Pembroke Group and the Millenium Group for
additional services rendered to the Company outside the scope of the Asset
Servicing Agreement.
In connection with the sales of property owned by Affiliated Limited
Partnerships, a licensed real estate brokerage affiliate of the Pembroke Group
was paid brokerage fees of $86,453 and $106,900 from various Affiliated Limited
Partnerships in 2001 and 2000, respectively.
G. Interest expense on amounts due to affiliates was as follows:
2001 2000 1999
---- ---- ----
NPM Capital, LLC $ - $ - $ 665
Blackacre Capital Group, LLC 319 275 245
NPO 53 149 281
Opportunity Fund 17 10 -
----- ----- ------
$ 389 $ 434 $1,191
===== ===== ======
F-25
H. In connection with the acquisitions of residual interests, affiliates of NPO
and the special director of the Company will be paid investment banking fees of
$900,000 for their services including the origination, negotiation and
structuring of the transactions. The fee was calculated as approximately 2% of
the expected cash flow to be received over the life of the assets. The total
fees will be payable without interest, over a period of 30 months, which
commenced January 1, 2002, from a portion of the monthly cash flow generated by
the acquisitions. The affiliates of NPO are Lawrence J. Cohen and Jay Chazanoff,
each beneficial owners of more than 5% of the outstanding shares of the
Company's Common Stock and Keith B. Stein who is a beneficial owner of more than
5% of the outstanding shares of the Company's Common Stock and the special
purpose director of the Company.
I. The law firm of Klehr, Harrison, Harvey, Brazenburg, & Ellers ("Klehr"),
Philadelphia, Pennsylvania, of which Alan E. Casnoff, a director of the Company,
is of counsel, has acted as counsel to the Company since July, 1999. Legal fees
for services rendered by Klehr to the Company during the fiscal year ended did
not exceed 5% of the revenues of such firm for its most recent fiscal year.
During 2001, the Company and the Affiliated Limited Partnerships paid Klehr
$17,000 and 9,000, respectively, for legal services.
9. Stock Option Plans
DVL has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
where the exercise price of DVL's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). Such information has been determined
as if DVL has accounted for its employee stock options under the fair value
method of that statement. The effect of applying SFAS No. 123 on 1999, 2000 and
2001 pro forma net income is not necessarily representative of the effects on
reported net income for future years due to, among other things: (1) vesting
period of the stock options and(2) the fair value of additional stock options in
future years. Had compensation cost for DVL's stock option plans been determined
based upon the fair value at the grant date for awards under the plans
consistent with the methodology prescribed under SFAS No. 123, DVL's net income
in 2001, 2000, and 1999, would have been approximately $2,854,000, $505,000, and
$2,270,000, basic earnings per share would have been $.17, $.03, and $.14
respectively and diluted earnings per share would have been $.03, $.01, and
$.04, respectively.
DVL's 1996 Stock Option Plan, as amended (the "Plan") provides for the
grant of options to purchase up to 2,500,000 shares of Common Stock to
directors, officers and key employees of DVL. It includes automatic grants of
15,000 options to individuals upon their becoming non-employee directors, as
well as automatic annual grants of 15,000 options to each non- employee
director.
All options are non-qualified stock options.
As of December 31, 2001, there were outstanding 1,473,131 ten (10) year
options. Under the Plan, the Company had 1,026,869 shares of common stock
remaining under the Plan for future grants of stock options.
F-26
The following table summarizes the activity under the Plan:
Year Ended December 31,
---------------------------------------------------------------
2001 2000 1999
------------------- ----------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- -------- -------- --------- --------
Options Outstanding at
Beginning of Year 1,278,131 $0.18 1,175,131 $0.19 1,020,131 $0.18
Granted 195,000 0.07 120,000 0.10 205,000 0.21
Cancelled - - (17,000) 0.21 (50,000) 0.12
--------- ----- --------- ----- --------- -----
Options Outstanding at
End of Year 1,473,131 $0.17 1,278,131 $0.18 1,175,131 $0.19
========= ===== ========= ===== ========= =====
Options Exercisable at
End of Year 1,473,131 $0.17 1,278,131 $0.18 1,175,131 $0.19
========= ===== ========= ===== ========= =====
Year Ended December 31, 2001
----------------------------------------------
Options Outstanding Options Exercisable
- -------------------------------------------------- ---------------------
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Exercise Exercise Life In Exercise
Price Shares Price Years Shares Price
- ----------- --------- -------- --------- --------- --------
$.08 0.12 420,000 $0.09 7.90 420,000 $0.09
.13 - 0.19 205,000 0.16 6.38 205,000 0.16
.20 - 0.22 848,131 0.21 5.13 848,131 0.21
- ----------- --------- -------- --------- --------- --------
TOTAL 1,473,131 $0.17 6.10 1,473,131 $0.17
========= ======== ========= ========= ========
The weighted-average fair value at date of grant for options granted during
the years ended December 31, 2001, 2000 and 1999 was $.07, $.09 and $.17 per
option, respectively. The fair value of options at date of grant was estimated
using the Black-Scholes option price model utilizing the following assumptions:
December 31,
--------------------------------------------------
2001 2000 1999
------------- ------------- ---------------
Risk-free interest rates 4.98% - 4.98% 5.83% - 6.56% 5.00% - 5.92%
Expected option life in years 10 10 10
Expected stock price volatility 85% 85% 85%
Expected divided yield 0% 0% 0%
F-27
10. Commitments, Contingent Liabilities and Legal Proceedings
COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------
Pursuant to the terms of the Limited Partner Settlement, a fund has been
established into which DVL is required to deposit 20% of the cash flow received
on its mortgage loans from Affiliated Limited Partnerships after repayment of
certain creditors, 50% of DVL's receipts from certain loans to and general
partnership investments in Affiliated Limited Partnerships and a contribution of
5% of DVL's net income (based on accounting principals generally accepted in the
United States of America) subject to certain adjustments in the years 2001
through 2012. The adjustments are significant enough that no amounts were
accrued for 2001.
No monies had been paid to the fund through December 31, 1999 as DVL had a
receivable from the fund for expenses paid by DVL on behalf of Affiliated
Limited Partnerships. During 2000, the Company paid $117,000 to the fund which
represented all amounts due to/from the fund as of December 31, 2000. During
2001 the Company expensed approximately $551,000 for amounts due to the fund of
which approximately $149,000 was accrued at year end and paid in January 2002.
These costs have been netted against the gain on satisfaction of mortgages
and/or interest on mortgage loans, where appropriate.
In August 1998, DVL entered into a lease of premises comprising
approximately 6,000 square feet. The lease for such office space is due to
expire on February 7, 2003. The base rent is $227,160 per annum, plus real
estate and operating expense escalation clauses. Net rent expense was $236,000,
$189,000, and $187,000 in 2001, 2000, and 1999, respectively.
DVL entered into a contract to buy a leasehold interest in Kearny, NJ for
the purchase price of $1.3 million plus the assumption of $2,850,000 in debt.
The tenant is K-Mart Corporation, Inc. which has filed for Chapter 11 bankruptcy
protection, and the bankruptcy court could disaffirm the lease. There has been
no indication from the court as to the status of the lease. The transaction is
expected to close in May 2002.
The real estate lease interest held by the Company's subsidiary, PSC, is
subject to a master lease agreement through June 2010 which requires monthly
payments of $39,441. The master lease payments are netted against rental income
in the Company's financial statements.
The Asset Servicing Agreement, pursuant to which NPO is providing the
Company with administrative and advisory services, requires monthly payments of
$53,750 through May 2008 with cost of living increases.
In connection with the Exchange Agreement with Blackacre, if at any time
after December 31, 2005, Blackacre is prevented from disposing of any of its
shares as a result of the Board of Directors determination that the transfer
would be materially adverse to the interest of the Company, then Blackacre shall
have the right to sell to the Company and the Company shall be obligated to
purchase up to the number of shares of common stock which when added to all
prior shares of common stock sold to the Company by Blackacre would have an
aggregate market value of not more than $1 million dollars.
11. Shareholders' Equity
Warrants for 3 million shares in aggregate were issued in connection with
the Company's purchase of its interest in Receivables II-A and Receivables II-B
during the year 2001 (Note 2).
As described in Note 7, the Company issued 4,753,113 shares of common stock
to Blackacre in December 2001 to retire $1,188,278 principal amount of Notes.
This represents a conversion rate of $.25 per share. As a result of this
exchange, Blackacre now owns approximately 25% of DVL's issued and outstanding
common stock.
F-28
See Note 6(c) and 7 with respect to Warrants and Notes, which are
redeemable at the Company's option in stock. Depending on the market price of
the Company's stock, there may not be sufficient authorized shares available to
be issued upon the redemption of the Warrants and the Notes.
The 100 shares of issued preferred stock carry no specified dividend but do
receive any dividend approved by the Board. To date, no dividend has been
authorized by the Board. On liquidation, the preferred is paid at face value
before the common stock.
In February 2000, DVL amended its Certificate of Incorporation and
increased its number of authorized shares of capital stock from 40,000,100 to
95,000,100 in order to (a) increase the number of authorized shares of DVL's
common stock, $.01 par value from 40,000,000 to 90,000,000 and (b) authorize
5,000,000 shares of "blank check" preferred stock, $.01 par value.
The Company's By-laws and Certificate of Incorporation restrict certain
transfers of the Company's capital stock in order to preserve certain of the
Company's federal income tax attributes which could be jeopardized through
certain changes in the stock ownership of the Company.
12. Subsequent Events
During 2001, DVL purchased two mortgage loans from an entity that is part
of the Opportunity Fund which are secured by real estate owned by Affiliated
Limited Partnerships in which DVL is the general partner. The loans were
purchased for an aggregate price of $400,000, paid in cash. The loans were
subsequently refinanced in 2002 where DVL realized approximately $380,000 from
the refinancing after closing costs.
F-29
13. Income Taxes
The provision for income taxes was as follows (in thousands):
2001 2000 1999
---- ---- ----
Currently Payable
Federal $ 80 $ - $ -
State - - -
-----------------------------------------
Total Current Provision 80 - -
-----------------------------------------
Deferred Provision
Federal (1,050) - -
State - - -
-----------------------------------------
Total Deferred (Benefit) (1,050) - -
-----------------------------------------
Total (Benefit) $ (970) $ - $ -
=========================================
The Company's effective income tax rate as a percentage of income differed from
the U.S. federal statutory rate as shown below:
U.S. Federal Statutory Rate 34.0% 34.0% 34.0%
Change in Valuation Allowance
and utilization of unrecognized
deferred tax assets -85.1% -34.0% -34.0%
-------------------------------------------
Effective Income Tax Rate -51.1% 0.0% 0.0%
===========================================
Deferred taxes result from timing differences in the recognition of revenue and
expense for tax and financial reporting purposes. The components of the
provision for deferred taxes were as follows:
Allowance for Losses $ 497 $ 324 $ 520
Notes Payable Litigation Settlement 206 (10) 445
Other 41 222 200
Carrying Value of LP Investments (391) (971) (263)
NOL Carryforwards 1,686 216 (228)
Retained Interests (909) - -
Mortgage Loans (69) 87 (310)
Change in Valuation Allowance (2,111) 132 (364)
-------------------------------------------
Total Deferred (Benefit) $ (1,050) $ 0 $ 0
===========================================
The significant components of deferred tax assets and liabilities were as
follows:
2001 2000
---- ----
Allowance for Losses $ 1,701 $ 2,198
Notes Payable Litigation Settlement
Redeemed Notes 972 1,178
Other 227 268
Carrying Value of LP Investments (2,025) (2,416)
NOL Carryforwards 22,314 24,000
Retained Interests 909 -
Mortgage Loans 2,750 2,681
------------------------
Deferred Tax Asset 26,848 27,909
Valuation Allowance (25,798) (27,909)
------------------------
Net Deferred Tax Asset $ 1,050 $ -
========================
F-30
Current taxes payable for 2001 have been reduced by $1,686,000 relating to the
utilization of net operating loss carryforwards. At December 31, 2001, the
Company had aggregate unused net operating loss carryforwards of approximately
$57 million, which may be available to reduce future taxable income, expiring
through 2019, with approximately $50 million expiring through 2007. The deferred
tax benefit of $1,050,000 resulted from a reduction in the valuation allowance,
as the Company's ability to utilize a portion of its net operation loss
carryforwards is more likely than not.
14. Segment Information
The Company has two reportable segments; real estate and residual interests. The
real estate business is comprised of real estate assets, mortgage loans on real
estate, real estate management and investments in Affiliated Limited
Partnerships which own real estate. The residual interests business is comprised
of investments in residual interests in securitized receivables portfolios.
2001 2000 1999
---- ---- ----
Revenues
Real estate $ 6,753 $ 6,063 $ 7,735
Residual interests 2,802 - -
-------- -------- --------
Total consolidated revenues $ 9,555 $ 6,063 $ 7,735
======== ======== ========
Net income
Real estate $ 1,409 $ 505 $ 2,293
Residual interests 1,457 - -
-------- -------- --------
Total consolidated net income $ 2,866 $ 505 $ 2,293
======== ======== ========
Assets
Real estate $ 42,248 $ 45,437 $ 41,858
Residual interests 37,442 - -
-------- -------- --------
Total consolidated assets $ 79,960 $ 45,437 $ 41,858
======== ======== ========
F-31
15. Earnings Per Share
Year Ended
December 31,
---------------------------------------------
2001 2000 1999
---------- ---------- ----------
Income before extraordinary gain $ 2,505 $ 199 $ 1,026
Interest expense on litigation/settlement
notes 484 502 481
------------ ------------ ------------
Income before extraordinary gain
attributable to common stock 2,989 701 1,507
Extraordinary gain 361 306 1,267
------------ ------------ ------------
Net income attributable to common stock $ 3,350 $ 1,007 2,774
============ ============ ============
Weighted average number of common
shares outstanding - basic 16,599,517 16,560,450 16,560,450
Shares issuable upon exercise of
dilutive options and warrants 137,085,102 97,577,336 61,028,722
Less shares assumed repurchased (28,912,504) (17,800,200) (10,605,934)
------------ ------------ ------------
Weighted average number of common
shares outstanding - diluted 124,772,115 96,337,586 66,983,238
============ ============ ============
Basic earnings per share:
Income before extraordinary gain $ .15 $ .01 $ .06
Extraordinary gain .02 .02 .08
------------ ------------ ------------
Net income $ .17 $ .03 $ .14
============ ============ ============
Diluted earnings per share:
Income before extraordinary gain $ .03 $ .01 $ .02
Extraordinary gain .00 .00 .02
------------ ------------ ------------
Net income $ .03 $ .01 $ .04
============ ============ ============
At December 31, 2001, 2000 and 1999, there were 1,473,131, 1,130,131 and
863,131, respectively, in stock options that were not included in the
computation of Diluted EPS because the exercise price was greater than the
average market price of the Common Stock, thereby resulting in an anti-dilutive
effect.
Additionally, there were 3,000,000, -0- and -0- warrants in 2001, 2000 and
1999, respectively, that were not included in the computation of Diluted EPS
because the exercise price was greater than the average market price of the
Common Stock, there by resulting in an anti-dilutive effect.
F-32
DVL, INC. AND SUBSIDIARIES
SCHEDULE III- REAL ESTATE AND ACCUMULATED DEPRECIATION
IN THOUSANDS
Costs Capitalized
Subsequent To Gross Amount Of Which Carried
Initial Cost Acquisition At Close Of Period
-------------------- ------------- -----------------------------
Building and Building and Building and
Description Encumbrances Land Improvements Improvements Land Improvement Total
- --------------- ------------ ---- ------------ ------------ ---- ----------- -----
Warehouse
Manufacturing
Kearny, New Kersey $ - $ 80 $ 426 $ - $ 80 $ 514 $ 594
Warehouse Manu-
facturing & Retail
Kearny, New Jersey $ 3,000 $ 648 $ 2,590 $ - $ 648 $2,590 $3,238
Leasehold Imrprovements
Bogota, New Jersey $ - $ - $ 19 $ 7 $ - $ 26 $ 26
Land: Kearny, NJ $ 200 $ 388 $ - $ - $ 388 $ - $ 388
-------- ------- -------- ----- ------ ------ ------
$ 3,200 $1,116 $ 3,035 $ 7 $1,116 $3,130 $4,246
======== ====== ======== ----- ====== ====== ======
Line on Which Depreciation
Accumulated Date of Date in Latest Income Statement
Depreciation Construction Acquired is Computed
------------ ------------ -------- --------------------------
Description
- -----------
Warehouse
Manufacturing
Kearny, New Jersey $ 34 1977 11/98 Straight-line method
40 years
Warehouse Manu-
Facturing & Retail
Kearny, New Jersey $ 69 1977 12/00 Straight-line method
40 years
Leasehold Improvements
Bogota, New Jersey $ 1 2000 12/00 Straight-line method
40 years
Land: Kearny, NJ $ - - 03/01 -
--------
$ 104
========
YEAR ENDED DECEMBER 31,
2001 2000 1999
----------------------------
(A) RECONCILIATION OF REAL ESTATE OWNED
BALANCE AT BEGINNING OF YEAR $3,763 $ 506 $ 706
ADDITIONS DURING THE YEAR 483 3,257 9
DELETIONS DURING THE YEAR -- -- (209)
------ ------ ------
BALANCE AT END OF YEAR $4,246 $3,763 $ 506
====== ====== ======
Year Ended December 31,
2001 2000 1999
----------------------------
(A) RECONCILIATION OF ACCUMULATED DEPRECIATION
BALANCE AT BEGINNING OF YEAR $ 26 $ 13 $ 2
ADDITIONS DURING THE YEAR: DEPRECIATION 78 13 11
------ ------ ------
BALANCE AT END OF YEAR $ 104 $ 26 $ 13
====== ====== ======
See notes to consolidated financial statements
F-33
EXHIBIT 11
DVL, INC. and Subsidiaries
Computation of Earnings Per Share
(in thousands except share and per share data)
(unaudited)
Year Ended
December 31,
---------------------------------------------
2001 2000 1999
---------- ---------- ----------
Income before extraordinary gain $ 2,505 $ 199 $ 1,026
Interest expense on litigation/settlement
notes 484 502 481
------------ ------------ ------------
Income before extraordinary gain
attributable to common stock 2,989 701 1,507
Extraordinary gain 361 306 1,267
------------ ------------ ------------
Net income attributable to common stock $ 3,350 $ 1,007 2,774
============ ============ ============
Weighted average number of common
shares outstanding - basic 16,599,517 16,560,450 16,560,450
Shares issuable upon exercise of
dilutive options and warrants 137,085,102 97,577,336 61,028,722
Less shares assumed repurchased (28,912,504) (17,800,200) (10,605,934)
------------ ------------ ------------
Weighted average number of common
shares outstanding - diluted 124,772,115 96,337,586 66,983,238
============ ============ ============
Basic earnings per share:
Income before extraordinary gain $ .15 $ .01 $ .06
Extraordinary gain .02 .02 .08
------------ ------------ ------------
Net income $ .17 $ .03 $ .14
============ ============ ============
Diluted earnings per share:
Income before extraordinary gain $ .03 $ .01 $ .02
Extraordinary gain .00 .00 .02
------------ ------------ ------------
Net income $ .03 $ .01 $ .04
============ ============ ============
DVL, INC. -- TABLE 1
LONG TERM MORTGAGES DUE FROM AFFILIATED PARTNERSHIPS (4)
DECEMBER 31, 2001 (In Thousands)
Net Under-
Location of Mtg. lying Security
Affiliated Property Mortgage Unearned Loan Loan Monthly [mortgage(s)
Partnership Securing Loan Balance Interest Receiv. Balance Yield Amdat. Maturity upon] Tenant(s)
- ---------------------------------------------------------------------------------------------------------------------------------
Alexandria Wellsville, NY $ 839 $ 629 $ 210 $ -- 51% $ 1 February Land and Eckerd
Associates 2027 a commercial Stores, Inc.
building (1)
Alma Alma, AR 1,863 734 1,129 687 15% $12 March Land and Wal-Mart
Associates (2) 2027 a commercial Stores, Inc.
building (1)
Ava Associates Ossipee, NH 812 551 261 - 16% $ - February Land and Hannaford
Associates (2) 2027 a commercial Bros. Co.
building (1)
Brent Brent, AL 1,397 530 867 519 15% $ 9 February Land and Wal-Mart
Associates (2) 2027 a commercial Stores, Inc.
building (1)
Champlain Champlain, NY 1,321 691 630 - 21% $ - January Land and Ames Dept.
Associates 2020 a commercial Stores, Inc.
building (1)
Checotah Checotah, OK 1,462 610 852 527 15% $ 9 February Land and Wal-Mart
Associates (2) 2027 a commercial Stores, Inc.
building (1)
Edna Edna, TX 3,107 2,239 868 673 23% $ - January Land and Wal-Mart
Associates 2028 a commercial Stores, Inc.
building (1)
Fairbury Fairbury, NE 1,707 729 978 605 15% $10 August Land and Wal-Mart
Associates (2) 2027 a commercial Stores, Inc.
building (1)
Fort Edward (3) Fort Edward, NY 1,433 73 1,360 - 12% $14 May Land and a Vacant
Associates 2029 supermarket
FYS Yakima, WA 376 78 298 - 10% $ 1 August Land and a Kroger Co.
Associates 2021 supermarket
Hoosick Falls Hoosick Falls, NY 1,329 640 689 - 15% $10 August Land and a GU Markets,
Associates 2021 supermarket Inc.
DVL, INC. -- TABLE 1: CONTINUED
LONG TERM MORTGAGES DUE FROM AFFILIATED PARTNERSHIPS (4)
DECEMBER 31, 2001 (In Thousands)
Net Under-
Location of Mtg. lying Security
Affiliated Property Mortgage Unearned Loan Loan Monthly [mortgage(s)
Partnership Securing Loan Balance Interest Receiv. Balance Yield Amort. Maturity upon] Tenant(S)
- ---------------------------------------------------------------------------------------------------------------------------------
Jena Jena, LA $ 2,602 $ 1,932 $ 670 606 35% $ 1 February Land and Wal-Mart
Associates 2027 a commercial Stores, Inc.
building (1)
building (1)
Orange Park Jacksonville, FL 1,404 551 853 811 12% $9 with January Land and Toys "R" Us,
Associates a final 2020 a commercial Inc.
pmt. of building (1)
$672
Port Isabel Port Isabel, TX 2,045 770 1,275 749 15% $12 February Land and Wal-Mart
Associates (2) 2027 a commercial Stores, Inc.
building (1)
Stigler Stigler, OK 2,536 1,909 627 524 28% $ 2 August Land and Wal-Mart
Associates 2027 a commercial Stores, Inc.
building (1)
St. Albans St. Albans, VT 1,753 772 981 626 30% $15 May Land and a Fonda Group
Associates 2029 commercial
building (1)
Waldron Waldron, AR 3,002 2,218 784 654 22% $ - December Land and a Wal-Mart
Associates 2031 commercial Stores, Inc.
building (1)
Watseka Watseka, IL 1,038 252 786 643 12% Varying December Land and a K-Mart
Associates 2015 commercial Corporation (3)
------- ------- ------- building (1)
$30,026 $15,908 $14,118 $7,624
- -------------------
(1) These loans are wrap-around loans.
(2) These loans were restructured as part of the Limited Partner Settlement.
The settlement may have the effect of reducing DVL's yield in the future,
which reduced yield is dependent on the actual additional debt service
received on these mortgages in the future.
(3) Building is currently vacant, tenant has filed for bankruptcy and
dissaffirmed its lease.
(4) DVL's net investment in these mortgages was $6,494,000 and $6,472,000 at
December 31, 2001 and 2000, respectively.
DVL, INC. -- TABLE 2
LONG TERM MORTGAGES, ACQUIRED FROM KENBEE,
DUE FROM AFFILIATED PARTNERSHIPS (1)(5)
DECEMBER 31, 2001 (In Thousands)
Partner- Under- Net Amt. Net
Location ship lying of Col- Mtg.
of Property Mortgage Loan lateral Loans
Affiliated Partnership Securing Loan Balance Balance Pledged Recvable Maturity Tenant
- -----------------------------------------------------------------------------------------------------------------------------------
Aledo Associates LP Aledo, IL (2) $ 1,843 $ 964 $ 879 $ 1,207 November 2018 Wal-Mart Stores, Inc.
Caldwell Associates Caldwell, TX (2) 1,621 820 801 1,085 May 2019 Wal-Mart Stores, Inc.
Cherokee Associates Woodstock, GA (2) 2,902 2,424 478 2,438 July 2023 Wal-Mart Stores, Inc.
Clinton Associates Clinton, IL (2) 3,357 771 2,586 1,865 June 2029 Wal-Mart Stores, Inc.
Columbus Associates Columbus, TX (2) 3,840 891 2,949 1,812 December 2029 Wal-Mart Stores, Inc.
Covington Associates Covington, GA (2) 4,709 1,271 3,438 1,885 January 2030 Wal-Mart Stores, Inc.(4)
Douglas Associates Douglas, GA (2) 2,140 936 1,204 2,118 December 2023 Wal-Mart Stores, Inc.
operating as - Buds
Elmira Associates Elmira, NY (2) 682 - 682 285 November 2021 Fays Drug Company, Inc.
Iowa Park Associates LP Iowa Park, TX (2) 1,715 657 1,058 938 March 2021 Wal-Mart Stores, Inc.
Lawrenceburg Associates Lawrenceburg, KY (2) 2,961 720 2,241 1,024 December 2029 Wal-Mart Stores, Inc.
Marshall Associates LP Marshall, IL (2) 1,576 861 715 1,072 November 2018 Wal-Mart Stores, Inc.
Mt. Pleasant Associates LP Mt. Pleasant, IA (2) 2,288 1,150 1,138 1,458 November 2019 Wal-Mart Stores, Inc.
Robstown Associates LP Robstown, TX (2) 1,895 804 1,091 878 October 2020 Wal-Mart Stores, Inc.(4)
Sonya Associates LP Booneville, MO (2) 1,554 920 634 1,172 June 2018 Wal-Mart Stores, Inc.
Southfield Associates Southfield, MI (3) 3,539 592 2,947 837 July 2026 Pitney-Bowes, Inc.
Winder Associates Winder, GA (2) 1,754 813 941 1,375 March 2021 Wal-Mart Stores, Inc.
------- ------- ------- -------
$38,376 $14,594 $23,782 $21,449
- --------------------------------
(1) These loans were acquired pursuant to the Limited Partner Settlement from
Kenbee. DVL's loan balance equals it's net investment in the related loan
due previously from Kenbee, less specific write-downs on certain loans
based upon the anticipated cash flow to be generated by each loan.
(2) The loans due from these partnerships are secured by mortgages upon land
and commercial buildings.
(3) The loans due from these partnerships are secured by mortgages upon land
and office buildings.
(4) Building is currently vacant, however, tenant is obligated under the terms
of the lease to continue to pay rent.
(5) DVL's total loan balances of these mortgages were $21,449,000 and
$28,053,000 at December 31, 2001 and 2000, respectively. The decrease
resulted from the satisfaction of certain mortgage indebtedness (eg.
Douglasville, Marlow, and Van Buren) and collections on certain mortgages.