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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________________ to ______________________
Commission file number: 1-8356
DVL, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2892858
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
70 East 55th Street, New York, New York 10022
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (212) 350-9900
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since
last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes: _X_ No: ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Class Outstanding at August 13, 2002
----------------------------- ------------------------------
Common Stock, $.01 par value 21,713,563
DVL, INC. AND SUBSIDIARIES
INDEX
Part I. Item 1 - Financial Information: Pages
-----
Consolidated Balance Sheets -
June 30, 2002 (unaudited) and December 31, 2001 1-2
Consolidated Statements of Operations -
Three Months Ended June 30, 2002 (unaudited)
and 2001 (unaudited) 3,5
Consolidated Statements of Operations -
Six Months Ended June 30, 2002 (unaudited)
and 2001 (unaudited) 4,5
Consolidated Statement of Shareholders' Equity -
Six Months Ended June 30, 2002 (unaudited) 6
Consolidated Statements of Cash Flows -
Six Months ended June 30, 2002 (unaudited) and
2001 (unaudited) 7-8
Notes to Consolidated Financial Statements (unaudited) 9-15
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-22
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 22
Part II. Other Information:
Item 6 - Exhibits and Reports on Form 8-K 23
Signature 24
Exhibits 25
Part I - Financial Information
Item 1. Financial Statements
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2002 2001
----------- ------------
ASSETS (unaudited)
- ------
Residual interests in securitized portfolios $ 36,989 $ 36,906
-------- --------
Mortgage loans receivable from affiliated
partnerships (net of unearned interest of
$15,704 for 2002 and $15,908 for 2001) 31,996 35,567
Allowance for loan losses 2,908 4,095
-------- --------
Net mortgage loans receivable 29,088 31,472
-------- --------
Cash (including restricted cash of $163 and
$260 for 2002 and 2001) 2,907 2,987
Investments
Real estate at cost (net of accumulated
depreciation of $144 for 2002 and $104 for 2001) 4,539 4,142
Real estate lease interests 1,013 1,080
Affiliated limited partnerships (net of allowances
for losses of $538 and $540, for 2002 and 2001) 1,067 1,121
Deferred income tax benefits 1,430 1,050
Other assets 1,011 932
-------- --------
Total assets $ 78,044 $ 79,690
======== ========
(continued)
See notes to consolidated financial statements.
1
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(continued)
June 30, December 31,
2002 2001
----------- -----------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Notes payable - residual interests $ 34,723 $ 35,044
Underlying mortgages payable 20,396 22,218
Long-term debt - affiliates 1,961 1,942
Long-term debt - other 5,180 5,067
Notes payable - litigation settlement 1,654 1,902
Redeemed notes payable - litigation settlement 834 596
Fees due to affiliates 750 928
Security deposits, accounts payable and accrued
liabilities (including deferred income of $304
for 2002 and $17 for 2001) 626 1,038
--------- ---------
Total liabilities 66,124 68,735
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock $10.00 par value, authorized,
issued and outstanding 100 shares 1 1
Preferred stock, $.01 par value, authorized 5,000,000 -- --
Common stock, $.01 par value, authorized - 90,000,000
issued and outstanding 21,713,563 shares for 2002
and 21,313,563 shares for 2001 217 213
Additional paid-in capital 95,785 95,757
Deficit (84,083) (85,016)
--------- ---------
Total shareholders' equity 11,920 10,955
--------- ---------
Total liabilities and shareholders' equity $ 78,044 $ 79,690
========= =========
See notes to consolidated financial statements.
2
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
Three Months Ended
June 30,
--------------------
2002 2001
-------- --------
Income from affiliates:
Interest on mortgage loans $ 735 $ 737
Gain on satisfaction of mortgage loans 252 176
Partnership management fees 78 94
Management fees 108 172
Transaction and other fees from partnerships 50 139
Distributions from investments 16 33
Income from others:
Interest income - residual interests 1,084 783
Net rental income (including depreciation
and amortization of $25 for 2002 and $35
for 2001) 129 191
Distributions from investments 29 56
Other income and interest 13 20
-------- --------
2,494 2,401
-------- --------
Operating expenses:
General and administrative 341 347
Asset servicing fee - NPO Management LLC 164 162
Legal and professional fees 133 71
Interest expense:
Underlying mortgages 412 528
Notes payable - residual interests 689 522
Affiliates 73 89
Litigation settlement notes 82 115
Others 137 151
-------- --------
2,031 1,985
-------- --------
Income before income tax benefit and loss 463 416
Income tax expense (benefit) (380) --
-------- --------
Income before extraordinary loss 843 416
Extraordinary losses on the settlements
of indebtedness (60) --
-------- --------
Net income $ 783 $ 416
======== ========
(continued)
See notes to consolidated financial statements.
3
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
Six Months Ended
June 30,
--------------------
2002 2001
-------- --------
Income from affiliates:
Interest on mortgage loans $ 1,504 $ 1,634
Gain on satisfaction of mortgage loans 252 327
Partnership management fees 152 201
Management fees 154 206
Transaction and other fees from partnerships 69 209
Distributions from investments 46 90
Income from others:
Interest income - residual interests 2,176 783
Net rental income (including depreciation
and amortization of $53 for 2002 and $71
for 2001) 328 371
Distributions from investments 29 94
Other income and interest 22 32
-------- --------
4,732 3,947
-------- --------
Operating expenses:
General and administrative 705 653
Asset servicing fee - NPO Management LLC 325 318
Legal and professional fees 250 178
Interest expense:
Underlying mortgages 882 1,069
Notes payable - residual interests 1,388 522
Affiliates 144 177
Litigation settlement notes 162 243
Others 263 299
-------- --------
4,119 3,459
-------- --------
Income before income tax benefit and (loss) gain 613 488
Income tax expense (benefit) (380) --
-------- --------
Income before extraordinary (loss) gain 993 488
Extraordinary (losses) gains on the
settlements of indebtedness (60) 14
-------- --------
Net income $ 933 $ 502
======== ========
(continued)
See notes to consolidated financial statements.
4
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
(continued)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ----------------------------
2002 2001 2002 2001
----------- ------------ ------------ ------------
Basic earnings per share:
Income before extraordinary items $ .04 $ .03 $ .04 $ .03
Extraordinary items .00 .00 .00 .00
----------- ------------ ------------ ------------
Net income $ .04 $ .03 $ .04 $ .03
=========== ============ ============= ============
Diluted earnings per share:
Income before extraordinary items $ .02 $ .00 $ .02 $ .00
Extraordinary items .00 .00 .00 .00
----------- ------------ ------------ ------------
Net income $ .02 $ .00 $ .02 $ .00
=========== ============ ============ ============
Weighted average shares outstanding - basic 21,713,563 16,560,450 21,713,563 16,560,450
Effect of dilutive notes, options and warrants 34,160,221 125,829,094 37,839,780 125,829,094
----------- ------------ ------------ ------------
Weighted average shares outstanding - diluted 55,873,784 142,389,544 59,553,343 142,389,544
=========== ============ ============ ============
See notes to consolidated financial statements.
5
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands except share data)
(unaudited)
Preferred Stock Common Stock Additional
--------------- ------------------- paid-in
Shares Amount Shares Amount capital Deficit Total
------- ------ ---------- ------- -------- --------- -------
Balance-January 1, 2002 100 $ 1 21,313,563 $ 213 $ 95,757 $ (85,016) $10,955
Issuance of Common Stock as
compensation for services
received -- -- 400,000 4 28 -- 32
Net income -- -- -- -- -- 933 933
------- ----- ---------- ------- -------- --------- -------
Balance-June 30, 2002 100 $ 1 21,713,563 $ 217 $ 95,785 $ (84,083) $11,920
======= ===== ========== ======= ======== ========= =======
See notes to consolidated financial statements.
6
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
-------------------
2002 2001
------- -------
Cash flows from operating activities:
Income before extraordinary items $ 993 $ 488
Adjustments to reconcile net income before extra-
ordinary gains to net cash (used in) provided by
operating activities
Interest income accreted on residual interests (190) (98)
Accrued interest added to indebtedness 119 136
Gain on satisfactions of mortgage loans (252) (327)
Depreciation 44 39
Amortization of unearned interest on loan receivables (132) (58)
Amortization of real estate lease interests 67 68
Imputed interest on notes 162 243
Stock issued for services received 32 --
Net (increase) in deferred income tax benefits (380) --
Net (increase) decrease in prepaid financing and
other assets (79) 316
Net (decrease) in accounts payable, security, deposits
and accrued liabilities (699) (296)
Net (decrease) increase in fee due to affiliates (178) 28
Net increase in deferred income 287 210
------- -------
Net cash (used in) provided by operating activities (206) 749
------- -------
Cash flows from investing activities:
Collections on loans receivable 2,397 3,715
Real estate acquisitions and capital improvements (25) (248)
Net decrease in affiliated limited partnership
interests and other investments 12 94
------- -------
Net cash provided by investing activities 2,384 3,561
------- -------
(continued)
See notes to consolidated financial statements
7
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
(continued)
Six Months Ended
June 30,
--------------------
2002 2001
-------- --------
Cash flows from financing activities:
Proceeds from new borrowings $ 400 $ 200
Repayment of indebtedness (491) (741)
Payments on underlying mortgages payable (1,822) (2,433)
Payments on notes payable - residual interest (214) (1)
Payments related to debt tender offers and redemptions (131) (59)
-------- --------
Net cash used in financing activities (2,258) (3,034)
-------- --------
Net (decrease) increase in cash (80) 1,276
Cash, beginning of period 2,987 1,184
-------- --------
Cash, end of period $ 2,907 $ 2,460
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,545 $ 1,291
======== ========
Supplemental disclosure of non-cash investing and
financing activities:
Net reduction of notes payable - debt tender offers
and redemptions $ 369 $ 14
======= ========
Residual interests in securitized portfolios -
(decrease) increase $ (107) $ 28,374
======= ========
Notes payable - residual interests - (decrease)
increase $ (107) $ 27,610
======= ========
Foreclosure on mortgage loan receivable collateralized
by real estate $ 416 $ --
======= ========
See notes to consolidated financial statements.
8
DVL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
In the opinion of DVL, Inc. ("DVL" or the "Company"), the accompanying
financial statements contain all adjustments (consisting of only normal
accruals) necessary in order to present a fair presentation of the financial
position of DVL and the results of its operations for the periods set forth
herein. The results of the Company's operations for the three and six months
ended June 30, 2002 should not be regarded as indicative of the results that may
be expected from its operations for the full year. Certain amounts from the
three and six months ended June 30, 2001 have been reclassified to conform to
the presentation for the three and six months ended June 30, 2002. For further
information, refer to the consolidated financial statements and the accompanying
notes included in DVL's Annual Report on Form 10-K for the year ended December
31, 2001.
2. Residual Interests In Securitized Portfolios
During 2001, the Company, through its wholly-owned consolidated subsidiary,
S2 Inc. ("S2"), acquired 99.9% Class B member interests in Receivables II-A LLC,
a limited liability company ("Receivables II-A") and 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 interests entitle the Company to be allocated 99.9% of all items of
income, loss and distribution of Receivables II-A and Receivables II-B.
Receivables II-A and Receivables II-B solely receive the residual cash flow from
five securitized receivable pools after payment to the securitized noteholders.
The Company purchased its interests for an aggregate purchase price of
$35,791,264, including costs of $1,366,264 which included the issuance of
warrants, valued at $136,000, for the purchase of 3 million shares of the common
stock of DVL, exercisable until 2011 at a price of $.20 per share. The purchase
price was paid by the issuance of 8% per annum limited recourse promissory notes
by S2 in the aggregate amount of $34,425,000. Principal and interest are payable
from the future monthly cash flow. The notes mature August 15, 2020 through
December 31, 2021 and are secured by a pledge of S2's interests in Receivables
II-A, Receivables II-B and all proceeds and distributions related to such
interests. 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 $3,442,500 of the purchase
price. The amount of the guaranty is regularly reduced by 10% of the principal
paid. The amount of the guaranty at June 30, 2002 was $3,411,500. Payments, if
any, due under this guaranty are payable after August 15, 2020.
In accordance with the purchase agreements, from the acquisition dates
through June 30, 2002, the residual interests in securitized portfolios and the
notes payable increased by approximately $592,000 based on the performance of
the underlying receivables.
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:
Years Minimum Maximum
----- ------- -------
2002 to 2009 $ 742,500 $ 880,000
2010 to final payment $1,050,000 $1,150,000
on notes payable*
* Final payment on the notes payable expected 2016 related to the
Receivables II-A transaction and 2018 for the Receivables II-B
transaction.
The Company believes it will receive significant cash flows after final payment
of the notes payable.
9
3. Mortgage Loans Receivable
Virtually all of DVL's loans receivable arose out of transactions in which
affiliated limited partnerships purchased commercial, office and industrial
properties which are typically leased on a long-term basis to unaffiliated
creditworthy tenants. Each mortgage loan is collateralized by a lien,
subordinate to any senior liens, on real estate owned by such affiliated limited
partnership. DVL's loan portfolio is comprised of long-term wrap-around and
other mortgage loans due from affiliated limited partnerships.
4. Notes Payable - Litigation Settlement/Redemptions
As a result of its 1993 settlement of class action litigation, in December
1995, DVL issued notes (the "Notes") in the aggregate principal amount of
$10,386,851. The Notes, which are general unsecured obligations of DVL, accrue
interest at the rate of ten (10%) percent per annum and are due on December 31,
2005. Pursuant to the terms of the Notes, interest was paid on the first five
anniversary dates by the issuance of additional Notes with a principal amount
equal to the accrued interest obligation then due. As a result of various
transactions described below as of June 30, 2002 Notes with an aggregate
principal amount of approximately $2,000,000 were outstanding with a carrying
value of $1,654,000.
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 or the
potential dilutive effect. The redemption of the Notes will 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 some or all of its redemption option to the extent it does
not buy back the outstanding Notes by means of cash tender offers or cash
redemptions.
The Company sent redemption letters to note holders who held Notes that
aggregated approximately $1,079,000 offering to pay the Notes in cash at the
face value plus accrued interest of approximately $48,000. As of June 30, 2002,
$293,000 has been paid and the remaining $834,000 is payable, but no longer
accrues interest.
5. Real Estate
The Company currently owns two contiguous properties located in Kearny, New
Jersey and one property located in Fort Edward, New York.
These properties are:
(1) Eight buildings totaling 347,000 square feet on 8 acres located in an
industrial park in Kearny, NJ leased to various unrelated tenants.
(2) Fee title in 8 acres of land in Kearny, NJ underlying a KMart store.
(3) During the second quarter of 2002 the Company foreclosed on a mortgage loan
receivable which was in default. The collateral for the mortgage loan was a
31,000 square foot former Grand Union Supermarket and approximately six acres of
land underlying the building. The carrying value for the property was $416,000
at June 30, 2002.
(4) The Company is in the process of acquiring an additional interest in real
estate as previously disclosed in the Company's Form 10-K
10
6. Other Transactions with Affiliates
A. The Company has provided management, accounting, and administrative services
to certain entities which are affiliated with NPO and/or, Blackacre. The fees
received from management service contracts are as follows:
Fees Received Fees Received Fees Received Fees Received
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
Affiliate Of 6/30/02 6/30/01 6/30/02 6/30/01
- ------------ ------------- ------------- ------------- -------------
NPO and Blackacre $ 6,731 $ 34,526 $ 13,461 $ 41,231
NPO $ 12,000 $ 12,000 $ 24,000 $ 24,000
NPO(1) $ 58,597 $ 6,000 $ 142,597 $ 103,000
(1) Of the total cash received for the six months ended June 30, 2002, $78,000
represented prior deferred fees paid in the first quarter of 2002. The
Company is entitled to a current fee of $2,000 per month and a deferred fee
of $6,500 per month paid annually in the first quarter of the fiscal year.
In addition, the Company received annual incentive fees of $52,597 and $0
for the six months ended June 30, 2002 and 2001, respectively.
B. Millennium Financial Services, an affiliate of NPO, has received fees
representing compensation, and reimbursement of expenses for collection
services as follows:
Fees For The Fees For The Fees For The Fees For The
Three Months Three Months Six Months Six Months
Ended 6/30/02 Ended 6/30/01 Ended 6/30/02 Ended 6/30/01
------------- ------------- ------------- -------------
$ 55,083 $ 9,154 $ 85,083 $ 41,769
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 as follows:
Fees For The Fees For The Fees For The Fees For The
Three Months Three Months Six Months Six Months
Ended 6/30/02 Ended 6/30/01 Ended 6/30/02 Ended 6/30/01
------------- ------------- ------------- -------------
$ 37,376 $ 50,053 $ 37,376 $ 59,303
The Pembroke Group and the Millenium Group were issued a total of 400,000 shares
of common stock, valued at $32,000, during the first quarter of 2002 for
additional services rendered to the Company outside the scope of the Asset
Servicing Agreement.
C. 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 in aggregate for their services
in connection with the origination, negotiation and structuring of the
transactions. The fee is payable without interest, over 30 months starting
January, 2002, from a portion of the monthly cash flow generated by the
acquisitions. At June 30, 2002, $720,000 remained payable.
7. Contingent Liabilities
In connection with class action litigation settled in 1992 ("Settlement"),
DVL is required to deposit into a settlement fund a portion of the net cash flow
received from affiliated limited partnership mortgages and other loans
receivable from affiliated limited partnerships. These costs have been netted
against the gain on satisfaction of mortgages and/or interest on mortgage loans.
The payments were as follows:
Three Months Three Months Six Months Six Months
Ended 6/30/02 Ended 6/30/01 Ended 6/30/02 Ended 6/30/01
------------- ------------- ------------- -------------
$ 217,000 $ 218,000 $ 219,000 $ 398,000
11
In addition, DVL is required to contribute to the settlement fund 5% of its
net income (based on generally accepted accounting principals) less amortization
of certain loans, in the years 2001 to 2012. The estimated amortization of the
certain loans for 2002 is significant enough that no amounts due to the
settlement fund were accrued through June 30, 2002.
8. Restriction on Certain Transfers of Capital Stock
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
9. Earnings per share (unaudited)
(in thousands except share and per share data)
The following tables present the basic and diluted EPS for the six months and
three months ended June 30, 2002 and 2001.
Six Months Ended June 30,
-------------------------
2002 2001
----------------------------------- -------------------------------------
Weighted Weighted
Average Average
Number of Per Share Number of Per Share
Amount Shares Amount Amount Amount Amount
------ ---------- --------- ------ ----------- ---------
Income before extraordinary items $ 993 $ 488
====== ===
Basic EPS
Income available to common stockholders $ 993 21,713,563 $ .04 $ 488 16,560,450 $ 0.03
======== =======
Effect of litigation settlement notes 162 15,311,474 243 75,125,274
Effect of dilutive stock options and warrants - 22,528,306 - 50,703,820
------ ----------- ------ -------------
Diluted EPS
Income available to common stockholders $1,155 59,553,343 $ .02 $ 731 142,389,544 $ 0.00
====== =========== ======== ====== ============= =======
Three Months Ended June 30,
---------------------------
2002 2001
----------------------------------- -------------------------------------
Weighted Weighted
Average Average
Number of Per Share Number of Per Share
Amount Shares Amount Amount Amount Amount
------ --------- --------- ------ --------- ---------
Income before extraordinary items $ 843 $ 416
====== ===
Basic EPS
Income available to common stockholders $ 843 21,713,563 $ .04 $ 416 16,560,450 $ 0.03
======== =======
Effect of litigation settlement notes 82 12,629,695 115 75,125,274
Effect of dilutive stock options and warrants - 21,530,526 - 50,703,820
------ ----------- ------ --------------
Diluted EPS
Income available to common stockholders $ 925 55,873,784 $ .02 $ 531 142,389,544 $ 0.00
====== =========== ======== ====== ============= =======
13
At June 30, 2002 and 2001 there were approximately $2,000,000 and
$3,514,000, respectively, aggregate principal amount of Notes outstanding. The
Company has the option to redeem the outstanding Notes by issuing 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 calculation of diluted
earnings per share assumes that the outstanding Notes are redeemed at the
average closing stock price for the three and six months ended June 30, 2002 and
2001, respectively. The change in the weighted average number of common shares
outstanding - diluted resulted from 1) a decrease in the weighted average amount
of Notes outstanding and 2) an increase in the average closing stock price for
the three and six months ended June 30, 2002 compared to the three and six
months ended June 30, 2001.
Also included in the weighted average number of diluted shares are warrants
representing rights to acquire up to 49% of the outstanding common stock of the
Company on a fully diluted basis. The number of shares issued pursuant to such
warrants will adjust depending upon the number of shares issued pursuant to a
redemption of the Notes. Therefore, the potential issuance of shares of common
stock to satisfy the Notes has a doubling effect on the weighted average number
of diluted shares since the number of shares needed to satisfy the warrants
would also increase.
In addition, at June 30, 2002 and 2001 there were 3,848,131 and 3,473,131,
respectively, potentially dilutive options and warrants excluded from 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.
10. 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.
June 30,
--------------------
2002 2001
-------- --------
Revenues
Real estate $ 2,534 $ 3,132
Residual interests 2,176 783
Corporate/Other 22 32
-------- --------
Total consolidated revenues $ 4,732 $ 3,947
======== ========
Net income (loss)
Real estate $ (160) $ 195
Residual interests 754 261
Corporate/Other 339 46
-------- --------
Total consolidated net income $ 933 $ 502
======== ========
Assets
Real estate $ 39,625 $ 43,114
Residual interests 36,989 28,472
Corporate/Other 1,430 -
-------- --------
Total consolidated assets $ 78,044 $ 71,586
======== ========
14
11. Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("FAS 109"), which requires the Company
to a 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 l09 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.
In 2002 the Company recognized $380,000 of income tax benefit as a result
of a reduction in the valuation allowance on deferred tax assets. In 2001 the
provision for income taxes was completely offset by the reduction in the
valuation allowance on deferred tax assets.
15
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This June 30, 2002 Quarterly Report on Form 10-Q 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 DVL and its management team. DVL'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 and other risks and
uncertainties that are discussed herein and in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
- -----------------------------------------------------------------------------
DVL had income before extraordinary items, extraordinary losses, and net income,
as follows:
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------------ ------------------
Income before extraordinary items $ 843,000 $ 416,000
Extraordinary losses $ (60,000) $ -0-
Net income $ 783,000 $ 416,000
Interest expense on underlying mortgages decreased (2002 - $412,000, 2001 -
$528,000) as a result of a) the sale of one mortgage in 2002 which had an
underlying mortgage and b) the sale of four mortgages in 2001 which had
underlying mortgages. The decrease was partially offset by an increase in
interest expense related to two mortgage loans purchased in December 2001 which
have underlying mortgages.
Gain on satisfaction of mortgage loans was as follows:
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------------ ------------------
$ 252,000 $ 176,000
The gains in 2002 and 2001 were a result of the Company collecting net proceeds
on the satisfaction of mortgage loans that were greater than the carrying
values.
Management fees decreased (2002 - $108,000, 2001 - $172,000) primarily from the
Company earning a one time fee of $100,000 in June 2001.
Transaction and other fees from affiliated limited partnerships were as follows:
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------------ ------------------
$ 50,000 $ 139,000
16
Transaction fees are earned by the Company in connection with sales of
partnership properties and the Company sold fewer partnership properties during
the second quarter 2002 compared to the second quarter 2001.
Interest income on residual interests (2002 - $1,084,000, 2001 - $783,000) and
interest expense on the related notes payable (2002 - $689,000, 2001 - $522,000)
increased from 2001 to 2002 as DVL completed the acquisitions in March 2001 and
August 2001.
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------------ ------------------
Net rental income from others $ 129,000 $ 191,000
Gross rental income from others $ 583,000 $ 520,000
The decrease in net rental income was primarily the result of an increase in the
allowance for bad debts of $75,000 relating to receivables from a major tenant.
The increase in the allowance for bad debts was partially offset by higher gross
rents.
The asset servicing fee due from the Company to NPO increased (2002 - $164,000,
2001 - $162,000) pursuant to its terms due to an increase in the consumer price
index.
Legal and professional fees increased (2002 - $133,000, 2001 - $71,000)
primarily as a result of legal fees relating to the preparation of proxy
materials.
Interest expense on the litigation settlement notes ("Notes") decreased (2002 -
$82,000, 2001 - $115,000) as a result of redeeming Notes during 2000 and 2001 as
well as exchanging Notes for Common Stock in December 2001.
Interest expense to affiliates decreased (2002 - $73,000, 2001 - $89,000)
because the interest bearing amount outstanding to affiliates was reduced.
Interest expense relating to other debts decreased (2002 - $137,000, 2001 -
$151,000) primarily due to decreases in interest rates on floating rate loans
and repayments of principal. The reductions in interest expense were partially
offset by new borrowings.
In 2002 the Company recognized $380,000 of income tax benefit as a result of a
reduction in the valuation allowance on deferred tax assets. In 2001 the
provision for income taxes was completely offset by the reduction in the
valuation allowance on deferred tax assets utilized during the quarter.
Extraordinary losses of $60,000 in 2002 resulted from redeeming Notes at face
value which were carried at a discount.
17
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
- -------------------------------------------------------------------------
DVL had income before extraordinary items, extraordinary gains (losses), and net
income as follows:
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
---------------- ----------------
Income before extraordinary items $ 993,000 $ 488,000
Extraordinary gains (losses) $ (60,000) $ 14,000
Net income $ 933,000 $ 502,000
Interest income on mortgage loans from affiliates decreased (2002 - $1,504,000,
2001 - $1,634,000) and interest expense on underlying mortgages decreased (2002
- - $882,000, 2001 - $1,069,000) as a result of a) the sale of one mortgage in
2002 which had an underlying mortgage and b) the sale of four mortgages in 2001
which had underlying mortgages. The decreases in interest income on mortgage
loans and interest expense on underlying mortgages were partially offset by
increases related to two mortgage loans purchased in December 2001 which have
underlying mortgages.
Gain on satisfaction of mortgage loans were as follows:
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
---------------- ----------------
$ 252,000 $ 327,000
The gains in 2002 and 2001 were a result of the Company collecting net proceeds
on the satisfaction of mortgage loans that were greater than the carrying
values.
Management fees decreased (2002 - $154,000, 2001 - $206,000) primarily from the
Company earning a one time fee of $100,000 in June 2001.
Transaction and other fees from affiliated limited partnerships were as follows:
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
---------------- ----------------
$ 69,000 $ 209,000
Transaction fees were earned by the Company in connection with the sales of
partnership properties and the Company sold fewer partnership properties during
2002 compared to 2001.
Interest income on residual interests (2002 - $2,176,000, 2001 - $783,000) and
interest expense on the related notes payable (2002 - $1,388,000, 2001 -
$522,000) increased from 2001 to 2002 as DVL completed the acquisitions in March
2001 and August 2001.
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
---------------- ----------------
Net rental income from others $ 328,000 $ 371,000
Gross rental income from others $ 1,156,000 $ 1,028,000
The decrease in net rental income was primarily the result of an increase in the
allowance for bad debts of $75,000 relating to receivables from a major tenant.
The increase in the allowance for bad debts was partially offset by higher gross
rents.
18
General and administrative expenses increased to $705,000 in 2002 from $653,000
in 2001. The primary reasons for the increase were greater salaries and
consulting costs in the first quarter of 2002.
The asset servicing fee due from the Company to NPO increased (2002 - $325,000,
2001 - $318,000) pursuant to its terms due to an increase in the consumer price
index.
Legal and professional fees increased (2002 - $250,000, 2001 - $178,000) as a
result of the issuance of stock valued at $32,000 for services rendered to the
Company and legal fees relating to the preparation of proxy materials.
Interest expense on the Notes decreased (2002 - $162,000, 2001 - $243,000) as a
result of redeeming notes during 2002 and 2001 as well as exchanging Notes for
Common Stock in December 2001.
Interest expense to affiliates decreased (2002 - $144,000, 2001 - $177,000)
because the interest bearing amount outstanding to affiliates was reduced.
Interest expense relating to other debts decreased (2002 - $263,000, 2001 -
$299,000) primarily due to decreases in interest rates on floating rate loans
and repayments of principal. The reductions in interest expense were partially
offset by new borrowings.
In 2002 the Company recognized $380,000 of income tax benefit as a result of a
reduction in the valuation allowance on deferred tax assets. In 2001 the
provision for income taxes was completely offset by the reduction in the
valuation allowance on deferred tax assets utilized during the six months ended
June 30, 2001.
Extraordinary losses of $60,000 in 2002 resulted from redeeming Notes at face
value which were carried at a discount. Extraordinary gains of $14,000 in 2001
resulted from redeeming Notes at less than carrying value.
19
Liquidity and Capital Resources
- -------------------------------
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 the 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 it's anticipated cash flow provided by operations
is sufficient to meet its current cash requirements through at least January
2003. The Company believes that its current liquid assets 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 residual interests held by its
subsidiaries should provide significant liquidity to the Company.
The purchase agreements executed in connection with the Company's
acquisition of residual interests 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:
Years Minimum Maximum
----- ------- -------
2002 to 2009 $ 742,500 $ 880,000
2010 to final payment $1,050,000 $1,150,000
on the notes*
* Final payment on the notes payable expected 2016 related to the Receivables
II-A transaction and 2018 for the Receivables II-B transaction.
The Company believes it will receive significant cash flow after final
payment of the notes payable.
20
Acquisitions and Financings
- ---------------------------
Loans which are scheduled to become due through 2007 are as follows:
Outstanding
Original Principal
Loan Balance at Due
Purpose Creditor Amount June 30, 2002 Date
- ------- -------- ----------- ------------- ----
Repurchase of Notes
Issued by the Company Blackacre(1) $ 1,560,000 $ 1,961,000 09/30/03
Purchase of Mortgages Unaffiliated Bank(2)(3) $ 1,000,000 $ 685,000 05/01/06
Purchase of a Mortgage
and Refinancing of
Existing Mortgages Unaffiliated Bank(2)(3) $ 1,450,000 $ 891,000 04/01/05
Purchase of Real Estate
Assets Unaffiliated Bank(4)(7) $ 3,000,000 $ 3,000,000 09/01/02
Purchase of Land Unaffiliated Bank(5)(7) $ 200,000 $ 200,000 09/01/02
Purchase of Mortgages Unaffiliated Bank(6) $ 400,000 $ 366,000 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.
(7) The Company is in the process of acquiring an additional interest in real
estate as previously disclosed in the Company's Form 10-K. As part of the
commitment from the lender if such acquisitions is consummated (of which
there can be no assurance) the two loans which are due September 1, 2002
will be extended to become due in 2007.
21
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.
ITEM 3. 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, the acquisition of mortgage loans
or the acquisition of real estate.
DVL's ability to realize value on its mortgage holdings is sensitive to
interest rate fluctuations in that the sales prices of real property and
mortgages vary with interest rates.
22
Part II - Other Information
Item 2. Changes in Securities
---------------------
(A) In the first half of 2002, the Company issued 400,000 shares of
Common Stock, valued $32,000, to the following four individuals:
Lawrence J. Cohen, 200,000 shares; Steve Simms, 66,667 shares;
Ron Jacobs, 66,667 shares; and Jay Chazanoff, 66,666 shares.
The shares were issued in exchange for asset management services
rendered to the Company outside the scope of the Asset Servicing
Agreement. There were no underwriters or placement agents in-
volved in this issuance and no commissions were paid. The
Company relied upon the exemption provided by Section 4(2) of
the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(A) Exhibits: 99.1 Chief Executive Officer and Chief Financial
Officer Certificate Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
(B) There were no reports of Form 8-K filed during the three months
ended June 30, 2002
23
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DVL, INC.
By: /s/ Jay Thailer
--------------------------------
Jay Thailer, Executive Vice
President and Chief Financial
Officer
August 13, 2002
24