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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 September 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.
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(Exact name of registrant as specified in its charter)
Delaware 13-2892858
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
70 East 55th Street, New York, 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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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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes: No: X
---- ----
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 November 13, 2002
- ----------------------------- --------------------------------
Common Stock, $.01 par value 21,713,563
DVL, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information: Pages
-----
Item 1 - Financial Statements
Consolidated Balance Sheets -
September 30, 2002 (unaudited) and December 31,
2001 1-2
Consolidated Statements of Operations -
Three Months Ended September 30, 2002 (unaudited)
and 2001 (unaudited) 3,5
Consolidated Statements of Operations -
Nine Months Ended September 30, 2002 (unaudited)
and 2001 (unaudited) 4,5
Consolidated Statement of Shareholders' Equity -
Nine Months Ended September 30, 2002 (unaudited) 6
Consolidated Statements of Cash Flows -
Nine Months ended September 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
Item 4 - Controls and Procedures 22
Part II. Other Information:
Item 6 - Exhibits and Reports on Form 8-K 23
Signature 24-26
Exhibit Index 27
Part I - Financial Information
Item 1. Financial Statements
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2002 2001
------------- -------------
ASSETS (unaudited)
- ------
Residual interests in securitized portfolios $ 37,304 $ 36,906
-------- --------
Mortgage loans receivable from affiliated
partnerships (net of unearned interest of
$15,639 for 2002 and $15,908 for 2001) 31,623 35,567
Allowance for loan losses 2,889 4,095
-------- --------
Net mortgage loans receivable 28,734 31,472
-------- --------
Cash (including restricted cash of $187 and
$215 for 2002 and 2001) 2,588 2,987
Investments
Real estate at cost (net of accumulated
depreciation of $175 for 2002 and $104 for 2001) 8,535 4,142
Real estate lease interests 979 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 1,120 932
-------- --------
Total assets $ 81,757 $ 79,690
======== ========
(continued)
See notes to consolidated financial statements.
1
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(continued)
September 30, December 31,
2002 2001
------------- ------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Notes payable - residual interests $ 34,829 $ 35,044
Underlying mortgages payable 19,875 22,218
Long-term debt - affiliates 2,021 1,942
Long-term debt - other 9,067 5,067
Notes payable - litigation settlement 1,666 1,902
Redeemed notes payable - litigation settlement 856 596
Fees due to affiliates 661 928
Security deposits, accounts payable and accrued
liabilities (including deferred income of $164
for 2002 and $17 for 2001) 485 1,038
--------- ---------
Total liabilities 69,460 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 (83,706) (85,016)
--------- ---------
Total shareholders' equity 12,297 10,955
--------- ---------
Total liabilities and shareholders' equity $ 81,757 $ 79,690
========= =========
See notes to consolidated financial statements.
2
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
Three Months Ended
September 30,
----------------------
2002 2001
---------- ----------
Income from affiliates:
Interest on mortgage loans $ 699 $ 758
Partnership management fees 74 97
Management fees 52 555
Transaction and other fees from partnerships 98 --
Distributions from investments 21 19
Income from others:
Interest income - residual interests 1,093 765
Net rental income (including depreciation
and amortization of $22 for 2002 and $36
for 2001) 194 190
Distributions from investments -- 30
Other income and interest 8 22
---------- ----------
2,239 2,436
---------- ----------
Operating expenses:
General and administrative 354 374
Asset servicing fee - NPO Management LLC 164 161
Legal and professional fees 76 56
Interest expense:
Underlying mortgages 354 486
Notes payable - residual interests 691 611
Affiliates 73 89
Litigation settlement notes 68 119
Others 157 146
---------- ----------
1,937 2,042
---------- ----------
Income before income tax benefit and loss 302 394
Income tax (benefit) expense (86) 40
---------- ----------
Income before extraordinary loss 388 354
Extraordinary losses on the settlements
of indebtedness (11) --
---------- ---------
Net income $ 377 $ 354
========== =========
(continued)
See notes to consolidated financial statements.
3
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
(continued)
Nine Months Ended
September 30,
----------------------
2002 2001
---------- ----------
Income from affiliates:
Interest on mortgage loans $ 2,203 $ 2,392
Gain on satisfaction of mortgage loans 252 327
Partnership management fees 226 298
Management fees 206 761
Transaction and other fees from partnerships 167 205
Distributions from investments 67 113
Income from others:
Interest income - residual interests 3,269 1,548
Net rental income (including depreciation
and amortization of $75 for 2002 and $106
for 2001) 522 561
Distributions from investments 29 124
Other income and interest 30 54
---------- ----------
6,971 6,383
---------- ----------
Operating expenses:
General and administrative 1,113 1,052
Asset servicing fee - NPO Management LLC 489 479
Legal and professional fees 272 209
Interest expense:
Underlying mortgages 1,236 1,555
Notes payable - residual interests 2,079 1,133
Affiliates 217 266
Litigation settlement notes 230 362
Others 420 445
---------- ----------
6,056 5,501
---------- ----------
Income before income tax benefit and (loss) gain 915 882
Income tax expense (benefit) (466) 40
---------- ----------
Income before extraordinary (loss) gain 1,381 842
Extraordinary (losses) gains on the
settlements of indebtedness (71) 14
---------- ---------
Net income $ 1,310 $ 856
========== =========
(continued)
See notes to consolidated financial statements.
4
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
(unaudited)
(continued)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
2002 2001 2002 2001
----------- ------------ ------------ ------------
Basic earnings per share:
Income before extraordinary items $ .02 $ .02 $ .06 $ .05
Extraordinary items .00 .00 .00 .00
----------- ------------ ------------ ------------
Net income $ .02 $ .02 $ .06 $ .05
=========== ============ ============ ============
Diluted earnings per share:
Income before extraordinary items $ .01 $ .00 $ .03 $ .01
Extraordinary items .00 .00 .00 .00
----------- ------------ ------------ ------------
Net income $ .01 $ .00 $ .03 $ .01
=========== ============ ============ ============
Weighted average shares outstanding - basic 21,713,563 16,560,450 21,713,563 16,560,450
Effect of dilutive notes, options and warrants 35,314,515 91,295,902 36,948,399 111,790,090
----------- ------------ ------------ ------------
Weighted average shares outstanding - diluted 57,028,078 107,856,352 58,661,962 128,350,540
=========== ============ ============ ============
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 -- -- -- -- -- 1,310 1,310
------- ----- ---------- ------- -------- --------- -------
Balance-September 30, 2002 100 $ 1 21,713,563 $ 217 $ 95,785 $ (83,706) $12,297
======= ===== ========== ======= ======== ========= =======
See notes to consolidated financial statements.
6
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
--------------------
2002 2001
-------- --------
Cash flows from operating activities:
Income before extraordinary items $ 1,381 $ 842
Adjustments to reconcile net income before extra-
ordinary (losses) gains to net cash provided by
operating activities
Interest income accreted on residual interests (305) (141)
Accrued interest added to indebtedness 179 247
Gain on satisfactions of mortgage loans (252) (327)
Depreciation 76 60
Amortization of unearned interest on loan receivables (197) (87)
Amortization of real estate lease interests 101 101
Imputed interest on notes 230 362
Stock issued for services received 32 --
Net increase in deferred income tax benefits (380) --
Net decrease in prepaid financing and other assets 63 196
Net decrease in accounts payable, security, deposits
and accrued liabilities (700) (271)
Net (decrease) increase in fee due to affiliates (267) 41
Net increase in deferred income 147 97
------- ------
Net cash provided by operating activities 108 1,120
------- -------
Cash flows from investing activities:
Collections on loans receivable 2,813 4,155
Real estate acquisitions and capital improvements (335) (349)
Net decrease in affiliated limited partnership
interests and other investments 12 94
------- ------
Net cash provided by investing activities 2,490 3,900
------- ------
(continued)
See notes to consolidated financial statements
7
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
(continued)
Nine Months Ended
September 30,
----------------------
2002 2001
-------- --------
Cash flows from financing activities:
Proceeds from new borrowings $ 400 $ 200
Repayment of indebtedness (570) (863)
Payments on underlying mortgages payable (2,343) (2,920)
Payments on notes payable - residual interest (308) (12)
Payments related to debt tender offers and redemptions (176) (140)
-------- --------
Net cash used in financing activities (2,997) (3,735)
-------- --------
Net (decrease) increase in cash (399) 1,285
Cash, beginning of period 2,987 1,184
-------- --------
Cash, end of period $ 2,588 $ 2,469
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 3,715 $ 1,722
======== ========
Supplemental disclosure of non-cash investing and
financing activities:
Net reduction of notes payable - debt tender offers
and redemptions $ 436 $ 14
======= ========
Residual interests in securitized portfolios -
increase $ 93 $ 38,479
======= ========
Notes payable - residual interests - increase $ 93 $ 37,181
======= ========
Foreclosure on mortgage loan receivable collateralized
by real estate $ 416 $ --
======= ========
Purchase of real estate with debt financing $ 3,968 $ --
======= ========
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 nine months
ended September 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 nine months ended September 30, 2001 have been reclassified to
conform to the presentation for the three and nine months ended September 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 September 30, 2002 was $3,402,847. Payments,
if any, due under this guaranty are payable after August 15, 2020.
In accordance with the purchase agreements, from the acquisition dates
through September 30, 2002, the residual interests in securitized portfolios and
the notes payable increased by approximately $793,000 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 September 30, 2002 Notes with an aggregate
principal amount of approximately $1,950,000 were outstanding with a carrying
value of $1,666,000.
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, depending upon
market conditions, 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 $1,144,000, offering to pay the Notes in cash at the
face value plus accrued interest of approximately $48,000. As of September 30,
2002, $337,000 has been paid and the remaining $856,000 is payable, but no
longer accrues interest.
5. Real Estate
The Company currently owns the following properties:
(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) An 89,000 square foot building leased to K-Mart and 8 acres of underlying
land in Kearny, NJ.
(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 September 30, 2002.
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 Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
Affiliate Of 9/30/02 9/30/01 9/30/02 9/30/01
- ------------ ------------- ------------- ------------- -------------
NPO and Blackacre $ 6,731 $ 6,731 $ 20,192 $ 47,962
NPO $ 12,000 $ 12,000 $ 36,000 $ 36,000
NPO(1) $ 45,000 $ 6,000 $ 187,597 $ 109,000
(1) Of the total cash received for the nine months ended September 30, 2002,
$117,000 represented prior deferred fees. 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 nine months ended
September 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 Nine Months Nine Months
Ended 9/30/02 Ended 9/30/01 Ended 9/30/02 Ended 9/30/01
------------- ------------- ------------- -------------
$ 30,000 $ 47,451 $ 115,083 $ 89,220
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 Nine Months Nine Months
Ended 9/30/02 Ended 9/30/01 Ended 9/30/02 Ended 9/30/01
------------- ------------- ------------- -------------
$ -0- $ -0- $ 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 the 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 September 30, 2002, $630,000 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 its 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 Nine Months Nine Months
Ended 9/30/02 Ended 9/30/01 Ended 9/30/02 Ended 9/30/01
------------- ------------- ------------- -------------
$ 665 $ 2,000 $ 219,665 $ 400,000
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 September 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 nine months and
three months ended September 30, 2002 and 2001.
Nine Months Ended September 30,
-------------------------------
2002 2001
----------------------------------- -------------------------------------
Weighted Weighted
Average Average
Number of Per Share Number of Per Share
Amount Shares Amount Amount Shares Amount
------ ---------- --------- ------ ----------- ---------
Income before extraordinary items $1,381 $ 842
====== ===
Basic EPS
Income available to common stockholders $1,381 21,713,563 $ .06 $ 842 16,560,450 $ 0.05
======== =======
Effect of litigation settlement notes 230 14,989,916 362 65,513,576
Effect of dilutive stock options and warrants -- 21,958,483 -- 46,276,514
------ ----------- ------ ------------
Diluted EPS
Income available to common stockholders $1,611 58,661,962 $ .03 $1,204 128,350,540 $ 0.01
====== =========== ======== ====== ============ =======
Three Months Ended September 30,
--------------------------------
2002 2001
----------------------------------- -------------------------------------
Weighted Weighted
Average Average
Number of Per Share Number of Per Share
Amount Shares Amount Amount Shares Amount
------ --------- --------- ------ --------- ---------
Income before extraordinary items $ 388 $ 354
====== ===
Basic EPS
Income available to common stockholders $ 388 21,713,563 $ .02 $ 354 16,560,450 $ 0.02
======== =======
Effect of litigation settlement notes 68 14,435,869 119 52,922,384
Effect of dilutive stock options and warrants -- 20,878,646 -- 38,373,518
------ ----------- ------ ------------
Diluted EPS
Income available to common stockholders $ 456 57,028,078 $ .01 $ 473 107,856,352 $ 0.00
====== =========== ======== ====== ============ =======
13
At September 30, 2002 and 2001 there were approximately $1,950,000 and
$3,597,000, 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 nine months ended September 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 nine months ended September 30, 2002 compared to the
three and nine months ended September 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 September 30, 2002 and 2001 there were 3,848,131 and
3,278,131, 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. The
Corporate other net income of $361,000 includes $380,000 of deferred income tax
benefit.
Nine Months Ended
September 30,
---------------------
2002 2001
-------- --------
Revenues
Real estate $ 3,672 $ 4,781
Residual interests 3,269 1,548
Corporate/Other 30 54
-------- --------
Total consolidated revenues $ 6,971 $ 6,383
======== ========
Net income (loss)
Real estate $ (203) $ 476
Residual interests 1,152 411
Corporate/Other 361 (31)
-------- --------
Total consolidated net income $ 1,310 $ 856
======== ========
Assets
Real estate $ 43,023 $ 42,880
Residual interests 37,304 38,620
Corporate/Other 1,430 --
-------- --------
Total consolidated assets $ 81,757 $ 81,500
======== ========
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 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. The Company
also recognized $86,000 in federal tax benefits in 2002 relating to the
elimination of the alternative minimum tax for 2001. In 2001 the provision for
income taxes was completely offset by the reduction in the valuation allowance
on deferred tax assets.
12. Subsequent Event
In October 2002, DVL entered into a lease of its current premises
comprising 5,679 square feet at 70 East 55th Street, New York, New York. The
lease is for 5 years expiring January 31, 2008 at a base rent of $215,802 per
annum, plus real estate and operating expense escalation clauses.
15
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This September 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 September 30, 2002 Compared to Three Months Ended September
30, 2001
DVL had income before extraordinary items, extraordinary losses, and net income,
as follows:
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
Income before extraordinary items $ 388,000 $ 354,000
Extraordinary losses $ (11,000) $ -0-
Net income $ 377,000 $ 354,000
Interest income on mortgage loans to affiliates decreased (2002 - $699,000, 2001
- - $758,000) and interest expense on underlying mortgages decreased (2002 -
$354,000, 2001 - $486,000) 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 income and interest expense related to two mortgage loans purchased in
December 2001 which have underlying mortgages.
Management fees decreased (2002 - $52,000, 2001 - $555,000) primarily due to a
$442,900 incentive fee earned during the quarter ended September 30, 2001.
Transaction and other fees from affiliated limited partnerships were as follows:
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
$ 98,000 $ -0-
16
Transaction fees are earned by the Company in connection with sales of
partnership properties and the Company sold more partnership properties during
the third quarter 2002 compared to the third quarter 2001.
Interest income on residual interests (2002 - $1,093,000, 2001 - $765,000) and
interest expense on the related notes payable (2002 - $691,000, 2001 - $611,000)
increased from 2001 to 2002 as DVL completed the acquisitions in March 2001 and
August 2001.
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
Net rental income from others $ 194,000 $ 190,000
Gross rental income from others $ 615,000 $ 540,000
The increase in gross rents was offset by an increase in the allowance for bad
debts of $45,000 relating to receivables from a major tenant. The Company has
been reserving $15,000 per month as a result of the tenant being unable to pay
full rent. The tenant is obligated to pay $117,120 per month but has been paying
$87,120 per month. The difference of $30,000 per month has not been forgiven but
has been deferred pending the tenants efforts at a recapitalization of its
company. The tenant continues to occupy its space.
General and administrative expenses decreased to $354,000 in 2002 from $374,000
in 2001. The primary reasons for the decrease were lower salaries and employee
related cost.
The asset servicing fee due from the Company to NPO increased (2002 - $164,000,
2001 - $161,000) pursuant to its terms due to an increase in the consumer price
index.
Legal and professional fees increased (2002 - $76,000, 2001 - $56,000) primarily
as a result of higher accounting fees.
Interest expense on the litigation settlement notes ("Notes") decreased (2002 -
$68,000, 2001 - $119,000) as a result of redeeming Notes during 2001 and 2002 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 due to affiliates was reduced.
Interest expense relating to other debts increased (2002 - $157,000, 2001 -
$146,000) primarily due to the Company borrowing approximately $3,968,000 to
purchase real estate in August 2002.
In 2001 the Company accrued $40,000 for alternative minimum taxes and in 2002
recognized $86,000 in tax benefits relating to the elimination of the
alternative minimum tax for 2001. In 2002 and 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 $11,000 in 2002 resulted from redeeming Notes at face
value which were carried at a discount.
17
Nine Months Ended June 30, 2002 Compared to Nine Months Ended September 30, 2001
DVL had income before extraordinary items, extraordinary gains (losses), and net
income as follows:
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
Income before extraordinary items $1,381,000 $ 842,000
Extraordinary gains (losses) $ (71,000) $ 14,000
Net income $1,310,000 $ 856,000
Interest income on mortgage loans to affiliates decreased (2002 - $2,203,000,
2001 - $2,392,000) and interest expense on underlying mortgages decreased (2002
- - $1,236,000, 2001 - $1,555,000) 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:
Nine Months Ended Nine Months Ended
September 30, 2002 September 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 - $206,000, 2001 - $761,000) primarily from the
Company earning a $442,900 incentive fee during the nine months ended September
30, 2001.
Transaction and other fees from affiliated limited partnerships were as follows:
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
$ 167,000 $ 205,000
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 - $3,269,000, 2001 - $1,548,000) and
interest expense on the related notes payable (2002 - $2,079,000, 2001 -
$1,133,000) increased from 2001 to 2002 as DVL completed the acquisitions in
March 2001 and August 2001.
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
Net rental income from others $ 522,000 $ 561,000
Gross rental income from others $ 1,772,000 $ 1,568,000
The decrease in net rental income was primarily the result of an increase in the
allowance for bad debts of $120,000 relating to receivables from a major tenant.
The increase in the allowance for bad debts was partially offset by higher gross
rents. The Company has been reserving $15,000 per month as a result of the
tenant being unable to pay full rent. The tenant is obligated to pay $117,120
per month but has been paying $87,120 per month. The difference of $30,000 per
month has not been forgiven but has been deferred pending the tenants efforts at
a recapitalization of its company. The tenant continues to occupy its space.
18
General and administrative expenses increased to $1,113,000 in 2002 from
$1,052,000 in 2001. The primary reasons for the increase were greater salaries,
employee benefit costs and consulting costs.
The asset servicing fee due from the Company to NPO increased (2002 - $489,000,
2001 - $479,000) pursuant to its terms due to an increase in the consumer price
index.
Legal and professional fees increased (2002 - $272,000, 2001 - $209,000) as a
result of the issuance of stock valued at $32,000 for services rendered to the
Company, legal fees relating to the preparation of proxy materials, and higher
accounting fees.
Interest expense on the Notes decreased (2002 - $230,000, 2001 - $362,000) as a
result of redeeming notes during 2001 and 2002 as well as exchanging Notes for
Common Stock in December 2001.
Interest expense to affiliates decreased (2002 - $217,000, 2001 - $266,000)
because the interest bearing amount due to affiliates was reduced.
Interest expense relating to other debts decreased (2002 - $420,000, 2001 -
$445,000) 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. The Company borrowed approximately $3,968,000 in
August 2002 to finance the purchase of real estate.
In 2001 the Company accrued $40,000 for alternative minimum taxes and in 2002
recognized $86,000 in tax benefits relating to the elimination of the
alternative minimum tax for 2001. 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 nine months ended September 30, 2001.
Extraordinary losses of $71,000 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 its anticipated cash flow provided by operations
is sufficient to meet its current cash requirements through at least September
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 2008 are as follows:
Outstanding
Original Principal
Loan Balance at Due
Purpose Creditor Amount 09/30/02 Date
- ------- -------- -------- ----------- ----
Repurchase of Notes
Issued by the Company Blackacre(1) $ 1,560,000 $ 2,021,427 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) $ 4,500,000 $ 4,500,000 09/01/04
Purchase of Mortgages Unaffiliated Bank(5)(2) $ 400,000 $ 366,000 05/01/06
Purchase of Building Unaffiliated Bank(6)(7) $ 2,667,542 $ 2,667,542 06/30/08
(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 8.25% per annum. Monthly payments are interest only.
(5) Interest rate is 8.25% per annum.
(6) Interest rate is 7.5% per annum with a balloon payment due June 30,2008 of
$2,284,542.
(7) The Company through its wholly-owned subsidiary, Delbrook Holding, LLC
purchased an 89,000 square foot building in Kearny, NJ, currently leased to
K-Mart Stores, Inc. ("K-Mart") for $4,303,000 including costs and the
assumption of $2,667,542 in debt. The lease requires K-Mart to pay
$30,353.33 per month plus all operating and structural costs of the
building.
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.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC reports. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
22
Part II - Other Information
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 September 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
November 13, 2002
CERTIFICATIONS
I, Alan E. Casnoff, certify that:
1. I have reviewed this quarterly report on Form 10-Q of DVL, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15b-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
24
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Alan E.Casnoff
- -----------------------
Alan E. Casnoff
Chief Executive Officer
November 13, 2002
CERTIFICATIONS
I, Jay Thailer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of DVL, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15b-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
25
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Jay Thailer
- -----------------------
Jay Thailer
Chief Financial Officer
November 13, 2002
26
EXHIBIT INDEX
Exhibit Description
- ------- ----------------------------------------------------------------------
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
27