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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File No. 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
incorporation or organization) Identification No.)
70 East 55th Street, 7th Floor, New York 10022
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 350-9900
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ----------------------------- ---------------------
Common Stock, $.01 par value None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy information statements
incorporated by reference in Part IV of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
----- -----
The aggregate market value of the Common Stock of the Registrant held by non-
affiliates as of March 25, 2003 was $2,638,140.
The number of shares outstanding of Common Stock of the Registrant as of March
25, 2003 was 21,713,563.
DVL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED DECEMBER 31, 2002
ITEMS IN FORM 10-K
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Page
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PART I
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 9
Item 6. Selected Consolidated Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 24
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 31
Item 13. Certain Relationships and Related Transactions 40
Item 14. Controls and Procedures 43
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 44
PART I
This 2002 Annual Report on Form 10-K contains statements which constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Those statements include statements regarding the intent, belief or
current expectations of the Registrant and its management team. The Registrant's
stockholders and prospective investors are cautioned that any such forward-
looking statements are not guarantees of future performance and involve risks
and uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements. Such risks and uncertainties
include, among other things, general economic conditions, the ability of the
Registrant to obtain additional financings, the ability of the Registrant to
successfully implement its business strategy and other risks and uncertainties
that are discussed herein.
ITEM 1. BUSINESS.
OVERVIEW
DVL, Inc., a Delaware corporation incorporated in 1977 ("DVL" or the
"Company"), is a commercial finance company which is primarily engaged in the
ownership of residual interests in securitized portfolios, and the ownership and
servicing of a portfolio of secured commercial mortgage loans made to limited
partnerships in which the Company serves as general partner (each an "Affiliated
Limited Partnership"). In addition, the Company performs real estate asset
management and administrative services.
DVL is the 99.9% owner of two entities whose sole assets are the residual
interests in five securitized receivable pools. The securitized receivable pools
consist of receivables which are the obligations of various insurance companies
to pay money over a term of years. DVL receives the residual cash flow from the
five securitized receivable pools after payment to the securitized noteholders.
DVL is the general partner of approximately 64 Affiliated Limited
Partnerships which own income-producing commercial, office and industrial
properties comprising approximately 2.5 million square feet. A majority of the
properties are subject to long-term triple net leases with various tenants. The
principal tenant is Wal-Mart Stores, Inc. The Company, for numerous reasons
detailed in Critical Accounting Policies, does not consolidate any of the
various Affiliated Limited Partnerships in which it holds the general partner
and limited partner interest nor does DVL account for such interests on the
equity method. The Company also performs real estate and partnership management
services for these partnerships.
The mortgage loans held by the Company are primarily "wrap-around" mortgage
loans which are subject to non-recourse, underlying mortgages held by unrelated
institutional lenders. These underlying loans self-liquidate from the base rents
payable by the tenants over the primary term of their leases. The majority of
the mortgage payments from the Affiliated Limited Partnerships are used to pay
the underlying mortgage holders required monthly principal and interest
payments. In addition, the Company receives a portion of the Affiliated Limited
Partnerships' percentage rent income as additional debt service. The Company's
other principal assets include (a) real estate interests held for development,
(b) a long term leasehold interest in a commercial property, and (c) limited
partnership interests in certain Affiliated Limited Partnerships.
1
The Company derives the majority of its income from (a) residual interests
in securitized receivables portfolios, (b) wrap-around mortgages (as a result of
the difference in the effective interest rates between the wrap around mortgage
and the underlying mortgages), (c) percentage rents received from various
tenants of the Affiliated Limited Partnerships, (d) rentals received as a result
of its real estate holdings (e) long-term leasehold interests, (f) fees received
as General Partner of the Affiliated Limited Partnerships (including disposition
and management fees), (g) distributions received as a limited partner in the
Affiliated Limited Partnerships, and (h) fees from management contracts.
As of December 31, 2002, the Company had net operating loss carry-forwards
("NOLS") aggregating approximately $52 million, which expire in various years
through 2019, including $45 million which expire through 2007. If the Company
generates profits in the future, the Company may be subject to limitations on
the use of its NOLS pursuant to the Internal Revenue Code. It is anticipated
that the taxable income associated with the residual interests will utilize
significant NOLS. There can be no assurance that a significant amount of the
Company's existing NOLS will be available to the Company at such time as the
Company desires to use them.
DVL believes that its anticipated cash flow provided by operations is
sufficient to meet its current cash requirements through March 2004. The Company
has in the past and expects in the future to continue to augment its cash flow
with additional cash generated from either the sale or refinancing of its assets
and/or borrowings. See Management Discussion and Analysis of Financial Condition
and Results of Operations.
The Company's current strategy is to (i) maximize the value of its assets
and meet its short-term working capital needs by continuing to manage,
administer and service its existing portfolio,(ii) obtain additional investments
and (iii) expand through the acquisition of one or more companies to generate
additional income and cash flow. The Company anticipates that it would finance
any possible future acquisition through new borrowing or the issuance of its
common or preferred stock. There can be no assurance that the Company will be
able to identify or acquire businesses. While the Company regularly evaluates
and discusses potential acquisitions, the Company currently has no
understandings, committments or agreements with respect to any acquisitions.
Each share of the stock of the Company includes a restriction prohibiting
sale, transfer, disposition or acquisition of any stock until September 30, 2009
without the prior consent of the Board of Directors of the Company by any person
or entity that owns or would own 5% or more of the issued and outstanding stock
of the Company if such sale, purchase or transfer would in the opinion of the
Board, jeopardize the Company's preservation of its federal income tax
attributes under Section 382 of the Internal Revenue Code. See Changes in
Control in Item 12 for a more detailed discussion.
The principal executive offices of the Company are located at 70 East 55th
Street, 7th Floor, New York, New York 10022. The Company's telephone number is
(212) 350-9900. The Company and its subsidiaries have not engaged in any
business activity outside of the United States.
2
BUSINESS ACTIVITIES
RESIDUAL INTERESTS IN SECURITIZED PORTFOLIOS
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
approximately $35,791,000, including costs of approximately $1,366,000 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 and investment banking fees to an affiliate aggregating $900,000.
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 payment of up to $3,443,000 of the
purchase price. The amount of the guaranty is regularly reduced by 10% of the
principal paid. The amount of the guaranty at December 31, 2002 was $3,342,000.
Payments, if any, due under this guaranty are payable after August 15, 2020.
In accordance with the purchase agreements, from the acquisition dates
through December 31, 2002, the residual interests in securitized portfolios and
the notes payable were decreased by approximately $532,000 as a result of
purchase price adjustments.
The following table reconciles the initial purchase price with the carrying
value at December 31, 2002:
Initial purchase price $ 35,791,000
Adjustments to purchase price (532,000)
Principal payments (41,000)
Accretion 893,000
------------
$ 36,111,000
============
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 $ 743,000 $ 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.
3
The Company believes it will receive significant cash flows after final payment
of the notes payable.
MORTGAGE LOANS
The Company's mortgage loan portfolio consists primarily of long-term wrap-
around and other mortgage loans to Affiliated Limited Partnerships secured by
the types of properties discussed above. Most of the loans are subordinated
obligations with the majority of the payments received being utilized to
amortize the related underlying mortgage loan over the primary term of the
related lease. The Company builds equity in the mortgage loans over time as the
principal balance of such underlying mortgage loans are amortized. At December
31, 2002, the Company had investments in 32 mortgage loans to Affiliated Limited
Partnerships with a carrying value for financial reporting purposes of
$31,222,000 (prior to the allowance for loan losses of approximately
$2,870,000). These mortgage loan receivables are subject to underlying mortgage
obligations of $19,391,000.
Generally, the tenants of the Affiliated Limited Partnerships executed
"triple-net" leases and, therefore, the tenants are responsible for the payment
of all taxes, insurance and other property costs. In certain instances, the
partnership is required to maintain the roof and structure of the premises.
DVL's mortgage portfolio included 22 loans with a net carrying value of
$25,627,000 as of December 31, 2002, which are due from Affiliated Limited
Partnerships that own properties leased to Wal-Mart Stores, Inc. These mortgage
loan receivables were subject to underlying mortgage obligations of $17,046,000
as of December 31, 2002. Wal-Mart is a public company subject to the reporting
requirements of the SEC. Wal-Mart has closed two of its stores located on the
properties subject to the Company's mortgages with a net carrying value of
$2,427,000. However, Wal-Mart continues to pay the required rent with respect to
such properties. Net carrying value refers to the unpaid principal balance less
any allowance for reserves, and any amount which represents future interest
based upon the purchase of the loan at a discount.
In addition to base rent, most leases also require the tenant to pay
additional rent equal to a percentage of gross receipts from the tenant's
operation of a property above a specified amount ("Percentage Rent"). In all
cases where the partnership is entitled to receive Percentage Rent, and the
Company holds the wrap-around mortgage, a portion of such rent is required to be
paid to the Company as additional interest and/or additional debt service on the
long-term mortgage.
The Company has the right to refinance the outstanding mortgage loans
underlying its wrap-around mortgage loans provided that the debt service and
principal amount of a refinanced loan are no greater than that of the existing
wrap-around loan. The Company also has the right to arrange senior financing
secured by properties on which it holds first or second mortgage loans by
subordinating such mortgage loans, subject to the limitations set forth above.
During 2001, DVL purchased two mortgage loans from an entity that is part
of the Opportunity Fund (see "Opportunity Fund", discussed below on page 16)
which are secured by real estate owned by Affiliated Limited Partnerships in
which DVL is the general partner. The loans were purchased for an aggregate
price of $325,000, paid in cash. In early 2002, DVL obtained bank financing of
$400,000, less closing costs, secured by such loans.
4
All of the Company's mortgage loans are pledged to secure the indebtedness
of the Company to NPO Management, LLC ("NPO") and Blackacre Capital Group, LLC
("BCG"), which are entities engaged in real estate lending and management
transactions and are affiliated with certain stockholders and insiders of the
Company. See Items 7 and 13 below for a description of certain related
transactions involving NPO and BCG.
LOAN PORTFOLIO
The following table sets forth the number of various loans owed to the
Company which are outstanding, the aggregate loan balances, including accrued
interest, and the allowances for loan losses, at December 31, 2002. See Tables 1
and 2 of Appendix "A" to this Form 10-K for detailed information as to each such
loan.
Number Aggregate Allowance
of Loan for Loan
Type of Loan Loans Amount Losses
------------ -------- --------- ---------
(dollars in thousands)
Long-term mortgages due from Affiliated
Limited Partnerships $ 46,801
Less: unearned interest (1) (15,579)
--------
Total loans collateralized by mortgages 32 31,222 $ 2,870
-------- -------- --------
Loans collateralized by limited partnership
interests 18 257 215
-------- -------- --------
Advances due from Affiliated Limited Partnerships 3 101 --
-------- -------- --------
Total loans 53 $ 31,580 $ 3,085
======== ======== ========
- ----------
(1) Unearned interest represents the unamortized balance of discounts on
previously funded loans.
INVESTMENTS IN AFFILIATED LIMITED PARTNERSHIPS
The Company over the years has acquired various limited partnership
interests in Affiliated Limited Partnerships. At December 31, 2002 and 2001 the
Company's carrying value of such limited partnerships was $1,066,000 and
$1,121,000, respectively.
PARTNERSHIP AND PROPERTY MANAGEMENT
The Company is the general partner of approximately 64 Affiliated Limited
Partnerships, which the Company does not consolidate (see Overview), from which
it receives management, transaction and other fees. The Company, through
Professional Service Corporation ("PSC"), its wholly-owned subsidiary, is
engaged in the management of an industrial property located in New Jersey
pursuant to a master lease. This master lease permits PSC to sub-lease the
property to tenants and retain profits subject to the payment by PSC of
operating expenses and rent to the entity that owns the property.
In January 2003, the Company was advised that its largest subtenant at the
PSC Property would be going out of business. The Company negotiated a lease
extension with its subtenant thru June of 2003.
5
In connection with the continued viability of the property, the Company is
pursuing two separate strategies: (1) re-leasing of the property to various
subtenants and (2) the potential sale of the property to a third party with the
Company retaining a portion of such net sale proceeds. The Company is currently
negotiating subleases with several potential subtenants and is negotiating an
agreement with the fee owner of the property, allocating the proceeds on a sale.
Fees for Services
In June 1998, the Company entered into a Management Services Agreement with
a limited partnership (in which certain of its partners are affiliates of NPO
and Blackacre (as defined below)) under which the Company renders services for a
fee. This agreement may be terminated with 30 days prior notice by either party.
As compensation, the Company received the following (a) a monthly fee through
November 2000, and (b) after all the partners of the partnership have earned a
20% internal rate of return, compounded quarterly, on their capital
contributions, an amount of cash equal to 25% of the profits, as defined in the
agreement. The Company received compensation under such agreement equal to $0,
$442,900, and $363,000 in 2002, 2001 and 2000, respectively.
In addition, the Company provides services for a limited partnership (whose
general partner is an affiliate of NPO) to render certain accounting and
administrative services. As compensation, the Company receives expense
reimbursements of $4,000 per month. The Company received compensation under such
agreement of $48,000 during each of 2002, 2001, and 2000.
The Company has a property management agreement with an entity that is part
of the Opportunity Fund pursuant to which DVL provides property management
services. The Company received compensation under such agreement of $27,000 in
each of 2002, 2001, and 2000.
In November 1999, the Company entered into a management service agreement
with an entity whose partners are affiliates of NPO to render certain accounting
and administrative services. As compensation, the Company receives a monthly fee
of $2,000, a monthly deferred fee of $6,500 and an annual incentive fee if
certain levels of profitability are obtained. The Company recorded fees of
$129,000 and $152,000 in 2002 and 2001 which included incentive fees of $53,000
and $50,000, respectively.
REAL ESTATE HOLDINGS
The Company currently owns the following properties:
(1) Eight industrial buildings totaling 347,000 square feet on approximately
eight acres located in Kearny, NJ leased to various unrelated tenants.
(2) An 89,000 square foot building on approximately eight acres of land leased
to K-Mart in Kearny, NJ which adjoins the property described above.
The Company is currently pursuing a redevelopement of the Kearny
properties into an integrated shopping center. In 2002, the Kearny property was
designated as part of the Passaic River Redevelopment Area by the Town of
Kearny.
6
As a result, the Company has sued the town of Kearny claiming that the
redevelopment plan is not in conformity with New Jersey law. The lawsuit is
currently pending. In the event the lawsuit is unsuccessful, the redeveloper
appointed by the Town will be required to acquire the Company's properties for
their fair market value.
The Company has had its properties appraised and such appraisal indicated
that the value of the Company's properties are in excess of their carrying
value. In the interim, the Company continues to lease the properties to multiple
tenants which provides positive cash flow to the Company.
(3) A vacant 31,000 square foot former Grand Union Supermarket and approximately
six acres of land underlying the building. The Company has entered into
agreements to sell the property for $810,000 which is being carried at $413,000
at December 31, 2002.
OPPORTUNITY FUND
The Company, BCG, an affiliate of Blackacre (as defined below), P.N.M.
Capital LLC, an affiliate of NPO ("PNM"), and Pemmil Management LLC, an
affiliate of NPO ("Pemmil") and PNM (collectively the "NPO Affiliates") are
parties to a certain Agreement which is called the Opportunity Agreement (the
"Opportunity Agreement"). The Opportunity Agreement had a term of three years
and expired April 2001. The Opportunity Agreement provided for an arrangement
(the "Opportunity Fund") whereby the fund had the right of first refusal to
finance the acquisition of limited partnership interests or mortgage loans to
Affiliated Limited Partnerships in which the Company is general partner, or
which the Company already owns, if the Company was unable to pursue such
business opportunity with its own funds from its reserves or available from
operations, or by obtaining financing from a third party or issuing equity.
All of the required capital contributions were to be provided by the other
members. The Company was to receive up to 20% of the profits from an opportunity
after the other investors received a return of their investment plus preferred
annual returns ranging from 12% to 20%.
The Opportunity Agreement has now terminated. While the Opportunity Fund no
longer has the right of first refusal with regard to opportunities, the Company
may continue to present opportunities to the fund.
As of March 1, 2003, the Opportunity Fund had purchased 15 wrap mortgages
of Affiliated Limited Partnerships from unaffiliated third parties, acquired
limited partnership units from unaffiliated individuals in three Affiliated
Limited Partnerships, and acquired an ownership interest in a property of an
Affiliated Limited Partnership. During 2000, DVL purchased three of the
mortgages owned by the Opportunity Fund. During 2001, a newly formed, wholly-
owned subsidiary of DVL purchased two of the mortgages owned by the Opportunity
Fund. In December 2001, the Opportunity Fund also sold its ownership interest in
a property located in Kearny, NJ to an entity in which certain partners are
affiliates of NPO. As of March 2003 the Opportunity Fund owns four mortgages.
During 2001, DVL was paid approximately $280,000 from the investments by the
Opportunity Fund, of which $189,000 was used to pay amounts owed by DVL under a
note in favor of an entity that is part of the Opportunity Fund incurred in
connection with the acquisition of certain mortgage loans. During 2002, DVL did
not receive any payments from the investments by the Opportunity Fund.
7
EMPLOYEES
As of March 2003, the Company had 10 employees, all of whom were employed
on a full-time basis other than the President of the Company, who serves on a
part-time basis. The Company is not a party to any collective bargaining
agreement and the Company's employees are not represented by any labor union.
The Company considers its relationship with its employees to be good.
SEGMENTS
The Company has two reportable segments; real estate and residual
interests.
You can find information about our business segment information in "Note
12. Segment Information" of our Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES.
The Company maintains corporate headquarters in New York City in a leased
facility located at 70 E. 55th Street, New York, New York, which occupies
approximately 5,600 square feet of office space. The lease for such office space
is due to expire on January 31, 2008. The base rent is $215,802 per annum. A
description of the other properties owned by the Company appears in the
subsection captioned "Real Estate Holdings" in Item 1 above. The Company
believes that its existing facilities are adequate to meet its current operating
needs and that suitable additional space should be available to the Company on
reasonable terms should the Company require additional space to accommodate
future operations or expansion.
ITEM 3. LEGAL PROCEEDINGS.
The Company from time to time is a party in various lawsuits incidental to
its business operations. In the opinion of the Company, none of such litigation
in which it is currently a party, if adversely determined, will have a material
adverse effect on the Company's financial condition or its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
8
PART II
ITEM 5. MARKET FOR DVL'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock of DVL is traded on the over-the-counter market and is
quoted on the OTC Bulletin Board maintained by the NASD under the symbol "DVLN".
As of March 17, 2003, the last reported sale price of DVL common stock was $.16
per share. The following table sets forth, for the calendar periods indicated,
the high and low bid prices of the Common Stock as reported by the NASD for 2002
and 2001. Such prices are inter-dealer prices without retail mark-up, mark-down
or commission, and do not represent actual transactions.
2002 High Low
- ---- ---- ---
Fourth Quarter ...................... $ .19 $ .09
Third Quarter ....................... .21 .12
Second Quarter ...................... .21 .13
First Quarter ....................... .24 .08
2001 High Low
- ---- ---- ---
Fourth Quarter ..................... $ .10 $ .07
Third Quarter ....................... .09 .05
Second Quarter ...................... .07 .05
First Quarter ....................... .06 .05
At March 20, 2003, there were 3,416 holders of record of Common Stock of
DVL. No dividends have been paid since October 1990. At this time, DVL does not
anticipate paying any dividends in the foreseeable future.
9
ITEM 6. SELECTED FINANCIAL DATA
The data set forth below should be read in conjunction with other financial
information of DVL, including its consolidated financial statements and
accountants' report thereon included elsewhere herein and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Consolidated Statements of Operations Data
(In thousands except for per share data)
Year Ended December 31,
2002 2001 2000 1999 1998
-------- ------- -------- ------- --------
Revenues
Affiliates $ 4,087 $ 5,303 $ 4,812 $ 6,360 $ 5,794
Other 5,007 4,252 1,251 1,375 528
-------- ------- -------- ------- --------
Total $ 9,094 $ 9,555 $ 6,063 $ 7,735 $ 6,322
======== ======= ======== ======= ========
Income (loss) before extraordinary gain $ 1,462 $ 2,505 $ 199 $ 1,026 $ (758)
Extraordinary (loss) gain on the
settlement of indebtedness (71) 361 306 1,267 202
-------- -------- -------- ------- --------
Net Income (loss) $ 1,391 $ 2,866 $ 505 $ 2,293 $ (556)
======== ======== ======== ======= ========
Basic earnings (loss) per share
Income (loss) before extraordinary gain $ .06 $ .15 $ .01 $ .06 $ (.04)
Extraordinary gain .00 .02 .02 .08 .01
-------- -------- -------- ------- --------
Net Income (loss) $ .06 $ .17 $ .03 $ .14 $ (.03)
======== ======== ======== ======= ========
Diluted earnings (loss) per share
Income (loss) before extraordinary gain $ .03 $ .03 $ .01 $ .02 $ (.04)
Extraordinary gain .00 .00 .00 .02 .01
-------- -------- -------- ------- --------
Net Income (loss) $ .03 $ .03 $ .01 $ .04 $ (.03)
======== ======== ======== ======= ========
10
Consolidated Balance Sheet Data
(In thousands)
As at December 31
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Total assets $79,584 $79,690 $45,437 $41,858 $55,635
======= ======= ======= ======= =======
Notes payable - residual interests $33,416 $35,044 $ -- $ -- $ --
======= ======= ======= ======= =======
Underlying mortgages payable $19,391 $22,218 $26,019 $27,692 $38,644
======= ======= ======= ======= =======
Long-term debt and notes payable $12,720 $ 8,911 $10,781 $ 5,156 $ 9,937
======= ======= ======= ======= =======
Shareholders' equity $12,378 $10,955 $ 7,573 $ 7,068 $ 4,775
======= ======= ======= ======= =======
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
INTRODUCTION
The Company is a commercial finance company which has been primarily
engaged in the ownership and servicing of a portfolio of secured commercial
mortgage loans, as well as managing numerous properties and the limited
partnerships which own such properties. During 2001, the Company purchased
ownership interests in residual interests in securitized receivables portfolios,
which should provide significant cash flow and income for the Company.
DVL believes that its anticipated cash flow provided by operations is
sufficient to meet its current cash requirements through March 2004. The Company
has in the past and expects in the future to continue to augment its cash flow
with additional cash generated from either the sale or refinancing of its assets
and/or borrowings.
The Company's current strategy is to (i) maximize the value of its assets
and meet its short-term working capital needs by continuing to manage,
administer and service its existing portfolio, (ii) obtain additional
investments, and (iii) expand through the acquisition of one or more companies
to generate additional income. There can be no assurance that the Company will
be able to identify or acquire businesses. While the Company regularly evaluates
and discusses potential acquisitions, the Company currently has no
understandings, commitments or agreements with respect to any acquisitions. The
Company anticipates that it would finance any possible future acquisition
through new borrowings or the issuance of its common or preferred stock.
At December 31, 2002, the Company had net operating loss carryforwards
("NOLS") aggregating approximately $52 million, which expire in various years
through 2019, including $45 million which expire through 2007. If the Company
generates taxable income in the future, the Company may be subject to
limitations on the use of its NOLS pursuant to the Internal Revenue Code. It is
anticipated that the taxable income associated with the residual interests will
utilize significant NOLS. There can be no assurance that a significant amount of
the Company's existing NOLS will be available to the Company at such time as the
Company desires to use them.
12
SIGNIFICANT EVENTS
ACQUISITION OF RESIDUAL INTERESTS IN SECURITIZED PORTFOLIOS
During 2001, the Company, through its wholly-owned consolidated subsidiary,
acquired 99.9% Class B member interests in Receivables II-A and 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
approximately $35,791,000, including costs of approximately $1,366,000 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 and investment banking fees to an affiliate aggregating $900,000.
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 payment of up to $3,443,000 of the
purchase price. The amount of the guaranty is regularly reduced by 10% of the
principal paid. The amount of the guaranty at December 31, 2002 was $3,342,000.
Payments, if any, due under this guaranty are payable after August 15, 2020.
In accordance with the purchase agreements, from the acquisition dates
through December 31, 2002, the residual interests in securitized portfolios and
the notes payable were decreased by approximately $532,000, as a result of
purchase price adjustments.
The following table reconciles the initial purchase price with the carrying
value at December 31, 2002:
Initial purchase price $ 35,791,000
Adjustments to purchase price (532,000)
Principal payments (41,000)
Accretion 893,000
------------
$ 36,111,000
============
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 $ 743,000 $ 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.
13
The Company believes it will receive significant cash flows after final payment
of the notes payable.
RECENT DEBT REDEMPTIONS
To date, the Company has redeemed an aggregate of $1,145,000 of the
Company's 10% redeemable promissory notes due December 31, 2005 (the "Notes")
for cash at the face value plus accrued interest of approximately $49,000. As of
December 31, 2002, $384,000 has been paid and the remaining $810,000 payable is
reflected as a non-interest bearing liability.
The Company has the option to redeem the outstanding Notes by issuing
additional shares of common stock with a then current market value (determined
based on a formula set forth in the Notes), equal to 110% of the face value of
the Notes plus any accrued and unpaid interest thereon. Because the applicable
market value of the common stock will be determined at the time of redemption,
it is not possible currently to ascertain the precise number of shares of common
stock that may have to be issued to redeem the outstanding Notes. The redemption
of the Notes may cause significant dilution for current shareholders. The actual
dilutive effect cannot be currently ascertained since it depends on the number
of shares to be actually issued to satisfy the Notes. The Company currently
intends to exercise at some point in the future its redemption option to the
extent it does not buy back the outstanding Notes by means of cash tender offers
or cash redemptions.
Notes with an aggregate principal amount of approximately $1,951,000 remain
outstanding as of December 31, 2002. The redemptions and the exchange of Notes
for common stock by Blackacre (as defined below) have reduced the potential
dilutive effective on the Company's current stockholders that would result from
redemption of the notes for shares of common stock. However, given the aggregate
principal amount of Notes which remains outstanding, the potential dilutive
effect of such a redemption is still significant.
BLACKACRE TRANSACTION
The Company had outstanding as of December 31, 2002 approximately $1,951,000
aggregate principal amount of 10% redeemable notes due December 31, 2005. The
notes are redeemable in cash, or at the option of DVL, for common stock at a
formula based upon the market price of the DVL common stock.
In an effort to reduce the potential future dilution to existing shareholders
resulting from a redemption of the notes for stock, in December 2001 the Company
entered into an agreement with Blackacre Bridge Capital, LLC ("Blackacre"), an
affiliate of BCG and Stephen Feinberg, under which Blackacre exchanged
$1,188,278 principal amount of notes for 4,753,113 shares of DVL's common stock
(the "Exchange Agreement"). This represents a conversion rate of $.25 per share.
The Exchange Agreement includes a provision which states that Blackacre shall
not sell or acquire any shares of the Company without the written consent of the
Board of Directors of the Company. The Board may withhold consent prior to
December 31, 2005, only if such transfer would, in the sole discretion of the
Board of Directors, jeopardize the Company's preservation of its Federal Income
Tax attributes under Section 382 of the Internal Revenue Code or in the case of
a transfer after December 31, 2005 would be materially adverse to the interest
of the Company.
14
If at any time after December 31, 2005, Blackacre is prevented from disposing of
any of its shares as a result of the Board of Directors determination that the
transfer would be materially adverse to the interest of the Company, then
Blackacre shall have the right to sell to the Company and the Company shall be
obligated to purchase up to the number of shares of common stock which when
added to all prior shares of common stock sold to the Company by Blackacre would
have an aggregate market value of not more than $1 million dollars.
The transaction resulted in an extraordinary gain of $482,000 in 2001. As a
result of the exchange, Blackacre and its affiliates now own approximately 25%
of DVL's issued and outstanding common stock.
NPM AND NPO TRANSACTIONS
In September of 1996, in an effort to alleviate liquidity problems and meet
certain mandatory debt repayment requirements, the Company entered into a loan
transaction with NPM Capital, LLC ("NPM") pursuant to which NPM purchased
certain loans from creditors of the Company. The original principal loan amount
from NPM was $8,382,000 (the "Original Loan").
Under the terms of the Original Loan, the principal balance was payable
over six years with interest accruing at the rate of 10.25% per annum. In May
1999, DVL repaid all amounts due under the NPM loan.
In connection with the transactions contemplated by the Original Loan, in
March 1996, the Company and NPO, an affiliate of certain principals of NPM,
entered into an Asset Servicing Agreement (the "Asset Servicing Agreement"),
pursuant to which NPO is providing the Company with administrative and advisory
services relating to the assets of the Company and its Affiliated Limited
Partnerships. In consideration for such services, the Company pays NPO $600,000
per year (with cost of living increases) over the seven-year term of the
original agreement, subject to early termination under certain conditions.
During 2001 the agreement was extended under the same terms and conditions for
another five years to March 2008. The current annual fee is $654,000. The
Company recorded fees to NPO of $652,000, $640,000, and $623,000 under the Asset
Servicing Agreement for 2002, 2001 and 2000, respectively. As of December 31,
2002 and 2001 the Company owed NPO accrued fees of $33,000 and $28,000,
respectively plus other expenses of $10,000 in each year.
In connection with the Original Loan, certain affiliates of NPM acquired an
aggregate of 1,000,000 shares (the "Base Shares") of the Company's Common Stock
for $200,000. The Base Shares currently represent approximately 4.6% of the
outstanding Common Stock of the Company. An affiliate of NPM also acquired 100
shares of preferred stock of the Company for $1,000. The Company issued to
affiliates of NPM, warrants (the "Warrants"), exercisable as of January 1999, to
purchase such number of shares of Common Stock as, when added to the Base
Shares, adjusted for shares of common stock subsequently issued to, or purchased
in the open market by affiliates of NPM and NPO represent an aggregate of 49% of
the outstanding Common Stock of the Company on a fully-diluted basis. The
original exercise price of the Warrants was $.16 per share, subject to
applicable anti- dilution provisions and subject to a maximum aggregate exercise
price of approximately $1,900,000. The Warrants expire on December 31, 2007. The
Warrants were valued for financial statement purposes at $516,000 at the date of
issuance and such value resulted in a debt discount which was amortized using
the effective interest rate method. Through March 2003, no Warrants have been
exercised.
15
The possibility that some or all of the Warrants may be exercised creates
the potential for significant dilution of the current stockholders. The actual
dilutive effect cannot be currently ascertained, since it depends on whether,
and if so to what extent, the Warrants are exercised.
OPPORTUNITY FUND
In April 1998, DVL, an affiliate of Blackacre and affiliates of NPO entered
into an Opportunity Agreement providing for the Opportunity Fund, pursuant to
which entities would be formed, from time to time, to enter into certain
transactions involving the acquisition of limited partnership interests in the
assets of, or mortgage loans to, Affiliated Limited Partnerships or other assets
in which the Company has an interest. These investment opportunities were to be
presented to the Opportunity Fund on a first-refusal basis, if the Company, due
to financial constraints, was unable to pursue such business opportunities with
its own funds.
All of the required capital contributions were to be provided by the
members other than the Company. The Company was to receive up to 20% of the
profits from an opportunity after the other investors received a return of their
investment plus preferred annual returns ranging from 12% to 20%.
The Opportunity Agreement has now terminated. While the fund no longer has
the right of first refusal with regard to opportunities, the Company may
continue to present opportunities to the fund.
As of March 1, 2003, the Opportunity Fund had purchased 15 wrap mortgages
of Affiliated Limited Partnerships from unaffiliated third parties, acquired
limited partnership units from unaffiliated individuals in three Affiliated
Limited Partnerships, and acquired an ownership interest in a property of an
Affiliated Limited Partnership.
During 2000, DVL purchased three of the mortgages owned by the Opportunity
Fund. During 2001, a newly formed, wholly-owned subsidiary of DVL purchased two
of the mortgages owned by the Opportunity Fund. In December 2001, the
Opportunity Fund sold its ownership interest in a property in Kearny, NJ to an
entity in which certain partners are affiliates of NPO. As of March 2003, the
Opportunity Fund owns four mortgages. During 2001, DVL was paid approximately
$280,000 from the investments by the Opportunity Fund, of which $189,000 was
used to pay amounts owed by DVL under a note in favor of an entity that is part
of the Opportunity Fund incurred in connection with the acquisition of certain
mortgage loans. During 2002, DVL did not receive any payments from the
investments by the Opportunity Fund.
RESULTS OF OPERATIONS
DVL had income before extraordinary items, net income after extraordinary
items, and extraordinary (losses) gains, as follows:
2002 2001 2000
---- ---- ----
Income before extraordinary items $1,462,000 $ 2,505,000 $ 199,000
Extraordinary (losses) gains $ (71,000) $ 361,000 $ 306,000
Net income $1,391,000 $ 2,866,000 $ 505,000
16
Interest income on mortgage loans from affiliates decreased (2002-
$2,903,000, 2001 - $3,118,000, 2000 - $3,436,000) and interest expense on
underlying mortgages decreased (2002 - $1,648,000, 2001 - $2,029,000, 2000 -
$2,329,000), as a result of a reduction in the size of DVL's mortgage portfolio.
Gains on satisfaction of mortgage loans were as follows:
2002 2001 2000
---- ---- ----
$ 252,000 $ 615,000 $ 256,000
These gains resulted from the Company collecting net proceeds on the
satisfaction of mortgage loans that were greater than the Company's carrying
value.
Management fees decreased (2002 - $239,000, 2001 - $804,000, 2000 -
$500,000) in 2002 from 2001 and increased in 2001 from 2000 primarily as a
result of the Company earning a $442,900 incentive fee during 2001.
Included in management fees were incentive management fees of $-0-,
$442,900, and $312,500 received during 2002, 2001, and 2000, respectively, from
PBD Holdings, Inc. an entity that is owned by affiliates of NPO and BCG ("PBD").
Incentive management fees are earned when properties owned by PBD are sold;
therefore, the fees earned by the Company vary based on the sales proceeds. PBD
currently has one parcel of land remaining.
The Company also provided property management and administrative services
for which it received fees of $239,000, $361,000 and $138,000 for 2002, 2001,
and 2000, respectively, which are included in management fees. The increases in
property management and administrative services from 2000 to 2001 were a result
of the Company obtaining new property management contracts. The fees for 2001
included non recurring fees of $174,000.
Transaction and other fees from Affiliated Limited Partnerships were as follows:
2002 2001 2000
---- ---- ----
$ 293,000 $ 260,000 $ 413,000
Transaction and other fees were earned in connection with the sales of
partnership properties and refinancings of underlying mortgages. The amount of
fees vary from year to year depending on the size and number of transactions.
Interest income on residual interests (2002 - $4,373,000, 2001 -
$2,802,000, 2000 - $0) and interest expense on the related notes payable (2002 -
$2,771,000; 2001 - $1,840,000, 2000 - $0) arose as DVL completed the
acquisitions of residual interests in March 2001 and August 2001.
Rental income from others was as follows:
2002 2001 2000
---- ---- ----
Net rental income from others $ 561,000 $ 720,000 $ 523,000
Gross rental income from others $2,441,000 $2,122,000 $1,899,000
17
The decrease in net rental income in 2002 from 2001 was primarily the
result of an increase in bad debts of $334,000 relating to write off of
receivables from a major tenant. The increase in bad debts was partially offset
by higher gross rents. The tenant has notified the Company that they have sold
their assets. The purchaser of the inventory has agreed to the pay the Company
$94,000 in rent per month plus real estate taxes and insurance from January 2003
through June 2003. The Company is seeking replacement tenants for the space that
will become vacant.
The primary reason for the increase in net rental income from 2000 to 2001
was the result of lower costs. The reduction in costs was due to a reduction in
lease obligations resulting from the purchase in December 2000 of certain real
estate which the Company had previously leased. The increase in net rental
income was partially offset by a rent reduction granted to a tenant and greater
depreciation expense due to the purchase of the real estate assets, as well as
higher insurance costs.
Distributions from investments from others decreased in 2002 from 2001
(2002 - $35,000, 2001 - $667,000) and increased in 2001 from 2000 (2001 -
$667,000; 2000 - $149,000) primarily as a result of receiving $280,000 in
distributions from investments in the Opportunity Funds and $348,000 in
distributions above the carrying value of other investments in 2001.
General and administrative expenses decreased in 2002 from 2001 (2002 -
$1,478,000, 2001 - $1,743,000) primarily due to decreases in consulting costs
and state tax expense. Included in consulting costs in 2001 were fees related to
a refinancing of certain assets. State tax expenses decreased in 2002 from 2001
due to a decrease in the Company's Delaware franchise tax, as well as a one time
tax payment in 2001 of $52,000. These decreases were partially offset by higher
salary and employee benefit costs.
General and administrative expenses increased in 2001 from 2000 (2001 -
$1,743,000, 2000 - $1,353,000). The primary reason for the increase in 2001 from
2000 was increased salaries and hiring costs as well as rent costs for the
Company's office headquarters due to escalation charges and lower rental
reimbursements.
The asset servicing fee paid to NPO increased (2002 - $652,000, 2001 -
$640,000, 2000 - $623,000) pursuant to the terms of the Asset Servicing
Agreement, due to an increase in the consumer price index.
Legal and professional fees increased in 2002 from 2001 (2002 - $371,000,
2001 - $344,000) as a result of $32,000 paid by the Company for services
rendered to the Company outside the scope of the Asset Servicing Agreement by
affiliates of NPO, and legal fees relating to the preparation of proxy
materials.
Legal and professional fees increased in 2001 from 2000 (2001 - $344,000,
2000 - $312,000) primarily due to expenses incurred in evaluating a potential
acquisition that was not completed. The Company has not employed an in-house
legal counsel since 1998; consequently, legal fees vary depending on the number
and sophistication of transactions that are executed.
Interest expense to affiliates consists primarily of interest on the
accrued NPO asset servicing fees and interest on the loan from Blackacre.
Interest expense to affiliates decreased (2002 - $286,000, 2001 - $389,000, 2000
- - $434,000) because the interest bearing amount due to affiliates was reduced.
18
Interest expense on litigation settlement Notes (2002 - $299,000, 2001 -
$484,000, 2000 - $502,000) would have increased in each year from 2000 through
2002 because of compounding of interest; however, the Company's efforts to
reduce the principal amount of Notes outstanding through tender offers,
redemptions and the exchange of Notes for common stock by Blackacre have
resulted in a decrease in the interest expense.
Interest expense relating to other debts increased in 2002 from 2001 (2002
- - $610,000, 2001 - $551,000) due to the Company borrowing approximately
$3,968,000 in August, 2002 to finance the purchase of real estate. The increase
in interest expense created by the new borrowings was partially offset by
decreases in interest rates on floating rate loans and repayments of principal.
Interest expense relating to other debts increased in 2001 from 2000. (2001
- - $551,000, 2000 - $311,000). During 2000, the Company borrowed an aggregate of
$6,425,000 to fund the acquisition of eight new mortgage loans, the purchase of
all the land, buildings, and improvements from a limited partnership which owned
seven buildings in an industrial park in New Jersey, and refinanced three
existing mortgage receivables. Also, during the first quarter of 2001, the
Company borrowed $200,000 to purchase a parcel of land.
In 2001 the Company acccrued $80,000 for alternative minimum taxes and in
2002 recognized $86,000 in tax benefits relating to the elimination of the
alernative minimum tax for 2001. The Company recognized $397,000 and $1,050,000
of income tax benefit in 2002 and 2001, respectively, as a result of a reduction
in the valuation allowance on deferred tax assets. In 2000 the provision for
income taxes was completely offset by the reduction in the valuation allowance
on deferred tax assets utilized.
Extraordinary gains in 2001 and 2000 of $525,000 and $306,000,
respectively, were the result of tender offers and redemptions of Notes at less
than book value of such Notes. The Company also realized extraordinary losses in
2002 and 2001 of $71,000 and $164,000, respectfully, resulting from the
redemption of Notes at face value. The net extraordinary gain for 2001 was
$361,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance was $2,373,000 at December 31, 2002, compared
with $2,987,000 at December 31, 2001.
The Company's cash flow from operations is generated principally from rental
income from its leasehold interests and ownership of real estate, distributions
in connection with residual interests in securitized portfolios, interest on its
mortgage portfolio, management fees 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 March 2004.
The Company believes that its current liquid assets and credit resources will be
sufficient to fund operations on a short-term basis as well as on a long-term
basis.
The Company obtained an unsecured line of credit on December 15, 2002 for
$500,000 with an interest rate of prime plus one percent per annum which
terminates December 15, 2003. To date the Company has not drawn on the line of
credit. The terms of the line of credit provide that interest shall be payable
on the first day of each month.
19
The Company's acquisition in 2001 of its member interest in Receivables II-A
and Receivables II-B should provide significant liquidity to the Company.
The purchase agreements contain annual minimum and maximum levels of cash
flow that will be retained by the Company, after the payment of interest and
principal on the notes payable, which are as follows:
Years Minimum Maximum
----- ------- -------
2001 to 2009 $ 743,000 $ 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 payable which are scheduled to become due through 2008 are as follows:
Outstanding
Original Principal
Loan Balance at Due
Purpose Creditor Amount Dec. 31, 2002 Date
- ------- -------- ------------- -------------- ----
Repurchase of Notes
Issued by the Company Blackacre(1) $ 1,560,000 $ 2,084,053 09/30/03
Purchase of Mortgages Unaffiliated Bank(2)(3) $ 1,000,000 $ 604,136 05/01/06
Purchase of a Mortgage
and Refinancing of
Existing Mortgages Unaffiliated Bank(2)(3) $ 1,450,000 $ 742,363 11/30/06
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 $ 344,266 06/01/06
Purchase of Mortgages Unaffiliated Bank(6)(7) $ 2,667,542 $ 2,650,110 06/30/08
(1) Interest rate is 12% per annum, compounded monthly. Interest is added to
principal and is paid from a portion of cash received in satisfaction of
certain mortgage loans.
(2) This loan self-amortizes.
(3) Interest rate is prime plus 1.5% per annum payable monthly.
(4) Interest rate is 8.5% per annum. Monthly payments are interest only.
(5) Interest rate is 8.25% per annum payable monthly.
(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 $4,404,000 including costs and the
assumption of $2,668,000 in debt. The lease requires K-Mart to pay $30,000
per month plus all operating and structural costs of the building.
21
During 2001, DVL purchased two mortgage loans from an entity that is part
of the Opportunity Fund which are secured by real estate owned by Affiliated
Limited Partnerships in which DVL is the general partner. The loans were
purchased for an aggregate price of $400,000, paid in cash. The loans were
subsequently refinanced in 2002 and DVL realized approximately $380,000 from the
refinancing after closing costs.
The amounts obtained from the refinancings were primarily based on the
value of the base rents due from tenants during the period of the base lease
term subsequent to the payoff of the existing first mortgages. As a result of
the refinancings, the Company's asset base available for future refinancings has
diminished.
IMPACT OF INFLATION AND CHANGES IN INTEREST RATES
The Company's portfolio of mortgage loans made to Affiliated Limited
Partnerships consists primarily of loans made at fixed rates of interest.
Therefore, increases or decreases in market interest rates are generally not
expected to have an effect on the Company's earnings. Other than as a factor in
determining market interest rates, inflation has not had a significant effect on
the Company's net income.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principals generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to residual interests and allowance for losses. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilties
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
RESIDUAL INTERESTS: Residual interests represent the estimated discounted
cash flow of the differential of the total interest to be earned on the
securitized receivables and the sum of the interest to be paid to the
noteholders and the contractual servicing fee. Since these residual interests
are not subject to prepayment risk they are accounted for as investments
held-to-maturity and are carried at amortized cost using the effective yield
method. Permanent impairments are recorded immediately through earnings.
Favorable changes in future cash flows are recognized through earnings as
interest over the remaining life of the retained interest.
INCOME RECOGNITION: Interest income is recognized on the effective interest
method for the residual interest and all performing loans. The Company stops
accruing interest once a loan becomes non-performing. A loan is considered non-
performing when scheduled interest or principal payments are not received on a
timely basis and in the opinion of management, the collection of such payments
in the future appears doubtful. Interest income on restructured loans are
recorded as the payments are received.
22
ALLOWANCE FOR LOSSES: The adequacy of the allowance for losses is
determined through a quarterly review of the portfolios. Specific loss reserves
are provided as required based on management's evaluation of the underlying
collateral on each loan or investment.
DVL's allowance for loan losses generally is based upon the value of the
collateral underlying each loan and its carrying value. Management's evaluation
considers the magnitude of DVL's non-performing loan portfolio and internally
generated appraisals of certain properties.
For the Company's mortgage loan portfolio, the partnership properties are
valued based upon the cash flow generated by base rents and anticipated
percentage rents or base rent escalations to be received by the partnership. The
value of partnership properties which are not subject to percentage rents was
based upon historial appraisals. Management believes, that generally, the values
of such properties have not changed as the tenants, lease terms and timely
payment of rent have not changed. When any such changes have occurred,
management revalues the property as appropriate. Management evaluates and
updates such appraisals, periodically, and considers changes in the status of
the existing tenancy in such evaluations. Certain other properties were valued
based upon management's estimate of the current market value for each specific
property using similar procedures.
DVL does not consolidate any of the various Affiliated Limited Partnerships
in which it holds the general partner and limited partner interests nor does DVL
account for such interests on the equity method due to the following: (i) DVL's
interest in the partnerships as the general partner is a 1% interest, (the
proceeds of such 1% interest is payable to the limited partnership settlement
fund pursuant to the 1993 settlement of the class action between the limited
partners and DVL) the ("Limited Partnership Settlement"); (ii) under the terms
of such settlement, the limited partners have the right to remove DVL as the
general partner upon the vote of 70% or more of the limited partners; (iii) all
major decisions must be approved by a limited partnership Oversight Committee in
which DVL is not a member, (iv) there are no operating policies or decisions
made by the Affiliated Limited Partnership, due to the triple net lease
arrangements for the Affiliated Limited Partnership properties and (v) there are
no financing policies determined by the partnerships as all mortgages were in
place prior to DVL's obtaining its interest and all potential refinancings are
reviewed by the Oversight Committee. Accordingly, DVL accounts for its
investments in the Affiliated Limited Partnerships, on a cost basis with the
cost basis adjusted for impairments which took place in prior years.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DVL has no substantial cash flow exposure due to interest rate changes for
long-term debt obligations, because a majority of the long-term debt is at fixed
rates. DVL primarily enters into long-term debt for specific business purposes
such as the repurchase of debt at a discount, acquisition of mortgage loans, or
the purchase of real estate assets.
DVL's ability to realize on its mortgage holdings is sensitive to interest
rate fluctuations in that the sales prices of real property and mortgages vary
with interest rates.
The table set forth below presents principal amounts and related weighted
average interest rates by year of maturity for DVL's investment portfolio and
debt obligations.
There-
In Thousands 2003 2004 2005 2006 2007 after Total
- ------------------------------------------------------------------------------------
ASSETS
Cash equivalents $2,373 $ 2,373
Variable rate
Average interest rate 0.8% 0.8%
LONG TERM DEBT
Fixed rate $4,684 $6,772 $2,235 $2,754 $2,962 $ 9,616 $29,023
Average interest rate 8.97% 8.71% 7.97% 7.35% 7.35% 7.41% 9.10%
Variable rate $ 519 $ 707 $ 127 $ -0- $ -0- $ -0- $ 1,353
Average interest rate 6% 6% 6% -0- -0- -0-
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUPPLEMENTARY DATA
Quarterly Data (Unaudited)
For the Year Ended December 31, 2002
(In Thousands Except Share and Per Share Data)
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
Total Revenue $ 2,238 $ 2,494 $ 2,239 $ 2,123 $ 9,094
Total Expenses 2,088 2,031 1,937 2,059 8,115
Income before extra-
ordinary gain 150 843 388 81 1,462
Extraordinary gain (loss) -- (60) (11) -- (71)
Net income (loss) 150 783 377 81 1,391
Basic earnings (loss)
per share:
Income (loss) before
extraordinary gain $ .01 $ .04 $ .02 $ .00 $ .06
Extraordinary gain $ .00 $ .00 $ .00 $ .00 $ .00
Net income (loss) $ .01 $ .04 $ .02 $ .00 $ .06
Diluted earnings (loss)
per share:
Income (loss) before
extraordinary gain $ .00 $ .02 $ .01 $ .00 $ .03
Extraordinary gain $ .00 $ .00 $ .00 $ .00 $ .00
Net income (loss) $ .00 $ .02 $ .01 $ .00 $ .03
Weighted average
shares outstanding:
Basic 21,713,563 21,713,563 21,713,563 21,713,563 21,713,563
Diluted 65,378,189 55,873,784 57,028,078 60,149,306 58,776,493
Quarterly Data (Unaudited)
For the Year Ended December 31, 2001
(In Thousands Except Share and Per Share Data)
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
Total Revenue $ 1,546 $ 2,401 $ 2,436 $ 3,172 $ 9,555
Total Expenses 1,474 1,985 2,082 2,479 8,020
Income before
extraordinary gain 72 416 354 1,663 2,505
Extraordinary gain 14 -- -- 347 361
Net income 86 416 354 2,010 2,866
Basic earnings per
share:
Income before extra-
ordinary gain $ .01 $ .03 $ .02 $ .10 $ .15
Extraordinary gain $ .00 $ .00 $ .00 $ .02 $ .02
Net income $ .01 $ .03 $ .02 $ .12 $ .17
Diluted earnings per
share:
Income before extra-
ordinary gain $ .00 $ .00 $ .00 $ .02 $ .03
Extraordinary gain $ .00 $ .00 $ .00 $ .01 $ .00
Net income $ .00 $ .00 $ .00 $ .03 $ .03
Weighted average
shares outstanding:
Basic 16,560,450 16,560,450 16,560,450 17,020,429 16,599,517
Diluted 163,631,850 142,389,554 107,856,352 72,820,396 124,772,115
Basic and diluted earnings per share are computed independently for each of the
periods. Accordingly, the sum of the quarterly earnings per share amounts may
not agree to the total for the year. The financial statements and notes thereto,
together with the accountants' report thereon of Eisner, LLP, are set forth on
pages F-1 through F-31, which follow. The financial statements are listed in
Item 15(a)(1) hereof.
25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF DVL
A. The following table sets forth the name of each director and executive
officer of the Company, and the nature of all positions and offices with the
Company held by him at present. The term of all directors (other than the
special purpose director) expires at the Company's next annual meeting of
stockholders, which will be held on a date to be scheduled. The term of all
executive officers expires at the next annual meeting of directors, to be held
immediately thereafter.
NAME POSITION
Frederick E. Smithline Chairman of the Board
Myron Rosenberg Director
Alan E. Casnoff Director, President and Chief Executive Officer
Jay Thailer Executive Vice President and Chief Financial
Officer
Keith B. Stein Special Purpose Director
In addition to three directors, who have all of the powers normally granted
to corporate directors, the Company has one special purpose director, who was
elected in 1996 by the holder of the Company's Class A Preferred Stock. The
special purpose director has no right to vote at meetings of the Board, except
as to Bankruptcy Matters (as such term is defined in the Company's Certificate
of Incorporation).
B. The following is a brief account of the recent business experience of
each director and executive officer and directorships held with other companies
which file reports with the Securities and Exchange Commission:
FREDERICK E. SMITHLINE (age 71) has served as Chairman of the Board of the
Company since 1990 and as a director since 1982. From September 1989 to May
1996, Mr. Smithline was of counsel to the law firm of Epstein, Becker & Green,
P.C., New York, New York. Mr. Smithline has been of counsel to the law firm of
Fischbein, Badillo, Wagner and Harding from September 2002 to present.
MYRON ROSENBERG (age 74) has served as a director of the Company since
1973. Through December 1996, Mr. Rosenberg served as Executive Vice President of
Rosenthal & Rosenthal, Inc., New York, New York, a commercial finance concern,
where he had been employed since 1961. Mr. Rosenberg is currently associated
with the investment banking firm of Taurus Global, LLC.
26
ALAN E. CASNOFF (age 59) has served as President of the Company since
November 1994, and was appointed as a director in November 2001. Mr. Casnoff
served as Executive Vice President of the Company from October 1991 to November
1994. Mr. Casnoff has maintained his other business interests during this period
and thus has devoted less than full time to the business affairs of DVL. From
November 1990 to October 1991, Mr. Casnoff served as a consultant to the Company
and from 1971 to October 1991, as Secretary of the Company. Since May 1991, Mr.
Casnoff has also served as a director of Kenbee Management, Inc. ("Kenbee"), an
affiliate of the Company, and as President of Kenbee since November 1994. Since
1977, Mr. Casnoff has also been a partner of P&A Associates, a private real
estate development firm headquartered in Philadelphia, Pennsylvania. Since 1969,
Mr. Casnoff was associated with various Philadelphia, Pennsylvania law firms
which have been legal counsel to the Company and Kenbee. Since July 1999, he has
been of counsel to Klehr, Harrision, Harvey, Brazenburg & Ellers ("Klehr").
JAY THAILER (age 34) has served as Chief Financial Officer and Executive
Vice President since November 2001. From August 1998 to November 2001, Mr.
Thailer served as Vice President and Secretary of the Company. Mr. Thailer is a
Certified Public Accountant. Prior to joining the Company in 1997, Mr. Thailer
was associated with the accounting firm of Sobel & Company, C.P.A.'s, where his
clients included real estate development companies.
KEITH B. STEIN (age 45) has been a special purpose director of the Company
since September 1996. Mr. Stein is the Chairman, Chief Executive Officer, and a
director of National Auto Receivables Liquidation, Inc., a specialty finance
company. Mr. Stein is also Managing Partner of Crestwalk Capital Advisors, LLC,
a privately held boutique Investment banking firm focused on corporate
restructuring and reorganization, mergers and acquisitions advisory, as well as
principal activities, in the lower end of the middle market. From March 1993 to
September 1994, he served as Senior Vice President, Secretary and General
Counsel of WestPoint Stevens, Inc., a textile company, after having served the
same company from October 1992 to February 1993 in the capacity of Acting
General Counsel and Secretary. From May 1989 to February 1993, Mr. Stein was
associated with the law firm of Weil, Gotshal & Manges LLP. Mr. Stein is an
affiliate of NPM.
(c) Compliance with Section 16 (a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who are beneficial owners of more
than 10% of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Commission. Officers,
directors, and greater than 10% beneficial owners are required by Commission
regulations to furnish the Company with copies of all Section 16(a) forms they
file. To the Company's knowledge, based solely on review of such reports
furnished to the Company, and written representations that no other reports were
required during or with respect to the fiscal year ended December 31, 2002, all
Section 16(a) filing requirements applicable to such persons were satisfied.
27
ITEM 11. EXECUTIVE COMPENSATION
A. SUMMARY COMPENSATION TABLE
The following table sets forth all compensation awarded to, earned by or
paid to the following persons for services rendered to the Company in 2002 and
(if applicable) in 2001 and 2000: (1) the person serving as the Company's chief
executive officer during 2002; (2) those other persons who were serving as
executive officers as of the end of 2002 whose compensation exceeded $100,000
during 2002:
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
Compensation Awards ------------------- ---------
- -------------------
Securities
LTIP Other Annual Underlying
Name Year Salary Bonus Compensation Options/SAR
---- ---- ------ ----- ------------ -----------
Payouts
-------
Alan E. Casnoff 2002 $120,000 $ -- -- --
President and 2001 120,000 10,000 -- 100,000(2)
Chief Executive 2000 120,000 -- -- --
Officer
Jay Thailer 2002 $110,000 $ 15,000 --
Executive Vice 2001 110,000 15,000 -- 15,000(2)
President and Chief
Financial Officer (1)
(1) Mr. Thailer became Executive Vice President and Chief Financial Officer of
the Company on
November 8, 2001.
(2) Consists of options to purchase shares of Common Stock under the 1996 Stock
Options Plan.
28
B. OPTION GRANTS IN LAST FISCAL YEAR
No options were granted by the Company in 2002 under the DVL, Inc. 1996
Stock Option Plan (the "Plan") to the executive officers named in the Summary
Compensation Table. The Plan provides for the grant of options to purchase up to
2,500,000 shares of Common Stock to Employees and Non-Employee Directors (in
each case as defined in the Plan).
The Plan provides that any one employee wishing to exercise an option must
give prior notice to the Board. If the Board determines, in its reasonable
discretion, that such exercise will cause an "ownership change" (as defined in
Section 382 of the Internal Revenue Code of 1986, as amended) in the Company
which would have an adverse effect on the Company's use of its NOLS (as defined
in Section 382) (an "Adverse Ownership Change"), the Board shall deny approval
of the exercise. If the Board determines that such exercise would not cause an
Adverse Ownership Change, it shall approve the exercise. The conditions
described in this paragraph are referred to below as the "Section 382
Restrictions".
As of December 31, 2002, options to purchase 1,503,131 shares were
outstanding under the Plan and 996,869 shares were available for issuance upon
exercise of options which may be granted in the future.
29
C. FISCAL YEAR-END OPTION VALUES
The following table sets forth information as to options held as of the end
of 2002 by the executive officers named in the Summary Compensation Table. No
options were exercised by said officers in 2002. All options held by said
officers at fiscal year-end were immediately exercisable.
Number of Securities Underlying Value of Unexercised
Unexercised Options At Fiscal In-The-Money Options
Name Year End At Fiscal Year End
---- ------------------------------- --------------------
Alan E. Casnoff 475,000 $ 13,000
Jay Thailer 42,000 $ 3,065
D. COMPENSATION OF DIRECTORS
Regular directors who are not officers or employees of the Company
("Non-Employee Directors") presently receive a director's fee of $1,500 per
month, plus $500 for each Audit Committee meeting of the Board of Directors
attended. Directors who are officers or employees of the Company receive no
compensation for their services as directors or attendance at any Board of
Directors or committee meetings. Mr. Casnoff, who is a director, is also
President and Chief Executive Officer of the Company. The special purpose
director receives no compensation for his service as a director or attendance at
any Board of Directors or committee meetings.
On each of September 17, 2000, 2001 and 2002 options to purchase 15,000
shares of Common Stock at an exercise price equal to the then market price per
share were granted to each of the non-employee directors (Messrs. Rosenberg and
Smithline). The options were granted under the Plan, which provides for
automatic grants of options for 15,000 shares to each incumbent regular director
on each anniversary of the adoption of the Plan. The options vested immediately
and are exercisable for a term of ten (10) years from the date of grant. The
exercise price is equal to the fair market value on the date of grant.
E. EMPLOYMENT CONTRACTS AND ARRANGEMENTS
The Company entered into Indemnification Agreements with all officers and
directors effective upon their election as an officer or director of the
Company, contractually obligating the Company to indemnify them to the fullest
extent permitted by applicable law, in connection with claims arising from their
service to, and activities on behalf of, the Company.
The Company does not currently have any employment contracts in force.
F. BOARD OF DIRECTORS INTERLOCKS AND INSIDER PARTICIPATION
During 2002, no executive officer of the Company served as a director of or
a member of a compensation committee of any entity for which any of the persons
serving on the Board of Directors of the Company is an executive officer.
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
A. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of March 25, 2003
regarding the ownership of common stock of the Company by each person who is
known to the management of the Company to have been the beneficial owner of more
than 5% of the outstanding shares of the Company's common stock.
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent of Class*
------------------ -------------------- -----------------
Lawrence J. Cohen 5,520,707 (1)(4) 20.8%
Milton Neustadter 3,069,222 (1)(5) 12.4%
Jay Chazanoff 4,979,221 (2)(6) 18.8%
Ron Jacobs 4,679,735 (2)(7) 17.9%
Stephen Simms 4,679,735 (2)(8) 17.9%
Keith B. Stein 4,715,853 (3)(9) 17.9%
Robert W. Barron 4,321,030 (3)(10) 16.6%
Adam Frieman 4,160,517 (3)(11) 16.1%
Peter Offerman 4,040,502 (3)(12) 15.7%
Joseph Huston 3,997,770 (3)(13) 15.6%
Jan Sirota 4,040,502 (3)(14) 15.7%
Neal Polan 4,040,502 (3)(15) 15.7%
Michael Zarriello 4,040,502 (3)(16) 15.7%
Mark Mahoney 4,028,860 (3)(17) 15.7%
The SIII Associates Limited 6,015,281 (3)(18) 21.9%
Partnership Third Addison
Park Corporation and
Gary L. Shapiro
J.G. Wentworth, S.S.C.
Limited Partnership 3,000,000 (19) 12.1%
10 Presidential Boulevard
Suite 250
Bala Cynwyd, PA 19004
Stephen Feinberg 5,406,113 (20) 24.9%
450 Park Avenue
28th Floor
New York, NY 10022
31
NOTES TO TABLE
In each instance where a named individual is listed as the holder of a
currently exercisable option or Warrant, the shares which may be acquired upon
exercise thereof have been deemed outstanding for the purpose of computing the
percentage owned by such person, but not for the purpose of computing the
percentage owned by any other person, except with respect to options or Warrants
held by other members of a Holder's Holder Group (as defined below). An option
or Warrant is deemed to be currently exercisable if it may be exercised within
60 days. The number of Warrants attributed to each Holder herein is based upon
the number of warrants that would be issued as of the date of this document, and
is subject to adjustment to eliminate any possible dilution, as described in
"Changes of Control" below.
(1) As described in detail below in "Changes of Control", such persons are
members of the Pembroke Group (as defined in "Changes of Control" below), and
said persons share dispositive power with each other as to 2,645,735 shares of
the Company's Common Stock issuable to the members of the Pembroke Group upon
the exercise of Warrants by such members, which shares constitute 50.1% of all
of the shares issuable to the members of the Pembroke Group upon the exercise of
Warrants. The address of each member of the Pembroke Group is c/o Lawrence J.
Cohen, 70 East 55th Street, Seventh Floor, New York, NY 10022. The members of
the Pembroke Group explicitly disclaim beneficial ownership of all of the shares
of Common Stock and Warrants (and shares of Common Stock issuable upon exercise
of Warrants) owned by the other members of the Pembroke Group.
(2) As described in detail below in "Changes of Control", such persons are
members of the Millennium Group (as defined in "Changes of Control" below), and
said persons share dispositive power with each other as to 3,401,495 shares of
the Company's Common Stock issuable to the members of the Millennium Group upon
the exercise of Warrants by such members, which shares constitute 50.1% of all
of the shares issuable to the members of the Millennium Group upon the exercise
of Warrants. The address of each member of the Millennium Group is c/o Jay
Chazanoff, 70 East 55th Street, Seventh Floor, New York, NY 10022. The members
of the Millennium Group explicitly disclaim beneficial ownership of all of the
shares of Common Stock and Warrants (and shares of Common Stock issuable upon
exercise of Warrants) owned by the other members of the Millennium Group.
(3) As described in detail below in "Changes of Control", such persons are
members of the Florida Group (as defined in "Changes in Control" below), and
said persons share dispositive power with each other as to 3,912,317 shares of
the Company's Common Stock issuable to the members of the Florida Group upon the
exercise of Warrants (as defined in "Changes in Control" below) by such members,
which shares constitute 50.1% of all of the shares issuable to the members of
the Florida Group upon the exercise of Warrants. The address of each member of
the Florida Group is c/o Keith Stein, 70 East 55th Street, Seventh Floor, New
York, NY 10022.
(4) Based upon a Schedule 13D, as amended, as filed with the Securities and
Exchange Commission (the "Commission") on November 18, 1999, Mr. Cohen
possesses: (i) the sole power to vote 5,134,177 shares of Common Stock, which
includes 4,509,389 shares of Common Stock issuable upon exercise of Warrants;
(ii) shared power to vote 0 shares of Common Stock; (iii) the sole power to
dispose of 2,874,973 shares of Common Stock, which includes 2,250,185 shares of
Common Stock issuable upon exercise of Warrants; and (iv) shared power with the
other member of the Pembroke Group to dispose of 2,645,735 shares of Common
Stock, which includes 2,259,204 shares of Common Stock issuable upon the
exercise of Warrants held by Mr. Cohen and 386,531 shares of Common Stock
issuable upon exercise of Warrants held by the other member of the Pembroke
Group. Mr. Cohen explicitly disclaims beneficial ownership of all of the shares
of Common Stock and Warrants (and shares of Common Stock issuable upon exercise
of Warrants) owned by the other member of the Pembroke Group.
32
(5) Based upon a Schedule 13D, as amended, as filed with the Commission on
November 18, 1999, Mr. Neustadter possesses: (i) the sole power to vote 810,019
shares of Common Stock, which includes 771,519 shares of Common Stock issuable
upon exercise of Warrants; (ii) shared power to vote 0 shares of Common Stock;
(iii) the sole power to dispose of 423,488 shares of Common Stock, which
includes 384,988 shares of Common Stock issuable upon exercise of Warrants; and
(iv) shared power with the other member of the Pembroke Group to dispose of
2,645,735 shares of Common Stock, which includes 386,531 shares of Common Stock
issuable upon the exercise of Warrants held by Mr. Neustadter and 2,259,204
shares of Common Stock issuable upon exercise of Warrants held by the other
member of the Pembroke Group. Mr. Neustadter explicitly disclaims beneficial
ownership of all of the shares of Common Stock and Warrants (and shares of
Common Stock issuable upon exercise of Warrants) owned by the other member of
the Pembroke Group.
(6) Based upon a Schedule 13D, as amended, as filed with the Commission on
November 18, 1999, Mr. Chazanoff possesses: (i) the sole power to vote 2,893,810
shares of Common Stock, which includes 2,662,915 shares of Common Stock issuable
upon exercise of Warrants; (ii) shared power to vote 0 shares of Common Stock;
(iii) the sole power to dispose of 1,577,726 shares of Common Stock, which
includes 1,310,831 shares of Common Stock issuable upon exercise of Warrants;
and (iv) shared power with the other members of the Millennium Group to dispose
of 3,401,495 shares of Common Stock, which includes 1,316,084 shares of Common
Stock issuable upon the exercise of Warrants held by Mr. Chazanoff and 2,085,410
shares of Common Stock issuable upon exercise of Warrants held by the other
members of the Millennium Group. Mr. Chazanoff explicitly disclaims beneficial
ownership of all of the shares of Common Stock and Warrants (and shares of
Common Stock issuable upon exercise of Warrants) owned by the other members of
the Millennium Group.
(7) Based upon a Schedule 13D, as amended, as filed with the Commission on
November 18, 1999, Mr. Jacobs possesses: (i) the sole power to vote 2,320,945
shares of Common Stock, which includes 2,018,248 shares of Common Stock issuable
upon exercise of Warrants; (ii) shared power to vote 0 shares of Common Stock;
(iii) the sole power to dispose of 1,278,240 shares of Common Stock, which
includes 1,038,543 shares of Common Stock issuable upon exercise of Warrants;
and (iv) shared power with the other members of the Millennium Group to dispose
of 3,401,495 shares of Common Stock, which includes 1,042,705 shares of Common
Stock issuable upon the exercise of Warrants held by Mr. Jacobs and 2,358,790
shares of common stock issuable upon exercise of Warrants held by the other
members of the Millennium Group. Mr. Jacobs explicitly disclaims beneficial
ownership of all of the shares of Common Stock and Warrants (and shares of
Common Stock issuable upon exercise of Warrants) owned by the other members of
the Millenium Group.
(8) Based upon a Schedule 13D, as amended, as filed with the Commission on
November 18, 1999, Mr. Simms possesses: (i) the sole power to vote 2,320,945
shares of Common Stock, which includes 2,081,248 shares of Common Stock issuable
upon exercise of Warrants; (ii) shared power to vote 0 shares of Common Stock;
(iii) the sole power to dispose of 1,278,240 shares of Common Stock, which
includes 1,038,543 shares of Common Stock issuable upon exercise of Warrants;
and (iv) shared power with the other members of the Millennium Group to dispose
of 3,401,495 shares of Common Stock, which includes 1,042,705 shares of Common
Stock issuable upon the exercise of Warrants held by Mr. Simms and 2,358,790
shares of Common Stock issuable upon exercise of Warrants held by the other
members of the Millennium Group. Mr. Simms explicitly disclaims beneficial
ownership of all of the shares of Common Stock and Warrants (and shares of
Common Stock issuable upon exercise of Warrants) owned by the other members of
the Millennium Group.
33
(9) Based upon a Schedule 13D, as amended, as filed with the Commission on
November 18, 1999, Mr. Stein possesses: (i) the sole power to vote 1,533,478
shares of Common Stock, which includes 1,456,971 shares of Common Stock issuable
upon exercise of Warrants; (ii) shared power to vote 0 shares of Common Stock;
(iii) the sole power to dispose of 803,535 shares of Common Stock, which
includes 727,029 shares of Common Stock issuable upon exercise of Warrants; and
(iv) shared power with the other members of the Florida Group to dispose of
3,912,317 shares of Common Stock, which includes 729,942 shares of Common Stock
issuable upon the exercise of Warrants held by Mr. Stein and 3,182,375 shares of
Common Stock issuable upon exercise of Warrants held by the other members of the
Florida Group. Mr. Stein explicitly disclaims beneficial ownership of all of the
shares of Common Stock and Warrants (and shares of Common Stock issuable upon
exercise of Warrants) owned by the other members of the Florida Group.
(10) To the Company's knowledge, Mr. Barron possesses: (i) the sole power to
vote 781,795 shares of Common Stock, which includes 744,675 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 408,713 shares of Common Stock,
which includes 371,593 shares of Common Stock issuable upon exercise of
Warrants; and (iv) shared power with the other members of the Florida Group to
dispose of 3,912,317 shares of Common Stock, which includes 373,082 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Barron and
3,539,235 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group.
(11) To the Company's knowledge, Mr. Frieman possesses: (i) the sole power to
vote 485,707 shares of Common Stock, which includes 474,065 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 248,200 shares of Common Stock,
which includes 236,558 shares of Common Stock issuable upon exercise of
Warrants; and (iv) shared power with the other members of the Florida Group to
dispose of 3,912,317 shares of Common Stock, which includes 237,507 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Frieman and
3,674,810 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group.
(12) To the Company's knowledge, Mr. Offerman possesses: (i) the sole power to
vote 245,196 shares of Common Stock, which includes 233,554 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 128,185 shares of Common Stock,
which includes 116,543 shares of Common Stock issuable upon exercise of
Warrants; and (iv) shared power with the other members of the Florida Group to
dispose of 3,912,317 shares of Common Stock, which includes 117,011 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Offerman and
3,795,306 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group.
(13) To the Company's knowledge, Mr. Huston possesses: (i) the sole power to
vote 163,457 shares of Common Stock, which includes 155,696 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 85,453 shares of Common Stock,
which includes 77,692 shares of Common Stock issuable upon exercise of Warrants;
and (iv) shared power with the other members of the Florida Group to dispose of
3,912,317 shares of Common Stock, which includes 78,004 shares of Common Stock
issuable upon the exercise of Warrants held by Mr. Huston and 3,834,313 shares
of Common Stock issuable upon exercise of Warrants held by the other members of
the Florida Group.
34
(14) To the Company's knowledge, Mr. Sirota possesses: (i) the sole power to
vote 245,196 shares of Common Stock, which includes 233,554 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 128,185 shares of Common Stock,
which includes 116,543 shares of Common Stock issuable upon exercise of
Warrants; and (iv) shared power with the other members of the Florida Group to
dispose of 3,912,317 shares of Common Stock, which includes 117,011 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Sirota and
3,795,306 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group.
(15) To the Company's knowledge, Mr. Polan possesses: (i) the sole power to vote
245,196 shares of Common Stock, which includes 233,554 shares of Common Stock
issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of Common
Stock; (iii) the sole power to dispose of 128,185 shares of Common Stock, which
includes 116,543 shares of Common Stock issuable upon exercise of Warrants; and
(iv) shared power with the other members of the Florida Group to dispose of
3,912,317 shares of Common Stock, which includes 117,011 shares of Common Stock
issuable upon the exercise of Warrants held by Mr. Polan and 3,795,306 shares of
Common Stock issuable upon exercise of Warrants held by the other members of the
Florida Group.
(16) To the Company's knowledge, Mr. Zarriello possesses: (i) the sole power to
vote 245,196 shares of Common Stock, which includes 233,554 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 128,185 shares of Common Stock,
which includes 116,543 shares of Common Stock issuable upon exercise of
Warrants; and (iv) shared power with the other members of the Florida Group to
dispose of 3,912,317 shares of Common Stock, which includes 117,011 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Zarriello and
3,795,306 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group.
(17) To the Company's knowledge, Mr. Mahoney possesses: (i) the sole power to
vote 233,554 shares of Common Stock, which includes 233,554 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 116,543 shares of Common Stock,
which includes 116,543 shares of Common Stock issuable upon exercise of
Warrants; and (iv) shared power with the other members of the Florida Group to
dispose of 3,912,317 shares of Common Stock, which includes 116,543 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Mahoney and
3,795,774 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group.
(18) To the Company's knowledge, the SIII Associates Limited Partnership
possesses: (i) the sole power to vote 4,011,694 shares of Common Stock, which
includes 3,809,840 shares of Common Stock issuable upon exercise of Warrants;
(ii) shared power to vote 0 shares of Common Stock; (iii) the sole power to
dispose of 2,102,964 shares of Common Stock, which includes 1,901,110 shares of
Common Stock issuable upon exercise of Warrants; and (iv) shared power with the
other members of the Florida Group to dispose of 3,912,317 shares of Common
Stock, which includes 1,908,730 shares of Common Stock issuable upon the
exercise of Warrants held by the SIII Associates Limited Partnership and
2,003,587 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group. Third Addison Park Corporation is the
general partner of the SIII Associates Limited Partnership, and Gary L. Shapiro
is the chief executive officer of Third Addison Park Corporation.
35
(19) To the Company's knowledge, J.G. Wentworth, S.S.C. Limited Partnership
possesses: (i) the sole power to vote 3,000,000 shares of Common Stock, which
includes 3,000,000 shares of Common Stock issuable upon exercise of Warrants;
(ii) shared power to vote 0 shares of Common Stock; (iii) the sole power to
dispose of 3,000,000 shares of Common Stock, which includes 3,000,000 shares of
Common Stock issuable upon exercise of Warrants.
(20) Based upon a Schedule 13D, as filed with the Commission on January 20,
2002, Mr. Feinberg possesses: (i) the sole power to vote and direct the
disposition of the 4,753,113 shares of Common Stock, held by Blackacre Bridge
Capital, L.L.C. and the sole power to vote and direct the disposition of the
653,000 shares of Common Stock held by Blackacre Capital Group, L.P.
36
B. SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information as of December 31,
2002 regarding ownership of Common Stock by (i) each director and nominee for
director, (ii) each of the executive officers named in the Summary Compensation
Table contained herein, and (iii) all executive officers and directors as a
group (5 persons). Unless otherwise indicated, each stockholder listed below has
sole voting and investment power with respect to the shares set forth opposite
such stockholder's name. All persons listed below have an address c/o the
Company's principal executive offices in New York.
Name of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class
- ---------------- -------------------- -----------
Alan E. Casnoff 685,000 (2) 3.1%
Jay Thailer 64,000 (3) **
Myron Rosenberg 378,854 (4) 1.7%
Frederick E. Smithline 191,550 (5) **
Keith B. Stein 4,715,853 (6) 17.9%
All current directors
and executive officers
as a group (5 persons) 6,035,257 (7) 25.3%
* In each instance where a named individual is listed as the holder of
a currently exercisable option or warrant, the shares which may be acquired upon
exercise thereof have been deemed outstanding for the purpose of computing the
percentage owned by such person, but not for the purpose of computing the
percentage owned by any other person, except the group referred to in note 7. An
option or warrant is deemed to be currently exercisable if it may be exercised
within 60 days.
** Less than 1%
(1) Messrs. Casnoff and Thailer are executive officers of the Company. Messrs.
Rosenberg, and Smithline are the regular directors Mr. Casnoff was appointed as
a director in 2001 and Mr. Stein is the special purpose director.
(2) Excludes 480 shares held by Mr. Casnoff's adult son, as to which shares Mr.
Casnoff disclaims beneficial ownership. Includes 26,000 shares owned by a
corporation partially owned and controlled by Mr. Casnoff, and 475,000 shares
which may be acquired upon the exercise of currently exercisable options.
(3) Represents 42,000 shares which may be acquired upon the exercise of
currently exercisable options and 22,000 shares held by Mr. Thailer and his wife
as joint tenants.
(4) Includes 4,300 shares held by Mr. Rosenberg's wife, as to which shares he
disclaims beneficial ownership, and 90,000 shares which may be acquired upon the
exercise of currently exercisable options.
(5) Includes 550 shares held by Mr. Smithline and his brother as
tenants-in-common as to which Mr. Smithline disclaims beneficial ownership. Also
includes 90,000 shares which may be acquired upon the exercise of currently
exercisable options.
37
(6) Based upon a Schedule 13D, as amended, as filed with the Commission on
November 18, 1999, Mr. Stein possesses: (i) the sole power to vote 1,533,478
shares of Common Stock, which includes 1,456,971 shares of Common Stock issuable
upon exercise of Warrants; (ii) shared power to vote 0 shares of Common Stock;
(iii) the sole power to dispose of 803,535 shares of Common Stock, which
includes 727,029 shares of Common Stock issuable upon exercise of Warrants; and
(iv) shared power with the other members of the Florida Group to dispose of
3,912,317 shares of Common Stock, which includes 729,942 shares of Common Stock
issuable upon the exercise of Warrants held by Mr. Stein and 3,182,375 shares of
Common Stock issuable upon exercise of Warrants held by the other members of the
Florida Group. Mr. Stein explicitly disclaims beneficial ownership of all of the
shares of Common Stock and Warrants (and shares of Common Stock issuable upon
exercise of Warrants) owned by the other members of the Florida Group.
(7) Number of shares and percentage owned includes 2,136,483 shares which may be
acquired through exercise of currently exercisable options and Warrants held by
certain of the named persons. The number of outstanding shares for the purpose
of computation of percentage of ownership by the group includes such shares.
C. CHANGES IN CONTROL
Each of the Certificate of Incorporation (the "Certificate") and the
By-laws (the "By-laws") of the Company contains restrictions prohibiting the
sale, transfer, disposition, purchase or acquisition of any capital stock until
September 30, 2009, without the prior authorization of the Board of Directors of
the Company, by or to any holder (a) who beneficially owns directly or through
attribution (as generally determined under Section 382 of the Internal Revenue
Code of 1986, as amended (the "Code")) five percent (5%) or more of the value of
the then issued and outstanding shares of capital stock of the Company or (b)
who, upon the sale, transfer disposition purchase or acquisition of any capital
stock of the Company would beneficially own directly or through attribution (as
generally determined under Section 382 of the Code) five percent (5%) or more of
the value of the then issued and outstanding capital stock of the Company, if
that sale, transfer, disposition, purchase or acquisition would, in the sole
discretion and judgment of the Board of Directors of the Company jeopardize the
Company's preservation of its federal income tax attributes pursuant to Section
382 of the Code. The Board of Directors has the right to void any such
transaction.
In connection with the Original Loan by NPM in September 1996, the Company
issued to, or for the benefit of, the members of the Florida Group (who are
affiliates of NPM) and the Pembroke and Millennium Groups (who are affiliates of
NPM and NPO), Warrants to purchase such number of shares of Common Stock as,
when added to the 1,000,000 shares issued to the members of the Holder Groups
contemporaneously with the Warrants, represent rights to acquire up to 49% of
the outstanding Common Stock on a fully diluted basis. In accordance with their
terms, the Warrants were originally exercisable commencing January 1999 and
expire after December 31, 2007. Pursuant to a stockholders agreement (the
"Agreement") entered into among each of the parties that acquired the Warrants
(each, a "Holder"), such parties agreed, among other things, that the Warrants
could not be exercised until September 27, 1999. If and at such time as any or
all of the Warrants are exercised, it is possible that a "change in control" of
the Company, within the meaning of applicable rules and regulations under the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), may be
deemed to occur, depending upon the extent of exercise.
38
Pursuant to the Agreement, the Holders have agreed to certain limitations
on the disposition of Common Stock and Warrants owned or held by them, which are
described below. The Holders presently have rights of first refusal/first offer
with respect to the disposition of shares of Common Stock and Warrants held by
other Holders (unless the disposition is made to certain specified affiliates of
a Holder). Subject to the above-mentioned rights of first refusal/first offer
and certain other limitations, (i) through September 27, 1999, a Holder may
dispose of up to one-half (or more subject to the consent of a majority of the
Holders in such Holder's Holder Group) of his shares of Common Stock and (ii)
after September 27, 1999, a Holder may dispose of all of his or its shares of
Common Stock (excluding shares issuable upon exercise of Warrants). A Holder may
not dispose of his Warrants (except to another Holder or certain specified
affiliates of a Holder) or convert, exercise or exchange any of such Warrants
until after September 27, 1999. After September 27, 1999, subject to the
above-mentioned rights of first refusal/first offer and certain other
limitations, a Holder may dispose of up to an aggregate of 49.9% (or more,
subject to the consent of a majority of the other Holders in such Holder's
Holder Group) of his shares of Common Stock issuable upon exercise of his
Warrants after giving effect to conversion, exercise or exchange of such
Warrants. The "Holder Groups" consist of the "Millennium Group", the "Pembroke
Group" and the "Florida Group". The members of the Millennium Group are Jay
Chazanoff, Ron Jacobs and Stephen Simms. The members of the Pembroke Group are
Lawrence J. Cohen and Milton Neustadter. The members of the Florida Group are
Stephen L. Gurba, Peter Offermann, Joseph Huston, Jan Sirota, Neal Polan,
Michael Zarriello, Adam Frieman, Mark Mahoney, Keith B. Stein, Robert W. Barron
and Gary Shapiro (through his holdings in The SIII Associates Limited
Partnership and Third Addison Park Corporation). For further information
regarding the foregoing, see "Certain Relationships and Related Transactions"
below.
Equity Compensation Plan Information
Number of securities Weighted average Number of
to be issued upon exercise price of remaining
exercise of outstand- outstanding op- available
ing options warrants tions warrants for future
Plan Category and rights and rights issuance
------------- --------------------- ----------------- ----------
(a) (b) (c)
Equity compensation
approved by security
holders 1,503,131 $.17 996,869
Equity compensation
plans not approved by
security holders -0- -0- -0-
--------- ---- -------
Total 1,503,131 $.17 996,869
========= ==== =======
39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BLACKACRE TRANSACTION
In an effort to reduce the potential future dilution to existing shareholders
resulting from a redemption of the Notes for stock, in December 2001, the
Company entered into the Exchange Agreement with Blackacre, an affiliate of BCG
and Stephen Feinberg under which Blackacre exchanged $1,188,278 principal amount
of notes for 4,753,113 shares of DVL's common stock. This represents a
conversion rate of $.25 per share.
The Exchange Agreement includes a provision which states that Blackacre shall
not sell or acquire any shares of the Company without the written consent of the
Board of Directors of the Company. The Board may withhold consent prior to
December 31, 2005, only if such transfer would, in the sole discretion of the
Board of Directors, jeopardize the Company's preservation of its Federal Income
Tax attributes under Section 382 of the Internal Revenue Code or in the case of
a transfer after December 31, 2005 would be materially adverse to the interest
of the Company.
If at any time after December 31, 2005, Blackacre is prevented from disposing of
any of its shares as a result of the Board of Directors determination that the
transfer would be materially adverse to the interest of the Company, then
Blackacre shall have the right to sell to the Company and the Company shall be
obligated to purchase up to the number of shares of common stock which when
added to all prior shares of common stock sold to the Company by Blackacre would
have an aggregate market value of not more than $1 million dollars.
After the transaction, DVL had 21,313,563 shares of common stock issued and
outstanding.
The transaction resulted in an extraordinary gain of $482,000. As a result of
the exchange, Blackacre and its affiliates beneficially now own approximately
25% of DVL's issued and outstanding common stock.
NPM AND NPO TRANSACTIONS
The Company consummated a multi-faceted transaction on September 27, 1996,
pursuant to which: (i) certain existing indebtedness of the Company was acquired
by NPM, under an Amended and Restated Loan Agreement dated as of March 27, 1996
pursuant to which the Company became indebted to NPM in the original principal
amount of $8,382,000; (ii) 1,000,000 shares of Common Stock (representing 4.6%
of the Common Stock now outstanding) were issued to, and purchased by, the
Holders (see Item 12(C) above); (iii) the Certificate of Incorporation of the
Company was amended to permit the issuance of warrants, to limit change of
ownership of capital stock of the Company and to designate Preferred Stock
together with rights, powers and preferences (including the appointment of a
special purpose director); (iv) Warrants to purchase additional shares of Common
Stock (which, when added to the 1,000,000 shares acquired, represent rights to
acquire up to 49% of the outstanding Common Stock, on a fully diluted basis)
were issued to, or for the benefit of, the Holders; (v) 100 shares of Preferred
Stock were issued to an affiliate of NPM; (vi) most, but not all, convertible
securities and warrants existing and outstanding prior to the transaction were
converted into Common Stock; and (vii) the Company continued the engagement of
NPO to perform administrative and advisory services relating to the assets of
the Company and its affiliated partnerships, pursuant to an Asset Servicing
Agreement dated March 27, 1996. In consideration for such services, the Company
pays NPO $600,000 per year (with cost of living increases) over the seven-year
term of the original agreement, subject to early termination under certain
conditions.
40
During 2001 the agreement was extended under the same terms and conditions for
another five years to March 2008. The current annual fee is $654,000. The
Company paid to NPO $652,000 and $1,038,000 plus other expenses of $10,000 in
2002 and 2001 respectively. As of December 31, 2002 and 2001 the Company had
accrued service fees payable to NPO of $33,000 and $28,000 respectively. During
2002, 2001 and 2000 the Company provided office space under the Asset Servicing
Agreement to NPO, consisting of 228 square feet of the Company's New York
location. The allocated cost for such space was $9,000, 10,000 and 9,000,
respectively.
The members of the Millenium Group, the Pembroke Group, and the Florida
Group are affiliates of NPM, and therefore have a material interest in the
transactions between the Company and NPM, described in the preceding paragraphs.
Keith B. Stein, the special purpose director of the Company is an affiliate of
NPM, and therefore has a material interest in said transactions. Mr. Stein is
also a beneficial owner of more than 5% of the outstanding shares of the
Company's Common Stock. The members of the Millenium Group and the Pembroke
Group are affiliates of NPO. The Pembroke Group is controlled by Lawrence J.
Cohen, who is a beneficial owner of more than 5% of the outstanding shares of
the Company's Common Stock. The Millienium Group is owned and controlled by Jay
Chazanoff, Stephen Simms, and Ron Jacobs, each beneficial owners of more than 5%
of the outstanding shares of the Company's Common Stock.
Since June 1998, the Company has received fees from a limited partnership
(in which certain of its partners are affiliates of NPO and Blackacre). This
agreement may be terminated with 30 days notice by either party. The Company
receives the following (a) a monthly fee through November 2000, and (b) after
all the partners of the partnership have earned a 20% internal rate of return,
compounded quarterly, on their capital contributions, an amount of cash equal to
25% of the profits, as defined in the agreement. For 2002 and 2001 the Company
received compensation under such agreement equal to $-0- and $442,900,
respectively.
The Company has received fees pursuant to a service agreement with another
limited partnership whose general partner is an affiliate of NPO, to render
certain accounting and administrative services. As compensation, the Company
receives expense reimbursements of $4,000 per month. The Company received
aggregate compensation under such agreement of $48,000 for 2002 and 2001.
The Company received fees from an entity that is part of the Opportunity
Fund in consideration for the Company providing property management services.
For 2002 and 2001, the Company received compensation equal to $27,000 and
$27,000, respectively, under such arrangement.
The Company has received fees from an entity whose partners, Messrs. Cohen,
Chazanoff, Simms and Jacobs, are affiliates of NPO in consideration for the
Company providing certain accounting and administrative services. As
compensation, the Company receives a monthly fee of $2,000, a monthly deferred
fee of $6,500 and an annual incentive fee if certain levels of profitability are
obtained. The Company recorded fees of $154,000 and $152,000 in 2002 and 2001,
respectively, which included incentive fees of $52,000 and $50,000,
respectively.
The Millenium Group, an affiliate of NPO, received approximately $37,000
and $67,000 for 2002 and 2001, respectively, representing compensation and
reimbursement of expenses for collection services on notes payable to the
Company. In addition, in 2002 and 2001 the Company paid or accrued fees of
$108,000 and $150,000 to the Millenium Group and $-0- and $205,000 to the
Pembroke Group (another affiliate of NPO), respectively, and in 2002 issued a
total of 400,000 shares of Common Stock, valued at $32,000, to the Pembroke
Group and the Millenium Group for additional services rendered to the Company
outside the scope of the Asset Servicing Agreement.
In connection with sales of property owned by Affiliated Limited
Partnerships a licensed real estate brokerage affiliate of the Pembroke Group
was paid brokerage fees of $37,376 and $86,453 from various Affiliated Limited
Partnerships in 2002 and 2001, respectively.
41
The law firm of Klehr, Harrison, Harvey, Brazenburg, & Ellers ("Klehr"),
Philadelphia, Pennsylvania, of which Alan E. Casnoff, a director of the Company,
is of counsel, has acted as counsel to the Company since July, 1999. Legal fees
for services rendered by Klehr to the Company during the fiscal year ended did
not exceed 5% of the revenues of such firm for its most recent fiscal year.
In connection with the acquisitions of residual interests, affiliates of
NPO and the special director of the Company will be paid investment banking fees
of $900,000 for their services including the origination, negotiation and
structuring of the transactions. As of December 31, 2002 $540,000 of the fee is
outstanding. The fee was calculated as approximately 2% of the expected cash
flow to be received over the life of the assets. The total fees will be payable
without interest, over a period of 30 months, which commenced January 1, 2002,
from a portion of the monthly cash flow generated by the acquisitions. The
affiliates of NPO are Lawrence J. Cohen and Jay Chazanoff, each beneficial
owners of more than 5% of the outstanding shares of the Company's Common Stock
and Keith B. Stein who is a beneficial owner of more than 5% of the outstanding
shares of the Company's Common Stock and the special purpose director of the
Company.
OPPORTUNITY FUND
The Company, Blackacre, PNM, and Pemmil were parties to the Opportunity
Agreement. The Opportunity Agreement had a term of three years, subject to
earlier termination if certain maximum capital contributions have been reached.
The Opportunity Agreement provided for an Opportunity Fund whereunder, with
respect to certain transactions involving the acquisition of limited partnership
interests of, or mortgage loans to, Affiliated Limited Partnerships in which the
Company is general partner, or which the Company already owns, if the Company,
due to financial constraints, is unable to pursue such business opportunity with
its own funds from its reserves or available from operations, or by obtaining
financing from a third party or issuing equity (each such opportunity, an
"Opportunity"), then the Opportunity Fund has a right of first refusal to
finance such Opportunity.
PNM and Pemmil are owned and controlled by members of the Pembroke Group
and the Millenium Group.
All of the required capital contributions were to be provided by the other
members. The Company was to receive up to 20% of the profits from an opportunity
after the other investors received a return of their investment plus preferred
annual returns ranging from 12% to 20%.
The Opportunity Agreement has now terminated. While the Opportunity Fund no
longer has the right of first refusal with regard to opportunities, the Company
may continue to present opportunities to the fund.
As of March 2003, the Opportunity Fund had purchased 15 wrap mortgages of
Affiliated Limited Partnerships from unaffiliated third parties, acquired
limited partnership units from unaffiliated individuals in three Affiliated
Limited Partnerships, and acquired the property of an Affiliated Limited
Partnership. During 2000, DVL purchased three of the mortgages owned by the
Opportunity Fund. In December 2001, the Opportunity Fund also sold its property
located in Kearny, NJ to an entity in which certain partners are affiliates of
NPO. During 2001, a newly formed, wholly- owned subsidiary of DVL purchased two
of the mortgages owned by the Opportunity Fund. As of March 2003, the
Opportunity Fund owns four mortgages. During 2001, DVL was paid approximately
$280,000 from the investments by the Opportunity Fund, of which $189,000 was
used to pay amounts owed by DVL under a note in favor of an entity that is part
of the Opportunity Fund incurred in connection with the acquisition of certain
mortgage loans. During 2002, DVL did not receive any payments from the
investments by the Opportunity Fund.
42
ITEM 14. 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.
43
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this report:
(1) The Financial Statements required by Item 8 of this report are listed
below:
Item 8
Page No.
--------
Independent Auditors' Report F - 1
Consolidated Balance Sheets -
December 31, 2002 and 2001 F - 2
Consolidated Statements of Operations
for each of the years in the three year period
ended December 31, 2002 F - 4
Consolidated Statements of Shareholders'
Equity for each of the years in the three
year period ended December 31, 2002 F - 6
Consolidated Statements of Cash Flows for
each of the years in the three year period
ended December 31, 2002 F - 7
Notes to Consolidated Financial Statements F - 10
(2) The Financial Statement Schedules required
by Item 8 of this report are listed below:
Schedule III - Real Estate and Accumulated
Depreciation
Other schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the financial
statements or notes thereto.
44
(3) INDEX OF EXHIBITS
The following is a list of the Exhibits filed as a part of this report
(those marked * are filed herewith):
3. ARTICLES OF INCORPORATION AND BY-LAWS.
(a) DVL's Certificate of Incorporation, filed March 28, 1977 (Incorpo-
rated by reference to Exhibit 6(d) to DVL's Form S-1 Registra- tion
Statement No. 2-58847 dated April 28, l977.)
(b) DVL's Certificate of Amendment to Certificate of Incorporation, filed
July 13, 1977 (Incorporated by reference to Exhibit 6(e) to Amendment
No. 1. to DVL's Form S-1 Registration Statement No. 2-58847 dated
August 25, l977.)
(c) DVL's Certificate of Amendment to Certificate of Incorporation, filed
August 3, 1982. (Incorporated by reference to Exhibit 3(c) to DVL's
Form 10-K for the fiscal year ended December 31, 1982.)
(d) DVL's Certificate of Amendment to Certificate of Incorporation, filed
May 27, 1983. (Incorporated by reference to Exhibit 3(d) to DVL's Form
10-K for the fiscal year ended December 31, 1983.)
(e) DVL's Certificate of Amendment to Certificate of Incorporation, filed
July 24, 1987. (Incorporated by reference to Exhibit 3(e) to DVL's
Form 10-K for the fiscal year ended December 31, 1987.)
(f) DVL's Certificate of Amendment to Certificate of Incorporation, filed
December 20, 1993. (Incorporated by reference to DVL's Form 10-K for
fiscal year ended December 31, 1993.)
(g) DVL's Certificate of Amendment to Certificate of Incorporation, filed
December 4, 1995 (Incorporated by reference to DVL's proxy statement
dated October 13, 1995 - Exhibit A.)
(h) DVL's Certificate of Amendment to Certificate of Incorporation filed
September 17, 1996. (Incorporated by reference to DVL's proxy
statement dated July 31, 1996 - Exhibit I.)
(i) DVL's Certificate of Amendment of Certificate of Incorporation filed
February 7, 2000. (Incorporated by reference to DVL's Form 10-K for
the fiscal year ended December 31, 1999.)
(j) DVL's By-Laws, as in full force and effect at all times since March
28, l977. (Incorporated by reference to Exhibit 3(c) to DVL's Form
10-K for the fiscal year ended December 31, 1980.)
(k) DVL's First Amendment to By-Laws dated as of January 1, 1994.
(Incorporated by reference to Exhibit 3(d) to DVL's Form 10-K for the
fiscal year ended December 31, 1995.)
(l) DVL's Second Amendment to By-Laws, effective September 17, 1996.
(Incorporated by reference to DVL's proxy statement dated July 31,
1996 - Exhibit J.)
(m) DVL's Third Amendment to the By-Laws, effective February 1, 2000.
(Incorporated by reference to DVL's Form 10-K for the fiscal year
ended December 31, 1999.)
45
10. MATERIAL CONTRACTS.
10.1 Stipulation of Settlement of IN RE KENBEE LIMITED PARTNERSHIP
LITIGATION dated August 12, 1992. (Incorporated by reference to
Exhibit 10(b)(25) to DVL's Form 10-K for the fiscal year ended
December 31, 1995.)
10.2 Stipulation of Partial Settlement and Order in IN RE DEL-VAL FINANCIAL
CORPORATION SECURITIES LITIGATION Master File #MDL872. (Incorporated
by reference to Exhibit 10(b)(28) to DVL's Form 10-K for the fiscal
year ended December 31, 1995.)
10.3 Asset Servicing Agreement between DVL, PSC, Kenbee Realty and NPO
dated as of March 27, 1996. (Incorporated by reference to Exhibit
10(b)(34) to DVL's Form 10-K for the fiscal year ended December 31,
1995.)
10.4 Asset Servicing Agreement between DVL and NPO. (Incorporated by
Reference to DVL's Proxy Statement dated July 31, 1996 - Exhibit C.)
10.5 Stock Purchase Agreement between DVL and NPM. (Incorporated by
Reference to DVL's Proxy Statement dated July 31, 1996 - Exhibit D.)
10.6 Securities Purchase Agreement between DVL and NPM. (Incorporated by
Reference to DVL's Proxy Statement dated July 31, 1996 - Exhibit E.)
10.7 Common Stock Warrant issued by DVL to NPO. (Incorporated by Reference
to DVL's Proxy Statement dated July 31, 1996 - Exhibit F.)
+ 10.8 DVL 1996 Stock Option Plan. (Incorporated by Reference to DVL's Proxy
Statement dated July 31, 1996 - Exhibit K.)
+ 10.9 Amendment to DVL 1996 Stock Option Plan effective February 1, 2000.
(Incorporated by reference to DVL's Form 10-K for fiscal year ended
December 31, 1999.)
10.10 Promissory Note dated as of October 20, 1997, in the original
principal amount of $1,760,000 from DVL to Blackacre. (Incorpo- rated
by reference to Exhibit 10.2 to DVL's Form 10-Q for the quarter ended
September 30, 1997.)
10.11 Subordination Agreement, dated as of October 20, 1997, among DVL,
Blackacre, NPM and NPO. (Incorporated by reference to Exhibit 10.3 to
DVL's Form 10-Q for the quarter ended September 30, 1997.)
10.12 Agreement Among Members dated April 10, 1998, by and among Black-
acre, PNM, Pem Mil, and DVL. (Incorporated by reference to DVL's Form
10-K for the fiscal year ended December 31, 1998.)
10.13 Management Services Agreement dated June 1, 1998, by and between DVL
and PBD Holdings, LP ("PBD"). (Incorporated by reference to DVL's Form
10-K for the fiscal year ended December 31, 1998.)
46
10.14 Loan Agreement, Promissory Note and Pledge, Collateral Assignment and
Security Agreement, each dated as of March, 2000, each relat- ing to
a loan from Pennsylvania Business Bank to DVL in the orig- inal
principal amount of $1,000,000. (Incorporated by reference to DVL's
Form 10-Q for the quarter ended June 30, 2000.)
10.15 Term Loan Note and Term Loan Agreement, each dated as of March, 2000,
each relating to a loan from Bankphiladelphia to DVL in the original
principal amount of $1,450,000. (Incorpor- ated by reference to DVL's
Form 10-Q for the quarter ended
June 30, 2000.)
10.16 First Amendment to Loan Agreement, Pledge Agreement, Promissory Note
and Other Documents dated August 2000, relating to a loan from
Pennsylvania Business Bank to DVL, Inc. in the original principal
amount of $1,000,000. (Incorporated by reference to DVL's Form 10-Q
for the quarter ended September 30, 2000.)
10.17 Mortgage Assignment Agreement dated August 2000, relating to an
assignment and sale of two mortgage loans from Rumson Mortgage
Holdings, LLC to DVL, Inc. for a total sale price of $900,000.
(Incorporated by reference to DVL's Form 10-Q for the quarter ended
September 30, 2000.)
10.18 Note in the original principal amount of $200,000, dated August 2000,
relating to the sale of two mortgage loans from Rumson Mortgage
Holdings, LLC to DVL, Inc. (Incorporated by reference to DVL's Form
10-Q for the quarter ended
September 30, 2000.)
10.19 Agreement of Purchase and Sale, dated as of October 2, 2000, relating
to the purchase of real estate assets by Del Toch, LLC from Passaic
Avenue South Associates. (Incorporated by reference to DVL's Form
10-K filed for the fiscal year ended
December 31, 2000.)
10.20 Agreement of Purchase and Sale, dated as of October 12, 2000,
relating to the purchase of land by Delborne Land Company, LLC from
Mcany of Kearny, Inc. (Incorporated by reference to DVL's Form 10-K
filed for the fiscal year ended December 31, 2000.)
* 10.21 Waiver of Event of Default and Agreement regarding demand and payment
of fees dated March 2001 by NPO.
10.22 Purchase Agreement, dated April 27, 2001, by and among J.G. Wentworth
Receivables II LLC, Receivables II-A LLC, Receivables II-A Holding
Company, LLC, J.G. Wentworth S.S.C., Limited Partnership, J.G.
Wentworth Management Company, Inc., S2 Holdings, Inc., and DVL, Inc.
for the purchase of residual interests in securitized portfolios.
(Incorporated by reference to DVL's Form 8-K dated May 9, 2001.)
10.23 Non-negotiable, Secured Purchase Money Promissory Note dated April
27, 2001 in the original principal amount of $22,073,270 payable to
the order of J.G. Wentworth S.S.C., Limited Partnership from S2
Holdings, Inc. (Incorporated by reference to DVL's Form 8-K dated May
9, 2001.)
47
10.24 Non-negotiable, Secured Purchase Money Promissory Note dated April
27, 2001 in the original principal amount of $3,252,730 payable to
the order of J.G. Wentworth S.S.C., Limited Partnership from S2
Holdings, Inc. (Incorporated by reference to DVL's Form 8-K dated May
9, 2001.)
10.25 Guaranty and Surety Agreement dated April 27, 2001 by and from DVL,
Inc. in favor or J.G. Wentworth S.S.C., Limited Partnership.
(Incorporated by reference to DVL's Form 8-K dated May 9, 2001.)
10.26 Common Stock Warrant dated April 27, 2001. (Incorporated by reference
to DVL's Form 8-K dated May 9, 2001.)
10.27 Purchase Agreement, dated as of August 20, 2001, by and among J.G.
Wentworth Receivables II LLC, Receivables II-B LLC, Receivables II-B
Holding Company LLC, J.G. Wentworth S.S.C. Limited Partnership, J.G.
Wentworth Management Company, Inc., S2 Holding, Inc. and DVL, Inc.
for the purchase of residual interests in securitized portfolios.
(Incorporated by reference to DVL's Form 8-K dated August 28, 2001.)
10.28 Non-Negotiable, Secured Purchase Money Promissory Note dated as of
August 15, 2001 in the original principal amount of $7,931,560.00
payable to the order of J.G. Wentworth S.S.C. Limited Partnership
from S2 Holdings, Inc. (Incorporated by reference to DVL's Form 8-K
dated August 28, 2001.)
10.29 Non-Negotiable, Secured Purchase Money Promissary Note dated as of
August 15, 2001 in the original principal amount of $1,168,440.00
payable to the order of J.G. Wentworth S.S.C. Limited Partnership
from S2 Holdings, Inc. (Incorporated by reference to DVL's Form 8-K
dated August 28, 2001.)
10.30 Guaranty & Surety Agreement dated as of August 20, 2001 by and from
DVL, Inc. in favor of J.G. Wentworth S.S.C. Limited Partnership.
(Incorporated by reference to DVL's Form 8-K dated August 28, 2001.)
10.31 Pledge Agreement, dated as of August 20, 2001 by S2 Holdings, Inc.
for the benefit of J.G. Wentworth S.S.C. Limited Partnership.
(Incorporated by reference to DVL's Form 8-K dated August 28, 2001.)
10.32 Common Stock Warrant dated as of August 15, 2001. (Incorporated by
reference to DVL's Form 8-K dated August 28, 2001.)
10.33 Exchange Agreement, dated as of December 28, 2001, by and between
DVL, Inc. and Blackacre Bridge Capital, L.L.C. (Incorporated by
reference to DVL's Form 8-K dated January 11, 2002.)
48
21. SUBSIDIARIES OF DVL.
The Company's only significant subsidiaries are Professional Service
Corporation (a Delaware Corporation), Del Toch, LLC (a Delaware
Limited Liability Corporation), Delborne Land Company, LLC (a Delaware
Limited Liability Corporation), S2 Holdings, Inc. (a Delaware Holding
Company), DVL Mortgage Holdings, LLC (a Delaware Limited Liability
Corporation), Receivables II-A, LLC (a Nevada Limited Liability
Corporation), Receivables II-B,LLC (a Nevada Limited Liability
Corporation), Delbrook Holdings, LLC (a Delaware Limited Liability
Corporation)
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.
+ Management Compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 15C of Form-10K
(b) No reports on Form 8-K were filed during the quarter ended December 31,
2002.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, DVL has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DVL, INC.
Date: March 27, 2003 By: /s/ Alan E. Casnoff
---------------------------
Alan E. Casnoff, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of DVL and in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Jay Thailer
- --------------------------
Jay Thailer Executive Vice President and March 27, 2003
Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Alan E. Casnoff
- --------------------------
Alan E. Casnoff Director, President and Chief March 27, 2003
Executive Officer (Principal
Executive Officer)
/s/ Frederick E. Smithline
- --------------------------
Frederick E. Smithline Director March 27, 2003
/s/ Myron Rosenberg
- --------------------------
Myron Rosenberg Director March 27, 2003
50
CERTIFICATIONS
I, Alan E. Casnoff, certify that:
1. I have reviewed this annual report on Form 10-K of DVL, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 15d-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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
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
March 27, 2003
51
CERTIFICATIONS
I, Jay Thailer, certify that:
1. I have reviewed this annual report on Form 10-K of DVL, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 15d-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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
6. The registrant's other certifying officers and I have indicated in this
annual 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
March 27, 2003
52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements of DVL, Inc.
and Subsidiaries and Independent Auditors Report
Page
----
Independent Auditors' Report F - 1
Consolidated Balance Sheets-December 31, 2002 and 2001 F - 2
Consolidated Statements of Operations for each of the
years in the three year period ended December 31, 2002 F - 4
Consolidated Statements of Shareholders' Equity
for each of the years in the three year period
ended December 31, 2002 F - 6
Consolidated Statements of Cash Flows for each of the
years in the three year period ended December 31, 2002 F - 7
Notes to Consolidated Financial Statements F - 10
Schedule III - Real Estate and Accumulated Depreciation
Eisner, LLP
100 Campus Drive
Florham Park, New Jersey 07932
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
DVL, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of DVL, Inc.
and subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three- year period ended December 31, 2002. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above
present fairly, in all material respects, the consolidated financial position of
DVL, Inc. and subsidiaries as at December 31, 2002 and 2001, and the
consolidated results of their operations and their consolidated cash flows for
each of the years in the three-year period ended December 31, 2002 in conformity
with accounting principles generally accepted in the United States of America.
In connection with our audits of the consolidated financial statements
referred to above, we audited the accompanying financial schedule III. In our
opinion, this financial schedule, when considered in relation to the
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information stated therein.
EISNER, LLP
Florham Park, New Jersey
March 6, 2003
With respect to
Note 5 Item (2)
March 12, 2003
With respect to
Note 13
March 14, 2003
F-1
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
---------------------
2002 2001
-------- --------
ASSETS
Residual interests in securitized portfolios $ 36,111 $ 36,906
-------- --------
Mortgage loans receivable from affiliated limited
partnerships (net of unearned interest of $15,579
for 2002 and $15,908 for 2001) 31,222 35,567
Allowance for loan losses 2,870 4,095
-------- --------
Net mortgage loans receivable 28,352 31,472
-------- --------
Cash (including restricted cash of $177 and $215
for 2002 and 2001 respectively) 2,373 2,987
Investments
Real estate at cost (net of accumulated deprecia-
tion of $226 for 2002 and $104 for 2001) 8,490 4,142
Real estate lease interests 945 1,080
Affiliated limited partnerships (net of allow-
ance for losses of $538 and $540 for 2002 and
2001 respectively) 1,066 1,121
Deferred income tax benefits 1,447 1,050
Other assets 800 932
-------- --------
Total assets $ 79,584 $ 79,690
======== ========
See notes to consolidated financial statements.
(continued)
F-2
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(continued)
December 31,
--------------------
2002 2001
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes Payable - residual interests $ 33,416 $ 35,044
Underlying mortgages payable 19,391 22,218
Long-term debt - affiliates 2,084 1,942
Long-term debt - other 8,901 5,067
Notes payable - litigation settlement 1,735 1,902
Redeemed notes payable - litigation settlement 810 596
Fees due to affiliates 573 928
Security deposits, accounts payable, and accrued
liabilities (including deferred income of $18
for 2002 and $17 for 2001) 296 1,038
-------- --------
Total liabilities 67,206 68,735
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock $10.00 par value, authorized -
100 shares for 2002 and 2001, issued - 100 shares
for 2002 and 2001 1 1
Preferred stock, $.01 par value, authorized 5,000,000
shares for 2002 and 2001, issued - 0 shares for 2002
and 2001 -- --
Common stock, $.01 par value, authorized -
90,000,000 shares, issued - 21,713,563 shares for
2002 and 21,313,563 shares for 2001 217 213
Additional paid-in capital 95,785 95,757
Deficit (83,625) (85,016)
-------- --------
Total shareholders' equity 12,378 10,955
-------- --------
Total liabilities and shareholders' equity $ 79,584 $ 79,690
======== ========
See notes to consolidated financial statements.
F-3
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
Year Ended December 31,
----------------------------------
2002 2001 2000
---------- ---------- ----------
Income from affiliates:
Interest on mortgage loans $ 2,903 $ 3,118 $ 3,436
Gain on satisfaction of mortgage loans 252 615 256
Partnership management fees 316 368 454
Management fees 239 804 500
Transaction and other fees from
partnerships 293 260 413
Distributions from investments 84 138 253
Income from others:
Interest income - residual interests 4,373 2,802 --
Net rental income (including depreciation
and amortization of $104 for 2002 and
$140 for 2001, and $10 for 2000) 561 720 523
Distributions from investments 35 667 149
Other income and interest 38 63 79
---------- ---------- ----------
9,094 9,555 6,063
---------- ---------- ----------
Operating expenses:
General and administrative 1,478 1,743 1,353
Asset Servicing Fee - NPO Management LLC 652 640 623
Legal and professional fees 371 344 312
Interest expense:
Underlying mortgages 1,648 2,029 2,329
Notes payable - residual interests 2,771 1,840 --
Affiliates 286 389 434
Litigation Settlement Notes 299 484 502
Others 610 551 311
---------- ---------- ----------
8,115 8,020 5,864
---------- ---------- ----------
Income before income tax benefit
and extraordinary (loss) gain 979 1,535 199
Income tax (benefit) (483) (970) --
---------- ---------- ----------
Income before extraordinary (loss) gain 1,462 2,505 199
Extraordinary (loss) gains on the
settlements of indebtedness (71) 361 306
---------- ---------- ----------
Net income $ 1,391 $ 2,866 $ 505
========== ========== ==========
See notes to consolidated financial statements
(continued)
F-4
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
(continued)
Year Ended December 31,
-----------------------------------------
2002 2001 2000
----------- ------------ ------------
Basic earnings per share:
Income before extraordinary (loss)
gain $ .06 $ .15 $ .01
Extraordinary (loss) gains .00 .02 .02
----------- ------------ -----------
Net income $ .06 $ .17 $ .03
=========== ============ ===========
Diluted earnings per share:
Income before extraordinary (loss)
gain $ .03 $ .03 $ .01
Extraordinary (loss) gain .00 .00 .00
----------- ------------ -----------
Net income $ .03 $ .03 $ .01
=========== ============ ===========
Weighted average shares outstanding -
basic 21,713,563 16,599,517 16,560,450
Effect of dilutive securities 37,062,930 108,172,598 79,777,136
----------- ----------- ----------
Weighted average shares outstanding -
diluted 58,776,493 124,772,115 96,337,586
=========== ============ ===========
See notes to consolidated financial statements.
F-5
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands except share data)
Additional
paid-in
Shares Amount Shares Amount capital Deficit Total
------ ------ ---------- ------ ---------- --------- -------
Balance - January 1, 2000 100 $ 1 16,560,450 $ 166 $95,288 $ (88,387) $ 7,068
Net income -- -- -- -- -- 505 505
---- ------ ---------- ----- ------- --------- -------
Balance - December 31, 2000 100 1 16,560,450 166 95,288 (87,882) 7,573
---- ------ ---------- ----- ------- --------- -------
Issuance of warrants in connection with
the purchase of residual interests in
securitized portfolios -- -- -- -- 136 -- 136
Issuance of common stock in connection with
exchange of notes payable for stock -- -- 4,753,113 47 333 -- 380
Net income -- -- -- -- -- 2,866 2,866
---- ------ ---------- ----- ------- --------- -------
Balance - December 31, 2001 100 1 21,313,563 213 95,757 (85,016) 10,955
---- ------ ---------- ----- ------- --------- -------
Issuance of common stock as compensation
for services received -- -- 400,000 4 28 -- 32
Net income -- -- -- -- -- 1,391 1,391
---- ------ ---------- ----- ------- --------- -------
Balance - December 31, 2002 100 $ 1 21,713,563 $ 217 $95,785 $ (83,625) $12,378
==== ====== ========== ===== ======= ========= =======
See notes to consolidated financial statements.
F-6
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
------------------------------
2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Income before extraordinary items $ 1,462 $ 2,505 $ 199
Adjustments to reconcile income before extra-
ordinary items to net cash provided by (used in)
operating activities
Interest income accreted on residual interests (477) (381) --
Accrued interest added to indebtedness 242 294 273
Gain on satisfactions of mortgage loans (252) (615) (256)
Depreciation 127 80 10
Amortization of unearned interest on loans
receivable (257) (115) (62)
Amortization of real estate lease interests 135 135 136
Imputed interest on notes 300 484 502
Stock issued for services received 32 -- --
Net increase in deferred income tax benefits (397) (1,050) --
Net decrease (increase) in prepaid financing
and other assets 382 303 (390)
Net (decrease) increase in accounts payable,
security deposits and accrued liabilities (743) 444 95
Net (decrease) in fees due to affiliates (355) (345) (1,094)
Net increase (decrease) in deferred income 1 4 (22)
------- ------ -------
Net cash provided by (used in) operating
activities 200 1,743 (609)
------- ------ -------
Cash flows from investing activities:
Collections on residual interests 41 -- --
Collections on loans receivable 3,255 7,872 4,949
Investments in loans receivable - (325) (2,426)
Real estate acquisitions and capital improvements (341) (610) (3,391)
Net decrease in affiliated limited partnership
interests and other investments 13 684 169
------- ------- -------
Net cash provided by (used in) investing
activities 2,968 7,621 (699)
------- ------- -------
See notes to consolidated financial statements
(continued)
F-7
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(continued)
Year Ended December 31,
------------------------------
2002 2001 2000
-------- -------- --------
Cash flows from financing activities:
Proceeds from new borrowings $ 400 $ 200 $ 6,425
Repayment of indebtedness (736) (1,288) (992)
Payments on underlying mortgages payable (2,827) (5,701) (4,040)
Payments on notes payable - residual interests (397) (105) --
Payments related to debt tender offers and
redemptions (222) (667) (171)
-------- -------- -------
Net cash (used in) provided by financing
activities (3,782) (7,561) 1,222
-------- -------- -------
Net (decrease) increase in cash (614) 1,803 (86)
Cash, beginning of year 2,987 1,184 1,270
-------- -------- -------
Cash, end of year $ 2,373 2,987 1,184
======== ======== =======
Supplemental disclosure of cash flow
information:
Cash paid during the year for interest $ 5,174 $ 4,601 $ 2,499
======== ======== =======
Cash paid for income taxes $ -- $ 44 $ 35
======== ======== =======
See notes to consolidated financial statements
(continued)
F-8
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(continued)
Year Ended December 31,
---------------------------
2002 2001 2000
------- ------- -------
Supplemental disclosure of non-cash investing
and financing activities:
Net reduction of notes payable - debt
tender offers and redemptions $ 436 $ 945 $ 306
======= ======= =======
Residual interests in securitized portfolios ($ 1,231) $36,525 $ -
======= ======= =======
Notes payable - residual interests ($ 1,231) $35,124 $ -
======= ======= =======
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.
F-9
DVL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands unless otherwise noted
(except share and per share amounts)
1. Summary of Significant Accounting Policies
a. THE COMPANY: DVL, Inc. ("DVL or the "Company") is a Delaware corporation
headquartered in New York, New York. DVL's common stock is traded on the over-
the-counter market and is quoted on the OTC Bulletin Board maintained by the
NASD under the symbol "DVLN". DVL is a commercial finance company which manages
numerous real estate properties and partnerships, and holds and services
commercial mortgage loans. DVL's investments consist primarily of residual
interests in securitized portfolios, commercial mortgage loans due from
affiliated partnerships, limited partnership investments in affiliated
partnerships and other real estate interests. DVL has six 100% owned active
subsidiaries: Professional Service Corporation ("PSC"), Del Toch, LLC ("Del
Toch"), Delborne Land Company, LLC ("Delborne"), S2 Holdings, Inc. ("S2"), DVL
Mortgage Holdings, LLC ("DMH") and Delbrook Holdings, LLC ("Delbrook") all of
which are consolidated for accounting purposes. DVL does not consolidate any of
the various partnerships (the "Affiliated Limited Partnerships") in which it
holds the general partner and limited partner interests nor does DVL account for
such interests on the equity method due to the following: (i) DVL's interest in
the partnerships as the general partner is a 1% interest, (the proceeds of such
1% interest is payable to the limited partnership settlement fund pursuant to
the 1993 settlement of the class action between the limited partners and DVL)
the ("Limited Partnership Settlement"); (ii) under the terms of such settlement,
the limited partners have the right to remove DVL as the general partner upon
the vote of 70% or more of the limited partners; (iii) all major decisions must
be approved by a limited partnership Oversight Committee in which DVL is not a
member, (iv) there are no operating policies or decisions made by the Affiliated
Limited Partnership, due to the triple net lease arrangements for the Affiliated
Limited Partnership properties and (v) there are no financing policies
determined by the partnerships as all mortgages were in place prior to DVL's
obtaining its interest and all potential refinancings are reviewed by the
Oversight Committee. Accordingly, DVL accounts for its investments in the
Affiliated Limited Partnerships, on a cost basis with the cost basis adjusted
for impairments which took place in prior years. Accounting for such investments
on the equity method would not result in any material change to the Company's
financial position or results of operations.
Also, DVL has two inactive subsidiaries: Del-Val Capital Corp. ("DVCC") and
RH Interests, Inc. ("RH") which have been consolidated in these financial
statements. Additionally, S2 owns 99.9% Class B member interests in Receivables
II-A, LLC and Receivables II-B, LLC which are passive entities created solely to
receive the residual cash flow from the securitized receivable pools that each
entity owns. All material intercompany transactions and accounts are eliminated
in consolidation.
b. RESIDUAL INTERESTS: Residual interests represent the estimated discounted
cash flow of the differential of the total interest to be earned on the
securitized receivables and the sum of the interest to be paid to the
noteholders and the contractual servicing fee. Since these residual interests
are not subject to prepayment risk they are accounted for as investments held-
to-maturity and are carried at amortized cost using the effective yield method.
Permanent impairments are recorded immediately through earnings. Favorable
changes in future cash flows are recognized through earnings as interest over
the remaining life of the retained interest.
F-10
c. INCOME RECOGNITION: Interest income is recognized on the effective interest
method for the residual interest and all performing loans. The Company stops
accruing interest once a loan becomes non-performing. A loan is considered non-
performing when scheduled interest or principal payments are not received on a
timely basis and in the opinion of management, the collection of such payments
in the future appears doubtful. Interest income on restructured loans are
recorded as the payments are received. The following table presents details of
the impared loan portfolio at December 31, 2002 and 2000.
2002 2001
---- ----
Mortgage loans receivable $ 2,305 $ 2,247
Underlying loans (622) --
Allowance for loan losses (468) (945)
Unearned interest (899) (886)
------- -------
Net realizable value $ 316 $ 416
======== =======
Average impaired loan portfolio $ 1,384 $ 681
======== =======
The Company recognized no interest income on its impaired loan portfolio during
the years ended December 31, 2002, 2001 and 2000.
Rental income is recognized in income as rent under the related leases becomes
due. DVL records contingent rents in the period in which the contingency is
resolved. Management and transaction fees are recognized as earned.
Distributions from investments are recorded as income when the amount to be
received can be estimated and collection is probable.
d. ALLOWANCE FOR LOSSES: The adequacy of the allowance for losses is determined
through a quarterly review of the portfolios. Specific loss reserves are
provided as required based on management's evaluation of the underlying
collateral on each loan or investment.
DVL's allowance for loan losses generally is based upon the value of the
collateral underlying each loan and its carrying value. Management's evaluation
considers the magnitude of DVL's non-performing loan portfolio and internally
generated appraisals of certain properties.
For the Company's mortgage loan portfolio, the partnership properties are
valued based upon the cash flow generated by base rents and anticipated
percentage rents or base rent escalations to be received by the partnership. The
value of partnership properties which are not subject to percentage rents was
based upon historial appraisals. Management believes, that generally, the values
of such properties have not changed as the tenants, lease terms and timely
payment of rent have not changed. When any such changes have occurred,
management revalues the property as appropriate. Management evaluates and
updates such appraisals, periodically, and considers changes in the status of
the existing tenancy in such evaluations. Certain other properties were valued
based upon management's estimate of the current market value for each specific
property using similar procedures.
Allowances related to the Company's investments in Affiliated Limited
Partnerships are adjusted quarterly in order to value the investments at
approximately 14% of the original investment amount due to potential anticipated
losses upon liquidation of these investments.
F-11
e. LAND, BULDINGS AND EQUIPMENT: Land, buildings and equipment are stated at
cost. Depreciation is provided by charges to operations on either a straight-
line basis or accelerated basis over their estimated useful lives (5 to 40
years).
f. PREPAID FINANCING: Prepaid financing costs are deferred and amortized over
the term of the respective debt using the effective interest rate method.
Prepaid financing costs on interest only loans are amortized using the straight-
line method over the term of the financing.
g. IMPAIRMENT OF REAL ESTATE INVESTMENTS AND REAL ESTATE LEASE INTERESTS: DVL
does not have any impaired real estate investments and/or real estate lease
interests at December 31, 2002. All assets are analyzed annually based upon
prior appraised values, which are adjusted every year based on cash flow
assumptions set forth in such appraisals.
h. RESTRICTED CASH: As of December 31, 2002 and 2001, DVL had restricted cash of
$177, and $215, respectively. The restricted cash at December 31, 2002 and 2001,
represents monies owed to the Settlement Fund.
i. FEDERAL INCOME TAXES: DVCC, PSC, RH, Del Toch, S2, DMH, Delbrook and Delborne
are included in DVL's consolidated federal income tax return.
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 financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In addition, FAS
109 requires the recognition of future tax benefits such as net operating loss
carryforwards, to the extent that realization of such benefits is more likely
than not.
j. EARNINGS PER SHARE: Basic per share data is determined by dividing net income
by the weighted average shares outstanding during the period. Diluted per share
data is computed by dividing net income by the weighted average shares
outstanding, assuming all dilutive potential common shares were issued. With
respect to the assumed proceeds from the exercise of dilutive options, the
treasury stock method is calculated using the average market price for the
period.
F-12
The following table presents the computation of basic and diluted per share data
for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
------------------------------- ------------------------------ -------------------------------
Weighted Weighted Weighted
Net Average Per Share Net Average Per Share Net Average Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
------- ---------- --------- ------- ---------- --------- ------ ---------- ---------
Basic EPS, Income
before extraordinary
items available to
common stockholders $ 1,462 21,713,563 $ .06 $ 2,505 16,599,517 $ .15 $ 199 16,560,450 $ .01
======= ========== ===== ======= ========== ===== ===== ========== =====
Effect of litigation
settlement notes 299 15,478,297 484 62,289,639 502 42,047,571
Effective of dilutive
stock options and
warrants -- 21,584,633 -- 45,882,959 -- 37,729,565
------- ---------- ------- ---------- ----- ==========
Diluted EPS, Income
available to common
stockholders $ 1,761 58,776,493 $ .03 $ 2,989 124,772,115 $ .03 $ 701 96,337,586 $ .01
======= ========== ===== ======= =========== ===== ===== ========== =====
At December 31, 2002, 2001 and 2000, stock 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, aggregated 3,983,131, 4,473,131, and
1,130,131 respectively, thereby resulting in an anti-dilutive effect.
Stock-based compensation: Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") allows companies to
either expense the estimated fair value of stock options or to follow the
intrinsic value method set forth in APB Opinion 25, "Accounting for Stock Issued
to Employees" ("APB 25") but disclose the pro forma effects on net income had
the fair value of the options been expensed. The Company has elected to continue
to apply APB 25 in accounting for its stock option incentive plans.
Pro forma information regarding net income and earnings per share is required by
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Such information has been determined as if DVL
has accounted for its employee stock options under the fair value method of that
statement. The effect of applying SFAS No. 123 on 2000, 2001 and 2002 pro forma
net income is not necessarily representative of the effects on reported net
income for future years due to, among other things: (1) vesting period of the
stock options and(2) the fair value of additional stock options in future years.
Had compensation cost for DVL's stock option plans been determined based upon
the fair value at the grant date for awards under the plans consistent with the
methodology prescribed under SFAS No. 123, DVL's net income in 2002, 2001, and
2000 would have been approximately as follows:
December 31,
----------------------------------
2002 2001 2000
------ ------ ------
Net income $1,391 $2,866 $ 505
====== ====== ======
Earnings per share
Basic $ 0.06 $ 0.17 $ 0.03
====== ====== ======
Diluted $ 0.03 $ 0.03 $ 0.01
====== ====== ======
Proforma charge for stock options $ 4 $ 12 $ --
====== ====== ======
Proforma net income $1,387 $2,854 $ 505
====== ====== ======
Proforma earnings per share
Basic $ 0.06 $ 0.17 $ 0.03
====== ====== ======
Diluted $ 0.03 $ 0.03 $ 0.01
====== ====== ======
F-13
k. FAIR VALUE OF FINANCIAL INSTRUMENTS: As disclosed in Note 3, DVL's loan
portfolio is valued based on the value of the underlying collateral. As all
loans are either receivables from Affiliated Limited Partnerships or are
collateralized by interests in Affiliated Limited Partnerships, it is not
practical to estimate fair value of the loans. Due to the nature of the
relationship between the Alliliated Limited Partnerships and DVL's general
partner interest in the Affiliated Limited Partnerships and the authority of the
Oversight Committee, the amount at which the loans could be exchanged with third
parties is not reasonably determinable, as any such estimate would have to
consider the intention of the Oversight Committee, the amounts owed, if any, to
DVL for its interests in the Affiliated Limited Partnerships and any transaction
fees to which DVL might be entitled. See Note 2 for discussion on residual
interests.
l. USE OF ESTIMATES: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
m. RECENTLY ISSUED ACCOUNTING STANDARDS: In May 2002, the FASB issued "Statement
of Financial Accounting Standards No. 145, Rescission of FAS Statements 4, 44
and 64, Amendment of FAS Statement 13 and Technical Corrections" ("SFAS 145").
SFAS 145 eliminates Statement 4 (and Statement 64, as it amends Statement 4),
which requires gains and losses from extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, and thus, also the
exception to applying Opinion 30 is eliminated as well. This statement is
effective for fiscal years beginning after May 2002 for the provisions related
to the rescission of Statements 4 and 64 and for all transactions entered into
beginning May 2002 for the provision related to the amendment of Statement 13.
The Company does not expect that adoption of SFAS 145 will have a material
impact on its operations or financial position. However, as a result of this
pronouncement, gains and losses from the extinguishment of debt will be
classified as part of operations rather than as an extraordinary item.
Additionally, upon the Company adopting this pronouncement, the prior years'
financial statements will be restated to conform to the new classification.
In June 2002, the FASB issued "Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"). SFAS 146 requires recording costs associated with exit or disposal
activities at their fair values when a liability has been incurred. Under
previous guidance, certain exit costs were accrued upon management's commitment
to an exit plan. We are required to adopt SFAS 146 on January 1, 2003. The
Company has not yet determined what impact the adoption of SFAS 146 will have on
its operations and financial positions.
F-14
2. Residual Interests In Securitized Portfolios
During 2001, the Company, through its wholly-owned consolidated subsidiary,
S2 Holdings 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, including costs of $1,366, which included the issuance of warrants,
valued at $136, for the purchase of 3 million shares of the common stock of DVL,
exercisable until 2011 at a price of $.20 per share and investment banking fees
to an affiliate aggregating $900. 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. 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
payment of up to $3,443 of the purchase price. The amount of the guaranty is
regularly reduced by 10% of the principal paid. The amount of the guaranty at
December 31, 2002 was $3,342. Payments, if any, due under this guaranty are
payable after August 15, 2020.
In accordance with the purchase agreements, from the acquisition dates
through December 31, 2002, the residual interests in securitized portfolios and
the notes payable were decreased by approximately $532 as a result of purchase
price adjustments.
The following table reconciles the initial purchase price with the carrying
value at December 31, 2002:
Initial purchase price $ 35,791
Adjustments to purchase price (532)
Principal payments (41)
Accretion 893
-------
$ 36,111
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 $ 743 $ 880
2010 to final payment $1,050 $1,150
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.
F-15
The following table presents the key economic assumptions at December 31, 2002
and the sensitivity of the current fair value of residual cash flows to
immediate 10 percent and 20 percent adverse changes in those assumptions:
Carrying value of residual interests $ 36,111
Fair value of residual interests $ 37,481
Weighted-average life (in years) 10.5
Expected credit losses 5.41%
Impact on fair value of 10% adverse change $ 995
Impact on fair value of 20% adverse change $ 1,982
Discount rate 11.90%
Impact on fair value of 10% adverse change $ 2,823
Impact on fair value of 20% adverse change $ 5,317
Those sensitivities are hypothetical and should be used with caution. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the residual interest is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in another
which might magnify or counteract the sensitivities.
3. Mortgage Loans Receivable and Underlying Mortgages Payable
Virtually all of DVL's loans receivable arose out of transactions in which
Affiliated Limited Partnerships purchased commercial, office and industrial
properties typically leased on a long-term basis to unaffiliated, creditworthy
tenants. Each mortgage loan is collateralized by a lien, primarily subordinate
to senior liens, on real estate owned by an Affiliated Limited Partnership.
DVL's loan portfolio is comprised of long-term wrap-around and other mortgage
loans due from Affiliated Limited Partnerships; and loans due from limited
partners collateralized by their interests in Affiliated Limited Partnerships
("Partners' Notes").
DVL's mortgage portfolio included 22 and 23 mortgage loans with net
carrying values of $25,677 and $28,377 as of December 31, 2002 and 2001,
respectively, which are due from Affiliated Limited Partnerships that own
properties leased to Wal-Mart Stores, Inc. Wal-Mart is a public company subject
to the reporting requirements of the SEC. Wal-Mart has closed certain of its
stores located on the properties subject to the Company's mortgages. However,
Wal-Mart continues to pay the required rent with respect to such leases. Net
carrying value refers to the unpaid principal balance less any allowance for
reserves, and any amount which represents future interest based upon the
purchase of the loan at a discount.
DVL is liable for underlying non-recourse first mortgages on a substantial
portion of its mortgage portfolio. The underlying mortgages are payable to
unrelated financial institutions and bear interest at rates of 6.66% to 14.0%
and require principal and interest payments solely from the proceeds of the wrap
mortgages receivable.
F-16
The Limited Partner Settlement, as well as the settlements with other
limited partnerships, resulted in the modification of terms of certain
performing mortgage loans receivable from Affiliated Limited Partnerships which
bore interest at effective rates of up to 15% per annum, aggregating net
carrying values of $4,914, and $5,101, subject to underlying mortgages of
$2,659, and $3,087, at December 31, 2002 and 2001, respectively, and mature
through 2027.
In addition, at the time of the settlement, the terms of the loans to
Kenbee collateralized by similar loans were restructured and modified. The
restructured and modified loans due directly from the partnerships bear interest
at stated rates of up to 15.5% and mature through 2030. As of December 31, 2002
and 2001 the modified loans due directly from the Affiliated Limited
Partnerships aggregated net carrying values of $17,004, and $19,160, and subject
to underlying mortgages of $12,699, and $14,594, respectively. DVL recognized
interest income on these restructured mortgage loans of approximately $329,
$352, and $309, for 2002, 2001, and 2000, respectively.
F-17
DVL's mortgage and other loans due from Affiliated Limited Partnerships, an
unaffiliated entity and limited partners are as follows:
2002 2001
-------------------------------------- --------------------------------------
Interest Allowance Interest Allowance
Number Included For Loan Number Included For Loan
of Loan In Loan Losses of Loan In Loan Losses
Mortgage Loan Loans Balance Balance (Note 4) Loans Balance Balance (Note 4)
- ---------------------------------------------- ------ ------- -------- --------- ------ -------- -------- ---------
(Dollar amounts in thousands)
Long-term wrap-around mortgage loans ranging
from $358 to $3,387 in 2002 and from $376 to
$3,107 in 2001 maturing at various dates
through May 2029 (a) 16 $ 26,516 $ 45 $ 468 16 $ 27,264 $ 21 $ --
Other long-term mortgage loans of $1,292 in
2002 and ranging from $1,329 to $1,433 in
2001 maturing at various dates through
December 2029 (b) 1 1,292 -- -- 2 2,762 -- 945
Long-term wrap-around and other mortgage
loans acquired from Kenbee pursuant to the
Limited Partner Settlement ranging from
$285 and $2,363 in 2002 and from $285 to
$2,438 in 2001 maturing at various dates
through June 2031 (c) 15 18,993 -- 1,989 16 21,449 -- 2,289
General allowance -- -- -- 413 -- -- -- 861
---- -------- ----- -------- ---- -------- ---- -------
Total mortgage loans 32 46,801 45 2,870 34 51,475 21 4,095
LOANS COLLATERALIZED BY LIMITED PARTNERSHIP
INTERESTS
Loans ranging from $1 to $54 in 2002 and from
$1 to $58 in 2001 in default (d) Included
in pre-paid financing and other assets 18 257 -- 215 21 355 -- 278
DUE FROM AFFILIATED PARTNERSHIPS
Advances and Other 3 101 -- -- 5 14 -- --
---- -------- ----- -------- ---- -------- ---- -------
Total loans receivable 53 47,159 $ 45 $ 3,085 60 51,844 $ 21 $ 4,373
==== ===== ======== ==== =======
Less unearned interest on partnership
mortgage loans 15,579 15,908
-------- ========
Net loans receivable $ 31,580 $ 35,936
======== ========
Underlying mortgages ranging from $105 and
$2,349 in 2002 and from $197 to $2,424 in
2001 maturing at various dates through 2011 $ 19,391 $ 22,218
======== ========
F-18
Activity on all collateralized loans is as follows:
2002 2001 2000
-------- -------- --------
(in thousands)
Balance, beginning of year $ 51,830 $ 54,368 $ 48,802
Investments in loans receivables -- 6,109 13,584
Collections on loans to affiliates (3,255) (7,872) (4,949)
Unearned interest offset against loans
satisfied, sold and written off -- (775) (2,199)
Loans written-off and written down (1,517) -- (870)
-------- -------- --------
Balance, end of year $ 47,058 $ 51,830 $ 54,368
======== ======== ========
Unearned interest activity is as follows:
2002 2001 2000
-------- -------- --------
(in thousands)
Balance, beginning of year $ 15,908 $ 12,340 $ 5,810
Additional unearned interest in
connection with new loans receivable -- 4,458 8,791
Amortization to income (257) (115) (62)
Decrease in connection with the
satisfaction or write-off of loans (72) (775) (2,199)
-------- -------- -------
Balance, end of year $ 15,579 $ 15,908 $ 12,340
======== ======== ========
(a) DVL previously funded certain wrap-around mortgages due from Affiliated
Limited Partnerships, whereby the original principal of the wrap equaled the
outstanding balance of an underlying first mortgage loan plus the amount of
funds advanced by DVL to the partnership. These loans mature through May 2029,
bear interest at effective rates from 10% to 51% per annum and are
collateralized primarily by second mortgages on commercial and industrial
properties located in various states. DVL is responsible to make principal and
interest payments on the first mortgage loan to the extent received from the
borrower and, in certain instances, has the right to refinance or pay off the
first mortgage loan and succeed to its seniority. Currently, the partnerships or
the tenants are making the underlying mortgage payments directly and DVL is
applying such payments to its wrap-around mortgage loans. To the extent that the
underlying mortgage payment is less than the wrap- around mortgage payment, the
partnership is obligated to pay DVL the balance. These wrap- around loans are
subject to underlying mortgage loans of $6,691 in 2002 and $7,624 in 2001, which
bear interest at rates ranging from 6.66% to 13.00% per annum, are payable to
unaffiliated lenders in monthly installments, mature on various dates through
January 2019 and are collateralized by liens senior to DVL's liens. See Note 6
for the five year maturities of such underlying loans.
(b) DVL's other long-term mortgage loans, exclusive of its wrap-around
mortgages, are collateralized by one first mortgage aggregating $1,292 at
December 31, 2002 and two first mortgages aggregating $2,762 at December 31,
2001, respectively. These loans mature through December 2029, bear interest at
effective rates of up to 15% per annum and are collateralized by first mortgages
on commercial and industrial properties. The scheduled principal maturities of
DVL's commercial mortgage loan portfolio, excluding wrap-around mortgages, in
each of the next five years are $39 in 2003, $41 in 2004, $44 in 2005, $46 in
2006 and $49 in 2007.
F-19
(c) DVL acquired long-term wrap-around and other mortgage loans to
Affiliated Limited Partnerships pursuant to the Limited Partner Settlement. The
principal balance of such loans when acquired in 1992 equaled DVL's net
investment in the related loan previously due from Kenbee less specific
write-downs of $18,223 on certain of these loans based upon the anticipated cash
flow to be generated by each loan (Note 4). Although these loans have stated
interest rates of up to 15.5% per annum, interest, if any, is imputed based upon
the anticipated cash flow to be generated by each loan. The loans are
collateralized by first, second and third mortgages on commercial and industrial
properties located in various states and mature through June 2031. The
wrap-around loans are subject to senior liens of $12,700 in 2002 and $14,594 in
2001, which bear interest at rates ranging from 6.69% to 14% per annum, are
payable to unaffiliated lenders, mature on various dates through December 2019
and are collateralized by liens senior to DVL's liens. The payment of the
underlying first mortgages are also being made by the partnerships or tenants as
discussed in (a) above. See Note 6 for the five year maturities of such
underlying loans.
(d) DVL made loans directly to limited partners to finance their
partnership investments. As a result of the Limited Partner Settlement, DVL
received loans due from limited partners in 1992 in replacement of loans due
from Kenbee collateralized by such Partners' Notes. The majority of these loans
were non-performing at December 31, 2002 and 2001. These assets are included in
other assets on the Balance Sheet.
4. Allowance for Losses and Other Reserves
Allowance for loan loss activity is as follows:
2002 2001
--------- -------
(in thousands)
Balance, beginning of year $ 4,373 $ 5,534
Loans satisfied, written-off or written-down (1,288) (1,161)
--------- -------
Balance, end of year $ 3,085 $ 4,373
========= =======
5. Investments
REAL ESTATE
The Company currently owns the following properties:
(1) Eight buildings totaling 347,000 square feet on eight acres located in an
industrial park in Kearny, NJ leased to various unrelated tenants.
(2) The Company through its wholly-owned subsidiary, Delbrook Holding, LLC
purchased an 89,000 square foot building in Kearny, NJ, which adjoins the
property described above currently leased to K-Mart Stores, Inc. ("K-Mart") for
$4,016 including costs and the assumption of $2,668, in debt.
(3) A vacant 31,000 square foot former Grand Union Supermarket and approximately
six acres of land underlying the building. On March 12, 2003, the Company has
entered into agreements to sell the property for $810. The property, which was
acquired through foreclosure on a mortgage, was recorded at $416, which was the
net carrying value of the mortgage at the date of foreclosure and was less than
the fair value at that date.
F-20
Affiliated Limited Partnerships
DVL acquired various interests in Affiliated Limited Partnerships pursuant
to the terms of certain settlement agreements and through purchases. Management
valued all of these investments at approximately 14% of the original investment
amount due to potential anticipated losses upon liquidation of these
investments. During 2002, 2001 and 2000, DVL recorded income of $84, $138, and
$253, respectively, from distributions received from these investments.
The activity on DVL's investments in Affiliated Limited Partnerships is as
follows:
2002 2001
------ ------
(in thousands)
Balance, beginning of year $1,121 $1,157
Various interests acquired through
purchases and foreclosed partner notes 24 94
Distributions received from partnerships (96) (328)
Income from partnerships 84 138
Change in reserves, net of write-offs (67) 60
----- ------
Balance, end of year $1,066 $1,121
====== ======
At December 31, 2002, all of DVL's investments in Affiliated Limited
Partnerships are pledged to collateralize its indebtedness (Note 6).
OTHER INVESTMENTS
In connection with a 1993 litigation settlement with three related
partnerships that did not participate in the Limited Partner Settlement, DVL
received limited partnership interests in three partnerships. These
partnerships' sole assets are the restructured partnership mortgage loans on the
properties leased to Wal-Mart Stores, Inc. by the three related partnerships.
These investments, which are carried on the equity basis, were valued based upon
the anticipated cash flow to be generated by the restructured mortgage loans.
Management had provided an allowance for losses of $400 as of December 31, 2000
primarily resulting from a decrease in the estimated fair value of the
underlying collateral of one of the three partnership mortgage loans. In
December 2001, the partnerships refinanced the underlying loans collateralized
by the restructured mortgage loans and DVL received net proceeds of
approximately $1,400, which was approximately $348 in excess of the carrying
value. The $348 was recorded as income from distributions from investments -
others.
F-21
6. Long-Term Debt and Loans Payable Underlying Wrap-around Mortgages
DVL's long-term debt is comprised of the following loans payable:
2002 2001
------- -------
(in thousands)
Loan collateralized by real estate bearing
interest at 8.50% per annum. Monthly
payments are interest only, maturing
September, 2004 $ 4,534 $ --
Loan collateralized by real estate bearing
interest at 7.50% per annum with a balloon
payment due June, 2008 of $2,285 2,667 --
Loan to purchase existing mortgages, self-
amortizing and bearing interest at 8.25% per
annum, maturing September 2005 347 --
Loan collateralized by commercial mortgage
loans and real estate bearing interest at
prime plus 1.5% per annum maturing May, 2006 607 824
Loan collateralized by commercial mortgage
loans and real estate bearing interest at
prime plus 1.5% per annum maturing April, 2005 746 1,041
Loan collateralized by real estate bearing
interest at 9.5% per annum, maturing June, 2002 -- 202
Loan collateralized by real estate bearing
interest at 10% per annum, maturing
December, 2001 -- 3,000
------ -------
8,901 5,067
Loan collateralized by commercial mortgages
and real estate bearing interest at 12% per
annum, maturing September 2003 (a) 2,084 1,942
------ -------
Total long-term debt $10,985 $ 7,009
======= =======
(a) See Debt Tender Offer (Note 7) for description of financing agreement
with Blackacre Bridge Capital, LLC.
The aggregate amount of long-term debt and loans payable underlying
wrap-around mortgages (Note 3) maturing during the next five years is as
follows:
Loans Payable
Long-term Underlying Wrap
Debt Around Mortgages
--------- ----------------
(in thousands)
2003 $ 2,787 $ 2,416
2004 5,418 2,061
2005 310 2,052
2006 70 2,684
2007 75 2,887
Thereafter 2,325 7,291
--------- -------
$ 10,985 $19,391
========= =======
F-22
The Company obtained an unsecured line of credit on December 15, 2002 for $500
with an interest rate of prime plus one percent per annum which terminates
December 15, 2003. The terms of the line of credit provide that interest shall
be payable on the first day of each month. To date the Company has not drawn on
the line of credit.
7. Notes Payable - Litigation Settlement/Debt Tender Offers and Redemptions
In December 1995, DVL completed its obligations under a 1993 settlement of
its class action litigation by, among other things, issuing notes to the
plaintiffs (the "Notes") in the aggregate principal amount of $10,387. The
Notes, which are general unsecured obligations of DVL, accrue interest at the
rate of ten (10%) percent per annum, with principal under the Notes, together
with all accrued and unpaid interest thereunder, due on December 31, 2005.
Pursuant to the terms of the Notes, through December 31, 2000, DVL paid the
accrued interest by the issuance of additional Notes with the principal amount
equal to the accrued interest at each interest due date.
To date, the Company has sent redemption letters ("Redemptions") to note
holders who held Notes that aggregated approximately $1,145 offering to pay the
Notes in cash at the face value plus accrued interest of approximately $49. As
of December 31, 2002, $384 has been paid and the remaining $810 payable is
reflected as a non-interest bearing liability.
Additionally, the Company entered into an agreement in December 2001 with
Blackacre Bridge Capital, LLC ("BBC") under which BBC exchanged $1,188 principal
amount of Notes ($862 carrying value) for 4,753,113 shares of DVL's common stock
valued at $380.
Since October 1997, the Company conducted three cash tender offers (the
"Offers") at a Tender Offer price of $0.12 per $1.00 principal amount of Notes.
Notes with an aggregate principal amount of approximately $1,951 remain
outstanding as of December 31, 2002 (carrying value $1,735).
In order to fund the acquisition of the Notes in the first and second
offers, the Company borrowed from Blackacre Capital Group, LLC ("BCG") (the "BC
Loan"). The BC Loan matures on September 30, 2003 and bears interest at the rate
of 12% per annum compounded monthly, payable at maturity. Total borrowings under
the BC Loan including accrued interest were $2,084 as of December 31, 2002. In
addition, BCG was entitled to acquire 15% of all Notes acquired by the Company
in excess of $3,998 in connection with the first and second Offers under the
same terms and conditions as the Company. BCG acquired Notes aggregating $816
under these terms. The Notes acquired by BCG accrued interest of $372 through
December 28, 2001 when the aggregate amount of $1,188 of Notes was exchanged for
Stock.
The Company's obligations under the BC Loan are secured by substantially
all of the assets of the Company. The BC Loan is senior to all indebtedness of
the Company other than indebtedness to NPO and, with respect to individual
assets, the related secured lender. The effective interest rate to the Company
for financial reporting purposes, including the Company's costs associated with
the BC Loan, and the value of the 653,000 shares issued to Blackacre in
connection therewith, is approximately 14% per annum. Interest payable in
connection with the BC Loan will be deferred until the Company satisfies all of
its obligations owing to NPO. However, the Company is required to pay principal
payments of 15% of all proceeds that would otherwise be remitted to NPO, to
Blackacre. Thereafter, interest and principal will be paid from 100% of the
proceeds then available to the Company from the mortgage collateral held as
security for the BC Loan.
F-23
8. Transactions with Affiliates
The members of the Millenium Group (defined below), the Pembroke Group
(defined below), and the Florida Group are affiliates of NPM. Keith B. Stein,
the special purpose director of the Company is an affiliate of NPM and a
beneficial owner of more than 5% of the outstanding shares of the Company's
Common Stock. The members of the Millenium Group and the Pembroke Group are
affiliates of NPO. The Pembroke Group ("Pembroke Group") is owned and controlled
by Lawrence J. Cohen, who is a beneficial owner of more than 5% of the
outstanding shares of the Company's Common Stock. The Millienium Group
("Millenium Group") is owned and controlled by Jay Chazanoff, Stephen Simms, and
Ron Jacobs, each beneficial owners of more than 5% of the outstanding shares of
the Company's Common Stock. Blackacre and its affiliates are beneficial owners
of more than 5% of the outstanding shares of the Company's Common Stock.
A. OPPORTUNITY FUND
In April 1998, DVL, an affiliate of Blackacre and affiliates of NPO entered
into a certain Agreement Among Members (the "Opportunity Agreement"), providing
for an arrangement (the "Opportunity Fund"), pursuant to which entities would be
formed, from time to time, to enter into certain transactions involving the
acquisition of limited partnership interests in the assets of, or mortgage loans
to, affiliated limited partnerships or other assets in which the Company has an
interest.
As of March 1, 2002, the Opportunity Fund had purchased 15 wrap mortgages
of Affiliated Limited Partnerships from unaffiliated third parties, acquired
limited partnership units from unaffiliated individuals in three Affiliated
Limited Partnerships, and acquired an ownership interest in a property of an
Affiliated Limited Partnership. During 2000, DVL purchased three of the
mortgages owned by the Opportunity Fund. During 2001, a newly formed,
wholly-owned subsidiary of DVL purchased two of the mortgages owned by the
Opportunity Fund. As of March 2003, the Opportunity Fund owns four mortgages. In
December 2001, the Opportunity Fund sold its ownership interest in a property in
Kearny, NJ to an entity in which certain partners are affiliates of NPO. During
2001, DVL was paid approximately $280 from the investments by the Opportunity
Fund, of which $189 was used to pay amounts owed by DVL under a note in favor of
an entity that is part of the Opportunity Fund incurred in connection with the
acquisition of certain mortgage loans. During 2002, DVL did not receive any
payments from the investments by the Opportunity Fund.
B. Since June 1998, the Company has received fees from a limited partnership (in
which certain of its partners are affiliates of NPO and Blackacre). This
agreement may be terminated with 30 days notice by either party. The Company
receives the following (a) a monthly fee through November 2000, and (b) after
all the partners of the partnership have earned a specified return, an incentive
fee of 25% of the profits, as defined in the agreement. For 2002, 2001, and 2000
the Company received compensation under such agreement equal to $-0-, $443, and
$363, respectively.
C. The Company has received fees pursuant to a service agreement with another
limited partnership whose general partner is Lawrence J. Cohen, to render
certain accounting and administrative services. As compensation, the Company
receives expense reimbursements of $4 per month. For 2002, 2001, and 2000 the
Company received aggregate annual compensation under such agreement of $48.
D. The Company received fees from an entity that is part of the Opportunity Fund
in consideration for the Company providing property management services. For
2002, 2001 and 2000, the Company received annual compensation, under such
agreement equal to $27, $27, and $27, respectively, under such arrangement.
F-24
E. The Company has received fees from an entity whose partners are affiliates of
NPO, Messrs. Cohen, Chazanoff, Simms and Jacobs, in consideration for the
Company providing certain accounting and administrative services. As
compensation, the Company receives a monthly fee of $2 a monthly deferred fee of
approximately $7 and an annual incentive fee if certain levels of profitability
are attained. The Company recorded fees of $154, $152 and $102 in 2002, 2001 and
2000 which included incentive fees of $52, $50 and $-0-, respectively.
F. The Millenium Group, an affiliate of NPO, received approximately $37, $67,
and $90 for 2002, 2001, and 2000, respectively, representing compensation and
reimbursement of expenses for collection services on notes payable to the
Company. In addition, in 2002, 2001, and 2000 the Company paid or accrued fees
of $108, $150, and $25, to the Millenium Group and $-0-, $205 and $55 to the
Pembroke Group (another affiliate of NPO), respectively, and in 2002 issued a
total of 400,000 shares of Common Stock, valued at $32, to the Pembroke Group
and the Millenium Group for additional services rendered to the Company outside
the scope of the Asset Servicing Agreement. The additional services included
advice relating to the redemption and exchange of Notes.
In connection with the sales of property owned by Affiliated Limited
Partnerships, a licensed real estate brokerage affiliate of the Pembroke Group
was paid brokerage fees of $37, $86, and $107, from various Affiliated Limited
Partnerships in 2002, 2001 and 2000, respectively.
G. Interest expense on amounts due to affiliates was as follows:
2002 2001 2000
---- ---- ----
Blackacre Capital Group, LLC $ 281 $ 319 $ 275
NPO 5 53 149
Opportunity Fund - 17 10
----- ----- ------
$ 286 $ 389 $ 434
===== ===== ======
H. In connection with the acquisitions of residual interests, affiliates of NPO
and the special director of the Company will be paid investment banking fees of
$900 for their services including the origination, negotiation and structuring
of the transactions. As of December 31, 2002 $540 of the fee is outstanding. The
fee was calculated as approximately 2% of the expected cash flow to be received
over the life of the assets. The total fees will be payable without interest,
over a period of 30 months, which commenced January 1, 2002, from a portion of
the monthly cash flow generated by the acquisitions. The affiliates of NPO are
Lawrence J. Cohen and Jay Chazanoff, each beneficial owners of more than 5% of
the outstanding shares of the Company's Common Stock and Keith B. Stein who is a
beneficial owner of more than 5% of the outstanding shares of the Company's
Common Stock and the special purpose director of the Company.
I. The law firm of Klehr, Harrison, Harvey, Brazenburg, & Ellers ("Klehr"),
Philadelphia, Pennsylvania, of which Alan E. Casnoff, a director of the Company,
is of counsel, has acted as counsel to the Company since July, 1999. Legal fees
for services rendered by Klehr to the Company during the fiscal year ended did
not exceed 5% of the revenues of such firm for its most recent fiscal year.
During 2002, 2001, and 2000, the Company and the Affiliated Limited Partnerships
paid Klehr $36, $17 and $19, respectively, for legal services.
F-25
J. The Company recorded fees to NPO of $652, $640, and $623 under the Asset
Servicing Agreement for 2002, 2001 and 2000, respectively plus other expenses of
$10 in each year. During 2002, 2001 and 2000 the Company provided office space
under the Asset Servicing Agreement to NPO consisting of 228 square feet of the
Company's New York location. The allocated cost for such space was $9, $10, and
$9, respectively. The Company also paid to NPO $10 during each of the years
2002, 2001, and 2000 for other expenses.
9. Commitments, Contingent Liabilities and Legal Proceedings
COMMITMENTS AND CONTINGENT LIABILITIES
Pursuant to the terms of the Limited Partner Settlement, a fund has been
established into which DVL is required to deposit 20% of the cash flow received
on certain of its mortgage loans from Affiliated Limited Partnerships after
repayment of certain creditors, 50% of DVL's receipts from certain loans to, and
general partnership investments in, Affiliated Limited Partnerships and a
contribution of 5% of DVL's net income (based on accounting principles generally
accepted in the United States of America) subject to certain adjustments in the
years 2001 through 2012. The adjustments are significant enough that no amounts
were accrued for 2001 and 2002.
During 2000, the Company paid $117 to the fund which represented all
amounts due to/from the fund as of December 31, 2000. During 2002 and 2001 the
Company expensed approximately $217 and $551, respectively, for amounts due to
the fund of which approximately $-0-, and $149, respectively, was accrued at
year end and paid in January 2002. These costs have been netted against the gain
on satisfaction of mortgages and/or interest on mortgage loans, where
appropriate.
DVL leases premises comprising approximately 5,600 square feet. The lease
for such office space is due to expire on January 31, 2008. The base rent is
$216 per annum, plus real estate and operating expense escalation clauses. Net
rent expense was $221, $236, and $189 in 2002, 2001, and 2000, respectively.
The future minimum rentals during the next five years is as follows:
2003 $ 216
2004 216
2005 216
2006 216
2007 216
Thereafter 18
-------
$ 1,098
=======
The real estate lease interest held by the Company's subsidiary, PSC, is
subject to a master lease agreement through June 2010 which requires monthly
payments of approximately $39. The master lease payments are netted against
rental income in the Company's financial statements.
The Asset Servicing Agreement, pursuant to which NPO is providing the
Company with administrative and advisory services, requires monthly payments of
approximately $55 through May 2008 with cost of living increases.
In connection with the Exchange Agreement with BBC, if at any time after
December 31, 2005, BBC is prevented from disposing of any of its shares as a
result of the Board of Directors determination that the transfer would be
materially adverse to the interest of the Company, then BBC shall have the right
to sell to the Company and the Company shall be obligated to purchase up to the
number of shares of common stock which when added to all prior shares of common
stock sold to the Company by BBC would have an aggregate market value of not
more than $1 million.
F-26
10. Shareholders' Equity
Preferred and Common Stock
The 100 shares of issued preferred stock carry no specified dividend but
do receive any dividend approved by the Board. To date, no dividend has been
authorized by the Board. On liquidation, the preferred is paid at face value
before the common stock.
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.
Stock Option Plans
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). Such information has been determined
as if DVL has accounted for its employee stock options under the fair value
method of that statement. The effect of applying SFAS No. 123 on 2000, 2001 and
2002 pro forma net income is not necessarily representative of the effects on
reported net income for future years due to, among other things: (1) vesting
period of the stock options and(2) the fair value of additional stock options in
future years. Had compensation cost for DVL's stock option plans been determined
based upon the fair value at the grant date for awards under the plans
consistent with the methodology prescribed under SFAS No. 123, DVL's net income
in 2002, 2001, and 2000 would have been approximately $1,387, $2,854, and $505,
basic earnings per share would have been $.06, $.17, and $.03, respectively and
diluted earnings per share would have been $.03, $.03, and $.01, respectively.
The weighted-average fair value at date of grant for options granted during
the years ended December 31, 2002, 2001, and 2000 was $.12, $.07, and $.09 per
option, respectively. The fair value of options at date of grant was estimated
using the Black-Scholes option price model utilizing the following assumptions:
December 31,
----------------------------------------------
2002 2001 2000
------------- ------------- --------------
Risk-free interest rates 3.87% - 3.87% 4.98% - 4.98% 5.83% - 6.56%
Expected option life in years 10 10 10
Expected stock price volatility 85% 85% 85%
Expected divided yield 0% 0% 0%
DVL's 1996 Stock Option Plan, as amended (the "Plan") provides for the
grant of options to purchase up to 2,500,000 shares of Common Stock to
directors, officers and key employees of DVL. It includes automatic grants of
15,000 options to individuals upon their becoming non-employee directors, as
well as automatic annual grants of 15,000 options to each non- employee
director.
All options are non-qualified stock options.
F-27
As of December 31, 2002 and 2001, there were outstanding 1,503,131 and
1,473,131 ten year options, respectively. Under the Plan, the Company had
996,869 and 1,026,869 shares of common stock remaining under the Plan for future
grants of stock options as of December 31, 2002 and 2001, respectively.
The following table summarizes the activity under the Plan:
Year Ended December 31,
----------------------------------------------------------------
2002 2001 2000
------------------ ------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Options Outstanding at
Beginning of Year 1,473,131 $0.17 1,278,131 $0.18 1,175,131 $0.19
Granted 30,000 0.14 195,000 0.07 120,000 0.10
Cancelled -- -- -- -- (17,000) 0.21
--------- ----- --------- ----- --------- -----
Options Outstanding at
End of Year 1,503,131 $0.17 1,473,131 $0.17 1,278,131 $0.18
========= ===== ========= ===== ========= =====
Options Exercisable at
End of Year 1,503,131 $0.17 1,473,131 $0.17 1,278,131 $0.18
========= ===== ========= ===== ========= =====
Year Ended December 31, 2002
- ---------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -------------------------------------------------- ----------------------
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Exercise Exercise Life In Exercise
Price Shares Price Years Shares Price
- ----------- --------- -------- --------- --------- ---------
$.08 0.12 420,000 $0.09 7.36 420,000 $0.09
.13 - 0.19 235,000 0.16 5.72 235,000 0.16
.20 - 0.22 848,131 0.21 4.13 848,131 0.21
- ----------- --------- -------- --------- --------- --------
TOTAL 1,503,131 $0.17 5.28 1,503,131 $0.17
========= ======== ========= ========= ========
Warrants and Notes Redeemable in Stock
During 2001, the Company, in connection with the purchase of the residual
interests issued warrants to purchase 3 million shares of common stock with an
excercise price of $0.20 per share which expire as follows: warrant for 2
million shares - February 2011; warrant for 1 million shares - August 2011.
F-28
In 1996, the affiliates of NPM acquired 1,000,000 shares (the "Base
Shares") of DVL Common Stock and DVL issued to affiliates of NPM and NPO
warrants (the "Warrants") to purchase shares of Common Stock which, when added
to the Base Shares, aggregates 49% of the outstanding Common Stock of DVL,
adjusted for shares of common stock subsequently issued to and purchased by
affiliates of NPM and NPO, on a diluted basis expiring December 31, 2007. The
original exercise price of the Warrants was $.16 per share, subject to
applicable anti- dilution provisions and subject to a maximum aggregate exercise
price of $1,900 (the exercise price as of December 31, 2002 is $0.09 per share).
At December 31, 2002, shares underlying the Warrants and exercise price
aggregated 20,217,900 and $0.09, respectively. No warrants have been exercised
through December 31, 2002.
The Company has the option to redeem the outstanding Notes (approximately $1,951
at December 31, 2002) by issuing additional shares of Common Stock with a then
current market value (determined based on a formula set forth in the Notes),
equal to 110% of the face value of the Notes plus any accrued and unpaid
interest thereon. Because the applicable market value of the Common Stock will
be determined at the time of redemption, it is not possible currently to
ascertain the precise number of shares of Common Stock that may have to be
issued to redeem the outstanding Notes. The redemption of the notes may cause
significant dilution for current shareholders. The actual dilutive effect cannot
be currently ascertained since it depends on the number of shares to be actually
issued to satisfy the Notes. The Company currently intends to exercise at some
point in the future its redemption option to the extent it does not buy back the
outstanding Notes by means of cash tender offers or cash redemptions.
F-29
11. Income Taxes
The provision for income taxes was as follows (in thousands):
2002 2001 2000
---- ---- ----
Currently Payable
Federal $ (86) $ 80 $ --
State -- -- --
--------------------------------------
Total Current Provision (86) 80 --
--------------------------------------
Deferred Provision
Federal (397) (1,050) --
State -- -- --
--------------------------------------
Total Deferred (Benefit) (397) (1,050) --
--------------------------------------
Total (Benefit) $ (483) $ (970) $ --
======================================
The Company's effective income tax rate as a percentage of income differed from
the U.S. federal statutory rate as shown below:
U.S. Federal Statutory Rate 34.0% 34.0% 34.0%
Change in Valuation Allowance and -83.3% -85.1% -34.0%
Utilization of Unrecognized Deferred
Tax Assets
--------------------------------------
Effective Income Tax Rate -49.3% -51.1% 0.0%
======================================
Deferred taxes result from timing differences in the recognition of revenue and
expense for tax and financial reporting purposes. The components of the
provision for deferred taxes were as follows:
Allowance for Losses $ 585 $ 497 $ 324
Notes Payable Litigation Settlement (19) 206 (10)
Other 18 41 222
Carrying Value of LP Investments (44) (391) (971)
NOL Carryforwards 2,086 1,686 216
Retained Interests (1,364) (909) --
Mortgage Loans 141 (69) 87
Change in Valuation Allowance (1,800) (2,111) 132
--------------------------------------
Total Deferred (Benefit) $ (397) $ (1,050) $ 0
======================================
The significant components of deferred tax assets and liabilities were as
follows:
2002 2001
---- ----
Allowance for Losses $ 1,117 $ 1,701
Notes Payable Litigation Settlement
Redeemed Notes 990 972
Other 209 227
Carrying Value of LP Investments (1,980) (2,025)
NOL Carryforwards 20,228 22,314
Retained Interests 2,273 909
Mortgage Loans 2,608 2,750
Deferred Tax Asset 25,445 26,848
Valuation Allowance (23,998) (25,798)
------------------------
Net Deferred Tax Asset $ 1,447 $ 1,050
========================
F-30
Current taxes payable for 2002 have been reduced by $2,086 relating to the
utilization of net operating loss carryforwards. At December 31, 2002, the
Company had aggregate unused net operating loss carryforwards of approximately
$52 million, which may be available to reduce future taxable income, expiring
through 2019, with approximately $45 million expiring through 2007. The deferred
tax benefit of $1,447 resulted from a reduction in the valuation allowance, as
the Company's ability to utilize a portion of its net operation loss
carryforwards is more likely than not.
12. 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 $472 and $927 in 2002 and 2001, respectively
include $397 and $1,050 of deferred income tax benefit, respectively.
2002 2001 2000
---- ---- ----
Revenues
Real estate $ 4,683 $ 6,690 $ 6,063
Residual interests 4,373 2,802 --
Corporate/Other 38 63 --
-------- -------- --------
Total consolidated revenues $ 9,094 $ 9,555 $ 6,063
======== ======== ========
Net income (loss)
Real estate $ (677) $ 983 $ 505
Residual interests 1,596 956 --
Corporate/Other 472 927 --
-------- -------- --------
Total consolidated net income $ 1,391 $ 2,866 $ 505
======== ======== ========
Assets
Real estate $ 42,026 $ 41,734 $ 45,437
Residual interests 36,111 36,906 --
Corporate/Other 1,447 1,050 --
-------- -------- --------
Total consolidated assets $ 79,584 $ 79,690 $ 45,437
======== ======== ========
13. Subsequent Events
In December 2002 the wrap mortgage receivable from an Affiliated Limited
Partnership in the amount of $634, net of unearned interest of $650, became
delinquent. The mortgage receivable had a specific allowance for loan losses of
$334 associated with it. The Company does not expect to record a loss when the
collateral is foreclosed on.
On March 14, 2003 the property collateralizing the wrap mortgage receivable
from an Affiliated Limited Partnership was sold and the Company received net
proceeds of approximately $160 which should result in an estimated gain of
approximately $86 to be recorded in 2003.
F-31
DVL, INC. AND SUBSIDIARIES
Schedule III- REAL ESTATE AND ACCUMULATED DEPRECIATION
IN THOUSANDS
Costs Capitalized
Subsequent to Gross Amount of Which Carried
INITIAL COST Acquisition At Close of Period
----------------------- ------------ ---------------------------------
Building and Building and Building and
Description Encumbrances Land improvements improvements Land improvement Total
- ----------- ------------ ------ ------------ ------------ ------ ----------- -------
Supermarket & Land
Fort Edwards, NY $ -- $ 100 $ 316 -- $ 100 $ 316 $ 416
Warehouse
Manufacturing
Kearny, New Jersey $ -- $ 80 $ 426 $ 127 $ 80 $ 553 $ 633
Warehouse Manu-
facturing & Retail
Kearny, New Jersey $ 3,000 $ 648 $ 2,590 $ -- $ 648 $ 2,590 $ 3,238
Leasehold Improve-
ments
Bogota, New Jersey $ -- $ -- $ 19 $ 7 $ -- $ 26 $ 26
Retail Store & Land
Kearny, New Jersey $ 4,150 $ 388 $ 4,016 $ -- $ 388 $ 4,016 $ 4,404
------- ------- ------- ------- ------- ------- -------
$ 7,150 $ 1,216 $ 7,367 $ 134 $ 1,216 $ 7,501 $ 8,717
======= ======= ======= ======= ======= ======= =======
Life on Which Depreciation
Accumulated Date of Date in Latest Income Statement
Depreciation Construction Acquired is Computed
------------ ------------ -------- --------------------------
$ 4 1982 06/02 Straight-line method
40 years
$ 47 1977 11/98 Straight-line method
40 years
$ 136 1977 12/00 Straight-line method
40 years
$ 1 2000 12/00 Straight-line method
$ 38 1987 08/02 Straight-line method
40 years
-------
$ 226
=======
DVL, INC. AND SUBSIDIARIES
Schedule III- REAL ESTATE AND ACCUMULATED DEPRECIATION
IN THOUSANDS
Year ended December 31,
2002 2001 2000
------ ------ ------
(A) Reconciliation of Real Estate Owned
Balance at beginning of year $4,246 $3,763 $ 506
Additions during the year 4,471 483 3,257
------ ------ ------
Balance at end of year $8,717 $4,246 $3,763
====== ====== ======
Year ended December 31,
2002 2001 2000
------ ------ ------
(A) Reconciliation of Accumulated Depreciation
Balance at beginning of year $ 104 $ 26 $ 13
Additions during the year: Depreciation 122 78 13
------ ------ ------
Balance at end of year $ 226 $ 104 $ 26
====== ====== ======
See notes to consolidated financial statements
DVL, INC. -- TABLE 1
LONG TERM MORTGAGES DUE FROM AFFILIATED PARTNERSHIPS (4)
DECEMBER 31, 2002 (In Thousands)
Net Under-
Security Location of Mtg. lying
Affiliated Property Mortgage Unearned Loan Loan Monthly [mortgage(s)
Partnership Securing Loan Balance Interest Receiv. Balance Yield Amort. Maturity upon] Tenant(s)
- -----------------------------------------------------------------------------------------------------------------------------------
Alexandria Wellsville, NY $ 830 $ 620 $ 210 $ -- 51% $ 1 February Land and Eckerd
Associates 2027 a commercial Stores,
building (1) Inc.
Alma Alma, AR 1,803 718 1,085 591 15% $12 March Land and Wal-Mart
Associates (2) 2027 a commercial Stores,
building (1) Inc.
Ava Associates Ossipee, NH 808 547 261 -- 16% $-- February Land and Hannaford
Associates (2) 2027 a commercial Bros. Co.
building (1)
Brent Brent, AL 1,349 512 837 448 15% $ 9 February Land and Wal-Mart
Associates (2) 2027 a commercial Stores,
building (1) Inc.
Champlain Champlain, NY 1,284 650 634 -- 21% $-- January Land and Ames Dept.
Associates 2020 a commercial Stores,
building (1) Inc.
Checotah Checotah, OK 1,404 586 818 455 15% $ 9 February Land and Wal-Mart
Associates (2) 2027 a commercial Stores,
building Inc. (1)
Edna Edna, TX 3,079 2,245 834 611 23% $-- January Land and Wal-Mart
Associates 2028 a commercial Stores,
building Inc. (1)
Fairbury Fairbury, NE 1,655 712 943 521 15% $10 August Land and Wal-Mart
Associates (2) 2027 a commercial Stores,
building (1) Inc.
FYS Yakima, WA 358 71 287 -- 10% $ 1 August Land and a Kroger
Associates 2021 supermarket Co.
Hoosick Falls Hoosick Falls, 1,292 622 670 -- 15% $10 August Land and a GU Markets,
Associates NY 2021 supermarket Inc.
DVL, INC. -- TABLE 1: CONTINUED
LONG TERM MORTGAGES DUE FROM AFFILIATED PARTNERSHIPS (4)
DECEMBER 31, 2002 (In Thousands)
Net Under-
Location of Mtg. lying Security
Affiliated Property Mortgage Unearned Loan Loan Monthly [mortgage(s)
Partnership Securing Loan Balance Interest Receiv. Balance Yield Amort. Maturity upon] Tenant(s)
- -------------------------------------------------------------------------------------------------------------------------------
Jena Jena, LA $ 2,568 $ 1,948 $ 620 $ 545 35% $ 1 February Land and Wal-Mart
Associates 2027 a commercial Stores, Inc.
building (1)
Orange Park Jacksonville, 1,381 534 847 795 12% $9 with January Land and Toys "R" Us,
Associates FL a final 2020 a commercial Inc.
pmt. of building (1)
$672
Port Isabel Port Isabel, 1,976 745 1,231 644 15% $12 February Land and Wal-Mart
Associates(2) TX 2027 a commercial Stores, Inc.
building (1)
Stigler Stigler, OK 2,480 1,899 581 460 28% $ 2 August Land and Wal-Mart
Associates 2027 a commercial Stores, Inc.
building (1)
St. Albans St. Albans, 1,566 703 863 403 30% $15 May Land and a Fonda Group
Associates VT 2029 commercial
building (1)
Waldron Waldron, AR 2,953 2,218 735 592 22% $ -- December Land and a Wal-Mart
Associates 2031 commercial Stores, Inc.
building (1)
Watseka Watseka, IL 1,022 249 773 627 12% Varying December Land and a K-Mart
Associates 2015 commercial Corporation(3)
building (1)
------- ------- ------- -------
$27,808 $15,579 $12,229 $ 6,692
- ----------
(1) These loans are wrap-around loans.
(2) These loans were restructured as part of the Limited Partner Settlement.
The settlement may have the effect of reducing DVL's yield in the future,
which reduced yield is dependent on the actual additional debt service
received on these mortgages in the future.
(3) Building is currently vacant, tenant has filed for bankruptcy and
dissaffirmed its lease. (4) DVL's net investment in these mortgages was
$5,537, and $6,494, at December 31, 2002 and 2001, respectively.
DVL, INC. -- TABLE 2
LONG TERM MORTGAGES, ACQUIRED FROM KENBEE, DUE FROM
AFFILIATED PARTNERSHIPS (1)(5)
DECEMBER 31, 2002 (In Thousands)
Partner- Under- Net Amt. Net
Location ship lying of Col- Mtg.
of Property Mortgage Loan lateral Loans
Affiliated Partnership Securing Loan Balance Balance Pledged Recvable Maturity Tenant
- -----------------------------------------------------------------------------------------------------------------------------------
Aledo Associates LP Aledo, IL (2) $ 1,755 $ 901 $ 854 $ 1,144 November 2018 Wal-Mart Stores, Inc.
Caldwell Associates Caldwell, TX (2) 1,545 741 804 1,007 May 2019 Wal-Mart Stores, Inc.
Cherokee Associates Woodstock, GA (2) 2,803 2,349 454 2,363 July 2023 Wal-Mart Stores, Inc.
Clinton Associates Clinton, IL (2) 3,305 695 2,610 1,789 June 2029 Wal-Mart Stores, Inc.
Columbus Associates Columbus, TX (2) 3,788 802 2,986 1,724 December 2029 Wal-Mart Stores, Inc.
Covington Associates Covington, GA (2) 4,691 1,183 3,508 1,797 January 2030 Wal-Mart Stores, Inc.(4)
Douglas Associates Douglas, GA (2) 2,070 866 1,204 2,047 December 2023 Wal-Mart Stores, Inc.
operating as - Buds
Elmira Associates Elmira, NY (2) 704 -- 704 285 November 2021 Fays Drug Company, Inc.
Iowa Park Associates LP Iowa Park, TX (2) 1,659 568 1,091 849 March 2021 Wal-Mart Stores, Inc.
Lawrenceburg Associates Lawrenceburg, KY (2) 2,924 638 2,286 942 December 2029 Wal-Mart Stores, Inc.
Marshall Associates LP Marshall, IL (2) 1,503 804 699 1,015 November 2018 Wal-Mart Stores, Inc.
Mt. Pleasant Associates LP Mt. Pleasant, IA (2) 2,185 1,073 1,112 1,381 November 2019 Wal-Mart Stores, Inc.
Robstown Associates LP Robstown, TX (2) 1,828 715 1,113 789 October 2020 Wal-Mart Stores, Inc.(4)
Sonya Associates LP Booneville, MO (2) 1,480 844 636 1,096 June 2018 Wal-Mart Stores, Inc.
Southfield Associates Southfield, MI (3) 3,583 520 3,063 765 July 2026 Pitney-Bowes, Inc.
------- ------- ------- -------
$35,823 $12,699 $23,124 $18,993
(1) These loans were acquired pursuant to the Limited Partner Settlement from
Kenbee. DVL's loan balance equals it's net investment in the related loan
due previously from Kenbee, less specific write-downs on certain loans
based upon the anticipated cash flow to be generated by each loan.
(2) The loans due from these partnerships are secured by mortgages upon land
and commercial buildings.
(3) The loans due from these partnerships are secured by mortgages upon land
and office buildings.
(4) Building is currently vacant, however, tenant is obligated under the terms
of the lease to continue to pay rent.
(5) DVL's total loan balances of these mortgages were $18,993, and $21,449, at
December 31, 2002 and 2001, respectively. The decrease resulted from the
satisfaction of certain mortgage indebtedness (eg. Winder) and collections
on certain mortgages.