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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ______________________
Commission file number: 1-8356
DVL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2892858
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
70 EAST 55TH STREET, NEW YORK, NEW YORK 10022
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (212) 350-9900
-----------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes: X No:
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes: No: X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
CLASS OUTSTANDING AT AUGUST 12, 2003
----- ------------------------------
Common Stock, $.01 par value 21,713,563
DVL, INC. AND SUBSIDIARIES
INDEX
Part I. Item 1 - Financial Information: PAGES
-----
Consolidated Balance Sheets -
June 30, 2003 (unaudited) and
December 31, 2002 1-2
Consolidated Statements of Operations -
Three Months Ended June 30, 2003 (unaudited)
and 2002 (unaudited) 3,5
Consolidated Statements of Operations -
Six Months Ended June 30, 2003 (unaudited)
and 2002 (unaudited) 4,5
Consolidated Statement of Shareholders' Equity -
Six Months Ended June 30, 2003 (unaudited) 6
Consolidated Statements of Cash Flows -
Six Months ended June 30, 2003 (unaudited)
and 2002 (unaudited) 7-8
Notes to Consolidated Financial Statements (unaudited) 9-16
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-23
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 23
Item 4 - Controls and Procedures 23
Part II. Other Information:
Item 6 - Exhibits and Reports on Form 8-K 24
Signature 25
Exhibits 26-28
Part I - Financial Information
Item 1. Financial Statements
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2003 2002
------------- -------------
(unaudited)
ASSETS
Residual interests in securitized portfolios $ 39,050 $ 36,111
-------- --------
Mortgage loans receivable from affiliated
partnerships (net of unearned interest of
$14,772 for 2003 and $15,579 for 2002) 28,930 31,222
Allowance for loan losses 2,536 2,870
-------- --------
Net mortgage loans receivable 26,394 28,352
-------- --------
Cash (including restricted cash of $181 and
$177 for 2003 and 2002) 2,768 2,373
Investments
Real estate at cost (net of accumulated
depreciation of $325 for 2003 and $226 for 2002) 8,702 8,490
Real estate lease interests 862 945
Affiliated limited partnerships (net of allowances
for losses of $506 and $538, for 2003 and 2002) 1,062 1,066
Deferred income tax benefits 1,804 1,447
Other assets 772 800
-------- --------
Total assets $ 81,414 $ 79,584
======== ========
(continued)
See notes to consolidated financial statements.
1
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(continued)
June 30, December 31,
2003 2002
------------ ------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable - residual interests $ 35,903 $ 33,416
Underlying mortgages payable 17,622 19,391
Long-term debt - affiliates 2,182 2,084
Long-term debt - other 8,625 8,901
Notes payable - litigation settlement 1,676 1,735
Redeemed notes payable - litigation settlement 794 810
Fees due to affiliates 395 573
Line of credit 283 --
Security deposits, accounts payable and accrued
liabilities (including deferred income of $301
for 2003 and $18 for 2002) 613 296
-------- --------
Total liabilities 68,093 67,206
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock $10.00 par value, authorized,
issued and outstanding 100 shares 1 1
Preferred stock, $.01 par value, authorized 5,000,000
Common stock, $.01 par value, authorized - 90,000,000
issued and outstanding 21,713,563 shares for 2003
and 2002 217 217
Additional paid-in capital 95,798 95,785
Deficit (82,695) (83,625)
-------- --------
Total shareholders' equity 13,321 12,378
-------- --------
Total liabilities and shareholders' equity $ 81,414 $ 79,584
======== ========
See notes to consolidated financial statements.
2
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
Three Months Ended
June 30,
----------------------
2003 2002
---------- ----------
Income from affiliates:
Interest on mortgage loans $ 659 $ 735
Gain on satisfaction of mortgage loans 40 252
Partnership management fees 70 78
Management fees 48 108
Transaction and other fees from partnerships 1 50
Distributions from investments 23 16
Income from others:
Interest income - residual interests 1,154 1,084
Net rental income (including depreciation
and amortization of $46 for 2003 and $25
for 2002) 231 129
Distributions from investments 35 29
Other income and interest 13 13
---------- ----------
2,274 2,494
---------- ----------
Operating expenses:
General and administrative 420 368
Asset Servicing Fee - NPO Management LLC 168 164
Legal and professional fees 79 106
Loss on redemption of notes payable -- 60
Interest expense:
Underlying mortgages 340 412
Notes payable - residual interests 721 689
Affiliates 73 73
Litigation Settlement Notes 71 82
Others 186 137
---------- ----------
2,058 2,091
---------- ----------
Income before income tax benefit 216 403
Income tax benefit (153) (380)
---------- ----------
Net income $ 369 $ 783
========== ==========
(continued)
See notes to consolidated financial statements.
3
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
Six Months Ended
JUNE 30,
----------------------
2003 2002
---------- ----------
Income from affiliates:
Interest on mortgage loans $ 1,380 $ 1,504
Gain on satisfaction of mortgage loans 88 252
Partnership management fees 139 152
Management fees 143 154
Transaction and other fees from partnerships 37 69
Distributions from investments 53 46
Income from others:
Interest income - residual interests 2,250 2,176
Net rental income (including depreciation
and amortization of $95 for 2003 and $53
for 2002) 531 328
Distributions from investments 35 29
Other income and interest 22 22
---------- ----------
4,678 4,732
---------- ----------
Operating expenses:
General and administrative 819 759
Asset Servicing Fee - NPO Management LLC 332 325
Legal and professional fees 137 196
Loss on redemption of notes payable -- 60
Interest expense:
Underlying mortgages 697 882
Notes payable - residual interests 1,411 1,388
Affiliates 144 144
Litigation Settlement Notes 139 162
Others 376 263
---------- ----------
4,055 4,179
---------- ----------
Income before income tax benefit 623 553
Income tax benefit (307) (380)
---------- ----------
Net income $ 930 $ 933
========== ==========
(continued)
See notes to consolidated financial statements.
4
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
(unaudited)
(continued)
Three Months Ended Six Months Ended
JUNE 30, JUNE 30,
------------------------ --------------------------
2003 2002 2003 2002
----------- ---------- ------------ -----------
Basic earnings per share:
Net income $ .02 $ .04 $ .04 $ .04
=========== ========== ============ ===========
Diluted earnings per share:
Net income $ .01 $ .02 $ .02 $ .02
=========== =========== ============ ===========
Weighted average shares outstanding - basic 21,713,563 21,713,563 21,713,563 21,713,563
Effect of dilutive securities 33,765,095 34,160,221 33,091,210 37,839,780
----------- ----------- ------------ ----------
Weighted average shares outstanding - diluted 55,478,658 55,873,784 54,804,773 59,553,343
=========== =========== ============ ==========
See notes to consolidated financial statements.
5
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands except share data)
(unaudited)
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------ ------ ---------- ------- -----
Balance-January 1, 2003 100 $ 1 21,713,563 $ 217 $ 95,785 $ (83,625) $12,378
Net income -- -- -- -- -- 930 930
Effect of issuance and
repricing of options -- -- -- -- 13 -- 13
----- ------ ---------- ------- -------- --------- -------
Balance-June 30, 2003 100 $ 1 21,713,563 $ 217 $ 95,798 $ (82,695) $13,321
===== ====== ========== ======= ======== ========= =======
See notes to consolidated financial statements.
6
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
JUNE 30,
------------------
2003 2002
------- -------
Cash flows from operating activities:
Income before adjustments $ 930 $ 933
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Interest income accreted on residual interests (270) (190)
Accrued interest added to indebtedness 132 119
Gain on satisfactions of mortgage loans (88) (252)
Loss on redemption of notes payable - 60
Issuance and repricing of options 13 -
Depreciation 88 44
Deferred income tax benefits (357) (380)
Amortization of unearned interest on loan receivables (157) (132)
Amortization of real estate lease interests 83 67
Imputed interest on notes 139 162
Stock issued for services received -- 32
Net decrease (increase) in prepaid financing and
other assets 28 (79)
Net increase (decrease) in accounts payable, security
deposits and accrued liabilities 34 (699)
Net decrease in fees due to affiliates (178) (178)
Net increase in deferred income 283 287
------- -------
Net cash provided by (used in) operating activities 680 (206)
------- -------
Cash flows from investing activities:
Collections on residual interests 7 --
Collections on loans receivable 1,903 2,397
Real estate acquisitions and capital improvements -- (25)
Net decrease in affiliated limited partnership
interests and other investments 4 12
------- -------
Net cash provided by investing activities 1,914 2,384
------- -------
(continued)
See notes to consolidated financial statements
7
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
(continued)
Six Months Ended
JUNE 30,
-------------------
2003 2002
-------- --------
Cash flows from financing activities:
Proceeds from new borrowings $ 283 $ 400
Repayment of indebtedness (508) (491)
Payments on underlying mortgages payable (1,769) (1,822)
Payments on notes payable - residual interest (189) (214)
Payments related to debt redemptions (16) (131)
-------- --------
Net cash used in financing activities (2,199) (2,258)
-------- --------
Net increase (decrease) in cash 395 (80)
Cash, beginning of period 2,373 2,987
-------- --------
Cash, end of period $ 2,768 $ 2,907
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,647 $ 2,545
======== ========
Supplemental disclosure of non-cash investing and
financing activities:
Residual interests in securitized portfolios -
increase (decrease) $ 2,676 $ (107)
======== ========
Notes payable - residual interests - increase
(decrease) $ 2,676 $ (107)
======== ========
Foreclosure on mortgage loan receivable
collateralized by real estate $ 300 $ 416
======== ========
See notes to consolidated financial statements.
8
DVL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in thousands unless otherwise noted
(except share and per share data)
1. Basis of Presentation
In the opinion of DVL, Inc. ("DVL" or the "Company"), the accompanying
financial statements contain all adjustments (consisting of only normal
accruals) necessary in order to present a fair presentation of the financial
position of DVL and the results of its operations for the periods set forth
herein. The results of the Company's operations for the three and six months
ended June 30, 2003 should not be regarded as indicative of the results that may
be expected from its operations for the full year. Certain amounts from the
three and six months ended June 30, 2002 have been reclassified to conform to
the presentation for the three and six months ended June 30, 2003. For further
information, refer to the consolidated financial statements and the accompanying
notes included in DVL's Annual Report on Form 10-K for the year ended December
31, 2002.
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
June 30, 2003 was $3,376. Payments, if any, due under this guaranty are payable
after August 15, 2020.
In accordance with the purchase agreements, from the acquisition dates
through June 30, 2003, the residual interests in securitized portfolios and the
notes payable were increased by approximately $2,143 as a result of purchase
price adjustments.
The following table reconciles the initial purchase price with the carrying
value at June 30, 2003:
Initial purchase price $ 35,791
Adjustments to purchase price 2,143
Principal payments (48)
Accretion 1,164
--------
$ 39,050
========
9
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
2003 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.
3. Mortgage Loans Receivable
Virtually all of DVL's loans receivable arose out of transactions in which
affiliated limited partnerships purchased commercial, office and industrial
properties typically leased on a long-term basis to unaffiliated creditworthy
tenants. Each mortgage loan is collateralized by a lien, subordinate to senior
liens, on real estate owned by the affiliated limited partnership which owns
such property. DVL's loan portfolio is comprised of long-term wrap-around and
other mortgage loans due from affiliated limited partnerships.
4. Real Estate
The Company, directly and through various wholly owned subsidiaries,
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) An 89,000 square foot building in Kearny, NJ, which adjoins the property
described above, currently leased to K-Mart Stores, Inc. ("K-Mart").
(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
entered into an agreement to sell a portion of the property for $185 cash. There
is no assurance that the transaction will be completed. 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.
(4) A vacant 32,000 square foot former Ames Department Store and approximately
one acre of land underlying the building. The property, which was acquired
through foreclosure on a mortgage, was recorded at $300, which was the net
carrying value of the mortgage at the date of foreclosure and was less than the
fair value at that date.
5. Notes Payable - Litigation Settlement/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 a 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. The
Company has the option to redeem the outstanding Notes by issuing shares of
Common Stock (See Note 8, Shareholder's Equity).
10
To date, the Company has sent redemption letters to note holders who held
Notes that aggregated approximately $1,145, offering to pay the Notes in cash at
face value plus accrued interest of approximately $49. As of June 30, 2003, $400
has been paid and the remaining $794 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 has conducted three cash tender offers at
a tender offer price of $0.12 per $1.00 principal amount of Notes, resulting in
the retirement of approximately $9,016 principal amount of Notes.
Accordingly, notes with an aggregate principal amount of approximately
$1,947 remain outstanding as of June 30, 2003 (carrying value $1,676).
6. Transactions with Affiliates
A. The Company has provided management, accounting, and administrative services
to certain entities which are affiliated with NPO Management, LLC ("NPO")
and/or, Blackacre Capital, LLC ("Blackacre"), which are entities engaged in real
estate lending and management transactions and are affiliated with certain
stockholders and insiders of the Company. The fees received from management
service contracts are as follows:
Fees Received Fees Received Fees Received Fees Received
For The Three For The Three For The Six For The Six
Months Ended Months Ended Months Ended Months Ended
AFFILIATE OF 06/30/03 06/30/02 06/30/03 06/30/02
- ------------ ------------- ------------- ------------- -------------
NPO and Blackacre $ 12 $ 7 $ 25 $ 13
NPO (1) $ 18 $ 71 $ 123 $ 167
(1) Of the total cash received for the six months ended June 30, 2003 and 2002,
$39 and $78 respectively, represented prior deferred fees paid in the first
quarter of 2003 and 2002. The Company is entitled to a current fee of $2
per month and a deferred fee of $7 per month paid annually in the first
quarter of the fiscal year. In addition, the Company received annual
incentive fees of $48 and $53 during the six months ending June 30, 2003
and 2002, respectively.
B. Millennium Financial Services, an affiliate of NPO, has received fees
representing compensation, and reimbursement of expenses for collection
services as follows:
Fees For The Fees For The Fees For the Fees For The
Three Months Three Months Six Months Six Months
ENDED 06/30/03 ENDED 06/30/02 ENDED 6/30/03 ENDED 6/30/02
-------------- -------------- ------------- -------------
$ 48 $ 55 $ 95 $ 85
In connection with the sales of property owned by affiliated limited
partnerships, a licensed real estate brokerage affiliate of the Pembroke Group
was paid brokerage fees as follows:
Fees For The Fees For The Fees For The Fees For The
Three Months Three Months Six Months Six Months
ENDED 06/30/03 ENDED 06/30/02 ENDED 06/30/03 ENDED 06/30/02
-------------- -------------- ------------- -------------
$ -- $ 37 $ 12 $ 37
11
The Pembroke Group and the Millenium Group, whose members are affiliates of NPO,
were issued a total of 400,000 shares of common stock, valued at $32, during the
first quarter of 2002 for additional services rendered to the Company outside
the scope of the Asset Servicing Agreement (defined below).
C. In connection with the acquisitions of residual interests in Receivables II-A
and Receivables II-B, affiliates of NPO and the special director of the Company
will be paid investment banking fees of $900 in the aggregate for their services
in connection with the origination, negotiation and structuring of the
transactions. The fee is payable without interest, over 30 months starting
January, 2002, from a portion of the monthly cash flow generated by the
acquisitions. At June 30, 2003, $360 remained payable.
D. Interest expense on amounts due to affiliates was as follows:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
06/30/03 06/30/02 06/30/03 06/30/02
------------ ------------ ---------- ----------
Blackacre Capital Group, LLC $ 71 $ 71 $ 141 $ 137
NPO 2 2 3 7
------------ ------------ ---------- ----------
$ 73 $ 73 $ 144 $ 144
============ ============ ========== ==========
E. The Company recorded fees to NPO of $332 and $325 for the six months ended
June 30, 2003 and 2002, respectively, plus other expenses of $3 in each period
under the Asset Servicing Agreement (the "Asset Servicing Agreement") between
the Company and NPO, pursuant to which NPO provides the Company with
administrative and advisory services relating to the assets of the Company and
its Affiliated Limited Partnerships. During 2003 and 2002 the Company provided
office space under the Asset Servicing Agreement to NPO consisting of 228 square
feet of the Company's New York location.
7. 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 the six months ended June 30, 2003 and 2002.
During the six months ended June 30, 2003 and 2002 the Company expensed
approximately $107 and $218, respectively, for amounts due to the fund of which
approximately $0 was accrued at June 30, 2003 and 2002. These costs have been
netted against the gain on satisfaction of mortgages and/or interest on mortgage
loans, where appropriate.
The real estate lease interest held by the Company's subsidiary,
Professional Service Corporation, 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.
DVL is a limited recourse guarantor on debt of approximately $2,302 which is
secured soley by DVL's interest in the property.
12
8. Shareholder's Equity
The Company has the option to redeem the outstanding Notes (approximately
$1,947 at June 30, 2003) 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.
In 1996, affiliates of NPM Capital, LLC ("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, including without limitation, anti-
dilution protection from any redemption of the Notes and subject to a maximum
aggregate exercise price of $1,916. At June 30, 2003, shares underlying the
Warrants aggregated 20,082,903 at an exercise price of $0.10. No warrants have
been exercised through June 30, 2003.
The actual dilutive effect of the Warrants and the Notes cannot be currently
ascertained since it depends on the number of shares to be actually issued to
satisfy the Notes and the Warrants. 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.
RESTRICTION ON CERTAIN TRANSFERS OF COMMON STOCK: 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.
13
9. Earnings per share (unaudited)
The following tables present the computation of basic and diluted per share data
for the three and six months ended June 30, 2003 and 2002.
SIX MONTHS ENDED JUNE 30,
-------------------------
2003 2002
----------------------------------- -------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF PER SHARE NUMBER OF PER SHARE
AMOUNT SHARES AMOUNT AMOUNT SHARES AMOUNT
------ ---------- --------- ------ ----------- ---------
Basic EPS,
Income available to common stockholders $ 930 21,713,563 $ .04 $ 933 21,713,563 $ 0.04
======== =======
Effect of litigation settlement notes 139 12,757,935 162 15,311,474
Effect of dilutive stock options and warrants -- 20,333,275 -- 22,528,306
------ ---------- ------ ------------
Diluted EPS,
Income available to common stockholders $1,069 54,804,773 $ .02 $1,095 59,553,343 $ 0.02
====== =========== ======== ====== ============ =======
THREE MONTHS ENDED JUNE 30,
---------------------------
2003 2002
----------------------------------- -------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF PER SHARE NUMBER OF PER SHARE
AMOUNT SHARES AMOUNT AMOUNT SHARES AMOUNT
------ ---------- --------- ------ ----------- ---------
Basic EPS,
Income available to common stockholders $ 369 21,713,563 $ .02 $ 783 21,713,563 $ 0.04
======== =======
Effect of litigation settlement notes 71 13,420,602 82 12,629,695
Effect of dilutive stock options and warrants -- 20,344,493 -- 21,530,526
----- ---------- ----- ------------
Diluted EPS,
Income available to common stockholders $ 440 55,478,658 $ .01 $ 865 55,873,784 $ 0.02
==== =========== ======== ===== ============ =======
14
At June 30, 2003 and 2002 there were 3,884,085 and 4,008,131, respectively,
potentially dilutive options and warrants excluded from the computation of
Diluted EPS because the exercise price was greater than the average market price
of the Common Stock, thereby resulting in an anti-dilutive effect.
The following pro forma information regarding net income and earnings per
share is required by Statement of Financial Accounting Standards ("SFAS") No.
123 "Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", which was released in
December 2002 as an amendment of SFAS No. 123.
Six Months Ended Three Months Ended
JUNE 30, JUNE 30,
---------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 930 $ 933 $ 369 $ 783
Stock-based employee compensation
expense included in Reported net
income, net of related tax effects -- -- -- --
Stock-based employee compensation
determined under the fair value
based method, net of related tax
effects -- -- -- --
------- ------- ------- -------
Proforma net income $ 930 $ 933 $ 369 $ 783
======= ======= ======= =======
Earnings per share:
Basic $ 0.04 $ 0.04 $ 0.02 $ 0.04
======= ======= ======= =======
Diluted $ 0.02 $ 0.02 $ 0.01 $ 0.02
======= ======= ======= =======
Proforma earnings per share
Basic $ 0.04 $ 0.04 $ 0.02 $ 0.04
======= ======= ======= =======
Diluted $ 0.02 $ 0.02 $ 0.01 $ 0.02
======= ======= ======= =======
For the three and six months ended June 30, 2003 the Company recognized an
expense of $13 relating to the issuance and repricing of options issued to a
consultant.
15
10. Segment Information
The Company has two reportable segments; real estate and residual interests. The
real estate business is comprised of real estate assets, mortgage loans on real
estate, real estate management and investments in affiliated limited
partnerships which own real estate. The residual interests business is comprised
of investments in residual interests in securitized receivables portfolios. The
corporate/other net income of $264 and $339 in 2003 and 2002 respectively,
include $357 and $380 of deferred income tax benefit, respectively.
JUNE 30,
--------------------
2003 2002
------- -------
Revenues
Real estate $ 2,406 $ 2,534
Residual interests 2,250 2,176
Corporate/Other 22 22
------- -------
Total consolidated revenues $ 4,678 $ 4,732
======= =======
Net income
Real estate $ (151) $ (160)
Residual interests 830 754
Corporate/Other 251 339
------- -------
Total consolidated net income $ 930 $ 933
======= =======
Assets
Real estate $40,560 $39,625
Residual interests 39,050 36,989
Corporate/other 1,804 1,430
------- -------
Total consolidated assets $81,414 $78,044
======= =======
11. Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("FAS 109"), which requires the Company
to recognize deferred tax assets and liabilities for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In addition, FAS
l09 requires the recognition of future tax benefits such as net operating loss
carryforwards, to the extent that realization of such benefits is more likely
than not.
For the six months ended June 30, 2003 and 2002 the Company recognized $357
and $380, respectively of income tax benefit as a result of a reduction in the
valuation allowance on deferred tax assets.
16
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands)
This June 30, 2003 Quarterly Report on Form 10-Q contains statements which
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Those statements include statements regarding the
intent, belief or current expectations of DVL and its management team. DVL's
stockholders and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements. Such risks and uncertainties
include, among other things, general economic conditions and other risks and
uncertainties that are discussed herein and in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002.
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 liabilities
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.
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.
17
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 historical appraisals. Management believes that generally, the values
of such properties have not changed as the tenants, lease terms and timely
payment of rent have not changed. When any such changes have occurred,
management 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.
LIMITED PARTNERSHIPS: 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
DVL had net income of $369 and $783 for the three months ended June 30, 2003 and
2002, respectively.
Interest income on mortgage loans from affiliates decreased (2003 - $659, 2002 -
$735) and interest expense on underlying mortgages decreased (2003 - $340, 2002
- - $412) principally because the Company disposed of two mortgage loans, repaying
the underlying mortgages and foreclosed on two mortgage loans which were
delinquent.
The gain on satisfaction of mortgage loans was as follows:
Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
------------------ ------------------
$ 40 $ 252
The gain on satisfaction of mortgage loans results when the net proceeds on the
satisfaction of a mortgage loan is greater than its carrying value.
Transaction and other fees from affiliated limited partnerships were as follows:
Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
------------------ ------------------
$ 1 $ 50
18
Transaction fees are earned by the Company in connection with sales of
partnership properties, and the Company sold fewer partnership properties during
the second quarter 2003 compared to the second quarter 2002.
Interest income on residual interests (2003 - $1,154, 2002 - $1,084) and
interest expense on the related notes payable (2003 - $721, 2002 - $689)
remained consistent as the periodic payment receivables continued to perform.
Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
------------------ ------------------
Net rental income from others $ 231 $ 129
Gross rental income from others $ 605 $ 583
The increase in net rental income from 2002 to 2003 was the result of higher
gross rents obtained from a temporary tenant at the property which the Company
operates under a master lease. It is not anticipated that this increase will
continue.
General and administrative expenses increased (2003 - $420, 2002 - $368). The
primary reason for the increase was greater stockholder and insurance costs as
well as franchise taxes.
The asset servicing fee due from the Company to NPO increased (2003 - $168, 2002
- - $164) pursuant to the terms of the agreement.
Legal and professional fees decreased (2003 - $79, 2002 - $106) as a result of
legal fees relating to the preparation of proxy materials which were incurred
only in 2002.
In 2002 the Company recognized a $60 loss from redeeming notes at face value
which were carried at a discount.
Interest expense on the litigation settlement notes decreased (2003 - $71, 2002
- - $82) as a result of the reduction in the principal amount of such notes
outstanding, due to redemptions by the Company during 2002.
Interest expense relating to other debts increased (2003 - $186, 2002 - $137)
because the Company borrowed $3,968 in August 2002 to finance the purchase of
real estate.
In 2003 and 2002 the Company recognized $153 and $380, respectively of income
tax benefit.
19
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
DVL had net income of $930 and $933 for the six months ended June 30, 2003 and
2002
Interest income on mortgage loans from affiliates decreased (2003 - $1,380, 2002
- - $1,504) and interest expense on underlying mortgages decreased (2003 - $697,
2002 - $882). During 2002 and 2003, the Company disposed of two mortgage loans,
which had underlying mortgages and stopped accruing interest income on two
mortgage loans which were delinquent.
Gain on satisfaction of mortgage loans were as follows:
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
---------------- ----------------
$ 88 $ 252
The gains in 2002 and 2003 were a result of the Company collecting net proceeds
on the satisfaction of mortgage loans that were greater than the carrying
values.
Transaction and other fees from affiliated limited partnerships were as follows:
Six Months Ended Six Months Ended,
June 30, 2003 June 30, 2002
---------------- -----------------
$ 37 $ 69
Transaction fees were earned by the Company in connection with the sales of
partnership properties and the Company sold fewer partnership properties during
2003 compared to 2002.
Interest income on residual interests (2003 - $2,250, 2002 - $2,176) and
interest expense on the related notes payable (2003 - $1,411, 2002 - $1,388)
remained consistent as the periodic payment receivables continued to perform.
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
------------------- ------------------
Net rental income from others $ 531 $ 328
Gross rental income from others $ 1,335 $ 1,156
The increase in net rental income from 2002 to 2003 was the result of higher
gross rents as the Company obtained a temporary tenant at a higher rent for the
property which the Company operates under a master lease. It is not anticipated
that this increase will continue.
General and administrative expenses increased to $819 in 2003 from $759 in 2002.
The primary reason for the increase was greater stockholder and insurance costs
as well as franchise taxes.
The asset servicing fee due from the Company to NPO increased (2003 - $332, 2002
- - $325) pursuant to the terms of the agreement.
Legal and professional fees decreased (2003 - $137, 2002 - $196) as a result of
the issuance of stock valued at $32 for services rendered to the Company and
legal fees relating to the preparation of proxy materials in 2002.
In 2002 the Company recognized a $60 loss from redeeming notes at face value
which were carried at a discount.
Interest expense on the litigation settlement notes decreased (2003 - $139, 2002
- - $162) as a result of the redemption of litigation settlement notes during
2002.
20
Interest expense relating to other debts increased (2003 - $376, 2002 - $263)
primarily due to the Company borrowing $3,968 in August 2002 to finance the
purchase of real estate.
In 2003 and 2002 the Company recognized $307 and $380, respectively of income
tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operations is generated principally from
rental income from its leasehold interests and ownership of real estate,
distributions in connection with the residual interests in securitized
portfolios, interest on its mortgage portfolio, management fees 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 August
2004. The Company believes that its current liquid assets will be sufficient to
fund operations on a short- term basis as well as on a long-term basis.
The Company obtained an unsecured line of credit on December 15, 2002 which
provides for aggregate borrowings of up to $500 with an interest rate of prime
plus one percent per annum and terminates December 15, 2003. To date the Company
has drawn $283 on the line of credit in order to retire debt. The terms of the
line of credit provide that interest shall be payable on the first day of each
month.
The Company's member interests in Receivables II-A and Receivables II-B
should provide significant liquidity to the Company.
The purchase agreements with respect to the acquisition of such member
interests contain annual minimum and maximum levels of cash flow that will be
retained by the Company after the payment of interest and principal on the notes
payable, which are as follows:
YEARS MINIMUM MAXIMUM
----- ------- -------
2003 to 2009 $ 743 $ 880
2010 to final payment $ 1,050 $ 1,150
on the notes*
*Final payment on the notes payable expected 2016 related to the Receivables
IIA transaction and 2018 for the Receivables IIB transaction.
The Company believes it will receive significant cash flow after final
payment of the notes payable.
21
ACQUISITIONS AND FINANCINGS
Loans which are scheduled to become due through 2008 are as follows:
Outstanding
Original Principal
Loan Balance at Due
Purpose Creditor Amount June 30, 2003 Date
- ------- -------- ------------- -------------- ----
Repurchase of Notes
Issued by the Company Blackacre(1) $ 1,560 $ 2,182 09/30/03
Purchase of Mortgages Unaffiliated Bank(2)(3) $ 1,000 $ 520 05/01/06
Purchase of a Mortgage
and Refinancing of
Existing Mortgages Unaffiliated Bank(2)(3) $ 1,450 $ 681 11/30/06
Purchase of Real Estate
Assets Unaffiliated Bank(4) $ 4,500 $ 4,500 09/01/04
Purchase of Mortgages Unaffiliated Bank(5)(2) $ 400 $ 246 06/01/06
Purchase of Real Estate Unaffiliated Bank(6) $ 2,668 $ 2,623 06/30/08
Assets
(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. The Company intends to refinance the outstanding
principal amount prior to its scheduled due date.
(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
$2,285.
22
IMPACT OF INFLATION AND CHANGES IN INTEREST RATES
The Company's portfolio of mortgage loans made to affiliated limited
partnerships consists primarily of loans made at fixed rates of interest.
Therefore, increases or decreases in market interest rates are generally not
expected to have an effect on the Company's earnings. Other than as a factor in
determining market interest rates, inflation has not had a significant effect on
the Company's net income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DVL has no substantial cash flow exposure due to interest rate changes for
long term debt obligations, because a majority of the long-term debt is at fixed
rates. DVL primarily enters into long-term debt for specific business purposes
such as the repurchase of debt at a discount, the acquisition of mortgage loans
or the acquisition of real estate.
DVL's ability to realize value on its mortgage holdings is sensitive to
interest rate fluctuations in that the sales prices of real property and
mortgages vary with interest rates.
ITEM 4. CONTROLS AND PROCEDURES
In designing and evaluating the disclosure controls and procedures, the
Company's management recognized that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurances of achieving
the desired control objectives, as ours are designed to do, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
The Company 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, as of June 30, 2003, our
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic SEC reports.
23
Part II - Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits: 31.1 Chief Executive Officer's Certificate, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certificate, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer's Certificate, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(B) There were no reports of Form 8-K filed during the three months ended
June 30, 2003.
24
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DVL, INC.
By: /s/ JAY THAILER
---------------------------
Jay Thailer, Executive Vice
President and Chief Financial
Officer
August 12, 2003
25