10-Q 1 c25330_10-q.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from__________________ to ______________________ Commission file number: 1-8356 DVL, Inc. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-2892858 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 70 East 55th Street, New York, New York 10022 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (212) 350-9900 -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes: _X_ No: ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Class Outstanding at August 13, 2002 ----------------------------- ------------------------------ Common Stock, $.01 par value 21,713,563 DVL, INC. AND SUBSIDIARIES INDEX Part I. Item 1 - Financial Information: Pages ----- Consolidated Balance Sheets - June 30, 2002 (unaudited) and December 31, 2001 1-2 Consolidated Statements of Operations - Three Months Ended June 30, 2002 (unaudited) and 2001 (unaudited) 3,5 Consolidated Statements of Operations - Six Months Ended June 30, 2002 (unaudited) and 2001 (unaudited) 4,5 Consolidated Statement of Shareholders' Equity - Six Months Ended June 30, 2002 (unaudited) 6 Consolidated Statements of Cash Flows - Six Months ended June 30, 2002 (unaudited) and 2001 (unaudited) 7-8 Notes to Consolidated Financial Statements (unaudited) 9-15 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 16-22 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 22 Part II. Other Information: Item 6 - Exhibits and Reports on Form 8-K 23 Signature 24 Exhibits 25 Part I - Financial Information Item 1. Financial Statements DVL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) June 30, December 31, 2002 2001 ----------- ------------ ASSETS (unaudited) ------ Residual interests in securitized portfolios $ 36,989 $ 36,906 -------- -------- Mortgage loans receivable from affiliated partnerships (net of unearned interest of $15,704 for 2002 and $15,908 for 2001) 31,996 35,567 Allowance for loan losses 2,908 4,095 -------- -------- Net mortgage loans receivable 29,088 31,472 -------- -------- Cash (including restricted cash of $163 and $260 for 2002 and 2001) 2,907 2,987 Investments Real estate at cost (net of accumulated depreciation of $144 for 2002 and $104 for 2001) 4,539 4,142 Real estate lease interests 1,013 1,080 Affiliated limited partnerships (net of allowances for losses of $538 and $540, for 2002 and 2001) 1,067 1,121 Deferred income tax benefits 1,430 1,050 Other assets 1,011 932 -------- -------- Total assets $ 78,044 $ 79,690 ======== ======== (continued) See notes to consolidated financial statements. 1 DVL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands except share data) (continued) June 30, December 31, 2002 2001 ----------- ----------- (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Liabilities: Notes payable - residual interests $ 34,723 $ 35,044 Underlying mortgages payable 20,396 22,218 Long-term debt - affiliates 1,961 1,942 Long-term debt - other 5,180 5,067 Notes payable - litigation settlement 1,654 1,902 Redeemed notes payable - litigation settlement 834 596 Fees due to affiliates 750 928 Security deposits, accounts payable and accrued liabilities (including deferred income of $304 for 2002 and $17 for 2001) 626 1,038 --------- --------- Total liabilities 66,124 68,735 --------- --------- Commitments and contingencies Shareholders' equity: Preferred stock $10.00 par value, authorized, issued and outstanding 100 shares 1 1 Preferred stock, $.01 par value, authorized 5,000,000 -- -- Common stock, $.01 par value, authorized - 90,000,000 issued and outstanding 21,713,563 shares for 2002 and 21,313,563 shares for 2001 217 213 Additional paid-in capital 95,785 95,757 Deficit (84,083) (85,016) --------- --------- Total shareholders' equity 11,920 10,955 --------- --------- Total liabilities and shareholders' equity $ 78,044 $ 79,690 ========= ========= See notes to consolidated financial statements. 2 DVL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) (Unaudited) Three Months Ended June 30, -------------------- 2002 2001 -------- -------- Income from affiliates: Interest on mortgage loans $ 735 $ 737 Gain on satisfaction of mortgage loans 252 176 Partnership management fees 78 94 Management fees 108 172 Transaction and other fees from partnerships 50 139 Distributions from investments 16 33 Income from others: Interest income - residual interests 1,084 783 Net rental income (including depreciation and amortization of $25 for 2002 and $35 for 2001) 129 191 Distributions from investments 29 56 Other income and interest 13 20 -------- -------- 2,494 2,401 -------- -------- Operating expenses: General and administrative 341 347 Asset servicing fee - NPO Management LLC 164 162 Legal and professional fees 133 71 Interest expense: Underlying mortgages 412 528 Notes payable - residual interests 689 522 Affiliates 73 89 Litigation settlement notes 82 115 Others 137 151 -------- -------- 2,031 1,985 -------- -------- Income before income tax benefit and loss 463 416 Income tax expense (benefit) (380) -- -------- -------- Income before extraordinary loss 843 416 Extraordinary losses on the settlements of indebtedness (60) -- -------- -------- Net income $ 783 $ 416 ======== ======== (continued) See notes to consolidated financial statements. 3 DVL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) (Unaudited) Six Months Ended June 30, -------------------- 2002 2001 -------- -------- Income from affiliates: Interest on mortgage loans $ 1,504 $ 1,634 Gain on satisfaction of mortgage loans 252 327 Partnership management fees 152 201 Management fees 154 206 Transaction and other fees from partnerships 69 209 Distributions from investments 46 90 Income from others: Interest income - residual interests 2,176 783 Net rental income (including depreciation and amortization of $53 for 2002 and $71 for 2001) 328 371 Distributions from investments 29 94 Other income and interest 22 32 -------- -------- 4,732 3,947 -------- -------- Operating expenses: General and administrative 705 653 Asset servicing fee - NPO Management LLC 325 318 Legal and professional fees 250 178 Interest expense: Underlying mortgages 882 1,069 Notes payable - residual interests 1,388 522 Affiliates 144 177 Litigation settlement notes 162 243 Others 263 299 -------- -------- 4,119 3,459 -------- -------- Income before income tax benefit and (loss) gain 613 488 Income tax expense (benefit) (380) -- -------- -------- Income before extraordinary (loss) gain 993 488 Extraordinary (losses) gains on the settlements of indebtedness (60) 14 -------- -------- Net income $ 933 $ 502 ======== ======== (continued) See notes to consolidated financial statements. 4 DVL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) (unaudited) (continued)
Three Months Ended Six Months Ended June 30, June 30, -------------------------- ---------------------------- 2002 2001 2002 2001 ----------- ------------ ------------ ------------ Basic earnings per share: Income before extraordinary items $ .04 $ .03 $ .04 $ .03 Extraordinary items .00 .00 .00 .00 ----------- ------------ ------------ ------------ Net income $ .04 $ .03 $ .04 $ .03 =========== ============ ============= ============ Diluted earnings per share: Income before extraordinary items $ .02 $ .00 $ .02 $ .00 Extraordinary items .00 .00 .00 .00 ----------- ------------ ------------ ------------ Net income $ .02 $ .00 $ .02 $ .00 =========== ============ ============ ============ Weighted average shares outstanding - basic 21,713,563 16,560,450 21,713,563 16,560,450 Effect of dilutive notes, options and warrants 34,160,221 125,829,094 37,839,780 125,829,094 ----------- ------------ ------------ ------------ Weighted average shares outstanding - diluted 55,873,784 142,389,544 59,553,343 142,389,544 =========== ============ ============ ============
See notes to consolidated financial statements. 5 DVL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands except share data) (unaudited)
Preferred Stock Common Stock Additional --------------- ------------------- paid-in Shares Amount Shares Amount capital Deficit Total ------- ------ ---------- ------- -------- --------- ------- Balance-January 1, 2002 100 $ 1 21,313,563 $ 213 $ 95,757 $ (85,016) $10,955 Issuance of Common Stock as compensation for services received -- -- 400,000 4 28 -- 32 Net income -- -- -- -- -- 933 933 ------- ----- ---------- ------- -------- --------- ------- Balance-June 30, 2002 100 $ 1 21,713,563 $ 217 $ 95,785 $ (84,083) $11,920 ======= ===== ========== ======= ======== ========= =======
See notes to consolidated financial statements. 6 DVL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Six Months Ended June 30, ------------------- 2002 2001 ------- ------- Cash flows from operating activities: Income before extraordinary items $ 993 $ 488 Adjustments to reconcile net income before extra- ordinary gains to net cash (used in) provided by operating activities Interest income accreted on residual interests (190) (98) Accrued interest added to indebtedness 119 136 Gain on satisfactions of mortgage loans (252) (327) Depreciation 44 39 Amortization of unearned interest on loan receivables (132) (58) Amortization of real estate lease interests 67 68 Imputed interest on notes 162 243 Stock issued for services received 32 -- Net (increase) in deferred income tax benefits (380) -- Net (increase) decrease in prepaid financing and other assets (79) 316 Net (decrease) in accounts payable, security, deposits and accrued liabilities (699) (296) Net (decrease) increase in fee due to affiliates (178) 28 Net increase in deferred income 287 210 ------- ------- Net cash (used in) provided by operating activities (206) 749 ------- ------- Cash flows from investing activities: Collections on loans receivable 2,397 3,715 Real estate acquisitions and capital improvements (25) (248) Net decrease in affiliated limited partnership interests and other investments 12 94 ------- ------- Net cash provided by investing activities 2,384 3,561 ------- ------- (continued) See notes to consolidated financial statements 7 DVL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) (continued) Six Months Ended June 30, -------------------- 2002 2001 -------- -------- Cash flows from financing activities: Proceeds from new borrowings $ 400 $ 200 Repayment of indebtedness (491) (741) Payments on underlying mortgages payable (1,822) (2,433) Payments on notes payable - residual interest (214) (1) Payments related to debt tender offers and redemptions (131) (59) -------- -------- Net cash used in financing activities (2,258) (3,034) -------- -------- Net (decrease) increase in cash (80) 1,276 Cash, beginning of period 2,987 1,184 -------- -------- Cash, end of period $ 2,907 $ 2,460 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 2,545 $ 1,291 ======== ======== Supplemental disclosure of non-cash investing and financing activities: Net reduction of notes payable - debt tender offers and redemptions $ 369 $ 14 ======= ======== Residual interests in securitized portfolios - (decrease) increase $ (107) $ 28,374 ======= ======== Notes payable - residual interests - (decrease) increase $ (107) $ 27,610 ======= ======== Foreclosure on mortgage loan receivable collateralized by real estate $ 416 $ -- ======= ======== See notes to consolidated financial statements. 8 DVL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation In the opinion of DVL, Inc. ("DVL" or the "Company"), the accompanying financial statements contain all adjustments (consisting of only normal accruals) necessary in order to present a fair presentation of the financial position of DVL and the results of its operations for the periods set forth herein. The results of the Company's operations for the three and six months ended June 30, 2002 should not be regarded as indicative of the results that may be expected from its operations for the full year. Certain amounts from the three and six months ended June 30, 2001 have been reclassified to conform to the presentation for the three and six months ended June 30, 2002. For further information, refer to the consolidated financial statements and the accompanying notes included in DVL's Annual Report on Form 10-K for the year ended December 31, 2001. 2. Residual Interests In Securitized Portfolios During 2001, the Company, through its wholly-owned consolidated subsidiary, S2 Inc. ("S2"), acquired 99.9% Class B member interests in Receivables II-A LLC, a limited liability company ("Receivables II-A") and Receivables II-B LLC, a limited liability company ("Receivables II-B"), from an unrelated party engaged in the acquisition and management of periodic payment receivables. The Class B member interests entitle the Company to be allocated 99.9% of all items of income, loss and distribution of Receivables II-A and Receivables II-B. Receivables II-A and Receivables II-B solely receive the residual cash flow from five securitized receivable pools after payment to the securitized noteholders. The Company purchased its interests for an aggregate purchase price of $35,791,264, including costs of $1,366,264 which included the issuance of warrants, valued at $136,000, for the purchase of 3 million shares of the common stock of DVL, exercisable until 2011 at a price of $.20 per share. The purchase price was paid by the issuance of 8% per annum limited recourse promissory notes by S2 in the aggregate amount of $34,425,000. Principal and interest are payable from the future monthly cash flow. The notes mature August 15, 2020 through December 31, 2021 and are secured by a pledge of S2's interests in Receivables II-A, Receivables II-B and all proceeds and distributions related to such interests. The principal amount of the notes and the purchase price are adjusted, from time to time, based upon the performance of the underlying receivables. DVL also issued its guaranty of up to $3,442,500 of the purchase price. The amount of the guaranty is regularly reduced by 10% of the principal paid. The amount of the guaranty at June 30, 2002 was $3,411,500. Payments, if any, due under this guaranty are payable after August 15, 2020. In accordance with the purchase agreements, from the acquisition dates through June 30, 2002, the residual interests in securitized portfolios and the notes payable increased by approximately $592,000 based on the performance of the underlying receivables. The purchase agreements contain annual minimum and maximum levels of cash flow that will be retained by the Company, after the payment of interest and principal on the notes payable, which are as follows: Years Minimum Maximum ----- ------- ------- 2002 to 2009 $ 742,500 $ 880,000 2010 to final payment $1,050,000 $1,150,000 on notes payable* * Final payment on the notes payable expected 2016 related to the Receivables II-A transaction and 2018 for the Receivables II-B transaction. The Company believes it will receive significant cash flows after final payment of the notes payable. 9 3. Mortgage Loans Receivable Virtually all of DVL's loans receivable arose out of transactions in which affiliated limited partnerships purchased commercial, office and industrial properties which are typically leased on a long-term basis to unaffiliated creditworthy tenants. Each mortgage loan is collateralized by a lien, subordinate to any senior liens, on real estate owned by such affiliated limited partnership. DVL's loan portfolio is comprised of long-term wrap-around and other mortgage loans due from affiliated limited partnerships. 4. Notes Payable - Litigation Settlement/Redemptions As a result of its 1993 settlement of class action litigation, in December 1995, DVL issued notes (the "Notes") in the aggregate principal amount of $10,386,851. The Notes, which are general unsecured obligations of DVL, accrue interest at the rate of ten (10%) percent per annum and are due on December 31, 2005. Pursuant to the terms of the Notes, interest was paid on the first five anniversary dates by the issuance of additional Notes with a principal amount equal to the accrued interest obligation then due. As a result of various transactions described below as of June 30, 2002 Notes with an aggregate principal amount of approximately $2,000,000 were outstanding with a carrying value of $1,654,000. The Company has the option to redeem the outstanding Notes by issuing additional shares of Common Stock with a then current market value (determined based on a formula set forth in the Notes) equal to 110% of the face value of the Notes plus any accrued and unpaid interest thereon. Because the applicable market value of the Common Stock will be determined at the time of redemption, it is not possible currently to ascertain the precise number of shares of Common Stock that may have to be issued to redeem the outstanding Notes or the potential dilutive effect. The redemption of the Notes will cause significant dilution for current shareholders. The actual dilutive effect cannot be currently ascertained since it depends on the number of shares to be actually issued to satisfy the Notes. The Company currently intends to exercise at some point in the future some or all of its redemption option to the extent it does not buy back the outstanding Notes by means of cash tender offers or cash redemptions. The Company sent redemption letters to note holders who held Notes that aggregated approximately $1,079,000 offering to pay the Notes in cash at the face value plus accrued interest of approximately $48,000. As of June 30, 2002, $293,000 has been paid and the remaining $834,000 is payable, but no longer accrues interest. 5. Real Estate The Company currently owns two contiguous properties located in Kearny, New Jersey and one property located in Fort Edward, New York. These properties are: (1) Eight buildings totaling 347,000 square feet on 8 acres located in an industrial park in Kearny, NJ leased to various unrelated tenants. (2) Fee title in 8 acres of land in Kearny, NJ underlying a KMart store. (3) During the second quarter of 2002 the Company foreclosed on a mortgage loan receivable which was in default. The collateral for the mortgage loan was a 31,000 square foot former Grand Union Supermarket and approximately six acres of land underlying the building. The carrying value for the property was $416,000 at June 30, 2002. (4) The Company is in the process of acquiring an additional interest in real estate as previously disclosed in the Company's Form 10-K 10 6. Other Transactions with Affiliates A. The Company has provided management, accounting, and administrative services to certain entities which are affiliated with NPO and/or, Blackacre. The fees received from management service contracts are as follows:
Fees Received Fees Received Fees Received Fees Received For the Three For the Three For the Six For the Six Months Ended Months Ended Months Ended Months Ended Affiliate Of 6/30/02 6/30/01 6/30/02 6/30/01 ------------ ------------- ------------- ------------- ------------- NPO and Blackacre $ 6,731 $ 34,526 $ 13,461 $ 41,231 NPO $ 12,000 $ 12,000 $ 24,000 $ 24,000 NPO(1) $ 58,597 $ 6,000 $ 142,597 $ 103,000
(1) Of the total cash received for the six months ended June 30, 2002, $78,000 represented prior deferred fees paid in the first quarter of 2002. The Company is entitled to a current fee of $2,000 per month and a deferred fee of $6,500 per month paid annually in the first quarter of the fiscal year. In addition, the Company received annual incentive fees of $52,597 and $0 for the six months ended June 30, 2002 and 2001, respectively. B. Millennium Financial Services, an affiliate of NPO, has received fees representing compensation, and reimbursement of expenses for collection services as follows:
Fees For The Fees For The Fees For The Fees For The Three Months Three Months Six Months Six Months Ended 6/30/02 Ended 6/30/01 Ended 6/30/02 Ended 6/30/01 ------------- ------------- ------------- ------------- $ 55,083 $ 9,154 $ 85,083 $ 41,769
In connection with the sales of property owned by affiliated limited partnerships, a licensed real estate brokerage affiliate of the Pembroke Group was paid brokerage fees as follows:
Fees For The Fees For The Fees For The Fees For The Three Months Three Months Six Months Six Months Ended 6/30/02 Ended 6/30/01 Ended 6/30/02 Ended 6/30/01 ------------- ------------- ------------- ------------- $ 37,376 $ 50,053 $ 37,376 $ 59,303
The Pembroke Group and the Millenium Group were issued a total of 400,000 shares of common stock, valued at $32,000, during the first quarter of 2002 for additional services rendered to the Company outside the scope of the Asset Servicing Agreement. C. In connection with the acquisitions of residual interests in Receivables II-A and Receivables II-B an affiliate of NPO and the special director of the Company will be paid investment banking fees of $900,000 in aggregate for their services in connection with the origination, negotiation and structuring of the transactions. The fee is payable without interest, over 30 months starting January, 2002, from a portion of the monthly cash flow generated by the acquisitions. At June 30, 2002, $720,000 remained payable. 7. Contingent Liabilities In connection with class action litigation settled in 1992 ("Settlement"), DVL is required to deposit into a settlement fund a portion of the net cash flow received from affiliated limited partnership mortgages and other loans receivable from affiliated limited partnerships. These costs have been netted against the gain on satisfaction of mortgages and/or interest on mortgage loans. The payments were as follows:
Three Months Three Months Six Months Six Months Ended 6/30/02 Ended 6/30/01 Ended 6/30/02 Ended 6/30/01 ------------- ------------- ------------- ------------- $ 217,000 $ 218,000 $ 219,000 $ 398,000
11 In addition, DVL is required to contribute to the settlement fund 5% of its net income (based on generally accepted accounting principals) less amortization of certain loans, in the years 2001 to 2012. The estimated amortization of the certain loans for 2002 is significant enough that no amounts due to the settlement fund were accrued through June 30, 2002. 8. Restriction on Certain Transfers of Capital Stock The Company's By-laws and Certificate of Incorporation restrict certain transfers of the Company's capital stock in order to preserve certain of the Company's federal income tax attributes which could be jeopardized through certain changes in the stock ownership of the Company. 12 9. Earnings per share (unaudited) (in thousands except share and per share data) The following tables present the basic and diluted EPS for the six months and three months ended June 30, 2002 and 2001.
Six Months Ended June 30, ------------------------- 2002 2001 ----------------------------------- ------------------------------------- Weighted Weighted Average Average Number of Per Share Number of Per Share Amount Shares Amount Amount Amount Amount ------ ---------- --------- ------ ----------- --------- Income before extraordinary items $ 993 $ 488 ====== === Basic EPS Income available to common stockholders $ 993 21,713,563 $ .04 $ 488 16,560,450 $ 0.03 ======== ======= Effect of litigation settlement notes 162 15,311,474 243 75,125,274 Effect of dilutive stock options and warrants - 22,528,306 - 50,703,820 ------ ----------- ------ ------------- Diluted EPS Income available to common stockholders $1,155 59,553,343 $ .02 $ 731 142,389,544 $ 0.00 ====== =========== ======== ====== ============= ======= Three Months Ended June 30, --------------------------- 2002 2001 ----------------------------------- ------------------------------------- Weighted Weighted Average Average Number of Per Share Number of Per Share Amount Shares Amount Amount Amount Amount ------ --------- --------- ------ --------- --------- Income before extraordinary items $ 843 $ 416 ====== === Basic EPS Income available to common stockholders $ 843 21,713,563 $ .04 $ 416 16,560,450 $ 0.03 ======== ======= Effect of litigation settlement notes 82 12,629,695 115 75,125,274 Effect of dilutive stock options and warrants - 21,530,526 - 50,703,820 ------ ----------- ------ -------------- Diluted EPS Income available to common stockholders $ 925 55,873,784 $ .02 $ 531 142,389,544 $ 0.00 ====== =========== ======== ====== ============= =======
13 At June 30, 2002 and 2001 there were approximately $2,000,000 and $3,514,000, respectively, aggregate principal amount of Notes outstanding. The Company has the option to redeem the outstanding Notes by issuing shares of Common Stock with a then current market value (determined based on a formula set forth in the Notes) equal to 110% of the face value of the Notes plus any accrued and unpaid interest thereon. Because the applicable market value of the Common Stock will be determined at the time of redemption, it is not possible currently to ascertain the precise number of shares of Common Stock that may have to be issued to redeem the outstanding Notes. The calculation of diluted earnings per share assumes that the outstanding Notes are redeemed at the average closing stock price for the three and six months ended June 30, 2002 and 2001, respectively. The change in the weighted average number of common shares outstanding - diluted resulted from 1) a decrease in the weighted average amount of Notes outstanding and 2) an increase in the average closing stock price for the three and six months ended June 30, 2002 compared to the three and six months ended June 30, 2001. Also included in the weighted average number of diluted shares are warrants representing rights to acquire up to 49% of the outstanding common stock of the Company on a fully diluted basis. The number of shares issued pursuant to such warrants will adjust depending upon the number of shares issued pursuant to a redemption of the Notes. Therefore, the potential issuance of shares of common stock to satisfy the Notes has a doubling effect on the weighted average number of diluted shares since the number of shares needed to satisfy the warrants would also increase. In addition, at June 30, 2002 and 2001 there were 3,848,131 and 3,473,131, respectively, potentially dilutive options and warrants excluded from the computation of Diluted EPS because the exercise price was greater than the average market price of the Common Stock, thereby resulting in an anti-dilutive effect. 10. Segment Information The Company has two reportable segments; real estate and residual interests. The real estate business is comprised of real estate assets, mortgage loans on real estate, real estate management and investments in affiliated limited partnerships which own real estate. The residual interests business is comprised of investments in residual interests in securitized receivables portfolios. June 30, -------------------- 2002 2001 -------- -------- Revenues Real estate $ 2,534 $ 3,132 Residual interests 2,176 783 Corporate/Other 22 32 -------- -------- Total consolidated revenues $ 4,732 $ 3,947 ======== ======== Net income (loss) Real estate $ (160) $ 195 Residual interests 754 261 Corporate/Other 339 46 -------- -------- Total consolidated net income $ 933 $ 502 ======== ======== Assets Real estate $ 39,625 $ 43,114 Residual interests 36,989 28,472 Corporate/Other 1,430 - -------- -------- Total consolidated assets $ 78,044 $ 71,586 ======== ======== 14 11. Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109 ("FAS 109"), which requires the Company to a recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, FAS l09 requires the recognition of future tax benefits such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not. In 2002 the Company recognized $380,000 of income tax benefit as a result of a reduction in the valuation allowance on deferred tax assets. In 2001 the provision for income taxes was completely offset by the reduction in the valuation allowance on deferred tax assets. 15 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This June 30, 2002 Quarterly Report on Form 10-Q contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements include statements regarding the intent, belief or current expectations of DVL and its management team. DVL's stockholders and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among other things, general economic conditions and other risks and uncertainties that are discussed herein and in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. RESULTS OF OPERATIONS Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 ----------------------------------------------------------------------------- DVL had income before extraordinary items, extraordinary losses, and net income, as follows: Three Months Ended Three Months Ended June 30, 2002 June 30, 2001 ------------------ ------------------ Income before extraordinary items $ 843,000 $ 416,000 Extraordinary losses $ (60,000) $ -0- Net income $ 783,000 $ 416,000 Interest expense on underlying mortgages decreased (2002 - $412,000, 2001 - $528,000) as a result of a) the sale of one mortgage in 2002 which had an underlying mortgage and b) the sale of four mortgages in 2001 which had underlying mortgages. The decrease was partially offset by an increase in interest expense related to two mortgage loans purchased in December 2001 which have underlying mortgages. Gain on satisfaction of mortgage loans was as follows: Three Months Ended Three Months Ended June 30, 2002 June 30, 2001 ------------------ ------------------ $ 252,000 $ 176,000 The gains in 2002 and 2001 were a result of the Company collecting net proceeds on the satisfaction of mortgage loans that were greater than the carrying values. Management fees decreased (2002 - $108,000, 2001 - $172,000) primarily from the Company earning a one time fee of $100,000 in June 2001. Transaction and other fees from affiliated limited partnerships were as follows: Three Months Ended Three Months Ended June 30, 2002 June 30, 2001 ------------------ ------------------ $ 50,000 $ 139,000 16 Transaction fees are earned by the Company in connection with sales of partnership properties and the Company sold fewer partnership properties during the second quarter 2002 compared to the second quarter 2001. Interest income on residual interests (2002 - $1,084,000, 2001 - $783,000) and interest expense on the related notes payable (2002 - $689,000, 2001 - $522,000) increased from 2001 to 2002 as DVL completed the acquisitions in March 2001 and August 2001. Three Months Ended Three Months Ended June 30, 2002 June 30, 2001 ------------------ ------------------ Net rental income from others $ 129,000 $ 191,000 Gross rental income from others $ 583,000 $ 520,000 The decrease in net rental income was primarily the result of an increase in the allowance for bad debts of $75,000 relating to receivables from a major tenant. The increase in the allowance for bad debts was partially offset by higher gross rents. The asset servicing fee due from the Company to NPO increased (2002 - $164,000, 2001 - $162,000) pursuant to its terms due to an increase in the consumer price index. Legal and professional fees increased (2002 - $133,000, 2001 - $71,000) primarily as a result of legal fees relating to the preparation of proxy materials. Interest expense on the litigation settlement notes ("Notes") decreased (2002 - $82,000, 2001 - $115,000) as a result of redeeming Notes during 2000 and 2001 as well as exchanging Notes for Common Stock in December 2001. Interest expense to affiliates decreased (2002 - $73,000, 2001 - $89,000) because the interest bearing amount outstanding to affiliates was reduced. Interest expense relating to other debts decreased (2002 - $137,000, 2001 - $151,000) primarily due to decreases in interest rates on floating rate loans and repayments of principal. The reductions in interest expense were partially offset by new borrowings. In 2002 the Company recognized $380,000 of income tax benefit as a result of a reduction in the valuation allowance on deferred tax assets. In 2001 the provision for income taxes was completely offset by the reduction in the valuation allowance on deferred tax assets utilized during the quarter. Extraordinary losses of $60,000 in 2002 resulted from redeeming Notes at face value which were carried at a discount. 17 Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 ------------------------------------------------------------------------- DVL had income before extraordinary items, extraordinary gains (losses), and net income as follows: Six Months Ended Six Months Ended June 30, 2002 June 30, 2001 ---------------- ---------------- Income before extraordinary items $ 993,000 $ 488,000 Extraordinary gains (losses) $ (60,000) $ 14,000 Net income $ 933,000 $ 502,000 Interest income on mortgage loans from affiliates decreased (2002 - $1,504,000, 2001 - $1,634,000) and interest expense on underlying mortgages decreased (2002 - $882,000, 2001 - $1,069,000) as a result of a) the sale of one mortgage in 2002 which had an underlying mortgage and b) the sale of four mortgages in 2001 which had underlying mortgages. The decreases in interest income on mortgage loans and interest expense on underlying mortgages were partially offset by increases related to two mortgage loans purchased in December 2001 which have underlying mortgages. Gain on satisfaction of mortgage loans were as follows: Six Months Ended Six Months Ended June 30, 2002 June 30, 2001 ---------------- ---------------- $ 252,000 $ 327,000 The gains in 2002 and 2001 were a result of the Company collecting net proceeds on the satisfaction of mortgage loans that were greater than the carrying values. Management fees decreased (2002 - $154,000, 2001 - $206,000) primarily from the Company earning a one time fee of $100,000 in June 2001. Transaction and other fees from affiliated limited partnerships were as follows: Six Months Ended Six Months Ended June 30, 2002 June 30, 2001 ---------------- ---------------- $ 69,000 $ 209,000 Transaction fees were earned by the Company in connection with the sales of partnership properties and the Company sold fewer partnership properties during 2002 compared to 2001. Interest income on residual interests (2002 - $2,176,000, 2001 - $783,000) and interest expense on the related notes payable (2002 - $1,388,000, 2001 - $522,000) increased from 2001 to 2002 as DVL completed the acquisitions in March 2001 and August 2001. Six Months Ended Six Months Ended June 30, 2002 June 30, 2001 ---------------- ---------------- Net rental income from others $ 328,000 $ 371,000 Gross rental income from others $ 1,156,000 $ 1,028,000 The decrease in net rental income was primarily the result of an increase in the allowance for bad debts of $75,000 relating to receivables from a major tenant. The increase in the allowance for bad debts was partially offset by higher gross rents. 18 General and administrative expenses increased to $705,000 in 2002 from $653,000 in 2001. The primary reasons for the increase were greater salaries and consulting costs in the first quarter of 2002. The asset servicing fee due from the Company to NPO increased (2002 - $325,000, 2001 - $318,000) pursuant to its terms due to an increase in the consumer price index. Legal and professional fees increased (2002 - $250,000, 2001 - $178,000) as a result of the issuance of stock valued at $32,000 for services rendered to the Company and legal fees relating to the preparation of proxy materials. Interest expense on the Notes decreased (2002 - $162,000, 2001 - $243,000) as a result of redeeming notes during 2002 and 2001 as well as exchanging Notes for Common Stock in December 2001. Interest expense to affiliates decreased (2002 - $144,000, 2001 - $177,000) because the interest bearing amount outstanding to affiliates was reduced. Interest expense relating to other debts decreased (2002 - $263,000, 2001 - $299,000) primarily due to decreases in interest rates on floating rate loans and repayments of principal. The reductions in interest expense were partially offset by new borrowings. In 2002 the Company recognized $380,000 of income tax benefit as a result of a reduction in the valuation allowance on deferred tax assets. In 2001 the provision for income taxes was completely offset by the reduction in the valuation allowance on deferred tax assets utilized during the six months ended June 30, 2001. Extraordinary losses of $60,000 in 2002 resulted from redeeming Notes at face value which were carried at a discount. Extraordinary gains of $14,000 in 2001 resulted from redeeming Notes at less than carrying value. 19 Liquidity and Capital Resources ------------------------------- The Company's cash flow from operations is generated principally from rental income from its leasehold interests and ownership of real estate, distributions in connection with the residual interests in securitized portfolios, interest on its mortgage portfolio, management fees from third parties and affiliates and transaction and other fees received as a result of the sale and/or refinancing of partnership properties and mortgages. The Company believes that it's anticipated cash flow provided by operations is sufficient to meet its current cash requirements through at least January 2003. The Company believes that its current liquid assets will be sufficient to fund operations on a short-term basis as well as on a long-term basis. The Company's acquisition in 2001 of its residual interests held by its subsidiaries should provide significant liquidity to the Company. The purchase agreements executed in connection with the Company's acquisition of residual interests contain annual minimum and maximum levels of cash flow that will be retained by the Company, after the payment of interest and principal on the notes payable, which are as follows: Years Minimum Maximum ----- ------- ------- 2002 to 2009 $ 742,500 $ 880,000 2010 to final payment $1,050,000 $1,150,000 on the notes* * Final payment on the notes payable expected 2016 related to the Receivables II-A transaction and 2018 for the Receivables II-B transaction. The Company believes it will receive significant cash flow after final payment of the notes payable. 20 Acquisitions and Financings --------------------------- Loans which are scheduled to become due through 2007 are as follows:
Outstanding Original Principal Loan Balance at Due Purpose Creditor Amount June 30, 2002 Date ------- -------- ----------- ------------- ---- Repurchase of Notes Issued by the Company Blackacre(1) $ 1,560,000 $ 1,961,000 09/30/03 Purchase of Mortgages Unaffiliated Bank(2)(3) $ 1,000,000 $ 685,000 05/01/06 Purchase of a Mortgage and Refinancing of Existing Mortgages Unaffiliated Bank(2)(3) $ 1,450,000 $ 891,000 04/01/05 Purchase of Real Estate Assets Unaffiliated Bank(4)(7) $ 3,000,000 $ 3,000,000 09/01/02 Purchase of Land Unaffiliated Bank(5)(7) $ 200,000 $ 200,000 09/01/02 Purchase of Mortgages Unaffiliated Bank(6) $ 400,000 $ 366,000 05/01/06
(1) Interest rate is 12% per annum, compounded monthly. Interest is added to principal. (2) This loan self-amortizes. (3) Interest rate is prime plus 1.5% per annum. (4) Interest rate is 10% per annum. (5) Interest rate is 9.5% per annum. (6) Interest rate is 8.25% per annum. (7) The Company is in the process of acquiring an additional interest in real estate as previously disclosed in the Company's Form 10-K. As part of the commitment from the lender if such acquisitions is consummated (of which there can be no assurance) the two loans which are due September 1, 2002 will be extended to become due in 2007. 21 IMPACT OF INFLATION AND CHANGES IN INTEREST RATES ------------------------------------------------- The Company's portfolio of mortgage loans made to affiliated limited partnerships consists primarily of loans made at fixed rates of interest. Therefore, increases or decreases in market interest rates are generally not expected to have an effect on the Company's earnings. Other than as a factor in determining market interest rates, inflation has not had a significant effect on the Company's net income. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DVL has no substantial cash flow exposure due to interest rate changes for long term debt obligations, because a majority of the long-term debt is at fixed rates. DVL primarily enters into long-term debt for specific business purposes such as the repurchase of debt at a discount, the acquisition of mortgage loans or the acquisition of real estate. DVL's ability to realize value on its mortgage holdings is sensitive to interest rate fluctuations in that the sales prices of real property and mortgages vary with interest rates. 22 Part II - Other Information Item 2. Changes in Securities --------------------- (A) In the first half of 2002, the Company issued 400,000 shares of Common Stock, valued $32,000, to the following four individuals: Lawrence J. Cohen, 200,000 shares; Steve Simms, 66,667 shares; Ron Jacobs, 66,667 shares; and Jay Chazanoff, 66,666 shares. The shares were issued in exchange for asset management services rendered to the Company outside the scope of the Asset Servicing Agreement. There were no underwriters or placement agents in- volved in this issuance and no commissions were paid. The Company relied upon the exemption provided by Section 4(2) of the Securities Act of 1933, as amended. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (A) Exhibits: 99.1 Chief Executive Officer and Chief Financial Officer Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (B) There were no reports of Form 8-K filed during the three months ended June 30, 2002 23 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DVL, INC. By: /s/ Jay Thailer -------------------------------- Jay Thailer, Executive Vice President and Chief Financial Officer August 13, 2002 24