-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ChJ6YDs+2zVm5sZQlA9X5lkzyMhfqQMfLKaViHUZsAMl1TCkKOOjDjlUryt8o5nA 9IbRAOGxJEjtSq38gAM7Cw== 0000930413-02-003197.txt : 20021113 0000930413-02-003197.hdr.sgml : 20021113 20021113113052 ACCESSION NUMBER: 0000930413-02-003197 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DVL INC /DE/ CENTRAL INDEX KEY: 0000215639 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 132892858 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08356 FILM NUMBER: 02818883 BUSINESS ADDRESS: STREET 1: 70 EAST 55TH STREET STREET 2: 7TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2014871300 MAIL ADDRESS: STREET 1: 70 EAST 55TH STREET STREET 2: 7TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: DEL VAL FINANCIAL CORP DATE OF NAME CHANGE: 19920703 10-Q 1 c26143_10q.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 September 30, 2002 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from__________________ to ______________________ Commission file number: 1-8356 DVL, Inc. ---------------------------------------------------------------------------- (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 Rule 12b-2 of the Exchange Act) Yes: No: X ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Class Outstanding at November 13, 2002 - ----------------------------- -------------------------------- Common Stock, $.01 par value 21,713,563 DVL, INC. AND SUBSIDIARIES INDEX Part I. Financial Information: Pages ----- Item 1 - Financial Statements Consolidated Balance Sheets - September 30, 2002 (unaudited) and December 31, 2001 1-2 Consolidated Statements of Operations - Three Months Ended September 30, 2002 (unaudited) and 2001 (unaudited) 3,5 Consolidated Statements of Operations - Nine Months Ended September 30, 2002 (unaudited) and 2001 (unaudited) 4,5 Consolidated Statement of Shareholders' Equity - Nine Months Ended September 30, 2002 (unaudited) 6 Consolidated Statements of Cash Flows - Nine Months ended September 30, 2002 (unaudited) and 2001 (unaudited) 7-8 Notes to Consolidated Financial Statements (unaudited) 9-15 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 16-22 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 22 Item 4 - Controls and Procedures 22 Part II. Other Information: Item 6 - Exhibits and Reports on Form 8-K 23 Signature 24-26 Exhibit Index 27 Part I - Financial Information Item 1. Financial Statements DVL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) September 30, December 31, 2002 2001 ------------- ------------- ASSETS (unaudited) - ------ Residual interests in securitized portfolios $ 37,304 $ 36,906 -------- -------- Mortgage loans receivable from affiliated partnerships (net of unearned interest of $15,639 for 2002 and $15,908 for 2001) 31,623 35,567 Allowance for loan losses 2,889 4,095 -------- -------- Net mortgage loans receivable 28,734 31,472 -------- -------- Cash (including restricted cash of $187 and $215 for 2002 and 2001) 2,588 2,987 Investments Real estate at cost (net of accumulated depreciation of $175 for 2002 and $104 for 2001) 8,535 4,142 Real estate lease interests 979 1,080 Affiliated limited partnerships (net of allowances for losses of $538 and $540, for 2002 and 2001) 1,067 1,121 Deferred income tax benefits 1,430 1,050 Other assets 1,120 932 -------- -------- Total assets $ 81,757 $ 79,690 ======== ======== (continued) See notes to consolidated financial statements. 1 DVL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands except share data) (continued)
September 30, December 31, 2002 2001 ------------- ------------ (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Liabilities: Notes payable - residual interests $ 34,829 $ 35,044 Underlying mortgages payable 19,875 22,218 Long-term debt - affiliates 2,021 1,942 Long-term debt - other 9,067 5,067 Notes payable - litigation settlement 1,666 1,902 Redeemed notes payable - litigation settlement 856 596 Fees due to affiliates 661 928 Security deposits, accounts payable and accrued liabilities (including deferred income of $164 for 2002 and $17 for 2001) 485 1,038 --------- --------- Total liabilities 69,460 68,735 --------- --------- Commitments and contingencies Shareholders' equity: Preferred stock $10.00 par value, authorized, issued and outstanding 100 shares 1 1 Preferred stock, $.01 par value, authorized 5,000,000 -- -- Common stock, $.01 par value, authorized - 90,000,000 issued and outstanding 21,713,563 shares for 2002 and 21,313,563 shares for 2001 217 213 Additional paid-in capital 95,785 95,757 Deficit (83,706) (85,016) --------- --------- Total shareholders' equity 12,297 10,955 --------- --------- Total liabilities and shareholders' equity $ 81,757 $ 79,690 ========= =========
See notes to consolidated financial statements. 2 DVL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) (unaudited) Three Months Ended September 30, ---------------------- 2002 2001 ---------- ---------- Income from affiliates: Interest on mortgage loans $ 699 $ 758 Partnership management fees 74 97 Management fees 52 555 Transaction and other fees from partnerships 98 -- Distributions from investments 21 19 Income from others: Interest income - residual interests 1,093 765 Net rental income (including depreciation and amortization of $22 for 2002 and $36 for 2001) 194 190 Distributions from investments -- 30 Other income and interest 8 22 ---------- ---------- 2,239 2,436 ---------- ---------- Operating expenses: General and administrative 354 374 Asset servicing fee - NPO Management LLC 164 161 Legal and professional fees 76 56 Interest expense: Underlying mortgages 354 486 Notes payable - residual interests 691 611 Affiliates 73 89 Litigation settlement notes 68 119 Others 157 146 ---------- ---------- 1,937 2,042 ---------- ---------- Income before income tax benefit and loss 302 394 Income tax (benefit) expense (86) 40 ---------- ---------- Income before extraordinary loss 388 354 Extraordinary losses on the settlements of indebtedness (11) -- ---------- --------- Net income $ 377 $ 354 ========== ========= (continued) See notes to consolidated financial statements. 3 DVL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) (unaudited) (continued) Nine Months Ended September 30, ---------------------- 2002 2001 ---------- ---------- Income from affiliates: Interest on mortgage loans $ 2,203 $ 2,392 Gain on satisfaction of mortgage loans 252 327 Partnership management fees 226 298 Management fees 206 761 Transaction and other fees from partnerships 167 205 Distributions from investments 67 113 Income from others: Interest income - residual interests 3,269 1,548 Net rental income (including depreciation and amortization of $75 for 2002 and $106 for 2001) 522 561 Distributions from investments 29 124 Other income and interest 30 54 ---------- ---------- 6,971 6,383 ---------- ---------- Operating expenses: General and administrative 1,113 1,052 Asset servicing fee - NPO Management LLC 489 479 Legal and professional fees 272 209 Interest expense: Underlying mortgages 1,236 1,555 Notes payable - residual interests 2,079 1,133 Affiliates 217 266 Litigation settlement notes 230 362 Others 420 445 ---------- ---------- 6,056 5,501 ---------- ---------- Income before income tax benefit and (loss) gain 915 882 Income tax expense (benefit) (466) 40 ---------- ---------- Income before extraordinary (loss) gain 1,381 842 Extraordinary (losses) gains on the settlements of indebtedness (71) 14 ---------- --------- Net income $ 1,310 $ 856 ========== ========= (continued) See notes to consolidated financial statements. 4 DVL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except share and per share data) (unaudited) (continued)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- ---------------------------- 2002 2001 2002 2001 ----------- ------------ ------------ ------------ Basic earnings per share: Income before extraordinary items $ .02 $ .02 $ .06 $ .05 Extraordinary items .00 .00 .00 .00 ----------- ------------ ------------ ------------ Net income $ .02 $ .02 $ .06 $ .05 =========== ============ ============ ============ Diluted earnings per share: Income before extraordinary items $ .01 $ .00 $ .03 $ .01 Extraordinary items .00 .00 .00 .00 ----------- ------------ ------------ ------------ Net income $ .01 $ .00 $ .03 $ .01 =========== ============ ============ ============ Weighted average shares outstanding - basic 21,713,563 16,560,450 21,713,563 16,560,450 Effect of dilutive notes, options and warrants 35,314,515 91,295,902 36,948,399 111,790,090 ----------- ------------ ------------ ------------ Weighted average shares outstanding - diluted 57,028,078 107,856,352 58,661,962 128,350,540 =========== ============ ============ ============
See notes to consolidated financial statements. 5 DVL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands except share data) (unaudited)
Preferred Stock Common Stock Additional --------------- -------------------- paid-in Shares Amount Shares Amount capital Deficit Total -------- ------ ----------- -------- ---------- --------- -------- Balance-January 1, 2002 100 $ 1 21,313,563 $ 213 $ 95,757 $ (85,016) $10,955 Issuance of Common Stock as compensation for services received -- -- 400,000 4 28 -- 32 Net income -- -- -- -- -- 1,310 1,310 ------- ----- ---------- ------- -------- --------- ------- Balance-September 30, 2002 100 $ 1 21,713,563 $ 217 $ 95,785 $ (83,706) $12,297 ======= ===== ========== ======= ======== ========= =======
See notes to consolidated financial statements. 6 DVL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Nine Months Ended September 30, -------------------- 2002 2001 -------- -------- Cash flows from operating activities: Income before extraordinary items $ 1,381 $ 842 Adjustments to reconcile net income before extra- ordinary (losses) gains to net cash provided by operating activities Interest income accreted on residual interests (305) (141) Accrued interest added to indebtedness 179 247 Gain on satisfactions of mortgage loans (252) (327) Depreciation 76 60 Amortization of unearned interest on loan receivables (197) (87) Amortization of real estate lease interests 101 101 Imputed interest on notes 230 362 Stock issued for services received 32 -- Net increase in deferred income tax benefits (380) -- Net decrease in prepaid financing and other assets 63 196 Net decrease in accounts payable, security, deposits and accrued liabilities (700) (271) Net (decrease) increase in fee due to affiliates (267) 41 Net increase in deferred income 147 97 ------- ------ Net cash provided by operating activities 108 1,120 ------- ------- Cash flows from investing activities: Collections on loans receivable 2,813 4,155 Real estate acquisitions and capital improvements (335) (349) Net decrease in affiliated limited partnership interests and other investments 12 94 ------- ------ Net cash provided by investing activities 2,490 3,900 ------- ------
(continued) See notes to consolidated financial statements 7 DVL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) (continued)
Nine Months Ended September 30, ---------------------- 2002 2001 -------- -------- Cash flows from financing activities: Proceeds from new borrowings $ 400 $ 200 Repayment of indebtedness (570) (863) Payments on underlying mortgages payable (2,343) (2,920) Payments on notes payable - residual interest (308) (12) Payments related to debt tender offers and redemptions (176) (140) -------- -------- Net cash used in financing activities (2,997) (3,735) -------- -------- Net (decrease) increase in cash (399) 1,285 Cash, beginning of period 2,987 1,184 -------- -------- Cash, end of period $ 2,588 $ 2,469 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 3,715 $ 1,722 ======== ======== Supplemental disclosure of non-cash investing and financing activities: Net reduction of notes payable - debt tender offers and redemptions $ 436 $ 14 ======= ======== Residual interests in securitized portfolios - increase $ 93 $ 38,479 ======= ======== Notes payable - residual interests - increase $ 93 $ 37,181 ======= ======== Foreclosure on mortgage loan receivable collateralized by real estate $ 416 $ -- ======= ======== Purchase of real estate with debt financing $ 3,968 $ -- ======= ========
See notes to consolidated financial statements. 8 DVL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation In the opinion of DVL, Inc. ("DVL" or the "Company"), the accompanying financial statements contain all adjustments (consisting of only normal accruals) necessary in order to present a fair presentation of the financial position of DVL and the results of its operations for the periods set forth herein. The results of the Company's operations for the three and nine months ended September 30, 2002 should not be regarded as indicative of the results that may be expected from its operations for the full year. Certain amounts from the three and nine months ended September 30, 2001 have been reclassified to conform to the presentation for the three and nine months ended September 30, 2002. For further information, refer to the consolidated financial statements and the accompanying notes included in DVL's Annual Report on Form 10-K for the year ended December 31, 2001. 2. Residual Interests In Securitized Portfolios During 2001, the Company, through its wholly-owned consolidated subsidiary, S2 Inc. ("S2"), acquired 99.9% Class B member interests in Receivables II-A LLC, a limited liability company ("Receivables II-A") and Receivables II-B LLC, a limited liability company ("Receivables II-B"), from an unrelated party engaged in the acquisition and management of periodic payment receivables. The Class B member interests entitle the Company to be allocated 99.9% of all items of income, loss and distribution of Receivables II-A and Receivables II-B. Receivables II-A and Receivables II-B solely receive the residual cash flow from five securitized receivable pools after payment to the securitized noteholders. The Company purchased its interests for an aggregate purchase price of $35,791,264, including costs of $1,366,264 which included the issuance of warrants, valued at $136,000, for the purchase of 3 million shares of the common stock of DVL, exercisable until 2011 at a price of $.20 per share. The purchase price was paid by the issuance of 8% per annum limited recourse promissory notes by S2 in the aggregate amount of $34,425,000. Principal and interest are payable from the future monthly cash flow. The notes mature August 15, 2020 through December 31, 2021 and are secured by a pledge of S2's interests in Receivables II-A, Receivables II-B and all proceeds and distributions related to such interests. The principal amount of the notes and the purchase price are adjusted, from time to time, based upon the performance of the underlying receivables. DVL also issued its guaranty of up to $3,442,500 of the purchase price. The amount of the guaranty is regularly reduced by 10% of the principal paid. The amount of the guaranty at September 30, 2002 was $3,402,847. Payments, if any, due under this guaranty are payable after August 15, 2020. In accordance with the purchase agreements, from the acquisition dates through September 30, 2002, the residual interests in securitized portfolios and the notes payable increased by approximately $793,000 based on the performance of the underlying receivables. The purchase agreements contain annual minimum and maximum levels of cash flow that will be retained by the Company, after the payment of interest and principal on the notes payable, which are as follows: Years Minimum Maximum ----- ------- ------- 2002 to 2009 $ 742,500 $ 880,000 2010 to final payment $1,050,000 $1,150,000 on notes payable* *Final payment on the notes payable expected 2016 related to the Receivables II-A transaction and 2018 for the Receivables II-B transaction. The Company believes it will receive significant cash flows after final payment of the notes payable. 9 3. Mortgage Loans Receivable Virtually all of DVL's loans receivable arose out of transactions in which affiliated limited partnerships purchased commercial, office and industrial properties which are typically leased on a long-term basis to unaffiliated creditworthy tenants. Each mortgage loan is collateralized by a lien, subordinate to any senior liens, on real estate owned by such affiliated limited partnership. DVL's loan portfolio is comprised of long-term wrap- around and other mortgage loans due from affiliated limited partnerships. 4. Notes Payable - Litigation Settlement/Redemptions As a result of its 1993 settlement of class action litigation, in December 1995, DVL issued notes (the "Notes") in the aggregate principal amount of $10,386,851. The Notes, which are general unsecured obligations of DVL, accrue interest at the rate of ten (10%) percent per annum and are due on December 31, 2005. Pursuant to the terms of the Notes, interest was paid on the first five anniversary dates by the issuance of additional Notes with a principal amount equal to the accrued interest obligation then due. As a result of various transactions described below, as of September 30, 2002 Notes with an aggregate principal amount of approximately $1,950,000 were outstanding with a carrying value of $1,666,000. The Company has the option to redeem the outstanding Notes by issuing additional shares of Common Stock with a then current market value (determined based on a formula set forth in the Notes) equal to 110% of the face value of the Notes plus any accrued and unpaid interest thereon. Because the applicable market value of the Common Stock will be determined at the time of redemption, it is not possible currently to ascertain the precise number of shares of Common Stock that may have to be issued to redeem the outstanding Notes or the potential dilutive effect. The redemption of the Notes will cause significant dilution for current shareholders. The actual dilutive effect cannot be currently ascertained since it depends on the number of shares to be actually issued to satisfy the Notes. The Company currently intends, depending upon market conditions, to exercise at some point in the future some or all of its redemption option to the extent it does not buy back the outstanding Notes by means of cash tender offers or cash redemptions. The Company sent redemption letters to note holders who held Notes that aggregated approximately $1,144,000, offering to pay the Notes in cash at the face value plus accrued interest of approximately $48,000. As of September 30, 2002, $337,000 has been paid and the remaining $856,000 is payable, but no longer accrues interest. 5. Real Estate The Company currently owns the following properties: (1) Eight buildings totaling 347,000 square feet on 8 acres located in an industrial park in Kearny, NJ leased to various unrelated tenants. (2) An 89,000 square foot building leased to K-Mart and 8 acres of underlying land in Kearny, NJ. (3) During the second quarter of 2002 the Company foreclosed on a mortgage loan receivable which was in default. The collateral for the mortgage loan was a 31,000 square foot former Grand Union Supermarket and approximately six acres of land underlying the building. The carrying value for the property was $416,000 at September 30, 2002. 10 6. Other Transactions with Affiliates A. The Company has provided management, accounting, and administrative services to certain entities which are affiliated with NPO and/or, Blackacre. The fees received from management service contracts are as follows:
Fees Received Fees Received Fees Received Fees Received For the Three For the Three For the Nine For the Nine Months Ended Months Ended Months Ended Months Ended Affiliate Of 9/30/02 9/30/01 9/30/02 9/30/01 - ------------ ------------- ------------- ------------- ------------- NPO and Blackacre $ 6,731 $ 6,731 $ 20,192 $ 47,962 NPO $ 12,000 $ 12,000 $ 36,000 $ 36,000 NPO(1) $ 45,000 $ 6,000 $ 187,597 $ 109,000
(1) Of the total cash received for the nine months ended September 30, 2002, $117,000 represented prior deferred fees. The Company is entitled to a current fee of $2,000 per month and a deferred fee of $6,500 per month paid annually in the first quarter of the fiscal year. In addition, the Company received annual incentive fees of $52,597 and $0 for the nine months ended September 30, 2002 and 2001, respectively. B. Millennium Financial Services, an affiliate of NPO, has received fees representing compensation, and reimbursement of expenses for collection services as follows:
Fees For The Fees For The Fees For The Fees For The Three Months Three Months Nine Months Nine Months Ended 9/30/02 Ended 9/30/01 Ended 9/30/02 Ended 9/30/01 ------------- ------------- ------------- ------------- $ 30,000 $ 47,451 $ 115,083 $ 89,220
In connection with the sales of property owned by affiliated limited partnerships, a licensed real estate brokerage affiliate of the Pembroke Group was paid brokerage fees as follows:
Fees For The Fees For The Fees For The Fees For The Three Months Three Months Nine Months Nine Months Ended 9/30/02 Ended 9/30/01 Ended 9/30/02 Ended 9/30/01 ------------- ------------- ------------- ------------- $ -0- $ -0- $ 37,376 $ 59,303
The Pembroke Group and the Millenium Group were issued a total of 400,000 shares of common stock, valued at $32,000, during the first quarter of 2002 for additional services rendered to the Company outside the scope of the Asset Servicing Agreement. C. In connection with the acquisitions of residual interests in Receivables II-A and Receivables II-B, an affiliate of NPO and the special director of the Company will be paid investment banking fees of $900,000 in the aggregate for their services in connection with the origination, negotiation and structuring of the transactions. The fee is payable without interest, over 30 months starting January, 2002, from a portion of the monthly cash flow generated by the acquisitions. At September 30, 2002, $630,000 remained payable. 7. Contingent Liabilities In connection with class action litigation settled in 1992 ("Settlement"), DVL is required to deposit into a settlement fund a portion of its cash flow received from affiliated limited partnership mortgages and other loans receivable from affiliated limited partnerships. These costs have been netted against the gain on satisfaction of mortgages and/or interest on mortgage loans. The payments were as follows:
Three Months Three Months Nine Months Nine Months Ended 9/30/02 Ended 9/30/01 Ended 9/30/02 Ended 9/30/01 ------------- ------------- ------------- ------------- $ 665 $ 2,000 $ 219,665 $ 400,000
11 In addition, DVL is required to contribute to the settlement fund 5% of its net income (based on generally accepted accounting principals) less amortization of certain loans, in the years 2001 to 2012. The estimated amortization of the certain loans for 2002 is significant enough that no amounts due to the settlement fund were accrued through September 30, 2002. 8. Restriction on Certain Transfers of Capital Stock The Company's By-laws and Certificate of Incorporation restrict certain transfers of the Company's capital stock in order to preserve certain of the Company's federal income tax attributes which could be jeopardized through certain changes in the stock ownership of the Company. 12 9. Earnings per share (unaudited) (in thousands except share and per share data) The following tables present the basic and diluted EPS for the nine months and three months ended September 30, 2002 and 2001.
Nine Months Ended September 30, ------------------------------- 2002 2001 ----------------------------------- ------------------------------------- Weighted Weighted Average Average Number of Per Share Number of Per Share Amount Shares Amount Amount Shares Amount ------ ---------- --------- ------ ----------- --------- Income before extraordinary items $1,381 $ 842 ====== === Basic EPS Income available to common stockholders $1,381 21,713,563 $ .06 $ 842 16,560,450 $ 0.05 ======== ======= Effect of litigation settlement notes 230 14,989,916 362 65,513,576 Effect of dilutive stock options and warrants -- 21,958,483 -- 46,276,514 ------ ----------- ------ ------------ Diluted EPS Income available to common stockholders $1,611 58,661,962 $ .03 $1,204 128,350,540 $ 0.01 ====== =========== ======== ====== ============ ======= Three Months Ended September 30, -------------------------------- 2002 2001 ----------------------------------- ------------------------------------- Weighted Weighted Average Average Number of Per Share Number of Per Share Amount Shares Amount Amount Shares Amount ------ --------- --------- ------ --------- --------- Income before extraordinary items $ 388 $ 354 ====== === Basic EPS Income available to common stockholders $ 388 21,713,563 $ .02 $ 354 16,560,450 $ 0.02 ======== ======= Effect of litigation settlement notes 68 14,435,869 119 52,922,384 Effect of dilutive stock options and warrants -- 20,878,646 -- 38,373,518 ------ ----------- ------ ------------ Diluted EPS Income available to common stockholders $ 456 57,028,078 $ .01 $ 473 107,856,352 $ 0.00 ====== =========== ======== ====== ============ =======
13 At September 30, 2002 and 2001 there were approximately $1,950,000 and $3,597,000, respectively, aggregate principal amount of Notes outstanding. The Company has the option to redeem the outstanding Notes by issuing shares of Common Stock with a then current market value (determined based on a formula set forth in the Notes) equal to 110% of the face value of the Notes plus any accrued and unpaid interest thereon. Because the applicable market value of the Common Stock will be determined at the time of redemption, it is not possible currently to ascertain the precise number of shares of Common Stock that may have to be issued to redeem the outstanding Notes. The calculation of diluted earnings per share assumes that the outstanding Notes are redeemed at the average closing stock price for the three and nine months ended September 30, 2002 and 2001, respectively. The change in the weighted average number of common shares outstanding - diluted resulted from 1) a decrease in the weighted average amount of Notes outstanding and 2) an increase in the average closing stock price for the three and nine months ended September 30, 2002 compared to the three and nine months ended September 30, 2001. Also included in the weighted average number of diluted shares are warrants representing rights to acquire up to 49% of the outstanding common stock of the Company on a fully diluted basis. The number of shares issued pursuant to such warrants will adjust depending upon the number of shares issued pursuant to a redemption of the Notes. Therefore, the potential issuance of shares of common stock to satisfy the Notes has a doubling effect on the weighted average number of diluted shares since the number of shares needed to satisfy the warrants would also increase. In addition, at September 30, 2002 and 2001 there were 3,848,131 and 3,278,131, respectively, potentially dilutive options and warrants excluded from the computation of Diluted EPS because the exercise price was greater than the average market price of the Common Stock, thereby resulting in an anti-dilutive effect. 10. Segment Information The Company has two reportable segments; real estate and residual interests. The real estate business is comprised of real estate assets, mortgage loans on real estate, real estate management and investments in affiliated limited partnerships which own real estate. The residual interests business is comprised of investments in residual interests in securitized receivables portfolios. The Corporate other net income of $361,000 includes $380,000 of deferred income tax benefit. Nine Months Ended September 30, --------------------- 2002 2001 -------- -------- Revenues Real estate $ 3,672 $ 4,781 Residual interests 3,269 1,548 Corporate/Other 30 54 -------- -------- Total consolidated revenues $ 6,971 $ 6,383 ======== ======== Net income (loss) Real estate $ (203) $ 476 Residual interests 1,152 411 Corporate/Other 361 (31) -------- -------- Total consolidated net income $ 1,310 $ 856 ======== ======== Assets Real estate $ 43,023 $ 42,880 Residual interests 37,304 38,620 Corporate/Other 1,430 -- -------- -------- Total consolidated assets $ 81,757 $ 81,500 ======== ======== 14 11. Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109 ("FAS 109"), which requires the Company to recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, FAS l09 requires the recognition of future tax benefits such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not. In 2002 the Company recognized $380,000 of income tax benefit as a result of a reduction in the valuation allowance on deferred tax assets. The Company also recognized $86,000 in federal tax benefits in 2002 relating to the elimination of the alternative minimum tax for 2001. In 2001 the provision for income taxes was completely offset by the reduction in the valuation allowance on deferred tax assets. 12. Subsequent Event In October 2002, DVL entered into a lease of its current premises comprising 5,679 square feet at 70 East 55th Street, New York, New York. The lease is for 5 years expiring January 31, 2008 at a base rent of $215,802 per annum, plus real estate and operating expense escalation clauses. 15 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This September 30, 2002 Quarterly Report on Form 10-Q contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements include statements regarding the intent, belief or current expectations of DVL and its management team. DVL's stockholders and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among other things, general economic conditions and other risks and uncertainties that are discussed herein and in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. RESULTS OF OPERATIONS Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001 DVL had income before extraordinary items, extraordinary losses, and net income, as follows: Three Months Ended Three Months Ended September 30, 2002 September 30, 2001 ------------------ ------------------ Income before extraordinary items $ 388,000 $ 354,000 Extraordinary losses $ (11,000) $ -0- Net income $ 377,000 $ 354,000 Interest income on mortgage loans to affiliates decreased (2002 - $699,000, 2001 - - $758,000) and interest expense on underlying mortgages decreased (2002 - $354,000, 2001 - $486,000) as a result of a) the sale of one mortgage in 2002 which had an underlying mortgage and b) the sale of four mortgages in 2001 which had underlying mortgages. The decrease was partially offset by an increase in interest income and interest expense related to two mortgage loans purchased in December 2001 which have underlying mortgages. Management fees decreased (2002 - $52,000, 2001 - $555,000) primarily due to a $442,900 incentive fee earned during the quarter ended September 30, 2001. Transaction and other fees from affiliated limited partnerships were as follows: Three Months Ended Three Months Ended September 30, 2002 September 30, 2001 ------------------ ------------------ $ 98,000 $ -0- 16 Transaction fees are earned by the Company in connection with sales of partnership properties and the Company sold more partnership properties during the third quarter 2002 compared to the third quarter 2001. Interest income on residual interests (2002 - $1,093,000, 2001 - $765,000) and interest expense on the related notes payable (2002 - $691,000, 2001 - $611,000) increased from 2001 to 2002 as DVL completed the acquisitions in March 2001 and August 2001. Three Months Ended Three Months Ended September 30, 2002 September 30, 2001 ------------------ ------------------ Net rental income from others $ 194,000 $ 190,000 Gross rental income from others $ 615,000 $ 540,000 The increase in gross rents was offset by an increase in the allowance for bad debts of $45,000 relating to receivables from a major tenant. The Company has been reserving $15,000 per month as a result of the tenant being unable to pay full rent. The tenant is obligated to pay $117,120 per month but has been paying $87,120 per month. The difference of $30,000 per month has not been forgiven but has been deferred pending the tenants efforts at a recapitalization of its company. The tenant continues to occupy its space. General and administrative expenses decreased to $354,000 in 2002 from $374,000 in 2001. The primary reasons for the decrease were lower salaries and employee related cost. The asset servicing fee due from the Company to NPO increased (2002 - $164,000, 2001 - $161,000) pursuant to its terms due to an increase in the consumer price index. Legal and professional fees increased (2002 - $76,000, 2001 - $56,000) primarily as a result of higher accounting fees. Interest expense on the litigation settlement notes ("Notes") decreased (2002 - $68,000, 2001 - $119,000) as a result of redeeming Notes during 2001 and 2002 as well as exchanging Notes for Common Stock in December 2001. Interest expense to affiliates decreased (2002 - $73,000, 2001 - $89,000) because the interest bearing amount due to affiliates was reduced. Interest expense relating to other debts increased (2002 - $157,000, 2001 - $146,000) primarily due to the Company borrowing approximately $3,968,000 to purchase real estate in August 2002. In 2001 the Company accrued $40,000 for alternative minimum taxes and in 2002 recognized $86,000 in tax benefits relating to the elimination of the alternative minimum tax for 2001. In 2002 and 2001 the provision for income taxes was completely offset by the reduction in the valuation allowance on deferred tax assets utilized during the quarter. Extraordinary losses of $11,000 in 2002 resulted from redeeming Notes at face value which were carried at a discount. 17 Nine Months Ended June 30, 2002 Compared to Nine Months Ended September 30, 2001 DVL had income before extraordinary items, extraordinary gains (losses), and net income as follows: Nine Months Ended Nine Months Ended September 30, 2002 September 30, 2001 ------------------ ------------------ Income before extraordinary items $1,381,000 $ 842,000 Extraordinary gains (losses) $ (71,000) $ 14,000 Net income $1,310,000 $ 856,000 Interest income on mortgage loans to affiliates decreased (2002 - $2,203,000, 2001 - $2,392,000) and interest expense on underlying mortgages decreased (2002 - - $1,236,000, 2001 - $1,555,000) as a result of a) the sale of one mortgage in 2002 which had an underlying mortgage and b) the sale of four mortgages in 2001 which had underlying mortgages. The decreases in interest income on mortgage loans and interest expense on underlying mortgages were partially offset by increases related to two mortgage loans purchased in December 2001 which have underlying mortgages. Gain on satisfaction of mortgage loans were as follows: Nine Months Ended Nine Months Ended September 30, 2002 September 30, 2001 ------------------ ------------------ $ 252,000 $ 327,000 The gains in 2002 and 2001 were a result of the Company collecting net proceeds on the satisfaction of mortgage loans that were greater than the carrying values. Management fees decreased (2002 - $206,000, 2001 - $761,000) primarily from the Company earning a $442,900 incentive fee during the nine months ended September 30, 2001. Transaction and other fees from affiliated limited partnerships were as follows: Nine Months Ended Nine Months Ended September 30, 2002 September 30, 2001 ------------------ ------------------ $ 167,000 $ 205,000 Transaction fees were earned by the Company in connection with the sales of partnership properties and the Company sold fewer partnership properties during 2002 compared to 2001. Interest income on residual interests (2002 - $3,269,000, 2001 - $1,548,000) and interest expense on the related notes payable (2002 - $2,079,000, 2001 - $1,133,000) increased from 2001 to 2002 as DVL completed the acquisitions in March 2001 and August 2001. Nine Months Ended Nine Months Ended September 30, 2002 September 30, 2001 ------------------ ------------------ Net rental income from others $ 522,000 $ 561,000 Gross rental income from others $ 1,772,000 $ 1,568,000 The decrease in net rental income was primarily the result of an increase in the allowance for bad debts of $120,000 relating to receivables from a major tenant. The increase in the allowance for bad debts was partially offset by higher gross rents. The Company has been reserving $15,000 per month as a result of the tenant being unable to pay full rent. The tenant is obligated to pay $117,120 per month but has been paying $87,120 per month. The difference of $30,000 per month has not been forgiven but has been deferred pending the tenants efforts at a recapitalization of its company. The tenant continues to occupy its space. 18 General and administrative expenses increased to $1,113,000 in 2002 from $1,052,000 in 2001. The primary reasons for the increase were greater salaries, employee benefit costs and consulting costs. The asset servicing fee due from the Company to NPO increased (2002 - $489,000, 2001 - $479,000) pursuant to its terms due to an increase in the consumer price index. Legal and professional fees increased (2002 - $272,000, 2001 - $209,000) as a result of the issuance of stock valued at $32,000 for services rendered to the Company, legal fees relating to the preparation of proxy materials, and higher accounting fees. Interest expense on the Notes decreased (2002 - $230,000, 2001 - $362,000) as a result of redeeming notes during 2001 and 2002 as well as exchanging Notes for Common Stock in December 2001. Interest expense to affiliates decreased (2002 - $217,000, 2001 - $266,000) because the interest bearing amount due to affiliates was reduced. Interest expense relating to other debts decreased (2002 - $420,000, 2001 - $445,000) primarily due to decreases in interest rates on floating rate loans and repayments of principal. The reductions in interest expense were partially offset by new borrowings. The Company borrowed approximately $3,968,000 in August 2002 to finance the purchase of real estate. In 2001 the Company accrued $40,000 for alternative minimum taxes and in 2002 recognized $86,000 in tax benefits relating to the elimination of the alternative minimum tax for 2001. In 2002 the Company recognized $380,000 of income tax benefit as a result of a reduction in the valuation allowance on deferred tax assets. In 2001 the provision for income taxes was completely offset by the reduction in the valuation allowance on deferred tax assets utilized during the nine months ended September 30, 2001. Extraordinary losses of $71,000 in 2002 resulted from redeeming Notes at face value which were carried at a discount. Extraordinary gains of $14,000 in 2001 resulted from redeeming Notes at less than carrying value. 19 LIQUIDITY AND CAPITAL RESOURCES The Company's cash flow from operations is generated principally from rental income from its leasehold interests and ownership of real estate, distributions in connection with the residual interests in securitized portfolios, interest on its mortgage portfolio, management fees from third parties and affiliates and transaction and other fees received as a result of the sale and/or refinancing of partnership properties and mortgages. The Company believes that its anticipated cash flow provided by operations is sufficient to meet its current cash requirements through at least September 2003. The Company believes that its current liquid assets will be sufficient to fund operations on a short-term basis as well as on a long-term basis. The Company's acquisition in 2001 of its residual interests held by its subsidiaries should provide significant liquidity to the Company. The purchase agreements executed in connection with the Company's acquisition of residual interests contain annual minimum and maximum levels of cash flow that will be retained by the Company, after the payment of interest and principal on the notes payable, which are as follows: Years Minimum Maximum ----- ------- ------- 2002 to 2009 $ 742,500 $ 880,000 2010 to final payment $1,050,000 $1,150,000 on the notes* *Final payment on the notes payable expected 2016 related to the Receivables II-A transaction and 2018 for the Receivables II-B transaction. The Company believes it will receive significant cash flow after final payment of the notes payable. 20 ACQUISITIONS AND FINANCINGS Loans which are scheduled to become due through 2008 are as follows:
Outstanding Original Principal Loan Balance at Due Purpose Creditor Amount 09/30/02 Date - ------- -------- -------- ----------- ---- Repurchase of Notes Issued by the Company Blackacre(1) $ 1,560,000 $ 2,021,427 09/30/03 Purchase of Mortgages Unaffiliated Bank(2)(3) $ 1,000,000 $ 685,000 05/01/06 Purchase of a Mortgage and Refinancing of Existing Mortgages Unaffiliated Bank(2)(3) $ 1,450,000 $ 891,000 04/01/05 Purchase of Real Estate Assets Unaffiliated Bank(4) $ 4,500,000 $ 4,500,000 09/01/04 Purchase of Mortgages Unaffiliated Bank(5)(2) $ 400,000 $ 366,000 05/01/06 Purchase of Building Unaffiliated Bank(6)(7) $ 2,667,542 $ 2,667,542 06/30/08
(1) Interest rate is 12% per annum, compounded monthly. Interest is added to principal. (2) This loan self-amortizes. (3) Interest rate is prime plus 1.5% per annum. (4) Interest rate is 8.25% per annum. Monthly payments are interest only. (5) Interest rate is 8.25% per annum. (6) Interest rate is 7.5% per annum with a balloon payment due June 30,2008 of $2,284,542. (7) The Company through its wholly-owned subsidiary, Delbrook Holding, LLC purchased an 89,000 square foot building in Kearny, NJ, currently leased to K-Mart Stores, Inc. ("K-Mart") for $4,303,000 including costs and the assumption of $2,667,542 in debt. The lease requires K-Mart to pay $30,353.33 per month plus all operating and structural costs of the building. 21 IMPACT OF INFLATION AND CHANGES IN INTEREST RATES The Company's portfolio of mortgage loans made to affiliated limited partnerships consists primarily of loans made at fixed rates of interest. Therefore, increases or decreases in market interest rates are generally not expected to have an effect on the Company's earnings. Other than as a factor in determining market interest rates, inflation has not had a significant effect on the Company's net income. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DVL has no substantial cash flow exposure due to interest rate changes for long term debt obligations, because a majority of the long-term debt is at fixed rates. DVL primarily enters into long-term debt for specific business purposes such as the repurchase of debt at a discount, the acquisition of mortgage loans or the acquisition of real estate. DVL's ability to realize value on its mortgage holdings is sensitive to interest rate fluctuations in that the sales prices of real property and mortgages vary with interest rates. ITEM 4. CONTROLS AND PROCEDURES Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation. 22 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K -------------------------------- (A) Exhibits: 99.1 Chief Executive Officer and Chief Financial Officer Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (B) There were no reports of Form 8-K filed during the three months ended September 30, 2002 23 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DVL, INC. By: /s/ Jay Thailer ----------------------------- Jay Thailer, Executive Vice President and Chief Financial Officer November 13, 2002 CERTIFICATIONS I, Alan E. Casnoff, certify that: 1. I have reviewed this quarterly report on Form 10-Q of DVL, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15b-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 24 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Alan E.Casnoff - ----------------------- Alan E. Casnoff Chief Executive Officer November 13, 2002 CERTIFICATIONS I, Jay Thailer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of DVL, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15b-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 25 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Jay Thailer - ----------------------- Jay Thailer Chief Financial Officer November 13, 2002 26 EXHIBIT INDEX Exhibit Description - ------- ---------------------------------------------------------------------- 99.1 Chief Executive Officer and Chief Financial Officer Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 27 EX-99.1 3 c26143_ex99-1.txt Exhibit 99.1 CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, Chief Executive Officer and Chief Financial Officer of DVL, Inc. (the "Company"), each hereby certify pursuant to 18 U.S.C.ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Company's Quarterly Report on Form 10-Q for the period ending September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Quarterly Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Alan Casnoff - ----------------------- Alan E. Casnoff Chief Executive Officer November 13, 2002 /s/Jay Thailer - ----------------------- Jay Thailer Chief Financial Officer November 13, 2002 27 -----END PRIVACY-ENHANCED MESSAGE-----