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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File No. 1-8356
DVL, INC.
Exact name of Registrant as specified in its charter)
Delaware 13-2892858
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
70 East 55th Street, 7th Floor, New York 10022
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 350-9900
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ----------------------------- ---------------------
Common Stock, $.01 par value None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy information statements
incorporated by reference in Part IV of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
----- -----
The aggregate market value of the Common Stock of the Registrant held by non-
affiliates as of March 25, 2003 was $2,638,140.
The number of shares outstanding of Common Stock of the Registrant as of March
25, 2003 was 21,713,563.
DVL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED DECEMBER 31, 2002
ITEMS IN FORM 10-K
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Page
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PART I
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 9
Item 6. Selected Consolidated Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 24
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 31
Item 13. Certain Relationships and Related Transactions 40
Item 14. Controls and Procedures 43
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 44
PART I
This 2002 Annual Report on Form 10-K contains statements which constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Those statements include statements regarding the intent, belief or
current expectations of the Registrant and its management team. The Registrant's
stockholders and prospective investors are cautioned that any such forward-
looking statements are not guarantees of future performance and involve risks
and uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements. Such risks and uncertainties
include, among other things, general economic conditions, the ability of the
Registrant to obtain additional financings, the ability of the Registrant to
successfully implement its business strategy and other risks and uncertainties
that are discussed herein.
ITEM 1. BUSINESS.
OVERVIEW
DVL, Inc., a Delaware corporation incorporated in 1977 ("DVL" or the
"Company"), is a commercial finance company which is primarily engaged in the
ownership of residual interests in securitized portfolios, and the ownership and
servicing of a portfolio of secured commercial mortgage loans made to limited
partnerships in which the Company serves as general partner (each an "Affiliated
Limited Partnership"). In addition, the Company performs real estate asset
management and administrative services.
DVL is the 99.9% owner of two entities whose sole assets are the residual
interests in five securitized receivable pools. The securitized receivable pools
consist of receivables which are the obligations of various insurance companies
to pay money over a term of years. DVL receives the residual cash flow from the
five securitized receivable pools after payment to the securitized noteholders.
DVL is the general partner of approximately 64 Affiliated Limited
Partnerships which own income-producing commercial, office and industrial
properties comprising approximately 2.5 million square feet. A majority of the
properties are subject to long-term triple net leases with various tenants. The
principal tenant is Wal-Mart Stores, Inc. The Company, for numerous reasons
detailed in Critical Accounting Policies, does not consolidate any of the
various Affiliated Limited Partnerships in which it holds the general partner
and limited partner interest nor does DVL account for such interests on the
equity method. The Company also performs real estate and partnership management
services for these partnerships.
The mortgage loans held by the Company are primarily "wrap-around" mortgage
loans which are subject to non-recourse, underlying mortgages held by unrelated
institutional lenders. These underlying loans self-liquidate from the base rents
payable by the tenants over the primary term of their leases. The majority of
the mortgage payments from the Affiliated Limited Partnerships are used to pay
the underlying mortgage holders required monthly principal and interest
payments. In addition, the Company receives a portion of the Affiliated Limited
Partnerships' percentage rent income as additional debt service. The Company's
other principal assets include (a) real estate interests held for development,
(b) a long term leasehold interest in a commercial property, and (c) limited
partnership interests in certain Affiliated Limited Partnerships.
1
The Company derives the majority of its income from (a) residual interests
in securitized receivables portfolios, (b) wrap-around mortgages (as a result of
the difference in the effective interest rates between the wrap around mortgage
and the underlying mortgages), (c) percentage rents received from various
tenants of the Affiliated Limited Partnerships, (d) rentals received as a result
of its real estate holdings (e) long-term leasehold interests, (f) fees received
as General Partner of the Affiliated Limited Partnerships (including disposition
and management fees), (g) distributions received as a limited partner in the
Affiliated Limited Partnerships, and (h) fees from management contracts.
As of December 31, 2002, the Company had net operating loss carry-forwards
("NOLS") aggregating approximately $52 million, which expire in various years
through 2019, including $45 million which expire through 2007. If the Company
generates profits in the future, the Company may be subject to limitations on
the use of its NOLS pursuant to the Internal Revenue Code. It is anticipated
that the taxable income associated with the residual interests will utilize
significant NOLS. There can be no assurance that a significant amount of the
Company's existing NOLS will be available to the Company at such time as the
Company desires to use them.
DVL believes that its anticipated cash flow provided by operations is
sufficient to meet its current cash requirements through March 2004. The Company
has in the past and expects in the future to continue to augment its cash flow
with additional cash generated from either the sale or refinancing of its assets
and/or borrowings. See Management Discussion and Analysis of Financial Condition
and Results of Operations.
The Company's current strategy is to (i) maximize the value of its assets
and meet its short-term working capital needs by continuing to manage,
administer and service its existing portfolio,(ii) obtain additional investments
and (iii) expand through the acquisition of one or more companies to generate
additional income and cash flow. The Company anticipates that it would finance
any possible future acquisition through new borrowing or the issuance of its
common or preferred stock. There can be no assurance that the Company will be
able to identify or acquire businesses. While the Company regularly evaluates
and discusses potential acquisitions, the Company currently has no
understandings, committments or agreements with respect to any acquisitions.
Each share of the stock of the Company includes a restriction prohibiting
sale, transfer, disposition or acquisition of any stock until September 30, 2009
without the prior consent of the Board of Directors of the Company by any person
or entity that owns or would own 5% or more of the issued and outstanding stock
of the Company if such sale, purchase or transfer would in the opinion of the
Board, jeopardize the Company's preservation of its federal income tax
attributes under Section 382 of the Internal Revenue Code. See Changes in
Control in Item 12 for a more detailed discussion.
The principal executive offices of the Company are located at 70 East 55th
Street, 7th Floor, New York, New York 10022. The Company's telephone number is
(212) 350-9900. The Company and its subsidiaries have not engaged in any
business activity outside of the United States.
2
BUSINESS ACTIVITIES
RESIDUAL INTERESTS IN SECURITIZED PORTFOLIOS
During 2001, the Company, through its wholly-owned consolidated subsidiary,
S2 Inc. ("S2"), acquired 99.9% Class B member interests in Receivables II-A LLC,
a limited liability company ("Receivables II-A") and Receivables II-B LLC, a
limited liability company ("Receivables II-B"), from an unrelated party engaged
in the acquisition and management of periodic payment receivables. The Class B
member interests entitle the Company to be allocated 99.9% of all items of
income, loss and distribution of Receivables II-A and Receivables II-B.
Receivables II-A and Receivables II-B solely receive the residual cash flow from
five securitized receivable pools after payment to the securitized noteholders.
The Company purchased its interests for an aggregate purchase price of
approximately $35,791,000, including costs of approximately $1,366,000 which
included the issuance of warrants, valued at $136,000, for the purchase of 3
million shares of the common stock of DVL, exercisable until 2011 at a price of
$.20 per share and investment banking fees to an affiliate aggregating $900,000.
The purchase price was paid by the issuance of 8% per annum limited recourse
promissory notes by S2 in the aggregate amount of $34,425,000. Principal and
interest are payable from the future monthly cash flow. The notes mature August
15, 2020 through December 31, 2021 and are secured by a pledge of S2's interests
in Receivables II-A, Receivables II-B and all proceeds and distributions related
to such interests. The principal amount of the notes and the purchase price are
adjusted, from time to time, based upon the performance of the underlying
receivables. DVL also issued its guaranty of payment of up to $3,443,000 of the
purchase price. The amount of the guaranty is regularly reduced by 10% of the
principal paid. The amount of the guaranty at December 31, 2002 was $3,342,000.
Payments, if any, due under this guaranty are payable after August 15, 2020.
In accordance with the purchase agreements, from the acquisition dates
through December 31, 2002, the residual interests in securitized portfolios and
the notes payable were decreased by approximately $532,000 as a result of
purchase price adjustments.
The following table reconciles the initial purchase price with the carrying
value at December 31, 2002:
Initial purchase price $ 35,791,000
Adjustments to purchase price (532,000)
Principal payments (41,000)
Accretion 893,000
------------
$ 36,111,000
============
The purchase agreements contain annual minimum and maximum levels of cash
flow that will be retained by the Company, after the payment of interest and
principal on the notes payable, which are as follows:
Years Minimum Maximum
----- ------- -------
2002 to 2009 $ 743,000 $ 880,000
2010 to final payment $1,050,000 $1,150,000
on notes payable*
* Final payment on the notes payable expected 2016 related to the Receivables
II-A transaction and 2018 for the Receivables II-B transaction.
3
The Company believes it will receive significant cash flows after final payment
of the notes payable.
MORTGAGE LOANS
The Company's mortgage loan portfolio consists primarily of long-term wrap-
around and other mortgage loans to Affiliated Limited Partnerships secured by
the types of properties discussed above. Most of the loans are subordinated
obligations with the majority of the payments received being utilized to
amortize the related underlying mortgage loan over the primary term of the
related lease. The Company builds equity in the mortgage loans over time as the
principal balance of such underlying mortgage loans are amortized. At December
31, 2002, the Company had investments in 32 mortgage loans to Affiliated Limited
Partnerships with a carrying value for financial reporting purposes of
$31,222,000 (prior to the allowance for loan losses of approximately
$2,870,000). These mortgage loan receivables are subject to underlying mortgage
obligations of $19,391,000.
Generally, the tenants of the Affiliated Limited Partnerships executed
"triple-net" leases and, therefore, the tenants are responsible for the payment
of all taxes, insurance and other property costs. In certain instances, the
partnership is required to maintain the roof and structure of the premises.
DVL's mortgage portfolio included 22 loans with a net carrying value of
$25,627,000 as of December 31, 2002, which are due from Affiliated Limited
Partnerships that own properties leased to Wal-Mart Stores, Inc. These mortgage
loan receivables were subject to underlying mortgage obligations of $17,046,000
as of December 31, 2002. Wal-Mart is a public company subject to the reporting
requirements of the SEC. Wal-Mart has closed two of its stores located on the
properties subject to the Company's mortgages with a net carrying value of
$2,427,000. However, Wal-Mart continues to pay the required rent with respect to
such properties. Net carrying value refers to the unpaid principal balance less
any allowance for reserves, and any amount which represents future interest
based upon the purchase of the loan at a discount.
In addition to base rent, most leases also require the tenant to pay
additional rent equal to a percentage of gross receipts from the tenant's
operation of a property above a specified amount ("Percentage Rent"). In all
cases where the partnership is entitled to receive Percentage Rent, and the
Company holds the wrap-around mortgage, a portion of such rent is required to be
paid to the Company as additional interest and/or additional debt service on the
long-term mortgage.
The Company has the right to refinance the outstanding mortgage loans
underlying its wrap-around mortgage loans provided that the debt service and
principal amount of a refinanced loan are no greater than that of the existing
wrap-around loan. The Company also has the right to arrange senior financing
secured by properties on which it holds first or second mortgage loans by
subordinating such mortgage loans, subject to the limitations set forth above.
During 2001, DVL purchased two mortgage loans from an entity that is part
of the Opportunity Fund (see "Opportunity Fund", discussed below on page 16)
which are secured by real estate owned by Affiliated Limited Partnerships in
which DVL is the general partner. The loans were purchased for an aggregate
price of $325,000, paid in cash. In early 2002, DVL obtained bank financing of
$400,000, less closing costs, secured by such loans.
4
All of the Company's mortgage loans are pledged to secure the indebtedness
of the Company to NPO Management, LLC ("NPO") and Blackacre Capital Group, LLC
("BCG"), which are entities engaged in real estate lending and management
transactions and are affiliated with certain stockholders and insiders of the
Company. See Items 7 and 13 below for a description of certain related
transactions involving NPO and BCG.
LOAN PORTFOLIO
The following table sets forth the number of various loans owed to the
Company which are outstanding, the aggregate loan balances, including accrued
interest, and the allowances for loan losses, at December 31, 2002. See Tables 1
and 2 of Appendix "A" to this Form 10-K for detailed information as to each such
loan.
Number Aggregate Allowance
of Loan for Loan
Type of Loan Loans Amount Losses
------------ -------- --------- ---------
(dollars in thousands)
Long-term mortgages due from Affiliated
Limited Partnerships $ 46,801
Less: unearned interest (1) (15,579)
--------
Total loans collateralized by mortgages 32 31,222 $ 2,870
-------- -------- --------
Loans collateralized by limited partnership
interests 18 257 215
-------- -------- --------
Advances due from Affiliated Limited Partnerships 3 101 --
-------- -------- --------
Total loans 53 $ 31,580 $ 3,085
======== ======== ========
- ----------
(1) Unearned interest represents the unamortized balance of discounts on
previously funded loans.
INVESTMENTS IN AFFILIATED LIMITED PARTNERSHIPS
The Company over the years has acquired various limited partnership
interests in Affiliated Limited Partnerships. At December 31, 2002 and 2001 the
Company's carrying value of such limited partnerships was $1,066,000 and
$1,121,000, respectively.
PARTNERSHIP AND PROPERTY MANAGEMENT
The Company is the general partner of approximately 64 Affiliated Limited
Partnerships, which the Company does not consolidate (see Overview), from which
it receives management, transaction and other fees. The Company, through
Professional Service Corporation ("PSC"), its wholly-owned subsidiary, is
engaged in the management of an industrial property located in New Jersey
pursuant to a master lease. This master lease permits PSC to sub-lease the
property to tenants and retain profits subject to the payment by PSC of
operating expenses and rent to the entity that owns the property.
In January 2003, the Company was advised that its largest subtenant at the
PSC Property would be going out of business. The Company negotiated a lease
extension with its subtenant thru June of 2003.
5
In connection with the continued viability of the property, the Company is
pursuing two separate strategies: (1) re-leasing of the property to various
subtenants and (2) the potential sale of the property to a third party with the
Company retaining a portion of such net sale proceeds. The Company is currently
negotiating subleases with several potential subtenants and is negotiating an
agreement with the fee owner of the property, allocating the proceeds on a sale.
Fees for Services
In June 1998, the Company entered into a Management Services Agreement with
a limited partnership (in which certain of its partners are affiliates of NPO
and Blackacre (as defined below)) under which the Company renders services for a
fee. This agreement may be terminated with 30 days prior notice by either party.
As compensation, the Company received the following (a) a monthly fee through
November 2000, and (b) after all the partners of the partnership have earned a
20% internal rate of return, compounded quarterly, on their capital
contributions, an amount of cash equal to 25% of the profits, as defined in the
agreement. The Company received compensation under such agreement equal to $0,
$442,900, and $363,000 in 2002, 2001 and 2000, respectively.
In addition, the Company provides services for a limited partnership (whose
general partner is an affiliate of NPO) to render certain accounting and
administrative services. As compensation, the Company receives expense
reimbursements of $4,000 per month. The Company received compensation under such
agreement of $48,000 during each of 2002, 2001, and 2000.
The Company has a property management agreement with an entity that is part
of the Opportunity Fund pursuant to which DVL provides property management
services. The Company received compensation under such agreement of $27,000 in
each of 2002, 2001, and 2000.
In November 1999, the Company entered into a management service agreement
with an entity whose partners are affiliates of NPO to render certain accounting
and administrative services. As compensation, the Company receives a monthly fee
of $2,000, a monthly deferred fee of $6,500 and an annual incentive fee if
certain levels of profitability are obtained. The Company recorded fees of
$129,000 and $152,000 in 2002 and 2001 which included incentive fees of $53,000
and $50,000, respectively.
REAL ESTATE HOLDINGS
The Company currently owns the following properties:
(1) Eight industrial buildings totaling 347,000 square feet on approximately
eight acres located in Kearny, NJ leased to various unrelated tenants.
(2) An 89,000 square foot building on approximately eight acres of land leased
to K-Mart in Kearny, NJ which adjoins the property described above.
The Company is currently pursuing a redevelopement of the Kearny
properties into an integrated shopping center. In 2002, the Kearny property was
designated as part of the Passaic River Redevelopment Area by the Town of
Kearny.
6
As a result, the Company has sued the town of Kearny claiming that the
redevelopment plan is not in conformity with New Jersey law. The lawsuit is
currently pending. In the event the lawsuit is unsuccessful, the redeveloper
appointed by the Town will be required to acquire the Company's properties for
their fair market value.
The Company has had its properties appraised and such appraisal indicated
that the value of the Company's properties are in excess of their carrying
value. In the interim, the Company continues to lease the properties to multiple
tenants which provides positive cash flow to the Company.
(3) A vacant 31,000 square foot former Grand Union Supermarket and approximately
six acres of land underlying the building. The Company has entered into
agreements to sell the property for $810,000 which is being carried at $413,000
at December 31, 2002.
OPPORTUNITY FUND
The Company, BCG, an affiliate of Blackacre (as defined below), P.N.M.
Capital LLC, an affiliate of NPO ("PNM"), and Pemmil Management LLC, an
affiliate of NPO ("Pemmil") and PNM (collectively the "NPO Affiliates") are
parties to a certain Agreement which is called the Opportunity Agreement (the
"Opportunity Agreement"). The Opportunity Agreement had a term of three years
and expired April 2001. The Opportunity Agreement provided for an arrangement
(the "Opportunity Fund") whereby the fund had the right of first refusal to
finance the acquisition of limited partnership interests or mortgage loans to
Affiliated Limited Partnerships in which the Company is general partner, or
which the Company already owns, if the Company was unable to pursue such
business opportunity with its own funds from its reserves or available from
operations, or by obtaining financing from a third party or issuing equity.
All of the required capital contributions were to be provided by the other
members. The Company was to receive up to 20% of the profits from an opportunity
after the other investors received a return of their investment plus preferred
annual returns ranging from 12% to 20%.
The Opportunity Agreement has now terminated. While the Opportunity Fund no
longer has the right of first refusal with regard to opportunities, the Company
may continue to present opportunities to the fund.
As of March 1, 2003, the Opportunity Fund had purchased 15 wrap mortgages
of Affiliated Limited Partnerships from unaffiliated third parties, acquired
limited partnership units from unaffiliated individuals in three Affiliated
Limited Partnerships, and acquired an ownership interest in a property of an
Affiliated Limited Partnership. During 2000, DVL purchased three of the
mortgages owned by the Opportunity Fund. During 2001, a newly formed, wholly-
owned subsidiary of DVL purchased two of the mortgages owned by the Opportunity
Fund. In December 2001, the Opportunity Fund also sold its ownership interest in
a property located in Kearny, NJ to an entity in which certain partners are
affiliates of NPO. As of March 2003 the Opportunity Fund owns four mortgages.
During 2001, DVL was paid approximately $280,000 from the investments by the
Opportunity Fund, of which $189,000 was used to pay amounts owed by DVL under a
note in favor of an entity that is part of the Opportunity Fund incurred in
connection with the acquisition of certain mortgage loans. During 2002, DVL did
not receive any payments from the investments by the Opportunity Fund.
7
EMPLOYEES
As of March 2003, the Company had 10 employees, all of whom were employed
on a full-time basis other than the President of the Company, who serves on a
part-time basis. The Company is not a party to any collective bargaining
agreement and the Company's employees are not represented by any labor union.
The Company considers its relationship with its employees to be good.
SEGMENTS
The Company has two reportable segments; real estate and residual
interests.
You can find information about our business segment information in "Note
12. Segment Information" of our Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES.
The Company maintains corporate headquarters in New York City in a leased
facility located at 70 E. 55th Street, New York, New York, which occupies
approximately 5,600 square feet of office space. The lease for such office space
is due to expire on January 31, 2008. The base rent is $215,802 per annum. A
description of the other properties owned by the Company appears in the
subsection captioned "Real Estate Holdings" in Item 1 above. The Company
believes that its existing facilities are adequate to meet its current operating
needs and that suitable additional space should be available to the Company on
reasonable terms should the Company require additional space to accommodate
future operations or expansion.
ITEM 3. LEGAL PROCEEDINGS.
The Company from time to time is a party in various lawsuits incidental to
its business operations. In the opinion of the Company, none of such litigation
in which it is currently a party, if adversely determined, will have a material
adverse effect on the Company's financial condition or its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
8
PART II
ITEM 5. MARKET FOR DVL'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock of DVL is traded on the over-the-counter market and is
quoted on the OTC Bulletin Board maintained by the NASD under the symbol "DVLN".
As of March 17, 2003, the last reported sale price of DVL common stock was $.16
per share. The following table sets forth, for the calendar periods indicated,
the high and low bid prices of the Common Stock as reported by the NASD for 2002
and 2001. Such prices are inter-dealer prices without retail mark-up, mark-down
or commission, and do not represent actual transactions.
2002 High Low
- ---- ---- ---
Fourth Quarter ...................... $ .19 $ .09
Third Quarter ....................... .21 .12
Second Quarter ...................... .21 .13
First Quarter ....................... .24 .08
2001 High Low
- ---- ---- ---
Fourth Quarter ..................... $ .10 $ .07
Third Quarter ....................... .09 .05
Second Quarter ...................... .07 .05
First Quarter ....................... .06 .05
At March 20, 2003, there were 3,416 holders of record of Common Stock of
DVL. No dividends have been paid since October 1990. At this time, DVL does not
anticipate paying any dividends in the foreseeable future.
9
ITEM 6. SELECTED FINANCIAL DATA
The data set forth below should be read in conjunction with other financial
information of DVL, including its consolidated financial statements and
accountants' report thereon included elsewhere herein and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Consolidated Statements of Operations Data
(In thousands except for per share data)
Year Ended December 31,
2002 2001 2000 1999 1998
-------- ------- -------- ------- --------
Revenues
Affiliates $ 4,087 $ 5,303 $ 4,812 $ 6,360 $ 5,794
Other 5,007 4,252 1,251 1,375 528
-------- ------- -------- ------- --------
Total $ 9,094 $ 9,555 $ 6,063 $ 7,735 $ 6,322
======== ======= ======== ======= ========
Income (loss) before extraordinary gain $ 1,462 $ 2,505 $ 199 $ 1,026 $ (758)
Extraordinary (loss) gain on the
settlement of indebtedness (71) 361 306 1,267 202
-------- -------- -------- ------- --------
Net Income (loss) $ 1,391 $ 2,866 $ 505 $ 2,293 $ (556)
======== ======== ======== ======= ========
Basic earnings (loss) per share
Income (loss) before extraordinary gain $ .06 $ .15 $ .01 $ .06 $ (.04)
Extraordinary gain .00 .02 .02 .08 .01
-------- -------- -------- ------- --------
Net Income (loss) $ .06 $ .17 $ .03 $ .14 $ (.03)
======== ======== ======== ======= ========
Diluted earnings (loss) per share
Income (loss) before extraordinary gain $ .03 $ .03 $ .01 $ .02 $ (.04)
Extraordinary gain .00 .00 .00 .02 .01
-------- -------- -------- ------- --------
Net Income (loss) $ .03 $ .03 $ .01 $ .04 $ (.03)
======== ======== ======== ======= ========
10
Consolidated Balance Sheet Data
(In thousands)
As at December 31
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Total assets $79,584 $79,690 $45,437 $41,858 $55,635
======= ======= ======= ======= =======
Notes payable - residual interests $33,416 $35,044 $ -- $ -- $ --
======= ======= ======= ======= =======
Underlying mortgages payable $19,391 $22,218 $26,019 $27,692 $38,644
======= ======= ======= ======= =======
Long-term debt and notes payable $12,720 $ 8,911 $10,781 $ 5,156 $ 9,937
======= ======= ======= ======= =======
Shareholders' equity $12,378 $10,955 $ 7,573 $ 7,068 $ 4,775
======= ======= ======= ======= =======
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
INTRODUCTION
The Company is a commercial finance company which has been primarily
engaged in the ownership and servicing of a portfolio of secured commercial
mortgage loans, as well as managing numerous properties and the limited
partnerships which own such properties. During 2001, the Company purchased
ownership interests in residual interests in securitized receivables portfolios,
which should provide significant cash flow and income for the Company.
DVL believes that its anticipated cash flow provided by operations is
sufficient to meet its current cash requirements through March 2004. The Company
has in the past and expects in the future to continue to augment its cash flow
with additional cash generated from either the sale or refinancing of its assets
and/or borrowings.
The Company's current strategy is to (i) maximize the value of its assets
and meet its short-term working capital needs by continuing to manage,
administer and service its existing portfolio, (ii) obtain additional
investments, and (iii) expand through the acquisition of one or more companies
to generate additional income. There can be no assurance that the Company will
be able to identify or acquire businesses. While the Company regularly evaluates
and discusses potential acquisitions, the Company currently has no
understandings, commitments or agreements with respect to any acquisitions. The
Company anticipates that it would finance any possible future acquisition
through new borrowings or the issuance of its common or preferred stock.
At December 31, 2002, the Company had net operating loss carryforwards
("NOLS") aggregating approximately $52 million, which expire in various years
through 2019, including $45 million which expire through 2007. If the Company
generates taxable income in the future, the Company may be subject to
limitations on the use of its NOLS pursuant to the Internal Revenue Code. It is
anticipated that the taxable income associated with the residual interests will
utilize significant NOLS. There can be no assurance that a significant amount of
the Company's existing NOLS will be available to the Company at such time as the
Company desires to use them.
12
SIGNIFICANT EVENTS
ACQUISITION OF RESIDUAL INTERESTS IN SECURITIZED PORTFOLIOS
During 2001, the Company, through its wholly-owned consolidated subsidiary,
acquired 99.9% Class B member interests in Receivables II-A and Receivables II-B
from an unrelated party engaged in the acquisition and management of periodic
payment receivables. The Class B member interests entitle the Company to be
allocated 99.9% of all items of income, loss and distribution of Receivables
II-A and Receivables II-B. Receivables II-A and Receivables II-B solely receive
the residual cash flow from five securitized receivable pools after payment to
the securitized noteholders.
The Company purchased its interests for an aggregate purchase price of
approximately $35,791,000, including costs of approximately $1,366,000 which
included the issuance of warrants, valued at $136,000, for the purchase of 3
million shares of the common stock of DVL, exercisable until 2011 at a price of
$.20 per share and investment banking fees to an affiliate aggregating $900,000.
The purchase price was paid by the issuance of 8% per annum limited recourse
promissory notes by S2 in the aggregate amount of $34,425,000. Principal and
interest are payable from the future monthly cash flow. The notes mature August
15, 2020 through December 31, 2021 and are secured by a pledge of S2's interests
in Receivables II-A, Receivables II-B and all proceeds and distributions related
to such interests. The principal amount of the notes and the purchase price are
adjusted, from time to time, based upon the performance of the underlying
receivables. DVL also issued its guaranty of payment of up to $3,443,000 of the
purchase price. The amount of the guaranty is regularly reduced by 10% of the
principal paid. The amount of the guaranty at December 31, 2002 was $3,342,000.
Payments, if any, due under this guaranty are payable after August 15, 2020.
In accordance with the purchase agreements, from the acquisition dates
through December 31, 2002, the residual interests in securitized portfolios and
the notes payable were decreased by approximately $532,000, as a result of
purchase price adjustments.
The following table reconciles the initial purchase price with the carrying
value at December 31, 2002:
Initial purchase price $ 35,791,000
Adjustments to purchase price (532,000)
Principal payments (41,000)
Accretion 893,000
------------
$ 36,111,000
============
The purchase agreements contain annual minimum and maximum levels of cash
flow that will be retained by the Company, after the payment of interest and
principal on the notes payable, which are as follows:
Years Minimum Maximum
----- ------- -------
2002 to 2009 $ 743,000 $ 880,000
2010 to final payment $1,050,000 $1,150,000
on notes payable*
* Final payment on the notes payable expected 2016 related to the Receivables
II-A transaction and 2018 for the Receivables II-B transaction.
13
The Company believes it will receive significant cash flows after final payment
of the notes payable.
RECENT DEBT REDEMPTIONS
To date, the Company has redeemed an aggregate of $1,145,000 of the
Company's 10% redeemable promissory notes due December 31, 2005 (the "Notes")
for cash at the face value plus accrued interest of approximately $49,000. As of
December 31, 2002, $384,000 has been paid and the remaining $810,000 payable is
reflected as a non-interest bearing liability.
The Company has the option to redeem the outstanding Notes by issuing
additional shares of common stock with a then current market value (determined
based on a formula set forth in the Notes), equal to 110% of the face value of
the Notes plus any accrued and unpaid interest thereon. Because the applicable
market value of the common stock will be determined at the time of redemption,
it is not possible currently to ascertain the precise number of shares of common
stock that may have to be issued to redeem the outstanding Notes. The redemption
of the Notes may cause significant dilution for current shareholders. The actual
dilutive effect cannot be currently ascertained since it depends on the number
of shares to be actually issued to satisfy the Notes. The Company currently
intends to exercise at some point in the future its redemption option to the
extent it does not buy back the outstanding Notes by means of cash tender offers
or cash redemptions.
Notes with an aggregate principal amount of approximately $1,951,000 remain
outstanding as of December 31, 2002. The redemptions and the exchange of Notes
for common stock by Blackacre (as defined below) have reduced the potential
dilutive effective on the Company's current stockholders that would result from
redemption of the notes for shares of common stock. However, given the aggregate
principal amount of Notes which remains outstanding, the potential dilutive
effect of such a redemption is still significant.
BLACKACRE TRANSACTION
The Company had outstanding as of December 31, 2002 approximately $1,951,000
aggregate principal amount of 10% redeemable notes due December 31, 2005. The
notes are redeemable in cash, or at the option of DVL, for common stock at a
formula based upon the market price of the DVL common stock.
In an effort to reduce the potential future dilution to existing shareholders
resulting from a redemption of the notes for stock, in December 2001 the Company
entered into an agreement with Blackacre Bridge Capital, LLC ("Blackacre"), an
affiliate of BCG and Stephen Feinberg, under which Blackacre exchanged
$1,188,278 principal amount of notes for 4,753,113 shares of DVL's common stock
(the "Exchange Agreement"). This represents a conversion rate of $.25 per share.
The Exchange Agreement includes a provision which states that Blackacre shall
not sell or acquire any shares of the Company without the written consent of the
Board of Directors of the Company. The Board may withhold consent prior to
December 31, 2005, only if such transfer would, in the sole discretion of the
Board of Directors, jeopardize the Company's preservation of its Federal Income
Tax attributes under Section 382 of the Internal Revenue Code or in the case of
a transfer after December 31, 2005 would be materially adverse to the interest
of the Company.
14
If at any time after December 31, 2005, Blackacre is prevented from disposing of
any of its shares as a result of the Board of Directors determination that the
transfer would be materially adverse to the interest of the Company, then
Blackacre shall have the right to sell to the Company and the Company shall be
obligated to purchase up to the number of shares of common stock which when
added to all prior shares of common stock sold to the Company by Blackacre would
have an aggregate market value of not more than $1 million dollars.
The transaction resulted in an extraordinary gain of $482,000 in 2001. As a
result of the exchange, Blackacre and its affiliates now own approximately 25%
of DVL's issued and outstanding common stock.
NPM AND NPO TRANSACTIONS
In September of 1996, in an effort to alleviate liquidity problems and meet
certain mandatory debt repayment requirements, the Company entered into a loan
transaction with NPM Capital, LLC ("NPM") pursuant to which NPM purchased
certain loans from creditors of the Company. The original principal loan amount
from NPM was $8,382,000 (the "Original Loan").
Under the terms of the Original Loan, the principal balance was payable
over six years with interest accruing at the rate of 10.25% per annum. In May
1999, DVL repaid all amounts due under the NPM loan.
In connection with the transactions contemplated by the Original Loan, in
March 1996, the Company and NPO, an affiliate of certain principals of NPM,
entered into an Asset Servicing Agreement (the "Asset Servicing Agreement"),
pursuant to which NPO is providing the Company with administrative and advisory
services relating to the assets of the Company and its Affiliated Limited
Partnerships. In consideration for such services, the Company pays NPO $600,000
per year (with cost of living increases) over the seven-year term of the
original agreement, subject to early termination under certain conditions.
During 2001 the agreement was extended under the same terms and conditions for
another five years to March 2008. The current annual fee is $654,000. The
Company recorded fees to NPO of $652,000, $640,000, and $623,000 under the Asset
Servicing Agreement for 2002, 2001 and 2000, respectively. As of December 31,
2002 and 2001 the Company owed NPO accrued fees of $33,000 and $28,000,
respectively plus other expenses of $10,000 in each year.
In connection with the Original Loan, certain affiliates of NPM acquired an
aggregate of 1,000,000 shares (the "Base Shares") of the Company's Common Stock
for $200,000. The Base Shares currently represent approximately 4.6% of the
outstanding Common Stock of the Company. An affiliate of NPM also acquired 100
shares of preferred stock of the Company for $1,000. The Company issued to
affiliates of NPM, warrants (the "Warrants"), exercisable as of January 1999, to
purchase such number of shares of Common Stock as, when added to the Base
Shares, adjusted for shares of common stock subsequently issued to, or purchased
in the open market by affiliates of NPM and NPO represent an aggregate of 49% of
the outstanding Common Stock of the Company on a fully-diluted basis. The
original exercise price of the Warrants was $.16 per share, subject to
applicable anti- dilution provisions and subject to a maximum aggregate exercise
price of approximately $1,900,000. The Warrants expire on December 31, 2007. The
Warrants were valued for financial statement purposes at $516,000 at the date of
issuance and such value resulted in a debt discount which was amortized using
the effective interest rate method. Through March 2003, no Warrants have been
exercised.
15
The possibility that some or all of the Warrants may be exercised creates
the potential for significant dilution of the current stockholders. The actual
dilutive effect cannot be currently ascertained, since it depends on whether,
and if so to what extent, the Warrants are exercised.
OPPORTUNITY FUND
In April 1998, DVL, an affiliate of Blackacre and affiliates of NPO entered
into an Opportunity Agreement providing for the Opportunity Fund, pursuant to
which entities would be formed, from time to time, to enter into certain
transactions involving the acquisition of limited partnership interests in the
assets of, or mortgage loans to, Affiliated Limited Partnerships or other assets
in which the Company has an interest. These investment opportunities were to be
presented to the Opportunity Fund on a first-refusal basis, if the Company, due
to financial constraints, was unable to pursue such business opportunities with
its own funds.
All of the required capital contributions were to be provided by the
members other than the Company. The Company was to receive up to 20% of the
profits from an opportunity after the other investors received a return of their
investment plus preferred annual returns ranging from 12% to 20%.
The Opportunity Agreement has now terminated. While the fund no longer has
the right of first refusal with regard to opportunities, the Company may
continue to present opportunities to the fund.
As of March 1, 2003, the Opportunity Fund had purchased 15 wrap mortgages
of Affiliated Limited Partnerships from unaffiliated third parties, acquired
limited partnership units from unaffiliated individuals in three Affiliated
Limited Partnerships, and acquired an ownership interest in a property of an
Affiliated Limited Partnership.
During 2000, DVL purchased three of the mortgages owned by the Opportunity
Fund. During 2001, a newly formed, wholly-owned subsidiary of DVL purchased two
of the mortgages owned by the Opportunity Fund. In December 2001, the
Opportunity Fund sold its ownership interest in a property in Kearny, NJ to an
entity in which certain partners are affiliates of NPO. As of March 2003, the
Opportunity Fund owns four mortgages. During 2001, DVL was paid approximately
$280,000 from the investments by the Opportunity Fund, of which $189,000 was
used to pay amounts owed by DVL under a note in favor of an entity that is part
of the Opportunity Fund incurred in connection with the acquisition of certain
mortgage loans. During 2002, DVL did not receive any payments from the
investments by the Opportunity Fund.
RESULTS OF OPERATIONS
DVL had income before extraordinary items, net income after extraordinary
items, and extraordinary (losses) gains, as follows:
2002 2001 2000
---- ---- ----
Income before extraordinary items $1,462,000 $ 2,505,000 $ 199,000
Extraordinary (losses) gains $ (71,000) $ 361,000 $ 306,000
Net income $1,391,000 $ 2,866,000 $ 505,000
16
Interest income on mortgage loans from affiliates decreased (2002-
$2,903,000, 2001 - $3,118,000, 2000 - $3,436,000) and interest expense on
underlying mortgages decreased (2002 - $1,648,000, 2001 - $2,029,000, 2000 -
$2,329,000), as a result of a reduction in the size of DVL's mortgage portfolio.
Gains on satisfaction of mortgage loans were as follows:
2002 2001 2000
---- ---- ----
$ 252,000 $ 615,000 $ 256,000
These gains resulted from the Company collecting net proceeds on the
satisfaction of mortgage loans that were greater than the Company's carrying
value.
Management fees decreased (2002 - $239,000, 2001 - $804,000, 2000 -
$500,000) in 2002 from 2001 and increased in 2001 from 2000 primarily as a
result of the Company earning a $442,900 incentive fee during 2001.
Included in management fees were incentive management fees of $-0-,
$442,900, and $312,500 received during 2002, 2001, and 2000, respectively, from
PBD Holdings, Inc. an entity that is owned by affiliates of NPO and BCG ("PBD").
Incentive management fees are earned when properties owned by PBD are sold;
therefore, the fees earned by the Company vary based on the sales proceeds. PBD
currently has one parcel of land remaining.
The Company also provided property management and administrative services
for which it received fees of $239,000, $361,000 and $138,000 for 2002, 2001,
and 2000, respectively, which are included in management fees. The increases in
property management and administrative services from 2000 to 2001 were a result
of the Company obtaining new property management contracts. The fees for 2001
included non recurring fees of $174,000.
Transaction and other fees from Affiliated Limited Partnerships were as follows:
2002 2001 2000
---- ---- ----
$ 293,000 $ 260,000 $ 413,000
Transaction and other fees were earned in connection with the sales of
partnership properties and refinancings of underlying mortgages. The amount of
fees vary from year to year depending on the size and number of transactions.
Interest income on residual interests (2002 - $4,373,000, 2001 -
$2,802,000, 2000 - $0) and interest expense on the related notes payable (2002 -
$2,771,000; 2001 - $1,840,000, 2000 - $0) arose as DVL completed the
acquisitions of residual interests in March 2001 and August 2001.
Rental income from others was as follows:
2002 2001 2000
---- ---- ----
Net rental income from others $ 561,000 $ 720,000 $ 523,000
Gross rental income from others $2,441,000 $2,122,000 $1,899,000
17
The decrease in net rental income in 2002 from 2001 was primarily the
result of an increase in bad debts of $334,000 relating to write off of
receivables from a major tenant. The increase in bad debts was partially offset
by higher gross rents. The tenant has notified the Company that they have sold
their assets. The purchaser of the inventory has agreed to the pay the Company
$94,000 in rent per month plus real estate taxes and insurance from January 2003
through June 2003. The Company is seeking replacement tenants for the space that
will become vacant.
The primary reason for the increase in net rental income from 2000 to 2001
was the result of lower costs. The reduction in costs was due to a reduction in
lease obligations resulting from the purchase in December 2000 of certain real
estate which the Company had previously leased. The increase in net rental
income was partially offset by a rent reduction granted to a tenant and greater
depreciation expense due to the purchase of the real estate assets, as well as
higher insurance costs.
Distributions from investments from others decreased in 2002 from 2001
(2002 - $35,000, 2001 - $667,000) and increased in 2001 from 2000 (2001 -
$667,000; 2000 - $149,000) primarily as a result of receiving $280,000 in
distributions from investments in the Opportunity Funds and $348,000 in
distributions above the carrying value of other investments in 2001.
General and administrative expenses decreased in 2002 from 2001 (2002 -
$1,478,000, 2001 - $1,743,000) primarily due to decreases in consulting costs
and state tax expense. Included in consulting costs in 2001 were fees related to
a refinancing of certain assets. State tax expenses decreased in 2002 from 2001
due to a decrease in the Company's Delaware franchise tax, as well as a one time
tax payment in 2001 of $52,000. These decreases were partially offset by higher
salary and employee benefit costs.
General and administrative expenses increased in 2001 from 2000 (2001 -
$1,743,000, 2000 - $1,353,000). The primary reason for the increase in 2001 from
2000 was increased salaries and hiring costs as well as rent costs for the
Company's office headquarters due to escalation charges and lower rental
reimbursements.
The asset servicing fee paid to NPO increased (2002 - $652,000, 2001 -
$640,000, 2000 - $623,000) pursuant to the terms of the Asset Servicing
Agreement, due to an increase in the consumer price index.
Legal and professional fees increased in 2002 from 2001 (2002 - $371,000,
2001 - $344,000) as a result of $32,000 paid by the Company for services
rendered to the Company outside the scope of the Asset Servicing Agreement by
affiliates of NPO, and legal fees relating to the preparation of proxy
materials.
Legal and professional fees increased in 2001 from 2000 (2001 - $344,000,
2000 - $312,000) primarily due to expenses incurred in evaluating a potential
acquisition that was not completed. The Company has not employed an in-house
legal counsel since 1998; consequently, legal fees vary depending on the number
and sophistication of transactions that are executed.
Interest expense to affiliates consists primarily of interest on the
accrued NPO asset servicing fees and interest on the loan from Blackacre.
Interest expense to affiliates decreased (2002 - $286,000, 2001 - $389,000, 2000
- - $434,000) because the interest bearing amount due to affiliates was reduced.
18
Interest expense on litigation settlement Notes (2002 - $299,000, 2001 -
$484,000, 2000 - $502,000) would have increased in each year from 2000 through
2002 because of compounding of interest; however, the Company's efforts to
reduce the principal amount of Notes outstanding through tender offers,
redemptions and the exchange of Notes for common stock by Blackacre have
resulted in a decrease in the interest expense.
Interest expense relating to other debts increased in 2002 from 2001 (2002
- - $610,000, 2001 - $551,000) due to the Company borrowing approximately
$3,968,000 in August, 2002 to finance the purchase of real estate. The increase
in interest expense created by the new borrowings was partially offset by
decreases in interest rates on floating rate loans and repayments of principal.
Interest expense relating to other debts increased in 2001 from 2000. (2001
- - $551,000, 2000 - $311,000). During 2000, the Company borrowed an aggregate of
$6,425,000 to fund the acquisition of eight new mortgage loans, the purchase of
all the land, buildings, and improvements from a limited partnership which owned
seven buildings in an industrial park in New Jersey, and refinanced three
existing mortgage receivables. Also, during the first quarter of 2001, the
Company borrowed $200,000 to purchase a parcel of land.
In 2001 the Company acccrued $80,000 for alternative minimum taxes and in
2002 recognized $86,000 in tax benefits relating to the elimination of the
alernative minimum tax for 2001. The Company recognized $397,000 and $1,050,000
of income tax benefit in 2002 and 2001, respectively, as a result of a reduction
in the valuation allowance on deferred tax assets. In 2000 the provision for
income taxes was completely offset by the reduction in the valuation allowance
on deferred tax assets utilized.
Extraordinary gains in 2001 and 2000 of $525,000 and $306,000,
respectively, were the result of tender offers and redemptions of Notes at less
than book value of such Notes. The Company also realized extraordinary losses in
2002 and 2001 of $71,000 and $164,000, respectfully, resulting from the
redemption of Notes at face value. The net extraordinary gain for 2001 was
$361,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance was $2,373,000 at December 31, 2002, compared
with $2,987,000 at December 31, 2001.
The Company's cash flow from operations is generated principally from rental
income from its leasehold interests and ownership of real estate, distributions
in connection with residual interests in securitized portfolios, interest on its
mortgage portfolio, management fees and transaction and other fees received as a
result of the sale and/or refinancing of partnership properties and mortgages.
The Company believes that its anticipated cash flow provided by operations is
sufficient to meet its current cash requirements through at least March 2004.
The Company believes that its current liquid assets and credit resources will be
sufficient to fund operations on a short-term basis as well as on a long-term
basis.
The Company obtained an unsecured line of credit on December 15, 2002 for
$500,000 with an interest rate of prime plus one percent per annum which
terminates December 15, 2003. To date the Company has not drawn on the line of
credit. The terms of the line of credit provide that interest shall be payable
on the first day of each month.
19
The Company's acquisition in 2001 of its member interest in Receivables II-A
and Receivables II-B should provide significant liquidity to the Company.
The purchase agreements contain annual minimum and maximum levels of cash
flow that will be retained by the Company, after the payment of interest and
principal on the notes payable, which are as follows:
Years Minimum Maximum
----- ------- -------
2001 to 2009 $ 743,000 $ 880,000
2010 to final payment 1,050,000 1,150,000
on the notes*
* Final payment on the notes payable expected 2016 related to the Receivables
II-A transaction and 2018 for the Receivables II-B transaction.
The Company believes it will receive significant cash flow after final payment
of the notes payable.
20
ACQUISITIONS AND FINANCINGS
Loans payable which are scheduled to become due through 2008 are as follows:
Outstanding
Original Principal
Loan Balance at Due
Purpose Creditor Amount Dec. 31, 2002 Date
- ------- -------- ------------- -------------- ----
Repurchase of Notes
Issued by the Company Blackacre(1) $ 1,560,000 $ 2,084,053 09/30/03
Purchase of Mortgages Unaffiliated Bank(2)(3) $ 1,000,000 $ 604,136 05/01/06
Purchase of a Mortgage
and Refinancing of
Existing Mortgages Unaffiliated Bank(2)(3) $ 1,450,000 $ 742,363 11/30/06
Purchase of Real Estate
Assets Unaffiliated Bank(4) $ 4,500,000 $ 4,500,000 09/01/04
Purchase of Mortgages Unaffiliated Bank(5)(2) $ 400,000 $ 344,266 06/01/06
Purchase of Mortgages Unaffiliated Bank(6)(7) $ 2,667,542 $ 2,650,110 06/30/08
(1) Interest rate is 12% per annum, compounded monthly. Interest is added to
principal and is paid from a portion of cash received in satisfaction of
certain mortgage loans.
(2) This loan self-amortizes.
(3) Interest rate is prime plus 1.5% per annum payable monthly.
(4) Interest rate is 8.5% per annum. Monthly payments are interest only.
(5) Interest rate is 8.25% per annum payable monthly.
(6) Interest rate is 7.5% per annum with a balloon payment due June 30, 2008 of
$2,284,542.
(7) The Company through its wholly-owned subsidiary, Delbrook Holding, LLC
purchased an 89,000 square foot building in Kearny, NJ, currently leased to
K-Mart Stores, Inc. ("K-Mart") for $4,404,000 including costs and the
assumption of $2,668,000 in debt. The lease requires K-Mart to pay $30,000
per month plus all operating and structural costs of the building.
21
During 2001, DVL purchased two mortgage loans from an entity that is part
of the Opportunity Fund which are secured by real estate owned by Affiliated
Limited Partnerships in which DVL is the general partner. The loans were
purchased for an aggregate price of $400,000, paid in cash. The loans were
subsequently refinanced in 2002 and DVL realized approximately $380,000 from the
refinancing after closing costs.
The amounts obtained from the refinancings were primarily based on the
value of the base rents due from tenants during the period of the base lease
term subsequent to the payoff of the existing first mortgages. As a result of
the refinancings, the Company's asset base available for future refinancings has
diminished.
IMPACT OF INFLATION AND CHANGES IN INTEREST RATES
The Company's portfolio of mortgage loans made to Affiliated Limited
Partnerships consists primarily of loans made at fixed rates of interest.
Therefore, increases or decreases in market interest rates are generally not
expected to have an effect on the Company's earnings. Other than as a factor in
determining market interest rates, inflation has not had a significant effect on
the Company's net income.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principals generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to residual interests and allowance for losses. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilties
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
RESIDUAL INTERESTS: Residual interests represent the estimated discounted
cash flow of the differential of the total interest to be earned on the
securitized receivables and the sum of the interest to be paid to the
noteholders and the contractual servicing fee. Since these residual interests
are not subject to prepayment risk they are accounted for as investments
held-to-maturity and are carried at amortized cost using the effective yield
method. Permanent impairments are recorded immediately through earnings.
Favorable changes in future cash flows are recognized through earnings as
interest over the remaining life of the retained interest.
INCOME RECOGNITION: Interest income is recognized on the effective interest
method for the residual interest and all performing loans. The Company stops
accruing interest once a loan becomes non-performing. A loan is considered non-
performing when scheduled interest or principal payments are not received on a
timely basis and in the opinion of management, the collection of such payments
in the future appears doubtful. Interest income on restructured loans are
recorded as the payments are received.
22
ALLOWANCE FOR LOSSES: The adequacy of the allowance for losses is
determined through a quarterly review of the portfolios. Specific loss reserves
are provided as required based on management's evaluation of the underlying
collateral on each loan or investment.
DVL's allowance for loan losses generally is based upon the value of the
collateral underlying each loan and its carrying value. Management's evaluation
considers the magnitude of DVL's non-performing loan portfolio and internally
generated appraisals of certain properties.
For the Company's mortgage loan portfolio, the partnership properties are
valued based upon the cash flow generated by base rents and anticipated
percentage rents or base rent escalations to be received by the partnership. The
value of partnership properties which are not subject to percentage rents was
based upon historial appraisals. Management believes, that generally, the values
of such properties have not changed as the tenants, lease terms and timely
payment of rent have not changed. When any such changes have occurred,
management revalues the property as appropriate. Management evaluates and
updates such appraisals, periodically, and considers changes in the status of
the existing tenancy in such evaluations. Certain other properties were valued
based upon management's estimate of the current market value for each specific
property using similar procedures.
DVL does not consolidate any of the various Affiliated Limited Partnerships
in which it holds the general partner and limited partner interests nor does DVL
account for such interests on the equity method due to the following: (i) DVL's
interest in the partnerships as the general partner is a 1% interest, (the
proceeds of such 1% interest is payable to the limited partnership settlement
fund pursuant to the 1993 settlement of the class action between the limited
partners and DVL) the ("Limited Partnership Settlement"); (ii) under the terms
of such settlement, the limited partners have the right to remove DVL as the
general partner upon the vote of 70% or more of the limited partners; (iii) all
major decisions must be approved by a limited partnership Oversight Committee in
which DVL is not a member, (iv) there are no operating policies or decisions
made by the Affiliated Limited Partnership, due to the triple net lease
arrangements for the Affiliated Limited Partnership properties and (v) there are
no financing policies determined by the partnerships as all mortgages were in
place prior to DVL's obtaining its interest and all potential refinancings are
reviewed by the Oversight Committee. Accordingly, DVL accounts for its
investments in the Affiliated Limited Partnerships, on a cost basis with the
cost basis adjusted for impairments which took place in prior years.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DVL has no substantial cash flow exposure due to interest rate changes for
long-term debt obligations, because a majority of the long-term debt is at fixed
rates. DVL primarily enters into long-term debt for specific business purposes
such as the repurchase of debt at a discount, acquisition of mortgage loans, or
the purchase of real estate assets.
DVL's ability to realize on its mortgage holdings is sensitive to interest
rate fluctuations in that the sales prices of real property and mortgages vary
with interest rates.
The table set forth below presents principal amounts and related weighted
average interest rates by year of maturity for DVL's investment portfolio and
debt obligations.
There-
In Thousands 2003 2004 2005 2006 2007 after Total
- ------------------------------------------------------------------------------------
ASSETS
Cash equivalents $2,373 $ 2,373
Variable rate
Average interest rate 0.8% 0.8%
LONG TERM DEBT
Fixed rate $4,684 $6,772 $2,235 $2,754 $2,962 $ 9,616 $29,023
Average interest rate 8.97% 8.71% 7.97% 7.35% 7.35% 7.41% 9.10%
Variable rate $ 519 $ 707 $ 127 $ -0- $ -0- $ -0- $ 1,353
Average interest rate 6% 6% 6% -0- -0- -0-
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUPPLEMENTARY DATA
Quarterly Data (Unaudited)
For the Year Ended December 31, 2002
(In Thousands Except Share and Per Share Data)
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
Total Revenue $ 2,238 $ 2,494 $ 2,239 $ 2,123 $ 9,094
Total Expenses 2,088 2,031 1,937 2,059 8,115
Income before extra-
ordinary gain 150 843 388 81 1,462
Extraordinary gain (loss) -- (60) (11) -- (71)
Net income (loss) 150 783 377 81 1,391
Basic earnings (loss)
per share:
Income (loss) before
extraordinary gain $ .01 $ .04 $ .02 $ .00 $ .06
Extraordinary gain $ .00 $ .00 $ .00 $ .00 $ .00
Net income (loss) $ .01 $ .04 $ .02 $ .00 $ .06
Diluted earnings (loss)
per share:
Income (loss) before
extraordinary gain $ .00 $ .02 $ .01 $ .00 $ .03
Extraordinary gain $ .00 $ .00 $ .00 $ .00 $ .00
Net income (loss) $ .00 $ .02 $ .01 $ .00 $ .03
Weighted average
shares outstanding:
Basic 21,713,563 21,713,563 21,713,563 21,713,563 21,713,563
Diluted 65,378,189 55,873,784 57,028,078 60,149,306 58,776,493
Quarterly Data (Unaudited)
For the Year Ended December 31, 2001
(In Thousands Except Share and Per Share Data)
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
Total Revenue $ 1,546 $ 2,401 $ 2,436 $ 3,172 $ 9,555
Total Expenses 1,474 1,985 2,082 2,479 8,020
Income before
extraordinary gain 72 416 354 1,663 2,505
Extraordinary gain 14 -- -- 347 361
Net income 86 416 354 2,010 2,866
Basic earnings per
share:
Income before extra-
ordinary gain $ .01 $ .03 $ .02 $ .10 $ .15
Extraordinary gain $ .00 $ .00 $ .00 $ .02 $ .02
Net income $ .01 $ .03 $ .02 $ .12 $ .17
Diluted earnings per
share:
Income before extra-
ordinary gain $ .00 $ .00 $ .00 $ .02 $ .03
Extraordinary gain $ .00 $ .00 $ .00 $ .01 $ .00
Net income $ .00 $ .00 $ .00 $ .03 $ .03
Weighted average
shares outstanding:
Basic 16,560,450 16,560,450 16,560,450 17,020,429 16,599,517
Diluted 163,631,850 142,389,554 107,856,352 72,820,396 124,772,115
Basic and diluted earnings per share are computed independently for each of the
periods. Accordingly, the sum of the quarterly earnings per share amounts may
not agree to the total for the year. The financial statements and notes thereto,
together with the accountants' report thereon of Eisner, LLP, are set forth on
pages F-1 through F-31, which follow. The financial statements are listed in
Item 15(a)(1) hereof.
25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF DVL
A. The following table sets forth the name of each director and executive
officer of the Company, and the nature of all positions and offices with the
Company held by him at present. The term of all directors (other than the
special purpose director) expires at the Company's next annual meeting of
stockholders, which will be held on a date to be scheduled. The term of all
executive officers expires at the next annual meeting of directors, to be held
immediately thereafter.
NAME POSITION
Frederick E. Smithline Chairman of the Board
Myron Rosenberg Director
Alan E. Casnoff Director, President and Chief Executive Officer
Jay Thailer Executive Vice President and Chief Financial
Officer
Keith B. Stein Special Purpose Director
In addition to three directors, who have all of the powers normally granted
to corporate directors, the Company has one special purpose director, who was
elected in 1996 by the holder of the Company's Class A Preferred Stock. The
special purpose director has no right to vote at meetings of the Board, except
as to Bankruptcy Matters (as such term is defined in the Company's Certificate
of Incorporation).
B. The following is a brief account of the recent business experience of
each director and executive officer and directorships held with other companies
which file reports with the Securities and Exchange Commission:
FREDERICK E. SMITHLINE (age 71) has served as Chairman of the Board of the
Company since 1990 and as a director since 1982. From September 1989 to May
1996, Mr. Smithline was of counsel to the law firm of Epstein, Becker & Green,
P.C., New York, New York. Mr. Smithline has been of counsel to the law firm of
Fischbein, Badillo, Wagner and Harding from September 2002 to present.
MYRON ROSENBERG (age 74) has served as a director of the Company since
1973. Through December 1996, Mr. Rosenberg served as Executive Vice President of
Rosenthal & Rosenthal, Inc., New York, New York, a commercial finance concern,
where he had been employed since 1961. Mr. Rosenberg is currently associated
with the investment banking firm of Taurus Global, LLC.
26
ALAN E. CASNOFF (age 59) has served as President of the Company since
November 1994, and was appointed as a director in November 2001. Mr. Casnoff
served as Executive Vice President of the Company from October 1991 to November
1994. Mr. Casnoff has maintained his other business interests during this period
and thus has devoted less than full time to the business affairs of DVL. From
November 1990 to October 1991, Mr. Casnoff served as a consultant to the Company
and from 1971 to October 1991, as Secretary of the Company. Since May 1991, Mr.
Casnoff has also served as a director of Kenbee Management, Inc. ("Kenbee"), an
affiliate of the Company, and as President of Kenbee since November 1994. Since
1977, Mr. Casnoff has also been a partner of P&A Associates, a private real
estate development firm headquartered in Philadelphia, Pennsylvania. Since 1969,
Mr. Casnoff was associated with various Philadelphia, Pennsylvania law firms
which have been legal counsel to the Company and Kenbee. Since July 1999, he has
been of counsel to Klehr, Harrision, Harvey, Brazenburg & Ellers ("Klehr").
JAY THAILER (age 34) has served as Chief Financial Officer and Executive
Vice President since November 2001. From August 1998 to November 2001, Mr.
Thailer served as Vice President and Secretary of the Company. Mr. Thailer is a
Certified Public Accountant. Prior to joining the Company in 1997, Mr. Thailer
was associated with the accounting firm of Sobel & Company, C.P.A.'s, where his
clients included real estate development companies.
KEITH B. STEIN (age 45) has been a special purpose director of the Company
since September 1996. Mr. Stein is the Chairman, Chief Executive Officer, and a
director of National Auto Receivables Liquidation, Inc., a specialty finance
company. Mr. Stein is also Managing Partner of Crestwalk Capital Advisors, LLC,
a privately held boutique Investment banking firm focused on corporate
restructuring and reorganization, mergers and acquisitions advisory, as well as
principal activities, in the lower end of the middle market. From March 1993 to
September 1994, he served as Senior Vice President, Secretary and General
Counsel of WestPoint Stevens, Inc., a textile company, after having served the
same company from October 1992 to February 1993 in the capacity of Acting
General Counsel and Secretary. From May 1989 to February 1993, Mr. Stein was
associated with the law firm of Weil, Gotshal & Manges LLP. Mr. Stein is an
affiliate of NPM.
(c) Compliance with Section 16 (a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who are beneficial owners of more
than 10% of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Commission. Officers,
directors, and greater than 10% beneficial owners are required by Commission
regulations to furnish the Company with copies of all Section 16(a) forms they
file. To the Company's knowledge, based solely on review of such reports
furnished to the Company, and written representations that no other reports were
required during or with respect to the fiscal year ended December 31, 2002, all
Section 16(a) filing requirements applicable to such persons were satisfied.
27
ITEM 11. EXECUTIVE COMPENSATION
A. SUMMARY COMPENSATION TABLE
The following table sets forth all compensation awarded to, earned by or
paid to the following persons for services rendered to the Company in 2002 and
(if applicable) in 2001 and 2000: (1) the person serving as the Company's chief
executive officer during 2002; (2) those other persons who were serving as
executive officers as of the end of 2002 whose compensation exceeded $100,000
during 2002:
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
Compensation Awards ------------------- ---------
- -------------------
Securities
LTIP Other Annual Underlying
Name Year Salary Bonus Compensation Options/SAR
---- ---- ------ ----- ------------ -----------
Payouts
-------
Alan E. Casnoff 2002 $120,000 $ -- -- --
President and 2001 120,000 10,000 -- 100,000(2)
Chief Executive 2000 120,000 -- -- --
Officer
Jay Thailer 2002 $110,000 $ 15,000 --
Executive Vice 2001 110,000 15,000 -- 15,000(2)
President and Chief
Financial Officer (1)
(1) Mr. Thailer became Executive Vice President and Chief Financial Officer of
the Company on
November 8, 2001.
(2) Consists of options to purchase shares of Common Stock under the 1996 Stock
Options Plan.
28
B. OPTION GRANTS IN LAST FISCAL YEAR
No options were granted by the Company in 2002 under the DVL, Inc. 1996
Stock Option Plan (the "Plan") to the executive officers named in the Summary
Compensation Table. The Plan provides for the grant of options to purchase up to
2,500,000 shares of Common Stock to Employees and Non-Employee Directors (in
each case as defined in the Plan).
The Plan provides that any one employee wishing to exercise an option must
give prior notice to the Board. If the Board determines, in its reasonable
discretion, that such exercise will cause an "ownership change" (as defined in
Section 382 of the Internal Revenue Code of 1986, as amended) in the Company
which would have an adverse effect on the Company's use of its NOLS (as defined
in Section 382) (an "Adverse Ownership Change"), the Board shall deny approval
of the exercise. If the Board determines that such exercise would not cause an
Adverse Ownership Change, it shall approve the exercise. The conditions
described in this paragraph are referred to below as the "Section 382
Restrictions".
As of December 31, 2002, options to purchase 1,503,131 shares were
outstanding under the Plan and 996,869 shares were available for issuance upon
exercise of options which may be granted in the future.
29
C. FISCAL YEAR-END OPTION VALUES
The following table sets forth information as to options held as of the end
of 2002 by the executive officers named in the Summary Compensation Table. No
options were exercised by said officers in 2002. All options held by said
officers at fiscal year-end were immediately exercisable.
Number of Securities Underlying Value of Unexercised
Unexercised Options At Fiscal In-The-Money Options
Name Year End At Fiscal Year End
---- ------------------------------- --------------------
Alan E. Casnoff 475,000 $ 13,000
Jay Thailer 42,000 $ 3,065
D. COMPENSATION OF DIRECTORS
Regular directors who are not officers or employees of the Company
("Non-Employee Directors") presently receive a director's fee of $1,500 per
month, plus $500 for each Audit Committee meeting of the Board of Directors
attended. Directors who are officers or employees of the Company receive no
compensation for their services as directors or attendance at any Board of
Directors or committee meetings. Mr. Casnoff, who is a director, is also
President and Chief Executive Officer of the Company. The special purpose
director receives no compensation for his service as a director or attendance at
any Board of Directors or committee meetings.
On each of September 17, 2000, 2001 and 2002 options to purchase 15,000
shares of Common Stock at an exercise price equal to the then market price per
share were granted to each of the non-employee directors (Messrs. Rosenberg and
Smithline). The options were granted under the Plan, which provides for
automatic grants of options for 15,000 shares to each incumbent regular director
on each anniversary of the adoption of the Plan. The options vested immediately
and are exercisable for a term of ten (10) years from the date of grant. The
exercise price is equal to the fair market value on the date of grant.
E. EMPLOYMENT CONTRACTS AND ARRANGEMENTS
The Company entered into Indemnification Agreements with all officers and
directors effective upon their election as an officer or director of the
Company, contractually obligating the Company to indemnify them to the fullest
extent permitted by applicable law, in connection with claims arising from their
service to, and activities on behalf of, the Company.
The Company does not currently have any employment contracts in force.
F. BOARD OF DIRECTORS INTERLOCKS AND INSIDER PARTICIPATION
During 2002, no executive officer of the Company served as a director of or
a member of a compensation committee of any entity for which any of the persons
serving on the Board of Directors of the Company is an executive officer.
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
A. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of March 25, 2003
regarding the ownership of common stock of the Company by each person who is
known to the management of the Company to have been the beneficial owner of more
than 5% of the outstanding shares of the Company's common stock.
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent of Class*
------------------ -------------------- -----------------
Lawrence J. Cohen 5,520,707 (1)(4) 20.8%
Milton Neustadter 3,069,222 (1)(5) 12.4%
Jay Chazanoff 4,979,221 (2)(6) 18.8%
Ron Jacobs 4,679,735 (2)(7) 17.9%
Stephen Simms 4,679,735 (2)(8) 17.9%
Keith B. Stein 4,715,853 (3)(9) 17.9%
Robert W. Barron 4,321,030 (3)(10) 16.6%
Adam Frieman 4,160,517 (3)(11) 16.1%
Peter Offerman 4,040,502 (3)(12) 15.7%
Joseph Huston 3,997,770 (3)(13) 15.6%
Jan Sirota 4,040,502 (3)(14) 15.7%
Neal Polan 4,040,502 (3)(15) 15.7%
Michael Zarriello 4,040,502 (3)(16) 15.7%
Mark Mahoney 4,028,860 (3)(17) 15.7%
The SIII Associates Limited 6,015,281 (3)(18) 21.9%
Partnership Third Addison
Park Corporation and
Gary L. Shapiro
J.G. Wentworth, S.S.C.
Limited Partnership 3,000,000 (19) 12.1%
10 Presidential Boulevard
Suite 250
Bala Cynwyd, PA 19004
Stephen Feinberg 5,406,113 (20) 24.9%
450 Park Avenue
28th Floor
New York, NY 10022
31
NOTES TO TABLE
In each instance where a named individual is listed as the holder of a
currently exercisable option or Warrant, the shares which may be acquired upon
exercise thereof have been deemed outstanding for the purpose of computing the
percentage owned by such person, but not for the purpose of computing the
percentage owned by any other person, except with respect to options or Warrants
held by other members of a Holder's Holder Group (as defined below). An option
or Warrant is deemed to be currently exercisable if it may be exercised within
60 days. The number of Warrants attributed to each Holder herein is based upon
the number of warrants that would be issued as of the date of this document, and
is subject to adjustment to eliminate any possible dilution, as described in
"Changes of Control" below.
(1) As described in detail below in "Changes of Control", such persons are
members of the Pembroke Group (as defined in "Changes of Control" below), and
said persons share dispositive power with each other as to 2,645,735 shares of
the Company's Common Stock issuable to the members of the Pembroke Group upon
the exercise of Warrants by such members, which shares constitute 50.1% of all
of the shares issuable to the members of the Pembroke Group upon the exercise of
Warrants. The address of each member of the Pembroke Group is c/o Lawrence J.
Cohen, 70 East 55th Street, Seventh Floor, New York, NY 10022. The members of
the Pembroke Group explicitly disclaim beneficial ownership of all of the shares
of Common Stock and Warrants (and shares of Common Stock issuable upon exercise
of Warrants) owned by the other members of the Pembroke Group.
(2) As described in detail below in "Changes of Control", such persons are
members of the Millennium Group (as defined in "Changes of Control" below), and
said persons share dispositive power with each other as to 3,401,495 shares of
the Company's Common Stock issuable to the members of the Millennium Group upon
the exercise of Warrants by such members, which shares constitute 50.1% of all
of the shares issuable to the members of the Millennium Group upon the exercise
of Warrants. The address of each member of the Millennium Group is c/o Jay
Chazanoff, 70 East 55th Street, Seventh Floor, New York, NY 10022. The members
of the Millennium Group explicitly disclaim beneficial ownership of all of the
shares of Common Stock and Warrants (and shares of Common Stock issuable upon
exercise of Warrants) owned by the other members of the Millennium Group.
(3) As described in detail below in "Changes of Control", such persons are
members of the Florida Group (as defined in "Changes in Control" below), and
said persons share dispositive power with each other as to 3,912,317 shares of
the Company's Common Stock issuable to the members of the Florida Group upon the
exercise of Warrants (as defined in "Changes in Control" below) by such members,
which shares constitute 50.1% of all of the shares issuable to the members of
the Florida Group upon the exercise of Warrants. The address of each member of
the Florida Group is c/o Keith Stein, 70 East 55th Street, Seventh Floor, New
York, NY 10022.
(4) Based upon a Schedule 13D, as amended, as filed with the Securities and
Exchange Commission (the "Commission") on November 18, 1999, Mr. Cohen
possesses: (i) the sole power to vote 5,134,177 shares of Common Stock, which
includes 4,509,389 shares of Common Stock issuable upon exercise of Warrants;
(ii) shared power to vote 0 shares of Common Stock; (iii) the sole power to
dispose of 2,874,973 shares of Common Stock, which includes 2,250,185 shares of
Common Stock issuable upon exercise of Warrants; and (iv) shared power with the
other member of the Pembroke Group to dispose of 2,645,735 shares of Common
Stock, which includes 2,259,204 shares of Common Stock issuable upon the
exercise of Warrants held by Mr. Cohen and 386,531 shares of Common Stock
issuable upon exercise of Warrants held by the other member of the Pembroke
Group. Mr. Cohen explicitly disclaims beneficial ownership of all of the shares
of Common Stock and Warrants (and shares of Common Stock issuable upon exercise
of Warrants) owned by the other member of the Pembroke Group.
32
(5) Based upon a Schedule 13D, as amended, as filed with the Commission on
November 18, 1999, Mr. Neustadter possesses: (i) the sole power to vote 810,019
shares of Common Stock, which includes 771,519 shares of Common Stock issuable
upon exercise of Warrants; (ii) shared power to vote 0 shares of Common Stock;
(iii) the sole power to dispose of 423,488 shares of Common Stock, which
includes 384,988 shares of Common Stock issuable upon exercise of Warrants; and
(iv) shared power with the other member of the Pembroke Group to dispose of
2,645,735 shares of Common Stock, which includes 386,531 shares of Common Stock
issuable upon the exercise of Warrants held by Mr. Neustadter and 2,259,204
shares of Common Stock issuable upon exercise of Warrants held by the other
member of the Pembroke Group. Mr. Neustadter explicitly disclaims beneficial
ownership of all of the shares of Common Stock and Warrants (and shares of
Common Stock issuable upon exercise of Warrants) owned by the other member of
the Pembroke Group.
(6) Based upon a Schedule 13D, as amended, as filed with the Commission on
November 18, 1999, Mr. Chazanoff possesses: (i) the sole power to vote 2,893,810
shares of Common Stock, which includes 2,662,915 shares of Common Stock issuable
upon exercise of Warrants; (ii) shared power to vote 0 shares of Common Stock;
(iii) the sole power to dispose of 1,577,726 shares of Common Stock, which
includes 1,310,831 shares of Common Stock issuable upon exercise of Warrants;
and (iv) shared power with the other members of the Millennium Group to dispose
of 3,401,495 shares of Common Stock, which includes 1,316,084 shares of Common
Stock issuable upon the exercise of Warrants held by Mr. Chazanoff and 2,085,410
shares of Common Stock issuable upon exercise of Warrants held by the other
members of the Millennium Group. Mr. Chazanoff explicitly disclaims beneficial
ownership of all of the shares of Common Stock and Warrants (and shares of
Common Stock issuable upon exercise of Warrants) owned by the other members of
the Millennium Group.
(7) Based upon a Schedule 13D, as amended, as filed with the Commission on
November 18, 1999, Mr. Jacobs possesses: (i) the sole power to vote 2,320,945
shares of Common Stock, which includes 2,018,248 shares of Common Stock issuable
upon exercise of Warrants; (ii) shared power to vote 0 shares of Common Stock;
(iii) the sole power to dispose of 1,278,240 shares of Common Stock, which
includes 1,038,543 shares of Common Stock issuable upon exercise of Warrants;
and (iv) shared power with the other members of the Millennium Group to dispose
of 3,401,495 shares of Common Stock, which includes 1,042,705 shares of Common
Stock issuable upon the exercise of Warrants held by Mr. Jacobs and 2,358,790
shares of common stock issuable upon exercise of Warrants held by the other
members of the Millennium Group. Mr. Jacobs explicitly disclaims beneficial
ownership of all of the shares of Common Stock and Warrants (and shares of
Common Stock issuable upon exercise of Warrants) owned by the other members of
the Millenium Group.
(8) Based upon a Schedule 13D, as amended, as filed with the Commission on
November 18, 1999, Mr. Simms possesses: (i) the sole power to vote 2,320,945
shares of Common Stock, which includes 2,081,248 shares of Common Stock issuable
upon exercise of Warrants; (ii) shared power to vote 0 shares of Common Stock;
(iii) the sole power to dispose of 1,278,240 shares of Common Stock, which
includes 1,038,543 shares of Common Stock issuable upon exercise of Warrants;
and (iv) shared power with the other members of the Millennium Group to dispose
of 3,401,495 shares of Common Stock, which includes 1,042,705 shares of Common
Stock issuable upon the exercise of Warrants held by Mr. Simms and 2,358,790
shares of Common Stock issuable upon exercise of Warrants held by the other
members of the Millennium Group. Mr. Simms explicitly disclaims beneficial
ownership of all of the shares of Common Stock and Warrants (and shares of
Common Stock issuable upon exercise of Warrants) owned by the other members of
the Millennium Group.
33
(9) Based upon a Schedule 13D, as amended, as filed with the Commission on
November 18, 1999, Mr. Stein possesses: (i) the sole power to vote 1,533,478
shares of Common Stock, which includes 1,456,971 shares of Common Stock issuable
upon exercise of Warrants; (ii) shared power to vote 0 shares of Common Stock;
(iii) the sole power to dispose of 803,535 shares of Common Stock, which
includes 727,029 shares of Common Stock issuable upon exercise of Warrants; and
(iv) shared power with the other members of the Florida Group to dispose of
3,912,317 shares of Common Stock, which includes 729,942 shares of Common Stock
issuable upon the exercise of Warrants held by Mr. Stein and 3,182,375 shares of
Common Stock issuable upon exercise of Warrants held by the other members of the
Florida Group. Mr. Stein explicitly disclaims beneficial ownership of all of the
shares of Common Stock and Warrants (and shares of Common Stock issuable upon
exercise of Warrants) owned by the other members of the Florida Group.
(10) To the Company's knowledge, Mr. Barron possesses: (i) the sole power to
vote 781,795 shares of Common Stock, which includes 744,675 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 408,713 shares of Common Stock,
which includes 371,593 shares of Common Stock issuable upon exercise of
Warrants; and (iv) shared power with the other members of the Florida Group to
dispose of 3,912,317 shares of Common Stock, which includes 373,082 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Barron and
3,539,235 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group.
(11) To the Company's knowledge, Mr. Frieman possesses: (i) the sole power to
vote 485,707 shares of Common Stock, which includes 474,065 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 248,200 shares of Common Stock,
which includes 236,558 shares of Common Stock issuable upon exercise of
Warrants; and (iv) shared power with the other members of the Florida Group to
dispose of 3,912,317 shares of Common Stock, which includes 237,507 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Frieman and
3,674,810 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group.
(12) To the Company's knowledge, Mr. Offerman possesses: (i) the sole power to
vote 245,196 shares of Common Stock, which includes 233,554 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 128,185 shares of Common Stock,
which includes 116,543 shares of Common Stock issuable upon exercise of
Warrants; and (iv) shared power with the other members of the Florida Group to
dispose of 3,912,317 shares of Common Stock, which includes 117,011 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Offerman and
3,795,306 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group.
(13) To the Company's knowledge, Mr. Huston possesses: (i) the sole power to
vote 163,457 shares of Common Stock, which includes 155,696 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 85,453 shares of Common Stock,
which includes 77,692 shares of Common Stock issuable upon exercise of Warrants;
and (iv) shared power with the other members of the Florida Group to dispose of
3,912,317 shares of Common Stock, which includes 78,004 shares of Common Stock
issuable upon the exercise of Warrants held by Mr. Huston and 3,834,313 shares
of Common Stock issuable upon exercise of Warrants held by the other members of
the Florida Group.
34
(14) To the Company's knowledge, Mr. Sirota possesses: (i) the sole power to
vote 245,196 shares of Common Stock, which includes 233,554 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 128,185 shares of Common Stock,
which includes 116,543 shares of Common Stock issuable upon exercise of
Warrants; and (iv) shared power with the other members of the Florida Group to
dispose of 3,912,317 shares of Common Stock, which includes 117,011 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Sirota and
3,795,306 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group.
(15) To the Company's knowledge, Mr. Polan possesses: (i) the sole power to vote
245,196 shares of Common Stock, which includes 233,554 shares of Common Stock
issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of Common
Stock; (iii) the sole power to dispose of 128,185 shares of Common Stock, which
includes 116,543 shares of Common Stock issuable upon exercise of Warrants; and
(iv) shared power with the other members of the Florida Group to dispose of
3,912,317 shares of Common Stock, which includes 117,011 shares of Common Stock
issuable upon the exercise of Warrants held by Mr. Polan and 3,795,306 shares of
Common Stock issuable upon exercise of Warrants held by the other members of the
Florida Group.
(16) To the Company's knowledge, Mr. Zarriello possesses: (i) the sole power to
vote 245,196 shares of Common Stock, which includes 233,554 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 128,185 shares of Common Stock,
which includes 116,543 shares of Common Stock issuable upon exercise of
Warrants; and (iv) shared power with the other members of the Florida Group to
dispose of 3,912,317 shares of Common Stock, which includes 117,011 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Zarriello and
3,795,306 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group.
(17) To the Company's knowledge, Mr. Mahoney possesses: (i) the sole power to
vote 233,554 shares of Common Stock, which includes 233,554 shares of Common
Stock issuable upon exercise of Warrants; (ii) shared power to vote 0 shares of
Common Stock; (iii) the sole power to dispose of 116,543 shares of Common Stock,
which includes 116,543 shares of Common Stock issuable upon exercise of
Warrants; and (iv) shared power with the other members of the Florida Group to
dispose of 3,912,317 shares of Common Stock, which includes 116,543 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Mahoney and
3,795,774 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group.
(18) To the Company's knowledge, the SIII Associates Limited Partnership
possesses: (i) the sole power to vote 4,011,694 shares of Common Stock, which
includes 3,809,840 shares of Common Stock issuable upon exercise of Warrants;
(ii) shared power to vote 0 shares of Common Stock; (iii) the sole power to
dispose of 2,102,964 shares of Common Stock, which includes 1,901,110 shares of
Common Stock issuable upon exercise of Warrants; and (iv) shared power with the
other members of the Florida Group to dispose of 3,912,317 shares of Common
Stock, which includes 1,908,730 shares of Common Stock issuable upon the
exercise of Warrants held by the SIII Associates Limited Partnership and
2,003,587 shares of Common Stock issuable upon exercise of Warrants held by the
other members of the Florida Group. Third Addison Park Corporation is the
general partner of the SIII Associates Limited Partnership, and Gary L. Shapiro
is the chief executive officer of Third Addison Park Corporation.
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(19) To the Company's knowledge, J.G. Wentworth, S.S.C. Limited Partnership
possesses: (i) the sole power to vote 3,000,000 shares of Common Stock, which
includes 3,000,000 shares of Common Stock issuable upon exercise of Warrants;
(ii) shared power to vote 0 shares of Common Stock; (iii) the sole power to
dispose of 3,000,000 shares of Common Stock, which includes 3,000,000 shares of
Common Stock issuable upon exercise of Warrants.
(20) Based upon a Schedule 13D, as filed with the Commission on January 20,
2002, Mr. Feinberg possesses: (i) the sole power to vote and direct the
disposition of the 4,753,113 shares of Common Stock, held by Blackacre Bridge
Capital, L.L.C. and the sole power to vote and direct the disposition of the
653,000 shares of Common Stock held by Blackacre Capital Group, L.P.
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B. SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information as of December 31,
2002 regarding ownership of Common Stock by (i) each director and nominee for
director, (ii) each of the executive officers named in the Summary Compensation
Table contained herein, and (iii) all executive officers and directors as a
group (5 persons). Unless otherwise indicated, each stockholder listed below has
sole voting and investment power with respect to the shares set forth opposite
such stockholder's name. All persons listed below have an address c/o the
Company's principal executive offices in New York.
Name of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class
- ---------------- -------------------- -----------
Alan E. Casnoff 685,000 (2) 3.1%
Jay Thailer 64,000 (3) **
Myron Rosenberg 378,854 (4) 1.7%
Frederick E. Smithline 191,550 (5) **
Keith B. Stein 4,715,853 (6) 17.9%
All current directors
and executive officers
as a group (5 persons) 6,035,257 (7) 25.3%
* In each instance where a named individual is listed as the holder of
a currently exercisable option or warrant, the shares which may be acquired upon
exercise thereof have been deemed outstanding for the purpose of computing the
percentage owned by such person, but not for the purpose of computing the
percentage owned by any other person, except the group referred to in note 7. An
option or warrant is deemed to be currently exercisable if it may be exercised
within 60 days.
** Less than 1%
(1) Messrs. Casnoff and Thailer are executive officers of the Company. Messrs.
Rosenberg, and Smithline are the regular directors Mr. Casnoff was appointed as
a director in 2001 and Mr. Stein is the special purpose director.
(2) Excludes 480 shares held by Mr. Casnoff's adult son, as to which shares Mr.
Casnoff disclaims beneficial ownership. Includes 26,000 shares owned by a
corporation partially owned and controlled by Mr. Casnoff, and 475,000 shares
which may be acquired upon the exercise of currently exercisable options.
(3) Represents 42,000 shares which may be acquired upon the exercise of
currently exercisable options and 22,000 shares held by Mr. Thailer and his wife
as joint tenants.
(4) Includes 4,300 shares held by Mr. Rosenberg's wife, as to which shares he
disclaims beneficial ownership, and 90,000 shares which may be acquired upon the
exercise of currently exercisable options.
(5) Includes 550 shares held by Mr. Smithline and his brother as
tenants-in-common as to which Mr. Smithline disclaims beneficial ownership. Also
includes 90,000 shares which may be acquired upon the exercise of currently
exercisable options.
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(6) Based upon a Schedule 13D, as amended, as filed with the Commission on
November 18, 1999, Mr. Stein possesses: (i) the sole power to vote 1,533,478
shares of Common Stock, which includes 1,456,971 shares of Common Stock issuable
upon exercise of Warrants; (ii) shared power to vote 0 shares of Common Stock;
(iii) the sole power to dispose of 803,535 shares of Common Stock, which
includes 727,029 shares of Common Stock issuable upon exercise of Warrants; and
(iv) shared power with the other members of the Florida Group to dispose of
3,912,317 shares of Common Stock, which includes 729,942 shares of Common Stock
issuable upon the exercise of Warrants held by Mr. Stein and 3,182,375 shares of
Common Stock issuable upon exercise of Warrants held by the other members of the
Florida Group. Mr. Stein explicitly disclaims beneficial ownership of all of the
shares of Common Stock and Warrants (and shares of Common Stock issuable upon
exercise of Warrants) owned by the other members of the Florida Group.
(7) Number of shares and percentage owned includes 2,136,483 shares which may be
acquired through exercise of currently exercisable options and Warrants held by
certain of the named persons. The number of outstanding shares for the purpose
of computation of percentage of ownership by the group includes such shares.
C. CHANGES IN CONTROL
Each of the Certificate of Incorporation (the "Certificate") and the
By-laws (the "By-laws") of the Company contains restrictions prohibiting the
sale, transfer, disposition, purchase or acquisition of any capital stock until
September 30, 2009, without the prior authorization of the Board of Directors of
the Company, by or to any holder (a) who beneficially owns directly or through
attribution (as generally determined under Section 382 of the Internal Revenue
Code of 1986, as amended (the "Code")) five percent (5%) or more of the value of
the then issued and outstanding shares of capital stock of the Company or (b)
who, upon the sale, transfer disposition purchase or acquisition of any capital
stock of the Company would beneficially own directly or through attribution (as
generally determined under Section 382 of the Code) five percent (5%) or more of
the value of the then issued and outstanding capital stock of the Company, if
that sale, transfer, disposition, purchase or acquisition would, in the sole
discretion and judgment of the Board of Directors of the Company jeopardize the
Company's preservation of its federal income tax attributes pursuant to Section
382 of the Code. The Board of Directors has the right to void any such
transaction.
In connection with the Original Loan by NPM in S