UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
-------------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURTIES AND EXCHANGE ACT OF 1934
For the transition period from to
----------------------- -----------------------
Commission file number: 1-8356
DVL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2892858
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(State or other jurisdiction of (I.R.S. employer identification no.)
70 East 55th Street, New York, New York 10022
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (212) 350-9900
---------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes: _X_ No: ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes: ___ No: _X_
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Class Outstanding at November 15, 2004
----- --------------------------------
Common Stock, $.01 par value 27,738,402
DVL, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information:
Item 1 - Financial Statements: Pages
-----
Consolidated Balance Sheets -
September 30, 2004 (unaudited) and
December 31, 2003 1-2
Consolidated Statements of Operations -
Three Months Ended September 30, 2004 (unaudited)
and 2003 (unaudited) 3,5
Consolidated Statements of Operations -
Nine Months Ended September 30, 2004 (unaudited) and
2003 (unaudited) 4,5
Consolidated Statement of Shareholder's Equity -
Nine Months Ended September 30, 2004 (unaudited) 6
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2004 (unaudited) and
2003 (unaudited) 7-8
Notes to Consolidated Financial Statements (unaudited) 9-17
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-24
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 25
Item 4 - Controls and Procedures 25
Part II. Other Information:
Item 6 - Exhibits 26
Signature 27
Part I - Financial Information
Item 1. Financial Statements
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2004 2003
------------ ------------
(unaudited)
ASSETS
Residual interests in securitized portfolios $ 36,810 $ 36,662
------------ ------------
Mortgage loans receivable from affiliated partnerships (net of
unearned interest of $13,974 for 2004 and $14,300 for 2003)
24,028 25,986
Allowance for loan losses 2,386 2,386
------------ ------------
Net mortgage loans receivable 21,642 23,600
------------ ------------
Cash (including restricted cash of $177 for 2004 and $172
for 2003) 3,144 2,176
Investments
Real estate at cost (net of accumulated depreciation of
$550 for 2004 and $412 for 2003) 8,123 8,380
Real estate lease interests 100 100
Affiliated limited partnerships (net of allowance for
Losses of $469 for 2004 and $476 for 2003) 955 1,000
Deferred income tax benefits 1,951 1,814
Other assets 1,034 1,008
------------ ------------
Total assets $ 73,759 $ 74,740
============ ============
(continued)
See notes to consolidated financial statements.
1
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(continued)
September 30, December 31,
2004 2003
------------ ------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable - residual interests $ 32,399 $ 33,016
Underlying mortgages payable 12,851 14,753
Debt - affiliates 2,382 2,287
Debt - other 8,640 8,262
Notes payable - litigation settlement 1,109 1,093
Redeemed notes payable-litigation settlement 796 801
Fees due to affiliates 43 218
Line of credit -- 168
Security deposits, accounts payable and accrued
Liabilities (including deferred income of $155 for
2004 and $18 for 2003) 544 477
------------ ------------
Total liabilities 58,764 61,075
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock $10.00 par value, authorized, issued
And outstanding 100 shares 1 1
Preferred stock, $.01 par value, authorized 5,000,000 -- --
Common stock, $.01 par value, authorized - 90,000,000
Issued and outstanding 27,738,402 shares for 2004
And 2003 277 277
Additional paid-in capital 96,469 96,464
Deficit (81,752) (83,077)
------------ ------------
Total shareholders' equity 14,995 13,665
------------ ------------
Total liabilities and shareholders' equity $ 73,759 $ 74,740
============ ============
See notes to consolidated financial statements.
2
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
(continued)
Three Months Ended
September 30,
-------------------------------
2004 2003
------------ ------------
Income from affiliates:
Interest on mortgage loans $ 567 $ 691
Gain on satisfaction of mortgage loans -- 11
Partnership management fees 67 74
Management fees 39 39
Transaction and other fees from partnerships 40 1
Distributions from partnerships 70 20
Income from others:
Interest income - residual interests 1,067 1,151
Net rental income (including depreciation and
amortization of $46 for 2004 and $46 for 2003) 176 (36)
Distributions from investments -- 7
Other income and interest 12 17
------------ ------------
2,038 1,975
------------ ------------
Operating expenses:
General and administrative 333 349
Asset Servicing Fee - NPO Management LLC 172 169
Legal and professional fees 40 32
Loss on sale of real estate 26 --
Impairment of real estate lease interest -- 462
Interest expense:
Underlying mortgages 243 331
Notes payable - residual interests 617 707
Affiliates 78 74
Litigation Settlement Notes 50 70
Others 185 190
------------ ------------
1,744 2,384
------------ ------------
Income (loss) before income tax benefit 294 (409)
Income tax benefit (167) (58)
------------ ------------
Net income (loss) $ 461 $ (351)
============ ============
(continued)
See notes to consolidated financial statements.
3
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
(continued)
Nine Months Ended
September 30,
2004 2003
------------ ------------
Income from affiliates:
Interest on mortgage loans $ 1,803 $ 2,071
Gain on satisfaction of mortgage loans 502 99
Partnership management fees 210 213
Management fees 149 182
Transaction and other fees from partnerships 148 38
Distributions from partnerships 115 73
Income from others:
Interest income - residual interests 3,249 3,401
Net rental income (including depreciation and
amortization of $139 for 2004 and $142 for 2003) 444 495
Distributions from investments 133 42
Other income and interest 30 39
------------ ------------
6,783 6,653
------------ ------------
Operating expenses:
General and administrative 1,074 1,168
Asset Servicing Fee - NPO Management LLC 512 501
Legal and professional fee 211 169
Impairment on real estate 100 --
Loss on sale of real estate 26 --
Impairment on real estate lease interest -- 462
Interest expense:
Underlying mortgages 771 1,028
Notes payable - residual interests 1,898 2,118
Affiliates 236 218
Litigation Settlement Notes 139 209
Others 633 566
------------ ------------
5,600 6,439
------------ ------------
Income before income tax benefit 1,183 214
Income tax benefit (142) (365)
------------ ------------
Net income $ 1,325 $ 579
============ ============
(continued)
See notes to consolidated financial statements.
4
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
(unaudited)
(continued)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Basic earnings per share:
Net income $ .02 $ (.02) $ .05 $ .03
=========== =========== =========== ===========
Diluted earnings per share:
Net income $ .01 $ (.02) $ .03 $ .01
=========== =========== =========== ===========
Weighted average shares
outstanding - basic 27,738,402 21,713,563 27,738,402 21,713,563
Effect of dilutive
securities
28,867,943 -- 29,535,750 33,655,451
----------- ----------- ----------- -----------
Weighted average shares
outstanding - diluted 56,606,345 21,713,563 57,274,152 55,369,014
=========== =========== =========== ===========
See notes to consolidated financial statements.
5
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands except share data)
(unaudited)
Preferred Stock Common Stock Additional
------------------ --------------------- Paid - In
Shares Amount Shares Amount Capital Deficit Total
------- ------- ---------- ------- ---------- ---------- ----------
Balance - January 1, 2004 100 $ 1 27,738,402 $ 277 $ 96,464 $ (83,077) $ 13,665
Net income -- -- -- -- -- 1,325 1,325
Effect of issuance of options -- -- -- -- 5 -- 5
------- ------- ---------- ------- ---------- ---------- ----------
Balance - September 30, 2004 100 $ 1 27,738,402 $ 277 $ 96,469 $ (81,752) $ 14,995
======= ======= ========== ======= ========== ========== ==========
See notes to consolidated financial statements.
6
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
-------------
2004 2003
-------- --------
Cash flows from operating activities:
Net income $ 1,325 $ 579
Adjustments to reconcile net income to net cash
provided by operating activities
Interest income accreted on residual interests (325) (424)
Accrued interest added to indebtedness 212 128
Gain on satisfactions of mortgage loans (502) (99)
Issuance and repricing of options 5 17
Depreciation 139 137
Impairment of real estate lease interest -- 462
Loss on sale or real estate 26 --
Amortization of unearned interest on loan receivables (326) (263)
Amortization of real estate lease interests -- 83
Impairment on real estate 100 --
Imputed interest on notes 139 209
Net increase in deferred income tax benefits (137) (440)
Net (increase) decrease in prepaid financing and
Other assets (271) 72
Net (decrease) increase in accounts payable,
security deposits and accrued liabilities (70) 30
Net decrease in fees due to affiliates (175) (266)
Net increase in deferred income 137 141
-------- --------
Net cash provided by operating activities 277 366
-------- --------
Cash flows from investing activities:
Proceeds from the sale of real estate and
insurance Settlement 306 --
Collections on residual interests -- 7
Collections on loans receivable 2,786 2,414
Real estate capital improvements (69) --
Net decrease in affiliated limited partnership
interests and other investments 45 3
-------- --------
Net cash provided by investing activities 3,068 2,424
-------- --------
(continued)
See notes to consolidated financial statements.
7
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
(continued)
Nine Months Ended
September 30,
-------------
2004 2003
--------- ---------
Cash flows from financing activities:
Proceeds from new borrowings $ 949 $ 283
Principal payments on debt (979) (554)
Repayments on underlying mortgages payable (1,902) (2,566)
Payments on notes payable - residual interest (440) (284)
Payments related to debt redemptions (5) (19)
--------- ---------
Net cash used in financing activities (2,377) (3,140)
--------- ---------
Net increase (decrease) in cash 968 (350)
Cash, beginning of period 2,176 2,373
--------- ---------
Cash, end of period $ 3,144 $ 2,023
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 3,288 $ 3,824
========= =========
Supplemental disclosure of non-cash investing and
financing activities:
Residual interests in securitized portfolios -
(decrease) $ (177) $ (714)
========= =========
Notes payable - residual interests - (decrease) $ (177) $ (714)
========= =========
Foreclosure on mortgage loan receivable
collateralized by real estate $ -- $ 300
========= =========
See notes to consolidated financial statements.
8
DVL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in thousands unless otherwise noted
(except share and per share amounts)
1. Basis of Presentation
In the opinion of DVL, Inc. ("DVL" or the "Company"), the accompanying
consolidated financial statements contain all adjustments (consisting of only
normal accruals) necessary in order to present a fair presentation of the
financial position of DVL and the results of its operations for the periods set
forth herein. The results of the Company's operations for the nine months ended
September 30, 2004 should not be regarded as indicative of the results that may
be expected from its operations for the full year. Certain amounts from the nine
months ended September 30, 2003 have been reclassified to conform to the
presentation for the nine months ended September 30, 2004. For further
information, refer to the consolidated financial statements and the accompanying
notes included in DVL's Annual Report on Form 10-K for the year ended December
31, 2003.
2. Residual Interests in Securitized Portfolios
During 2001, the Company, through its wholly-owned consolidated
subsidiary, S2 Holdings Inc. ("S2"), acquired 99.9% Class B member interests in
Receivables II-A LLC, a limited liability company ("Receivables II-A") and
Receivables II-B LLC, a limited liability company ("Receivables II-B"), from an
unrelated party engaged in the acquisition and management of periodic payment
receivables. The Class B member interests entitle the Company to be allocated
99.9% of all items of income, loss and distribution of Receivables II-A and
Receivables II-B. Receivables II-A and Receivables II-B receive all the residual
cash flow from five securitized receivable pools after payment to the
securitized noteholders.
The Company purchased the above interests for an aggregate purchase price
of $35,791, including costs of $1,366, which included the issuance of warrants,
valued at $136, for the purchase of 3 million shares of the common stock of DVL,
exercisable until 2011 at a price of $.20 per share, and investment banking fees
to an affiliate aggregating $900. The purchase price was paid by the issuance of
8% per annum limited recourse promissory notes by S2 in the aggregate amount of
$34,425. Principal and interest are payable from the future monthly cash flow.
The notes mature August 15, 2020 through December 31, 2021 and are secured by a
pledge of S2's interests in Receivable II-A, Receivables II-B and all proceeds
and distributions related to such interests. The principal amount of the notes
and the purchase price are adjusted, from time to time, based upon the
performance of the underlying receivables. DVL also issued its guaranty of
payment of up to $3,443 of the purchase price. The amount of the guaranty is
regularly reduced by 10% of the principal paid. The amount of the guaranty at
September 30, 2004 was $3,326. Payments, if any, due under this guaranty are
payable after August 15, 2020.
In accordance with the purchase agreements with respect to such
acquisitions, from the acquisition dates through September 30, 2004, the
residual interest in securitized portfolios and the notes payable were decreased
by approximately $714 as a result of purchase price adjustments. Adjustments to
the receivables based on the performance of the underlying periodic payment
receivables, both increases and decreases, could be material in the future.
9
The following table reconciles the initial purchase price with the
carrying value at September 30, 2004:
Initial purchase price $ 35,791
Adjustments to purchase price (714)
Principal payments (48)
Accretion 1,781
--------
$ 36,810
========
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
----- ------- -------
2004 to 2009 $ 743 $ 880
2010 to final payment on notes payable* $1,050 $1,150
*Final payment on the notes payable expected 2016 related to the
Receivables II-A transaction and 2018 for the Receivables II-B
transaction.
3. Mortgage Loans Receivable
Virtually all of DVL's loans receivable arose out of transactions in
which affiliated limited partnerships purchased commercial, office and
industrial properties which were typically leased on a long-term basis to
unaffiliated creditworthy tenants. Each mortgage loan is collateralized by a
lien, subordinate to senior liens, on real estate owned by the affiliated
limited partnership. DVL's loan portfolio is comprised of long-term wrap-around
and other mortgage loans due from affiliated limited partnerships.
4. Real Estate
The Company, directly and through various wholly owned subsidiaries,
currently owns the following properties:
(1) Eight buildings totaling 347,000 square feet on eight acres located in an
industrial park in Kearny, NJ leased to various unrelated tenants.
This site represents a portion of the Passaic River Development area as
designated for redevelopment by the town of Kearny, New Jersey. The Company is
currently negotiating with the Town of Kearny to be designated as the developer
for the site as well as other sites along Passaic Avenue. There can be no
assurance that the Company will be designated as the developer for such site or
any other site along Passaic Avenue. Pending final resolution of this issue, the
Company continues to lease the property to multiple tenants and receives a
positive cash flow from the properties.
(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.
10
(3) A vacant 31,000 square foot former Grand Union Supermarket and
approximately six acres of land underlying the building located in Fort Edward,
NY. The entire property, which was acquired through foreclosure on a mortgage,
was recorded at $416, which was the net carrying value of the mortgage at the
date of foreclosure and was less than the fair value at that date. The property
is currently being carried at $222.
(4) During the quarter ended September 30, 2004, the Company sold the vacant
32,000 square foot former Ames Department Store. The Company recognized a loss
of $26 from the sale. During the quarter ended March 31, 2004 an impairment
expense of $100 was recorded relating to this property.
(5) The Company also operates an industrial property in Bogota, NJ under a
master lease. The Company carries the master lease as an asset (real estate
lease interests). Due to vacancies at the property and difficulties arranging a
sale of the property, the Company had written down the value of the master lease
by $762 during the year ended December 31, 2003 to its estimated net realizable
value of $100. The estimated net realizable value was determined based on the
amount the Company would expect to realize based on an existing agreement of
sale with respect to such property. There can be no assurance that the Company
will consummate a sale of the property on acceptable terms or at all. Activity
related to the real estate lease interest is included in the real estate
segment.
In October 2004, DVL entered into an Agreement with Bogota Associates and
Industrial Associates, the owners of the land underlying the Bogota New Jersey
leasehold, pursuant to which the leasehold was cancelled in consideration of the
aforementioned partnerships agreeing to repay to DVL certain out-of-pocket
expenses including real estate taxes and environmental remediation costs as well
as $50 upon completion of a sale of the property to a third party. In the event
that the sale is not consummated and the third party continues to lease space in
Bogota, then DVL will receive a proportionate share of the net income from such
lease until such time as DVL has been paid its out-of-pocket expenses plus $50.
The total expenses to be reimbursed to DVL are approximately $120 not including
the $50 fee.
5. Notes Payable - Litigation Settlement/Redemptions
In December 1995, DVL completed its obligations under a 1993 settlement
of its class action litigation by, among other things, issuing notes to the
plaintiffs (the "Notes") in the aggregate principal amount of $10,387. The
Notes, which are general unsecured obligations of DVL, accrue interest at a rate
of ten (10%) percent per annum, with principal under the Notes, together with
all accrued and unpaid interest thereunder, due on December 31, 2005.
Notes with an aggregate principal amount of approximately $1,171 remained
outstanding as of September 30, 2004 (carrying value $1,109). On October 15,
2004, the Company gave notice of redemption to the holders of the remaining
Notes. Pursuant to the terms of the Notes, the Company had the option to redeem
the outstanding Notes by issuing to the holders shares of the Company's Common
Stock with a current market value equal to 110% of the unpaid principal amount
of the Notes plus accrued and unpaid interest thereon. The Notes will be
redeemed effective December 29, 2004 for an aggregate of approximately
10,577,000 shares of Common Stock (See Note 8).
Prior to the October 15, 2004 redemption notice, the Company had sent
redemption letters to certain note holders offering to pay the Notes in cash at
face value plus accrued interest. As of September 30, 2004, $796 is payable as a
result of the redemption letters and is reflected as a non-interest bearing
liability.
11
6. Transactions with Affiliates
Monies Received
- ---------------
The Company receives fee income for providing management, accounting, and
administrative services to certain entities which are affiliated with NPO
Management, LLC ("NPO") and/or, Blackacre Capital, LLC ("Blackacre"), which are
entities engaged in real estate lending and management transactions and are
affiliated with certain stockholders and insiders of the Company. The fee income
from management service contracts are as follows:
Fee Income Fee Income Fee Income Fee Income
For The Three For The Three For The Nine For The Nine
Affiliate Months Ended Months Ended Months Ended Months Ended
09/30/04 09/30/03 09/30/04 09/30/03
------------- ------------- ------------ ------------
NPO and Blackacre $ 6 $ 6 $ 18 $ 18
NPO $ 33 $ 33 $ 131 $ 164
Monies Paid
- -----------
A. The Company recorded fees to NPO of $512 and $501 for the nine months
ended September 30, 2004 and 2003, respectively, under the Asset Servicing
Agreement (the "Asset Servicing Agreement") between the Company and NPO,
pursuant to which NPO provides the Company with administrative and advisory
services relating to the assets of the Company and its Affiliated Limited
Partnerships. During 2004 and 2003 the Company provided office space under the
Asset Servicing Agreement to NPO consisting of 228 square feet of the Company's
New York location.
B. Millennium Financial Services, an affiliate of NPO, has received fees
from the Company representing compensation and reimbursement of expenses for
collection services as follows:
Fees Recorded Fees Recorded Fees Recorded Fees Recorded
For The Three For The Three For The Nine For The Nine
Months Ended Months Ended Months Ended Months Ended
09/30/04 09/30/03 09/30/04 09/30/03
-------- -------- -------- --------
$ 27 $ 30 $ 104 $ 125
In connection with the sales of property owned by affiliated limited
partnerships, a licensed real estate brokerage affiliate of the Pembroke Group,
whose members are affiliates of NPO, was paid brokerage fees by such affiliated
limited partnership as follows:
Fees Recorded Fees Recorded Fees Recorded Fees Recorded
For The Three For The Three For The Nine For The Nine
Months Ended Months Ended Months Ended Months Ended
09/30/04 09/30/03 09/30/04 09/30/03
------------- ------------- ------------- -------------
$ -- $ -- $ 13 $ 12
C. In connection with the acquisitions of residual interests in Receivables
II-A and Receivables II-B, affiliates of NPO and the special director of the
Company were paid investment banking fees of $900 in aggregate for their
services in connection with the origination, negotiation and structuring of the
transactions. The fee was payable without interest, over 30 months starting
January, 2002, from a portion of the monthly cash flow generated by the
acquisitions. The fee was paid in full as of June 30, 2004.
12
D. Interest expense on amounts due to affiliates was as follows:
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
09/30/04 09/30/03 09/30/04 09/30/03
-------- -------- -------- --------
Blackacre Capital Group, LLC $ 76 $ 73 $ 231 $ 214
NPO 2 1 5 4
-------- -------- -------- --------
$ 78 $ 74 $ 236 $ 218
======== ======== ======== ========
7. Contingent Liabilities
Pursuant to the terms of the Limited Partnership Settlement, a fund has
been established into which DVL is required to deposit 20% of the cash flow
received on certain of its mortgage loans from Affiliated Limited Partnerships
after repayment of certain creditors, 50% of DVL's receipts from certain loans
to, and general partnership investments in, Affiliated Limited Partnerships and
a contribution of 5% of DVL's net income (based on accounting principles
generally accepted in the United States of America) in the years 2001 through
2012 subject to certain adjustments. The adjustments are significant enough that
no amounts were accrued for the nine months ended September 30, 2004 and 2003.
During the nine months ended September 30, 2004 and 2003 the Company
expensed approximately $272 and $108, respectively, for amounts due to the fund
of which $-0- was accrued at both September 30, 2004 and 2003. These costs have
been netted against the gain on satisfaction of mortgages and/or interest on
mortgage loans, where appropriate.
The real estate lease interest held by the Company's subsidiary,
Professional Service Corporation, is subject to a master lease agreement through
June 2010 which requires monthly payments of approximately $39. The master lease
payments are netted against rental income in the Company's financial statements.
DVL is a limited recourse guarantor on debt of approximately $2,249 which is
secured solely by DVL's interest in the property.
8. Shareholder's Equity
On October 15, 2004, the Company gave notice of redemption to the holders
of approximately $1,171 principal amount of Notes. The Notes will be redeemed
effective December 29, 2004 for an aggregate of approximately 10,577,000 shares
of common stock.
In 1996, affiliates of NPM acquired 1,000,000 shares (the "Base Shares")
of DVL Common Stock and DVL issued to affiliates of NPM and NPO warrants (the
"Warrants") to purchase shares of Common Stock which, when added to the Base
Shares, aggregate 49% of the outstanding Common Stock of DVL, adjusted for
shares of common stock subsequently issued to and purchased by affiliates of NPM
and NPO, on a diluted basis expiring December 31, 2007. The original exercise
price of the Warrants was $.16 per share, subject to applicable anti-dilution
provisions including, without limitation, anti-dilution protection from any
redemption of the Notes and subject to a maximum aggregate exercise price of
$1,916. At September 30, 2004, shares underlying the Warrants aggregated
26,225,285 (not taking into account the redemption shares discussed above) at an
exercise price of $.07. No Warrants have been exercised through September 30,
2004.
Assuming the issuance of Common Stock on December 29, 2004 of
approximately 10,577,000 shares in redemption of the Notes, the number of shares
needed to satisfy the Warrants would be 36,387,500 at an exercise price of $.05.
13
RESTRICTION ON CERTAIN TRANSFERS OF COMMON STOCK: Each share of the stock
of the Company includes a restriction prohibiting sale, transfer, disposition or
acquisition of any stock until September 30, 2009 without the prior consent of
the Board of Directors of the Company by any person or entity that owns or would
own 5% or more of the issued and outstanding stock of the Company if such sale,
purchase or transfer would, in the opinion of the Board, jeopardize the
Company's preservation of its federal income tax attributes under Section 382 of
the Internal Revenue Code.
14
9. Earnings per share (unaudited)
The following tables present the computation of basic and diluted per share data
for the three and nine months ended September 30, 2004 and 2003.
Nine Months Ended September 30,
-------------------------------
2004 2003
---------------------------------- -----------------------------------
Weighted Weighted
Average Average
Number of Per Share Number of Per Share
Amount Shares Amount Amount Shares Amount
------ ---------- --------- --------- ---------- --------
Basic EPS, Income available to
common stockholders $ 1,325 27,738,402 $ .05 $ 579 21,713,563 $ .03
========= ========
Effect of litigation settlement notes 139 10,577,035 209 13,476,168
Effect of dilutive stock options and warrants -- 18,958,715 -- 20,179,283
------- ---------- --------- ----------
Diluted EPS, Income available to common stockholders $ 1,464 57,274,152 $ .03 $ 788 55,369,014 $ .01
======= ========== ========= ========= ========== ========
Three Months Ended September 30,
--------------------------------
2004 2003
----------------------------------- -----------------------------------
Weighted Weighted
Average Average
Number of Per Share Number of Per Share
Amount Shares Amount Amount Shares Amount
------ ---------- --------- --------- ---------- --------
Basic EPS, Income available to common stockholders $ 461 27,738,402 $ .02 $ (351) 21,713,563 $ (.02)
========= =======
Effect of litigation settlement notes 50 10,577,035 -- --
Effect of dilutive stock options and warrants -- 18,290,908 -- --
------ ----------- --------- ----------
Diluted EPS,
Income available to common stockholders $ 511 56,606,345 $ .01 $ (351) 21,713,563 $ (.02)
====== ========== ========= ========= ========== ========
15
At September 30, 2004 and 2003 there were 4,068,131 and 4,008,131
respectively, potentially dilutive options and warrants excluded from the
computation of Diluted EPS because the exercise price was greater than the
average market price of the Common Stock, thereby resulting in an anti-dilutive
effect.
Stock-based compensation: SFAS 123 and SFAS 148 allow companies to either
expense the estimated fair value of stock options or to follow the intrinsic
value method set forth in APB Opinion 25, "Accounting for Stock Issued to
Employees" ("APB 25" and related interpretations) but disclose the pro forma
effects on net income had the fair value of the options been expensed. The
Company has elected to continue to apply APB 25 in accounting for its stock
option incentive plans.
The following pro forma information regarding net income and earnings per
share is required by Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS No. 123").
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Reported net income $ 461 $ (351) $ 1,325 $ 579
Stock based compensation included in net
Income 5 4 5 17
Proforma and actual stock based
Compensation charge for stock options (5) (4) (5) (17)
--------- --------- --------- ---------
Proforma net income $ 461 $ (351) $ 1,325 $ 579
========= ========= ========= =========
Earnings per share as reported:
Basic $ 0.02 $ (0.02) $ 0.05 $ 0.03
========= ========= ========= =========
Diluted $ 0.01 $ (0.02) $ 0.03 $ 0.01
========= ========= ========= =========
Proforma earnings per share:
Basic $ 0.02 $ (0.02) $ 0.05 $ 0.03
========= ========= ========= =========
Diluted $ 0.01 $ (0.02) $ 0.03 $ 0.01
========= ========= ========= =========
16
10. Segment Information
The Company has two reportable segments; real estate and residual interests. The
real estate business is comprised of real estate assets, mortgage loans on real
estate, real estate management and investments in affiliated limited
partnerships which own real estate. The residual interests business is comprised
of investments in residual interests in securitized receivables portfolios. The
corporate/other net income of $165 and $365 in 2004 and 2003 respectively,
include $137 and $440 of deferred income tax benefit, respectively.
Nine Months Ended
September 30,
2004 2003
---------- ----------
Revenues
Real estate $ 3,504 $ 3,213
Residual interests 3,249 3,401
Corporate/other 30 39
---------- ----------
Total consolidated revenues $ 6,783 $ 6,653
========== ==========
Net income (loss)
Real estate $ (186) $ (1,056)
Residual interests 1,346 1,270
Corporate/other 165 365
---------- ----------
Total consolidated net income $ 1,325 $ 579
========== ==========
Assets
Real estate $ 34,998 $ 38,796
Residual interests 36,810 37,313
Corporate/other 1,951 1,887
---------- ----------
Total consolidated assets $ 73,759 $ 77,996
========== ==========
11. Income Taxes
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109 ("FAS 109"), which requires the
Company to recognize deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. In addition, FAS 109 requires the recognition of future tax benefits such
as net operating loss carryforwards, to the extent that realization of such
benefits is more likely than not.
In 2004 and 2003, the Company recognized $137 and $440, respectively, of
income tax benefit as a result of a reduction in the valuation allowance on
deferred tax assets.
17
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands)
This Quarterly Report on Form 10-Q for the quarter ended September 30, 2004
contains statements which constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Those statements include
statements regarding the intent, belief or current expectations of DVL and its
management team. DVL's stockholders and prospective investors are cautioned that
any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those projected in the forward-looking statements. Such risks and
uncertainties include, among other things, general economic conditions and other
risks and uncertainties that are discussed herein and in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principals generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to residual interests and allowance for losses. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
RESIDUAL INTERESTS: Residual interests represent the estimated discounted
cash flow of the differential of the total interest to be earned on the
securitized receivables and the sum of the interest to be paid to the
noteholders and the contractual servicing fee. Since these residual interests
are not subject to prepayment risk, they are accounted for as investments held
to maturity and are carried at amortized cost using the effective yield method.
Permanent impairments are recorded immediately through earnings. Favorable
changes in future cash flows are recognized through earnings 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.
18
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 are
based upon historical appraisals. Management believes that generally, the values
of such properties have not changed as the tenants, lease terms and timely
payment of rent have not changed. When any such changes have occurred,
management revalues the property as appropriate. Management evaluates and
updates such appraisals periodically, and considers changes in the status of the
existing tenancy in such evaluations. Certain other properties were valued based
upon management's estimate of the current market value for each specific
property using similar procedures.
LIMITED PARTNERSHIPS: DVL does not consolidate any of the various
Affiliated Limited Partnerships in which it holds the general partner and
limited partner interests, except where DVL holds greater than 50% ownership,
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 are 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.
None of the recently issued accounting standards had an effect on the Company's
consolidated financial statements.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2003
DVL had net income of $461 and a net loss of $(351) for the three months ended
September 30, 2004 and 2003, respectively.
Interest income on mortgage loans from affiliates decreased (2004 - $567, 2003 -
$691) and interest expense on underlying mortgages decreased (2004 - $243, 2003
- - $331). During 2003 the Company sold properties securing two underlying
mortgages and paid off the outstanding balances, wrote off one underlying
mortgage after the foreclosure of the related property and paid off another
underlying mortgage balance with a refinancing transaction. In April 2004, the
Company sold a property securing an underlying mortgage and paid off the
outstanding balance.
19
Gain on satisfaction of mortgage loans was as follows:
Three Months Ended Three MonthsEnded
September 30, 2004 September 30, 2003
-------------------- --------------------
$ -- $ 11
The gain in 2003 was a result of the Company collecting net proceeds on the
satisfaction of mortgage loans that were greater than the carrying values.
Transaction and other fees from affiliated limited partnerships were as follows:
Three Months Ended Three Months Ended
September 30, 2004 September 30, 2003
-------------------- --------------------
$ 40 $ 1
Transaction fees are earned by the Company in connection with sales of
partnership properties.
Interest income on residual interests (2004 - $1,067, 2003 - $1,151) remained
consistent as periodic payment receivables continued to perform. Interest
expense on the related notes payable (2004 - $617, 2003 - $707) decreased due to
a decrease in the outstanding principal balance of the notes payable.
Three Months Ended Three Months Ended
September 30, 2004 September 30, 2003
-------------------- --------------------
Net rental income from others $ 176 $ (36)
Gross rental income from others $ 419 $ 392
Net rental income increased as the Company ceased paying a portion of the master
lease payments starting September 1, 2003.
The Company recognized an impairment on the real estate lease interest of $462
in 2003 to properly reflect the anticipated realizable value following the
vacancy of a portion of the property by a temporary tenant.
General and administrative expenses decreased (2004 - $333, 2003 - $349). The
primary reason for the decrease was a $22 repayment of expenses from an
affiliated limited partnership.
The asset servicing fee due from the Company to NPO increased slightly (2004 -
$172, 2003 - $169) pursuant to the terms of the Asset Servicing Agreement due to
an increase in the consumer price index.
Legal and professional fees increased (2004 - $40, 2003 - $32) as a result of
legal fees incurred with respect to the sale of affiliated limited partnership
properties.
Interest expense on the litigation settlement notes decreased (2004 - $50, 2003
- - $70) as a result of the redemption by the Company of litigation settlement
notes during 2003.
20
Interest expense relating to other debts decreased (2004 - $185, 2003 - $190).
The Company made additional principal payments during the quarter which reduced
the interest expense. The decrease realized from the additional principal
payments was partially offset by the Company borrowing $949 earlier in 2004, as
a result of a refinancing transaction and the amortization of financing costs.
The Company recognized $137 and $83 of income tax benefit in 2004 and 2003,
respectively, as a result of a reduction in the valuation allowance on deferred
tax assets.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 2003
DVL had net income of $1,325 and $579 for the nine months ended September 30,
2004 and 2003, respectively.
Interest income on mortgage loans from affiliates decreased (2004 - $1,803, 2003
- - $2,071) and interest expense on underlying mortgages decreased (2004 - $771,
2003 - $1,028). During 2003 the Company sold properties securing two underlying
mortgages and paid off the outstanding balances, wrote off one underlying
mortgage after the foreclosure of the related property and paid off another
underlying mortgage balance with a refinancing transaction. In April 2004, the
Company sold a property securing an underlying mortgage and paid off the
outstanding balance.
Gain on satisfaction of mortgage loans was as follows:
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
-------------------- --------------------
$ 502 $ 99
The gains in 2004 and 2003 were a result of the Company collecting net proceeds
on the satisfaction of mortgage loans that were greater than the carrying
values.
Transaction and other fees from affiliated limited partnerships were as follows:
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
-------------------- --------------------
$ 148 $ 38
Transaction fees are earned by the Company in connection with sales of
partnership properties.
Interest income on residual interests (2004 - $3,249, 2003 - $3,401) remained
consistent as periodic payment receivables continued to perform. Interest
expense on the related notes payable (2004 - $1,898, 2003 - $2,118) decreased
due to a decrease in the outstanding principal balance of the notes payable.
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
-------------------- --------------------
Net rental income from others $ 444 $ 495
Gross rental income from others $ 1,246 $ 1,727
The decrease in net rental income from 2003 to 2004 was the result of a
temporary tenant, which had contributed to higher gross rents in previous
periods, vacating a property which the Company operates under a master lease.
21
The Company recognized an impairment on the real estate lease interest of $462
in 2003 to properly reflect the anticipated realizable value following the
vacancy of a portion of the property by a temporary tenant.
The increase in distributions from investments from others resulted primarily
from receiving an $84 distribution from the Opportunity Fund in 2004.
General and administrative expenses decreased (2004 - $1,074, 2003 - $1,168).
The primary reasons for the decrease were reduced stockholder and consulting
fees.
The asset servicing fee due from the Company to NPO increased slightly (2004 -
$512, 2003 - $501) pursuant to the terms of the Asset Servicing Agreement due to
an increase in the consumer price index.
Legal and professional fees increased (2004 - $211, 2003 - $169) as a result of
the increased cost of accounting services to the Company and legal fees incurred
with respect to sales of affiliated limited partnership properties.
The Company recognized an impairment on real estate of $100 in 2004 to reflect
its anticipated realizable value. The property was sold to a third party in
September 2004.
Interest expense on the litigation settlement notes decreased (2004 - $139, 2003
- - $209) as a result of the redemption by the Company of litigation settlement
notes during 2003.
Interest expense relating to other debts increased (2004 - $633, 2003 - $566)
primarily due to the Company borrowing an additional $949 as a result of a
refinancing transaction and the amortization of financing costs. The increase
from the additional borrowing was partially offset by reductions in interest
expense obtained by making additional principal payments.
In 2004, the Company recognized $137 of income tax benefit as a result of a
reduction in the valuation allowance on deferred tax assets. In 2003, the
Company recognized $440 of income tax benefit reduced by an income tax expense
of $75.
Liquidity and Capital Resources
- -------------------------------
The Company's cash flow from operations is generated principally from
interest on the residual interests in securitized portfolios, and interest on
its mortgage portfolio. Additionally the cash flows from operations arise from
management fees and transaction and other fees received as a result of the sale
and/or refinancing of partnership properties and mortgages, and rental income.
The Company believes that its anticipated cash flow provided by
operations is sufficient to meet its current cash requirements through at least
November, 2005. The Company believes that its current liquid assets will be
sufficient to fund operations on a short-term basis as well as on a long-term
basis.
The Company maintains a $500 unsecured line of credit with an interest
rate of prime plus one percent per annum and which terminates January 14, 2005.
There were no amounts outstanding on the line of credit as of September 30,
2004. The terms of the line of credit provide that interest shall be payable on
the first day of each month.
The cash flow from the Company's member interests in Receivables II-A and
Receivables II-B should provide significant liquidity to the Company.
22
The purchase agreements with respect to such acquisition 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
--------- ---------
2004 to 2009 $ 743 $ 880
2010 to final payment on the notes* $ 1,050 $ 1,150
* Final payment on the notes payable expected 2016 related to the
Receivables IIA transaction and 2018 for the Receivables IIB transaction.
The Company believes it will continue to receive significant cash flow
after final payment of the notes payable.
23
Acquisitions and Financings
- ---------------------------
Loans which are scheduled to become due through 2009 are as follows:
Outstanding
Principal
Original Balance at
Loan September 30, Due
Purpose Creditor Amount 2004 Date
- -------------------------------------- ------------------------ -------- ------------ --------
Repurchase of Notes
Issued by the Company Blackacre (1) $ 1,560 $ 2,382 01/05/06
Purchase of Mortgages Unaffiliated Bank (2)(3) $ 1,450 $ 1,263 05/01/09
Purchase of a Mortgage and Refinancing
of Existing Mortgages Unaffiliated Bank (2)(3) $ 1,450 $ 295 11/30/06
Purchase of Real Estate Assets Unaffiliated Bank (4) $ 4,500 $ 4,500 09/01/05
Purchase of Real Estate Assets
Unaffiliated Bank (5) $ 2,668 $ 2,545 06/30/08
(1) Interest paid 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 7.5% per annum. Monthly payments are interest only.
(5) Interest rate is 7.5% per annum with a balloon payment due June 30, 2008
of $2,285.
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.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DVL has no substantial cash flow exposure due to interest rate changes
for long term debt obligations, because a majority of its long-term debt is at
fixed rates. DVL primarily enters into long-term debt for specific business
purposes such as the repurchase of debt at a discount, the acquisition of
mortgage loans or the acquisition of real estate.
DVL's ability to realize value on its mortgage holdings is sensitive to
interest rate fluctuations in that the sales prices of real property and
mortgages vary with interest rates.
ITEM 4. CONTROLS AND PROCEDURES
In designing and evaluating the disclosure and procedures, the Company's
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurances of achieving the
desired control objectives, as ours are designed to do, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As of the end of the period covered by this report the Company carried
out an evaluation, under the supervision and with the participation of our
principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on this evaluation, our principal executive officer and
principal financial officer concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in our periodic SEC reports.
No change occurred in the Company's internal controls concerning
financial reporting during the Company's third quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.
25
Part II - Other Information
Item 6. Exhibits
--------
31.1 Chief Executive Officer's Certificate, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
26
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DVL, Inc.
By: /s/ Jay Thailer
------------------------------
Jay Thailer, Executive Vice
President and Chief Financial
Officer
November 15, 2004
27