SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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 March 31, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________________ to ______________________
Commission file number: 1-8356
DVL, Inc.
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(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.)
incorporation or organization)
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
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes: X No:
---- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Class Outstanding at May 14, 2001
- ----------------------------- --------------------------------
Common Stock, $.01 par value 16,560,450
DVL, INC. AND SUBSIDIARIES
INDEX
Part I. Item 1 - Financial Information: Page No.'s
----------
Consolidated Balance Sheets -
March 31, 2001 (unaudited) and December 31, 2000 1-2
Consolidated Statements of Operations -
Three Months Ended March 31, 2001 (unaudited)
and 2000 (unaudited) 3-4
Consolidated Statement of Shareholders' Equity for
the Three Months Ended March 31, 2001 (unaudited) 5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2001 (unaudited)
and 2000 (unaudited) 6-7
Notes to Consolidated Financial Statements (unaudited) 8-11
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-17
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 17
Part II. Other Information:
Item 6 - Exhibits and Reports on Form 8-K 18
Signature 19
Exhibit Index 20
Part I - Financial Information
Item 1. Financial Statements
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2001 2000
------------- -------------
ASSETS (unaudited)
- ------
Loans receivable (including amounts maturing
after one year)
Affiliates:
Mortgages due from affiliated partnerships $ 52,291 $ 53,979
Unearned interest (11,536) (12,340)
-------- --------
Net mortgage loans receivable from affiliated
partnerships 40,755 41,639
Others:
Non-performing loans collateralized by limited
partnership interests 379 389
Due from affiliated partnerships - 12
-------- --------
Total loans receivable 41,134 42,040
Allowance for loan losses 5,534 5,534
-------- --------
Net loans receivable 35,600 36,506
Residual interests in securitized portfolios 26,089 -
Cash (including restricted cash of $213 for 2001
and 2000) 1,738 1,184
Distributions and fees due from affiliated
partnerships 125 158
Investments
Real estate at cost (net of accumulated
depreciation of $45 for 2001 and $26 for 2000) 4,089 3,737
Real estate lease interests 1,182 1,215
Affiliated limited partnerships (net of allowances
for losses of $645 and $647, respectively) 1,150 1,157
Other investments (net of allowances for losses of
$400 for 2001 and 2000) 648 648
Prepaid financing and other assets 479 832
-------- --------
Total assets $ 71,100 $ 45,437
======== ========
See notes to consolidated financial statements.
1
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
March 31, December 31,
2001 2000
--------- ------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Underlying mortgages payable $ 25,492 $ 26,019
Notes Payable - Receivables IIA 25,325 -
Long-term debt - Blackacre Bridge Capital, LLC 2,143 2,080
Long-term debt - Rumson 173 202
Long-term debt - Other 5,425 5,577
Notes payable - litigation settlement 3,140 3,028
Asset Service Fee Payable - NPO 385 373
Investment banking fee due to affiliates 450 -
Accounts payable, security deposits and
accrued liabilities 834 585
-------- --------
Total liabilities 63,367 37,864
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock $10.00 par value, authorized -
100 shares for 2001 and 2000,
issued - 100 shares
for 2000 and 1999 1 1
Preferred stock, $.01 par value, authorized 5,000,000
shares for 2001 and 2000, issued - 0 shares for
2001 and 2000 - -
Common stock, $.01 par value, authorized -
90,000,000 shares for 2001 and 2000, issued -
16,560,450 shares for 2001 and 2000 166 166
Additional paid-in capital 95,362 95,288
Deficit (87,796) (87,882)
-------- --------
Total shareholders' equity 7,733 7,573
-------- --------
Total liabilities and shareholders' equity $ 71,100 $ 45,437
======== ========
See notes to consolidated financial statements.
2
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)(unaudited)
Three Months Ended
March 30,
2001 2000
---------- ---------
Income from affiliates:
Interest on mortgage loans $ 897 $ 895
Gain on satisfaction of mortgage loans 151 -
Partnership management fees 107 106
Transaction and other fees from partnerships 68 -
Distributions from investments 57 32
Rent and other income 2 2
Income from others:
Net rental income (including depreciation of
$19 for 2001 and $3 for 2000) 180 162
Distributions from investments 38 -
Management fees 34 50
Other income and interest 12 10
---------- --------
1,546 1,257
---------- --------
Operating expenses:
Recovery of provision for losses (3) (5)
Interest on underlying mortgages 541 568
General and administrative 309 326
Asset Servicing Fee - NPO Management LLC 156 150
Legal and professional fees 107 68
Interest expense
Blackacre Bridge Capital, LLC 71 66
Litigation Settlement Notes 128 124
NPO 12 55
Rumson 5 -
Others 148 31
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1,474 1,383
---------- --------
Operating income (loss) before extraordinary gain 72 (126)
Extraordinary gain on the settlements
of indebtedness 14 23
---------- --------
Net income (loss) $ 86 $ (103)
========== ========
(continued)
See notes to consolidated financial statements.
3
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(continued)
Three Months Ended
March 31,
2001 2000
---------- ----------
Basic earnings (loss) per share:
Income (loss) before extraordinary gain $ .01 $ (.01)
Extraordinary gain .00 .00
----------- ----------
Net income (loss) $ .01 (.01)
=========== ==========
Diluted earnings (loss) per share:
Income (loss) before extraordinary gain $ .00 $ (.01)
Extraordinary gain .00 .00
----------- ----------
Net income (loss) $ .00 $ (.01)
=========== ==========
Weighted average shares outstanding -
basic 16,560,450 16,560,450
Effect of dilutive securities 147,071,400 -
----------- ----------
Weighted average shares outstanding - 163,631,850 16,650,450
diluted =========== ==========
See notes to consolidated financial statements.
4
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, 2001 100 $ 1 16,560,450 $ 166 $95,288 $ (87,882) $ 7,573
Issuance of Warrants in
Connection with the purchase
of residual interests in
securitized portfolios - - - - 74 - 74
Net income - - - - - 86 86
------- ----- ---------- ------- ------- --------- -------
Balance-March 31, 2001 100 $ 1 16,560,450 $ 166 $95,362 $ (87,796) $ 7,733
======= ===== ========== ======= ======= ========= =======
5
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
----------------------
2001 2000
-------- --------
Cash flows from operating activities:
Income (loss) before extraordinary gain $ 72 $ (126)
Adjustments to reconcile net income (loss) before
extraordinary gains to net cash provided by (used in)
operating activities
Recovery of provision for losses (3) (5)
Accrued interest added to indebtedness 68 65
Gain on satisfactions of mortgage loans (151) -
Depreciation 21 6
Amortization of unearned interest on loan receivables (29) (13)
Amortization of real estate lease interests 33 34
Imputed interest on notes 128 124
Net decrease (increase) in other assets 228 (97)
Net increase (decrease) in accounts payable and accrued
liabilities 9 (120)
Net increase in asset service
fee payable - NPO 12 54
Net decrease in due from affiliated partnerships 12 34
Net decrease (increase) in distributions and fees due
from affiliated partnerships 33 (239)
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Net cash provided by (used in) operating activities 433 (283)
------- ------
Cash flows from investing activities:
Investments in loans receivable - (1,526)
Collections on loans receivable 1,077 399
Real estate acquisitions and capital improvements (248) (18)
Net decrease in affiliated limited partnership
interests and other investments 7 7
------- ------
Net cash provided by (used in) investing activities 836 (1,138)
------- ------
6
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
(continued)
Three Months Ended
March 31,
---------------------
2001 2000
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Cash flows from financing activities:
Proceeds from new borrowings $ 200 $ 2,525
Repayment of indebtedness (386) (87)
Payments on underlying mortgages payable (527) (493)
Payments related to debt tender offers and redemptions (2) (3)
-------- -------
Net cash (used in) provided by financing activities (715) 1,942
-------- -------
Net increase in cash 554 521
Cash, beginning of period 1,184 1,270
-------- -------
Cash, end of period $ 1,738 $ 1,791
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 601 $ 568
======== =======
Supplemental disclosure of non-cash investing and
financing activities:
Net reduction of notes payable - debt tender offers
and redemptions $ 14 $ 23
======== =======
Residual interests in securitized portfolios $ 26,089 $ -
======== =======
Notes Payable - Receivables IIA $ 25,325 $ -
======== =======
See notes to consolidated financial statements.
7
DVL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
In the opinion of DVL, Inc. ("DVL" or the "Company"), the accompanying
financial statements contain all adjustments (consisting of only normal
accruals) necessary in order to present a fair presentation of the financial
position of DVL and the results of its operations for the periods set forth
herein. The results of the Company's operations for the three months ended March
31, 2001 should not be regarded as indicative of the results that may be
expected from its operations for the full year. Certain amounts from the three
months ended March 31, 2000 have been reclassified to conform to the
presentation for the three months ended March 31, 2001. 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,
2000.
2. Loans Receivable
DVL, as holder of a second mortgage on a property owned by an Affiliated
Limited Partnership, received approximately $829,000 as partial payment of
amounts due under its mortgage resulting from a foreclosure by the senior
mortgage lender. The aggregate net proceeds received by DVL from this
partnership was $151,000 greater than DVL's carrying value, which resulted in a
gain on satisfaction of mortgages during the quarter ended March 31, 2001.
3. Residual Interests In Securitized Portfolios
On March 30, 2001, the Company's newly-formed wholly-owned subsidiary, S2
Holdings, Inc. ("S2"), entered into an agreement for the purchase of a 99.9%
Class B member interest in Receivables II-A LLC, a limited liability company
("Receivables II-A"), from Receivables II-A Holding Company LLC ("Seller"), a
newly formed indirect wholly-owned subsidiary of a company engaged in the
acquisition and management of periodic payment receivables. The Class B member
interest entitles S2 to be allocated 99.9% of all items of income, loss and
distribution. Receivables II-A owns all of the equity interests in three
subsidiary limited liability companies that have previously acquired and
securitized four portfolios of periodic payment receivables. Receivables II-A
solely has the right to receive the residual cash flow from the securitized
receivables after payment to the securitized noteholders.
On April 27, 2001, S2 purchased its interest for an aggregate purchase
price of $26,089,000, including costs of $690,000. The purchase price was paid
by the issuance of promissory notes by S2 in the aggregate amount of
$25,325,000, which are limited recourse and principal and interest are payable
from the future monthly cash flow received by S2 as distributions from the
periodic payment receivables owned by Receivables II-A's subsidiaries. The notes
mature on December 31, 2021, bear interest at the rate of 8% annually, and are
secured by a pledge of S2's interest in Receivables II-A and all proceeds and
distributions related to such interest. The principal amount of the notes and
the purchase price may be increased or decreased, from time to time, based upon
the performance of the underlying receivables. The balance of the purchase price
was paid by the issuance by DVL of a warrant, valued at $74,000, for the
purchase of 2 million shares of the common stock of DVL, exercisable until
February 15, 2011 at a price of $.20 per share. DVL also issued its guaranty of
up to $2,532,500 of the purchase price. Payments, if any, due under this
guaranty are payable after December 31, 2021.
4. Note Payable - Litigation Settlement/Debt Tender Offer and Redemptions
As a result of its 1993 settlement of a certain class action litigation, in
December 1995, DVL issued notes (the "Notes") in the aggregate principal amount
of $10,386,851. The Notes, which are general unsecured obligations of DVL,
accrue interest at the rate of ten (10%) percent per annum and are due on
December 31, 2005. Pursuant to the terms of the Notes, accrued and unpaid
interest payable on the first five anniversary dates following the issuance of
the Notes was payable, at the option of DVL, by the issuance of similar
additional Notes with a principal amount equal to the accrued and unpaid
interest obligation then due. On the five anniversary dates following the
issuance of the Notes, the Company satisfied its interest obligations thereunder
by issuing such additional Notes in lieu of payment of any cash.
8
The Company has had the option to redeem the outstanding Notes since
January 1, 1999 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 will cause significant
dilution for current shareholders. The actual dilutive effect cannot be
currently ascertained since it depends on the number of shares to be actually
issued to satisfy the Notes. The Company currently intends to exercise at some
point in the future some or all of its redemption option to the extent it does
not buy back the outstanding Notes by means of cash tender offers or cash
redemptions.
Since October 1997, the Company conducted three cash tender offers (the
"Offers") for its Notes at an offer price of $0.12 per $1.00 principal amount of
its Notes. The first two Offers were financed with a loan from Blackacre,
discussed below.
The results were as follows:
Principal Amount Principal Amount
of Notes of Notes Extraordinary Date
Purchased by Purchased by Gains to Offer
DVL Blackacre DVL Terminated
---------------- --------------- ------------ --------------
Offer # 1 $ 6,224,390 $ 392,750 $ 202,000 February 27, 1998
(1998)
$ 2,906,000
(1997)
Offer # 2 $ 2,413,652 $ 423,213 $ 1,267,000 May 14, 1999
(1999)
Offer # 3 $ 378,270 $ - 0 - $ 306,000 August 15, 2000
(2000)
Notes with an aggregate principal amount of approximately $4,082,000
remain outstanding as of March 31, 2001 (carrying value $3,140,000). The Offers
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.
During December 2000, the Company gave notice of cash redemptions at
face value of approximately $106,000 of Notes. As of March 31, 2001, cash in the
amount of $22,000 was disbursed in connection with such redemption and the
Company has accrued liabilities for additional amounts due. In addition, during
the quarter ended March 31, 2001, the Company acquired Notes which had aggregate
principal balances of approximately $16,000 for cash payments of approximately
$2,000, which resulted in an extraordinary gain of $14,000 for the quarter ended
March 31, 2001.
In order to fund the acquisition of the Notes in the first and second
offers and pay the related costs and expenses, the Company entered into an
amended financing arrangement (the "BC Arrangement") with Blackacre Capital
Group, LLC ("Blackacre"), NPM Capital LLC ("NPM"), and NPO Management LLC
("NPO"), as of October 20, 1997, in the form of a Fourth Amendment to a Loan
Agreement between such parties (as amended, the "Amended Loan Agreement),
permitting the Company to borrow up to $1,760,000 (the amount actually borrowed
by the Company pursuant to the BC Arrangement is referred to as the "BC Loan").
The BC Loan matures on September 30, 2002 and bears interest at the rate of 12%
per annum compounded monthly and payable at maturity. Total borrowings under the
BC Arrangement including accrued interest were $2,143,000 as of March 31, 2001.
In addition, Blackacre was entitled to acquire 15% of all Notes acquired by the
Company in excess of $3,998,000 in connection with the Offers under the same
terms and conditions as the Company. Blackacre acquired Notes aggregating
$392,750 under these terms from the first Offer and $423,213 from the second
Offer. DVL funded the third Offer with available cash.
9
As further consideration for Blackacre's providing the Company with the BC
Loan, the Company issued to Blackacre 653,000 shares of Common Stock.
The Company's obligations under the BC Loan are secured by all of the
assets of the Company currently pledged to NPO under the Amended Loan Agreement
and the other documents executed in connection therewith. The BC Loan is senior
to all indebtedness of the Company other than indebtedness to NPO and, with
respect to individual assets, the related secured lender. The effective interest
rate to the Company for financial reporting purposes, including the Company's
costs associated with the BC Loan, and the value of the 653,000 shares issued to
Blackacre in connection therewith, is approximately 14% per annum. Interest
payable in connection with the BC Loan will be deferred until the Company
satisfies all of its obligations owing to NPO. However, since April 27, 2000 the
Company is required to pay principal payments in an amount equal to 15% of all
proceeds that would otherwise be remitted to NPO, to Blackacre. Thereafter,
interest and principal will be paid from 100% of the proceeds then available to
the Company from the mortgage collateral held as security for the BC Loan.
5. Real Estate
-----------
In the first quarter of 2001, DVL purchased the fee title to a parcel
of land in Kearny, NJ from an unrelated third party for a purchase price of
$365,000, plus closing costs. The acquisition was funded with cash and bank
financing of $200,000. This bank financing accrues interest at the rate of 9.5%
per annum and requires monthly interest- only payments until December 1, 2001,
at which time the loan matures. The Company has the right to extend this loan
until June 1, 2002.
6. Other Transactions with Affiliates
A. Opportunity Fund
----------------
In April 1998, DVL, an affiliate of Blackacre and affiliates of NPO
entered into a certain Agreement Among Members (the "Opportunity Agreement"),
providing for an arrangement (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 will be presented to the
Opportunity Fund on a first refusal basis, if the Company, due to financial
constraints, is unable to pursue such business opportunity with its own funds.
The Opportunity Fund is expected to pursue each Opportunity with
respect to which it exercises its right of first refusal through the use of a
special purpose limited liability company. All of the required capital
contributions are to be provided by Blackacre and the NPO Affiliates. The
Company will receive up to 20% of the profits from an opportunity after BCG and
the NPO Affiliates receive the return of their investment plus preferred returns
ranging from 12% to 20% per annum.
As of May 1, 2001, the Opportunity Fund has 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 a leasehold interest of a tenant of an
Affiliated Limited Partnership. In addition, during 1999, the Opportunity Fund
acquired a property of an Affiliated Limited Partnership and the land underlying
this property from DVL. During 2000, DVL purchased three of the mortgages owned
by the Opportunity Fund for an aggregate purchase price of $900,000 payable in
cash and notes and the Opportunity Fund was fully satisfied on an additional
four mortgage loans, as each of the properties that secured these four mortgage
loans was sold. As of May 1, 2001, the Opportunity Fund owns eight mortgages.
For the three months ended March 31, 2001 and 2000, DVL was paid approximately
$33,000 and $0, respectively, from the investments by the Opportunity Fund,
which was used to pay amounts owed by DVL under a note in favor of an entity
that is part of the Opportunity Fund.
10
B. The Company has provided management, accounting, and administrative services
to certain limited partnerships which are affiliated with NPO, Blackacre, or the
Opportunity Fund. The management service contracts are as follows:
Fees Received For The Fees Received For The
Three Months Ended Three Months Ended
Affiliate Of 03/31/01 03/31/00
------------ --------------------- ---------------------
NPO and Blackacre (1) $ -0- $ 15,000
NPO $ 12,000 $ 11,500
Opportunity Fund $ 6,600 $ 6,600
NPO (2) $ 97,000 $ 6,000
(1) The Company has a 25% interest in profits after the investors receive a
compounded internal rate of return of 20%.
(2) Of the total cash received, $91,000 represented prior deferred fees paid in
the first quarter of 2001. The Company is entitled to a current fee of
$2,000 per month and a deferred fee of $6,500 per month. In addition, the
Company can earn an annual incentive fee.
C. Millennium Financial Services, an affiliate of NPO, received $4,616, and
$1,771 for the three months ended March 31, 2001, and 2000, respectively,
representing compensation and reimbursement of expenses for collection services
provided to the Company with respect to collection on limited partner notes. The
Company paid to Millennium Financial Services $25,000 for professional fees for
each of the quarters ended March 31, 2001 and 2000.
D. In connection with the acquisition of residual interests in securitized
portfolios an affiliate of NPO and a special director of the Company will be
paid an investment banking fee of $450,000 for its services in connection with
the origination, negotiation and structuring of the transaction. The fee will be
payable without interest, over the next two years out of a portion of cash flow
generated by the acquisition.
7. Shareholder's Equity
In February 2000, DVL amended its Certificate of Incorporation in order to
(a) increase the number of authorized shares of DVL's common stock, $.01 par
value, from 40,000,000 to 90,000,000 and (b) authorize 5,000,000 shares of
"blank check" preferred stock, $.01 par value. However, based upon the current
market price of the Company's common stock, there are not sufficient authorized
shares to be issued upon the exercise of the NPM warrants and the redemption of
the Notes.
8. Contingent Liabilities
In November 1992, DVL, Kenbee Management, Inc. ("Kenbee"), DVL's former
manager, and the limited partners of certain affiliated partnerships reached a
settlement in certain limited partnership class action litigation ("Limited
Partner Settlement"). The Limited Partner Settlement established a settlement
fund into which DVL is required to deposit a portion of the net cash flow
received from Affiliated Limited Partnership mortgages and other loans
receivable from Affiliated Limited Partnerships. For the three months ended
March 31, 2001 and March 31, 2000, DVL accrued $180,057 and $6,249,
respectively, for amounts due to the fund. In addition, DVL is required to
contribute 5% of it's net income based on Generally Accepted Accounting
Principals less amortization of loans, in the years 2001 to 2012. The estimated
amortization of the loans for 2001 is significant enough that no amounts were
accrued for the first quarter.
11
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This March 31, 2001 Quarterly Report on Form 10-Q contains statements which
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Those statements include statements regarding the
intent, belief or current expectations of DVL and its management team. DVL's
stockholders and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements. Such risks and uncertainties
include, among other things, general economic conditions and other risks and
uncertainties that are discussed herein and in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
- --------------------------------------------------------------------------------
DVL had net income (loss) from operations, net income (loss) after extraordinary
items, and extraordinary gains, as follows:
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
------------------ ------------------
Net income (loss) from operations $ 72,000 $ (126,000)
Extraordinary gains $ 14,000 $ 23,000
Net income (loss) after
extraordinary gains $ 86,000 $ (103,000)
Interest income on mortgage loans from affiliates increased slightly from 2000
to 2001, whereas, interest expense on underlying mortgages decreased from 2000
to 2001. During 2000, the Company purchased eight new mortgage loans, some of
which have underlying mortgages, however, the additional interest income and
interest expense that are generated from these purchases were partially offset
by the disposition of certain existing mortgage loans in DVL's mortgage
portfolio.
Gains on satisfaction of mortgage loans were as follows:
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
------------------ ------------------
$ 151,000 $ -0-
The gain in 2001 was a result of the Company collecting net proceeds on the
satisfaction of a mortgage loan that was greater than its carrying value.
Transaction and other fees from Affiliated Limited Partnerships were as follows:
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
------------------ ------------------
$ 68,000 $ -0-
Transaction and other fees were earned in connection with the sales of
partnership properties.
12
Net rental income for others were as follows:
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
------------------ ------------------
$ 180,000 $ 162,000
The primary reason for the increase in net rental income from 2000 to 2001 was
lower costs, as well as, higher rents paid by new and existing tenants. Costs
were lower due to lower repair and maintenance costs during the current quarter,
as well as, a reduction in lease obligations due to the purchase in 2000 of a
real estate asset which the Company had previously been leasing under a master
lease agreement. These increases in net rental income were partially offset by a
rent reduction granted to a tenant in September 2000 and greater depreciation
expense due to the purchase of new real estate assets.
Distribution from investments from others increased in 2001 from 2000 primarily
as a result of monies received from the Opportunity Fund (as defined below).
During the first quarter of 2001, the Company received $33,000 from the
Opportunity Fund.
The Company finalized settlement agreements that allow the Company to realize
cash proceeds that exceed the carrying value in previously reserved limited
partner notes receivables. As a result, DVL reflected a recovery in the
provision for losses as follows:
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
------------------ ------------------
$ 3,000 $ 5,000
General and administrative expenses decreased from 2000 to 2001. The primary
reason for the decrease was lower stockholder costs during the current quarter
due to the preparation and distribution of printed material during the first
quarter of 2000. This decrease was partially offset by greater rent costs for
the Company's office headquarters due to escalation charges and lower rental
reimbursements.
The asset servicing fee due from the Company to NPO (as defined below) increased
in 2001 from 2000 due to an increase in the consumer price index, pursuant to
the agreement.
Legal and professional fees increased in 2001 as compared to 2000 primarily as a
result of costs incurred relating to transactions, as well as, an increased
amount due to the settlement fund as a result of such transactions.
Interest expense on the loan from Blackacre (as defined below) increased in 2001
as compared to 2000, as a result of compounding interest.
Interest expense on the Notes (as defined below) increased in 2001 from 2000.
Additional Notes are issued every year for the interest that has accrued during
such year. However, the interest cost was partially reduced as a result of DVL
having repurchased Notes.
Interest expense associated with the NPO asset servicing fee decreased in 2001
from 2000. Interest accrues on all amounts due NPO and during 2000 such
outstanding amount was reduced.
Interest expense relating to other debts increased in 2001 from 2000 due to an
increase in amounts borrowed. During 2000, the Company borrowed an aggregate of
$6,425,000 to fund the acquisition of eight new mortgages loans, the purchase of
all of the real estate assets in an industrial park, and the refinancing of
three existing mortgage receivables. Also, during the first quarter of 2001, the
Company borrowed $200,000 to purchase a parcel of land.
13
Liquidity and Capital Resources
- -------------------------------
The Company's cash flow from operations is generated principally from
rental income from its leasehold interests in real estate, retained interests in
securitized portfolios, interest on its mortgage portfolio, management fees from
the operation of Affiliated Limited Partnerships and transaction and other fees
received as a result of the sale and/or refinancing of partnership properties
and mortgages. In addition, the Company's portfolio of loans to Affiliated
Limited Partnerships currently produces equity build-up due to the payments of
principal on mortgages on the properties senior to those held by the Company
although such portfolio does not currently produce substantial cash flow to the
Company.
DVL's anticipated cash flow provided by operations is sufficient to meet
its current cash requirements through at least January 2002. In the event that
management determines that such cash flow is not sufficient, NPO has agreed to
allow the Company to defer payment of its management fees. As of March 31, 2001,
the Company owed approximately $385,000 to NPO. DVL 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.
Residual Interest In Securitized Portfolios
- -------------------------------------------
On March 30, 2001, the Company's newly-formed wholly-owned subsidiary, S2
Holdings, Inc. ("S2"), entered into an agreement for the purchase of a 99.9%
Class B member interest in Receivables II-A LLC, a limited liability company
("Receivables II-A"), from Receivables II-A Holding Company LLC ("Seller"), a
newly formed indirect wholly-owned subsidiary of a company engaged in the
acquisition and management of periodic payment receivables. The Class B member
interest entitles S2 to be allocated 99.9% of all items of income, loss and
distribution. Receivables II-A owns all of the equity interests in three
subsidiary limited liability companies that have previously acquired and
securitized four portfolios of periodic payment receivables. Receivables II - A
solely has the right to receive the residual cash flow from the securitized
receivables after payment to the securitized noteholders.
On April 27, 2001, S2 purchased its interest for an aggregate purchase
price of $26,089,000, including costs of $690,000. The purchase price was paid
by the issuance of promissory notes by S2 in the aggregate amount of
$25,325,000, which are limited recourse and principal and interest are payable
from the future monthly cash flow received by S2 as distributions from the
periodic payment receivables owned by Receivables II-A's subsidiaries. The notes
mature on December 31, 2021, bear interest at the rate of 8% annually, and are
secured by a pledge of S2's interest in Receivables II-A and all proceeds and
distributions related to such interest. The principal amount of the notes and
the purchase price may be increased or decreased, from time to time, based upon
the performance of the underlying receivables. The balance of the purchase price
was paid by the issuance by DVL of a warrant, valued at $74,000, for the
purchase of 2 million shares of the common stock of DVL, exercisable until
February 15, 2011 at a price of $.20 per share. DVL also issued its guaranty of
up to $2,532,500 of the purchase price. Payments, if any, due under this
guaranty are payable after December 31, 2021.
The purchase agreement contains annual minimum and maximum levels of cash
flow that will be retained by S2, after the payment of interest and principal on
the notes, which are as follows:
Years Minimum Maximum
----- ------- -------
2001 to 2009 $462,500 $500,000
2010 to 2015 700,000 750,000
2016 to 2021 700,000 None
14
Debt Tenders and Redemptions
- ----------------------------
Since October 1997, the Company conducted three cash tender offers (the
"Offers") at a price of $0.12 per $1.00 principal amount of the Company's 10%
redeemable promissory notes due December 31, 2005 (the "Notes"). The first two
Offers were financed with a loan from Blackacre discussed below.
The results were as follows:
Principal Amount Principal Amount
of Notes of Notes Extraordinary Date
Purchased by Purchased by Gains to Offer
DVL Blackacre DVL Terminated
---------------- ---------------- ------------- ----------
Offer # 1 $ 6,224,390 $ 392,750 $ 202,000 February 27, 1998
(1998)
$ 2,906,000
(1997)
Offer # 2 $ 2,413,652 $ 423,213 $ 1,267,000 May 14, 1999
(1999)
Offer # 3 $ 378,270 $ - 0 - $ 306,000 August 15, 2000
(2000)
The Company has had the option to redeem the outstanding Notes since
January 1, 1999 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 will cause significant
dilution for current shareholders. The actual dilutive effect cannot be
currently ascertained since it depends on the number of shares to be actually
issued to satisfy the Notes. The Company currently intends to exercise at some
point in the future some or all 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 $4,082,000
remain outstanding as of March 31, 2001 (discounted value $3,140,000). The
Offers 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.
During December 2000, the Company gave notice of cash redemptions at
face value of approximately $106,000 of Notes. As of March 31, 2001, cash in the
amount of $22,000 was disbursed in connection with such redemption and the
Company has accrued liabilities for additional amounts due. In addition, during
the quarter ended March 31, 2001, the Company acquired Notes which had aggregate
principal balances of approximately $16,000 for cash payments of approximately
$2,000, which resulted in an extraordinary gain of $14,000 for the quarter ended
March 31, 2001.
15
In order to fund the acquisition of the Notes in the first and second
Offers and pay the related costs and expenses, the Company entered into an
amended financing arrangement (the "BC Arrangement") with Blackacre Capital
Group LLC ("Blackacre"), NPM Capital LLC ("NPM"), and NPO Management LLC
("NPO"), as of October 20, 1997, in the form of a Fourth Amendment to a Loan
Agreement between such parties (as amended, the "Amended Loan Agreement),
permitting the Company to borrow up to $1,760,000 (the amount actually borrowed
by the Company pursuant to the BC Arrangement is referred to as the "BC Loan").
The BC Loan matures on September 30, 2002 and bears interest at the rate of 12%
per annum compounded monthly and payable at maturity. Total borrowings under the
BC Arrangement including accrued interest were $2,143,000 as of March 31, 2001.
In addition, Blackacre was entitled to acquire 15% of all Notes acquired by the
Company in excess of $3,998,000 under the same terms and conditions as the
Company. Blackacre acquired Notes aggregating $392,750 under these terms from
the First Offer and $423,213 from the second Offer. DVL funded the third Offer
with available cash.
As further consideration for Blackacre's providing the Company with the BC
Loan, the Company issued to Blackacre 653,000 shares of Common Stock.
The Company's obligations under the BC Loan are secured by all of the
assets of the Company currently pledged to NPO under the Amended Loan Agreement
and the other documents executed in connection therewith. The BC Loan is senior
to all indebtedness of the Company other than indebtedness to NPO and, with
respect to individual assets, the related secured lender. The effective interest
rate to the Company for financial reporting purposes, including the Company's
costs associated with the BC Loan, and the value of the 653,000 shares issued to
Blackacre in connection therewith, is approximately 14% per annum. Interest
payable in connection with the BC Loan will be deferred until the Company
satisfies all of its obligations owing to NPO. However, since April 27, 2000 the
Company is required to pay principal payments in an amount equal to 15% of all
proceeds that would otherwise be remitted to NPO, to Blackacre. Thereafter,
interest and principal will be paid from 100% of the proceeds then available to
the Company from the mortgage collateral held as security for the BC Loan.
Acquisitions and Financings
- ---------------------------
Loans which are scheduled to become due in the coming years are as follows:
Original Balance
Loan Due at Due
Purpose Creditor Amount March 31, 2001 Date
- ------- -------- ------------- -------------- ----
Repurchase of Notes
Issued by the Company Blackacre $ 1,560,000 $ 2,143,000 09/30/02
Purchase of Mortgages Unaffiliated Bank(1) $ 1,000,000 $ 970,000 05/01/06
Purchase of a Mortgage
and Refinancing of
Existing Mortgages Unaffiliated Bank(1) $ 1,450,000 $ 1,255,000 04/01/05
Purchase of Real Estate
Assets Unaffiliated Bank(2) $ 3,000,000 $ 3,000,000 12/01/01
Purchase of Land Unaffiliated Bank(2) $ 200,000 $ 200,000 12/01/01
Purchase of Mortgages Rumson $ 200,000 $ 173,000 08/31/02
(1) This loan self-amortizes.
(2) The Company has the right to extend its loan until June 1, 2002.
16
IMPACT OF INFLATION AND CHANGES IN INTEREST RATES
- -------------------------------------------------
The Company's portfolio of mortgage loans made to Affiliated Limited
Partnerships consists primarily of loans made at fixed rates of interest.
Therefore, increases or decreases in market interest rates are generally not
expected to have an effect on the Company's earnings. Other than as a factor in
determining market interest rates, inflation has not had a significant effect on
the Company's net income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DVL has no substantial cash flow exposure due to interest rate changes for
long term debt obligations, because a majority of the long-term debt is at fixed
rates. DVL primarily enters into long-term debt for specific business purposes
such as the repurchase of debt at a discount or the acquisition of mortgage
loans.
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.
17
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(A) Exhibits:
11 - Statement RE: Computation of Earnings Per Share - Three Months
(B) There were no reports of Form 8-K filed during the three months ended
March 31, 2001.
18
SIGNATURE
- ---------
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/ Gary Flicker
--------------------------------
Gary Flicker, Executive Vice
President and Chief Financial
Officer (Principal Financial and
Chief Accounting Officer)
May 14, 2001
19
EXHIBIT INDEX
-------------
11 - Statement RE: Computation of Earnings Per Share - Three Months
20