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 MARCH 31, 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 MAY 14, 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 -
March 31, 2004 (unaudited) and December 31, 2003 1 - 2
Consolidated Statements of Operations -
Three Months Ended March 31, 2004 (unaudited) and
2003 (unaudited) 3 - 4
Consolidated Statement of Shareholder's Equity -
Three Months Ended March 31, 2004 (unaudited) 5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2004 (unaudited) and
2003 (unaudited) 6 - 7
Notes to Consolidated Financial Statements (unaudited) 8 - 17
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 18 - 22
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 23
Item 4 - Controls and Procedures 23
Part II. Other Information:
Item 6 - Exhibits and Reports on Form 8-K 24
Signature 25
Part I - Financial Information
Item 1. Financial Statements
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
MARCH 31, DECEMBER 31,
2004 2003
----------- -----------
(unaudited)
ASSETS
Residual interests in securitized portfolios $ 35,691 $ 36,662
-------- --------
Mortgage loans receivable from affiliated partnerships
(net of unearned interest of $14,179 for 2004 and $14,300 for 2003)
25,614 25,986
Allowance for loan losses 2,386 2,386
-------- --------
Net mortgage loans receivable 23,228 23,600
-------- --------
Cash (including restricted cash of $155 and $172 for 2004
and 2003) 1,978 2,176
Investments
Real estate at cost (net of accumulated depreciation of
$460 for 2004 and $412 for 2003) 8,232 8,380
Real estate lease interests 100 100
Affiliated limited partnerships (net of allowance for
losses of $476, for 2004 and 2003) 1,000 1,000
Deferred income tax benefits 1,814 1,814
Other assets 1,140 1,008
-------- --------
Total assets $ 73,183 $ 74,740
======== ========
(continued)
See notes to consolidated financial statements.
1
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(continued)
MARCH 31, DECEMBER 31,
2004 2003
---------- ----------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable - residual interests $ 31,798 $ 33,016
Underlying mortgages payable 14,235 14,753
Debt - affiliates 2,357 2,287
Debt - other 8,155 8,262
Notes payable - litigation settlement 1,078 1,093
Redeemed notes payable-litigation settlement 801 801
Fees due to affiliates 219 218
Line of credit 99 168
Security deposits, accounts payable and accrued
liabilities (including deferred income of $30 for
2004 and $18 for 2003) 647 477
---------- ----------
Total liabilities 59,389 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 96,464 96,464
Deficit (82,948) (83,077)
---------- ----------
Total shareholders' equity 13,794 13,665
---------- ----------
Total liabilities and shareholders' equity $ 73,183 $ 74,740
========== ==========
See notes to consolidated financial statements.
2
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2004 2003
---------- -----------
Income from affiliates:
Interest on mortgage loans $ 642 $ 721
Gain on satisfaction of mortgage loans -- 48
Partnership management fees 71 69
Management fees 61 95
Transaction and other fees from partnerships 38 36
Distributions from partnerships 20 30
Income from others:
Interest income - residual interests 1,098 1,096
Net rental income (including depreciation and
amortization of $48 for 2004 and $49 for 2003) 96 300
Distributions from investments 84 --
Other income and interest 10 9
---------- -----------
2,120 2,404
---------- -----------
Operating expenses:
General and administrative 367 399
Asset Servicing Fee - NPO Management LLC 169 164
Legal and professional fees 74 58
Impairment on real estate 100 --
Interest expense:
Underlying mortgages 272 357
Notes payable - residual interests 656 690
Affiliates 78 71
Litigation Settlement Notes 44 68
Others 206 190
---------- -----------
1,966 1,997
---------- -----------
Income before income tax expense (benefit) 154 407
Income tax expense (benefit) 25 (154)
---------- -----------
Net income $ 129 $ 561
========== ===========
(continued)
See notes to consolidated financial statements.
3
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
(unaudited)
(continued)
THREE MONTHS ENDED
MARCH 31,
---------
2004 2003
---- ----
Basic earnings per share:
Net income $ .00 $ .03
============= =============
Diluted earnings per share:
Net income $ .00 $ .01
============= =============
Weighted average shares outstanding - basic 27,738,402 21,713,563
Effect of dilutive securities 27,293,725 32,487,535
------------- -------------
Weighted average shares outstanding - diluted 55,032,127 54,201,098
============= =============
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, 2004 100 $ 1 27,728,402 $ 277 $ 96,464 $ (83,077) $ 13,665
Net income -- -- -- -- -- 129 129
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance - March 31, 2004 100 $ 1 27,738,402 $ 277 $ 96,464 $ (82,948) $ 13,794
========== ========== ========== ========== ========== =========== ==========
See notes to consolidated financial statements.
5
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
---------------
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 129 $ 561
Adjustments to reconcile net income to net cash provided
by operating activities
Interest income accreted on residual interests (120) (122)
Accrued interest added to indebtedness 70 65
Gain on satisfactions of mortgage loans -- (48)
Depreciation 48 49
Amortized of unearned interest on loan receivables (121) (69)
Amortization of real estate lease interests -- 33
Impairment on real estate 100 --
Imputed interest on notes 44 68
Net increase in deferred income tax benefits -- (179)
Net (increase) decrease in prepaid financing and other
Assets (132) 105
Net increase in accounts payable, security deposits
and accrued liabilities 158 31
Net increase (decrease) in fees due to affiliates 1 (89)
Net increase in deferred income 12 18
----------- -----------
Net cash provided by operating activities 189 423
----------- -----------
Cash flows from investing activities:
Collections on residual interests -- 7
Collections on loans receivable 493 1,267
Net increase in affiliated limited
partnership interests and other investments -- (11)
----------- -----------
Net cash provided by investing activities 493 1,263
----------- -----------
(continued)
See notes to consolidated financial statements
6
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
(continued)
THREE MONTHS ENDED
MARCH 31,
2004 2003
---- ----
Cash flows from financing activities:
Principal payments on debt $ (235) $ (200)
Repayments on underlying mortgages payable (518) (1,270)
Payments on notes payable - residual interest (127) (99)
Payments related to debt redemptions -- (2)
---------- ----------
Net cash used in financing activities (880) (1,571)
---------- ----------
Net (decrease) increase in cash (198) 115
Cash, beginning of period 2,176 2,373
---------- ----------
Cash, end of period $ 1,978 $ 2,488
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,149 $ 1,315
========== ==========
Supplemental disclosure of non-cash investing and
financing activities:
Residual interests in securitized portfolios -
(decrease) increase $ (1,091) $ 2,895
========== ==========
Notes payable - residual interests - (decrease)
increase $ (1,091) $ 2,895
========== ==========
Foreclosure on mortgage loan receivable collateralized
by real estate $ -- $ 300
========== ==========
See notes to consolidated financial statements.
7
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
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, 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 three
months ended March 31, 2003 have been reclassified to conform to the
presentation for the three months ended March 31, 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 its 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
March 31, 2004 was $3,342. 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 March 31, 2004, the residual
interest in securitized portfolios and the notes payable were decreased by
approximately $1,623 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.
8
The following table reconciles the initial purchase price with the
carrying value at March 31, 2004:
Initial purchase price $ 35,791
Adjustments to purchase price (1,623)
Principal payments (48)
Accretion 1,571
--------
$ 35,691
========
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 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.
9
(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 $110 after the sale of approximately one acre of
land in November 2003 and a reduction in the carrying value for $295 of
insurance proceeds relating to a vandalism claim.
(4) A vacant 32,000 square foot former Ames Department Store and
approximately one acre of land underlying the building located in Champlain, NY.
The property, which was acquired through foreclosure on a mortgage, was recorded
at $300, which was the net carrying value of the mortgage at the date of
foreclosure and was less than the fair value at that date.
During the quarter ended March 31, 2004 an impairment expense of $100
was recorded relating to this property in order to reduce the net carrying
value to the expected net realizable value based on a contract to sell the
property, which is anticipated to close in June of 2004.
(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 the existing agreement of
sale. 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.
5. Notes Payable - Litigation Settlement/Redemptions
Notes with an aggregate principal amount of approximately $1,171 remain
outstanding as of March 31, 2004 (carrying value $1,078).
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. The
Company has the option to redeem the outstanding Notes by issuing shares of
Common Stock. Any redemption of the Notes for Common Stock will have a
dilutive effect on current shareholders (See Note 8, Shareholder's Equity).
To date, the Company has sent redemption letters to certain note
holders offering to pay the Notes in cash at face value plus accrued interest.
As of March 31, 2004, $801 is payable as a result of the redemption letters and
is reflected as a non-interest bearing liability.
10
6. Transactions with Affiliates
MONIES RECEIVED
The Company has provided 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
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
AFFILIATE 03/31/04 03/31/03
---------- ------------- -------------
NPO and Blackacre $ 6 $ 6
NPO $ 55 $ 89
MONIES PAID
A. The Company recorded fees to NPO of $169 and $164 for the three months ended
March 31, 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
representing compensation and reimbursement of expenses for collection services
as follows:
Fees Recorded Fees Recorded
For The Three For The Three
Months Ended Months Ended
03/31/04 03/31/03
------------ -------------
$ 27 $ 47
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 as follows:
Fees Recorded Fees Recorded
For The Three For The Three
Months Ended Months Ended
03/31/04 03/31/03
------------ -------------
$ 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
are being paid investment banking fees of $900 in aggregate for their services
in connection with the origination, negotiation and structuring of the
transactions. The fee is payable without interest, over 30 months starting
January, 2002, from a portion of the monthly cash flow generated by the
acquisitions. At March 31, 2004 $180 remained payable.
11
D. Interest expense on amounts due to affiliates was as follows:
THREE MONTHS THREE MONTHS
ENDED ENDED
03/31/04 03/31/03
----------- -----------
Blackacre Capital Group, LLC $ 77 $ 70
NPO 1 1
----------- -----------
$ 78 $ 71
=========== ===========
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) subject to certain
adjustments in the years 2001 through 2012. The adjustments are significant
enough that no amounts were accrued for the three months ended March 31, 2004
and 2003.
During the three months ended March 31, 2004 and 2003 the Company
expensed approximately $4 and $37, respectively, for amounts due to the fund of
which approximately $4 and $36, respectively, was accrued at March 31, 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 $2,302 which is
secured solely by DVL's interest in the property.
8. Shareholder's Equity
The Company has the option to redeem the outstanding Notes
(approximately $1,171 at March 31, 2004) by issuing additional shares of Common
Stock with a then current market value (determined based on a formula set forth
in the Notes), equal to 110% of the face value of the Notes plus any accrued and
unpaid interest thereon. Because the applicable market value of the Common Stock
will be determined at the time of redemption, it is not possible currently to
ascertain the precise number of shares of Common Stock that may have to be
issued to redeem the outstanding Notes. The redemption of the notes may cause
significant dilution for current shareholders.
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 March 31, 2004, shares underlying
the Warrants aggregated 26,082,149 at an exercise price of $.07. No warrants
have been exercised through March 31, 2004.
12
The actual dilutive effect of the Warrants and the outstanding Notes cannot
be currently ascertained since it depends on the number of shares to be actually
issued to satisfy the Notes and the Warrants and because the Warrants have
anti-dilution protection from the redemption of the Notes for Common Stock. The
Company currently intends to exercise at some point in the future its redemption
option to the extent it does not buy back the outstanding Notes by means of cash
tender offers or cash redemptions.
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.
13
9. Earnings per share (unaudited)
The following tables present the computation of basic and diluted per share data
for the three months ended March 31, 2004 and 2003.
THREE MONTHS ENDED MARCH 31,
----------------------------
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
$ 129 27,738,402 $ .00 $ 561 21,713,563 $ .03
========== ========
Effect of litigation settlement
notes
44 8,739,799 68 12,138,997
Effect of dilutive stock options
and warrants
-- 18,553,926 -- 20,348,538
------- ----------- --------- ----------
Diluted EPS,
Income available to common
stockholders
$ 173 55,032,127 $ .00 $ 629 54,201,098 $ .01
======= ========== ========== ========= ========== ========
14
At March 31, 2004 and 2003 there were 4,008,131 and 3,893,131,
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").
MARCH 31,
---------
2004 2003
---- ----
Reported net income $ 129 $ 561
Stock based compensation included in net
income -- --
Proforma and actual stock based
compensation charge for stock options -- --
---------- --------
Proforma net income $ 129 $ 561
========== ========
Earnings per share as reported:
Basic $ 0.00 $ 0.03
========== ========
Diluted $ 0.00 $ 0.01
========== ========
Proforma earnings per share:
Basic $ 0.00 $ 0.03
========== ========
Diluted $ 0.00 $ 0.01
========== ========
15
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 (loss) income of $(25) and $131 in 2004 and 2003
respectively, include $0 and $179 of deferred income tax benefit, respectively.
MARCH 31,
---------
2004 2003
---- ----
Revenues
Real estate $ 1,012 $ 1,299
Residual interests 1,098 1,096
Corporate/other 10 9
----------- ---------
Total consolidated revenues $ 2,120 $ 2,404
=========== =========
Net income (loss)
Real estate $ (296) $ 26
Residual interests 440 404
Corporate/other (15) 131
----------- ---------
Total consolidated net income $ 129 $ 561
=========== =========
Assets
Real estate $ 35,678 $ 40,815
Residual interests 35,691 39,121
Corporate/other 1,814 1,626
----------- ---------
Total consolidated assets $ 73,183 $ 81,562
=========== =========
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 $0 and $179, respectively, of
income tax benefit as a result of a reduction in the valuation allowance on
deferred tax assets.
16
12. Subsequent Events
On April 29, 2004 the Company refinanced its existing obligations with an
unaffiliated bank, which resulted in the Company paying off $503 of existing
debt, part of which was at an 8.25% per annum fixed rate and the remainder at
prime plus 1.5% per annum. The Company borrowed a total of $1,450 at prime plus
1.5% per annum. The Company received cash from this transaction of $931. The
note is secured by collateral already pledged to the bank. Monthly payments of
principal and interest are to be made from a portion of the cash flow from the
collateral and the final maturity date is May 1, 2009.
On April 29, 2004 the Company was repaid $980 from a mortgage loan
receivable. This transaction will result in an estimated gain of $540 in the
second quarter of 2004.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands)
This March 31, 2004 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, 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46") "Consolidation
of Variable Interest Entities," in an effort to expand upon and strengthen
existing accounting guidance on when a company should include in its financial
statements the assets, liabilities and activities of another entity. The
adoption of FIN 46 did not result in the Company consolidating any additional
entities.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
DVL had net income of $129 and $561 for the three months ended March 31, 2004
and 2003, respectively.
19
Interest income on mortgage loans from affiliates decreased (2004 - $642, 2003 -
$721) and interest expense on underlying mortgages decreased (2004 - $272, 2003
- - $357). 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.
Gain on satisfaction of mortgage loans was as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
--------------- ---------------
$ -0- $ 48
The gain in 2003 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, 2004 MARCH 31, 2003
--------------- ---------------
$ 38 $ 36
Transaction fees are earned by the Company in connection with sales of
partnership properties.
Interest income on residual interests (2004 - $1,098, 2003 - $1,096) remained
consistent as periodic payment receivables continued to perform. Interest
expense on the related notes payable (2004 - $656, 2003 - $690) decreased due to
a decrease in the outstanding principal balance of the notes payable.
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
--------------- ---------------
Net rental income from others $ 96 $ 300
Gross rental income from others $ 365 $ 639
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 the property which the Company operates under a master lease.
The property is currently under contract to be sold.
Distributions from investments from others in 2004 resulted from receiving an
$84 distribution from the Opportunity Fund.
General and administrative expenses decreased (2004 - $367, 2003 - $399). The
primary reason for the decrease was reduced consulting fees.
The asset servicing fee due from the Company to NPO increased (2004 - $169, 2003
- - $164) pursuant to the terms of the Asset Servicing Agreement due to an
increase in the consumer price index.
Legal and professional fees increased (2004 - $74, 2003 - $58) as a result of
the increased cost of accounting services to the Company in 2004.
The Company recognized an impairment on real estate of $100 in 2004 to reflect
its anticipated realizable value. The Company has negotiated a contract of sale
for such property to a third party.
20
Interest expense on the litigation settlement notes decreased (2004 - $44, 2003
- - $68) as a result of the redemption of litigation settlement notes during 2003.
Interest expense relating to other debts increased (2004 - $206, 2003 - $190)
primarily due to the amortization of financing costs offset by decreases in
interest rates on floating rate loans and repayments of principal.
In 2003, the Company recognized $154 of income tax benefit as a result of a
reduction in the valuation allowance on deferred tax assets.
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 May, 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 obtained an unsecured line of credit on December 15, 2002 for
$500 with an interest rate of prime plus one percent per annum and which
terminates January 14, 2005. The amount outstanding on the line of credit was
$99 at March 31, 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.
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.
21
ACQUISITIONS AND FINANCINGS
Loans which are scheduled to become due through 2008 are as follows:
OUTSTANDING
ORIGINAL PRINCIPAL
LOAN BALANCE AT DUE
PURPOSE CREDITOR AMOUNT MARCH 31, 2004 DATE
------- -------- ------ -------------- ----
Repurchase of Notes
Issued by the Company Blackacre (1) $ 1,560 $ 2,357 01/02/05
Purchase of Mortgages Unaffiliated Bank (2)(3)
$ 1,000 $ 389 05/01/06
Purchase of a Mortgage and
Refinancing of Existing
Mortgages Unaffiliated Bank (2)(3)
$ 1,450 $ 425 11/30/06
Purchase of Real Estate
Assets Unaffiliated Bank (4)
$ 4,500 $ 4,500 09/01/04
Purchase of Mortgages Unaffiliated Bank (2)(5)
$ 400 $ 211 06/01/06
Purchase of Real Estate
Assets Unaffiliated Bank (6) $ 2,668 $ 2,596 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 8.5% per annum. Monthly payments are interest only.
The Company intends to refinance this loan when it becomes due in
September, 2004.
(5) Interest rate is 8.25% per annum payable monthly.
(6) Interest rate is 7.5% per annum with a balloon payment due June 30,
2008 of $2,285.
IMPACT OF INLFATION 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DVL has no substantial cash flow exposure due to interest rate changes for
long term debt obligations, because a majority of the long-term debt is at fixed
rates. DVL primarily enters into long-term debt for specific business purposes
such as the repurchase of debt at a discount, the acquisition of mortgage loans
or the acquisition of real estate.
DVL's ability to realize value on its mortgage holdings is sensitive to
interest rate fluctuations in that the sales prices of real property and
mortgages vary with interest rates.
ITEM 4. CONTROLS AND PROCEDURES
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 first quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
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Part II - Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits: 31.1 Client Executive Officer's Certificate, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.Service
Agreement between the Company and Compensation Solutions,
Inc. dated March 28, 2003
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.
(B) There were no reports on Form 8-K filed during the three months ended
March 31, 2004
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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
May 14, 2004
25