UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2009
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
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)
(212) 350-9900
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(registrant's telephone number, including area code)
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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. |X| Yes |_| No
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). |_| Yes |X| No
Indicate by check mark whether the registrant is a large accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer" "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). |_| Yes |X| No
The number of shares outstanding of the issuer's classes of common equity,
as of May 15, 2009 was:
Class Outstanding at May 15, 2009
----- ---------------------------
Common Stock, $.01 par value 44,770,345
DVL, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information:
Item 1 - Financial Statements: Pages
Consolidated Balance Sheets -
March 31, 2009 (unaudited) and December 31, 2008 1 - 2
Consolidated Statements of Operations -
Three Months Ended March 31, 2009 (unaudited) and
2008 (unaudited) 3 - 4
Consolidated Statement of Stockholder's Equity -
Three Months Ended March 31, 2009 (unaudited) 5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2009 (unaudited) and
2008 (unaudited) 6 - 7
Notes to Consolidated Financial Statements (unaudited) 8 - 16
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 17 - 27
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 28
Item 4 - Controls and Procedures 28 - 29
Part II. Other Information:
Item 1. Legal Proceedings 30
Item 1A. Risk Factors 30
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6 - Exhibits 30 - 36
Signature 31
Part I - Financial Information
Item 1. Financial Statements
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2009 2008
------------ ------------
(unaudited)
ASSETS
Residual interests in securitized portfolios $ 45,958 $ 45,789
------------ ------------
Mortgage loans receivable from affiliated partnerships (net
of unearned interest of $4,883 for 2009 and $5,181 for 2008) 14,110 14,279
Allowance for loan losses (2,280) (2,180)
------------ ------------
Net mortgage loans receivable 11,830 12,099
------------ ------------
Cash 872 496
Investments
Real estate at cost (net of accumulated depreciation and
amortization of $1,414 for 2009 and $1,353 for 2008) 8,872 8,927
Affiliated limited partnerships (net of allowance for
losses of $448, for 2009 and 2008) 657 657
Net deferred tax asset 2,257 2,257
Other assets 2,360 2,637
Assets of discontinued operations 1,755 2,203
------------ ------------
Total assets $ 74,561 $ 75,065
============ ============
(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,
2009 2008
------------ ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable - residual interests $ 33,684 $ 34,172
Underlying mortgages payable 3,330 3,626
Debt - other 10,916 11,195
Debt - affiliates 1,426 1,527
Interest rate swap 231 231
Redeemed notes payable - litigation settlement 770 775
Security deposits, accounts payable and accrued
liabilities (including deferred income of $185
for 2009 and $21 for 2008) 872 616
Liabilities of discontinued operations 32 --
------------ ------------
Total liabilities 51,261 52,142
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock $10.00 par value, authorized, issued
and outstanding 100 shares 1 1
Preferred stock, $.01 par value, authorized 5,000,000
shares, issued and outstanding -0- -- --
Common stock, $.01 par value, authorized - 90,000,000
shares issued and outstanding 44,770,345 for 2009 and
44,770,345 for 2008 448 448
Additional paid-in capital 97,003 97,003
Deficit (73,921) (74,298)
Accumulated other comprehensive loss (231) (231)
------------ ------------
Total stockholders' equity 23,300 22,923
------------ ------------
Total liabilities and stockholders' equity $ 74,561 $ 75,065
============ ============
See notes to consolidated financial statements.
2
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
Three Months Ended
March 31,
------------------
2009 2008
------- -------
Income from affiliates:
Interest on mortgage loans $ 544 $ 616
Gain on satisfaction of mortgage loans -- 634
Partnership management fees 53 61
Management fees 17 38
Transaction and other fees from partnerships 25 49
Distributions from partnerships 76 12
Income from others:
Interest income - residual interests 1,542 1,488
Net rental income (including depreciation and
amortization of $50 for 2009 and $48 for 2008) 42 161
Other income and interest 21 16
------- -------
2,320 3,075
------- -------
Operating expenses:
General and administrative 456 419
Asset servicing fee - NPO Management LLC 195 188
Legal and professional fees 73 106
Provision for loan losses 100 50
Interest expense:
Underlying mortgages 64 99
Notes payable - residual interests 689 750
Affiliates 45 52
Others 344 273
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1,966 1,937
------- -------
Income from continuing operations before income tax expense 354 1,138
Income tax expense -- (64)
------- -------
Income from continuing operations 354 1,074
Income (loss) from discontinued operations - net of tax of
$-0- in both periods 23 (101)
------- -------
Net income $ 377 $ 973
======= =======
(continued)
See notes to consolidated financial statements.
3
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(continued)
Three Months Ended
March 31,
--------------------------------
2009 2008
-------------- --------------
Basic earnings per share:
Income from continuing operations $ .01 $ .02
Loss from discontinued operations .00 .00
-------------- --------------
Net Income $ .01 $ .02
============== ==============
Diluted earnings per share:
Income from continuing operations $ .01 $ .02
Loss from discontinued operations .00 .00
-------------- --------------
Net Income $ .01 $ .02
============== ==============
Weighted average shares outstanding - basic 44,770,345 45,292,757
Effect of dilutive securities 34,445 133,389
-------------- --------------
Weighted average shares outstanding - diluted 44,804,790 45,426,146
============== ==============
See notes to consolidated financial statements.
4
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except share data)
Accumulated
Preferred Stock Common Stock Additional Other
---------------- -------------------- Paid - In Comprehensive Comprehensive
Shares Amount Shares Amount Capital Deficit Loss Total Income
------ ------ ---------- ------ ------- -------- ----- ------- ------
Balance - January 1, 2009 100 $ 1 44,770,345 $ 448 $97,003 $(74,298) $(231) $22,923 $ --
Net income -- -- -- -- -- 377 -- 377 377
------ ------ ---------- ------ ------- -------- ----- ------- ------
Balance - March 31, 2009 100 1 44,770,345 $ 448 $97,003 $(73,921) $(231) $23,300 $ 377
====== ====== ========== ====== ======= ======== ===== ======= ======
See notes to consolidated financial statements
5
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
-------------------
2009 2008
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Cash flows from operating activities:
Continuing operations:
Income from continuing operations $ 354 $ 1,074
Adjustments to reconcile income to net cash used in
operating activities from continuing operations
Interest income deducted from residual interests 329 858
Accrued interest subtracted from indebtedness (7) (10)
Gain on satisfaction of mortgage loans -- (634)
Depreciation 61 47
Provision for loan losses 100 50
Amortization of unearned interest on loan receivables (298) (412)
Net decrease in deferred tax asset -- 32
Net decrease (increase) in other assets 345 (240)
Net increase (decrease) in accounts payable, security
deposits and accrued liabilities 156 (57)
Net increase in deferred income 100 216
------- -------
Net cash provided by continuing operations 1,140 924
------- -------
Discontinued operations:
Income (loss) from discontinued operations 23 (101)
Gain on sale of discontinued asset (120) --
Net decrease (increase) in assets and liabilities of
discontinued operations 5 (185)
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Cash used in discontinued operations (92) (286)
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Net cash provided by operating activities 1,048 638
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(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,
-------------------
2009 2008
------- -------
Cash flows from investing activities:
Collections on loans receivable $ 467 $ 1,532
Real estate acquisitions and capital improvements (6) --
Net proceeds from sale of discontinued asset 595 --
------- -------
Cash provided by investing activities 1,056 1,532
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Cash flows from financing activities:
Proceeds from new borrowings 4,250 250
Principal payments on debt (4,623) (509)
Payment of prepaid financing costs (68) --
Payments on underlying mortgages payable (296) (536)
Payments on notes payable - residual interest (986) (1,395)
Payments related to debt redemptions (5) --
------- -------
Net cash used in financing activities (1,728) (2,190)
------- -------
Net increase (decrease) in cash 376 (20)
Cash, beginning of period 496 1,028
------- -------
Cash, end of period $ 872 $ 1,008
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 972 $ 1,107
======= =======
Cash paid for income taxes $ -- $ 41
======= =======
Supplemental disclosure of non-cash investing and
financing activities:
Residual interests in securitized portfolios -
increase/(decrease) $ 498 $ (963)
======= =======
Notes payable - residual interests -
increase/(decrease) $ 498 $ (963)
======= =======
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
consolidated financial statements contain all adjustments (consisting of only
normal accruals) necessary in order to present a fair presentation of the
consolidated financial position of DVL and the consolidated results of its
operations for the periods set forth herein. The results of the Company's
operations for the three months ended March 31, 2009 should not be regarded as
indicative of the results that may be expected from its operations for the full
year. 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, 2008.
2. Reclassifications
Certain amounts from 2008 have been reclassified to conform to the 2009
presentation.
3. Residual Interests in Securitized Portfolios
In accordance with the purchase agreements entered into with respect to
the residual interests from the acquisition dates through March 31, 2009, the
residual interest in securitized portfolios and the notes payable were increased
by a total of approximately $7,078 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. Permanent impairments are recorded immediately through results of
operations. Favorable changes (increases) in future cash flows are recognized
through results of operations as interest over the remaining life of the
retained interest.
The Company's wholly owned subsidiary, S2 Holdings, Inc. ("S2"), owns
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") which own five securitized receivable pools.
Receivables II A, and Receivables II B, are consolidated into S2 for financial
statement reporting purposes.
The Company considered Financial Accounting Standards Board Interpretation
No. 46R "Consolidation of Variable Interest Entities" when consolidating S2's
ownership of its member interests. The Company determined that S2's member
interests do not meet the definition of variable interest entities.
4. Real Estate
The Company currently owns eight buildings totaling 347,000 square feet on
eight and one half acres located in an industrial park in Kearny, NJ leased to
various unrelated tenants (the "Owned Site"). The Owned Site represents a
portion of the Passaic River Development area designated for redevelopment by
the town of Kearny, New Jersey (the "Property"). The Company continues to lease
such Property to multiple tenants and currently receives a positive cash flow
from the Property until such time as it can redevelop the Property as described
below.
8
In connection with the redevelopment of the Property, on December 11,
2007, DVL, and its wholly owned subsidiary, DVL Kearny Holdings, LLC ("DVL
Holdings"), entered into a Redeveloper Agreement (the "Redeveloper Agreement")
with the Town of Kearny, a body corporate and politic of the state of New
Jersey, County of Hudson (the "Town of Kearny"). Pursuant to the Redeveloper
Agreement, the Town of Kearny has agreed to designate DVL and DVL Holdings
(collectively, the "Redeveloper") as the redeveloper of the Property, a
substantial portion of which is currently owned by the Redeveloper. Pursuant to
the Redeveloper Agreement, the Redeveloper is obligated to redevelop the
Property, at its expense, in accordance with the plans and specifications
described therein, subject to review and approval of the Planning Board of the
Town of Kearny. The initial plans and specifications provide for the development
of up to approximately 150,000 square feet of retail space.
The term of the Redeveloper Agreement along with the Redeveloper's rights
thereunder, automatically expire on December 31, 2009 unless extended in writing
by the Town of Kearny. If the Redeveloper is in default of any terms or
conditions of the Redeveloper Agreement and does not cure within the appropriate
time as set forth in the agreement (to the extent that a cure period is provided
for such default), the Town of Kearny is afforded a number of rights including
the right to terminate the Redeveloper Agreement.
The payment obligations and the completion of all work to be performed by
the Redeveloper under the Redeveloper Agreement are jointly and severally
guaranteed by Alan Casnoff, the President of the Company, and Lawrence J. Cohen,
a stockholder and affiliate of the Company. Messrs. Casnoff and Cohen are
principals of P&A Associates and Pemmil Management, LLC ("Pemmil"),
respectively, which have entered into a Developer Services Agreement with the
Company with respect to the development of the Property, as described below. The
Company has agreed to indemnify Messrs. Cohen and Casnoff from any liability
related to the Redeveloper Agreement.
The Developer Services Agreement (the "Developer Services Agreement") with
P&A Associates and Pemmil (collectively the "Developer") provides that the
Developers will provide services with respect to the development, construction
and leasing of the Property. The Developer's obligations under the Developer
Services Agreement terminates upon the substantial completion of construction
and occupancy by the tenants of at least 95% of the retail space to be developed
on the Property.
Pursuant to the Developer Services Agreement, the Developer will be paid a
development fee of 4% of all project costs associated with the development of
the Property (excluding financing costs) as specified in the Developer Services
Agreement. Additionally, the Developer will be paid 20% of the net cash flow
generated by the project as a result of operations, refinancing and/or sale
after the Redeveloper receives from operations a 15% return on its net cash
investment and in the event of a refinancing or sale, the return of its net cash
investment plus a 15% return on such investment.
If the Developer is in default of any terms or conditions of the Developer
Services Agreement and does not cure within the appropriate time as set forth in
the agreement (to the extent that a cure period is provided for such default),
the Company is afforded a number of rights including the right to terminate the
Developer Services Agreement.
The Company has capitalized costs of $981 and $856 at March 31, 2009 and
at December 31, 2008, respectively related to expenses of the project.
9
On January 21, 2009, DVL Holdings entered into a Mortgage, Security
Agreement and Assignment of Leases and Rents (the "Agreement") with an
unaffiliated third party bank lender (the "Lender") in connection with the loan
by the Lender to the Company of an aggregate amount of up to $6,450 (the
"Principal Amount") pursuant to certain mortgage notes in the amount of $4,250
(the "First Note") and $2,200 (the "Second Note" and collectively with the First
Note, the "Notes"). DVL Holdings borrowed $4,250 pursuant to the First Note and
such funds were used to repay the outstanding borrowings under a prior
construction loan agreement. Borrowings under the Second Note will be advanced
by the Lender in the future upon the satisfaction of certain conditions
specified in such Note and such funds will be used in accordance with the terms
of the Agreement and Second Note. The principal amount to be borrowed under the
Second Note must be repaid to the Lender in the event such funds are not used as
provided in the Agreement and the Second Note. The principal amount outstanding
under the Notes bear interest at an annual rate equal to the greater of (i) six
percent or (ii) one percent plus the prime rate of interest designated by the
Lender as it's prime rate. Interest is payable on a monthly basis. All
outstanding principal together with accrued and unpaid interest is due on
January 21, 2011 (the "Maturity Date") with the option of DVL Holdings to extend
the Maturity Date to January 21, 2012 if certain terms and conditions are met as
specified in the Notes. The principal amounts of the Notes may be prepaid
without penalty. In addition, if certain income levels are not achieved by April
of 2010, the First Note must be paid down by $700 in accordance with the
Agreements.
Pursuant to the Agreement, DVL Holdings has granted to the Lender a
mortgage and security interest in the Owned Site and any additional property
acquired by DVL Holdings for the redevelopment project that becomes subject to
the lien of the mortgage under the Agreement including certain other property as
specified in the Agreement (hereinafter all references to the "Property" refer
to the Owned Site and such additional properties) and an assignment of the
leases and rents with respect to the Property. In addition, all obligations
under the Notes and the Agreement are guaranteed by the Company pursuant to a
guaranty dated January 21, 2009 from the Company in favor of the Lender.
Pursuant to the terms of the Redeveloper Agreement, the Property is to be
redeveloped by DVL Holdings under the Redeveloper Agreement. The use of the
Property is subject to the terms of the Redeveloper Agreement and the assignment
and assumption of the Redeveloper Agreement to or by the Lender in the event of
exercising their remedies upon the occurrence of an event of default under the
Agreement and the Notes, subject to the terms and provisions of the Redeveloper
Agreement. In connection with the purchase of certain additional property
comprising part of the Property, the mortgage pursuant to the Agreement will
also cover such property.
The Agreement and the Notes contain customary terms and provisions,
including default provisions. In addition to the customary default provisions,
it is an event of default under the Notes (i) if a default has occurred and
continues beyond applicable notice and cure periods under the Redeveloper
Agreement, (ii) generally, if DVL Holdings fails to acquire certain additional
property in connection with the redevelopment and the principal amount borrowed
under the Second Note is not repaid to the Lender, (iii) if the Redeveloper
Agreement is amended without the prior written consent of the Lender, or (iv) if
a certain lease (as specified in the Agreement) of a portion of the redeveloped
property is terminated or has not been modified or replaced with a new tenant in
accordance with the terms of the Agreement, unless DVL Holdings and the Company
deliver additional cash collateral or pay down the First Note in accordance with
the Agreement.
10
In order to undertake and complete the redevelopment of the Property, DVL
Holdings and the Company will need to obtain additional construction financing
and, potentially additional loan or equity financing, and given current economic
conditions, there can be no assurance that any such additional financing will be
obtained on acceptable terms or at all. Additionally, given the current economic
conditions there can be no assurance that the redevelopment will occur in the
five year period required under the Redevelopment Agreement or at all.
The Company also owns 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.
During 2008, the Company, through direct ownership or through its
investment in various limited partnerships, foreclosed on five Affiliated
Limited Partnerships for nonpayment of amounts due on mortgage loans and took
title to the five vacant Wal-Mart stores. At the time of the foreclosure, the
five mortgages had a combined carrying value of $1,776. The five stores are
included in the Company's real estate held at cost, for lease or sale. In 2009,
the Company entered into an agreement to sell one of the vacant stores for $600
and reclassified its carrying value to discontinued operations.
Discontinued Operations
(1) 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, (the "owners") pursuant to which the leasehold was cancelled in
consideration of the owners 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 addition
DVL owns a 8.25% limited partner interest in each of these partnerships. DVL
will also receive a percentage of the net sales proceeds. As of March 2009, the
sale has not yet been consummated and the third party continues to lease space.
The total expenses to be reimbursed to DVL are approximately $929 as of March
31, 2009 not including the $50 fee or any amounts to be received as a limited
partner. Activity related to the real estate lease interest is included in
discontinued operations. DVL has sued the prior tenants of the Property for
environmental contamination and has received $150 and expects to receive an
additional $250 toward the cleanup costs for the Property.
(2) The Company owns 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.
As of March 31, 2009, the Company has capitalized approximately $1,000 of
environmental remediation costs in connection with the cleaning of the site. The
Company anticipates that it will eventually recover a substantial portion of the
capitalized remediation costs on the property through the net proceeds received
from any potential future sale and reimbursement from certain companies that it
believes dumped chemicals on the site. Litigation on this issue is proceeding
through the judicial system. However, the Company's ability to recover such
costs depends on many factors, including the outcome of litigation and there can
be no assurance that the Company will recover all of the costs of such
remediation within the foreseeable future or at all. Such inability to recover
all of such remediation costs could have an adverse effect on the Company's
financial condition. The Company currently accounts for the property as an
"asset from discontinued operations" in its consolidated financial statements at
a carrying value of $747 after recording a provision for losses of $350.
11
(3) During 2008, the Company foreclosed on two affiliated limited partnerships
for nonpayment of amounts due on mortgage loans and took title to the two vacant
former Wal-Mart stores. At the time of the foreclosure, the two had a combined
carrying value of $696. During December, 2008, the Company sold one of the
former Wal-Mart stores and received net proceeds of $220. During February, 2009,
the Company sold the second former Wal-Mart store and received net proceeds of
$594. In 2009, the Company entered into an agreement to sell one of the vacant
Wal-Mart stores previously considered to be real estate assets for $600 and
reclassified its carrying value to discontinued operations.
5. Transactions with Affiliates
Management Fee Income Earned
The Company has provided management, accounting, and administrative
services to certain entities which are affiliated with NPO Management, LLC
("NPO") 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 the management service contract is as follows:
Fee Income For The Fee Income For The
Three Months Three Months
Ended 03/31/09 Ended 03/31/08
-------------- --------------
$ 17 $ 38
Management and Other Fees and Expenses Incurred
A. The Company recorded fees to NPO of $195 and $188 for the three months ended
March 31, 2009 and 2008, respectively, under an Asset Servicing Agreement (the
"Asset Servicing Agreement") between the Company and NPO, pursuant to which NPO
provides the Company with asset management, advisory and administrative services
relating to the assets of the Company and its Affiliated Limited Partnerships.
During 2009 and 2008 the Company provided office space required under the Asset
Servicing Agreement to NPO consisting of approximately 500 square feet of the
Company's New York location.
B. Millennium Financial Services, an affiliate of NPO, received fees from the
Company representing compensation for collection services and reimbursement for
other services provided to the Company as follows:
Fees Recorded For The Fees Recorded For The
Three Months Three Months
Ended 03/31/09 Ended 03/31/08
-------------- --------------
$ 27 $ 27
C. Interest expense on amounts due to affiliates was as follows:
Three Months Three Months
Ended Ended
03/31/09 03/31/08
-------- --------
Pemmil Funding $ 45 $ 52
12
6. Contingent Liabilities
During the three months ended March 31, 2009 and 2008 the Company expensed
approximately $21 and $5, respectively, during each period, for amounts due to
the Limited Partnership Settlement Fund. These costs have been netted against
the interest on mortgage loans.
7. Stockholder's Equity
In July 2008, the Company purchased 522,500 shares of common stock, par
value $0.01 per share, for a total purchase price of $63 or $0.12 per share, in
a privately negotiated transaction with an unaffiliated seller.
8. Cash Flow Hedges
The Company uses derivatives to manage risks related to interest rate
movements. Interest rate swap contracts designated and qualifying as cash flow
hedges are reported at fair value. In accordance with SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (the "Statement"), as amended
by SFAS No. 138 and SFAS No. 149, the Company established accounting and
reporting standards for derivative instruments. Specifically, the Statement
requires an entity to recognize all derivatives as either assets or liabilities
in the statement of financial position and to measure those in-struments at fair
value. Changes in the fair value of those instruments designated as cash flow
hedges are recorded in other comprehensive income, to the extent the hedge is
effective, and in the results of operations, to the extent the hedge is
ineffective or no longer qualifies as a hedge.
During September 2008, the Company entered into an interest rate swap
agreement related to one of their loans. Valued separately, the interest rate
swap agreement represents a liability as of March 31, 2009 and December 31,
2008, in the amount of $231. This value represents the fair value of the current
difference in interest paid and received under the swap agreement over the
remaining term of the agreement. Be- cause the swap is considered to be a cash
flow hedge and it is effective, the value of the swap agreement is recorded in
the Consolidated Statements of Stockholders' Equity as a separate component and
represents the only amount reflected in accumulated other comprehensive loss.
Changes in the swap agreement's fair value are reported currently in other
comprehensive loss. Payments are recognized in current operating results as
settlements occur under the agreement as a component of interest expense.
The following table summarizes the notional values of the Company's
derivative financial instruments. The notional value provides an indication of
the extent of the Company's involvement in these instruments on March 31, 2009,
but does not rep- resent exposure to credit, interest rate or market risks.
Hedge Type Notional Value Rate Termination Date Fair Value
- ---------- -------------- ---- ---------------- ----------
Interest rate swap $ 3,757 5.94% July 1, 2011 $ (231)
agreement
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 March 31, 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 table presents the computation of basic and diluted per share data
for the three months ended March 31, 2009 and 2008.
Three Months Ended March 31,
--------------------------------------------------------------------
2009 2008
-------------------------------- --------------------------------
Weighted Average Weighted Average
Number of Per Share Number of Per Share
Amount Shares Amount Amount Shares Amount
------ ---------- ------ ------ ---------- ------
Basic EPS,
Net income available to common stockholders $ 377 44,770,345 $ .01 $ 973 45,292,757 $ .02
====== ======
Effect of dilutive stock options -- 34,445 -- 133,389
------ ---------- ------ ----------
Diluted EPS,
Net income available to common stockholders $ 377 44,804,790 $ .01 $ 973 45,426,146 $ .02
====== ========== ====== ====== ========== ======
14
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 (loss) of $10 and $(40) in 2009 and 2008
respectively, include $0 and $32 of deferred income tax expense in 2009 and
2008, respectively.
Three Months Ended
March 31,
---------------------------------------
2009 2008
----------------- -----------------
Revenues
Residual interests $ 1,542 $ 1,488
Real estate 757 1,571
Corporate/other 21 16
----------------- -----------------
Total consolidated revenues $ 2,320 $ 3,075
================= =================
Net income (loss)
Residual interests $ 846 $ 731
Real estate (502) 383
Corporate/other 10 (40)
----------------- -----------------
Total income from continuing operations $ 354 $ 1,074
================= =================
Three Months Twelve Months
Ended Ended
March 31, 2009 December 31, 2008
----------------- -----------------
Assets
Residual interests $ 45,958 $ 45,789
Real estate 26,346 27,019
Corporate/other 2,257 2,257
----------------- -----------------
Total consolidated assets $ 74,561 $ 75,065
================= =================
15
11. Discontinued Operations
The Company classifies certain real estate holdings as held for sale. The
Company's properties located in Bogota, New Jersey, Fort Edward, New York,
Fairbury, Nebraska, Checotah, Oklahoma and Kenedy, Texas are included as real
estate assets held for sale. The operation of such assets for all periods
presented have been recorded as discontinued operations in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 144
"Accounting for the Impairment or Disposal of Long Lived Assets."
Discontinued operations for the three months ended March 31, 2009 and 2008 are
summarized as follows:
Three Months Three Months
Ended Ended
March 31, 2009 March 31, 2008
-------------- --------------
Income $ -- $ 58
Expenses 97 159
-------------- --------------
Loss from discontinued operations
before gain on sale (97) (101)
Gain on sale 120 --
-------------- --------------
Income (loss) from discontinued
operations $ 23 $ (101)
============== ==============
Assets and liabilities of discontinued operations at March 31, 2009 and
December 31, 2008 are summarized as follows:
March 31, December 31,
2009 2008
------------ ------------
Assets of discontinued operations $ 1,755 $ 2,203
============ ============
Liabilities of discontinued operations $ 32 $ --
============ ============
16
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 March 31, 2009
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, Inc., a
Delaware corporation ("DVL" or the "Company") 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, 2008.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") should be read in conjuction with the
consolidated financial statements and accompanying financial statement notes
appearing elsewhere herein and in conjuction with our Annual Report on Form 10-K
for the year ended December 31, 2008.
None of the recently issued accounting standards had any effect on the
Company's consolidated financial statements.
The Company currently owns eight buildings totaling 347,000 square feet on
eight and one half acres located in an industrial park in Kearny, NJ leased to
various unrelated tenants (the "Owned Site"). This site represents a portion of
the Passaic River Development area designated for redevelopment by the town of
Kearny, New Jersey (the "Property"). To date, the Company has not commenced
construction and given the current economic environment there can be no
assurance that the Company will commence construction in the near future or at
all. In addition, there can be no assurance that the Company will be able to
obtain the necessary financing to commence or complete redevelopment. The
Company continues to lease such property to multiple tenants and currently
receives a positive cash flow from the property until such time as it can
redevelop the Property as described below.
In connection with the redevelopment of the Property (as defined above),
on December 11, 2007, DVL, and its wholly owned subsidiary, DVL Kearny Holdings,
LLC ("DVL Holdings"), entered into a Redeveloper Agreement (the "Redeveloper
Agreement") with the Town of Kearny, a body corporate and politic of the state
of New Jersey, County of Hudson (the "Town of Kearny"). Pursuant to the
Redeveloper Agreement, the Town of Kearny has agreed to designate DVL and DVL
Holdings (collectively, the "Redeveloper") as the redeveloper of the Property, a
substantial portion of which is currently owned by the Redeveloper. Pursuant to
the Redeveloper Agreement, the Redeveloper is obligated to redevelop the
Property, at its expense, in accordance with the plans and specifications
described therein, subject to review and approval of the Planning Board of the
Town of Kearny. The initial plans and specifications provide for the development
of up to approximately 150,000 square feet of retail space.
The term of the Redeveloper Agreement along with the Redeveloper's rights
thereunder, automatically expire on December 31, 2009 unless extended in writing
by the Town of Kearny. If the Redeveloper is in default of any terms or
conditions of the Redeveloper Agreement and does not cure within the appropriate
time as set forth in the agreement (to the extent that a cure period is provided
for such default), the Town of Kearny is afforded a number of rights including
the right to terminate the Redeveloper Agreement.
17
The payment obligations and the completion of all work to be performed by
the Redeveloper under the Redeveloper Agreement are jointly and severally
guaranteed by Alan Casnoff, the President of the Company, and Lawrence J. Cohen,
a stockholder and affiliate of the Company. Messrs. Casnoff and Cohen are
principals of P&A Associates ("P&A") and Pemmil Management, LLC ("Pemmil"),
respectively, which have entered into a Developer Services Agreement with the
Company with respect to the development of the Property, as described below. The
Company has agreed to indemnify Messrs. Cohen and Casnoff from any liability
related to the Redeveloper Agreement.
The Developer Services Agreement (the "Developer Services Agreement") with
P&A Associates and Pemmil (collectively the "Developer") provides that the
Developers will provide services with respect to the development, construction
and leasing of the Property. The Developer's obligations under the Developer
Services Agreement terminates upon the substantial completion of construction
and occupancy by the tenants of at least 95% of the retail space to be developed
on the Property.
Pursuant to the Developer Services Agreement, the Developer will be paid a
development fee of 4% of all project costs associated with the development of
the Property (excluding financing costs) as specified in the Developer Services
Agreement. Additionally, the Developer will be paid 20% of the net cash flow
generated by the project as a result of operations, refinancing and/or sale
after the Redeveloper receives from operations a 15% return on its net cash
investment and in the event of a refinancing or sale, the return of its net cash
investment plus a 15% return on such investment.
If the Developer is in default of any terms or conditions of the Developer
Services Agreement and does not cure within the appropriate time as set forth in
the agreement (to the extent that a cure period is provided for such default),
the Company is afforded a number of rights including the right to terminate the
Developer Services Agreement.
The Company has capitalized costs of $981 and $856 as of March 31, 2009
and December 31, 2008, respectively, related to expenses of this project.
Under the terms of the first Construction Loan Agreement, DVL Holdings was
required to begin construction by June 1, 2008. On June 1, 2008, DVL Holdings
entered into Amendment No. 1, whereby the lender agreed to extend the term of
the Predevelopment Loan Phase (as defined in the Construction Loan Agreement) to
August 1, 2008. Because of delays, construction did not begin by such date and
therefore on September 8, 2008 DVL Holdings entered into Amendment No. 2 dated
August 1, 2008. Pursuant to Amendment No. 2, the lender has extended the term of
the Predevelopment Loan Phase for an additional six months which ended February
1, 2009 on the condition that the lender shall have no further obligation to
make any loan advances. In addition, the maturity date for payment of the
outstanding principal balance of the loan was accelerated effective as of August
1, 2008 making the entire outstanding principal balance of $4,495 (and any
accrued and unpaid interest thereon) due and payable on February 1, 2009, the
expiration of the Predevelopment Loan Phase.
On January 21, 2009, DVL Holdings, entered into a Mortgage, Security Agreement
and Assignment of Leases and Rents (the "Agreement") with an unaffiliated third
party bank lender in connection with the loan to the Company of an aggregate
amount of up to $6,450 (the "Principal Amount") pursuant to certain notes in the
amount of $4,250 (the "First Note") and $2,200 (the "Second Note" and
collectively with the First Note, the "Notes"). DVL Holdings borrowed $4,250
pursuant to the First Note and such funds were used to repay the outstanding
borrowings under the Construction Loan Agreement. Borrowings under the Second
Note will be advanced in the future upon the satisfaction of certain conditions
specified in such Note and such funds will be used in accordance with the terms
of the Agreement and Second Note. The principal amount to be borrowed under the
18
Second Note must be repaid in the event such funds are not used as provided in
the Agreement and the Second Note. The principal amount outstanding under the
Notes bear interest at an annual rate equal to the grater of (i) six percent or
(ii) one percent plus the prime rate of interest designated by the unaffiliated
third party bank lender as it prime rate. Interest is payable on a monthly
basis. All outstanding principal together with accrued and unpaid interest is
due on January 21, 2011 (the "Maturity Date") with the option of DVL Holdings to
extend the Maturity Date to January 21, 2012 if certain terms and conditions are
met as specified in the Notes. The principal amounts of the Notes may be prepaid
without penalty. In addition, if certain income levels are not achieved by April
of 2010, the loan must be paid down by $700 of the First Note in accordance with
the Agreements.
Pursuant to the Agreement, DVL Holdings has granted to the unaffiliated third
party bank lender a mortgage and security interest in the Owned Site and any
additional property acquired by DVL Holdings for the redevelopment project that
becomes subject to the lien of the mortgage under the Agreement including
certain other property as specified in the Agreement (hereafter all references
to the "Property" refer to the Owned Site and such additional properties) and an
assignment of the leases and rents with respect to the Property. In addition,
all obligations under the Notes and the Agreement are guaranteed by the Company
pursuant to a guaranty dated January 21, 2009 from the Company in favor of the
unaffiliated third party bank lender.
Pursuant to the terms of the Redeveloper Agreement, the Property is to be
redeveloped by DVL Holdings under the Redeveloper Agreement. The use of the
Property is subject to the terms of the Redeveloper Agreement and the assignment
and assumption of the Redeveloper Agreement to or by Signature Bank in the event
of exercising their remedies upon the occurrence of an event of default under
the Agreement and the Notes is subject to the terms and provisions of the
Redeveloper Agreement. In connection with the purchase of certain additional
property comprising part of the Property, the mortgage pursuant to the Agreement
will also cover such property.
The Agreement and the Notes contain customary terms and provisions, including
default provisions. In addition to the customary default provisions, it is an
event of default under the Notes (i) if a default has occurred and continues
beyond applicable notice and cure periods under the Redeveloper Agreement, (ii)
generally, if DVL Holdings fails to acquire certain additional property in
connection with the redevelopment and the principal amount borrowed under the
Second Note is not repaid, (iii) if the Redeveloper Agreement is amended without
the prior written consent of the unaffiliated third party bank lender, or (iv)
if a certain lease (as specified in the Agreement) of a portion of the
redeveloped property is terminated or has not been modified or replaced with a
new tenant in accordance with the terms of the Agreement, unless DVL Holdings
and DVL deliver additional cash collateral or pay down the First Note in
accordance with the Agreement.
In order to undertake and complete the redevelopment of the Property, DVL
Holdings and DVL will need to obtain additional construction financing and,
potentially additional loan or equity financing, and given current economic
conditions, there can be no assurance that any such additional financing will be
obtained on acceptable terms or at all. Additionally, given the current economic
conditions, there can be no assurance that the redevelopment will occur in the
five year period required under the Redevelopment Agreement or at all.
The Company also owns 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.
19
During 2008, the Company, through direct ownership or through its investment in
various limited partnerships, foreclosed on five Affiliated Limited Partnerships
for nonpayment of amounts due on mortgage loans and took title to the five
vacant Wal-Mart Stores. At the time of foreclosure, the five mortgages had a
combined carrying value of $1,776. The five stores are included in the Company's
real estate held at cost, for lease or sale. In 2009, the Company entered into
an agreement to sell one of the vacant stores and reclassified its carrying
value to discontinued operations.
Discontinued Operations
(1) 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 addition
DVL owns a 8.25% limited partner interest in each of these partnerships. DVL
will also receive a percentage of the net sales proceeds. As of March 2009, the
sale has not yet been consummated and the third party continues to lease space.
The total expenses to be reimbursed to DVL are approximately $929 as of March
31, 2009 not including the $50 fee or any amounts to be received as a limited
partner. Activity related to the real estate lease interest is included in
discontinued operations. DVL has sued the prior tenants of the property for
environmental contamination and has received $150 and expects to receive an
additional $250 towards the cleanup costs for the property.
(2) The Company owns 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.
As of March 31, 2009, the Company has capitalized approximately $1,000 of
environmental remediation costs in connection with the cleaning of the site. The
Company anticipates that it will eventually recover a substantial portion of the
capitalized remediation costs on the property through the net proceeds received
from any potential future sale and reimbursement from certain companies that it
believes dumped chemicals on the site. Litigation on this issue is proceeding
through the judicial system. However, the Company's ability to recover such
costs depends on many factors, including the outcome of litigation and there can
be no assurance that the Company will recover all of the costs of such
remediation within the foreseeable future or at all. Such inability to recover
all of such remediation costs could have an adverse effect on the Company's
financial condition. The Company currently accounts for the property as an
"asset from discontinued operations" in its consolidated financial statements at
a carrying value of $747 after recording a provision for losses of $350.
(3) During 2008, the Company foreclosed on two Affiliated Limited Partnerships
for nonpayment of amounts due on mortgage loans and took title to the two vacant
former Wal-Mart stores. At the time of the foreclosures, the two mortgages had a
combined carrying value of $696. During December, 2008, the Company sold one of
the former Wal-Mart stores and received net proceeds of $220. During February
2009, the Company sold a second former Wal-Mart store and received net proceeds
of $594. In 2009, the Company entered into an agreement to sell one of the
vacant stores previously considered to be a real estate asset for $600 and
reclassified its carrying value to discontinued operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes to the Critical Accounting Policies
and Estimates described in our Annual Report on Form 10-K for the year ended
December 31, 2008 filed with the SEC on April 15, 2009.
20
RESULTS OF OPERATIONS
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
DVL had income from continuing operations of $354 and $1,074 for the three
months ended March 31, 2009 and 2008, respectively.
Interest income on mortgage loans decreased to $544 as a result of the payoff of
loan balances. Interest expense on underlying mortgages decreased to $64
reflecting the application of a greater portion of each monthly payment to the
outstanding principal balances, payoff of loan balances and anticipated loan
maturities.
Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
-------------- --------------
Interest income on mortgage loans $ 544 $ 616
Interest expense on underlying mortgages $ 64 $ 99
The gain on satisfaction of mortgage loans results when the net proceeds on the
satisfaction of mortgage loans are greater than their carrying value.
Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
-------------- --------------
Gain on satisfaction of mortgage loans $ -- $ 634
Management fees decreased as a result of an agreed upon change increasing the
reimbursement of allocated expenses.
Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
-------------- --------------
Management fees $ 17 $ 38
Transaction and other fees were earned by the Company in connection with sales
of partnership properties. The amount of fees vary depending on the size and
number of transactions.
Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
-------------- --------------
Transaction and other fees from partner-
ships $ 25 $ 49
Interest income on residual interests increased and interest expense on the
related notes payable decreased as a result of purchase price adjustments
pursuant to the purchase agreements entered into by the Company's wholly owned
subsidiary, S2 Holdings, Inc. ("S2"), that owns a 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").
Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
-------------- --------------
Interest income on residual interests $ 1,542 $ 1,488
Interest expense on related notes
payable $ 689 $ 750
21
Net rental income decreased primarily as a result of a decrease in operating
expenses, combined with decreased gross rental income resulting from decreased
occupancy in anticipation of the Kearny redevelopment project. Operating
expenses for vacant Wal-Mart stores that the Company took title to in 2008 are
included for the three months ended March 31, 2009. There were no similar
expenses for the same period in 2008.
Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
-------------- --------------
Net rental income from others $ 42 $ 161
Gross rental income from others $ 306 $ 340
Distributions from partnerships increased in 2009 compared to 2008 as a result
of an increase in the amount of final distributions from affiliated
partnerships.
Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
-------------- --------------
Distributions from partnerships $ 76 $ 12
General and administrative expenses increased in 2009 from 2008 primarily as a
result of increased fixed rent per the Company's First Amendment to its office
lease agreement and increased depreciation expense on the Company's leasehold
improvements.
Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
-------------- --------------
General and administrative $ 456 $ 419
The asset servicing fee paid to NPO Management, LLC increased pursuant to the
terms of the Asset Servicing Agreement which calls for an adjustment to reflect
changes in the consumer price index.
Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
-------------- --------------
Asset servicing fee $ 195 $ 188
Legal and professional fees decreased in 2009 from 2008 primarily as a result of
the inclusion of expenses to retain Sarbanes Oxley professionals in 2008.
Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
-------------- --------------
Legal and professional fees $ 73 $ 106
The Company recorded a provision for loan losses on its mortgage portfolio of
$100 during the three months ended March 31, 2009.
Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
-------------- --------------
Provision for loan losses $ 100 $ 50
22
Interest expense to affiliates decreased in 2009 compared to 2008 as a result of
a decreased amount of debt owed to affiliates.
Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
-------------- --------------
Interest expense - affiliates $ 45 $ 52
Interest expense relating to other debts increased as a result of increases in
the amortization of financing expenses on new borrowings as compared to the
prior period.
Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
-------------- --------------
Interest expense - others $ 344 $ 273
The Company accrued expenses of $-0- and $32 for alternative minimum taxes
during each of the three months ended March 31, 2009 and 2008. The Company
recognized $-0- of deferred income tax expense during the three months ended
March 31, 2009 and $32 of deferred tax expense during the three months ended
March 31, 2008, as a result of changes in the valuation allowance on deferred
tax assets. This resulted in income tax expense as follows:
Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
-------------- --------------
Income tax expense $ -- $ 64
Discontinued operations consist of the operations of business segments the
Company considers as held for sale or has disposed of.
Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
-------------- --------------
Income $ -- $ 58
Expenses 97 159
-------------- --------------
Loss from discontinued operations
before gain on sale (97) (101)
Gain on sale 120 --
-------------- --------------
Income (loss) from discontinued
operations $ 23 $ (101)
============== ==============
23
Liquidity and Capital Resources
The Company's cash flow from operations is generated principally from
rental income from its ownership of real estate, distributions in connection
with residual interests in securitized portfolios, interest on its mortgage
portfolio, management fees and transaction and other fees received as a result
of the sale and/or refinancing of partnership properties and mortgages.
The Company's cash balance was $872 at March 31, 2009, compared to $496 at
December 31, 2008.
The Company believes that its anticipated cash flow provided by operations
and other sources is sufficient to meet its current operating cash requirements
for the next twelve months. The Company has in the past and expects in the
future to continue to augment its cash flow from operations with additional cash
generated from either the sale or refinancing of its assets and/or borrowings.
The cash flow from the Company's member interests in Receivables II-A and
Receivables II-B should continue to provide liquidity to the Company.
The purchase agreements with respect to the acquisition of such member
interests contain annual minimum and maximum levels of cash flow that will be
retained by the Company after the payment of interest and principal on the notes
payable, which are as follows:
Years Minimum Maximum
----- ------- -------
2009 $ 743 $ 880
2010 to final payment on the notes* $ 1,050 $ 1,150
* Final payment on the notes payable expected in 2015 related to the
Receivables II-A transaction and 2017 for the Receivables II-B transaction.
The Company believes it will continue to receive significant cash flow
after final payment of the notes payable.
24
Outstanding Financings
Outstanding loans payable as of March 31, 2009 which are scheduled to become due
through 2013 are as follows:
Outstanding
Original Balance Including
Loan Accrued Interest at Due
Purpose Creditor Amount March 31, 2009 Date
------- -------- ------ -------------- ----
Repurchase of Notes
Issued by the Company Pemmil (1) $ 2,500 $ 1,425 12/31/09
Purchase of Mortgages Unaffiliated Bank (2) $ 1,400 $ 1,204 04/30/09
Refinancing of Repurchase of
Notes Issued by the Company Unaffiliated Bank (3) $ 1,500 $ 1,460 06/01/09
Construction Financing Unaffiliated Bank (4) $ 4,250 $ 4,272 01/21/11
General Corporate Purposes Unaffiliated Bank (5) $ 250 $ 205 02/01/13
Refinancing of Notes Issued by
the Company to Acquire Property Unaffiliated Bank (6) $ 3,800 $ 3,776 07/01/11
(1) Pemmil Funding, LLC ("Pemmil") previously made a loan to the Company in
the original principal amount of $2,500 pursuant to the terms of that
certain Loan and Security Agreement, dated December 27, 2005 (the "Pemmil
Loan Agreement") between Pemmil and the Company evidenced by the Original
Term Note (which has subsequently been amended and restated pursuant to
the Amendment No.1). The outstanding obligations under the Pemmil Loan
Agreement and Original Term note through and including March 15, 2007 were
$1,190 in principal and $116 in accrued and unpaid interest. In March
2007, to fund a repurchase of shares of the Company's Common Stock from
Blackacre Bridge Capital LLC and Blackacre Capital Group L.P., Pemmil made
an additional loan advance to the Company in the principal amount of $650
pursuant to Amendment No. 1 to Loan and Security Agreement, entered into
by the Company on March 16, 2007 ("Amendment No. 1"). Under Amendment No.
1, all accrued and unpaid interest outstanding at March 15, 2007 was added
to the principal amount outstanding under the Pemmil Loan Agreement and
Pemmil loaned to the Company an additional $650 principal amount which
increased the total principal amount outstanding under the Pemmil Loan
Agree- ment to $1,956. Such principal amount was evidenced by an Amended
and Restated Term Note made by the Company to Pemmil which was executed
simultaneously with Amendment No. 1. In general, except as modified and
amended by Amendment No. 1 as described above, the terms and provisions of
the Pemmil Loan Agreement were unchanged and re- main in full force and
effect. The Pemmil Loan Agreement provided that the principal and unpaid
interest were December 27, 2008 and provided for interest at a rate of 12%
per annum, compounded monthly. Interest is payable monthly on the loan,
but the Company may elect not to make any such interest payment when due,
and such amount of unpaid monthly interest shall be added to principal.
The Company is required to pre- pay the loan (plus any accrued and unpaid
interest) to the extent that the Company consummates certain capital
transactions (as defined in the Pemmil Loan Agreement) that result in net
proceeds (as defined in the Pemmil Loan Agreement) to the Company. Pemmil
may, in its sole discretion, accelerate the Loan after the occurrence and
during the continuance of an event of default (as defined in the Pemmil
Loan Agree- ment). The obligations under the Pemmil Loan Agreement are
secured by a subordinated pledge of the Company's equity interest in S2
Holding, Inc., the Company's wholly- owned subsidiary. The Company may
prepay all or a portion of the loan at any time prior to maturity without
penalty or premium. During the three months ended March 31, 2009, the
Company paid $146 of interest accrued to Pemmil. On November 10, 2008 the
Pemmil Loan Agreement was amended to extend the due date for the payment
of the principal and unpaid interest to December 31, 2009.
25
(2) Interest rate is prime plus .5% per annum payable monthly. Monthly
payments are interest only. Annual principal payments of $50 are required.
In January of 2009, the lender agreed to recast the loan as a $2,200 term
loan to be secured by four Wal-Mart mortgages secured by properties leased
to Wal-Mart. At the same time the maturity date of the existing loan was
extended to April 30, 2009. On April 24, 2009 the Company entered into a
Loan Agreement, evidenced by a Term Note for $2,200. The principal amount
bears interest at an annual rate of Libor plus 4% and self amortizes with
a portion of the principal payable monthly through February 1, 2014 (the
"Maturity Date"). The repayment of the obligations under the Term Note and
the loan documents is secured by certain collateral assignments from DVL
Holdings to the lender with respect to mortgage notes and mortgages held
by DVL Holdings with respect to mortgage financings provided to affiliated
limited partnerships. Additionally, the Company guaranteed the obligations
of DVL Holdings under such loan documents. The majority of the loan
proceeds were used to paydown the existing loan.
(3) Interest rate is fixed at 7.75% per annum payable monthly. Monthly
payments are in- terest only. An annual principal payment of $50 is
required. The inability of the Company to refinance or definitively extend
such loan on or prior to its maturity date would have a material adverse
effect on the Company's financial condition.
(4) On January 21, 2009, DVL Holdings entered into a Mortgage, Security
Agreement and Assignment of Leases and Rents (the "Agreement") with
Signature Bank in connection with the loan by Signature Bank to the
Company of an aggregate amount of up to $6,450 (the "Principal Amount")
pursuant to the First Note (as defined above) in the amount of $4,250 and
the Second Note (as defined above) in the amount of $2,200. DVL Holdings
borrowed $4,250 pursuant to the First Note and such funds were used to
repay the outstanding borrowings under the Construction Loan Agreement.
Borrowings under the Second Note will be advanced by Signature Bank in the
future upon the satisfaction of certain conditions specified in such Note
and such funds will be used in accordance with the terms of the Agreement
and Second Note. See above in MD&A for a more detailed discussion of the
terms of the Agreement.
(5) On January 30, 2008, the Company entered into a loan agreement with an
unaffiliated third party bank for $250. The loan bears interest at a rate
of 7.5% per annum. Principal and interest payments of $5 are due monthly
through the scheduled maturity date of February 1, 2013.
(6) On June 6, 2008, Delbrook Holding LLC ("Delbrook"), a Delaware limited
liability Company and 100% owned subsidiary of DVL borrowed an aggregate
of $3,800 pursuant to a Mortgage Note (the "Mortgage Note") with an
unaffiliated third party bank in the principal amount of $3,800. The
Mortgage Note is secured by a mortgage on certain of the Company's
property located in Kearny, New Jersey and by an assign- ment of leases on
such property. The principal amount outstanding under the Note, bears
interest, which is payable monthly, at an annual rate equal to the one
month LIBOR Rate plus 2.1%.
26
The Company uses derivatives to manage risks related to interest rate movements.
Interest rate swap contracts designated and qualifying as cash flow hedges are
reported at fair value. In accordance with SFAS No. 133, "Accounting for Deriva-
tive Instruments and Hedging Activities" (the "Statement"), as amended by SFAS
No. 138 and SFAS No. 149, the Company established accounting and reporting
stand- ards for derivative instruments. Specifically, the Statement requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and to measure those instruments at fair value.
Changes in the fair value of those instruments designated as cash flow hedges
are recorded in other comprehensive income, to the extent the hedge is
effective, and in the results of operations, to the extent the hedge is
ineffective or no longer quali- fies as a hedge.
During September 2008, the Company entered into an interest rate swap agreement
related to one of their loans. Valued separately, the interest rate swap
agreement represents a liability as of March 31, 2009 and December 31, 2008, in
the amount of $231. This value represents the fair value of the current
difference in interest paid and received under the swap agreement over the
remaining term of the agreement. Because the swap is considered to be a cash
flow hedge and it is effective, the value of the swap agreement is recorded in
the Consolidated Statements of Stockholders' Equity as a separate component and
represents the only amount reflected in accumulated other comprehensive loss.
Changes in the swap agreement's fair value are reported currently in other
comprehensive loss. Payments are recognized in current operating results as
settlements occur under the agreement as a component of interest expense.
The following table summarizes the notional values of the Company's derivative
financial instruments. The notional value provides an indication of the extent
of the Company's involvement in these instruments on March 31, 2009, but does
not represent exposure to credit, interest rate or market risks.
Hedge Type Notional Value Rate Termination Date Fair Value
---------- -------------- ---- ---------------- ----------
Interest rate swap $ 3,757 5.94% July 1, 2011 $ (231)
agreement
The outstanding principal of the Mortgage Note is payable in monthly
installments of $5 beginning on August 1, 2008 and continuing on the first day
of each month there- after. The final monthly installment of the Mortgage Note
is due and payable at maturity on July 1, 2011 or before, at the option of the
Bank upon any defaults after the expiration of all applicable notice and cure
periods as specified therein.
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting Company as defined by Rule 12b-2 of the
Securities Exchange Act of 1934 (the "Exchange Act") and are not required to
provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in Company reports filed under the Exchange
Act, is accumulated and communicated to management, including the Company's
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, the Company is required
to carry out an evaluation of the effectiveness of the design and operation of
the Company's disclosure controls and procedures as of the end of the period
covered by this report. This evaluation was carried out with the participation
of the Company's principal executive officer and principal financial officer.
Based upon that evaluation, the Company's principal executive officer concluded
that the Company's disclosure controls and procedures were not effective because
of the material weaknesses discussed below and which were previously discussed
in our Annual Report on Form 10-K.
Management's Report on Internal Control Over Financial Reporting
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our "disclosure
controls and procedures" (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this report. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, our disclosure controls and
procedures were not effective as of March 31, 2009 because of a material
weakness. The basis for this determination was that, as discussed below, we
identified a material weakness in our internal control over financial reporting,
which we view as an integral part of our disclosure controls and procedures.
28
Management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) includes
those policies and procedures that: (a) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (b) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles in the
United States of America ("U.S.GAAP"), and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and
directors of the Company; and (c) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Company's assets that could have a material effect on the financial
statements.
Management assessed our internal control over financial reporting as of
March 31, 2009, the end of our fiscal quarter. Management based its assessment
on the criteria set forth in the Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
A material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company's annual or interim
financial statements will not be prevented or detected on a timely basis.
Because of its inherent limitations, internal controls over financial reporting
may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our control environment did not sufficiently promote effective internal
control over financial reporting throughout the organization. Specifically, we
had a shortage of support and resources in our accounting department, which
resulted in insufficient; (i) documentation and communication of certain
business transactions; and (ii) application of technical accounting rules as of
March 31, 2009. No misstatements occurred as a result of the material weakness.
Since December 2008, we have taken a number of steps that we believe will impact
the effectiveness of our internal control over financial reporting in the future
including the following:
o In March 2009 we implemented a Disclosure Committee to properly
ensure that we are complying with disclosure requirements by
addressing disclosure issues that may arise from time to time.
o We have engaged an outside certified public accounting firm to
supplement our finance and accounting departments to support the
preparation of financial statements and reports that are to be filed
with the SEC.
o We intend to utilize the outside accounting firm to review Form
10-Q's and Form 10-K's, to advise us of changes in accounting rules
and procedures as well as to review our income calculations from S-2
Holdings, LLC as well as our deferred tax calculations.
During the quarter ended March 31, 2009, we continue to implement the
steps out-lined in our 2008 Form 10-K that we believe will eliminate these
material weaknesses and improve the effectiveness of our internal controls over
financial reporting.
29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
We are a smaller reporting Company as defined by Rule 12b-2 of the
Securities Exchange Act of 1934 and are not required to provide the
information under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
10.1 Loan Agreement with an effective date of April 24, 2009 between
DVL Mortgage Holdings, LLC & Harleysville National Bank and Trust
Company.
10.2 Term Note - with an effective date of April 24, 2009 for
$2,200,000 with Harleysville National Bank and Trust Company as
Payee and DVL Mortgage Holdings, LLC as maker.
30
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/ Henry Swain
-------------------------------------
Henry Swain, Executive Vice President
and Chief Financial Officer
May 15, 2009
31