DVL
, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED
)
Dollars
in thousands unless otherwise noted
(except
share and per share amounts)
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 nine
months ended September 30, 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. Subsequent events have been evaluated through November 17,
2009, the date the financial statements were issued (see note 16).
Certain
amounts from 2008 have been reclassified to conform to the 2009
presentation. During the quarter ended September 30, 2009 the Company
reclassified, in all periods presented, certain assets in the consolidated
balance sheets out of discontinued operations and into real estate and other
assets as they no longer met the criteria for discontinued
operations. Additionally, the amounts in the consolidated statements
of operations and cash flows have been reclassified for all periods
presented.
|
3.
|
Recent
Accounting Pronouncements
|
In May
2009, the Financial Accounting Standards Board (“FASB”) issued Statement
No. 165,
Subsequent
Events
which is codified in FASB Accounting Standards Codification (“ASC”
or “Codification”) 855, Subsequent Events
(“ASC 855”). ASC 855 provides guidance on management’s
assessment of subsequent events. The new standard clarifies that management must
evaluate, as of each reporting period, events or transactions that occur after
the balance sheet date “through the date that the financial statements are
issued or are available to be issued.” Management must perform its assessment
for both interim and annual financial reporting periods. ASC 855 does
not significantly change the Company’s practice for evaluating such events.
ASC 855 is effective prospectively for interim and annual periods ending
after June 15, 2009 and requires disclosure of the date subsequent events
are evaluated through. The Company adopted ASC 855 during the quarter ended
June 30, 2009. The adoption of ASC 855 did not have any impact on the
Company’s results of operations and financial condition.
In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
Amendments to FASB Interpretation No. 46(R) (“FAS 167”), which modifies how a
company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
amendments will significantly affect the overall consolidation under FASB
ASC 810, Consolidation (“ASC 810”), and clarifies that the
determination of whether a company is required to consolidate an entity is based
on, among other things, an entity’s purpose and design and a company’s ability
to direct the activities of the entity that most significantly impact the
entity’s economic performance. ASC 810 requires an ongoing reassessment of
whether a company is the primary beneficiary of a variable interest entity.
ASC 810 also requires additional disclosures about a company’s involvement
in variable interest entities and any significant changes in risk exposure due
to that involvement. FAS 167 is effective for fiscal years beginning after
November 15, 2009. The Company is currently assessing the impact of the standard
on its consolidated financial statements.
In June
2009, the FASB issued Statement No. 168, The FASB Codification and the
Hierarchy of Generally Accepted Accounting Principles — a replacement of
FASB Statement 162 (SFAS No. 168), which is codified in
FASB ASC 105, Generally Accepted Accounting Principles (“ASC 105”).
ASC 105 establishes the Codification as the source of authoritative United
States accounting and reporting standards for all non-governmental entities
(other than guidance issued by the SEC). The Codification is a reorganization of
current GAAP into a topical format that eliminates the current GAAP hierarchy
and establishes two levels of guidance — authoritative and
nonauthoritative. According to the FASB, all “non-grandfathered, non-SEC
accounting literature” that is not included in the Codification would be
considered nonauthoritative. The FASB has indicated that the Codification does
not change current GAAP. Instead, the changes aim to (1) reduce the time
and effort it takes for users to research accounting questions and
(2) improve the usability of current accounting standards. ASC 105 is
effective for interim and annual periods ending on or after September 15,
2009. The Company adopted the requirements of ASC 105 beginning with the
quarter ended September 30, 2009.
|
4.
|
Residual
Interests in Securitized Portfolios
|
In
accordance with the purchase agreements entered into with respect to the
residual interests from the acquisition dates through September 30, 2009, the
residual interest in securitized portfolios and the notes payable were increased
by a total of approximately $7,648 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,” which is codified in FASB
ASC 810, 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.
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 until such time as it can redevelop the Property as
described below.
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,
originally set to expire on December 31, 2009, was extended to May 1, 2011. 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
Company has capitalized costs exclusive of land and building, of $1,116 and $856
at September 30, 2009 and at December 31, 2008, respectively related to the
development of the project.
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. As of September 30, 2009, three of the
properties have been sold which represented $997 of the carrying value and are
included in discontinued operations.
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
September 30, 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 a
component of real estate in its consolidated financial statements at a carrying
value of $762 after recording a provision for losses of $350.
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 an 8.25% limited partner
interest in each of these partnerships. DVL will also receive a percentage of
the net sales proceeds. As of September 30, 2009, the third party continues to
lease space. The total expenses to be reimbursed to DVL are approximately $703
as of September 30, 2009 not including the $50 fee or any amounts to be received
as a limited partner. Activity related to this receivable is included in other
assets. DVL sued the prior tenants of the Property for environmental
contamination and has received $400 toward the cleanup costs for the
Property.
|
7.
|
Discontinued
Operations
|
As of September 30, 2009 and 2008, the
activities of three of the five affiliated limited partnership properties
described in Footnote 5 have been included in discontinued operations. These
three properties were sold for net proceeds of $1,134 which resulted in a gain
from the sale of discontinued operations of approximately $137.
On April
24, 2009, the Company entered into a loan agreement with an unaffiliated third
party bank, 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 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.
On
January 21, 2009, DVL Holdings entered into a loan agreement, evidenced by a
note, with an unaffiliated third party bank in an aggregate amount of up to
$6,450 pursuant to a first note in the amount of $4,250 and a second note in the
amount of $2,200. DVL Holdings borrowed $4,240 pursuant to the first note and
such funds were used to repay outstanding borrowings. 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.
|
9.
|
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
Three
Months Ended
09/30/09
|
Fee
Income For The
Three
Months Ended
09/30/08
|
Fee
Income For The
Nine
Months Ended
09/30/09
|
Fee
Income For The
Nine
Months Ended
09/30/08
|
|
|
|
|
|
|
$ 13
|
$ 15
|
$ 43
|
$ 52
|
Management and Other Fees
and Expenses Incurred
A. The
Company incurred fees to NPO of $586 and $579 for the nine months September 30,
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
Three
Months
Ended
09/30/09
|
Fees
Recorded
For
The
Three
Months
Ended
09/30/08
|
Fees
Recorded
For
The
Nine
Months
Ended
09/30/09
|
Fees
Recorded
For
The
Nine
Months
Ended
09/30/08
|
|
|
|
|
|
|
$ 27
|
$ 27
|
$ 81
|
$ 81
|
C. Interest
expense on amounts due to affiliates was as follows:
|
|
Three
Months
Ended
09/30/09
|
Three
Months
Ended
09/30/08
|
Nine
Months
Ended
09/30/09
|
Nine
Months
Ended
09/30/08
|
|
|
|
|
|
|
|
Pemmil
Funding
|
$ 42
|
$ 45
|
$ 128
|
$ 142
|
|
10.
|
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 in the years 2004 through 2012 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. The adjustments to DVL’s net income were significant
enough that no amounts were accrued for the nine months ended September 30, 2009
and 2008.
In July
2008, the Company purchased 522,500 shares of its 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.
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, which is codified in FASB ASC 815, Derivatives and Hedging
(“ASC 815”),
the Company established
accounting and reporting standards for derivative instruments.
Specifically,
ASC 815 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 qualifies as a hedge. The interest rate swap agreements are
generally accounted for on a held to maturity basis and in cases where they are
terminated early, any gain or loss is generally amortized over the remaining
life of the hedged item.
During
September 2008, the Company entered into an interest rate swap agreement related
to one of its loans. Valued separately, the interest rate swap agreement
represents a liability as of September 30, 2009 and December 31, 2008, in the
amount of $180 and $231 respectively. During April 2009, the Company entered
into an interest rate swap agreement related to another of their loans. Valued
separately, the interest rate swap agreement represents a liability as of
September 30, 2009, in the amount of $22. 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 swaps are considered to be
a cash flow hedge and they are effective, the value of the swaps are 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 swaps 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 September 30, 2009, but
does not represent exposure to credit, interest rate or market risks. The fair
values of the interest rate swap agreements are based on significant other
observable inputs and therefore, are level 2 in the fair value hierarchy under
FASB ASC 820.
|
|
|
|
|
|
|
Hedge
Type
|
Notional
Value
|
Rate
|
Termination
Date
|
Fair
Value
|
|
|
|
|
|
|
|
Interest
rate swap agreement
|
$ 3,723
|
5.94%
|
July
1, 2011
|
$
(180)
|
|
|
|
|
|
|
|
Interest
rate swap agreement
|
$ 2,046
|
6.09%
|
February
1, 2014
|
$ (22)
|
The
following table presents the computation of basic and diluted per share data for
the three and nine months ended September 30, 2009 and 2008.
|
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
556
|
|
|
|
44,770,345
|
|
|
$
|
0.01
|
|
|
$
|
305
|
|
|
|
45,051,691
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive stock options
|
|
|
-
|
|
|
|
13,725
|
|
|
|
|
|
|
|
-
|
|
|
|
161,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
556
|
|
|
|
44,784,070
|
|
|
$
|
0.01
|
|
|
$
|
305
|
|
|
|
45,213,344
|
|
|
$
|
0.01
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
1,595
|
|
|
|
44,770,345
|
|
|
$
|
0.04
|
|
|
$
|
1,846
|
|
|
|
45,129,819
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive stock options
|
|
|
-
|
|
|
|
23,143
|
|
|
|
|
|
|
|
-
|
|
|
|
125,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
1,595
|
|
|
|
44,793,488
|
|
|
$
|
0.04
|
|
|
$
|
1,846
|
|
|
|
45,254,855
|
|
|
$
|
0.04
|
|
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 104 and $(171) in 2009 and 2008
respectively, include $152 and $335 of deferred income tax expense in 2009 and
2008, respectively.
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Residual
interests
|
|
$
|
4,684
|
|
|
$
|
4,466
|
|
|
Real
estate
|
|
|
2,324
|
|
|
|
3,398
|
|
|
Corporate
/ other
|
|
|
76
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated revenues
|
|
$
|
7,084
|
|
|
$
|
7,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
|
|
|
|
|
|
|
Residual
interests
|
|
$
|
2,643
|
|
|
$
|
2,282
|
|
|
Real
estate
|
|
|
(1,050
|
)
|
|
|
(217
|
)
|
|
Corporate
/ other
|
|
|
104
|
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
income from continuing operations
|
|
$
|
1,697
|
|
|
$
|
1,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
|
|
|
As
of
|
|
|
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Residual
interests
|
|
$
|
45,443
|
|
|
$
|
45,789
|
|
|
Real
estate
|
|
|
26,057
|
|
|
|
27,019
|
|
|
Corporate
/ other
|
|
|
2,105
|
|
|
|
2,257
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated assets
|
|
$
|
73,605
|
|
|
$
|
75,065
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
Discontinued
Operations
|
The
Company classifies certain real estate holdings as held for sale. The Company’s
properties located in Fairbury, Nebraska, Checotah, Oklahoma and Alma, Arkansas
are included in assets of discontinued operations. 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,” which is codified in FASB ASC 360.
Discontinued
operations for the nine months ended September 30, 2009 and 2008 are summarized
as follows:
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
$
|
-
|
|
|
$
|
178
|
|
|
Expenses
|
|
|
149
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations before gain on sale
|
|
|
(149
|
)
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale
|
|
|
47
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
$
|
(102
|
)
|
|
$
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
Assets
and liabilities of discontinued operations at September 30, 2009 and December
31, 2008 are summarized as follows:
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Assets
of discontinued operations
|
|
$
|
-
|
|
|
$
|
895
|
|
During
October 2009, the Company successfully negotiated an extension of the $1,358
loan with an unaffiliated bank. The new maturity date is June 5,
2012.
On
November 1, 2009, the Company foreclosed on the Iowa Park property.
On
November 2, 2009, the Company entered into an agreement (the “Agreement”) with
Real Estate Systems Implementation Group, LLC (“RESIG”), an affiliate of Imowitz
Koenig & Co., LLP, the Company’s former independent registered public
accountants, pursuant to which RESIG will provide substantially all of the
Company’s internal accounting, financial statement preparation and bookkeeping
functions on an outsourced consulting basis. A requirement of the Agreement was
the appointment of Neil H. Koenig as Chief Financial Officer, Principal
Financial Officer and Principal Accounting Officer of the Company.
On
November 6, 2009, the Company sold the Port Isabel, Texas property for net
proceeds of $874 which resulted in a net loss of approximately $68 in the fourth
quarter of 2009.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in
thousands)
This
Quarterly Report on Form 10-Q for the quarter ended September 30, 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 conjunction with the consolidated
financial statements and accompanying financial statement notes appearing
elsewhere herein and in conjunction with our Annual Report on Form 10-K for the
year ended December 31, 2008.
None of
the recently adopted accounting standards had a material 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 with respect to the redevelopment of the Property 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 and believes it will continue to receive such positive cash flow 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,
originally set to expire on December 31, 2009, was extended to May 1, 2011. 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
Company has capitalized costs exclusive of land and building, of $1,116 and $856
as of September 30, 2009 and December 31, 2008, respectively, related to the
development of this project.
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.
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. As of September 30, 2009, three of the properties have
been sold which represented $997 of the carrying value and are included in
discontinued operations.
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 an 8.25% limited
partner interest in each of these partnerships. DVL will also receive a
percentage of the net sales proceeds. As of September 30, 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 $703 as of September 30, 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 other assets.
DVL has sued the prior tenants of the property for environmental contamination
and has received $400 towards the cleanup costs for the property.
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
September 30, 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 a
component of real estate in its consolidated financial statements at a carrying
value of $762 after recording a provision for losses of $350.
Discontinued
Operations
As of September 30, 2009 and 2008, the
activities of three of the five affiliated limited partnership properties
described above have been included in discontinued operations. These three
properties were sold for net proceeds of $1,134 which resulted in a gain from
the sale of discontinued operations of approximately $137.
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.
RESULTS
OF OPERATIONS
Three Months Ended September
30, 2009 Compared to Three Months Ended September 30, 2008
DVL had
income from continuing operations of $716 and $433 for the three months ended
September 30, 2009 and 2008, respectively.
Interest
income on mortgage loans increased to $557 as a result of accretion on certain
mortgage loans. Interest expense on underlying mortgages decreased to $57
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
September 30,
2009
|
Three
Months Ended
September 30,
2008
|
|
Interest
income on mortgage loans
|
$
557
|
$ 353
|
|
Interest
expense on underlying mortgages
|
$
57
|
$
80
|
Partnership
management fees decreased as a result of a decrease in the number of
partnerships being managed.
|
|
Three
Months Ended
September 30,
2009
|
Three
Months Ended
September 30,
2008
|
|
Partnership
management fees
|
$ 59
|
$ 65
|
Management
fees decreased as a result of the loss of a property managed by an affiliate of
the Company.
|
|
Three
Months Ended
September 30,
2009
|
Three
Months Ended
September 30,
2008
|
|
Management
fees
|
$ 13
|
$ 15
|
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
September 30,
2009
|
Three
Months Ended
September 30,
2008
|
|
Transaction
and other fees from partnerships
|
$ 1
|
$ 0
|
Distributions
from partnerships decreased in 2009 compared to 2008 as a result of
distributions on sold partnerships being received in 2008.
|
|
Three
Months Ended
September 30,
2009
|
Three
Months Ended
September 30,
2008
|
|
Distributions
from partnerships
|
$ 27
|
$ 176
|
Interest
income on residual interests increased as a result of accretion and 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”). Interest expense on the related notes payable
decreased as a result of principal amortization.
|
|
Three
Months Ended
September 30,
2009
|
Three
Months Ended
September 30,
2008
|
|
Interest
income on residual interests
|
$
1,601
|
$ 1,502
|
|
Interest
expense on related notes payable
|
$
669
|
$
705
|
Net
rental income and gross rental income were consistent for the three-month
periods.
|
|
Three
Months Ended
September 30,
2009
|
Three
Months Ended
September 30,
2008
|
|
|
|
|
|
Net
rental income from others
|
$ 163
|
$ 157
|
|
Gross
rental income from others
|
$ 316
|
$ 312
|
General
and administrative expenses decreased in 2009 from 2008 primarily as a result of
decreased employee costs and insurance costs.
|
|
Three
Months Ended
September 30,
2009
|
Three
Months Ended
September 30,
2008
|
|
General
and administrative
|
$ 364
|
$ 392
|
The asset
servicing fee paid to NPO Management, LLC pursuant to the terms of the Asset
Servicing Agreement which calls for an adjustment to reflect changes in the
consumer price index. As a result of a decrease in the consumer price index,
there was no increase in the fee.
|
|
Three
Months Ended
September 30,
2009
|
Three
Months Ended
September 30,
2008
|
|
Asset
servicing fee
|
$ 195
|
$ 196
|
Legal and
professional fees were similar for the three-month periods.
|
|
Three
Months Ended
September 30,
2009
|
Three
Months Ended
September 30,
2008
|
|
Legal
and professional fees
|
$ 115
|
$ 119
|
The
Company recorded a provision for loan losses on its mortgage portfolio of $100
during the three months ended September 30, 2009.
|
|
Three
Months Ended
September 30,
2009
|
Three
Months Ended
September 30,
2008
|
|
Provision
for loan losses
|
$ 100
|
$ 50
|
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
September 30,
2009
|
Three
Months Ended
September 30,
2008
|
|
Interest
expense – affiliates
|
$
42
|
$ 45
|
Interest
expense relating to other debts decreased as a result of lower interest rates on
new borrowings and lower outstanding balances on existing
borrowings.
|
|
Three
Months Ended
September 30,
2009
|
Three
Months Ended
September 30,
2008
|
|
Interest
expense – others
|
$ 214
|
$ 267
|
The
Company accrued expenses of $0 and $32 for alternative minimum taxes during each
of the three months ended September 30, 2009 and 2008. The Company recognized
$152 of deferred income tax expense during the three months ended September 30,
2009 and $157 of deferred tax expense during the three months ended September
30, 2008, as a result of changes in deferred tax assets. The Company also
recorded current refunds receivable of $108 for the three months ended September
30, 2009. This resulted in income tax expense as
follows:
|
|
Three
Months Ended
September 30,
2009
|
Three
Months Ended
September 30,
2008
|
|
Income
tax expense
|
$ 44
|
$ 189
|
Discontinued
operations consist of the operations of business segments the Company considers
as held for sale or has disposed of.
|
|
Three
Months Ended
September 30, 2009
|
Three
Months Ended
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
$
|
-
|
|
|
|
$
|
61
|
|
|
|
Expenses
|
|
|
43
|
|
|
|
|
-
|
|
|
|
(Loss)
income from discontinued operations before loss on sale
|
|
|
(43
|
)
|
|
|
|
61
|
|
|
|
Loss
on sale
|
|
|
(73
|
)
|
|
|
|
-
|
|
|
|
(Loss)
income from discontinued operations
|
|
$
|
(116
|
)
|
|
|
$
|
61
|
|
|
Nine Months Ended September
30, 2009 Compared to Nine Months Ended September 30, 2008
DVL had
income from continuing operations of $1,697 and $1,894 for the nine months ended
September 30, 2009 and 2008, respectively.
Interest
income on mortgage loans increased to $1,686 as a result of accretion on certain
mortgage loans. Interest expense on underlying mortgages decreased to $182
reflecting the application of a greater portion of each monthly payment to the
outstanding principal, payoff of loan balances and anticipated loan
maturities.
|
|
Nine
Months Ended
September 30,
2009
|
Nine
Months Ended
September 30,
2008
|
|
Interest
income on mortgage loans
|
$ 1,686
|
$1,478
|
|
Interest
expense on underlying mortgages
|
$ 182
|
$
267
|
The gain
on satisfaction of mortgage loans results when the net proceeds on the
satisfaction of mortgage loans are greater than their carrying
value.
|
|
Nine
Months Ended
September 30,
2009
|
Nine
Months Ended
September 30,
2008
|
|
Gain
on satisfaction of mortgage loans
|
$ -
|
$
999
|
Partnership
management fees decreased as a result of a decrease in the number of
partnerships being managed.
|
|
Nine
Months Ended
September 30,
2009
|
Nine
Months Ended
September 30,
2008
|
|
Partnership
management fees
|
$ 168
|
$
189
|
Management
fees decreased as a result of the loss of a property managed by an affiliate of
the Company.
|
|
Nine
Months Ended
September 30,
2009
|
Nine
Months Ended
September 30,
2008
|
|
Management
fees
|
$ 43
|
$ 52
|
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.
|
|
Nine
Months Ended
September 30,
2009
|
Nine
Months Ended
September 30,
2008
|
|
Transaction
and other fees from partnerships
|
$ 27
|
$ 88
|
Distributions
from partnerships decreased in 2009 compared to 2008 as a result of
distributions on sold partnerships being received in 2008.
|
|
Nine
Months Ended
September 30,
2009
|
Nine
Months Ended
September 30,
2008
|
|
Distributions
from partnerships
|
$ 133
|
$ 230
|
Interest
income on residual interests increased as a result of accretion and purchase
price adjustments pursuant to the purchase agreements entered into by the
Company’s wholly owned subsidiary, S2, that owns a 99.9% Class B member
interests in Receivables II-A and Receivables II-B, LLC. Interest
expense on the related notes payable decreased as a result of principal
amortization.
|
|
Nine
Months Ended
September 30,
2009
|
Nine
Months Ended
September 30,
2008
|
|
Interest
income on residual interests
|
$
4,684
|
$
4,466
|
|
Interest
expense on related notes payable
|
$
2,034
|
$
2,177
|
Net
rental income decreased primarily as a result of 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 nine months ended September 30, 2009.
There were no similar expenses for the same period in 2008.
|
|
Nine
Months Ended
September 30,
2009
|
Nine
Months Ended
September 30,
2008
|
|
|
|
|
|
Net
rental income from others
|
$ 267
|
$
362
|
|
Gross
rental income from others
|
$ 878
|
$
906
|
General
and administrative expenses decreased in 2009 from 2008 primarily as a result of
decreased employee costs.
|
|
Nine
Months Ended
September 30,
2009
|
Nine
Months Ended
September 30,
2008
|
|
General
and administrative
|
$1,111
|
$ 1,154
|
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.
|
|
Nine
Months Ended
September 30,
2009
|
Nine
Months Ended
September 30,
2008
|
|
Asset
servicing fee
|
$ 586
|
$
579
|
Legal and
professional fees remained relatively constant from period to
period.
|
|
Nine
Months Ended
September 30,
2009
|
Nine
Months Ended
September 30,
2008
|
|
Legal
and professional fees
|
$ 274
|
$
291
|
The
Company recorded a provision for loan losses on its mortgage portfolio of $225
during the nine months ended September 30, 2009.
|
|
Nine
Months Ended
September 30,
2009
|
Nine
Months Ended
September 30,
2008
|
|
Provision
for loan losses
|
$ 225
|
$ 150
|
Interest
expense to affiliates decreased in 2009 compared to 2008 as a result of a
decreased amount of debt owed to affiliates.
|
|
Nine
Months Ended
September 30,
2009
|
Nine
Months Ended
September 30,
2008
|
|
Interest
expense – affiliates
|
$ 128
|
$ 142
|
Interest
expense relating to other debts decreased as a result of lower interest rates on
new borrowings.
|
|
Nine
Months Ended
September 30,
2009
|
Nine
Months Ended
September 30,
2008
|
|
Interest
expense – others
|
$ 770
|
$ 835
|
The
Company accrued expenses of $33 and $97 for alternative minimum taxes during the
nine months ended September 30, 2009 and 2008, respectively. The Company
recognized $152 of deferred income tax expense during the nine months ended
September 30, 2009 and $335 of deferred tax expense during the nine months ended
September 30, 2008, as a result of changes in deferred tax assets. The Company
also recorded current refunds receivable of $108 for the nine months ended
September 30, 2009. This resulted in income tax expense as
follows:
|
|
Nine
Months Ended
September 30,
2009
|
Nine
Months Ended
September 30,
2008
|
|
|
|
|
|
Income
tax expense
|
$ 77
|
$ 432
|
Discontinued
operations consist of the operations of business segments the Company considers
as held for sale or has disposed of.
|
|
Nine
Months Ended
September 30, 2009
|
Nine
Months Ended
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
$
|
-
|
|
|
|
$
|
178
|
|
|
|
Expenses
|
|
|
149
|
|
|
|
|
226
|
|
|
|
Loss
from discontinued operations before gain on sale
|
|
|
(149
|
)
|
|
|
|
(48
|
)
|
|
|
Gain
on sale
|
|
|
47
|
|
|
|
|
-
|
|
|
|
Loss
from discontinued operations
|
|
$
|
(102
|
)
|
|
|
$
|
(48
|
)
|
|
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 $1,702 at September 30, 2009, compared to $496 at
December 31, 2008. The Company places cash and cash equivalents with high credit
quality institutions to minimize credit risk exposure. As of, and for
the period ended September 30, 2009, the Company had bank balances in excess of
federally insured amounts. The Company has not experienced any losses on its
demand deposits, commercial papers or money market investments.
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 beyond twelve months.
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 2014 related to the Receivables II-A
transaction and 2018 for the Receivables II-B transaction.
The
Company believes it will continue to receive significant cash flow after final
payment of the notes payable.
Outstanding
Financings
Outstanding
loans payable as of September 30, 2009 which are scheduled to become due through
2014 are as follows:
|
Purpose
|
Creditor
|
Original
Loan
Amount
|
Outstanding
Balance
Including
Accrued
Interest at
September 30,
2009
|
Due
Date
|
|
|
|
|
|
|
|
Repurchase
of Notes Issued by the Company
|
Pemmil
(1)
|
$ 2,500
|
$ 1,380
|
12/31/09
|
|
|
|
|
|
|
|
Purchase
of Mortgages
|
Unaffiliated
Bank (2)
|
$ 2,200
|
$ 2,056
|
02/01/14
|
|
|
|
|
|
|
|
Refinancing
of Repurchase of Notes Issued by the Company
|
Unaffiliated
Bank (3)
|
$ 1,500
|
$ 1,358
|
06/05/12
|
|
|
|
|
|
|
|
Construction
Financing
|
Unaffiliated
Bank (4)
|
$ 4,250
|
$ 4,272
|
01/21/11
|
|
|
|
|
|
|
|
General
Corporate Purposes
|
Unaffiliated
Bank (5)
|
$ 250
|
$ 182
|
02/01/13
|
|
|
|
|
|
|
|
Refinancing
of Notes Issued by the Company to Acquire Property
|
Unaffiliated
Bank (6)
|
$ 3,800
|
$ 3,742
|
07/01/11
|
|
|
|
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 Pemmil Loan Agreement provided that the principal and
unpaid interest were originally due on 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 prepay 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 Agreement). The obligations under
the Pemmil Loan Agreement are secured by a subordinated pledge of the
Company’s equity interest in S2. The Company may prepay all or a portion
of the loan at any time prior to maturity without penalty or premium.
During the nine months ended September 30, 2009, the Company paid $275 of
interest previously 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. The Company is
currently in discussions to extend the due date. The inability of the
Company to refinance or extend such loan on or prior to its maturity date
would have a material adverse effect on the Company’s financial
condition.
|
|
(2)
|
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 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
interest only. An annual principal payment of $50 is required. During
November 2009, the Company negotiated an extension of the maturity of the
loan until June 5, 2012.
|
|
(4)
|
On
January 21, 2009, DVL Holdings entered into a loan agreement, evidenced by
a note, with an unaffiliated third party bank in an aggregate amount of up
to $6,450 pursuant to the first note in the amount of $4,250 and the
second note in the amount of $2,200. DVL Holdings borrowed $4,250 and such
funds were used to repay outstanding borrowings. 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.
|
|
(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 assignment 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 plus 2.1%.
|
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, which is codified in FASB ASC 815, Derivatives and Hedging
(“ASC 815”),
the Company established
accounting and reporting standards for derivative instruments.
Specifically,
ASC 815 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 qualifies as a hedge. The interest rate swap agreements are
generally accounted for on a held to maturity basis and in cases where they are
terminated early, any gain or loss is generally amortized over the remaining
life of the hedged item.
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 September 30, 2009 and December 31, 2008, in the
amount of $180 and $231, respectively. During April 2009, the Company entered
into an interest rate swap agreement related to another of their loans. Valued
separately, the interest rate swap agreement represents a liability as of
September 30, 2009, in the amount of $22. 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 swaps are considered to be
a cash flow hedge and they are effective, the value of the swaps are 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 swaps 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 September 30, 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 agreement
|
$ 3,740
|
5.94%
|
July
1, 2011
|
$
(180)
|
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
thereafter. 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.
|
Hedge
Type
|
Notional
Value
|
Rate
|
Termination
Date
|
Fair
Value
|
|
|
|
|
|
|
|
Interest
rate swap agreement
|
$ 2,161
|
6.09%
|
February
1, 2014
|
$ (22)
|
The
outstanding principal of the Mortgage Note is payable in monthly installments of
$39 beginning on June 1, 2009 and continuing on the first day of each month
thereafter. The final monthly installment of the Mortgage Note is due and
payable at maturity on February 1, 2014 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.
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 as of
September 30, 2009 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 September 30, 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.
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 September 30, 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 September
30, 2009. No misstatements occurred as a result of the material
weakness.
As previously disclosed in an 8-K dated
November 5, 2009, the Company engaged Real Estate Systems Implementation Group,
LLC (“RESIG”), an affiliate of Imowitz Koenig & Co., LLP, the Company’s
former independent registered public accountants, pursuant to which RESIG will
provide substantially all of the Company’s material accounting, financial
statement preparation and bookkeeping functions on an outsourced consulting
basis. We believe this arrangement will positively impact the
effectiveness of our internal control over financial reporting in the
future.
PART
II. OTHER INFORMATION
|
Item
1.
|
Legal
Proceedings
|
None
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.
|
|
Unregistered Sales of
Equity Securities and Use of
Proceeds
|
None
|
|
Defaults Upon Senior
Securities
|
None
|
|
Submission of Matters
to a Vote of Security
Holders
|
None
None
|
|
Exhibits and Report on
Form 8-K:
|
|
Exhibit No.
|
Description of
Document
|
|
|
|
|
10.1
|
Accounting
Services Agreement between DVL, Inc. and Real Estate Systems
Implementation Group, LLC dated November 2, 2009.
|
|
|
|
|
10.2
|
Amendment
to Redeveloper Agreement between the Town of Kearny, New Jersey and DVL,
Inc.
|
|
|
|
|
31.1
|
Principal
Executive Officer’s Certificate, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
31.2
|
Principal
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 the Section 908 of
Sarbanes-Oxley Act of 2002.
|
A Current
Report on Form 8-K, dated November 5, 2009, reporting an Item 4 “Change in
Registrant’s Certifying Accountant” and an Item 5 “Departure of Directors;
Election of Directors; Appointment of Principal Officers” was filed with the
Securities and Exchange Commission.
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/
Neil Koenig
|
|
|
|
Neil
Koenig, Executive Vice President and
Chief
Financial Officer
|
November
18, 2009
