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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
COMMISSION FILE NUMBER 1-2493
New Valley Corporation
(Exact name of registrant as specified in its charter)
DELAWARE 13-5482050
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 S.E. SECOND STREET, 32ND FLOOR
MIAMI, FLORIDA 33131
(Address of principal executive offices) (Zip Code)
(305) 579-8000
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
------ -------
AS OF NOVEMBER 14, 2002, THERE WERE OUTSTANDING 22,436,424 OF THE
REGISTRANT'S COMMON SHARES, $.01 PAR VALUE.
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NEW VALLEY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30,
2002 and December 31, 2001.................................... 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 4
2002 and 2001.................................................
Condensed Consolidated Statement of Changes in
Stockholders' Equity for the nine months ended
September 30, 2002............................................ 5
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2002 and 2001............. 6
Notes to the Condensed Consolidated Financial
Statements .................................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 21
Item 4. Controls and Procedures........................................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 22
Item 2. Changes in Securities and Use of Proceeds......................... 22
Item 6. Exhibits and Reports on Form 8-K.................................. 22
SIGNATURE........................................................................... 23
CERTIFICATIONS...................................................................... 23
-2-
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
September 30, December 31,
------------- ------------
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 101,625 $ 92,069
Investment securities available for sale ........................ 12,812 20,902
Restricted assets ............................................... 518 17,380
Note receivable, net ............................................ -- 1,000
Other current assets ............................................ 50 1,714
--------- ---------
Total current assets ........................................ 115,005 133,065
--------- ---------
Investments in real estate business, net ............................. 7,985 10,581
Convertible note receivable, net ..................................... -- 8,010
Long-term investments, net ........................................... 3,150 10,044
Other assets ......................................................... 139 998
--------- ---------
Total assets ................................................ $ 126,279 $ 162,698
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable and long-term obligations ...... $ -- $ 84
Accounts payable and accrued liabilities ........................ 2,761 7,574
Prepetition claims and restructuring accruals ................... 675 2,700
Income taxes .................................................... 10,219 9,079
--------- ---------
Total current liabilities ................................... 13,655 19,437
--------- ---------
Notes payable ........................................................ -- 11,142
Other long-term liabilities .......................................... 3,300 3,639
Commitments and contingencies ........................................ -- --
Stockholders' equity:
Common Shares, $.01 par value; 100,000,000 and 100,000,000 shares
authorized; 22,881,467 and 22,813,063 shares outstanding ...... 229 228
Additional paid-in capital ...................................... 865,588 864,197
Accumulated deficit ............................................. (747,763) (737,894)
Unearned compensation on stock options .......................... -- (26)
Accumulated other comprehensive (loss) income ................... (8,730) 1,975
--------- ---------
Total stockholders' equity .................................. 109,324 128,480
--------- ---------
Total liabilities and stockholders' equity .................. $ 126,279 $ 162,698
========= =========
See accompanying notes to condensed consolidated financial statements
-3-
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
--------------------------------------------------------------
Three Months Ended Nine Months Ended
--------------------------------------------------------------
September 30, September 30,
--------------------------------------------------------------
2002 2001 2002 2001
--------------------------------------------------------------
Revenues:
Real estate leasing ...................................... $ -- $ 2,538 $ 661 $ 7,604
(Loss) gain on sale of investments, net .................. (25) (287) 2,207 466
Interest and dividend income ............................. 593 644 1,716 2,906
------------ ------------ ------------ ------------
Total ................................................ 568 2,895 4,584 10,976
------------ ------------ ------------ ------------
Cost and expenses:
General and administrative ............................... 2,635 2,810 8,576 9,763
Rental real estate activities, excluding interest ........ -- 2,072 1,499 7,275
Interest expense ......................................... -- 442 338 1,677
------------ ------------ ------------ ------------
Total ................................................ 2,635 5,324 10,413 18,715
------------ ------------ ------------ ------------
Other results from continuing operations:
Equity income from real estate businesses ................ 341 -- 341 --
Gain on sale of real estate .............................. 139 -- 9,048 897
Gain on sale of assets ................................... -- -- -- 250
Provision for loss on net investment in subsidiary ....... -- -- (388) --
Provision for uncollectibility of notes receivable ....... (13,198) -- (13,198) --
Other income (loss) ...................................... -- (6) (10) (133)
------------ ------------ ------------ ------------
Total ................................................ (12,718) (6) (4,207) 1,014
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes
and minority interests ................................... (14,785) (2,435) (10,036) (6,725)
Income tax provision .......................................... -- 220 -- 428
Minority interests in loss from continuing operations
of consolidated subsidiaries ............................. -- (88) (167) (178)
------------ ------------ ------------ ------------
Loss from continuing operations ............................... (14,785) (2,567) (9,869) (6,975)
Discontinued operations:
Loss from discontinued operations, net of minority
interests of $2,636 and $3,734 and income tax benefit
of $2,752 and $3,561 ................................. -- (3,050) -- (4,894)
Gain on disposal of discontinued operations .............. -- -- -- 2,279
------------ ------------ ------------ ------------
Loss from discontinued operations .................... -- (3,050) -- (2,615)
------------ ------------ ------------ ------------
Net loss ...................................................... $ (14,785) $ (5,617) $ (9,869) $ (9,590)
============ ============ ============ ============
Loss per Common Share (basic and diluted):
Continuing operations .................................... $ (0.65) $ (0.12) $ (0.43) $ (0.31)
Discontinued operations .................................. -- (0.13) -- (0.11)
------------ ------------ ------------ ------------
Net loss per Common Share ................................ $ (0.65) $ (0.25) $ (0.43) $ (0.42)
============ ============ ============ ============
Number of shares used in computation .......................... 22,881,467 22,813,063 22,861,677 22,830,662
============ ============ ============ ============
See accompanying notes to condensed
consolidated financial statements
-4-
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Unearned Accumulated
Compensation Other
Common Paid-In Accumulated on Stock Comprehensive
Shares Capital Deficit Options Income (Loss) Total
------ ------- ------- ------- ------------ -----
Balance, December 31, 2001 . $ 228 $ 864,197 $(737,894) $ (26) $ 1,975 $ 128,480
Net loss ................ (9,869) (9,869)
Unrealized loss on
investment securities . (10,705) (10,705)
Exercise of stock options 1 264 265
Reclassification of
dividends payable ..... 711 711
Compensation expense
on stock option grants 416 26 -- 442
--------- --------- --------- --------- --------- ---------
Balance, September 30, 2002 $ 229 $ 865,588 $(747,763) $ -- $ (8,730) $ 109,324
========= ========= ========= ========= ========= =========
See accompanying notes to condensed
consolidated financial statements
-5-
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
------------------------------------
Nine Months Ended
September 30,
------------------------------------
2002 2001
------------------------------------
Cash flows from operating activities:
Net loss................................................................ $ (9,869) $ (9,590)
Adjustments to reconcile net loss to net cash provided from
(used for) operating activities:
Loss from discontinued operations................................... -- 2,615
Depreciation and amortization....................................... 191 1,989
Stock-based compensation expense.................................... 442 699
Gain on sale of investments......................................... (2,207) (466)
Gain on sale of assets.............................................. (8,660) (1,147)
Provision for uncollectibility of notes receivable ................. 13,198 --
Equity earnings in long-term investment............................. (341) --
Minority interests in loss from continuing operations
of consolidated subsidiaries...................................... (167) (179)
Changes in assets and liabilities, net of effects of dispositions:
Decrease in receivables and other assets.......................... 20,544 1,300
Decrease in accounts payable and accrued liabilities.............. (3,994) (3,172)
---------- -------
Net cash provided from (used for) operating activities..................... 9,137 (7,951)
--------- --------
Cash flows from investing activities:
Sale or maturity of investment securities............................. 5,626 10,634
Purchase of investment securities..................................... (6,034) (8,252)
Sale or liquidation of long-term investments.......................... -- 1,133
Purchase of long-term investments..................................... (750) (5,747)
Sale of real estate, net of closing costs............................. 20,461 10,172
Purchase of real estate............................................... (688) (1,213)
Sale of other assets.................................................. -- 250
Cash received in LTS acquisition...................................... -- 8,010
Purchase of LTS common stock.......................................... -- (3,945)
Payment of prepetition claims and restructuring accruals.............. (2,025) (2,634)
Repayment of note receivable.......................................... 1,000 --
Issuance of notes receivable.......................................... (5,000) --
--------- -------------
Net cash provided from investing activities................................ 12,590 8,408
-------- ---------
Cash flows used for financing activities:
Decrease in margin loans payable...................................... -- (2,028)
Proceeds from participating loan...................................... -- 2,478
Repayment of participating loan....................................... (12,400) --
Repayment of notes payable............................................ (36) (16,905)
Issuance of notes payable............................................. -- 9,524
Exercise of stock options............................................. 265 --
Repurchase of Common Shares........................................... -- (274)
------------ ----------
Net cash used for financing activities..................................... (12,171) (7,205)
-------- ---------
Net cash provided from discontinued operations............................. -- 139
------------ ----------
Net increase (decrease) in cash and cash equivalents....................... 9,556 (6,609)
Cash and cash equivalents, beginning of period............................. 92,069 82,067
-------- --------
Cash and cash equivalents, end of period................................... $101,625 $ 75,458
======= ========
See accompanying notes to condensed
consolidated financial statements
-6-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
The consolidated financial statements include the accounts of New Valley
Corporation and its majority-owned subsidiaries ("New Valley" or the
"Company"). The consolidated financial statements as of September 30, 2002
presented herein have been prepared by the Company and are unaudited. In
the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position
as of September 30, 2002 and the results of operations and cash flows for
all periods presented have been made. Results for the interim periods are
not necessarily indicative of the results for the entire year.
These financial statements should be read in conjunction with the
consolidated financial statements in New Valley's Annual Report on Form
10-K for the year ended December 31, 2001 as filed with the Securities and
Exchange Commission (Commission File Number 1-2493).
NATURE OF OPERATIONS
The Company is currently engaged in the real estate business through its
New Valley Realty division and is seeking to acquire additional operating
companies. In December 2001, New Valley determined to sell certain of its
remaining real estate holdings and completed the distribution to its
stockholders of its shares in Ladenburg Thalmann Financial Services Inc.
("LTS"), its former majority-owned subsidiary engaged in the investment
banking and brokerage business. The broker-dealer operations, which were
the primary source of New Valley's revenues since 1995, are treated as
discontinued operations in the consolidated financial statements. As a
result of the foregoing, the statement of operations has been reformatted
and certain prior year amounts have been reclassified to conform to current
year presentation.
Following the distribution of the LTS shares and asset dispositions in
Russia, the business strategy of New Valley is to continue to operate its
real estate business and to acquire operating businesses through merger,
purchase of assets, stock acquisition or other means, or to acquire control
of operating companies through one of such means, with the purpose of being
primarily engaged in a business or businesses other than that of investing,
reinvesting, owning, holding or trading in securities. In the interim, New
Valley's
cash and investment securities (aggregating $114,437 at September 30, 2002)
are available for general corporate purposes, including for acquisition
purposes. Pending any use of these funds in the real estate business or for
acquisitions, New Valley's liquid assets have been invested consistent with
the preservation of their value.
The Investment Company Act and its regulations generally impose substantive
restrictions on a company that owns "investment securities" having a value
in excess of 40% of the company's "total assets". New Valley, which is now
above this threshold following the distribution of LTS and asset
dispositions in Russia, has been relying since December 2001 on the
one-year exemption from registration under the Investment Company Act
provided by Rule 3a-2. New Valley will attempt to be engaged, within the
one-year period prescribed by Rule 3a-2, primarily in a business or
businesses other than that of investing, reinvesting, owning, holding or
trading in securities. If the Company were required to register under the
Investment Company Act, it would be subject to a number of severe
substantive restrictions on its operations, capital structure and
management. For example, it would also be prohibited from issuing
convertible securities and options and would be subject to limitations on
leverage. The Company is currently seeking to increase its ownership in
various real estate businesses and to acquire additional operating
businesses so as to avoid being required to register under the Investment
Company Act.
-7-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior interim period financial
information to conform to the current interim period presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", and requires (i) the recognition and
measurement of the impairment of long-lived assets to be held and used and
(ii) the measurement of long-lived assets to be disposed of by sale. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001.
The adoption of this statement did not impact on the Company's consolidated
financial statements for the three and nine months ended September 30,
2002.
2. INVESTMENTS IN REAL ESTATE BUSINESS
Shopping Center
New Valley disposed of its remaining U.S. shopping center in May 2002 and
recorded a gain of $139 and $564 for the three and nine months ended
September 30, 2002, respectively, which represented the shopping center's
negative book value, in connection with the disposal. No proceeds were
received in the disposal.
Russian Real Estate
On April 30, 2002, New Valley sold the shares of BrookeMil Ltd.
("BrookeMil") for approximately $22,000 before closing expenses. BrookeMil
owned the two Kremlin sites in Moscow, which were the Company's remaining
real estate holdings in Russia. Under the terms of the Western Realty Repin
LLC participating loan to BrookeMil, New Valley received approximately
$7,400 of the net proceeds from the sale and Apollo Real Estate Investment
Fund III, L.P. received approximately $12,400 of the proceeds. These
amounts are subject to adjustment based on final closing expenses. New
Valley recorded a gain on the sale of real estate of $8,484 in the second
quarter of 2002 in connection with the sale. New Valley also recorded
approximately $767 in additional general and administrative expenses
in the second quarter of 2002 related to the closing of its Russian
operations. The expenses consisted principally of employee severance.
Hawaiian Hotel
In 2001, together with developer Brickman Associates and other investors,
New Valley acquired control of the former Kona Surf Hotel in Kailua-Kona,
Hawaii. Following a major renovation, the property is scheduled to reopen
in 2004 as a Sheraton resort. The Company, which holds a 50% interest in
the hotel, has invested $5,900 in the project and is required to make
additional investments of up to an aggregate of $6,600 at September 30,
2002.
-8-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Residential Brokerage Business
During 2000 and 2001, New Valley acquired for approximately $2,000 a 37.2%
ownership interest in Prudential Long Island Realty ("Realty"), the largest
independently owned and operated real estate brokerage company on Long
Island, and a minority interest in an affiliated mortgage company. New
Valley is currently in negotiations to increase its ownership interest to
50% for a further investment of approximately $1,400. New Valley has also
engaged in discussions to provide additional financing to Realty to fund
potential acquisitions.
The Company accounts for its investments in the Kona Surf Hotel, Realty and
affiliated entities under the equity method. New Valley recorded income of
$341 in the third quarter of 2002 associated with such investments.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at fair
value, with net unrealized gains included as a component of stockholders'
equity. The Company had realized (losses) gains on sales of investment
securities available for sale of $(25) and $2,207 for the three and nine
months ended September 30, 2002, respectively, and $(287) and $(417) for
the three and nine months ended September 30, 2001, respectively.
The components of investment securities available for sale, which were all
equity securities, at September 30, 2002 are as follows:
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
Investment securities.......................... $21,542 $ 9 $ 8,739 $12,812
======= ========== ======== =======
4. RESTRICTED ASSETS
Restricted assets at December 31, 2001 consisted primarily of $16,856 held
in escrow by the United States District Court of New Jersey in connection
with a settlement of a lawsuit which cash was released to the Company in
March 2002.
5. NOTES RECEIVABLE
In March 2002, LTS borrowed $2,500 from New Valley. The loan, which bears
interest at 1% above the prime rate, is due on the earlier of December 31,
2003 or the completion of one or more equity financings where LTS receives
at least $5,000 in total proceeds. In July 2002, LTS borrowed an additional
$2,500 from New Valley on the same terms. In May 2002, LTS filed a
registration statement for a proposed rights offering to the holders of its
outstanding common stock, convertible notes, warrants and options. The
Company advised LTS that it would purchase up to $5,000 of LTS common stock
in the rights offering if such shares were otherwise unsubscribed for. A
portion of the proceeds from the rights offering was to be used to repay
the $5,000 of loans from the Company. In August 2002, Ladenburg announced
that it had postponed the rights offering due to market conditions.
New Valley evaluated its ability to collect the $13,198 of notes and
interest receivable from LTS at September 30, 2002. These notes receivable
include the $5,000 of notes discussed above and a $8,010 convertible note
issued to New Valley in May 2002 in connection with the LTS acquisition.
Management determined, based on current trends in the broker-dealer
industry and Ladenburg's
-9-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
operating results and liquidity needs, that a reserve for uncollectibility
should be established against these notes and interest receivable. As a
result, New Valley recorded a charge of $13,198 in the third quarter of
2002.
On October 8, 2002, LTS borrowed an additional $2,000 from New Valley. The
loan, which bears interest at 1% above prime rate, matures the earlier of
December 31, 2002, the date after LTS receives its federal income tax
refund for the fiscal year ended September 30, 2002, or the next business
day after LTS receives a loan from an affiliate of its clearing broker in
connection with the conversion of additional business to this broker. The
terms of this loan restrict LTS from incurring or assuming any indebtedness
that is not subordinated to the loan so long as the loan is outstanding.
6. LONG-TERM INVESTMENTS
At September 30, 2002, long-term investments consisted primarily of
investments in limited partnerships of $3,150. In the nine months ended
September 30, 2001, the Company recognized a gain of $883 on the
liquidation of an investment in a limited partnership. The Company is
required to make additional investments in one of the limited partnerships
of up to $987 at September 30, 2002. The Company believes the fair value of
the limited partnerships exceeds their carrying amount by approximately
$7,275 based on the indicated market values of the underlying investment
portfolio provided by the partnerships. The Company's estimate of the fair
value of its long-term investments are subject to judgment and are not
necessarily indicative of the amounts that could be realized in the current
market. The Company's investments in limited partnerships are illiquid, and
the ultimate realization of these investments is subject to the performance
of the underlying partnership and its management by the general partners.
7. OTHER LONG-TERM LIABILITIES
The components of other long-term liabilities at September 30, 2002 are as
follows:
LONG-TERM CURRENT
PORTION PORTION
------- -------
Retiree and disability obligations.............. $ 3,062 $ 500
Minority interests.............................. (28) --
Note payable for Western Realty
Development Class A interests............... 228 --
Other long-term liabilities..................... 38 --
------- -----------
Total other long-term liabilities............... $ 3,300 $ 500
===== =========
8. CONTINGENCIES
Lawsuits
In March 1997, a stockholder derivative suit was filed against the Company,
as a nominal defendant, its directors and Brooke Group Holding Inc.
("Brooke Group Holding"), an indirect wholly-owned subsidiary of Vector
Group Ltd., the Company's principal stockholder, in the Delaware Chancery
Court by a stockholder of the Company. The suit alleges that the Company's
purchase of the BrookeMil shares from Brooke (Overseas) Ltd., which was
then an indirect subsidiary of Brooke Group Holding, in January 1997
constituted a self-dealing transaction which involved the payment of
excessive consideration by the Company. The plaintiff seeks a declaration
that the Company's directors breached their fiduciary duties and Brooke
Group Holding aided and abetted such breaches and that damages be awarded
to the Company. In December 1999, another stockholder of the Company
commenced an action in Delaware Chancery Court substantially similar
-10-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
to the March 1997 action. This stockholder alleges, among other things,
that the consideration paid by the Company for the BrookeMil shares was
excessive, unfair and wasteful, that the special committee of the Company's
board lacked independence, and that the appraisal and fairness opinion were
flawed. By order of the court, both actions were consolidated. In January
2001, the court denied a motion to dismiss the consolidated action. Brooke
Group Holding and the Company believe that the allegations in the case are
without merit. Discovery in the case has commenced.
In July 1999, a purported class action was commenced on behalf of the
Company's former Class B preferred shareholders against the Company, Brooke
Group Holding and certain directors and officers of the Company in Delaware
Chancery Court. The complaint alleges that the recapitalization, approved
by a majority of each class of the Company's stockholders in May 1999, was
fundamentally unfair to the Class B preferred shareholders, the proxy
statement relating to the recapitalization was materially deficient and the
defendants breached their fiduciary duties to the Class B preferred
shareholders in approving the transaction. The plaintiffs seek class
certification of the action and an award of compensatory damages as well as
all costs and fees. The Court has dismissed six of plaintiff's nine claims
alleging inadequate disclosure in the proxy statement. Brooke Group Holding
and the Company believe that the remaining allegations are without merit.
Discovery in the case has commenced.
Although there can be no assurances, in the opinion of management, after
consultation with counsel, the ultimate resolution of these matters will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
As of September 30, 2002, New Valley had $675 of prepetition
bankruptcy-related claims and restructuring accruals including claims for
lease rejection damages. The remaining claims may be subject to future
adjustments based on potential settlements or decisions of the court. On
August 8, 2002, the Company paid $2,000 to settle a claim for unclaimed
monies that certain states were seeking on behalf of money transfer
customers and the restructuring accruals were reduced by a corresponding
amount in the third quarter of 2002. In connection with the settlement, in
the second quarter of 2002, the Company reclassified $711 of accrued
dividends to stockholders' equity.
-11-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
9. BUSINESS SEGMENT INFORMATION
The following table presents certain financial information of the Company's
continuing operations before taxes and minority interests as of and for the
three and nine months ended September 30, 2002 and 2001. The corporate and
other segment includes identifiable assets of $94,406 at September 30,
2001, previously classified in the broker-dealer segment, which was
discontinued and disposed of, effective December 20, 2001.
CORPORATE
REAL ESTATE AND OTHER TOTAL
----------- --------- -----
Three months ended September 30, 2002
Revenues............................... $ -- $ 568 $ 568
Other income (loss).................... 480 (13,198) (12,718)
Operating income (loss)................ 484 (15,269) (14,785)
Depreciation and
amortization........................ -- -- --
Three months ended September 30, 2001
Revenues............................... 2,538 357 2,895
Other loss............................. -- (6) (6)
Operating income (loss)................ 20 (2,455) (2,435)
Depreciation and
amortization........................ 661 -- 661
Nine months ended September 30, 2002
Revenues............................... 661 3,923 4,584
Other income (loss).................... 9,389 (13,596) (4,207)
Operating income (loss)................ 8,555 (18,591) (10,036)
Identifiable assets.................... 9,500 116,779 126,279
Depreciation and
amortization........................ 191 -- 191
Capital expenditures................... 688 -- 688
Nine months ended September 30, 2001
Revenues............................... 7,604 3,372 10,976
Other income........................... 897 117 1,014
Operating loss......................... (461) (6,264) (6,725)
Identifiable assets.................... 131,993 182,479 314,472
Depreciation and
amortization........................ 1,989 -- 1,989
Capital expenditures................... 1,213 -- 1,213
-12-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
10. DISCONTINUED OPERATIONS
Ladenburg Thalmann Financial Services Inc.
On December 20, 2001, New Valley distributed its 53.6% interest in LTS
common stock to holders of New Valley common shares through a special
dividend. New Valley stockholders received 0.988 of a LTS share for
each share of New Valley.
The consolidated financial statements of New Valley for 2001 have been
reclassified to reflect as discontinued operations New Valley's
broker-dealer operations. Accordingly, revenues, costs and expenses,
and cash flows of the discontinued operations have been excluded from
the respective captions in the consolidated statements of operations
and consolidated statements of cash flows. The net operating results of
these entities have been reported, net of applicable income taxes and
minority interests, as "Loss from discontinued operations", and the net
cash flows of these entities have been reported as "Net cash provided
from discontinued operations".
Summarized operating results of the discontinued broker-dealer
operations for the three and nine months ended September 30, 2001 are
as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
Revenues .................................... $ 18,054 $ 58,376
Expenses .................................... 26,492 70,565
-------- --------
Operating loss before income
taxes and minority interests ............ $ (8,438) $(12,189)
======== ========
Gain from Discontinued Operations
The Company recorded a gain on disposal of discontinued operations of
$2,279 for the nine months ended September 30, 2001 related to the
adjustment of accruals established during the Company's bankruptcy
proceedings in 1993 and 1994. The reversal of these accruals reduced
various tax accruals previously established.
11. COMPREHENSIVE INCOME
Comprehensive income of the Company includes net income and net changes
in the value of investment securities available for sale that have not
been included in net income. Comprehensive loss applicable to common
shares for the three and nine months ended September 30, 2002 and 2001
is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net loss ....................... $(14,785) $ (5,617) $ (9,869) $ (9,590)
Net change in unrealized gain
on investment securities .... (8,881) (7,285) (10,705) (5,556)
-------- -------- -------- --------
Comprehensive loss .......... $(23,666) $(12,902) $(20,574) $(15,146)
======== ======== ======== ========
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTRODUCTION
For the three and nine months ended September 30, 2002, the results of
continuing operations of New Valley's primary operating units include the
accounts of BrookeMil Ltd., a wholly-owned subsidiary, and other subsidiaries.
For the three and nine months ended September 30, 2001, the results of
continuing operations of New Valley's primary operating units include the
accounts of BrookeMil and Western Realty Investments LLC, a 99%-owned
subsidiary, and other subsidiaries.
RECENT DEVELOPMENTS
Distribution of Ladenburg Thalmann Financial Services Shares. On
December 20, 2001, New Valley distributed its 22,543,158 shares of Ladenburg
Thalmann Financial Services Inc. common stock, a 53.6% interest, to holders of
New Valley common shares through a special dividend. New Valley stockholders
received 0.988 of a Ladenburg Thalmann Financial Services share for each share
of New Valley. As a result, results from broker-dealer operations for the three
and nine months ended September 30, 2001 have been reclassified as "Loss from
Discontinued Operations".
Sale of Western Realty Investments. On December 21, 2001, Western
Realty Development LLC sold to Andante Limited, a Bermuda company, all of the
membership interests in its subsidiary Western Realty Investments, the entity
through which Western Realty Development owned the Ducat Place II office
building and the adjoining Ducat Place III site in Moscow, Russia. The purchase
price for the sale was approximately $42,000 including the assumption of
mortgage debt and payables. Of the net cash proceeds from the sale, New Valley
received approximately $21,000, and Apollo received approximately $9,000. These
amounts are subject to adjustment based on final closing expenses.
Sale of BrookeMil. On April 30, 2002, New Valley sold the shares of
BrookeMil for approximately $22,000 before closing expenses. BrookeMil owned the
two Kremlin sites in Moscow, which were the Company's remaining real estate
holdings in Russia. Under the terms of the Western Realty Repin LLC
participating loan to BrookeMil, New Valley received approximately $7,400 of the
net proceeds from the sale and Apollo Real Estate Investment Fund III, L.P.
received approximately $12,400 of the proceeds. These amounts are subject to
adjustment based on final closing expenses. New Valley recorded a gain on sale
of real estate of $8,484 for the nine months ended September 30, 2002 in
connection with the sale. New Valley also recorded $767 in additional general
and administrative expenses in the second quarter of 2002 related to the closing
of its Russian operations. The expenses consisted principally of employee
severance.
Shopping Center. New Valley disposed of its remaining U.S. shopping
center in May 2002 and recorded a gain of $564 for the nine months ended
September 30, 2002, which represented the shopping center's negative book value,
in connection with the disposal. No proceeds were received in the disposal.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 2 of New Valley's consolidated financial statements
in its Annual Report on Form 10-K for the year ended December 31, 2001 as filed
with the Securities and Exchange Commission included a summary of the
significant accounting policies and methods used in the preparation of its
consolidated financial statements. The following is a brief discussion of the
more significant accounting policies and methods used by New Valley.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
General. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
Long-Term Investments. At September 30, 2002, New Valley had long-term
investments of $3,150, representing investments in various limited partnerships.
The principal business of the limited partnerships is investing in investment
securities. These long-term investments are illiquid, and the value of the
investments is dependant on the performance of the underlying partnership and
its management by the general partners. In assessing potential impairment for
these investments, New Valley considers the external markets for these types of
investments as well as the forecasted financial performance of its investees. If
these forecasts are not met, New Valley may have to recognize an impairment
charge in its statement of operations.
Income Taxes. The year 2000 was the only year out of the last five in
which New Valley has reported net income. New Valley's losses during these and
prior years have generated federal tax net operating loss, or NOL, carryforwards
of approximately $124,000 as of September 30, 2002 and capital loss
carryforwards of $52,500, which expire at various dates from 2002 through 2021.
Generally accepted accounting principles require that New Valley record a
valuation allowance against the deferred tax asset associated with these loss
carryforwards if it is "more likely than not" that New Valley will not be able
to utilize it to offset future taxes. Due to the size of the loss carryforwards
in relation to New Valley's history of unprofitable operations and to the
continuing uncertainties surrounding its operations as it seeks to acquire
additional operating companies, New Valley has not recognized any of this net
deferred tax asset. New Valley currently provides for income taxes only to the
extent that it expects to pay cash taxes (primarily state taxes and the federal
alternative minimum tax) for current income.
It is possible, however, that New Valley could be profitable in the
future at levels which cause management to conclude that it is more likely than
not that it will realize all or a portion of the carryforwards. Upon reaching
such a conclusion, New Valley would immediately record the estimated net
realizable value of the deferred tax asset at that time and would then provide
for income taxes at a rate equal to its combined federal and state effective
rates, which would approximate 40% under current tax rates, rather than the
nominal rate currently being used. Subsequent revisions to the estimated net
realizable value of the deferred tax asset could cause New Valley's provision
for income taxes to vary significantly from period to period, although its cash
tax payments would remain unaffected until the benefit of the loss carryforwards
is utilized.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS
For the three and nine months ended September 30, 2002, the results of
operations of New Valley's primary operating units, which include New Valley's
U.S. shopping centers and BrookeMil (real estate), are summarized below. For the
three and nine months ended September 30, 2001, the results of operations of New
Valley's primary operating units, which include New Valley's U.S. shopping
centers, Western Realty Investments and BrookeMil (real estate), are summarized
below.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
-------- ------- -------- -------
Real estate:
Revenues ........................... $ -- $ 2,538 $ 661 $ 7,604
Expenses ........................... (4) 2,518 1,495 7,168
Other income ....................... 480 -- 9,389 897
-------- ------- -------- -------
Operating income (loss) before
taxes and minority interests .... $ 484 $ 20 $ 8,555 $ (461)
======== ======= ======== =======
Corporate and other:
Revenues ........................... $ 568 $ 357 $ 3,923 $ 3,372
Expenses ........................... 2,639 2,806 8,918 9,753
Other income (loss) ................ (13,198) (6) (13,596) 117
-------- ------- -------- -------
Operating loss before taxes
and minority interests .......... $(15,269) $(2,455) $(18,591) $(6,264)
======== ======= ======== =======
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2001
Consolidated total revenues were $568 for the three months ended
September 30, 2002 versus $2,895 for the same period last year. The decrease in
revenues of $2,327 is attributable primarily due to the sale of Western Realty
Investments and the disposal of Kanawha Mall LLC.
There were no revenues from the real estate operations for the three
months ended September 30, 2002 compared to revenues of $2,538 for the 2001
period. The decrease is due to the absence of rental revenue of $2,067 from
Western Realty Investments, which was sold in December 2001, and $471 from New
Valley's remaining shopping center, which was disposed of in May 2002. Expenses
of the real estate operations decreased as a result of the sale of Western
Realty Investments, the disposal of the shopping center and the sale of
BrookeMil in 2002.
For the three months ended September 30, 2002, New Valley's revenues of
$568 related to corporate and other activities consisted of interest and
dividend income of $593 and net losses on investments of $25. For the same
period in the prior year, revenues related to corporate and other activities
were $357, which consisted of interest and dividend income of $644 offset by net
losses on investments of $287.
Corporate and other expenses of $2,639 for the three months ended
September 30, 2002 consisted primarily of employee compensation and benefits of
$1,394. Corporate and other expenses of $2,806 for the third quarter of 2001
consisted primarily of employee compensation and benefits of $1,679.
New Valley evaluated its ability to collect $13,198 of notes and
interest receivable from LTS at September 30, 2002. New Valley determined, based
on current trends in the broker-dealer industry and Ladenburg's operating
results and liquidity needs, that a reserve for uncollectibility should be
established against
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
these notes and interest receivable. As a result, New Valley recorded a charge
of $13,198 in the third quarter of 2002.
There was no income tax for the three months ended September 30, 2002.
The income tax provision related to the three months ended September 30, 2001
related to Russian income tax expense at Western Realty Investments. The
effective tax rate does not bear a customary relationship with pre-tax
accounting income principally as a consequence of changes in the valuation
allowance relating to deferred tax assets.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2001
Consolidated total revenues were $4,584 for the nine months ended
September 30, 2002 versus $10,976 for the same period last year. The decrease in
revenues of $6,392 is attributable primarily due to the sale of Western Realty
Investments and the disposal of New Valley's remaining shopping center offset by
increased net gains on the sale of investments.
Revenues from the real estate operations for the nine months ended
September 30, 2002 decreased $6,943 primarily due to the absence of rental
revenue of $6,111 from Western Realty Investments, which was sold in December
2001, and New Valley's remaining shopping center, which was disposed of in May
2002. Expenses of the real estate operations decreased $5,673 in the 2002 period
due primarily to lower expenses as a result of the sale of Western Realty
Investments and the shopping center. New Valley recorded gains on sale of real
estate for the nine months ended September 30, 2002 of $8,484 in connection with
the April 2002 sale of BrookeMil and $564 from the disposal of the shopping
center. New Valley also recorded $767 in additional general and administrative
expenses for the nine months ended September 30, 2002 related to the closing of
its Russian operations. The expenses consisted principally of employee
severance. BrookeMil incurred expenses of $406 for the nine month period ended
September 30, 2001, respectively, in connection with the development of the
Kremlin sites.
For the nine months ended September 30, 2002, New Valley's revenues of
$3,923 related to corporate and other activities consisted of net gains on
investments of $2,207 and interest and dividend income of $1,716. For the same
period in the prior year, revenues related to corporate and other activities
were $3,372, which consisted of net gains on investments of $466 and interest
and dividend income of $2,906. The decrease in interest and dividend income is
due primarily to lower interest rates in 2002 versus 2001 offset by higher cash
balances in the 2002 period.
Corporate and other expenses of $8,918 for the nine months ended
September 30, 2002 consisted primarily of employee compensation and benefits of
$4,631. Corporate and other expenses of $9,753 for the nine months ended
September 30, 2001 consisted primarily of employee compensation and benefits of
$5,226.
New Valley recorded a $388 charge for the nine months ended September
30, 2002 related to a provision for loss on its net investment in its 72.7%
subsidiary, ThinkCorp Holdings Corporation, formerly known as Thinking Machines
Corporation. In June 1999, ThinkCorp Holdings sold substantially all of its
assets, consisting of its Darwin(R) software and services business, to Oracle
Corporation. The purchase price included a contingent payable of $20,300 based
on sales by Oracle of the Darwin product above specified sales targets during a
three-year period. Based on Oracle having informed ThinkCorp Holdings that the
specified sales targets for the 2000 and 2001 periods were not achieved and the
overall market conditions in the U.S. computer industry, New Valley determined
it was more likely than not that it would not recover its investment in
ThinkCorp Holding.
New Valley evaluated its ability to collect $13,198 of notes and
interest receivable from LTS at September 30, 2002. New Valley determined, based
on current trends in the broker-dealer industry and Ladenburg's operating
results and liquidity needs, that a reserve for uncollectibility should be
established against these notes and interest receivable. As a result, New Valley
recorded a charge of $13,198 in the third quarter of 2002.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
There was no income tax for the nine months ended September 30, 2002.
The income tax provision related to the nine months ended September 30, 2001
related to Russian income tax expense at Western Realty Investments. The
effective tax rate does not bear a customary relationship with pre-tax
accounting income principally as a consequence of the change in the valuation
allowance relating to deferred tax assets.
DISCONTINUED OPERATIONS
Ladenburg Thalmann Financial Services. On December 20, 2001, New Valley
distributed its 53.6% interest in Ladenburg Thalmann Financial Services common
stock to holders of New Valley common shares through a special dividend. New
Valley stockholders received 0.988 of a Ladenburg Thalmann Financial Services
share for each share of New Valley.
The consolidated financial statements of New Valley for 2001 have been
reclassified to reflect as discontinued operations New Valley's broker-dealer
operations. Accordingly, revenues, costs and expenses, and cash flows of the
discontinued operations have been excluded from the respective captions in the
consolidated statements of operations and consolidated statements of cash flows.
The net operating results of these entities have been reported, net of
applicable income taxes and minority interests, as "Loss from discontinued
operations," and the net cash flows of these entities have been reported as "Net
cash provided from discontinued operations."
Summarized operating results of the discontinued broker-dealer
operations for the three and nine months ended September 30, 2001 are as
follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
Revenues ............................... $ 18,054 $ 58,376
Expenses ............................... 26,492 70,565
-------- --------
Operating loss before income
taxes and minority interests ....... $ (8,438) $(12,189)
======== ========
Gain on Disposal of Discontinued Operations. New Valley recorded a gain
on disposal of discontinued operations of $2,279 in the nine months ended
September 30, 2001 related to the adjustment of accruals established during the
Company's bankruptcy proceedings in 1993 and 1994. The reversal of these
accruals reduced various tax accruals previously established.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2002, New Valley's cash and
cash equivalents increased from $92,069 to $101,625 due primarily to the receipt
of $17,551 in the first quarter related to a lawsuit, which was settled in the
fourth quarter of 2001.
Cash provided from operating activities for the nine months ended
September 30, 2002 was $9,137 compared with cash used for operating activities
for the nine months ended September 30, 2001 of $7,951. The difference is
primarily due to the receipt of $17,551 from the lawsuit.
The lawsuit settlement resulted from litigation, which arose out of the
insurers' participation in a program of insurance covering the amount of fuel in
the Westar IV and V communication satellites owned by New Valley's former
Western Union satellite business, which was sold in 1989. The two satellites,
each of which were launched in 1982 with an expected ten year life, had
shortened lives due to insufficient fuel. In the settlement, New Valley received
payment from the insurers for the shortened lives of the two satellites.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Cash provided from investing activities for the nine months ended
September 30, 2002 was $12,590 compared to $8,408 for the nine months ended
September 30, 2001. The difference is primarily attributable to the sale of
BrookeMil for $20,461, net of closing expenses, in 2002, net purchases of
marketable securities and long-term investments of $1,158 in 2002 versus net
sales of investment securities of $2,232 in 2001 and payment of restructuring
accruals of $2,025 in 2002 versus $2,634 in 2001. The amounts were offset by the
sale of one of New Valley's two shopping centers for $9,172 in 2001, cash
received of $8,010 in the LTS acquisition in 2001 and the issuance of $5,000 of
notes receivable to LTS in 2002.
As of September 30, 2002, New Valley had $675 of prepetition
bankruptcy-related claims and restructuring accruals including claims for lease
rejection damages. The remaining claims may be subject to future adjustments
based on potential settlements or decisions of the court. On August 8, 2002, the
Company paid $2,000 to settle a claim for unclaimed monies that certain states
were seeking on behalf of money transfer customers and the restructuring
accruals were reduced by a corresponding amount in the third quarter of 2002. In
connection with the settlement, in the second quarter of 2002, the Company
reclassified $711 of accrued dividends to stockholders' equity.
In March 2002, LTS borrowed $2,500 from New Valley. The loan, which
bears interest at 1% above the prime rate, is due on the earlier of December 31,
2003 or the completion of one or more equity financings where LTS receives at
least $5,000 in total proceeds. In July 2002, LTS borrowed an additional $2,500
from New Valley on the same terms. In May 2002, LTS filed a registration
statement for a proposed rights offering to the holders of its outstanding
common stock, convertible notes, warrants and options. The Company advised LTS
that it would purchase up to $5,000 of LTS common stock in the rights offering
if such shares were otherwise unsubscribed for. A portion of the proceeds from
the rights offering was to be used to repay the $5,000 of loans from the
Company. In August 2002, Ladenburg announced it had postponed the rights
offering due to market conditions.
New Valley evaluated its ability to collect the $13,198 of notes and
interest receivable from LTS at September 30, 2002. These notes receivable
include the $5,000 of notes discussed above and a $8,010 convertible note issued
to New Valley in May 2002 in connection with the LTS acquisition. New Valley
determined, based on current trends in the broker-dealer industry and
Ladenburg's operating results and liquidity needs, that a reserve for
uncollectibility should be established against these notes and interest
receivable. As a result, New Valley recorded a charge of $13,198 in the third
quarter of 2002.
On October 8, 2002, LTS borrowed an additional $2,000 from New Valley.
The loan, which bears interest at 1% above prime rate, matures the earlier of
December 31, 2002, the date after LTS receives its federal income tax refund for
the fiscal year ended September 30, 2002, or the next business day after LTS
receives a loan from an affiliate of its clearing broker in connection with the
conversion of additional business to this broker. The terms of the New Valley
loan restrict LTS from incurring or assuming any indebtedness that is not
subordinated to the loan so long as the loan is outstanding.
In April 2002, New Valley sold the shares of BrookeMil for
approximately $22,000 before closing expenses. New Valley recorded a gain of
approximately $8,484 in the second quarter of 2002 in connection with the sale.
New Valley holds a 50% interest in the former Kona Surf Hotel in
Kailua-Kona, Hawaii. Following a major renovation, the property is scheduled to
reopen in 2004 as a Sheraton resort. The Company is required to make additional
investments of up to an aggregate of $6,600 at September 30, 2002 in the
project. The Company is also required to make additional investments in another
limited partnership of up to $987 at September 30, 2002.
The Company is currently in negotiations to increase its ownership
interest in Prudential Long Island Realty and its affiliated mortgage company to
50% for a further investment of approximately $1,400. New Valley has also
engaged in discussions to provide additional financing to Realty to fund
potential acquisitions.
Cash flows used in financing activities were $12,171 for the nine
months ended September 30, 2002 and $7,205 for the nine months ended September
30, 2001. The 2002 amount primarily consists of the repayment of
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
the participating loan to Apollo in connection with the sale of BrookeMil. The
2001 amount primarily consists of the repayment of notes payable of $16,905 in
connection with the sale of a shopping center in January 2001, the refinancing
of Western Realty's note payable and a decrease in margin loans payable of
$2,208. The 2001 amount also included cash provided from financing activities of
$2,478 in connection with borrowings under the participating loan.
On October 5, 1999, New Valley's Board of Directors authorized the
repurchase of up to 2,000,000 Common Shares from time to time on the open market
or in privately negotiated transactions depending on market conditions. As of
November 13, 2002, New Valley had repurchased 867,043 shares for approximately
$3,344.
New Valley expects that its available working capital will be
sufficient to fund its currently anticipated cash requirements for 2002,
including the currently anticipated cash requirements of its operating
businesses, investments and commitments.
MARKET RISK
Market risk generally represents the risk of loss that may result from
the potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates, equity and commodity
prices, changes in the implied volatility of interest rate, foreign exchange
rate, equity and commodity prices and also changes in the credit ratings of
either the issuer or its related country of origin. Market risk is inherent to
both derivative and non-derivative financial instruments, and accordingly, the
scope of New Valley's market risk management procedures extends beyond
derivatives to include all market risk sensitive financial instruments.
Equity Price Risk
New Valley held investment securities available for sale totaling
$12,812 at September 30, 2002. Adverse market conditions could have a
significant effect on the value of New Valley's investments.
New Valley also holds long-term investments in limited partnerships and
limited liability companies. These investments are illiquid, and their ultimate
realization is subject to the performance of the investee entities.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
New Valley and its representatives may from time to time make oral or
written "forward-looking statements" within the meaning of the Private
Securities Reform Act of 1995, including any statements that may be contained in
the foregoing "Management's Discussion and Analysis of Financial Condition and
Results of Operations", in this report and in other filings with the Securities
and Exchange Commission and in its reports to stockholders, which represent New
Valley's expectations or beliefs with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties and, in connection with the "safe-harbor" provisions of the
Private Securities Reform Act, New Valley has identified under "Risk Factors" in
Item 1 of New Valley's Form 10-K for the year ended December 31, 2001 filed with
the Securities and Exchange Commission and in this section important factors
that could cause actual results to differ materially from those contained in any
forward-looking statements made by or on behalf of New Valley.
New Valley's operating businesses are subject to intense competition,
changes in consumer preferences, and local economic conditions. New Valley
Realty is additionally subject to the uncertainties relating to the real estate
business, including, without limitation, required capital improvements to
facilities, local real estate market conditions and federal, state, city and
municipal laws and regulations concerning, among others, zoning and
environmental matters. Uncertainties affecting New Valley generally include,
without limitation, the effect of market conditions on the salability of New
Valley's investment securities, the uncertainty of other potential acquisitions
and investments by New Valley, the effects of governmental regulation on New
Valley's ability to target and/or consummate any such acquisitions and the
effects of limited management experience in areas in which New Valley may become
involved.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Results actually achieved may differ materially from expected results
included in these forward-looking statements as a result of these or other
factors. Due to such uncertainties and risks, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date on which such statements are made. New Valley does not undertake to update
any forward-looking statement that may be made from time to time on behalf of
New Valley.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Market Risk" is incorporated
herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of New Valley's
management, including its principal executive officer and principal financial
officer, New Valley has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures within 90 days of the filing date of
this quarterly report, and, based on their evaluation, its principal executive
officer and principal financial officer have concluded that these controls and
procedures are effective. There were no significant changes in New Valley's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
Disclosure controls and procedures are New Valley's controls and other
procedures that are designed to ensure that information required to be disclosed
by it in the reports that it files or submits 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 by it in the reports that it
files under the Exchange Act is accumulated and communicated to its management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding disclosure.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 8 to the "Notes to the Condensed Quarterly Consolidated
Financial Statements" in Part I, Item 1 to this Report.
Item 2. Changes in Securities and Use of Proceeds
No securities of the Company which were not registered under the
Securities Act of 1933, as amended, have been issued or sold by the
Company during the three months ended September 30, 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer, Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer, Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW VALLEY CORPORATION
(Registrant)
Date: November 14, 2002 By: /s/ J. Bryant Kirkland III
----------------------------
J. Bryant Kirkland III
Vice President, Treasurer
and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
CERTIFICATION
I, Bennett S. LeBow, certify that:
1. I have reviewed this quarterly report on Form 10-Q of New Valley
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
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a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Bennett S. LeBow
------------------------------------
Bennett S. LeBow
Chairman and Chief Executive Officer
25
CERTIFICATION
I, J. Bryant Kirkland III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of New Valley
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
26
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ J. Bryant Kirkland III
------------------------------------------
J. Bryant Kirkland III
Vice President and Chief Financial Officer
27