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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 MARCH 31, 2003
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 [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER
(AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
AS OF MAY 14, 2003, THERE WERE OUTSTANDING 22,117,852 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 THREE MONTHS ENDED MARCH 31, 2003
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31,
2003 and December 31, 2002.................................... 3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 2003 and 2002................ 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity for the three months
ended March 31, 2003.......................................... 5
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2003 and 2002................ 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...................................................................... 24
-2-
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
March 31, December 31,
2003 2002
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 68,555 $ 82,113
Investment securities available for sale ........................ 12,567 13,391
Restricted assets ............................................... 1,199 1,811
Other current assets ............................................ 456 402
--------- ---------
Total current assets ........................................ 82,777 97,717
--------- ---------
Investments in real estate, net ...................................... 53,909 54,208
Investments in non-consolidated real estate businesses ............... 16,592 7,808
Restricted assets .................................................... 172 168
Furniture and equipment, net ......................................... 35 35
Long-term investments, net ........................................... 2,588 3,150
Other assets ......................................................... 434 462
--------- ---------
Total assets ................................................ $ 156,507 $ 163,548
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of mortgage note payable ........................ $ 644 $ 644
Accounts payable and accrued liabilities ........................ 3,142 5,741
Prepetition claims and restructuring accruals ................... 657 674
Income taxes .................................................... 10,476 10,499
--------- ---------
Total current liabilities ................................... 14,919 17,558
--------- ---------
Mortgage note payable ................................................ 39,749 39,856
Other long-term liabilities .......................................... 2,988 3,077
Commitments and contingencies ........................................ -- --
Stockholders' equity:
Common Shares, $.01 par value; 100,000,000 and 100,000,000 shares
authorized; 22,117,852 and 22,436,424 shares outstanding ...... 221 224
Additional paid-in capital ...................................... 862,333 863,676
Accumulated deficit ............................................. (762,781) (759,806)
Accumulated other comprehensive loss ............................ (922) (1,037)
--------- ---------
Total stockholders' equity .................................. 98,851 103,057
--------- ---------
Total liabilities and stockholders' equity .................. $ 156,507 $ 163,548
========= =========
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 March 31,
-------------------------------------
2003 2002
------------ ------------
Revenues:
Real estate leasing .................................... $ 1,799 $ 424
Gain on sale of investments, net ....................... 163 1,275
Interest and dividend income ........................... 281 585
------------ ------------
Total .............................................. 2,243 2,284
------------ ------------
Cost and expenses:
General and administrative ............................. 3,225 2,975
Rental real estate activities, excluding interest ...... 873 496
Interest expense ....................................... 397 237
------------ ------------
Total .............................................. 4,495 3,708
------------ ------------
Other results from operations:
Equity loss from non-consolidated real estate businesses (717) --
Other loss ............................................. (7) (4)
------------ ------------
Total .............................................. (724) (4)
------------ ------------
Loss from operations before minority interests .............. (2,976) (1,428)
Minority interests in loss from operations
of consolidated subsidiaries ....................... (1) (83)
------------ ------------
Net loss .................................................... $ (2,975) $ (1,345)
============ ============
Loss per Common Share (basic and diluted):
Net loss per Common Share .............................. $ (0.13) $ (0.06)
============ ============
Number of shares used in computation ........................ 22,232,135 22,821,490
============ ============
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)
Accumulated
Additional Other
Common Paid-In Accumulated Comprehensive
Shares Capital Deficit Loss Total
------ ---------- ----------- -------------- -----
Balance, December 31, 2002 ..... $ 224 $ 863,676 (759,806) (1,037) 103,057
Net loss .................... (2,975) (2,975)
Unrealized gain on investment
securities ................ 115 115
Repurchase of Common Shares . (3) (1,343) -- (1,346)
----- --------- --------- ------- ---------
Balance, March 31, 2003 ........ $ 221 $ 862,333 $(762,781) $ (922) $ 98,851
===== ========= ========= ======= =========
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)
Three Months Ended
March 31,
------------------------
2003 2002
-------- ---------
Cash flows from operating activities:
Net loss ............................................................. $ (2,975) $ (1,345)
Adjustments to reconcile net loss to net cash (used for) provided from
operating activities:
Depreciation and amortization .................................... 321 123
Equity loss from non-consolidated real estate businesses ......... 717 --
Gain on sale of investments ...................................... (163) (1,275)
Stock-based compensation expense ................................. -- 255
Minority interests in loss from operations
of consolidated subsidiaries ................................... (1) (83)
Decrease in receivables, restricted assets and other assets ...... 564 18,166
Decrease in accounts payable and accrued liabilities ............. (2,711) (2,252)
-------- ---------
Net cash (used for) provided from operating activities .................. (4,248) 13,589
-------- ---------
Cash flows from investing activities:
Sale or maturity of investment securities .......................... 1,179 3,040
Purchase of investment securities .................................. (165) --
Sale or liquidation of long-term investments ....................... 650 --
Investment in non-consolidated real estate businesses .............. (9,500) --
Purchase of and additions to real estate ........................... -- (688)
Payment of prepetition claims and restructuring accruals ........... (17) (7)
Increase in restricted assets ...................................... (4) --
Repayment of note receivable ....................................... -- 1,000
Issuance of note receivable ........................................ -- (2,500)
-------- ---------
Net cash (used for) provided from investing activities .................. (7,857) 845
-------- ---------
Cash flows from financing activities:
Repurchase of common shares ........................................ (1,346) --
Exercise of stock options .......................................... -- 265
Payment of notes payable ........................................... (107) (23)
-------- ---------
Net cash (used for) provided from financing activities ............. (1,453) 242
-------- ---------
Net (decrease) increase in cash and cash equivalents ............... (13,558) 14,676
Cash and cash equivalents, beginning of period ..................... 82,113 92,069
-------- ---------
Cash and cash equivalents, end of period ........................... $ 68,555 $ 106,745
======== =========
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 March 31, 2003
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 March 31, 2003 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, 2002 as filed with the Securities and
Exchange Commission (Commission File Number 1-2493).
NATURE OF OPERATIONS
The Company is engaged in the real estate business and is seeking to
acquire additional operating companies. The Company owns, through its New
Valley Realty Division, two commercial office buildings in Princeton, N.J.
and a 50% interest in the former Kona Surf Hotel in Kailua-Kona, Hawaii.
New Valley also holds a 50% interest in Montauk Battery Realty LLC, which
operates a residential real estate brokerage company in the New York
metropolitan area. At March 31, 2003, Vector Group Ltd. ("Vector"), New
Valley's principal stockholder, owned 58.1% of New Valley's Common Stock.
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.
NET LOSS PER COMMON SHARE
Basic net loss per common share is based on the weighted average number of
Common Shares outstanding. Diluted net loss per common share assuming full
dilution is based on the weighted average number of Common Shares
outstanding plus the additional common shares resulting from the exercise
of stock options and warrants if such exercise was dilutive. Options and
warrants to purchase Common Shares of 18,012,771 and 17,992,832 were not
included in the computation of diluted loss per share for the three months
ended March 31, 2003 and 2002, respectively, as the effect would have been
anti-dilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to prior interim period financial
information to conform to the current interim period presentation.
-7-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. SFAS No. 146 requires that liabilities for
costs associated with an exit activity or disposal of long-lived assets be
recognized when the liabilities are incurred and can be measured at fair
value. SFAS No. 146 is effective for the Company for any exit or disposal
activities that are initiated after December 31, 2002. The adoption of this
statement did not impact on the Company's consolidated financial
statements.
In November 2002, Financial Accounting Standards Board Interpretation
("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantors, Including Indirect Guarantees of Indebtedness of Others" was
issued. FIN No. 45 requires that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the obligation
it assumes under the guarantee. Guarantors will also be required to meet
expanded disclosure obligations. The initial recognition and measurement
provisions of FIN No. 45 are effective for guarantees issued or modified
after December 31, 2002. The disclosure requirements are effective for
annual and interim financial statements that end after December 15, 2002.
The adoption of this statement did not impact on the Company's consolidated
financial statements.
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of SFAS No. 123" was
issued. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee and director compensation. In addition,
this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS
No. 148 is effective for annual financial statements for fiscal years
ending after December 15, 2002 and for interim financial statements
commencing after such date. The Company has not elected the fair
value-based method of accounting for stock-based compensation under SFAS
No. 123, as amended by SFAS No. 148. See Note 10.
In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities"
was issued. This interpretation clarifies the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated
financial support from other parties. FIN No. 46 is effective February 1,
2003 for variable interest entities created after January 31, 2003, and
July 1, 2003 for variable interest entities created prior to February 1,
2003. The Company does not believe this interpretation will have a material
impact on its consolidated financial statements.
-8-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
2. INVESTMENTS IN REAL ESTATE AND MORTGAGE NOTE PAYABLE
OFFICE BUILDINGS
The components of the Company's investment in real estate and the related
non-recourse mortgage note payable collateralized by such real estate at
March 31, 2003 are as follows:
Land................................................................................. $ 7,636
Buildings............................................................................ 46,622
--------
Total......................................................................... 54,258
Less accumulated depreciation........................................................ (349)
--------
Net investment in real estate................................................. $ 53,909
========
Mortgage note payable................................................................ $ 40,393
Current portion of mortgage note payable............................................. 644
--------
Mortgage note payable - long-term portion............................................ $ 39,749
========
New Valley completed the acquisition of two commercial office buildings in
Princeton, N.J. on December 13, 2002 for $54,258. A portion of the purchase
price was financed with a mortgage loan of $40,500, which is due in
December 2006. The loan bears interest at a floating rate of 2% above
LIBOR, and is collateralized by a first mortgage on the office buildings,
as well as by an assignment of leases and rents. Principal is amortized to
the extent of $54 per month during the term of the loan. The loan may be
prepaid without penalty and is non-recourse against New Valley, except for
various specified environmental and related matters, misapplications of
tenant security deposits and insurance and condemnation proceeds, and fraud
or misrepresentation by New Valley in connection with the indebtedness.
PRO FORMA RESULTS
The following table presents unaudited pro forma results from operations as
if the purchase of the office buildings had occurred on January 1, 2002.
These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of what would have occurred had this
transaction been consummated as of such date.
PRO FORMA AS REPORTED
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2002
------------------ ------------------
Revenues............................................. $ 3,925 $ 2,284
Net loss............................................. $ (872) $(1,345)
======= =======
Net loss per common share (basic and diluted)........ $ (0.04) $ (0.06)
======= =======
3. INVESTMENTS IN NON-CONSOLIDATED REAL ESTATE BUSINESSES
RESIDENTIAL BROKERAGE BUSINESS
During 2000 and 2001, New Valley acquired for approximately $1,744 a 37.2%
ownership interest in B&H Associates of NY, doing business as Prudential
Long Island Realty ("Realty"), a residential real estate brokerage company
on Long Island, and a minority interest in an affiliated mortgage company.
On December 19, 2002, New Valley and the other owners of Realty contributed
-9-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
their interests in Realty to Montauk Battery Realty LLC ("Montauk"), a
newly formed entity. New Valley acquired a 50% interest in Realty as a
result of an additional investment of $1,413 by New Valley and the
redemption by Realty of various ownership interests. As part of the
transaction, Realty renewed for a ten-year term its franchise agreement
with The Prudential Real Estate Affiliates, Inc. The owners of Realty also
agreed, subject to receipt of any required regulatory approvals, to
contribute to Montauk their interests in the related mortgage company.
In March 2003, Montauk purchased the New York City-based residential
brokerage firm, Insignia Douglas Elliman, and an affiliated property
management company, for $71,250. New Valley invested an additional $9,500
in subordinated debt and equity of Montauk to help fund the acquisition.
The subordinated debt, which has a principal amount of $9,500, bears
interest at 12% per annum and is due in March 2013.
New Valley accounts for its interest in Montauk on the equity method and
recorded a loss of $577 for the three months ended March 31, 2003
associated with Montauk.
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 late 2004 as a Sheraton resort. The Company, which holds a 50% interest
in Koa Investors LLC, the owner of the hotel, has invested $5,900 in the
project and is required to make additional investments of up to $6,600 as
of March 31, 2003.
The Company accounts for its interest in Koa Investors LLC under the equity
method and recorded a loss of $140 for the three months ended March 31,
2003 associated with the property. Koa Investors' loss primarily represents
management fees. Koa Investors capitalizes all costs related to the
acquisition and development of the property.
4. 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 gains on sales of investment securities
available for sale of $75 and $1,275 for the three months ended March 31,
2003 and 2002, respectively.
The components of investment securities available for sale at March 31,
2003 are as follows:
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---- --------- ------------ -----
Marketable equity securities.............. $13,489 $2 $924 $12,567
5. LONG-TERM INVESTMENTS
At March 31, 2003, long-term investments consisted primarily of investments
in limited partnerships of $2,588 which are accounted for at historical
cost. The Company believes the fair value of the limited partnerships
exceeds their carrying amount by approximately $6,706 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
-10-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
the amounts that could be realized in the current market. The Company is
required to make additional investments in one of its limited partnerships
up to an aggregate of $983 at March 31, 2003. 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. The Company recognized a gain of
$88 for the three months ended March 31, 2003 related to the liquidation of
one of its limited partnership investments.
6. OTHER LONG-TERM LIABILITIES
The components of other long-term liabilities, excluding New Valley's
mortgage note payable, at March 31, 2003 are as follows:
LONG-TERM CURRENT
PORTION PORTION
--------- ------------
Retiree and disability obligations.............. $ 2,808 $ 500
Other long-term liabilities..................... 180 --
---------- ------------
Total other long-term liabilities............... $ 2,988 $ 500
========== ============
7. 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 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 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 March 31, 2003, New Valley had $657 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.
-11-
NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS) (UNAUDITED)
8. BUSINESS SEGMENT INFORMATION
The following table presents certain financial information of the Company's
operations before taxes and minority interests as of and for the three
months ended March 31, 2003 and 2002.
CORPORATE
REAL ESTATE AND OTHER TOTAL
----------- --------- -----
THREE MONTHS ENDED MARCH 31, 2003
Revenues................................ $ 1,799 $ 444 $ 2,243
Other expense........................... (717) (7) (724)
Operating loss.......................... (188) (2,788) (2,976)
Identifiable assets..................... 72,847 83,660 156,507
Depreciation and
amortization......................... 321 -- 321
Capital expenditures.................... -- -- --
THREE MONTHS ENDED MARCH 31, 2002
Revenues................................ $ 424 $ 1,860 $ 2,284
Other expense........................... -- (4) (4)
Operating loss.......................... (316) (1,112) (1,428)
Identifiable assets..................... 12,580 148,927 161,507
Depreciation and
amortization......................... 123 -- 123
Capital expenditures.................... 688 -- 688
9. COMPREHENSIVE INCOME (LOSS)
Comprehensive income of the Company includes net income and changes in the
value of investment securities available for sale that have not been
included in net income. Comprehensive income (loss) applicable to Common
Shares for the three months ended March 31, 2003 and 2002 is as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
Net loss.................................................. $ (2,975) $ (1,345)
Change in unrealized gain on investment securities........ 115 1,975
------------- -------------
Total comprehensive (loss) income......................... $ (2,860) $ 630
============= =============
-12-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
10. STOCK OPTION PLANS
The Company accounts for its stock-based employee compensation plans under
the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. No stock-based employee compensation cost is reflected in
net income to the extent options granted under these plans had an exercise
price equal to the market value of the underlying common stock on the date
of the grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS 123, "Accounting for Stock-Based Compensation", to
stock-based employee compensation for the three months ended March 31, 2003
and 2002.
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
Net loss applicable to Common Shares, as reported................ $ (2,975) $ (1,345)
Deduct: Amortization of fair value of New Valley option grants... (10) (119)
Add: Stock option compensation included in Vector net income..... 252 240
Deduct: Amortization of fair value of Vector option grants....... (422) (422)
-------- ---------
Net loss applicable to Common Shares, as adjusted................ $ (3,155) $ (1,646)
======== =========
Adjusted net loss per share - basic and diluted.................. $ (0.14) $ (0.07)
======== =========
-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 months ended March 31, 2003, the results of operations of
New Valley's primary operating units include the accounts of two commercial
office buildings located in Princeton, N.J., its 50% interest in Montauk Battery
Realty LLC and other subsidiaries. For the three months ended March 31, 2002,
the results of operations of New Valley's primary operating units include the
accounts of BrookeMil Ltd. ("BrookeMil"), a wholly-owned subsidiary, and other
subsidiaries.
RECENT DEVELOPMENTS
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 New Valley's remaining real estate
holdings in Russia. Under the terms of the Western Realty Repin LLC
participating loan to BrookeMil, New Valley received approximately $7,500 of the
net proceeds from the sale and Apollo Real Estate Investment Fund III, L.P.
received approximately $12,500 of the proceeds. New Valley recorded a gain on
sale of real estate of $8,484 for the year ended December 31, 2002 in connection
with the sale. New Valley also recorded $767 in additional general and
administrative expenses in 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 year ended December 31,
2002, which represented the shopping center's negative book value, in connection
with the disposal. No proceeds were received in the disposal.
PURCHASE OF OFFICE BUILDINGS. On December 13, 2002, New Valley
completed the acquisition of two commercial office buildings in Princeton, N.J.
for an aggregate purchase price of $54,000. The two buildings were constructed
in July 2000 and June 2001 and have a total of approximately 225,000 square feet
of rentable space. New Valley funded $40,500 of the purchase price with a
non-recourse mortgage loan due in December 2006.
MONTAUK BATTERY REALTY LLC. During 2000 and 2001, New Valley acquired
for approximately $1,744 a 37.2% ownership interest in Prudential Long Island
Realty, the largest independently owned and operated residential real estate
brokerage company on Long Island, and a minority interest in an affiliated
mortgage company. On December 19, 2002, New Valley and the other owners of
Prudential Long Island Realty contributed their interests in Prudential Long
Island Realty to Montauk Battery Realty LLC, a newly formed entity. New Valley
acquired a 50% interest in Montauk as a result of an additional investment of
approximately $1,413 by New Valley and the redemption by Prudential Long Island
Realty of various ownership interests. As part of the transaction, Prudential
Long Island Realty renewed its franchise agreement with The Prudential Real
Estate Affiliates, Inc for an additional ten-year term. The owners of Montauk
also agreed, subject to receipt of any required regulatory approvals, to
contribute to Montauk their interests in the related mortgage company.
In March 2003, Montauk purchased the leading New York City-based
residential brokerage firm, Insignia Douglas Elliman, and an affiliated property
management company, for $71,250. With that acquisition, the combination of
Prudential Long Island Realty with Douglas Elliman has created the largest
residential brokerage company in the New York metropolitan area. New Valley
invested an additional $9,500 in subordinated debt and equity of Montauk to help
fund the acquisition. The subordinated debt, which has a principal amount of
$9,500, bears interest at 12% per annum and is due in March 2013.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CRITICAL ACCOUNTING POLICIES
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.
INVESTMENT SECURITIES AVAILABLE FOR SALE. At March 31, 2003, New Valley
had investment securities available for sale of $12,567. New Valley classifies
investments in debt and marketable equity securities as either available for
sale or held to maturity. Investments classified as available for sale are
carried at fair value, with net unrealized gains and losses included as a
separate component of stockholders' equity. Realized gains and losses are
included in other income. The cost of securities sold is determined based on
average cost. Gains are recognized when realized in New Valley's consolidated
statement of operations. Losses are recognized as realized or upon the
determination of the occurrence of an other-than-temporary decline in fair
value. New Valley's policy is to review its securities on a regular basis to
evaluate whether any security has experienced an other-than-temporary decline in
fair value. If it is determined that an other-than-temporary decline exists in
one of New Valley's marketable securities, it is New Valley's policy to record a
realized loss on such investment in the Company's consolidated statements of
operations. In 2002, New Valley recorded a write down of $6,776 related to
other-than-temporary declines of its investment securities.
LONG-TERM INVESTMENTS. At March 31, 2003, New Valley had long-term
investments of $2,588, representing investments in various limited partnerships.
The principal business of the limited partnerships is investing in real estate
and 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, carry
forwards of approximately $159,000 as of March 31, 2003 and capital loss carry
forwards of $6,300, which expire at various dates from 2006 through 2023.
Generally accepted accounting principles require that New Valley record a
valuation allowance against the deferred tax asset associated with these loss
carry forwards 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 carry forwards
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 carry forwards. 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 carry
forwards 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
Consolidated total revenues were $2,243 for the three months ended
March 31, 2003 versus $2,284 for the same period last year. The decline in
revenues of $41 was attributable primarily to decreased gains on the sale of
investments of $1,112 and the absence of rental revenue from New Valley's
remaining U.S. shopping center, which was disposed of in May 2002, offset by
additional rental revenues from the acquisition of two commercial office
buildings in Princeton, N.J. in December 2002.
For the first quarter of 2003, the results of operations of New
Valley's primary operating units include the accounts of the two office
buildings, its 50% interest in Montauk Battery Realty LLC and other entities.
For the first quarter of 2002, the results of operations of New Valley's primary
operating units, which include the shopping center and BrookeMil (real estate),
are summarized below.
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------- -------
Real estate:
Revenues .................................. $ 1,799 $ 424
Expenses .................................. 1,270 740
Other loss ................................ (717) --
------- -------
Operating loss before taxes
and minority interests ................. $ (188) $ (316)
======= =======
Corporate and other:
Revenues .................................. $ 444 $ 1,860
Expenses .................................. 3,225 2,968
Other loss ................................ (7) (4)
------- -------
Operating loss before taxes
and minority interests ................. $(2,788) $(1,112)
======= =======
Revenues from real estate operations for the first quarter of 2003
increased by $1,375 primarily due to additional rental revenues from the
acquisition of the two office buildings in December 2002, offset by the absence
of rental revenue from New Valley's remaining shopping center disposed of in May
2002. Expenses of the real estate operations increased $530 in the 2003 period
due primarily to higher expenses as a result of the acquisition of the office
buildings offset by the expenses associated with the shopping center. BrookeMil
incurred expenses of $102 for the three month period ended March 31, 2002 in
connection with the development of the Kremlin sites.
Other loss from real estate activities in 2003 consisted of equity losses
from non-consolidated real estate businesses of $717. The equity losses resulted
from a loss of $140 related to New Valley's investment in Koa Investors, which
owns the former Kona Surf Hotel in Kailua-Kona, Hawaii, and a loss of $577 from
Montauk. Koa Investors' loss primarily represents management fees. Koa Investors
capitalizes all costs related to the acquisition and development of the
property.
For the first quarter of 2003, New Valley's revenues of $444 related to
corporate and other activities consisted of net gains on investments of $163 and
interest and dividends income of $281. For the first quarter of 2002, New
Valley's revenues of $1,860 related to corporate and other activities consisted
of net gains on investments of $1,275 and interest and dividends income of $585.
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Corporate and other expenses of $3,225 for the first quarter of 2003
consisted primarily of employee compensation and benefits of $1,603. Corporate
and other expenses of $2,968 for the first quarter of 2002 consisted primarily
of employee compensation and benefits of $1,620. The increase in corporate
expenses was primarily due to expenses related to a proposed acquisition by New
Valley which was not consummated.
There was no income tax provision for the first quarter of 2003 or
2002. 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.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter 2003, New Valley's cash and cash equivalents
decreased from $82,113 to $68,555 due primarily to the $9,500 investment in
Montauk and cash used in operations of $4,248.
Cash used for operating activities for the three months ended March 31,
2003 was $4,248 compared with cash provided from operating activities for the
three months ended March 31, 2002 of $13,589. The difference is primarily due to
the receipt of $17,551 in the first quarter from the lawsuit offset by a
decrease in payables in 2002, primarily associated with the payment of closing
expenses in 2002 related to the December 2001 sale of Western Realty
Investments.
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 was launched in 1982 with an expected ten-year life, had shortened
lives due to insufficient fuel. In the settlement, New Valley received payment
of $17,551 from the insurers in March 2002 for the shortened lives of the two
satellites.
Cash used for investing activities for the three months ended March 31,
2003 was $7,587 compared to cash provided from investing activities of $845 for
the three months ended March 31, 2002. The difference is primarily attributable
to the $9,500 investment in Montauk in 2003 and the differences in net sales of
marketable securities and long-term investments of $1,074 in 2003 versus $3,040
in 2002, offset by the issuance of a note receivable to Ladenburg Thalmann
Financial Services of $2,500 in 2002.
On December 13, 2002, New Valley completed the acquisition of two
commercial office buildings in Princeton, N.J. for an aggregate purchase price
of $54,258. To finance a portion of the purchase price for the office buildings,
New Valley borrowed on the closing date $40,500 from HSBC Realty Credit
Corporation (USA). The loan has a term of four years, bears interest at a
floating rate of 2% above LIBOR, and is secured by a first mortgage on the
office buildings, as well as by an assignment of leases and rents. Principal is
amortized to the extent of $54 per month during the term of the loan. The loan
may be prepaid without penalty and is non-recourse against New Valley, except
for various specified environmental and related matters, misapplications of
tenant security deposits and insurance and condemnation proceeds, and fraud or
misrepresentation by New Valley in connection with the indebtedness.
During 2000 and 2001, New Valley acquired for approximately $1,744 a
37.2% ownership interest in Prudential Long Island Realty, the largest
independently owned and operated real estate brokerage company on Long Island,
and a minority interest in an affiliated mortgage company. On December 19, 2002,
New Valley and the other owners of Prudential Long Island Realty contributed
their interests in Prudential Long Island Realty to Montauk Battery Realty LLC,
a newly formed entity. New Valley acquired a 50% interest in Montauk as a result
of an additional investment of $1,413 by New Valley and the redemption by
Prudential Long Island Realty of various ownership interests.
In March 2003, Montauk purchased the leading New York City - based
residential brokerage firm, Insignia Douglas Elliman, and an affiliated property
management company, for $71,250. With that acquisition, the combination of
Prudential Long Island Realty with Douglas Elliman has created the largest
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
residential brokerage company in the New York metropolitan area. New Valley
invested an additional $9,500 in subordinated debt and equity of Montauk to help
fund the acquisition. The subordinated debt, which has a principal amount of
$9,500, bears interest at 12% per annum and is due in March 2013.
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 late 2004 as a Sheraton resort. New Valley is required to make
additional investments of $6,600 at March 31, 2003 in the project. New Valley is
also required to make additional investments in another limited partnership of
up to $983 at March 31, 2003.
In March 2002, New Valley lent $2,500 to Ladenburg Thalmann Financial
Services Inc., the Company's majority-owned subsidiary until December 2001 which
acquired Ladenburg Thalmann & Co. Inc. from New Valley in May 2001. The loan,
which bears interest at 1% above the prime rate, was due on the earlier of
December 31, 2003 or the completion of one or more equity financings where
Ladenburg Thalmann Financial Services receives at least $5,000 in total
proceeds. In July 2002, Ladenburg Thalmann Financial Services borrowed an
additional $2,500 from New Valley on the same terms. In November 2002, New
Valley agreed, in connection with a $3,500 loan to Ladenburg Thalmann Financial
Services by an affiliate of its clearing broker, to extend the maturity of the
notes to December 31, 2006 and to subordinate the notes to the repayment of the
loan.
During 2002, Ladenburg Thalmann Financial Services incurred significant
operating losses as its revenues and liquidity were adversely affected by the
overall declines in the U.S. equity markets and the continued weak operating
environment for the broker-dealer industry. Accordingly, New Valley evaluated
its ability to collect its notes receivable and related interest from Ladenburg
Thalmann Financial Services at September 30, 2002. These notes receivable
included the $5,000 of notes issued in March 2002 and July 2002 and the $8,010
convertible note issued to New Valley in the May 2001 acquisition. Management
determined, based on current trends in the broker-dealer industry and Ladenburg
Thalmann Financial Services' 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, Ladenburg Thalmann Financial Services borrowed an
additional $2,000 from New Valley. The loan, which bore interest at 1% above the
prime rate, was repaid in December 2002 with the proceeds from the loan to
Ladenburg Thalmann Financial Services from an affiliate of its clearing broker.
Cash flows used for financing activities were $1,453 for the three
months ended March 31, 2003 as compared to cash flows provided from financing
activities of $242 for the three months ended March 31, 2002. The difference was
primarily due to the repurchase of 318,572 of New Valley's Common Shares for
$1,346 in 2003.
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
May 14, 2003, New Valley had repurchased 1,185,615 shares for approximately
$4,695.
New Valley expects that its available capital resources will be
sufficient to fund its currently anticipated cash requirements for 2003,
including the currently anticipated cash requirements of its operating
businesses, investments, commitments, and payments of principal and interest on
its outstanding indebtedness.
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 New Valley's consolidated financial statements.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities" was issued. SFAS No. 146 requires that liabilities for
costs associated with an exit activity or disposal of long-lived assets be
recognized when the liabilities are incurred and can be measured at fair value.
SFAS No. 146 is effective for the Company for any exit or disposal activities
that are initiated after December 31, 2002. The adoption of this statement did
not impact on New Valley's consolidated financial statements.
In November 2002, Financial Accounting Standards Board Interpretation
("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantors, Including Indirect Guarantees of Indebtedness of Others" was issued.
FIN No. 45 requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it assumes under the
guarantee. Guarantors will also be required to meet expanded disclosure
obligations. The initial recognition and measurement provisions of FIN No. 45
are effective for guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for annual and interim financial
statements that end after December 15, 2002. The adoption of this statement did
not impact on New Valley's consolidated financial statements.
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of SFAS No. 123" was
issued. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee and director compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for annual financial
statements for fiscal years ending after December 15, 2002 and for interim
financial statements commencing after such date. The Company has not elected the
fair value-based method of accounting for stock-based compensation under SFAS
No. 123, as amended by SFAS No. 148.
In January 2003, FIN No. 46, "Consolidation of Variable Interest
Entities" was issued. This interpretation clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
support from other parties. FIN No. 46 is effective February 1, 2003 for
variable interest entities created after January 31, 2003, and July 1, 2003 for
variable interest entities created prior to February 1, 2003. The Company does
not believe this interpretation will have a material impact on its consolidated
financial statements.
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
$12,567 at March 31, 2003. 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.
INTEREST RATE RISK
As of March 31, 2003, New Valley's outstanding debt has variable
interest rates, which increases the risk of fluctuating interest rates. New
Valley's exposure to market risk includes interest rate fluctuations in
connection with its variable rate borrowings, which could adversely affect its
cash flows. As of March 31, 2003, New Valley had no interest rate caps or swaps.
Based on a hypothetical 100 basis point increase or decrease in interest rates
(1%), New Valley's annual interest expense could increase or decrease by
approximately $400.
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, 2002 filed with
the Securities and Exchange Commission 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.
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.
-20-
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.
-21-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 to the Notes to the Condensed Consolidated Financial
Statements in Part I, Item 1 of this Report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
No securities of the Company that were not registered under the
Securities Act of 1933 have been issued or sold by the Company during
the quarter ended March 31, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Purchase and Sale Agreement, dated March 14, 2003,
by and among Insignia Financial Group, LLC,
Insignia ESG, Inc., Insignia Residential Group,
LLC, Insignia IP, Inc. and Montauk Battery Realty
LLC (incorporated by reference to Exhibit 2.1 in
New Valley's Current Report on Form 8-K dated
March 18, 2003).
10.1 First Amendment to Operating Agreement of Montauk
Battery Realty LLC, dated as of March 14, 2003.
10.2 Note and Equity Purchase Agreement, dated as of
March 14, 2003 (the "Note and Equity Purchase
Agreement"), by and between Montauk Battery Realty
LLC, New Valley Real Estate Corporation and The
Prudential Real Estate Financial Services of
America, Inc., including form of 12% Subordinated
Note due March 14, 2013.
10.3 Amendment to the Note and Equity Purchase
Agreement, dated as of April 14, 2003.
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
DATE ITEMS FINANCIAL STATEMENTS
---- ----- --------------------
January 16, 2003 5, 7 None
January 31, 2003 5 None
February 14, 2003 5,7 College Road Properties
March 18, 2003 5,7 None
-22-
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: May 15, 2003 By: /s/ J. BRYANT KIRKLAND III
----------------------------------
J. Bryant Kirkland III
Vice President, Treasurer
and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
-23-
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):
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: May 15, 2003
/s/ BENNETT S. LEBOW
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Bennett S. LeBow
Chairman and Chief Executive Officer
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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
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: May 15, 2003
/s/ J. BRYANT KIRKLAND III
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J. Bryant Kirkland III
Vice President and Chief Financial Officer
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