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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 JUNE 30, 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 AUGUST 13, 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 QUARTERLY PERIOD ENDED JUNE 30, 2003
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of June 30,
2003and December 31, 2002..................................... 2
Condensed Consolidated Statements of Operations for the
three months and six months ended June 30, 2003 and
2002.......................................................... 3
Condensed Consolidated Statement of Changes in
Stockholders' Equity for the six months ended
June 30, 2003................................................. 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2003 and 2002............... 5
Notes to the Condensed Consolidated Financial
Statements .................................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 23
Item 4. Controls and Procedures........................................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 24
Item 2. Changes in Securities and Use of Proceeds......................... 24
Item 4. Submission of Matters to a Vote of Security Holders............... 24
Item 6. Exhibits and Reports on Form 8-K.................................. 25
SIGNATURE........................................................................... 26
- 1 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
June 30, December 31,
2003 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 67,499 $ 82,113
Investment securities available for sale 19,276 13,391
Restricted assets 1,202 1,811
Other current assets 479 402
--------- ---------
Total current assets 88,456 97,717
--------- ---------
Investments in real estate, net 53,610 54,208
Investments in non-consolidated real estate businesses 15,912 7,808
Restricted assets 173 168
Long-term investments, net 2,408 3,150
Other assets 439 497
--------- ---------
Total assets $ 160,998 $ 163,548
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of mortgage note payable $ 644 $ 644
Accounts payable and accrued liabilities 3,184 5,741
Prepetition claims and restructuring accruals 656 674
Income taxes 10,446 10,499
--------- ---------
Total current liabilities 14,930 17,558
--------- ---------
Mortgage note payable 39,535 39,856
Other long-term liabilities 2,888 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 (764,696) (759,806)
Accumulated other comprehensive income (loss) 5,787 (1,037)
--------- ---------
Total stockholders' equity 103,645 103,057
--------- ---------
Total liabilities and stockholders' equity $ 160,998 $ 163,548
========= =========
See accompanying notes to condensed
consolidated financial statements
- 2 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Real estate leasing $ 1,777 $ 237 $ 3,576 $ 661
Gain on sale of investments, net -- 957 163 2,232
Interest and dividend income 142 538 423 1,123
------------ ------------ ------------ ------------
Total 1,919 1,732 4,162 4,016
------------ ------------ ------------ ------------
Cost and expenses:
General and administrative 2,529 2,966 5,754 5,941
Rental real estate activities, excluding interest 795 1,003 1,668 1,499
Interest expense 334 101 731 338
------------ ------------ ------------ ------------
Total 3,658 4,070 8,153 7,778
------------ ------------ ------------ ------------
Other results from continuing operations:
Gain on sale of real estate -- 8,909 -- 8,909
Equity loss from non-consolidated
real estate businesses (174) -- (891) --
Provision for loss on net investment in subsidiary -- (388) -- (388)
Other loss (5) (6) (12) (10)
------------ ------------ ------------ ------------
Total (179) 8,515 (903) 8,511
------------ ------------ ------------ ------------
(Loss) income from operations before minority interests (1,918) 6,177 (4,894) 4,749
Minority interests in loss of consolidated subsidiaries (3) (84) (4) (167)
------------ ------------ ------------ ------------
Net (loss) income $ (1,915) $ 6,261 $ (4,890) $ 4,916
============ ============ ============ ============
(Loss) income per Common Share (basic):
Net (loss) income per Common Share $ (0.09) $ 0.27 $ (0.22) $ 0.22
============ ============ ============ ============
Number of shares used in computation 22,117,852 22,851,613 22,174,678 22,851,613
============ ============ ============ ============
(Loss) income per Common Share (diluted):
Net (loss) income per Common Share $ (0.09) $ 0.27 $ (0.22) $ 0.21
============ ============ ============ ============
Number of shares used in computation 22,117,852 22,893,107 22,174,678 22,870,153
============ ============ ============ ============
See accompanying notes to condensed
consolidated financial statements
- 3 -
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 Income (Loss) Total
-------- ------------ ------------- -------------- ---------
Balance, December 31, 2002 $ 224 $ 863,676 $(759,806) $(1,037) $ 103,057
Net loss -- -- (4,890) -- (4,890)
Unrealized gain on investment
securities -- -- -- 6,824 6,824
Repurchase of Common Shares (3) (1,343) -- -- (1,346)
----- --------- --------- ------- ---------
Balance, June 30, 2003 $ 221 $ 862,333 $(764,696) $ 5,787 $ 103,645
===== ========= ========= ======= =========
See accompanying notes to condensed
consolidated financial statements
- 4 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Six Months Ended
June 30,
---------------------------
2003 2002
-------- ---------
Cash flows from operating activities:
Net (loss) income $ (4,890) $ 4,916
Adjustments to reconcile net (loss) income to net cash (used for)
provided from operating activities:
Depreciation and amortization 642 191
Equity loss from non-consolidated real estate businesses 891 --
Stock-based compensation expense -- 450
Gain on sale of investments (163) (2,232)
Gain on sale of assets -- (8,909)
Minority interests in loss from operations of
consolidated subsidiaries -- (167)
Changes in assets and liabilities, net of effects of dispositions
and acquisitions:
Decrease in receivables and other assets 590 19,067
Decrease in accounts payable and accrued liabilities (2,765) (2,016)
-------- ---------
Net cash (used for) provided from operating activities (5,695) 11,300
-------- ---------
Cash flows from investing activities:
Sale or maturity of investment securities 1,179 5,575
Purchase of investment securities (165) (3,007)
Sale or liquidation of long-term investments 874 --
Purchase of long-term investments (44) --
Purchase of non-consolidated real estate businesses (9,500) (750)
Distributions from non-consolidated real estate businesses 427 --
Sale of real estate, net -- 20,461
Purchase of real estate -- (688)
Payment of prepetition claims and restructuring accruals (18) (29)
Increase in restricted assets (5) --
Repayment of note receivable -- 1,000
Issuance of note receivable -- (2,500)
-------- ---------
Net cash provided from investing activities (7,252) 20,062
-------- ---------
Cash flows from financing activities:
Repayment of participating loan -- (12,400)
Repayment of mortgage notes payable (321) (36)
Exercise of stock options -- 265
Repurchase of Common Shares (1,346) --
-------- ---------
Net cash used in financing activities (1,667) (12,171)
-------- ---------
Net (decrease) increase in cash and cash equivalents (14,614) 19,191
Cash and cash equivalents, beginning of period 82,113 92,069
-------- ---------
Cash and cash equivalents, end of period $ 67,499 $ 111,260
======== =========
See accompanying notes to condensed
consolidated financial statements
- 5 -
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 June 30, 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 June 30, 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 Douglas Elliman Realty, LLC,
formerly known as Montauk Battery Realty, LLC, which operates a residential
real estate brokerage company in the New York metropolitan area. At June
30, 2003, Vector Group Ltd. ("Vector"), New Valley's principal stockholder,
owned 58.1% of New Valley's Common Shares.
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.
New Valley holds two investments that are accounted for using the equity
method. The Company does not control the decision making process or
business management practices of these entities. Accordingly, New Valley
relies on management of these entities and their independent accountants to
provide it with accurate financial information prepared in accordance with
generally accepted accounting principles that New Valley uses in the
application of the equity method. The Company is not aware, however, of any
errors in or possible misstatements of the financial information provided
by its equity entities that would have a material effect on New Valley's
consolidated financial statements.
NET (LOSS) INCOME PER COMMON SHARE
Basic net (loss) income per common share is based on the weighted average
number of Common Shares outstanding. Diluted net (loss) income 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 18,032,771 Common Shares were not included
in the computation of diluted loss per share for the three and six months
ended June 30, 2003, respectively, as the effect would have been
anti-dilutive.
- 6 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
RECLASSIFICATIONS
Certain reclassifications have been made to prior interim period financial
information to conform to the current interim period presentation.
NEW ACCOUNTING PRONOUNCEMENTS
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.
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The Company is currently analyzing the
provisions of SFAS No. 149 to determine if there will be any impact of
adoption, but does not believe that there will be any material impact on
its consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
- 7 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
SFAS No. 150 establishes standards for how companies classify and measure
certain financial instruments with characteristics of both liabilities and
equity. It requires companies to classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). SFAS
No. 150 is effective immediately for financial instruments entered into or
modified after May 15, 2003 and in the first interim period after June 15,
2003 for all other financial instruments. The Company is currently
analyzing the provisions of SFAS No. 150 to determine its impact, but does
not believe that there will be any material impact on its consolidated
financial statements.
2. INVESTMENTS IN REAL ESTATE AND MORTGAGE NOTE PAYABLE
OFFICE BUILDINGS
The components of the Company's investments in real estate and the related
non-recourse mortgage note payable collateralized by such real estate at
June 30, 2003 are as follows:
Land $ 7,636
Buildings 46,622
--------
Total 54,258
Less accumulated depreciation (648)
--------
Investments in real estate, net $ 53,610
========
Mortgage note payable $ 40,179
Current portion of mortgage note payable 644
--------
Mortgage note payable - long-term portion $ 39,535
========
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 SIX MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2002 2002 2002
------------ ---------- ------------ ----------
Revenues $ 3,457 $ 7,382 $ 1,732 $ 4,016
Net income $ 6,764 $ 5,892 $ 6,261 $ 4,916
========= ========= ========= =========
Net income per common
share (basic) $ 0.30 $ 0.26 $ 0.27 $ 0.22
========= ========= ========= =========
Net income per common
share (diluted) $ 0.30 $ 0.26 $ 0.27 $ 0.21
========= ========= ========= =========
- 8 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
SHOPPING CENTER
New Valley disposed of its remaining U.S. shopping center in May 2002 and
recorded a gain of $425 for the three and six months ended June 30, 2002,
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
$7,500 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 the sale of real estate of $8,484 in the second quarter
of 2002 in connection with the sale. New Valley also recorded $767 in
additional general and administrative expenses related to the closing of
its Russian operations for the three and six months ended June 30, 2002.
The expenses consisted principally of employee severance.
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
Douglas Elliman Real Estate ("Realty"), formerly known as Prudential Long
Island Realty, a residential real estate brokerage company on Long Island,
New York and a minority interest in an affiliated mortgage company. On
December 19, 2002, New Valley and the other owners of Realty contributed
their interests in Realty to Douglas Elliman Realty, LLC, formerly known as
Montauk Battery Realty, LLC, a newly formed entity. New Valley acquired a
50% interest in Douglas Elliman Realty, LLC 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 Douglas Elliman Realty,
LLC their interests in the related mortgage company. As a result, New
Valley's equity loss from Douglas Elliman Realty, LLC includes 50% of the
mortgage company's results from operations.
In March 2003, Douglas Elliman Realty, LLC purchased the New York
City-based residential brokerage firm, Douglas Elliman, LLC, formerly known
as 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 Douglas Elliman Realty, LLC 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. Interest income on the
subordinated debt is recognized in the Company's consolidated statements of
operations as part of equity income (loss) from non-consolidated real
estate businesses.
New Valley accounts for its interest in Douglas Elliman Realty, LLC on the
equity method and recorded a loss of $112 and a loss of $689 for the three
and six months ended June 30, 2003, respectively, associated with Douglas
Elliman Realty, LLC. New Valley's equity loss in Douglas Elliman Realty,
LLC includes New Valley's portion ($725) of amortization associated with
Douglas Elliman, LLC's customer contracts outstanding at the acquisition
date.
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 June 30, 2003.
- 9 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
The Company accounts for its interest in Koa Investors under the equity
method and recorded losses of $62 and $202 for the three and six months
ended June 30, 2003, respectively, 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 $0 and $75 for the three and six months ended June
30, 2003, respectively, and $957 and $2,232 for the three and six months
ended June 30, 2002, respectively.
The components of investment securities available for sale, which were all
equity securities, at June 30, 2003 are as follows:
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---------- ----------- -----
Investment securities.........................$13,489 $5,873 $86 $19,276
5. LONG-TERM INVESTMENTS
At June 30, 2003, long-term investments consisted primarily of investments
in limited partnerships of $2,408 which are accounted for at historical
cost. The Company believes the fair value of the limited partnerships
exceeds their carrying amount by approximately $7,827 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 is
required to make additional investments in one of its limited partnerships
up to an aggregate of $979 at June 30, 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 $0
and $88 for the three and six months ended June 30, 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 June 30, 2003 are as follows:
LONG-TERM CURRENT
PORTION PORTION
------- -------
Retiree and disability obligations $2,716 $500
Other long-term liabilities 172 --
------ ----
Total other long-term liabilities $2,888 $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
- 10 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
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 is ongoing.
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 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
and recently filed a motion for summary judgment on the remaining three
claims.
The Company has received a notice of proposed assessment from a state
taxing authority related to the years ended December 31, 1994 and 1995. If
the state taxing authority were to prevail, New Valley would owe
approximately $6,900, including interest, at June 30, 2003. The Company
intends to vigorously oppose the proposed assessment. An initial
administrative hearing has been scheduled for October 2003. If New Valley
is unsuccessful in the initial administrative hearing, it may request an
additional administrative hearing prior to challenging the notice of
proposed assessment in court. No assurances can be given that the Company
will prevail in this matter. New Valley believes it has fully provided for
any amounts due in its consolidated financial statements at June 30, 2003.
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.
In 1994, the Company commenced an action against the United States
government seeking damages for breach of a launch services agreement
covering the launch of one of the Westar satellites owned by New Valley's
former Western Union satellite business. The Company had a contract with
NASA to launch two Westar satellites. The first satellite was launched in
1984, and the second was scheduled to be launched in 1986. Following the
explosion of the space shuttle Challenger in January 1986, the President of
the United States announced a change in the government's policy regarding
commercial satellite launches, and the Company's satellite was not
launched. As a result, the Company sued the government for breach of
contract seeking damages of approximately $34,000. In 1995, the United
States Court of Federal Claims granted the government's motion to dismiss
and, in 1997, the United States Court of Appeals for the Federal Circuit
reversed and remanded the case. Discovery recently concluded, and the
Company believes that a trial will be scheduled by the court sometime in
the fall of 2003.
As of June 30, 2003, New Valley had $656 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
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
8. BUSINESS SEGMENT INFORMATION
The following table presents certain financial information of the Company's
operations as of and for the three and six months ended June 30, 2003 and
2002.
CORPORATE
REAL ESTATE AND OTHER TOTAL
----------- --------- -----
THREE MONTHS ENDED JUNE 30, 2003
Revenues $ 1,777 $ 142 $ 1,919
Other loss (174) (5) (179)
Operating income (loss) before taxes
and minority interests 486 (2,404) (1,918)
Depreciation and amortization 321 -- 321
THREE MONTHS ENDED JUNE 30, 2002
Revenues $ 237 $ 1,495 $ 1,732
Other income (loss) 8,909 (394) 8,515
Operating income (loss) before taxes
and minority interests 8,143 (1,966) 6,177
Depreciation and amortization 68 -- 68
SIX MONTHS ENDED JUNE 30, 2003
Revenues $ 3,576 $ 586 $ 4,162
Other loss (891) (12) (903)
Operating income (loss) before taxes
and minority interests 298 (5,192) (4,894)
Identifiable assets 72,261 88,737 160,998
Depreciation and amortization 642 -- 642
Capital expenditures -- -- --
SIX MONTHS ENDED JUNE 30, 2002
Revenues $ 661 $ 3,355 $ 4,016
Other income (loss) 8,909 (398) 8,511
Operating income (loss) before taxes
and minority interests 8,071 (3,322) 4,749
Identifiable assets 1,458 150,867 152,325
Depreciation and amortization 191 -- 191
Capital expenditures 688 -- 688
- 12 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
9. COMPREHENSIVE INCOME
Comprehensive income of the Company includes net (loss) income and net
changes in the value of investment securities available for sale that have
not been included in net (loss) income. Comprehensive income applicable to
Common Shares for the three and six months ended June 30, 2003 and 2002 is
as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- ---------------------------
2003 2002 2003 2002
------- ------- ------- -------
Net (loss) income $(1,915) $ 6,261 $(4,890) $ 4,916
Net change in unrealized gain
(loss) on investment securities 6,709 (3,799) 6,824 (1,824)
------- ------- ------- -------
Comprehensive income $ 4,794 $ 2,462 $ 1,934 $ 3,092
======= ======= ======= =======
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 shares 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 and six months ended June
30, 2003 and 2002, respectively.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2003 2002 2003 2002
------- ------- ------- -------
Net (loss) income applicable to Common
Shares, as reported $(1,915) $ 6,261 $(4,890) $ 4,916
Deduct: Amortization of fair value of
New Valley option grants (15) (94) (25) (213)
Add: Stock option compensation included
Vector net interest 252 240 504 480
Deduct: Amortization of fair value of
Vector option grants (422) (422) (844) (844)
------- ------- ------- -------
Net loss applicable to Common Shares, as
adjusted $(2,100) $ 5,985 $(5,255) $ 4,339
======= ======= ======= =======
Adjusted net (loss) income per
share - basic and diluted $ (0.09) $ 0.26 $ (0.24) $ 0.19
======= ======= ======= =======
- 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 six months ended June 30, 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
Douglas Elliman Realty, LLC and other subsidiaries. For the three and six months
ended June 30, 2002, the results of operations of New Valley's primary operating
units include the accounts of BrookeMil Ltd., 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.
DOUGLAS ELLIMAN REALTY, LLC. During 2000 and 2001, New Valley acquired
for approximately $1,744 a 37.2% ownership interest in Prudential Douglas
Elliman Real Estate, formerly known as 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
Douglas Elliman contributed their interests in Prudential Douglas Elliman to
Douglas Elliman Realty, LLC, formerly known as Montauk Battery Realty, LLC, a
newly formed entity. New Valley acquired a 50% interest in Douglas Elliman
Realty, LLC as a result of an additional investment of approximately $1,413 by
New Valley and the redemption by Prudential Douglas Elliman Real Estate of
various ownership interests. As part of the transaction, Prudential Douglas
Elliman Real Estate renewed its franchise agreement with The Prudential Real
Estate Affiliates, Inc for an additional ten-year term. The owners of Douglas
Elliman Realty, LLC also agreed, subject to receipt of any required regulatory
approvals, to contribute to Douglas Elliman Realty, LLC their interests in the
related mortgage company. As a result, New Valley's equity loss from Douglas
Elliman Realty, LLC includes 50% of the mortgage company's results from
operations.
In March 2003, Douglas Elliman Realty, LLC purchased the leading New
York City-based residential brokerage firm, Douglas Elliman, LLC, formerly
Insignia Douglas Elliman, and an affiliated property management company, for
$71,250. With that acquisition, the combination of Prudential Douglas Elliman
Real Estate with Douglas Elliman, LLC 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 Douglas Elliman Realty, LLC
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 June 30, 2003, New Valley
had investment securities available for sale of $19,276. 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. During the six
months ended June 30, 2003, New Valley had net increases to unrealized gains on
investment securities of $6,824, which have been included in accumulated other
comprehensive income in the Company's consolidated statement of changes in
stockholders' equity.
INVESTMENTS IN NON-CONSOLIDATED REAL ESTATE BUSINESSES. New Valley
accounts for its 50% interest in Douglas Elliman Realty, LLC and in KOA
Investors LLC on the equity method because it has a significant, but less than
controlling, interest in these entities. New Valley records its investments in
these entities in its consolidated balance sheets as "Investments in
non-consolidated real estate businesses" and its share of the entities' income
or loss as "Equity income (loss) from non-consolidated real estate businesses".
Judgment is required in determining controlling interest. Factors considered by
New Valley in determining whether it has significant influence or has control
include risk and reward sharing, experience and financial condition of the other
investors, voting rights, involvement in day-to-day capital and operating
decisions and continuing involvement. The difference between consolidation and
the equity method impacts certain financial ratios because of the presentation
of the detailed line items reported in the financial statements. However, New
Valley's consolidated net income or loss for the period and its stockholders'
equity at the end of the period are the same whether its investments in these
entities are accounted for under the equity method or these entities are
consolidated. Because New Valley does not control the decision-making process or
business management practices of these entities, it relies on management of
these entities and their independent accountants to provide it with accurate
financial information prepared in accordance with generally accepted accounting
principles that New Valley uses in the application of the equity method. New
Valley is not aware, however, of any errors in or possible misstatements of the
financial information provided by these entities that would have a material
effect on New Valley's consolidated financial statements.
LONG-TERM INVESTMENTS. At June 30, 2003, New Valley had long-term
investments of $2,408, 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 consolidated statements 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 $161,000 as of June 30, 2003 and capital loss carry
forwards of $6,000, which expire at various dates from 2006 through 2023. New
Valley also has approximately $13,500 of alternative minimum tax credit
carry forwards as of June 30, 2003, which may be carried forward indefinitely
under current U.S. tax law. 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
- 15 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
RESULTS OF OPERATIONS
For the three and six months ended June 30, 2003 and June 30, 2002, the
results of operations of New Valley's primary operating units are as follows.
For the three and six months ended June 30, 2003, New Valley's real estate
operations include the accounts of the two office buildings, its 50% interest in
Douglas Elliman Realty, LLC and other entities. For the three and six months
ended June 30, 2002, real estate operations include the shopping center and
BrookeMil.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- --------------------------
2003 2002 2003 2002
------- ------- ------- -------
Real estate:
Revenues $ 1,777 $ 237 $ 3,576 $ 661
Expenses 1,117 1,003 2,387 1,499
Other (loss) income (174) 8,909 (891) 8,909
------- ------- ------- -------
Operating income before
taxes and minority interests $ 486 $ 8,143 $ 298 $ 8,071
======= ======= ======= =======
Corporate and other:
Revenues $ 142 $ 1,495 $ 586 $ 3,355
Expenses 2,541 3,067 5,766 6,279
Other loss (5) (394) (12) (398)
------- ------- ------- -------
Operating loss before taxes
and minority interests $(2,404) $(1,966) $(5,192) $(3,322)
======= ======= ======= =======
THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2002
Consolidated total revenues were $1,919 for the three months ended June
30, 2003 versus $1,732 for the same period last year. The increase in revenues
of $187 was attributable primarily to additional rental revenues from the
acquisition of the two commercial office buildings in Princeton, N.J. in
December 2002 offset by decreased gains on the sale of investments of $957 and
the absence of rental revenue from New Valley's remaining U.S. shopping center,
which was disposed of in May 2002.
Revenues from real estate operations for the three months ended June
30, 2003 increased by $1,540 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 $114 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
and expenses associated with the closing of BrookeMil's Russian operations. New
Valley recorded gains on sale of real estate in the second quarter of 2002 of
$8,484 in connection with the April 2002 sale of BrookeMil and $425 from the
- 16 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
disposal of the remaining U.S. shopping center. 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.
Other income from real estate activities in 2003 consisted of equity
losses from non-consolidated real estate businesses of $174. The losses resulted
from losses of $112 related to Douglas Elliman Realty, LLC and $62 related to
New Valley's investment in Koa Investors, which owns the former Kona Surf Hotel
in Kailua-Kona, Hawaii. Koa Investors' loss primarily represents management
fees. Koa Investors capitalizes all costs related to the acquisition and
development of the property. New Valley's equity loss in Douglas Elliman Realty,
LLC includes New Valley's portion ($725) of amortization associated with Douglas
Elliman, LLC's customer contracts outstanding at the acquisition date.
For the three months ended June 30, 2003, New Valley's revenues of $142
related to corporate and other activities consisted of interest and dividend
income of $142. For the same period in the prior year, revenues related to
corporate and other activities were $1,495, which consisted of net gains on
investments of $957 and interest and dividend income of $538. The decrease in
interest income is due primarily to lower interest rates and lower cash balances
in 2003 versus 2002.
Corporate and other expenses of $2,541 for the three months ended June
30, 2003 consisted primarily of employee compensation and benefits of $1,436 and
legal expense of $417. Corporate and other expenses of $3,067 for the second
quarter of 2002 consisted primarily of employee compensation and benefits of
$1,616 and legal expense of $484.
New Valley recorded a $388 charge for the three months ended June 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. Oracle subsequently advised ThinkCorp Holdings that the
specified sales target for 2002 was likewise not met.
There was no income tax for the three months ended June 30, 2003 and
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.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2002
Consolidated total revenues were $4,162 for the six months ended June
30, 2003 versus $4,016 for the same period last year. The increase in revenues
of $146 was attributable primarily to additional rental revenues from the
acquisition of the two commercial office buildings in Princeton, N.J. in
December 2002 offset by decreased gains on the sale of investments of $2,069 and
the absence of rental revenue from New Valley's remaining U.S. shopping center,
which was disposed of in May 2002.
Revenues from real estate operations for the six months ended June 30,
2003 increased by $2,915 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 $888 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 and
expenses associated with the closing of BrookeMil's Russian operations. New
Valley recorded gains on sale of real estate in the second quarter of 2002 of
$8,484 in connection with the April 2002 sale of BrookeMil and $425 from the
disposal of the remaining U.S. shopping center. 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.
- 17 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Other income from real estate activities in 2003 consisted of equity
losses from non-consolidated real estate businesses of $891. The equity losses
resulted from $689 of losses associated with Douglas Elliman Realty, LLC and
$202 related to New Valley's investment in Koa Investors, which owns the former
Kona Surf Hotel in Kailua-Kona, Hawaii. Koa Investors' loss primarily represents
management fees. Koa Investors capitalizes all costs related to the acquisition
and development of the property. New Valley's equity loss in Douglas Elliman
Realty, LLC includes New Valley's portion ($725) of amortization associated with
Douglas Elliman, LLC's customer contracts outstanding at the acquisition date.
For the six months ended June 30, 2002, New Valley's revenues of $586
related to corporate and other activities consisted of net gains on investments
of $163 and interest and dividend income of $423. For the same period in the
prior year, revenues related to corporate and other activities were $3,355,
which consisted of net gains on investments of $2,232 and interest and dividend
income of $1,123. The decrease in interest income is due primarily to lower
interest rates and lower cash balances in 2003 versus 2002.
Corporate and other expenses of $5,766 for the six months ended June
30, 2003 consisted primarily of employee compensation and benefits of $3,039 and
legal expense of $1,188. Corporate and other expenses of $6,279 for the six
months ended June 30, 2002 consisted primarily of employee compensation and
benefits of $3,237 and legal expense of $893. The increase in corporate
expense was primarily due to expenses related to a proposed acquisition by New
Valley which was not consummated.
New Valley recorded a $388 charge for the six months ended June 30,
2003 related to a provision for loss on its net investment in ThinkCorp
Holdings.
There was no income tax for the six months ended June 30, 2003 and
2002, respectively. 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 six months ended June 30, 2003, New Valley's cash and cash
equivalents decreased from $82,113 to $67,499 due primarily to the $9,500
investment in Douglas Elliman Realty, LLC and cash used for operations of
$5,695.
Cash used for operating activities for the six months ended June 30,
2003 was $5,695 compared with cash provided from operating activities for the
six months ended June 30, 2002 of $11,300. The difference is primarily due to
the receipt of $17,551 in the first quarter of 2002 from the settlement of a
lawsuit offset by a decrease in payables, 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 six months ended June 30,
2003 was $7,252 compared to cash provided from investing activities of $20,062
for the six months ended June 30, 2002. The difference is primarily attributable
to the sale of BrookeMil for $20,461, net of closing expenses, in 2002, the
$9,500 investment in Douglas Elliman Realty, LLC in 2003 and the differences in
net sales of marketable securities and long-term investments of $1,844 in 2003
versus $2,568 in 2002, offset by the issuance of a note receivable to Ladenburg
Thalmann Financial Services Inc. 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,
- 18 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 Douglas Elliman Real Estate, the largest
independently owned and operated real estate brokerage company on Long Island,
New York and a minority interest in an affiliated mortgage company. On December
19, 2002, New Valley and the other owners of Prudential Douglas Elliman Real
Estate contributed their interests in Prudential Douglas Elliman Real Estate to
Douglas Elliman Realty, LLC, a newly formed entity. New Valley acquired a 50%
interest in Douglas Elliman Realty, LLC as a result of an additional investment
of $1,413 by New Valley and the redemption by Prudential Douglas Elliman Real
Estate of various ownership interests.
In March 2003, Douglas Elliman Realty, LLC purchased the leading New
York City - based residential brokerage firm, Douglas Elliman, LLC, formerly
Insignia Douglas Elliman, and an affiliated property management company, for
$71,250. With that acquisition, the combination of Prudential Douglas Elliman
Real Estate with Douglas Elliman, LLC 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 Douglas Elliman Realty, LLC
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 June 30, 2003 in the project. New Valley is
also required to make additional investments in another limited partnership of
up to $979 at June 30, 2003.
In March 2002, New Valley lent $2,500 to Ladenburg Thalmann Financial
Services, 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.
New Valley has received a notice of proposed assessment from a state
taxing authority related to the years ended December 31, 1994 and 1995. If the
state taxing authority were to prevail, New Valley would owe approximately
$6,900, including interest, at June 30, 2003. New Valley intends to vigorously
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
oppose the proposed assessment. An initial administrative hearing has been
scheduled for October 2003. If New Valley is unsuccessful in the initial
administrative hearing, it may request an additional administrative hearing
prior to challenging the notice of proposed assessment in court. No assurances
can be given that New Valley will prevail in this matter. New Valley believes it
has fully provided for any amounts due in its consolidated financial statements
as of June 30, 2003.
As of June 30, 2003, New Valley had $656 of prepetition
bankruptcy-related claims and restructuring accruals including claims for lease
rejection damages and for unclaimed monies that certain states are seeking on
behalf of money transfer customers. The remaining claims may be subject to
future adjustments based on potential settlements or decisions of the court.
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.
Cash flows used in financing activities were $1,667 for the six months
ended June 30, 2003 and $12,171 for the six months ended June 30, 2002. The 2003
amount primarily consists of the repurchase of 318,572 of New Valley's Common
Shares for $1,346 in 2003. The 2002 amount primarily consists of the repayment
of the participating loan to Apollo in connection with the sale of BrookeMil.
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
August 13, 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.
NEW ACCOUNTING PRONOUNCEMENTS
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003. The
Company is currently analyzing the provisions of SFAS No. 149 to determine if
there will be any impact of adoption, but does not believe that there will be
any material impact on its consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how companies classify and measure certain
financial instruments with characteristics of both liabilities and equity. It
requires companies to classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
immediately for financial instruments entered into or modified after May 15,
2003 and in the first interim period after June 15, 2003 for all other financial
instruments. The Company is currently analyzing the provisions of SFAS No. 150
to determine its impact, but does not believe that there will be any 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
$19,276 at June 30, 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 June 30, 2003, New Valley's outstanding debt consisted of a
non-recourse mortgage note payable with a variable interest rate, 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 borrowing, which could adversely affect its cash flows. As of June 30,
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 Litigation Reform Act of 1995, including any statements that may be
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 Litigation 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.
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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 its disclosure controls
and procedures as of the end of the period covered by this report, and, based on
that evaluation, its principal executive officer and principal financial officer
have concluded that these controls and procedures are effective. There were no
changes in New Valley's internal control over financial reporting during the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, New Valley's internal control over financial
reporting.
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 or submits 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.
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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 June 30, 2003.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
New Valley held its 2003 annual meeting of stockholders on June 2,
2003. There were 22,117,852 New Valley common shares entitled to be voted on the
April 28, 2003 record date for the meeting. The only matter submitted to the New
Valley's stockholders for a vote at the annual meeting was to elect the
following eight director nominees to serve for the ensuing year and until their
successors are elected. The votes cast and withheld for such nominees were as
follows:
NOMINEE FOR WITHHELD
------- --- --------
Henry C. Beinstein 19,989,152 146,111
Arnold I. Burns 19,989,014 146,249
Ronald J. Kramer 19,988,872 146,391
Richard J. Lampen 19,989,091 146,172
Bennett S. LeBow 19,987,106 148,157
Howard M. Lorber 19,988,735 146,528
Barry W. Ridings 19,988,180 147,083
Victor M. Rivas 19,988,636 146,627
Based on these voting results, each of the directors nominated was
elected.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Second Amendment to Operating Agreement of Douglas Elliman
Realty, LLC (formerly known as Montauk Battery Realty, LLC),
dated as of May 19, 2003.
31.1 Certification of Chief Executive Officer, Pursuant to
Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, Pursuant to
Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 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.
32.2 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
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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: August 14, 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)
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