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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 NOVEMBER 12, 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 SEPTEMBER 30, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30,
2003 and December 31, 2002.................................... 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30,
2003 and 2002................................................. 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity for the nine months ended
September 30, 2003............................................ 5
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2003 and 2002............. 6
Notes to Condensed Consolidated Financial Statements.............. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 25
Item 4. Controls and Procedures........................................... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 26
Item 2. Changes in Securities and Use of Proceeds......................... 26
Item 6. Exhibits and Reports on Form 8-K.................................. 26
SIGNATURE........................................................................... 27
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NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
September 30, December 31,
2003 2002
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 66,652 $ 82,113
Investment securities available for sale .................................. 19,557 13,391
Restricted assets ......................................................... 1,190 1,811
Other current assets ...................................................... 433 402
--------- ---------
Total current assets .................................................. 87,832 97,717
--------- ---------
Investments in real estate, net ................................................ 53,311 54,208
Investments in non-consolidated real estate businesses ......................... 17,274 7,808
Restricted assets .............................................................. 174 168
Long-term investments, net ..................................................... 2,559 3,150
Other assets ................................................................... 412 497
--------- ---------
Total assets .......................................................... $ 161,562 $ 163,548
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of mortgage note payable .................................. $ 644 $ 644
Accounts payable and accrued liabilities .................................. 3,006 5,741
Prepetition claims and restructuring accruals ............................. 655 674
Income taxes .............................................................. 10,445 10,499
--------- ---------
Total current liabilities ............................................. 14,750 17,558
--------- ---------
Mortgage note payable .......................................................... 39,374 39,856
Other long-term liabilities .................................................... 2,808 3,077
Commitments and contingencies .................................................. -- --
Stockholders' equity:
Common Shares, $.01 par value; 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 ....................................................... (764,524) (759,806)
Accumulated other comprehensive income (loss) ............................. 6,600 (1,037)
--------- ---------
Total stockholders' equity ............................................ 104,630 103,057
--------- ---------
Total liabilities and stockholders' equity ............................ $ 161,562 $ 163,548
========= =========
See accompanying notes to condensed
consolidated financial statements
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NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Real estate leasing ....................................... $ 1,797 $ -- $ 5,373 $ 661
Gain (loss) on sale of investments, net ................... 443 (25) 606 2,207
Interest and dividend income .............................. 153 593 576 1,716
------------ ------------ ------------ ------------
Total ................................................. 2,393 568 6,555 4,584
------------ ------------ ------------ ------------
Cost and expenses:
General and administrative ................................ 2,595 2,635 8,349 8,576
Rental real estate activities, excluding interest ......... 838 -- 2,506 1,499
Interest expense .......................................... 348 -- 1,079 338
------------ ------------ ------------ ------------
Total ................................................. 3,781 2,635 11,934 10,413
------------ ------------ ------------ ------------
Other results from operations:
Gain on sale of real estate ............................... -- 139 -- 9,048
Equity income from non-consolidated real estate businesses 1,527 341 636 341
Provision for loss on net investment in subsidiary ........ -- -- -- (388)
Provision for uncollectibility of notes receivable ........ -- (13,198) -- (13,198)
Other income (loss) ....................................... 33 -- 21 (10)
------------ ------------ ------------ ------------
Total ................................................. 1,560 (12,718) 657 (4,207)
------------ ------------ ------------ ------------
Income (loss) from operations before income taxes
and minority interests .................................... 172 (14,785) (4,722) (10,036)
Minority interests in loss of consolidated subsidiaries ........ -- -- (4) (167)
------------ ------------ ------------ ------------
Net income (loss) .............................................. $ 172 $ (14,785) $ (4,718) $ (9,869)
============ ============ ============ ============
Income (loss) per Common Share (basic):
Net income (loss) per Common Share ........................ $ 0.01 $ (0.65) $ (0.21) $ (0.43)
============ ============ ============ ============
Number of shares used in computation ........................... 22,117,852 22,881,467 22,155,528 22,861,677
============ ============ ============ ============
Income (loss) per Common Share (diluted):
Net income (loss) per Common Share ........................ $ 0.01 $ (0.65) $ (0.21) $ (0.43)
============ ============ ============ ============
Number of shares used in computation ........................... 22,120,166 22,881,467 22,155,528 22,861,677
============ ============ ============ ============
See accompanying notes to condensed
consolidated financial statements
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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 .................... -- -- (4,718) -- (4,718)
Unrealized gain on investment
securities ................ -- -- -- 7,637 7,637
Repurchase of Common Shares . (3) (1,343) -- -- (1,346)
--------- --------- --------- --------- ---------
Balance, September 30, 2003 .... $ 221 $ 862,333 $(764,524) $ 6,600 $ 104,630
========= ========= ========= ========= =========
See accompanying notes to condensed
consolidated financial statements
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NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Nine Months Ended
September 30,
-------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss .................................................................... $ (4,718) $ (9,869)
Adjustments to reconcile net loss to net cash (used for)
provided from operating activities:
Depreciation and amortization ........................................... 962 191
Stock-based compensation expense ........................................ -- 442
Gain on sale of investments ............................................. (606) (2,207)
Gain on sale of assets .................................................. -- (8,660)
Provision for uncollectibility of notes receivable ...................... -- 13,198
Equity income from non-consolidated real estate businesses .............. (636) (341)
Minority interests in loss from operations of consolidated subsidiaries . (4) (167)
Changes in assets and liabilities, net of effects of dispositions:
Decrease in receivables and other assets .............................. 610 20,544
Decrease in accounts payable and accrued liabilities .................. (3,054) (3,994)
--------- ---------
Net cash (used for) provided from operating activities ......................... (7,446) 9,137
--------- ---------
Cash flows from investing activities:
Sale or maturity of investment securities ................................. 2,361 5,626
Purchase of investment securities ......................................... (372) (6,034)
Sale or liquidation of long-term investments .............................. 874 --
Purchase of long-term investments ......................................... (195) --
Purchase of non-consolidated real estate businesses ....................... (9,500) (750)
Distributions from non-consolidated real estate businesses ................ 670 --
Sale of real estate, net .................................................. -- 20,461
Purchase of real estate ................................................... -- (688)
Payment of prepetition claims and restructuring accruals .................. (19) (2,025)
Increase in restricted assets ............................................. (6) --
Repayment of note receivable .............................................. -- 1,000
Issuance of notes receivable .............................................. -- (5,000)
--------- ---------
Net cash (used for) provided from investing activities ......................... (6,187) 12,590
--------- ---------
Cash flows used for financing activities:
Repayment of participating loan ........................................... -- (12,400)
Repayment of mortgage notes payable ....................................... (482) (36)
Exercise of stock options ................................................. -- 265
Repurchase of Common Shares ............................................... (1,346) --
--------- ---------
Net cash used for financing activities ......................................... (1,828) (12,171)
--------- ---------
Net (decrease) increase in cash and cash equivalents ........................... (15,461) 9,556
Cash and cash equivalents, beginning of period ................................. 82,113 92,069
--------- ---------
Cash and cash equivalents, end of period ....................................... $ 66,652 $ 101,625
========= =========
See accompanying notes to condensed
consolidated financial statements
-6-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
The consolidated financial statements include the accounts of New
Valley Corporation and its majority-owned subsidiaries ("New Valley" or
the "Company"). The consolidated financial statements as of September
30, 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 September 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 September 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.
-7-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is based on the weighted
average number of Common Shares outstanding. Diluted net income (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 18,032,771 were not included in the computation of diluted
loss per share for the three and nine months ended September 30, 2003
and 2002, as the effect would have been anti-dilutive.
EQUITY INCOME FROM NON-CONSOLIDATED REAL ESTATE BUSINESSES
The Company accounts for its non-consolidated real estate businesses,
Douglas Elliman Realty, LLC and Koa Investors LLC, which are 50% owned
by the Company, on the equity method. See Note 3.
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 11.
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
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not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN No. 46, as amended, is effective February 1, 2003 for
variable interest entities created after January 31, 2003, and December
15, 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 adoption of this
statement did not impact on the Company's 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 adoption of this statement did not impact on the
Company's 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 September 30, 2003 are as follows:
Land ......................................... $ 7,636
Buildings .................................... 46,622
--------
Total ................................. 54,258
Less accumulated depreciation ................ (947)
--------
Investments in real estate, net ....... $ 53,311
========
Mortgage note payable ........................ $ 40,018
Current portion of mortgage note payable ..... 644
--------
Mortgage note payable - long-term portion .... $ 39,374
========
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.
-9-
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 NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 2002 30, 2002 30, 2002 30, 2002
------------ ----------- ------------ -----------
Revenues ....................... $ 2,407 $ 9,789 $ 568 $ 4,584
Net loss ....................... $(14,219) $ (8,327) $(14,785) $ (9,869)
======== ======== ======== ========
Net loss per common
share (basic and diluted) ... $ (0.62) $ (0.36) $ (0.65) $ (0.43)
======== ======== ======== ========
Shopping Center
New Valley disposed of its remaining U.S. shopping center in May 2002
and recorded a gain in connection with the disposal of $139 and $564
for the three and nine months ended September 30, 2002, respectively,
which resulted from the shopping center's negative book value. 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 nine months ended September 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 $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, 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
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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 46% 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 earned by New Valley on the subordinated
debt is recognized in the Company's consolidated statements of
operations as part of equity income from non-consolidated real estate
businesses.
New Valley accounts for its interest in Douglas Elliman Realty, LLC on
the equity method and recorded income of $1,590 and $901 for the three
and nine months ended September 30, 2003, respectively, associated with
Douglas Elliman Realty, LLC. New Valley recorded income of $1,014 for
the three and nine months ended September 30, 2002, respectively,
associated with Douglas Elliman Realty, LLC. New Valley's equity income
in Douglas Elliman Realty, LLC has been reduced by New Valley's portion
($621 and $1,346, respectively) of amortization expense 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 has committed to make
additional investments of up to $6,600 at September 30, 2003. The
Company anticipates funding $1,500 in November 2003.
The Company accounts for its interest in Koa Investors under the equity
method and recorded a losses of $63 and $265 for the three and nine
months ended September 30, 2003, respectively, associated with the
property. Koa Investors' loss primarily represents management fees. The
Company recorded a loss of $673 for the three and nine months ended
September 30, 2002, respectively, associated with the property. Koa
Investors capitalizes all costs related to the acquisition and
development of the property during the construction phase.
4. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at
fair value, with net unrealized gains (losses) included as a component
of stockholders' equity. The Company had realized gains (losses) on
sales of investment securities available for sale of $443 and $518 for
the three and nine months ended September 30, 2003, respectively, and
$(25) and $2,207 for the three and nine months ended September 30,
2002, respectively.
The components of investment securities available for sale, which were
all equity securities, at September 30, 2003 are as follows:
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
Investment securities.......... $12,957 $6,659 $59 $19,557
-11-
5. LONG-TERM INVESTMENTS
At September 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 $8,521
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 has committed to make additional
investments in one of its limited partnerships up to an aggregate of
$980 at September 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 nine months ended September 30,
2003 related to the liquidation of one of its limited partnership
investments.
6. NOTES RECEIVABLE
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.
7. OTHER LONG-TERM LIABILITIES
The components of other long-term liabilities, excluding New Valley's
mortgage note payable, at September 30, 2003 are as follows:
LONG-TERM CURRENT
PORTION PORTION
--------- -------
Retiree and disability obligations ..... $2,630 $ 500
Other long-term liabilities ............ 178 --
------ ------
Total other long-term liabilities ...... $2,808 $ 500
====== ======
-12-
8. CONTINGENCIES
Lawsuits
In March 1997, a stockholder derivative suit was filed against the
Company, as a nominal defendant, its directors and Brooke Group Holding
Inc. ("Brooke Group Holding"), an indirect wholly-owned subsidiary of
Vector 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 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 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 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 $7,050, including interest, at September 30, 2003. An
initial administrative hearing has been scheduled for December 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 September 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.
-13-
As of September 30, 2003, New Valley had $655 of prepetition
bankruptcy-related claims and restructuring accruals. The remaining
claims may be subject to future adjustments based on potential
settlements or decisions of the court.
In December 2001, New Valley's subsidiary, Western Realty Development
LLC, sold all the membership interests in its subsidiary, Western
Realty Investments LLC, which was the entity through which Western
Realty Development owned the Ducat Place II office building and the
adjoining Ducat Place III site in Moscow, Russia, to Andante Limited, a
Bermuda company. In August 2003, Andante submitted an indemnification
claim to Western Realty Development alleging losses of $1,225 from
breaches of various representations made in the purchase agreement.
Under the terms of the purchase agreement, Western Realty Development
has no obligation to indemnify Andante unless the aggregate amount of
all claims for indemnification made by Andante exceeds $750, and
Andante is required to bear the first $200 of any proven loss. New
Valley would be responsible for 70% of any damages payable by Western
Realty Development. Western Realty Development intends to contest the
indemnification claim.
9. 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 and nine months ended September 30, 2003 and 2002.
CORPORATE
REAL ESTATE AND OTHER TOTAL
----------- --------- -----
Three months ended September 30, 2003
Revenues ................................ $ 1,797 $ 596 $ 2,393
Other income ............................ 1,527 33 1,560
Operating income (loss) ................. 2,138 (1,966) 172
Depreciation and amortization ........... 320 -- 320
Three months ended September 30, 2002
Revenues ................................ -- 568 568
Other income (loss) ..................... 480 (13,198) (12,718)
Operating income (loss) ................. 484 (15,269) (14,785)
Depreciation and amortization ........... -- -- --
Nine months ended September 30, 2003
Revenues ................................ $ 5,373 $ 1,182 $ 6,555
Other income ............................ 636 21 657
Operating income (loss) ................. 2,424 (7,146) (4,722)
Identifiable assets ..................... 73,298 88,264 161,562
Depreciation and amortization ........... 962 -- 962
Capital expenditures .................... -- -- --
Nine months ended September 30, 2002
Revenues ................................ 661 3,923 4,584
Other income (loss) ..................... 9,389 (13,596) (4,207)
Operating income (loss) ................. 8,213 (18,249) (10,036)
Identifiable assets ..................... 9,500 116,779 126,279
Depreciation and amortization ........... 191 -- 191
Capital expenditures .................... 688 -- 688
-14-
10. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) of the Company includes net income (loss)
and net changes in the value of investment securities available for
sale that have not been included in net income (loss). Comprehensive
income (loss) applicable to Common Shares for the three and nine months
ended September 30, 2003 and 2002 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income (loss) .................. $ 172 $(14,785) $ (4,718) $ (9,869)
Net change in unrealized gain
on investment securities ........ 813 (8,881) 7,637 (10,705)
-------- -------- -------- --------
Comprehensive income (loss) ..... $ 985 $(23,666) $ 2,919 $(20,574)
======== ======== ======== ========
11. 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 nine months ended September 30,
2003 and 2002, respectively.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income (loss) applicable to
Common Shares, as reported .............. $ 172 $(14,785) $ (4,718) $ (9,869)
Deduct: Amortization of fair value of
New Valley option grants ................ (13) (10) (38) (223)
Add: Stock option compensation
included ................................ 252 240 756 720
Deduct: Amortization of fair value of
Vector option grants .................... (422) (422) (1,266) (1,266)
-------- -------- -------- --------
Net loss applicable to Common Shares,
as adjusted ............................. $ (11) $(14,977) $ (5,266) $(10,638)
======== ======== ======== ========
Adjusted net loss per share - basic and
diluted ................................. $ (0.00) $ (0.66) $ (0.24) $ (0.47)
======== ======== ======== ========
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTRODUCTION
For the three and nine months ended September 30, 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 nine
months ended September 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 $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 $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 46% 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.
-16-
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 September 30, 2003, New
Valley had investment securities available for sale of $19,557. 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 nine
months ended September 30, 2003, New Valley had net increases to unrealized
gains on investment securities of $7,637, 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 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 September 30, 2003, New Valley had long-term
investments of $2,560, which principally represented 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 $161,500 as of September 30, 2003 and capital loss
carry forwards of $5,100, 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 September 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 to utilize it
-17-
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 nine months ended September 30, 2003 and September
30, 2002, the results of operations of New Valley's primary operating units are
as follows. For the three and nine months ended September 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
nine months ended September 30, 2002, real estate operations include the
shopping center and BrookeMil.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Real estate:
Revenues .......................... $ 1,797 $ -- $ 5,373 $ 661
Expenses .......................... 1,186 (4) 3,585 1,837
Other income ...................... 1,527 480 636 9,389
-------- -------- -------- --------
Operating income (loss) before
taxes and minority interests ... $ 2,138 $ 484 $ 2,424 $ 8,213
======== ======== ======== ========
Corporate and other:
Revenues .......................... $ 596 $ 568 $ 1,182 $ 3,923
Expenses .......................... 2,595 2,639 8,349 8,576
Other income (loss) ............... 33 (13,198) 21 (13,596)
-------- -------- -------- --------
Operating loss before taxes
and minority interests ......... $ (1,966) $(15,269) $ (7,146) $(18,249)
======== ======== ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2002
Consolidated total revenues were $2,393 for the three months ended
September 30, 2003 versus $568 for the same period last year. The increase in
revenues of $1,825 was attributable primarily to additional rental revenues from
the acquisition of two commercial office buildings in Princeton, N.J. in
December 2002 and increased gains on the sale of investments of $468 offset by
lower interest income of $440.
Revenues from real estate operations for the three months ended
September 30, 2003 were $1,797, which represented rental revenues from New
Valley's two office buildings, which were acquired in December 2002. Expenses of
the real estate operations were $1,186 in the 2003 period which were primarily
associated with the office buildings. There were neither significant revenues
nor expenses associated with real estate operations for the three months ended
September 30, 2002.
-18-
Other income from real estate activities for the three months ended
September 30, 2003 consisted of equity income from non-consolidated real estate
businesses of $1,527. The equity income resulted from income of $1,590 from
Douglas Elliman Realty, LLC offset by a loss of $63 related to New Valley's
investment in Koa Investors, which owns the former Kona Surf Hotel in
Kailua-Kona, Hawaii. The principal source of Douglas Elliman Realty, LLC's
revenues and profitability is commissions earned on residential property sales.
As a result, the third quarter is generally its most profitable quarter as
Douglas Elliman, LLC and Prudential Douglas Elliman Real Estate recognize
revenue upon closing of the underlying real estate sale. Therefore, revenue
recognized by Douglas Elliman Realty, LLC in the third quarter includes closings
of residential property sales that were contracted during in the spring and
summer months, which is the principal selling season of Douglas Elliman, LLC and
Prudential Douglas Elliman Real Estate. New Valley's equity income in Douglas
Elliman Realty, LLC has been reduced by New Valley's portion ($620) of
amortization expense associated with Douglas Elliman, LLC's customer contracts
outstanding at the acquisition date. Koa Investors' loss primarily represents
management fees. Koa Investors capitalizes all costs related to the acquisition
and development of the property during the construction phase.
For the three months ended September 30, 2003, New Valley's revenues of
$596 related to corporate and other activities consisted of net gains on
investments of $443 and interest and dividend income of $153. For the same
period in the prior year, revenues related to corporate and other activities
were $568, which consisted of interest and dividend income of $593 offset by
losses on investments of $25. The decrease in interest income is due primarily
to lower prevailing interest rates and lower cash balances in 2003 versus 2002.
Corporate and other expenses of $2,595 for the three months ended
September 30, 2003 consisted primarily of employee compensation and benefits of
$1,472 and legal expense of $342. Corporate and other expenses of $2,639 for the
third quarter of 2002 consisted primarily of employee compensation and benefits
of $1,394 and legal expense of $482.
New Valley evaluated its ability to collect $13,198 of notes and
interest receivable from Ladenburg Thalmann Financial Services Inc. at September
30, 2002. New Valley determined, based on current trends in the broker-dealer
industry and Ladenburg's operating results and liquidity needs, that a reserve
for uncollectibility should be established against these notes and interest
receivable. As a result, New Valley recorded a charge of $13,198 in the third
quarter of 2002.
There was no income tax for the three months ended September 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.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2002
Consolidated total revenues were $6,555 for the nine months ended
September 30, 2003 versus $4,584 for the same period last year. The increase in
revenues of $1,971 was attributable primarily to additional rental revenues from
the acquisition of two commercial office buildings in Princeton, N.J. in
December 2002 offset by decreased gains on the sale of investments of $1,601,
decreased interest and dividend income of $1,140 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 nine months ended
September 30, 2003 increased by $4,712 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
$1,748 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 $564 from the disposal of the remaining U.S. shopping center, which resulted
from the shopping center's negative book value. 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.
-19-
Other income from real estate activities for the nine months ended
September 30, 2003 consisted of equity income from non-consolidated real estate
businesses of $636. The equity income resulted from income of $901 from Douglas
Elliman Realty, LLC offset by a loss of $265 related to New Valley's investment
in Koa Investors, which owns the former Kona Surf Hotel in Kailua-Kona, Hawaii.
New Valley's equity income in Douglas Elliman Realty, LLC has been reduced by
New Valley's portion ($1,346) of amortization expense associated with Douglas
Elliman, LLC's customer contracts outstanding at the acquisition date. Koa
Investors' loss primarily represents management fees. Koa Investors capitalizes
all costs related to the acquisition and development of the property during the
construction phase.
For the nine months ended September 30, 2002, New Valley's revenues of
$1,182 related to corporate and other activities consisted of net gains on
investments of $606 and interest and dividend income of $576. For the same
period in the prior year, revenues related to corporate and other activities
were $3,923, which consisted of net gains on investments of $2,207 and interest
and dividend income of $1,716. The decrease in interest income is due primarily
to lower prevailing interest rates and lower cash balances in 2003 versus 2002.
Corporate and other expenses of $8,349 for the nine months ended
September 30, 2003 consisted primarily of employee compensation and benefits of
$4,511 and legal expense of $1,530. Corporate and other expenses of $8,576 for
the nine months ended September 30, 2002 consisted primarily of employee
compensation and benefits of $4,631 and legal expense of $1,375.
New Valley recorded a $388 charge for the nine months ended September
30, 2002 related to a provision for loss on its net investment in its 72.7%
subsidiary, ThinkCorp Holdings Corporation, formerly known as Thinking Machines
Corporation. In June 1999, ThinkCorp Holdings sold substantially all of its
assets, consisting of its Darwin(R) software and services business, to Oracle
Corporation. The purchase price included a contingent payable of $20,300 based
on sales by Oracle of the Darwin product above specified sales targets during a
three-year period. Based on Oracle having informed ThinkCorp Holdings that the
specified sales targets for the 2000 and 2001 periods were not achieved and the
overall market conditions in the U.S. computer industry, New Valley determined
it was more likely than not that it would not recover its investment in
ThinkCorp Holding. Oracle subsequently advised ThinkCorp Holdings that the
specified sales target for 2002 was likewise not met.
New Valley evaluated its ability to collect $13,198 of notes and
interest receivable from Ladenburg Thalmann Financial Services at September 30,
2002. New Valley determined, based on current trends in the broker-dealer
industry and Ladenburg's operating results and liquidity needs, that a reserve
for uncollectibility should be established against these notes and interest
receivable. As a result, New Valley recorded a charge of $13,198 in the third
quarter of 2002.
There was no income tax for the nine months ended September 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 nine months ended September 30, 2003, New Valley's cash and
cash equivalents decreased from $82,113 to $66,652 due primarily to the $9,500
investment in Douglas Elliman Realty, LLC and cash used in operations of $7,446.
Cash used for operating activities for the nine months ended September
30, 2003 was $7,446 compared to cash provided from operating activities for the
nine months ended September 30, 2002 of $9,137. The difference is primarily due
to the receipt of $17,551 in the first quarter of 2002 from a lawsuit. The
lawsuit settlement resulted from litigation, which arose out of the insurers'
participation in a program of insurance covering the amount of fuel in the
Westar IV and V communication satellites owned by New Valley's former Western
Union satellite business, which was sold in 1989. The two satellites, each of
which 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.
-20-
Cash used for investing activities for the nine months ended September
30, 2003 was $6,187 compared with cash provided from investing activities for
the nine months ended September 30, 2002 of $12,590. The difference is primarily
attributable to the sale of BrookeMil for $20,461, net of closing expenses, in
2002 and the $9,500 investment in Douglas Elliman Realty, LLC in 2003 offset by
the issuance of a note receivable to Ladenburg Thalmann Financial Services of
$5,000 in 2002, differences in net sales of marketable securities and long-term
investments of $3,826 and the payment of prepetition claims and restructuring
accruals of $2,006.
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 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 has committed to make
additional investments of up to $6,600 at September 30, 2003, of which $1,500 is
anticipated to be funded in November 2003, in the project. New Valley has also
committed to make additional investments in another limited partnership of up to
$980 at September 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.
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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
$7,050, including interest, at September 30, 2003. An initial administrative
hearing has been scheduled for December 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 at September 30, 2003.
In December 2001, New Valley's subsidiary, Western Realty Development
LLC, sold all the membership interests in its subsidiary, Western Realty
Investments LLC, which was the entity through which Western Realty Development
owned the Ducat Place II office building and the adjoining Ducat Place III site
in Moscow, Russia, to Andante Limited, a Bermuda company. In August 2003,
Andante submitted an indemnification claim to Western Realty Development
alleging losses of $1,225 from breaches of various representations made in the
purchase agreement. Under the terms of the purchase agreement, Western Realty
Development has no obligation to indemnify Andante unless the aggregate amount
of all claims for indemnification made by Andante exceeds $750, and Andante is
required to bear the first $200 of any proven loss. New Valley would be
responsible for 70% of any damages payable by Western Realty Development.
Western Realty Development intends to contest the indemnification claim.
As of September 30, 2003, New Valley had $655 of prepetition
bankruptcy-related claims and restructuring accruals. The remaining claims may
be subject to future adjustments based on potential settlements or decisions of
the court. In August 2002, the Company paid $2,000 to settle a claim for
unclaimed monies that certain states were seeking on behalf of money transfer
customers and the restructuring accruals were reduced by a corresponding amount
in the third quarter of 2002. In connection with the settlement, in the second
quarter of 2002, the Company reclassified $711 of accrued dividends to
stockholders' equity.
In April 2002, New Valley sold the shares of BrookeMil for
approximately $22,000 before closing expenses. New Valley recorded a gain of
$8,484 in the second quarter of 2002 in connection with the sale.
Cash flows used in financing activities were $1,828 for the nine months
ended September 30, 2003 and $12,171 for the nine months ended September 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.
In October 1999, New Valley's Board of Directors authorized the
repurchase of up to 2,000,000 Common Shares from time to time on the open market
or in privately negotiated transactions depending on market conditions. As of
November 13, 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.
-22-
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
support from other parties. FIN No. 46, as amended, is effective February 1,
2003 for variable interest entities created after January 31, 2003, and December
15, 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
adoption of this statement did not impact on New Valley's 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 adoption of this statement did not impact on New Valley's
consolidated financial statements.
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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
$19,557 at September 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 September 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 September 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
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.
-25-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 8 to the "Notes to the Condensed Quarterly Consolidated
Financial Statements" in Part I, Item 1 to this Report.
Item 2. Changes in Securities and Use of Proceeds
No securities of the Company which were not registered under the
Securities Act of 1933, as amended, have been issued or sold by the
Company during the three months ended September 30, 2003.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 First Amendment to Loan Agreement dated as of October
24, 2003 between New Valley Corporation, each of the
lenders signatory thereto and HSBC Realty Credit
Corporation (USA), as Administrative Agent.
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: November 13, 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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