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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
COMMISSION FILE NUMBER 1-2493
NEW VALLEY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-5482050
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 S.E. SECOND STREET, 32ND FLOOR
MIAMI, FLORIDA 33131
(Address of principal executive offices) (Zip Code)
(305) 579-8000
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [x] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES [ ] NO [x]
AS OF MAY 7, 2004, THERE WERE OUTSTANDING 22,117,852 OF THE REGISTRANT'S
COMMON SHARES, $.01 PAR VALUE.
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NEW VALLEY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2004
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
------
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31,
2004 and December 31, 2003.................................... 3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 2004 and 2003................ 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity for the three months
ended March 31, 2004.......................................... 5
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2004 and 2003................ 6
Notes to the 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................................................... 24
Item 4. Controls and Procedures........................................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 25
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities......................... 25
Item 6. Exhibits and Reports on Form 8-K.................................. 25
SIGNATURE........................................................................... 26
-2-
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
March 31, December 31,
-------------- ---------------
2004 2003
-------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 62,183 $ 66,593
Investment securities available for sale.............................. 22,052 17,944
Restricted assets..................................................... 1,025 771
Other current assets.................................................. 1,853 1,870
-------------- ---------------
Total current assets.............................................. 87,113 87,178
-------------- ---------------
Investments in real estate, net............................................ 52,714 53,012
Investments in non-consolidated real estate businesses..................... 20,705 18,718
Restricted assets.......................................................... 174 174
Long-term investments, net................................................. 2,509 2,429
Other assets............................................................... 358 385
-------------- ---------------
Total assets...................................................... $ 163,573 $ 161,896
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of mortgage note payable.............................. $ 644 $ 644
Accounts payable and accrued liabilities.............................. 2,495 3,684
Prepetition claims and restructuring accruals......................... 600 600
Income taxes.......................................................... 11,197 11,264
-------------- ---------------
Total current liabilities......................................... 14,936 16,192
-------------- ---------------
Mortgage note payable...................................................... 39,106 39,266
Other long-term liabilities................................................ 2,597 2,690
Commitments and contingencies.............................................. -- --
Stockholders' equity:
Common Shares, $.01 par value; 100,000,000 shares
authorized; 22,117,852 shares outstanding........................... 221 221
Additional paid-in capital............................................ 862,584 862,584
Accumulated deficit................................................... (766,390) (765,468)
Accumulated other comprehensive income................................ 10,519 6,411
-------------- ---------------
Total stockholders' equity........................................ 106,934 103,748
-------------- ---------------
Total liabilities and stockholders' equity....................... $ 163,573 $ 161,896
============== ===============
See accompanying Notes to Condensed Consolidated Financial Statements
-3-
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended March 31,
----------------------------------
2004 2003
-------------- ---------------
Revenues:
Real estate leasing........................................ $ 1,781 $ 1,799
-------------- ---------------
Total.................................................. 1,781 1,799
-------------- ---------------
Cost and expenses:
General and administrative................................. 2,414 3,225
Rental real estate activities.............................. 860 873
-------------- ---------------
Total.................................................. 3,274 4,098
-------------- ---------------
Other results from operations:
Equity income (loss) from non-consolidated
real estate businesses................................... 646 (717)
Gain on sale of investments, net........................... -- 163
Interest and dividend income............................... 249 281
Interest expense........................................... (319) (397)
Other loss................................................. (5) (7)
-------------- ---------------
Total.................................................. 571 (677)
-------------- ---------------
Loss from operations before minority interests.................. (922) (2,976)
Minority interests in loss from operations
of consolidated subsidiaries........................... -- (1)
-------------- ---------------
Net loss ....................................................... $ (922) $ (2,975)
============== ===============
Loss per Common Share (basic and diluted):
Net loss per Common Share.................................. $ (0.04) $ (0.13)
============== ===============
Number of shares used in computation............................ 22,117,852 22,232,135
============== ===============
See accompanying Notes to Condensed Consolidated Financial Statements
-4-
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
COMMON SHARES ADDITIONAL ACCUMULATED
---------------------- PAID-IN ACCUMULATED OTHER
SHARES AMOUNT CAPITAL DEFICIT INCOME TOTAL
---------- ------- ---------- ----------- ----------- --------
Balance, December 31, 2003............ 22,117,852 $ 221 $ 862,584 $ (765,468) $ 6,411 $103,748
Net loss......................... -- -- -- (922) -- (922)
Other comprehensive income:
Net change in unrealized gain
on investment securities..... -- -- -- -- 4,108 4,108
---------- ------- ---------- ----------- ----------- --------
Balance, March 31, 2004............... 22,117,852 $ 221 $ 862,584 $ (766,390) $ 10,519 $106,934
========== ======= ========== =========== =========== ========
See accompanying Notes to Condensed Consolidated Financial Statements
-5-
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
--------------------------
Three Months Ended
March 31,
--------------------------
2004 2003
--------- --------
Cash flows from operating activities:
Net loss................................................................ $ (922) $ (2,975)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization....................................... 321 321
Equity (income) loss from non-consolidated real estate businesses... (646) 717
Gain on sale of investments......................................... -- (163)
Distributions from non-consolidated real estate businesses.......... 159 --
Minority interests in loss from operations
of consolidated subsidiaries...................................... -- (1)
(Increase) decrease in other current assets, restricted assets and
other assets...................................................... (233) 564
Decrease in accounts payable and accrued liabilities................ (1,349) (2,711)
--------- --------
Net cash used for operating activities..................................... (2,670) (4,248)
--------- ---------
Cash flows from investing activities:
Sale or maturity of investment securities............................. -- 1,179
Purchase of investment securities..................................... -- (165)
Investment in long-term investments................................... (229) --
Sale or liquidation of long-term investments.......................... 149 650
Investment in non-consolidated real estate businesses................. (1,500) (9,500)
Payment of prepetition claims and restructuring accruals.............. -- (17)
Increase in restricted assets......................................... -- (4)
--------- --------
Net cash used for investing activities..................................... (1,580) (7,857)
--------- --------
Cash flows from financing activities:
Repurchase of common shares........................................... -- (1,346)
Payment of notes payable.............................................. (160) (107)
--------- --------
Net cash used for financing activities................................ (160) (1,453)
--------- --------
Net decrease in cash and cash equivalents............................. (4,410) (13,558)
Cash and cash equivalents, beginning of period........................ 66,593 82,113
-------- --------
Cash and cash equivalents, end of period.............................. $ 62,183 $ 68,555
======== ========
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 condensed consolidated financial statements include the accounts of New
Valley Corporation and its majority-owned subsidiaries ("New Valley" or the
"Company"). The condensed consolidated financial statements as of March 31,
2004 presented herein have been prepared by the Company and are unaudited.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position
as of March 31, 2004 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, 2003 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 Koa Investors LLC ("Koa Investors") which owns the
former Kona Surf Hotel in Kailua-Kona, Hawaii. New Valley also holds a 50%
interest in Douglas Elliman Realty, LLC ("Douglas Elliman Realty"), which
operates a residential real estate brokerage company in the New York
metropolitan area. At March 31, 2004, 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.
NET LOSS PER COMMON SHARE
Basic net loss per common share is based on the weighted average number of
Common Shares outstanding. Diluted net loss per common share assuming full
dilution is based on the weighted average number of Common Shares
outstanding plus the additional Common Shares resulting from the exercise
of stock options and warrants if such exercise was dilutive. Options and
warrants to purchase Common Shares of 18,032,771 and 18,012,771 were not
included in the computation of diluted loss per share for the three months
ended March 31, 2004 and 2003, respectively, as the effect would have been
anti-dilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to prior interim period financial
information to conform to the current interim period presentation.
-7-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NEW ACCOUNTING PRONOUNCEMENTS
In 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 the Company's consolidated financial statements.
In December 2003, Financial Accounting Standards Board Interpretation
("FIN") No. 46(R), "Consolidation of Variable Interest Entities (revised
December 2003)" was issued. The interpretation revises FIN No. 46,
"Consolidation of Variable Interest Entities" to exempt certain entities
from the requirements of FIN No. 46. The interpretation requires a company
to consolidate a variable interest entity ("VIE"), as defined, when the
company will absorb a majority of the variable interest entity's expected
losses, receive a majority of the variable interest entity s expected
residual returns, or both. FIN No. 46(R) also requires consolidation of
existing, non-controlled affiliates if the VIE is unable to finance its
operations without investor support, or where the other investors do not
have exposure to the significant risks and rewards of ownership. The
interpretation applies immediately to a VIE created or acquired after
January 31, 2003. For a VIE acquired before February 1, 2003, FIN No. 46(R)
applies in the first interim period ending after March 15, 2004. The
adoption of this interpretation did not impact the Company's 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 investment in real estate and the related
non-recourse mortgage note payable collateralized by such real estate at
March 31, 2004 are as follows:
Land................................................................................. $ 7,636
Buildings............................................................................ 46,622
---------
Total......................................................................... 54,258
Less accumulated depreciation........................................................ (1,544)
---------
Net investment in real estate................................................. $ 52,714
=========
Mortgage note payable................................................................ $ 39,750
Current portion of mortgage note payable............................................. 644
---------
Mortgage note payable - long-term portion............................................ $ 39,106
=========
-8-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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.
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, formerly known as Montauk Battery Realty,
LLC, a newly formed entity. New Valley acquired a 50% interest in Douglas
Elliman Realty as a result of an additional investment of $1,413 by New
Valley and the redemption by Realty of various ownership interests. As part
of the transaction, Realty renewed for a ten-year term its franchise
agreement with The Prudential Real Estate Affiliates, Inc. The owners of
Realty also agreed, upon receipt of the required regulatory approvals, to
contribute to Douglas Elliman Realty their interests in the related
mortgage company.
In March 2003, Douglas Elliman Realty purchased the New York City - based
residential brokerage firm, Douglas Elliman, LLC ("Douglas Elliman"),
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 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,
which totaled $312 for the three months ended March 31, 2004, earned by New
Valley 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 on the
equity method and recorded income of $709 and a loss of $577 for the three
months ended March 31, 2004 and 2003, respectively, associated with Douglas
Elliman Realty. New Valley's equity income from Douglas Elliman Realty for
the three months ended March 31, 2004 includes $312 of interest income
earned by New Valley on the subordinated debt and a loss of $58, which
represents 44% of the mortgage company's loss from operations. New Valley's
equity income from Douglas Elliman Realty for the three months ended March
31, 2003 includes $30, which represents 46% of the mortgage company's
income from operations.
-9-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Summarized financial information as of March 31, 2004, December 31, 2003
and for the three months ended March 31, 2004 and 2003, respectively, for
Douglas Elliman Realty is presented below. The summarized financial
information for the three months ended March 31, 2003 includes Realty's
results from operations from January 1, 2003 to March 31, 2003 and the
results from operations of Douglas Elliman and its affiliated property
management company from March 14, 2003 (date of acquisition) to March 31,
2003.
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
Cash................................................. $ 8,778 $ 9,062
Other current assets................................. 6,733 6,385
Property, plant and equipment, net................... 11,485 11,311
Trademarks........................................... 21,663 21,663
Goodwill............................................. 34,337 34,319
Other intangible assets, net......................... 3,279 4,021
Other noncurrent assets.............................. 970 632
Notes payable - current.............................. 4,041 4,033
Other current liabilities............................ 10,292 10,176
Notes payable - long term............................ 72,291 73,473
Members' equity (deficiency)......................... 621 (289)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
Revenues........................................... $ 53,520 $ 18,645
Costs and expenses................................. 49,772 19,245
Depreciation expense............................... 1,096 292
Amortization expense............................... 299 --
Interest expense, net.............................. 1,443 322
-------------- --------------
Net income (loss).................................. $ 910 $ (1,214)
============== ==============
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. In April 2004, a subsidiary of Koa
Investors LLC, the owner of the hotel, closed on a $57,000 construction
loan to finance the planned renovation. The Company, which holds a 50%
interest in Koa Investors, had invested $8,900 in the project and had
committed to make additional investments of up to $3,600 at March 31,
2004. New Valley funded $1,000 of this amount in April 2004.
The Company accounts for its interest in Koa Investors under the equity
method and recorded losses of $63 and $140 in 2004 and 2003, respectively,
associated with the property. Koa Investors' losses primarily represent
management fees. Koa Investors capitalizes all costs related to the
acquisition and development of the property during the construction phase.
-10-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
4. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at fair
value, with net unrealized gains included as a component of stockholders'
equity. The Company had realized gains on sales of investment securities
available for sale of $75 for the three months ended March 31, 2003.
The components of investment securities available for sale at March 31,
2004 are as follows:
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
------- ---------- ---------- -------
Marketable equity securities.............. $11,533 $10,519 $ -- $22,052
5. LONG-TERM INVESTMENTS
At March 31, 2004, long-term investments consisted primarily of investments
in limited partnerships of $2,509 which are accounted for at historical
cost. The Company believes the fair value of the limited partnerships
exceeds their carrying amount by approximately $9,882 based on the
indicated market values of the underlying investment portfolio provided by
the partnerships based on the indicated market values of the underlying
assets or investment portfolio. The Company's estimates 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 of up to an aggregate of $899 at March 31, 2004.
In addition, the investments in limited partnerships are illiquid, and the
ultimate realization of these investments is subject to the performance of
the underlying partnership and its management by the general partners. The
Company recognized a gain of $88 for the three months ended March 31, 2003
related to the liquidation of one of its limited partnership investments.
6. OTHER LONG-TERM LIABILITIES
The components of other long-term liabilities, excluding New Valley's
mortgage note payable, at March 31, 2004 are as follows:
LONG-TERM CURRENT
PORTION PORTION
--------- -------
Retiree and disability obligations.............. $ 2,436 $ 500
Other long-term liabilities..................... 161 --
-------- -------
Total other long-term liabilities........... $ 2,597 $ 500
======== =======
7. CONTINGENCIES
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
-11-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 $7,440, including interest, at March 31, 2004. An initial
administrative hearing was held in December 2003, and the hearing officer
has not yet ruled. 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 March 31, 2004.
Although there can be no assurances, in the opinion of management, after
consultation with counsel, the ultimate resolution of these matters will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
As of March 31, 2004, New Valley had $600 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,
sold all the membership interests in Western Realty Investments LLC to
Andante Limited. 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. New Valley
is contesting the indemnification claim.
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
-12-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
reversed and remanded the case. Discovery recently concluded and a trial
could be scheduled by the court as early as the second quarter of 2004.
8. LADENBURG THALMANN FINANCIAL SERVICES
On December 20, 2001, the Company distributed its 53.6% interest
(22,543,158 shares) in Ladenburg Thalmann Financial Services Inc. common
stock to holders of the Company's Common Shares through a special
dividend. The Company had acquired the shares in May 2001, along with cash
and an $8,010 convertible promissory note of Ladenburg Thalmann Financial
Services, in connection with Ladenburg Thalmann Financial Services'
acquisition of the Company's 80.1%-owned subsidiary, Ladenburg Thalmann &
Co.
The $8,010 convertible promissory note due December 31, 2005 issued to the
Company in connection with the acquisition bears interest at 7.5% per
annum, is convertible into 3,844,216 shares of Ladenburg Thalmann
Financial Services common stock and is secured by a pledge of the
Ladenburg Thalmann & Co. stock. In June 2002, the Company, together with
other holders of Ladenburg Thalmann Financial Services' convertible notes,
agreed with Ladenburg Thalmann Financial Services to forbear until May 15,
2003 payment of the interest due to them under the convertible notes on
the interest payment dates commencing June 30, 2002 through March 31,
2003. In March 2003, the holders of the convertible notes agreed to extend
the interest forbearance period to January 15, 2005 with respect to
interest payments due through December 31, 2004. Interest on the deferred
amounts accrues at 8.0% per annum on the notes held by the Company.
In March 2004, the Company entered into a debt conversion agreement with
Ladenburg Thalmann Financial Services and the other remaining holder of
the convertible notes. The Company and the other holder agreed to convert
their notes, with an aggregate principal amount of $18,010,000, together
with the accrued interest, into common stock of Ladenburg Thalmann
Financial Services. Pursuant to the conversion agreement, the conversion
price of the note held by the Company will be reduced from the current
conversion price of approximately $2.08 to $1.10 per share.
The note conversion transaction is subject to approval by the Ladenburg
Thalmann Financial Services shareholders. The Company, several
shareholders of Ladenburg Thalmann Financial Services affiliated with the
Company and the other holder of the convertible notes have committed to
vote their shares of common stock of Ladenburg Thalmann Financial Services
at its shareholder meeting in accordance with the vote of a majority of
votes cast at the meeting excluding the shares held by such parties. At
the closing, the Company's note, representing approximately $9,470 of
principal and accrued interest, will be converted into approximately
8,610,000 shares of common stock of Ladenburg Thalmann Financial Services.
The Company currently intends to distribute to its stockholders shares of
common stock of Ladenburg Thalmann Financial Services issued to the
Company pursuant to the conversion agreement.
After the conversion of the $8,010 convertible note, New Valley will
continue to hold $5,000 principal amount of notes receivable and related
interest receivable of $491 at March 31, 2004 from LTS, which are due
December 31, 2006 and bear interest at 1% above the prime rate. These
notes are subordinate to approximately $2,000 of LTS debt to an affiliate
of its clearing broker and were written off in the third quarter of 2002,
based on the then current trends in the broker-dealer industry and LTS's
operating results and liquidity needs. Accordingly, the carrying value of
the notes and interest receivable was $0 as of March 31, 2004.
-13-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
9. BUSINESS SEGMENT INFORMATION
The following table presents certain financial information of the Company's
operations before taxes and minority interests as of and for the three
months ended March 31, 2004 and 2003.
CORPORATE
REAL ESTATE AND OTHER TOTAL
---------- --------- ---------
Three months ended March 31, 2004
Revenues................................ $ 1,781 $ -- $ 1,781
Other income............................ 327 244 571
Income (loss) from operations
before taxes and minority interests.. 1,248 (2,170) (922)
Identifiable assets..................... 76,382 87,191 163,573
Depreciation and amortization........... 321 -- 321
Capital expenditures.................... -- -- --
Three months ended March 31, 2003
Revenues................................ $ 1,799 $ -- $ 1,799
Other (loss) income..................... (1,114) 437 (677)
Income (loss) from operations
before taxes and minority interests.. (188) (2,788) (2,976)
Identifiable assets..................... 72,847 83,660 156,507
Depreciation and amortization........... 321 -- 321
Capital expenditures.................... -- -- --
10. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) of the Company includes net income (loss) and
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 months ended March 31, 2004 and
2003 is as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
Net loss.................................................. $ (922) $ (2,975)
Change in unrealized gain on investment securities........ 4,108 115
-------------- --------------
TTotal comprehensive income (loss)......................... $ 3,186 $ (2,860)
============== ==============
-14-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 stock on the date
of the grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS 123, "Accounting for Stock-Based Compensation", to
stock-based employee compensation for the three months ended March 31, 2004
and 2003.
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
Net loss applicable to Common Shares, as reported................... $ (922) $ (2,975)
Deduct: Amortization of fair value of New Valley option grants...... (13) (10)
Deduct: Amortization of fair value of Vector option grants, net..... -- (170)
-------------- --------------
Net loss applicable to Common Shares, as adjusted................... $ (935) $ (3,155)
============== ==============
Adjusted net loss per share - basic and diluted..................... $ (0.04) $ (0.14)
============== ==============
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------
INTRODUCTION
New Valley is engaged in the real estate business and is seeking to
acquire additional operating companies. New Valley owns, through its New Valley
Realty Division, two commercial office buildings in Princeton, N.J. and a 50%
interest in Koa Investors LLC, which owns the former Kona Surf Hotel in
Kailua-Kona, Hawaii. New Valley also holds a 50% interest in Douglas Elliman
Realty, LLC, which operates a residential real estate brokerage company in the
New York metropolitan area.
RECENT DEVELOPMENTS
Purchase of Office Buildings. On December 13, 2002, New Valley
completed the acquisition of the 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, Preferred Empire Mortgage
Company. In December 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, formerly known as Montauk Battery Realty,
LLC, a newly formed entity. New Valley acquired a 50% interest in Douglas
Elliman Realty 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 also agreed, upon receipt of required regulatory approvals, to contribute
to Douglas Elliman Realty their interests in the related mortgage company.
In March 2003, Douglas Elliman Realty 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 has created the largest residential brokerage company in
the New York metropolitan area. Upon closing of the acquisition, Douglas Elliman
entered into a ten-year franchise agreement with The Prudential Real Estate
Affiliates, Inc. New Valley invested an additional $9,500 in subordinated debt
and equity of Douglas Elliman Realty to help fund the acquisition. The
subordinated debt, which has a principal amount of $9,500, bears interest at 12%
per annum and is due in March 2013.
New Valley accounts for its interest in Douglas Elliman Realty on the
equity method. New Valley's equity income from Douglas Elliman Realty includes
interest earned by New Valley on the subordinated debt and its proportionate
interest in the mortgage company's results from operations.
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------
CRITICAL ACCOUNTING POLICIES
General. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
Investment securities available for sale. At March 31, 2004, New Valley
had investment securities available for sale of $22,052. 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 results from continuing operations. 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 an impairment charge with
respect to such investment in the Company's consolidated statements of
operations. During the first quarter of 2004, New Valley experienced net
increases to unrealized gains on investment securities of $4,108, 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 and in KOA Investors 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 March 31, 2004, New Valley had long-term
investments of $2,509, 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 $163,000 as of March 31, 2004 and capital loss carry
forwards of $5,000, 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 March 31, 2004, 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 to
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------
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 first quarter of 2004 and 2003, New Valley's results of
operations include the accounts of its two office buildings, its primary real
estate operating unit. Equity income (loss) from New Valley's 50% interests in
Douglas Elliman Realty and Koa Investors is included in other income (loss) from
real estate activities.
Three Months Ended March 31,
----------------------------
2004 2003
---------- ---------
Real estate:
Revenues............................................... $ 1,781 $ 1,799
Expenses............................................... 860 873
Other income (loss).................................... 327 (1,114)
---------- ---------
Operating income (loss) before taxes
and minority interests............................. $ 1,248 $ (188)
========== =========
Corporate and other:
Revenues............................................... $ -- $ --
Expenses............................................... 2,414 3,225
Other loss............................................. 244 437
---------- ----------
Operating income (loss) before taxes
and minority interests............................. $ (2,170) $ (2,788)
========== ==========
Real Estate
Revenues from real estate operations were $1,781 for the three months
ended March 31, 2004 versus $1,799 for the same period in 2003. Expenses from
real estate operations for the three months ended March 31, 2004 were $860
compared to $873 for the same period in 2003.
Other income from real estate activities in 2004 consisted of equity
income from non-consolidated real estate businesses of $646 and interest expense
of $319. The equity income resulted from income of $709 from Douglas Elliman
Realty offset by a loss of $63 related to New Valley's investment in Koa
Investors. Koa Investors capitalizes all costs related to the acquisition and
development of the Hawaii property.
Other loss from real estate activities in 2003 consisted of equity losses
from non-consolidated real estate businesses of $717 and interest expense of
$397. The equity losses resulted from a loss of $140 related to New Valley's
investment in Koa Investors and a loss of $577 from Douglas Elliman Realty. Koa
Investors' loss primarily represents management fees.
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------
Corporate and others
Corporate and other expenses of $2,414 for the first quarter of 2004
consisted primarily of employee compensation and benefits of $1,568 and legal
expense of $143 . Corporate and other expenses of $3,225 for the first quarter
of 2003 consisted primarily of employee compensation and benefits of $1,603 and
legal expense of $771. The decrease in corporate expenses in 2004 was primarily
due to expenses, primarily legal, incurred in 2003 related to a proposed
acquisition by New Valley which was not consummated.
For the first quarter of 2004, New Valley's income of $244 from corporate
and other activities consisted primarily of interest and dividends income of
$249. For the first quarter of 2003, New Valley's revenues of $444 related to
corporate and other activities consisted of net gains on investments of $163 and
interest and dividends income of $281.
There was no income tax provision for the first quarter of 2004 or 2003.
The effective tax rate does not bear a customary relationship with pre-tax
accounting income principally as a consequence of the change in the valuation
allowance relating to deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter 2004, New Valley's cash and cash equivalents
decreased from $66,593 to $62,183 due primarily to cash used in operations of
$2,670 and $1,500 of investments in non-consolidated real estate businesses.
Cash used for operating activities for the three months ended March 31,
2004 was $2,670 compared to $4,248 in the prior year. The difference is
primarily due to a decline in New Valley's net loss from $2,975 in the 2003
period to $922 in the 2004 period and a decrease in payments of accounts
payable and accrued liabilities in the 2004 period as compared to the 2003
period.
Cash used for investing activities for the three months ended March 31,
2004 was $1,580 compared to $7,857 for the three months ended March 31, 2003.
The decrease is primarily attributable to the $9,500 investment in
non-consolidated real estate businesses in the 2003 period versus $1,500 in 2004
offset by the differences in net sales of marketable securities and long-term
investments of $1,664 in 2003 versus net purchases of long-term investments of
$80 in the 2004 period.
On December 13, 2002, New Valley completed the acquisition of the two
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, a newly formed entity. New Valley acquired a 50%
interest in Douglas Elliman Realty 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 purchased the leading New York
City-based residential brokerage firm, Douglas Elliman, and an affiliated
property management company, for $71,250. New Valley invested an
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------
additional $9,500 in subordinated debt and equity of Douglas Elliman Realty 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 Koa Investors which owns the former
Kona Surf Hotel in Kailua-Kona, Hawaii. Following a major renovation, the
property is currently scheduled to reopen in late 2004 as a Sheraton resort. In
April 2004, a subsidiary of Koa Investors closed on a $57,000 construction loan
to finance the planned renovation. New Valley had committed to make additional
investments of up to $3,600 at March 31, 2004 in the project. New Valley funded
$1,000 of this amount in April 2004. New Valley has also committed to make
additional investments in another limited partnership of up to $899 at March 31,
2004.
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.
New Valley evaluated its ability to collect $13,198 of 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 the then 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.
In March 2004, New Valley agreed, subject to Ladenburg Thalmann Financial
Services' shareholder approval, to convert its convertible note into common
stock. See Note 8 to the Condensed Consolidated Financial Statements.
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
$7,400 , including interest, at March 31, 2004. An initial administrative
hearing was held in December 2003, and the hearing officer has not yet ruled. 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 March 31, 2004.
As of March 31, 2004, New Valley had $600 of prepetition
bankruptcy-related claims and restructuring accruals, primarily related to
disputed claims with respect to former employee benefit matters. These remaining
claims may be subject to future adjustments based on potential settlements or
decisions of the court.
Cash flows used for financing activities were $160 for the three months
ended March 31, 2004 as compared to $1,453 for the three months ended March 31,
2003. The difference was primarily due to the repurchase of 318,572 of New
Valley's Common Shares for $1,346 in 2003.
On October 5, 1999, New Valley's Board of Directors authorized the
repurchase of up to 2,000,000 Common Shares from time to time on the open market
or in privately negotiated transactions depending on market conditions. As of
May 7, 2004, New Valley had repurchased 1,185,615 shares for approximately
$4,695.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------
New Valley expects that its available capital resources will be
sufficient to fund its currently anticipated cash requirements for 2004,
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 December 2003, Financial Accounting Standards Board Interpretation
("FIN") No. 46(R), "Consolidation of Variable Interest Entities (revised
December 2003)" was issued. The interpretation revises FIN No. 46,
"Consolidation of Variable Interest Entities" to exempt certain entities from
the requirements of FIN No. 46. The interpretation requires a company to
consolidate a variable interest entity ("VIE"), as defined, when the company
will absorb a majority of the variable interest entity s expected losses,
receive a majority of the variable interest entity's expected residual returns,
or both. FIN No. 46(R) also requires consolidation of existing, non-controlled
affiliates if the VIE is unable to finance its operations without investor
support, or where the other investors do not have exposure to the significant
risks and rewards of ownership. The interpretation applies immediately to a VIE
created or acquired after January 31, 2003. For a VIE acquired before February
1, 2003, FIN No. 46(R) applies in the first interim period ending after March
15, 2004. The adoption of this interpretation did not impact the Company's
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.
OFF-BALANCE SHEET ARRANGEMENTS
New Valley has various agreements in which it may be obligated to
indemnify the other party with respect to certain matters. Generally, these
indemnification clauses are included in contracts arising in the normal course
of business under which New Valley customarily agrees to hold the other party
harmless against losses arising from a breach of representations related to such
matters as title to assets sold and licensed or certain intellectual property
rights. Payment by New Valley under such indemnification clauses is generally
conditioned on the other party making a claim that is subject to challenge by
New Valley and dispute resolution procedures specified in the particular
contract. Further, New Valley's obligations under these arrangements may be
limited in terms of time and/or amount, and in some instances, New Valley may
have recourse against third parties for certain payments made by it. It is not
possible to predict the maximum potential amount of future payments under these
indemnification agreements due to the conditional nature of New Valley's
obligations and the unique facts of each particular agreement. Historically,
payments made by New Valley under these agreements have not been material. As of
March 31, 2004, New Valley was not aware of any indemnification agreements that
would or are reasonably likely to have a current or future material adverse
effect on its financial position, results of operations or cash flows.
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------
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. New
Valley is contesting the indemnification claim.
Restricted assets of $1,199 and $945 at March 31, 2004 and December 31,
2003, respectively, consisted primarily of amounts held in escrow related to New
Valley's real estate operations. New Valley is not aware of any material
variable interest entities.
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 $22,052
at March 31, 2004. Adverse market conditions could have a significant effect on
the value of New Valley's investments.
New Valley also holds long-term investments in limited partnerships and
limited liability companies. These investments are illiquid, and their ultimate
realization is subject to the performance of the investee entities.
Interest Rate Risk
As of March 31, 2004, New Valley's outstanding debt has variable interest
rates, which increases the risk of fluctuating interest rates. New Valley's
exposure to market risk includes interest rate fluctuations in connection with
its variable rate borrowings, which could adversely affect its cash flows. As of
March 31, 2004, 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.
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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)
------------------------------------------------
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, 2003 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, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
No securities of the Company that were not registered under the
Securities Act of 1933 have been issued or sold by the Company during
the quarter ended March 31, 2004. No securities of the Company were
repurchased by the Company or its affiliated purchasers during the
quarter ended March 31, 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Debt Conversion Agreement, dated as of March 29, 2004, among
the Ladenburg Thalmann Financial Services Inc., New Valley
and Frost-Nevada Investments Trust (incorporated by
reference to Exhibit 10.55 in Ladenburg Thalmann Financial
Services Inc.'s Annual Report on Form 10-K for the year
ended December 31, 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: May 10, 2004 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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