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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 [X] NO [ ]
AS OF AUGUST 6, 2004, THERE WERE OUTSTANDING 22,125,936 OF THE REGISTRANT'S
COMMON SHARES, $.01 PAR VALUE.
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NEW VALLEY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of June 30,
2004 and December 31, 2003.................................... 2
Condensed Consolidated Statements of Operations for the
three months and six months ended June 30, 2004 and 3
2003..........................................................
Condensed Consolidated Statement of Changes in
Stockholders' Equity for the six months ended
June 30, 2004................................................. 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2004 and 2003............... 5
Notes to the Condensed Consolidated Financial
Statements .................................................. 6
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, Use of Proceeds and
Issuer Purchases of Equity Securities......................... 26
Item 4. Submission of Matters to a Vote of Security Holders............... 26
Item 6. Exhibits and Reports on Form 8-K.................................. 27
SIGNATURE..................................................................... 28
- 1 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
June 30, December 31,
2004 2003
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 69,765 $ 66,593
Investment securities available for sale ........................ 12,574 17,944
Receivables from broker ......................................... 543 --
Restricted assets ............................................... 633 771
Other current assets ............................................ 1,006 1,870
--------- ---------
Total current assets ........................................ 84,521 87,178
--------- ---------
Investment in real estate, net ....................................... 52,415 53,012
Investments in non-consolidated real estate businesses ............... 25,268 18,718
Restricted assets .................................................... 176 174
Long-term investments, net ........................................... 2,264 2,429
Other assets ......................................................... 327 385
--------- ---------
Total assets ................................................ $ 164,971 $ 161,896
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of mortgage note payable ........................ $ 644 $ 644
Accounts payable and accrued liabilities ........................ 2,663 3,684
Prepetition claims and restructuring accruals ................... 600 600
Income taxes .................................................... 11,314 11,264
--------- ---------
Total current liabilities ................................... 15,221 16,192
--------- ---------
Mortgage note payable ................................................ 38,891 39,266
Other long-term liabilities .......................................... 2,608 2,690
Commitments and contingencies ........................................ -- --
Stockholders' equity:
Common Shares, $.01 par value; 100,000,000 and 100,000,000 shares
authorized; 22,125,936 and 22,117,852 shares outstanding ..... 221 221
Additional paid-in capital ...................................... 862,675 862,584
Accumulated deficit ............................................. (758,913) (765,468)
Accumulated other comprehensive income .......................... 4,268 6,411
--------- ---------
Total stockholders' equity .................................. 108,251 103,748
--------- ---------
Total liabilities and stockholders' equity .................. $ 164,971 $ 161,896
========= =========
See accompanying notes to condensed
consolidated financial statements
- 2 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- --------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues:
Real estate leasing .............................. $ 1,811 $ 1,777 $ 3,592 $ 3,576
------------ ------------ ------------ ------------
Total ........................................ 1,811 1,777 3,592 3,576
------------ ------------ ------------ ------------
Cost and expenses:
General and administrative ....................... 3,224 2,529 5,638 5,754
Rental real estate activities .................... 874 795 1,734 1,668
------------ ------------ ------------ ------------
Total ........................................ 4,098 3,324 7,372 7,422
------------ ------------ ------------ ------------
Other results from operations:
Equity income (loss) from non-consolidated
real estate businesses ......................... 4,642 (174) 5,288 (891)
Gain on sale of investments, net ................. 5,292 -- 5,292 163
Interest and dividend income ..................... 206 142 455 423
Interest expense ................................. (320) (334) (639) (731)
Other loss ....................................... (6) (5) (11) (12)
------------ ------------ ------------ ------------
Total ........................................ 9,814 (371) 10,385 (1,048)
------------ ------------ ------------ ------------
Income (loss) from operations before minority interests 7,527 (1,918) 6,605 (4,894)
Minority interests in loss from operations
of consolidated subsidiaries ..................... -- (3) -- (4)
Income tax provision .................................. 50 -- 50 --
------------ ------------ ------------ ------------
Net income (loss) ..................................... $ 7,477 $ (1,915) $ 6,555 $ (4,890)
============ ============ ============ ============
Income (loss) per Common Share (basic):
Net income (loss) per Common Share ............... $ 0.34 $ (0.09) $ 0.30 $ (0.22)
============ ============ ============ ============
Number of shares used in computation .................. 22,119,273 22,117,852 22,118,562 22,174,678
============ ============ ============ ============
Income (loss) per Common Share (diluted):
Net income (loss) per Common Share ............... $ 0.34 $ (0.09) $ 0.30 $ (0.22)
============ ============ ============ ============
Number of shares used in computation .................. 22,123,808 22,117,852 22,130,166 22,174,678
============ ============ ============ ============
See accompanying notes to condensed
consolidated financial statements
- 3 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Accumulated
Common Shares Additional Other
------------------------ Paid-in Accumulated Comprehensive
Shares Amount Capital Deficit Income Total
---------- ---------- ---------- ---------- ------------- ----------
Balance, December 31, 2003 ......... 22,117,852 $ 221 $ 862,584 $ (765,468) $ 6,411 $ 103,748
Comprehensive income:
Net income .................... -- -- -- 6,555 -- 6,555
Other comprehensive income:
Net change in unrealized gain
on investment securities .. -- -- -- -- (2,143) (2,143)
Exercise of warrants ............ -- --
8,084 -- 91 -- -- 91
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 2004 ............. 22,125,936 $ 221 $ 862,675 $ (758,913) $ 4,268 $ 108,251
========== ========== ========== ========== ========== ==========
See accompanying notes to condensed
consolidated financial statements
- 4 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Six Months Ended
June 30,
-------------------------
2004 2003
-------- --------
Cash flows from operating activities:
Net income (loss) ........................................................... $ 6,555 $ (4,890)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization ............................................. 646 642
Equity (income) loss from non-consolidated real estate businesses ......... (5,288) 891
Distributions from non-consolidated real estate businesses ................ 1,238 427
Gain on sale of investments ............................................... (5,292) (163)
Decrease in receivables and other assets .................................. 1,009 585
Decrease in accounts payable and accrued liabilities ...................... (1,053) (2,765)
-------- --------
Net cash used in operating activities .......................................... (2,185) (5,273)
-------- --------
Cash flows from investing activities:
Sale or maturity of investment securities ................................. 7,863 1,179
Purchase of investment securities ......................................... -- (165)
Sale or liquidation of long-term investments .............................. 531 874
Purchase of long-term investments ......................................... (253) (44)
Investments in non-consolidated real estate businesses .................... (2,500) (9,500)
Payment of prepetition claims and restructuring accruals .................. -- (18)
-------- --------
Net cash provided from (used in) investing activities .......................... 5,641 (7,674)
-------- --------
Cash flows from financing activities:
Repayment of mortgage note payable ........................................ (375) (321)
Exercise of warrants ...................................................... 91 --
Repurchase of Common Shares ............................................... -- (1,346)
-------- --------
Net cash used in financing activities .......................................... (284) (1,667)
-------- --------
Net increase (decrease) in cash and cash equivalents ........................... 3,172 (14,614)
Cash and cash equivalents, beginning of period ................................. 66,593 82,113
-------- --------
Cash and cash equivalents, end of period ....................................... $ 69,765 $ 67,499
======== ========
See accompanying notes to condensed
consolidated financial statements
- 5 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
The consolidated financial statements include the accounts of New Valley
Corporation and its majority-owned subsidiaries ("New Valley" or the
"Company"). The consolidated financial statements as of June 30, 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 June 30, 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 June 30, 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.
New Valley holds two investments that are accounted for using the equity
method. The Company does not control the decision making process or
business management practices of these entities. Accordingly, New Valley
relies on management of these entities and their independent accountants to
provide it with accurate financial information prepared in accordance with
generally accepted accounting principles that New Valley uses in the
application of the equity method. The Company is not aware, however, of any
errors in or possible misstatements of the financial information provided
by its equity entities that would have a material effect on New Valley's
consolidated financial statements.
NET 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.
The following table reconciles weighted average shares outstanding for
basic and diluted purposes.
- 6 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Weighted-average common
shares outstanding ... 22,119,273 22,117,852 22,118,562 22,174,678
Assumed exercise of stock
options .............. 4,535 -- 11,604 --
---------- ---------- ---------- ----------
Weighted-average common
shares outstanding
assuming dilution .... 22,123,808 22,117,852 22,130,166 22,174,678
========== ========== ========== ==========
The following stock options and warrants were outstanding during the three
and six months ended June 30, 2004 and 2003, but were not included in the
computation of diluted net income (loss) per Common Share because either
the options' exercise prices were greater than the average market price of
the Common Shares or, in the case of net loss per common share, the effect
would have been anti-dilutive during the respective periods:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ---------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Number of stock options ....... 105,333 165,333 73,000 165,333
----------- ----------- ----------- -----------
Weighted-average exercise price $ 5.30 $ 4.79 $ 5.19 $ 4.79
=========== =========== =========== ===========
Number of warrants ............ 17,867,438 17,867,438 17,867,438 17,867,438
----------- ----------- ----------- -----------
Weighted-average exercise price $ 11.30 $ 11.30 $ 11.30 $ 11.30
=========== =========== =========== ===========
RECLASSIFICATIONS
Certain reclassifications have been made to prior interim period financial
information to conform to the current interim period presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2004, the FASB reached a consensus on Emerging Issues Task Force
Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" ("EITF 03-1"). EITF 03-1 provides
guidance for determining when an investment is impaired and whether the
impairment is other than temporary. EITF 03-1 also incorporates into its
consensus the required disclosures about unrealized losses on investments
announced by the EITF in late 2003 and adds new disclosure requirements
relating to cost-method investments. The impairment accounting guidance is
effective for reporting periods beginning after June 15, 2004 and the new
disclosure requirements for annual reporting periods ending after June 15,
2004. The Company does not expect the adoption of the impairment guidance
contained in EITF 03-1 to have a material impact on its financial position
or results of operations.
In March 2004, the FASB reached a consensus on EITF 03-16, "Accounting for
Investments in Limited Liability Companies" ("EITF 03-16"). EITF 03-16
provides guidance for determining whether a noncontrolling investment in a
limited liability company should be accounted for using the cost method or
the equity method. Companies will be required to adopt the provisions of
this consensus in reporting periods beginning after June 15, 2004. The
Company does not expect the adoption of the impairment guidance contained
in EITF 03-16 to have a material impact on its financial position or
results of operations.
- 7 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
2. INVESTMENT IN REAL ESTATE AND MORTGAGE NOTE PAYABLE
OFFICE BUILDINGS
The components of the Company's investments in real estate and the related
non-recourse mortgage note payable collateralized by such real estate at
June 30, 2004 are as follows:
Land........................................................ $ 7,636
Buildings................................................... 46,622
---------
Total................................................ 54,258
Less accumulated depreciation............................... (1,843)
---------
Net investment in real estate........................ $ 52,415
=========
Mortgage note payable....................................... $ 39,535
Current portion of mortgage note payable.................... 644
---------
Mortgage note payable - long-term portion................... $ 38,891
=========
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 (3.9375% from July 15, 2004 to
January 20, 2005) 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 had an initial principal amount
of $9,500, bears interest at 12% per annum and is due in March 2013.
Interest income, which totaled $307 and $619 for the three and six months
ended June 30, 2004, respectively, and $343 and $343 for the three and six
months ended June 30, 2003, respectively, 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.
- 8 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
New Valley accounts for its interest in Douglas Elliman Realty on the
equity method and recorded income of $4,704 and $5,413 for the three and
six months ended June 30, 2004, respectively, and a loss of $112 and $689
for the three and six months ended June 30, 2003, respectively, associated
with Douglas Elliman Realty. New Valley's equity loss in Douglas Elliman
Realty during the three and six months ended June 30, 2003 includes New
Valley's portion ($725) of amortization associated with Douglas Elliman's
customer contracts outstanding at the acquisition date.
New Valley's equity income from Douglas Elliman Realty for the three and
six months ended June 30, 2004 includes $307 and $619, respectively, of
interest income earned by New Valley on the subordinated debt and income of
$28 and a loss of $30, respectively, which represent 44% of the mortgage
company's income (loss) from operations. New Valley's equity income from
Douglas Elliman Realty for the three and six months ended June 30, 2003
includes $343 of interest income earned by New Valley on the subordinated
debt and income of $86 and $115, respectively, which represents 46% of the
mortgage company's income from operations.
Summarized financial information as of June 30, 2004, December 31, 2003 and
for the three and six months ended June 30, 2004 and 2003, respectively,
for Douglas Elliman Realty is presented below. The summarized financial
information for the six months ended June 30, 2003 includes Realty's
results from operations from January 1, 2003 to June 30, 2003 and the
results from operations of Douglas Elliman and its affiliated property
management company from March 14, 2003 (date of acquisition) to June 30,
2003.
June 30, 2004 December 31, 2003
------------- -----------------
Cash ............................. $ 16,106 $ 9,062
Other current assets ............. 7,025 6,385
Property, plant and equipment, net 13,668 11,310
Trademarks ....................... 21,663 21,663
Goodwill ......................... 34,336 34,319
Other intangible assets, net ..... 3,513 3,977
Other noncurrent assets .......... 1,006 692
Notes payable - current .......... 4,796 3,659
Other current liabilities ........ 15,332 11,090
Notes payable - long term ........ 69,167 72,948
Members' equity (deficiency) ..... 8,022 (289)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
Revenues........................... $ 79,880 $ 46,232 $ 133,400 $ 64,877
Costs and expenses................. 68,528 43,178 118,300 62,423
Depreciation expense............... 1,053 971 2,149 1,263
Amortization expense............... 151 1,743 450 1,743
Interest expense, net.............. 1,410 1,422 2,853 1,744
----- ----- ----- -----
Net income (loss).................. $ 8,738 $ (1,082) $ 9,648 $ (2,296)
======= ====== ======= ======
- 9 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
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 four star Sheraton resort with approximately 525 rooms.
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
$9,900 in the project and had committed to make additional investments of
up to $2,600 at June 30, 2004. In the event that Koa Investors makes
distributions of cash, the Company is entitled to 50% of the cash
distributions until it has recovered its invested capital and achieved an
annual 12% internal rate of return ("IRR"), compounded on a quarterly
basis. The Company is then entitled to 35% of subsequent cash distributions
until it has achieved an annual 25% IRR. The Company is then entitled to
30% of subsequent cash distributions until it has achieved an annual 35%
IRR. After the Company has achieved an annual 35% IRR, the Company is then
entitled to 25% of subsequent cash distributions.
The Company accounts for its interest in Koa Investors under the equity
method and recorded losses of $62 and $62 for the three months ended June
30, 2004 and 2003, respectively, and losses of $125 and $202 for the six
months ended June 30, 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
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(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 $5,179 and $5,179 for the three and six months ended
June 30, 2004, respectively, and $0 and $75 for the three and six months
ended June 30, 2003, respectively.
The components of investment securities available for sale, which were all
equity securities, at June 30, 2004, are as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Gain Loss Value
------- ---------- ---------- --------
Investment securities..................... $ 8,306 $4,341 $ 73 $ 12,574
5. LONG-TERM INVESTMENTS
At June 30, 2004, long-term investments consisted primarily of investments
in limited partnerships of $2,264, which are accounted for at historical
cost. The Company believes the fair value of the limited partnerships
exceeds their carrying amount by approximately $10,730 based on the
indicated market values of the underlying investment portfolio provided by
the partnerships. The Company's estimate of the fair value of its long-term
investments are subject to judgment and are not necessarily indicative of
the amounts that could be realized in the current market. The Company is
required to make additional investments in one of its limited partnerships
up to an aggregate of $879 at June 30, 2004. 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 gains of
$113 for the three and six months ended June 30, 2004 and $0 and $88 for
the three and six months ended June 30, 2003, respectively, related to the
liquidation of one of its limited partnership investments.
6. OTHER LONG-TERM LIABILITIES
The components of other long-term liabilities, excluding New Valley's
mortgage note payable, at June 30, 2004 are as follows:
Long-term Current
Portion Portion
--------- -------
Retiree and disability obligations $2,445 $ 500
Other long-term liabilities ...... 163 --
------ ------
Total other long-term liabilities $2,608 $ 500
====== ======
7. CONTINGENCIES
LAWSUITS
In March 1997, a stockholder derivative suit was filed against the Company,
as a nominal defendant, its directors and Brooke Group Holding Inc.
("Brooke Group Holding"), an indirect wholly-owned subsidiary of Vector, in
the Delaware Chancery Court by a stockholder of the Company. The suit
alleges that the Company's purchase of the BrookeMil Ltd. 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
- 11 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
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. Recently,
on motion of the defendants, one of the plaintiff stockholders was
dismissed from the proceeding for lack of standing.
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 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 $7,700, including interest, at June 30, 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 June 30, 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 June 30, 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
- 12 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
government's motion to dismiss and, in 1997, the United States Court of
Appeals for the Federal Circuit reversed and remanded the case. Trial of
the case began in New York federal court in July 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, 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 would 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 and to other conditions, including
the absence of any material adverse change. 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, would 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.
On July 20, 2004, Ladenburg Thalmann Financial Services announced that it
is currently re-examining its capital needs to support its liquidity and
capital base for the near term. Ladenburg Thalmann Financial Services's
2004 annual shareholders meeting, where the debt conversion agreement was
to have been presented for shareholder approval, has been delayed until
Ladenburg Thalmann Financial Services can determine its capital needs. Upon
completion of this determination, Ladenburg Thalmann Financial Services
will proceed with its shareholder meeting and the debt conversion agreement
as management deems appropriate.
After the conversion of the $8,010 convertible note, New Valley would
continue to hold $5,000 principal amount of notes receivable and related
interest receivable of $553 at June 30, 2004 from Ladenburg Thalmann
Financial Services, which are due December 31, 2006 and bear interest at 1%
above the prime rate. These notes are subordinate to approximately $2,000
of Ladenburg Thalmann Financial Services's 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 Ladenburg
Thalmann Financial Services's operating results and liquidity needs.
Accordingly, the carrying value of the notes and interest receivable was $0
as of June 30, 2004.
- 13 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
9. WARRANTS
On June 14, 2004, warrants to purchase 17,859,354 Common Shares expired.
The warrants were issued in connection with the Company's 1999
recapitalization. A total of 8,084 warrants were exercised during the three
and six months ended June 30, 2004.
10. BUSINESS SEGMENT INFORMATION
The following table presents certain financial information of the Company's
operations as of and for the three and six months ended June 30, 2004 and
2003.
Corporate
Real Estate and Other Total
----------- --------- -----
THREE MONTHS ENDED JUNE 30, 2004
Revenues.............................. $ 1,811 -- $ 1,811
Other income.......................... 4,322 5,492 9,814
Operating income before
taxes and minority interests....... 5,259 2,268 7,527
Depreciation and amortization......... 325 -- 325
THREE MONTHS ENDED JUNE 30, 2003
Revenues.............................. $ 1,777 $ -- $ 1,777
Other (loss) income................... (508) 137 (371)
Operating income (loss) before
taxes and minority interests....... 474 (2,392) (1,918)
Depreciation and amortization......... 321 -- 321
SIX MONTHS ENDED JUNE 30, 2004
Revenues.............................. $ 3,592 -- $ 3,592
Other income.......................... 4,649 5,736 10,385
Operating income before
taxes and minority interests....... 6,507 98 6,605
Identifiable assets................... 80,240 84,731 164,971
Depreciation and amortization......... 646 -- 646
Capital expenditures.................. -- -- --
SIX MONTHS ENDED JUNE 30, 2003
Revenues.............................. $ 3,576 $ -- $ 3,576
Other (loss) income................... (1,622) 574 (1,048)
Operating income (loss) before
taxes and minority interests....... 286 (5,180) (4,894)
Identifiable assets................... 72,561 88,737 161,298
Depreciation and amortization......... 642 -- 642
Capital expenditures.................. -- -- --
- 14 -
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
11. COMPREHENSIVE INCOME
Comprehensive income 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 applicable to
Common Shares for the three and six months ended June 30, 2004 and 2003 is
as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
------- ------- ------- -------
Net income (loss) ........... $ 7,477 $(1,915) $ 6,555 $(4,890)
Net change in unrealized gain
on investment securities . (6,251) 6,709 (2,143) 6,824
------- ------- ------- -------
Comprehensive income ..... $ 1,226 $ 4,794 $ 4,412 $ 1,934
======= ======= ======= =======
12. STOCK OPTION PLANS
The Company accounts for its stock-based employee compensation plans under
the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. No stock-based employee compensation cost is reflected in
net income to the extent options granted under these plans had an exercise
price equal to the market value of the underlying Common Shares on the date
of the grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS 123, "Accounting for Stock-Based Compensation", to
stock-based employee compensation for the three and six months ended June
30, 2004 and 2003, respectively.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------- ------- ------- -------
Net income (loss) applicable to
Common Shares, as reported ....... $ 7,477 $(1,915) $ 6,555 $(4,890)
Deduct: Amortization of fair value of
New Valley option grants ........ (12) (15) (25) (25)
Deduct: Amortization of fair value of
Vector option grants ............. -- (170) -- (340)
------- ------- ------- -------
Net income (loss) applicable to
Common Shares, as adjusted ....... $ 7,465 $(2,100) $ 6,530 $(5,255)
======= ======= ======= =======
Adjusted net income (loss) per share -
- basic and diluted .............. $ 0.34 $ (0.09) $ 0.30 $ (0.24)
======= ======= ======= =======
- 15 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
EXPIRATION OF WARRANTS. On June 14, 2004, warrants to purchase
17,859,354 Common Shares expired. The warrants were issued in connection with
the Company's 1999 recapitalization. A total of 8,084 warrants were exercised
during the three and six months ended June 30, 2004.
LADENBURG CONVERTIBLE NOTES. In March 2004, New Valley and the other
holder of the convertible notes of Ladenburg Thalmann Financial Services Inc.
entered into a debt conversion agreement with the company. New Valley and the
other holder agreed to convert their notes, with an aggregate principal amount
of $18,010, 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 New Valley would 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 and to other conditions, including the
absence of any material adverse change. New Valley, several shareholders of
Ladenburg Thalmann Financial Services affiliated with New Valley 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, New Valley's note, representing
approximately $9,470 of principal and accrued interest, would be converted into
approximately 8,610,000 shares of Ladenburg Thalmann Financial Services common
stock. At June 30, 2004, the Ladenburg notes and interest receivable were
carried on New Valley's consolidated balance sheet at $0. New Valley currently
intends to distribute to its stockholders shares of Ladenburg Thalmann Financial
Services common stock issued to New Valley pursuant to the conversion agreement.
On July 20, 2004, Ladenburg Thalmann Financial Services announced that
it is currently re-examining its capital needs to support its liquidity and
capital base for the near term. Ladenburg Thalmann Financial Services' 2004
annual shareholder meeting, where the debt conversion agreement was to have been
presented for shareholder approval, has been delayed until Ladenburg Thalmann
Financial Services can determine its capital needs. Upon completion of this
determination, Ladenburg Thalmann Financial Services will proceed with its
shareholder meeting and the debt conversion agreement as management deems
appropriate.
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.
- 16 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
CRITICAL ACCOUNTING POLICIES
GENERAL. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
INVESTMENT SECURITIES AVAILABLE FOR SALE. At June 30, 2004, New Valley
had investment securities available for sale of $12,574. 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.
- 17 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 June 30, 2004, New Valley had long-term
investments of $2,264 which principally represented investments in various
limited partnerships. The principal business of the limited partnerships is
investing in investment securities and real estate. 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 $159,500 as of June 30, 2004 and capital loss carry
forwards of $1,750 which expire at various dates from 2006 through 2023. New
Valley also has approximately $13,550 of alternative minimum tax credit carry
forwards as of June 30, 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 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.
- 18 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS
For the three and six months ended June 30, 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 June 30, Six Months Ended June 30,
-------------------------- --------------------------
2004 2003 2004 2003
------- ------- ------- -------
Real estate:
Revenues ...................... $ 1,811 $ 1,777 $ 3,592 $ 3,576
Expenses ...................... 874 795 1,734 1,668
Other income (loss) ........... 4,322 (508) 4,649 (1,622)
------- ------- ------- -------
Operating income before
taxes and minority interests $ 5,259 $ 474 $ 6,507 $ 286
======= ======= ======= =======
Corporate and other:
Revenues ...................... $ -- $ -- $ -- $ --
Expenses ...................... 3,224 2,529 5,638 5,754
Other income (loss) ........... 5,492 137 5,736 574
------- ------- ------- -------
Operating income (loss) before
taxes and minority interests $ 2,268 $(2,392) $ 98 $(5,180)
======= ======= ======= =======
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2003
REAL ESTATE
Revenues from real estate operations were $1,811 for the three months
ended June 30, 2004 versus $1,777 for the same period in 2003. Expenses from
real estate operations for the three months ended June 30, 2004 were $874
compared to $795 for the same period in 2003.
Other income from real estate activities for the three months ended June
30, 2004 consisted of equity income from non-consolidated real estate businesses
of $4,642 and interest expense of $320. The equity income resulted from income
of $4,704 from Douglas Elliman Realty offset by a loss of $62 related to New
Valley's investment in Koa Investors. The principal source of Douglas Elliman
Realty's revenues and profitability is commissions earned on residential
property sales in the New York metropolitan area, which experienced high levels
of residential sales activity and real estate prices during the first half of
2004. In addition to the strength in the New York metropolitan residential real
estate market, the second and third quarters are generally the most profitable
quarters for Douglas Elliman Realty as it recognizes revenue on closing of the
underlying real estate sale. Revenue recognized by Douglas Elliman Realty in
these quarters includes closings of residential property sales that were
contracted during the spring and summer months, which is its principal selling
season. A downturn in the residential real estate market or economic conditions
in the New York metropolitan region could have a material adverse effect on
Douglas Elliman Realty and New Valley's investment in that company. Koa
Investors' loss primarily represents management fees. 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 $174 and interest expense of
$334. The equity losses resulted from a loss of $62 related to New Valley's
investment in Koa Investors and a loss of $112 from Douglas Elliman Realty. New
Valley's equity income in Douglas Elliman Realty for the three months ended June
30, 2003 was reduced by New Valley's portion ($725) of amortization expense
associated with Douglas Elliman's customer contracts outstanding at the
acquisition date. Koa Investors' loss primarily represents management fees.
- 19 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CORPORATE AND OTHER
Corporate and other expenses of $3,224 for the three months ended June
30, 2004 consisted primarily of employee compensation and benefits of $1,761 and
legal expense of $444. Corporate and other expenses of $2,529 for the 2003
period consisted primarily of employee compensation and benefits of $1,436 and
legal expense of $417. The increase in corporate expenses in 2004 was primarily
due to increased compensation expense, franchise taxes and other overhead
expenses associated with maintaining a public company.
For the three months ended June 30, 2004, New Valley's income of
$5,492 from corporate and other activities consisted primarily of gains on
sales of investments of $5,292 and interest and dividend income of $206. For the
three months ended June 30, 2003, New Valley's income of $137 related to
corporate and other activities consisted primarily of interest and dividend
income.
The income tax provision for the three months ended June 30, 2004 related
to alternative minimum tax expense. There was no income tax provision for the
three months ended June 30, 2003. The effective tax rates do not bear a
customary relationship with pre-tax accounting income principally as a
consequence of the Company's use of net operating loss carry forwards and a
change in the valuation allowance relating to deferred tax assets.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2003
REAL ESTATE
Revenues from real estate operations were $3,592 for the six months ended
June 30, 2004 versus $3,576 for the same period in 2003. Expenses from real
estate operations for the six months ended June 30, 2004 were $1,734 compared to
$1,668 for the same period in 2003.
Other income from real estate activities for the six months ended June
30, 2004 consisted of equity income from non-consolidated real estate businesses
of $5,288 and interest expense of $639. The equity income resulted from income
of $5,413 from Douglas Elliman Realty offset by a loss of $125 related to New
Valley's investment in Koa Investors. The principal source of Douglas Elliman
Realty's revenues and profitability is commissions earned on residential
property sales in the New York metropolitan area, which experienced high levels
of residential sales activity and real estate prices during the first half of
2004. A downturn in the residential real estate market or economic conditions in
the New York metropolitan region could have a material adverse effect on Douglas
Elliman Realty and New Valley's investment in that company. 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 $891 and interest expense of
$731. The equity losses resulted from a loss of $202 related to New Valley's
investment in Koa Investors and a loss of $689 from Douglas Elliman Realty. New
Valley's equity loss in Douglas Elliman Realty for the six months ended June 30,
2003 includes New Valley's portion ($725) of amortization associated with
Douglas Elliman's customer contracts outstanding at the acquisition date. Koa
Investors' loss primarily represents management fees. Koa Investors' loss
primarily represents management fees.
CORPORATE AND OTHER
Corporate and other expenses of $5,638 for the six months ended June 30,
2004 consisted primarily of employee compensation and benefits of $3,329 and
legal expense of $587. Corporate and other expenses of $5,754 for the 2003
period consisted primarily of employee compensation and benefits of $3,039 and
legal expenses of $1,188. The decrease in legal expenses in 2004 was primarily
due to legal expenses incurred in 2003 related to a proposed acquisition by New
Valley which was not consummated. The decrease in legal expenses during the 2004
period was offset by increases in compensation expense, franchise taxes and
other overhead expenses associated with maintaining a public company.
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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)
For the six months ended June 30, 2004, New Valley's income of $5,736
from corporate and other activities consisted primarily of gains from the sales
of investments of $5,292 and interest and dividend income of $455. For the six
months ended June 30, 2003, New Valley's income of $574 related to corporate and
other activities consisted of interest and dividend income of $423 and net gains
from the sale of investments of $163.
The income tax provision for the six months ended June 30, 2004 related
to alternative minimum tax expense. There was no income tax provision for the
six months ended June 30, 2003. The effective tax rates do not bear a customary
relationship with pre-tax accounting income principally as a consequence of the
Company's use of net operating loss carry forwards and a change in the valuation
allowance relating to deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2004, New Valley's cash and cash
equivalents increased from $66,593 to $69,765 due primarily to the sales of
marketable securities of $7,863 offset by cash used for operations of $2,183 and
investments in non-consolidated real estate businesses of $2,500.
Cash used for operating activities for the six months ended June 30,
2004 was $2,185 compared with $5,273 for the six months ended June 30, 2003. The
difference is primarily due to decreases in payments of accounts payable and
accrued liabilities in the 2004 period as compared to the 2003 period and
increases in distributions received from Douglas Elliman Realty, comprised
primarily of tax distributions and interest income received on the subordinated
note, in the 2004 period as compared to the 2003 period.
Cash provided from investing activities for the six months ended June
30, 2004 was $5,641 compared to cash used for investing activities of $7,674 for
the six months ended June 30, 2003. The difference is primarily attributable to
the net sales of marketable securities and long-term investments of $8,141 in
2004 versus $1,844 in the 2003 period and investments in non-consolidated real
estate businesses in the 2003 period of $9,500.
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 (3.9375% from July 15, 2004 to
January 20, 2005) 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 additional $9,500 in subordinated debt and equity of Douglas Elliman
Realty to help fund the acquisition. The subordinated debt, which had an initial
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 four star Sheraton
resort with approximately 525 rooms. In April 2004, a subsidiary of Koa
Investors closed on a $57,000 construction loan to finance the planned
renovation. New Valley had invested $9,900 in the project and had committed to
make additional investments of up to $2,600 at June 30, 2004. In the event that
Koa Investors makes distributions of cash, the Company is entitled to 50% of the
cash distributions until it has recovered its invested capital and achieved an
annual 12% internal rate of return ("IRR"), compounded on a quarterly basis. The
Company is then entitled to 35% of subsequent cash distributions until it has
achieved an annual 25% IRR. The Company is then entitled to 30% of subsequent
cash distributions until it has achieved an annual 35% IRR. After the Company
has achieved an annual 35% IRR, the Company is then entitled to 25% of
subsequent cash distributions.
New Valley has also committed to make additional investments in another
limited partnership of up to $879 at June 30, 2004.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In 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. On
July 20, 2004, Ladenburg Thalmann Financial Services announced that it is
currently re-examining its capital needs to support its liquidity and capital
base for the near term. Ladenburg Thalmann Financial Services's 2004 annual
shareholders meeting, where the debt conversion agreement was to have been
presented for shareholder approval, has been delayed until LTS can determine its
capital needs. Upon completion of this determination, LTS will proceed with its
shareholder meeting and the debt conversion agreement as management deems
appropriate.
Cash flows used in financing activities were $284 for the six months
ended June 30, 2004 and $1,667 for the six months ended June 30, 2003. The
difference was primarily due to the repurchase of 318,572 of New Valley's Common
Shares for $1,346 in 2003.
On June 14, 2004, warrants to purchase 17,859,354 Common Shares
expired. The warrants were issued in connection with the Company's 1999
recapitalization. A total of 8,084 warrants were exercised during the three and
six months ended June 30, 2004.
On October 5, 1999, New Valley's Board of Directors authorized the
repurchase of up to 2,000,000 Common Shares from time to time on the open market
or in privately negotiated transactions depending on market conditions. As of
August 6, 2004, New Valley had repurchased 1,185,615 shares for approximately
$4,695.
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
$7,700, including interest, at June 30, 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 June 30, 2004.
As of June 30, 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.
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.
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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)
NEW ACCOUNTING PRONOUNCEMENTS
In March 2004, the FASB reached a consensus on Emerging Issues Task
Force Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" ("EITF 03-1"). EITF 03-1 provides guidance
for determining when an investment is impaired and whether the impairment is
other than temporary. EITF 03-1 also incorporates into its consensus the
required disclosures about unrealized losses on investments announced by the
EITF in late 2003 and adds new disclosure requirements relating to cost-method
investments. The impairment accounting guidance is effective for reporting
periods beginning after June 15, 2004 and the new disclosure requirements for
annual reporting periods ending after June 15, 2004. The Company does not expect
the adoption of the impairment guidance contained in EITF 03-1 to have a
material impact on its financial position or results of operations.
In March 2004, the FASB reached a consensus on EITF 03-16, "Accounting
for Investments in Limited Liability Companies" ("EITF 03-16"). EITF 03-16
provides guidance for determining whether a noncontrolling investment in a
limited liability company should be accounted for using the cost method or the
equity method. Companies will be required to adopt the provisions of this
consensus in reporting periods beginning after June 15, 2004. The Company does
not expect the adoption of the impairment guidance contained in EITF 03-16 to
have a material impact on its financial position or results of operations.
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
June 30, 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.
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 $809 and $945 at June 30, 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-
- 23 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
derivative financial instruments, and accordingly, the scope of New Valley's
market risk management procedures extends beyond derivatives to include all
market risk sensitive financial instruments.
EQUITY PRICE RISK
New Valley held investment securities available for sale totaling
$12,574 at June 30, 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 June 30, 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 June 30, 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.
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.
- 24 -
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 7 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 June 30, 2004. No securities of the Company were repurchased by
the Company or its affiliated purchasers during the quarter ended June 30, 2004.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
New Valley held its 2004 annual meeting of stockholders on May 24,
2004. There were 22,117,852 New Valley common shares entitled to be voted on the
April 19, 2004 record date for the meeting. The only matter submitted to the New
Valley's stockholders for a vote at the annual meeting was to elect the
following eight director nominees to serve for the ensuing year and until their
successors are elected. The votes cast and withheld for such nominees were as
follows:
Nominee For Withheld
------- --- --------
Henry C. Beinstein 21,424,282 103,192
Arnold I. Burns 21,424,240 103,234
Ronald J. Kramer 21,424,894 102,580
Richard J. Lampen 21,424,712 102,762
Bennett S. LeBow 21,372,482 154,992
Howard M. Lorber 21,423,693 103,781
Barry W. Ridings 21,424,292 103,182
Victor M. Rivas 21,424,706 102,768
Based on these voting results, each of the directors nominated was
elected.
- 26 -
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
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
- 27 -
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW VALLEY CORPORATION
(Registrant)
Date: August 9, 2004 By: /s/ J. Bryant Kirkland III
-------------------------------------
J. Bryant Kirkland III
Vice President, Treasurer
and Chief Financial Officer
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