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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 NOVEMBER 5, 2004, THERE WERE OUTSTANDING 22,082,036 OF THE
REGISTRANT'S COMMON SHARES, $.01 PAR VALUE.
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NEW VALLEY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30,
2004 and December 31, 2003 ..................................................... 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30,
2004 and 2003 .................................................................. 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity for the nine months ended
September 30, 2004 ............................................................. 5
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 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 ............................................ 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk ......................... 27
Item 4. Controls and Procedures ............................................................ 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................................. 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ........................ 28
Item 6. Exhibits ........................................................................... 28
SIGNATURE ...................................................................................... 29
-2-
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
September 30, December 31,
2004 2003
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 71,595 $ 66,593
Investment securities available for sale.................................. 10,758 17,944
Restricted assets......................................................... 577 771
Other current assets...................................................... 893 1,870
--------- ---------
Total current assets................................................. 83,823 87,178
--------- ---------
Investments in real estate, net................................................. 52,116 53,012
Investments in non-consolidated real estate businesses.......................... 27,602 18,718
Restricted assets............................................................... 176 174
Long-term investments, net...................................................... 2,332 2,429
Note receivable................................................................. 500 --
Other assets.................................................................... 308 385
--------- ---------
Total assets......................................................... $ 166,857 $ 161,896
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of mortgage note payable.................................. $ 644 $ 644
Accounts payable and accrued liabilities.................................. 3,742 3,684
Prepetition claims........................................................ 600 600
Income taxes.............................................................. 11,379 11,264
--------- ---------
Total current liabilities............................................ 16,365 16,192
--------- ---------
Mortgage note payable........................................................... 38,730 39,266
Other long-term liabilities..................................................... 2,609 2,690
Commitments and contingencies................................................... -- --
Stockholders' equity:
Common Shares, $.01 par value; 100,000,000 and 100,000,000 shares
authorized; 22,082,036 and 22,117,852 shares outstanding................ 221 221
Additional paid-in capital................................................ 862,473 862,584
Accumulated deficit....................................................... (756,635) (765,468)
Accumulated other comprehensive income.................................... 3,094 6,411
--------- ---------
Total stockholders' equity........................................... 109,153 103,748
--------- ---------
Total liabilities and stockholders' equity........................... $ 166,857 $ 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 Nine Months Ended
September 30, September 30,
---------------------------- ------------------------
2004 2003 2004 2003
---------- ----------- ---------- ----------
Revenues:
Real estate leasing................................... $ 1,809 $ 1,797 $ 5,401 $ 5,373
----------- ----------- ----------- -----------
Total............................................ 1,809 1,797 5,401 5,373
----------- ----------- ----------- -----------
Cost and expenses:
General and administrative............................ 3,260 2,595 8,898 8,349
Rental real estate activities......................... 831 838 2,565 2,506
----------- ----------- ----------- -----------
Total............................................ 4,091 3,433 11,463 10,855
----------- ----------- ----------- -----------
Other results from operations:
Equity income from non-consolidated
real estate businesses.............................. 4,539 1,527 9,827 636
Gain on sale of investments, net...................... 321 443 5,613 606
Interest and dividend income.......................... 219 153 674 576
Interest expense...................................... (454) (348) (1,093) (1,079)
Other (loss) income................................... (1) 33 (12) 21
----------- ----------- ----------- -----------
Total............................................ 4,624 1,808 15,009 760
----------- ----------- ----------- -----------
Income (loss) from operations before income
taxes and minority interests.......................... 2,342 172 8,947 (4,722)
Minority interests in loss from operations
of consolidated subsidiaries.......................... (1) -- (1) (4)
Income tax provision........................................ 65 -- 115 --
----------- ----------- ----------- -----------
Net income (loss)........................................... $ 2,278 $ 172 $ 8,833 $ (4,718)
=========== =========== =========== ===========
Income (loss) per Common Share (basic):
Net income (loss) per Common Share.................... $ 0.10 $ 0.01 $ 0.40 $ (0.21)
=========== =========== =========== ===========
Number of shares used in computation........................ 22,105,609 22,117,852 22,114,213 22,155,528
=========== =========== =========== ===========
Income (loss) per Common Share (diluted):
Net income (loss) per Common Share.................... $ 0.10 $ 0.01 $ 0.40 $ (0.21)
=========== =========== =========== ===========
Number of shares used in computation........................ 22,115,736 22,120,166 22,120,215 22,155,528
=========== =========== =========== ===========
See accompanying notes to condensed
consolidated financial statements
-4-
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
COMMON SHARES 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
Net income........................ - - - 8,833 - 8,833
Net change in unrealized gain
on investment securities....... - - - - (3,317) (3,317)
Exercise of warrants.............. 8,084 - 91 - - 91
Repurchase of common shares....... (43,900) - (202) - - (202)
---------- ------- ---------- ----------- ------------- ---------
Balance, September 30, 2004.......... 22,082,036 $ 221 $ 862,473 $ (756,635) $ 3,094 $ 109,153
========== ======= ========= =========== ============= =========
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)
Nine Months Ended
September 30,
-------------------------------
2004 2003
---------- ----------
Cash flows from operating activities:
Net income (loss).............................................................. $ 8,833 $ (4,718)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization............................................. 969 962
Distributions from non-consolidated real estate businesses................ 3,443 670
Gain on sale of investments............................................... (5,613) (606)
Equity income from non-consolidated real estate businesses................ (9,827) (636)
Minority interests in loss from operations of consolidated subsidiaries... (1) (4)
Changes in assets and liabilities:
Decrease in receivables and other assets............................... 1,173 604
Increase (decrease) in accounts payable and accrued liabilities........ 93 (3,054)
---------- ----------
Net cash used in operating activities............................................. (930) (6,782)
---------- ----------
Cash flows from investing activities:
Proceeds from sale of investment securities................................. 9,336 2,361
Purchase of investment securities........................................... -- (372)
Proceeds from sale or liquidation of long-term investments.................. 564 874
Purchase of long-term investments........................................... (321) (195)
Purchase of non-consolidated real estate businesses......................... (2,500) (9,500)
Payment of prepetition claims............................................... -- (19)
Issuance of note receivable................................................. (500) --
---------- ----------
Net cash provided from (used in) investing activities............................. 6,579 (6,851)
---------- ----------
Cash flows used in financing activities:
Repayment of mortgage note payable.......................................... (536) (482)
Exercise of warrants........................................................ 91 --
Repurchase of Common Shares................................................. (202) (1,346)
---------- ----------
Net cash used in financing activities............................................. (647) (1,828)
---------- ----------
Net increase (decrease) in cash and cash equivalents.............................. 5,002 (15,461)
Cash and cash equivalents, beginning of period.................................... 66,593 82,113
---------- ----------
Cash and cash equivalents, end of period.......................................... $ 71,595 $ 66,652
========== ==========
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
September 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 September 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 condensed consolidated 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 and real estate properties. 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 Sheraton Keauhou Bay Resort & Spa 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 September 30, 2004, Vector Group Ltd. ("Vector"), New Valley's
principal stockholder, owned 58.2% 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 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.
-7-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Weighted-average common
shares outstanding.................. 22,105,609 22,117,852 22,114,213 22,155,528
Assumed exercise of stock
options............................. 10,127 2,314 6,002 --
---------- ---------- ---------- ----------
Weighted-average common
shares outstanding
assuming dilution................... 22,115,736 22,120,166 22,120,215 22,155,528
========== ========== ========== ==========
The following stock options and warrants were outstanding during the three and
nine months ended September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Number of stock options ....... 105,333 125,333 105,333 165,333
-------------- -------------- -------------- --------------
Weighted-average exercise price $ 5.30 $ 5.11 $ 5.30 $ 4.79
============== ============== ============== ==============
Number of warrants ............ -- 17,867,438 17,867,438 17,867,438
-------------- -------------- -------------- --------------
Weighted-average exercise price $ -- $ 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 adoption of EITF 03-1 did not have a
material impact on the Company's financial position or results of operations.
-8-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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
adoption of EITF 03-16 did not have a material impact on the Company's
financial position or results of operations.
2. INVESTMENTS IN REAL ESTATE AND MORTGAGE NOTE PAYABLE
The components of the Company's investments in real estate and the related
non-recourse mortgage note payable collateralized by such real estate at
September 30, 2004 are as follows:
Land .................................... $ 7,636
Buildings ............................... 46,622
--------
Total ........................... 54,258
Less accumulated depreciation ........... (2,142)
--------
Investments in real estate, net . $ 52,116
========
Mortgage note payable ................... $ 39,374
Current portion of mortgage note payable 644
--------
Mortgage note payable - long-term portion $ 38,730
========
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.
In October 2004, New Valley entered into various extensions of the leases
at the office buildings. As a result of the extensions, the average
remaining lease term of tenants increased to approximately eight years and
the major tenant, a leading drug company, increased the amount of space
leased. Based on market conditions, New Valley may seek to dispose of or
refinance the office buildings in the future.
-9-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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. In
October 2004, upon receipt of the required regulatory approvals, the
former owners of Realty contributed 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.
New Valley accounts for its interest in Douglas Elliman Realty on the
equity method and recorded income of $4,602 and $10,015 for the three and
nine months ended September 30, 2004, respectively, and $1,590 and $901
for the three and nine months ended September 30, 2003, respectively,
associated with Douglas Elliman Realty. New Valley's equity income from
Douglas Elliman Realty for the three and nine months ended September 30,
2004 includes $313 and $932, respectively, of interest income earned by
New Valley on the subordinated debt and income of $89 and $59,
respectively, which represents 44% of the mortgage company's income from
operations. New Valley's equity income from Douglas Elliman Realty for the
three and nine months ended September 30, 2003 includes $293 and $636 of
interest income earned by New Valley on the subordinated debt and income
of $78 and $193, respectively, which represents 46% of the mortgage
company's income from operations. New Valley's equity income in Douglas
Elliman Realty during the three and nine months ended September 30, 2003
also includes New Valley's portion ($621 and $1,346, respectively) of
amortization associated with Douglas Elliman's customer contracts
outstanding at the acquisition date.
Summarized financial information as of September 30, 2004, December 31,
2003 and for the three and nine months ended September 30, 2004 and 2003,
respectively, for Douglas Elliman Realty is presented below. The
summarized financial information for the nine months ended September 30,
2003 includes Realty's results from operations from January 1, 2003 to
September 30, 2003 and the results from operations of Douglas Elliman and
its affiliated property management company from March 14, 2003 (date of
acquisition) to September 30, 2003.
September 30, 2004 December 31, 2003
------------------ -----------------
Cash and cash equivalents .............. $ 22,522 $ 9,062
Other current assets ................... 5,339 6,385
Property, plant and equipment, net ..... 13,473 11,310
Trademarks ............................. 21,663 21,663
Goodwill ............................... 34,427 34,319
Other intangible assets, net ........... 3,426 3,977
Other noncurrent assets ................ 1,253 692
Notes payable - current ................ 6,984 3,659
Other current liabilities .............. 17,203 11,090
Notes payable - long term .............. 65,421 72,948
Members' equity (deficiency) ........... 12,495 (289)
-10-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
------------- ------------- ------------- ------------
Revenues............................ $ 78,379 $ 58,891 $ 211,779 $ 123,768
Costs and expenses.................. 67,265 52,700 185,565 115,123
Depreciation expense................ 1,102 989 3,251 2,252
Amortization expense................ 150 1,355 600 3,098
Interest expense, net............... 1,462 1,474 4,315 3,218
Other income........................ -- 67 -- 67
------------- ------------- ------------- ------------
Net income.......................... $ 8,400 $ 2,440 $ 18,048 $ 144
============= ============= ============= ============
The Company received cash distributions from Douglas Elliman Realty of
$2,205 and $3,443 for the three and nine months ended September 30, 2004,
respectively, and $243 and $670 for the three and nine months ended
September 30, 2003, respectively. The cash distributions consisted
primarily of tax distributions and interest payments received on the
subordinated note.
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 reopening in the
fourth quarter 2004 as the Sheraton Keauhou Bay Resort & Spa, a four star
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 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 September 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 $63 and $63 for the three months ended
September 30, 2004 and 2003, respectively, and losses of $188 and $265 for
the nine months ended September 30, 2004 and 2003, respectively,
associated with the property. Koa Investors' losses primarily represent
management fees. Koa Investors capitalizes substantially all costs related
to the acquisition and development of the property during the construction
phase, which ceased in connection with the opening of the hotel in the
fourth quarter of 2004. Koa Investors anticipates that the hotel will
experience operating losses during its opening phase.
4. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at fair
value, with net unrealized gains (losses) included as a component of
stockholders' equity. The Company had realized gains (losses) on sales of
investment securities available for sale of $288 and $5,467 for the three
and nine months ended September 30, 2004, respectively, and $443 and $518
for the three and nine months ended September 30, 2003, respectively.
-11-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The components of investment securities available for sale, which were all
equity securities, at September 30, 2004 are as follows:
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
------ ---------- ---------- -------
Equity securities..................................... $7,664 $ 3,500 $ 406 $10,758
5. LONG-TERM INVESTMENTS
At September 30, 2004, long-term investments consisted primarily of
investments in limited partnerships of $2,332, which are accounted for at
historical cost. The Company believes the fair value of the limited
partnerships exceeds their carrying amount by approximately $11,172 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 $810 at September 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 $33 and $146 for the three and nine months
ended September 30, 2004 and $0 and $88 for the three and nine months
ended September 30, 2003, respectively, related to the liquidation of one
of its limited partnership investments.
6. LADENBURG THALMANN FINANCIAL SERVICES INC.
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. The holders of the convertible notes subsequently agreed to extend
the interest forbearance period to May 13, 2005 with respect to interest
payments due through March 31, 2005. 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.
-12-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 $9,620 of
principal and accrued interest, would be converted into approximately
8,745,000 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 $621 at September 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 September 30, 2004.
In September and November 2004, Ladenburg Thalmann Financial Services
borrowed a total of $1,750 from New Valley ($500 outstanding at September
30, 2004). The loans, which bear interest at 2% above prime, are due on
the earlier of January 15, 2006 or the tenth business day following the
completion of one or more debt or equity financings where Ladenburg
Thalmann Financial Services receives at least $10,000 in total proceeds.
7. OTHER LONG-TERM LIABILITIES
The components of other long-term liabilities, excluding New Valley's
mortgage note payable, at September 30, 2004 are as follows:
LONG-TERM CURRENT
PORTION PORTION
------- -------
Retiree and disability obligations...................... $ 2,443 $ 500
Other long-term liabilities............................. 166 --
--------- -------
Total other long-term liabilities....................... $ 2,609 $ 500
========= =======
8. CONTINGENCIES
Lawsuits
In March 1997, a stockholder derivative suit was filed against the
Company, as a nominal defendant, its directors and Brooke Group Holding
Inc. ("Brooke Group Holding"), an indirect wholly-owned subsidiary of
Vector, in the Delaware Chancery Court by a stockholder of the Company.
The suit alleges that the Company's purchase of the BrookeMil 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
-13-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(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 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 $7,950, including interest, at September 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 September 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 September 30, 2004, New Valley had $600 of prepetition
bankruptcy-related claims. 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
-14-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(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 was completed in New York federal court in August 2004 and the
parties are awaiting the ruling of the court.
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 2004
prior to the expiration of the warrants.
10. BUSINESS SEGMENT INFORMATION
The following table presents certain financial information of the
Company's operations before taxes and minority interests as of and for the
three and nine months ended September 30, 2004 and 2003.
CORPORATE
REAL ESTATE AND OTHER TOTAL
----------- --------- ---------
Three months ended September 30, 2004
Revenues...................................... $ 1,809 $ -- $ 1,809
Other results from operations................. 4,085 539 4,624
Operating income (loss) before
taxes and minority interests............... 5,063 (2,721) 2,342
Depreciation and amortization................. 323 -- 323
Three months ended September 30, 2003
Revenues...................................... $ 1,797 $ -- $ 1,797
Other results from operations................. 1,179 629 1,808
Operating income (loss) before
taxes and minority interests............... 2,138 (1,966) 172
Depreciation and amortization................. 320 -- 320
Nine months ended September 30, 2004
Revenues...................................... $ 5,401 $ -- $ 5,401
Other results from operations................. 8,734 6,275 15,009
Operating income (loss) before
taxes and minority interests............... 11,570 (2,623) 8,947
Depreciation and amortization................. 969 -- 969
Capital expenditures.......................... -- -- --
Nine months ended September 30, 2003
Revenues...................................... $ 5,373 $ -- $ 5,373
Other results from
Other results from operations................. (443) 1,203 760
Operating income (loss) before
taxes and minority interests............... 2,424 (7,146) (4,722)
Depreciation and amortization................. 962 -- 962
Capital expenditures.......................... -- -- --
Identifiable assets
September 30, 2004............................ $ 82,652 $ 84,205 $ 166,857
September 30, 2003............................ 73,298 88,264 161,562
-15-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(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 for the three
and nine months ended September 30, 2004 and 2003 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income (loss) ................. $ 2,278 $ 172 $ 8,833 $ (4,718)
Net change in unrealized gain
on investment securities ...... (1,174) 813 (3,317) 7,637
--------- --------- --------- ---------
Comprehensive income .......... $ 1,104 $ 985 $ 5,516 $ 2,919
========= ========= ========= =========
11. STOCK OPTION PLANS
The Company accounts for its stock-based employee compensation plans under
the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. No stock-based employee compensation cost is reflected in
net income to the extent options granted under these plans had an exercise
price equal to the market value of the underlying common shares on the
date of the grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation for the three and nine
months ended September 30, 2004 and 2003, respectively.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income (loss) applicable to
Common Shares, as reported ........... $ 2,278 $ 172 $ 8,833 $ (4,718)
Deduct: Amortization of fair value of
New Valley option grants ............. (12) (13) (37) (38)
Deduct: Amortization of fair value of
Vector option grants, net ............ -- (170) -- (510)
-------- -------- -------- --------
Net income (loss) applicable to Common
Shares, as adjusted .................. $ 2,266 $ (11) $ 8,796 $ (5,266)
======== ======== ======== ========
Adjusted net income (loss) per share-
basic and diluted .................... $ 0.10 $ (0.00) $ 0.40 $ (0.24)
======== ======== ======== ========
-16-
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 and real estate properties. 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 Sheraton
Keauhou Bay Resort & Spa 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 2004
prior to the expiration of the warrants.
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 $9,620 of principal and accrued interest, would be converted into
approximately 8,745,000 shares of Ladenburg Thalmann Financial Services common
stock. At September 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.
In September and November 2004, Ladenburg Thalmann Financial Services
borrowed a total of $1,750 from New Valley ($500 outstanding at September 30,
2004). The loans, which bear interest at 2% above prime, are due on the earlier
of January 15, 2006 or the tenth business day following the completion of one or
more debt or equity financings where Ladenburg Thalmann Financial Services
receives at least $10,000 in total proceeds.
Hawaiian Hotel. New Valley holds a 50% interest in Koa Investors which
owns the Sheraton Keauhou Bay Resort & Spa in Kailua-Kona, Hawaii. Following a
major renovation, the property is reopening in the fourth quarter of 2004 as a
four star resort with approximately 525 rooms.
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.
-17-
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. In October 2004, upon receipt
of required regulatory approvals, the former owners of Douglas Elliman Realty
contributed 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 had an initial 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 September 30, 2004, New
Valley had investment securities available for sale of $10,758. 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 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.
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 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
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 to provide it with accurate financial information prepared in
accordance with generally accepted accounting principles that New Valley uses in
the application of the equity method. New Valley is not aware, however, of any
errors in or possible misstatements of the financial information provided by
these entities that would have a material effect on New Valley's consolidated
financial statements.
Long-Term Investments. At September 30, 2004, New Valley had long-term
investments of $2,332 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 $158,100 as of September 30, 2004 and capital loss
carry forwards of $1,500 which expire at various dates from 2006 through 2023.
New Valley also has approximately $13,600 of alternative minimum tax credit
carry forwards as of September 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.
-19-
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 nine months ended September 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 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- ---------------------------------
2004 2003 2004 2003
-------- --------- -------- ---------
Real estate:
Revenues................................ $ 1,809 $ 1,797 $ 5,401 $ 5,373
Expenses................................ 831 838 2,565 2,506
Other results from operations........... 4,085 1,179 8,734 (443)
-------- --------- -------- ---------
Operating income before
taxes and minority interests........ $ 5,063 $ 2,138 $ 11,570 $ 2,424
======== ========= ======== =========
Corporate and other:
Revenues................................ $ -- $ -- $ -- $ --
Expenses................................ 3,260 2,595 8,898 8,349
Other results from operations .......... 539 629 6,275 1,203
-------- --------- -------- ---------
Operating loss before taxes
and minority interests.............. $ (2,721) $ (1,966) $ (2,623) $ (7,146)
======== ========= ======== =========
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2003
Real Estate
Revenues from real estate operations were $1,809 for the three months
ended September 30, 2004 versus $1,797 for the same period in 2003. Expenses
from real estate operations for the three months ended September 30, 2004 were
$831 compared to $838 for the same period in 2003.
Other income from real estate activities for the three months ended
September 30, 2004 consisted of equity income from non-consolidated real estate
businesses of $4,539 and interest expense of $454. The equity income resulted
from income of $4,602 from Douglas Elliman Realty offset by a loss of $63
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 nine months 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 substantially all costs related to the
acquisition and development of the Hawaii property, which ceased in connection
with the opening of the hotel in the fourth quarter of 2004. Koa Investors
anticipates that the hotel will experience operating losses during its opening
phase.
Other income from real estate activities for the three months ended
September 30, 2003 consisted of equity income from non-consolidated real estate
businesses of $1,527 and interest expense of $348. The equity income resulted
from income of $1,590 from Douglas Elliman Realty offset by a loss of $63
related to New Valley's investment in Koa Investors. New Valley's equity income
in Douglas Elliman Realty for the three months ended September 30, 2003 was
reduced by New Valley's portion ($620) of amortization expense associated with
Douglas Elliman's customer contracts outstanding at the acquisition date. Koa
Investors' loss primarily represents management fees.
-20-
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 $3,260 for the three months ended
September 30, 2004 consisted primarily of employee compensation and benefits of
$1,971 and legal expense of $583. Corporate and other expenses of $2,595 for the
quarter ended September 30, 2003 consisted primarily of employee compensation
and benefits of $1,472 and legal expense of $342. The increase in corporate
expenses in 2004 was primarily due to increased compensation expense, legal
expense and other overhead expenses associated with maintaining a public
company. The increase in legal expense related primarily to litigation expenses
associated with the Company's 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. Trial of the case was completed in New York federal court in
August 2004 and the parties are awaiting the ruling of the court.
For the three months ended September 30, 2004, New Valley's other income
of $539 from corporate and other activities consisted primarily of gains on
sales of investments of $321 and interest and dividend income of $219. For the
three months ended September 30, 2003, New Valley's other income of $629 from
corporate and other activities consisted primarily of interest and dividend
income.
The income tax provision for the three months ended September 30, 2004
related to alternative minimum tax and state income tax expense. There was no
income tax provision for the three months ended September 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.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2003
Real Estate
Revenues from real estate operations were $5,401 for the nine months
ended September 30, 2004 versus $5,373 for the same period in 2003. Expenses
from real estate operations for the nine months ended September 30, 2004 were
$2,565 compared to $2,506 for the same period in 2003.
Other income from real estate activities for the nine months ended
September 30, 2004 consisted of equity income from non-consolidated real estate
businesses of $9,827 and interest expense of $1,093. The equity income resulted
from income of $10,015 from Douglas Elliman Realty offset by a loss of $188
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 nine months 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' loss primarily represents management fees. Koa Investors
capitalizes substantially all costs related to the acquisition and development
of the Hawaii property, which ceased in connection with the opening of the hotel
in the fourth quarter of 2004. Koa Investors anticipates that the hotel will
experience operating losses during its opening phase.
Other loss from real estate activities for the nine months ended
September 30, 2003 consisted of equity income from non-consolidated real estate
businesses of $636 and interest expense of $1,079. The equity income resulted
from income of $901 from Douglas Elliman Realty offset by a loss of $265 related
to New Valley's investment in Koa Investors. New Valley's equity loss in Douglas
Elliman Realty for the nine months ended September 30, 2003 includes New
Valley's portion ($1,346) of amortization associated with Douglas Elliman's
customer contracts outstanding at the acquisition date. Koa Investors' loss
primarily represents management fees.
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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)
Corporate and other
Corporate and other expenses of $8,898 for the nine months ended September
30, 2004 consisted primarily of employee compensation and benefits of $5,300 and
legal expense of $1,170 . Corporate and other expenses of $8,349 for the 2003
period consisted primarily of employee compensation and benefits of $4,511 and
legal expenses of $1,530. The decrease in legal expenses in 2004 was primarily
due the absence of legal expenses incurred in 2003 related to a proposed
acquisition by New Valley which was not consummated offset by increased
litigation expenses in 2004 related to the lawsuit in New York federal court.
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.
For the nine months ended September 30, 2004, New Valley's income of
$6,275 from corporate and other activities consisted primarily of gains from the
sales of investments of $5,613 and interest and dividend income of $674. For the
nine months ended September 30, 2003, New Valley's income of $1,203 from
corporate and other activities consisted of interest and dividend income of $576
and net gains from the sale of investments of $606.
The income tax provision for the nine months ended September 30, 2004
related to alternative minimum tax and state income tax expense. There was no
income tax provision for the nine months ended September 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 nine months ended September 30, 2004, New Valley's cash and
cash equivalents increased from $66,593 to $71,595 due primarily to the sales of
marketable securities of $ 9,336 offset by investments in non-consolidated real
estate businesses of $2,500 and cash used in operations of $930.
Cash used in operating activities for the nine months ended September 30,
2004 was $930 compared with $6,782 for the nine months ended September 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 nine months ended
September 30, 2004 was $6,579 compared to cash used in investing activities of
$6,851 for the nine months ended September 30, 2003. The difference is primarily
attributable to the net sales of marketable securities and long-term investments
of $9,579 in 2004 versus $2,668 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,
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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)
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 Sheraton
Keauhou Bay Resort & Spa in Kailua-Kona, Hawaii. Following a major renovation,
the property is reopening in the fourth quarter of 2004 as a four star resort
with approximately 525 rooms. In April 2004, a subsidiary of Koa Investors
closed on a $57,000 construction loan to finance the renovation. New Valley had
invested $9,900 in the project and had committed to make additional investments
of up to $2,600 at September 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 $810 at September 30, 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 6 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. In September and November 2004, Ladenburg Thalmann Financial
Services borrowed a total of $1,750 from New Valley. The loans, which bear
interest at 2% above prime, will be due on the earlier of January 15, 2006 or
the tenth business day following the completion of one or more debt or equity
financings where Ladenburg Thalmann Financial Services receives at least $10,000
in total proceeds.
Cash flows used in financing activities were $647 for the nine months
ended September 30, 2004 and $1,828 for the nine months ended September 30,
2003. The difference was primarily due to the repurchase of
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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)
318,572 of New Valley's Common Shares for $1,346 in 2003 versus the repurchase
of 43,900 Common Shares for $202 in the 2004 period.
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 2004 prior to the expiration to
the warrants.
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
November 5, 2004, New Valley had repurchased 1,229,515 shares for approximately
$4,897.
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
$7,950, including interest, at September 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 September 30, 2004.
As of September 30, 2004, New Valley had $600 of prepetition
bankruptcy-related claims. 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 over the next 12 months,
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 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 adoption of EITF 03-1 did not have a
material impact on the Company's 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 adoption of EITF 03-16 did
not have a material impact on the Company's 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
-24-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 September 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 $753 and $945 at September 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-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 $10,758
at September 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 September 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 September 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.
-25-
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.
-26-
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.
-27-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 8 to the "Notes to the Condensed Quarterly Consolidated
Financial Statements" in Part I, Item 1 of this Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
No securities of the Company that were not registered under the
Securities Act of 1933 have been issued or sold by the Company during
the quarter ended September 30, 2004. The Company's purchases of its
Common Shares during the three months ended September 30, 2004 were
as follows:
Total Number Maximum Number
of Shares of Shares that
Total Purchased as May Yet Be
Number of Average Part of Publicly Purchased Under
Shares Price Paid Announced Plans the Plans
Period Purchased per Share or Programs or Programs
- ---------------------------------- --------- ---------- ---------------- ---------------
July 1 to July 31, 2004........... -- $ -- -- --
August 1 to August 31, 2004....... 43,900 4.55 1,229,515* 770,485*
Sept. 1 to Sept. 30, 2004......... -- -- -- --
--------- ---------- --------- -------
Total............................. 43,900 $ 4.55 1,229,515 770,485
========= ========== ========= =======
- ----------
* 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 in the open
market or in privately negotiated transactions depending on market
conditions.
Item 6. 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.
-28-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW VALLEY CORPORATION
(Registrant)
Date: November 9, 2004 By: /s/J. Bryant Kirkland III
-----------------------------------------
J. Bryant Kirkland III
Vice President, Treasurer
and Chief Financial Officer
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