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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2005
Commission File Number 1-2493
New Valley Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-5482050
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 S.E. Second Street, 32nd Floor
Miami, Florida 33131
(Address of principal executive offices) (Zip Code)
(305) 579-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 9, 2005, there were outstanding 23,332,036 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 THREE MONTHS ENDED MARCH 31, 2005
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31,
2005 and December 31, 2004.................................... 3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 2005 and 2004................ 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity for the three months
ended March 31, 2005.......................................... 5
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2005 and 2004................ 6
Notes to the Condensed Consolidated Financial
Statements .................................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 18
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 6. Exhibits.......................................................... 28
SIGNATURE............................................................................. 29
-2-
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
March 31, December 31,
2005 2004
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 94,682 $ 70,688
Investment securities available for sale.............................. 13,373 7,837
Due from broker....................................................... -- 830
Restricted assets..................................................... -- 606
Deferred income taxes................................................. -- 9,000
Other current assets.................................................. 303 2,314
--------- ---------
Total current assets.............................................. 108,358 91,275
--------- ---------
Investment in real estate held for sale.................................... -- 51,817
Investments in non-consolidated real estate businesses..................... 26,620 27,160
Restricted assets.......................................................... -- 134
Long-term investments, net................................................. 2,454 2,408
Notes receivable from LTS.................................................. -- 1,750
Other assets............................................................... 626 634
--------- ---------
Total assets...................................................... $ 138,058 $ 175,178
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of mortgage note payable.............................. $ -- $ 644
Accounts payable and accrued liabilities.............................. 3,980 5,805
Prepetition claims.................................................... 300 300
Income taxes.......................................................... 469 1,649
--------- ---------
Total current liabilities......................................... 4,749 8,398
--------- ---------
Mortgage note payable...................................................... -- 38,569
Other long-term liabilities................................................ 2,342 2,575
Commitments and contingencies.............................................. -- --
Stockholders' equity:
Common Shares, $.01 par value; 100,000,000 shares
authorized; 23,332,036 and 22,082,036 shares outstanding............ 233 221
Additional paid-in capital............................................ 862,187 862,473
Unearned compensation on restricted stock............................. (8,330) --
Accumulated deficit................................................... (726,003) (739,011)
Accumulated other comprehensive income................................ 2,880 1,953
--------- ---------
Total stockholders' equity........................................ 130,967 125,636
--------- ---------
Total liabilities and stockholders' equity....................... $ 138,058 $ 175,178
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements
-3-
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31,
-----------------------------------
2005 2004
------------ ------------
Revenues ............................................... $ -- $ --
------------ ------------
Total ......................................... -- --
------------ ------------
Cost and expenses:
General and administrative ........................ 3,366 2,414
------------ ------------
Total ......................................... 3,366 2,414
------------ ------------
Other results from operations:
Equity (loss) income from non-consolidated
real estate businesses .......................... (306) 646
Gain on sale of investments ....................... 1,441 --
Interest and dividend income ...................... 486 249
Gain from conversion of LTS notes ................. 9,461 --
Equity loss from operations of LTS ................ (299) --
Other loss ........................................ (3) (5)
------------ ------------
Total ......................................... 10,780 890
------------ ------------
Income (loss) from operations before income taxes ...... 7,414 (1,524)
Income tax expense (benefit) ........................... 2,927 (244)
------------ ------------
Income (loss) from continuing operations ............... 4,487 (1,280)
Discontinued operations:
Income from discontinued operations, net of income
tax expense of $178 and $244 .................... 231 358
Gain on disposal of discontinued operations, net of
income tax expense of $6,395 and $0 ............. 8,290 --
------------ ------------
Income from discontinued operations ........... 8,521 358
------------ ------------
Net income (loss) ..................................... $ 13,008 $ (922)
============ ============
Income (loss) per Common Share (basic):
Continuing operations ............................. $ 0.19 $ (0.06)
Discontinued operations ........................... 0.37 0.02
------------ ------------
Net income (loss) per Common Share ................ $ 0.56 $ (0.04)
============ ============
Number of shares used in computation ................... 23,193,147 22,117,852
============ ============
Income (loss) per Common Share (diluted):
Continuing operations ............................. $ 0.19 $ (0.06)
Discontinued operations ........................... 0.37 0.02
------------ ------------
Net income (loss) per Common Share ................ $ 0.56 $ (0.04)
============ ============
Number of shares used in computation ................... 23,242,513 22,117,852
============ ============
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)
Unearned Accumulated
Common Shares Additional Compensation Other
------------------ Paid-In Restricted Accumulated Comprehensive
Shares Amount Capital On Stock Deficit Income Total
------ ------ ------- -------- ----------- ------------- -----
Balance, December 31, 2004............ 22,082,036 $ 221 $ 862,473 $ -- $ (739,011) $ 1,953 $125,636
Net income....................... -- -- -- -- 13,008 -- 13,008
Other comprehensive income:
Net change in unrealized gain
on investment securities..... -- -- -- -- -- 927 927
Distribution of LTS stock........ (9,162) (9,162)
Issuance of restricted stock..... 1,250,000 12 8,876 (8,875) -- -- 13
Compensation expense on restricted
stock grant.................. -- -- -- 545 -- -- 545
---------- -------- --------- ------- ---------- ------- --------
Balance, March 31, 2005............... 23,332,036 $ 233 $ 862,187 $(8,330) $ (726,003) $ 2,880 $130,967
========== ======== ========= ======= ========== ======= ========
See accompanying Notes to Condensed Consolidated Financial Statements
-5-
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
----------------------------------
2005 2004
---------------- -----------------
Cash flows from operating activities:
Net income (loss)....................................................... $ 13,008 $ (922)
Income from discontinued operations..................................... (8,521) (358)
------------- -----------
Subtotal.............................................................. 4,487 (1,280)
------------- -----------
Adjustments to reconcile net income (loss) to net cash used for
operating activities:
Compensation expense on restricted stock grant...................... 545 --
Equity (income) loss from non-consolidated real estate businesses... 306 (646)
Equity loss from operations of LTS.................................. 299 --
Gain on sale of investments......................................... (1,441) --
Gain from conversion of LTS notes receivable to LTS common stock.... (9,461) --
Distributions from non-consolidated real estate businesses.......... 234 159
Deferred income tax expense......................................... 2,875 --
Decrease in other current assets, restricted assets and other assets (174) 95
Decrease in accounts payable and accrued liabilities................ (1,488) (1,764)
------------- -----------
Net cash used for operating activities..................................... (3,818) (3,436)
------------- -----------
Cash flows from investing activities:
Sale or maturity of investment securities............................. 3,161 --
Purchase of investment securities..................................... (500) --
Investment in long-term investments................................... (46) (229)
Sale or liquidation of long-term investments.......................... -- 149
Issuance of notes receivable from LTS................................. (1,750) --
Purchase of LTS Common Stock.......................................... (1,500) --
Investment in non-consolidated real estate businesses................. -- (1,500)
------------- -----------
Net cash used for investing activities..................................... (635) (1,580)
------------- -----------
Cash flows from financing activities:
Issuance of restricted stock.......................................... 13 --
------------- -----------
Net cash provided from financing activities................................ 13 --
------------- -----------
Net cash provided from discontinued operations............................. 28,434 606
------------- -----------
Net increase (decrease) in cash and cash equivalents.................. 23,994 (4,410)
Cash and cash equivalents, beginning of period........................ 70,688 66,593
------------- -----------
Cash and cash equivalents, end of period.............................. $ 94,682 $ 62,183
============= ===========
See accompanying Notes to Condensed Consolidated Financial Statements
-6-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
1. Principles of Reporting
The condensed consolidated financial statements include the accounts of New
Valley Corporation and its majority-owned subsidiaries ("New Valley" or the
"Company"). The condensed consolidated financial statements as of March 31,
2005 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 state fairly the financial position as
of March 31, 2005 and the results of operations and cash flows for all
periods presented have been made. Results for the interim periods are not
necessarily indicative of the results for the entire year.
These financial statements should be read in conjunction with the
consolidated financial statements in New Valley's Annual Report on Form
10-K for the year ended December 31, 2004 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. New
Valley 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. The Company also owns, through
its New Valley Realty Division, a 50% interest in Koa Investors LLC ("Koa
Investors"), which owns the Sheraton Keauhou Bay Resort & Spa in
Kailua-Kona, Hawaii. At March 31, 2005, Vector Group Ltd. ("Vector"), New
Valley's principal stockholder, owned 55.1% of New Valley's Common Shares.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Net 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 March 31,
----------------------------
2005 2004
---------- ----------
Weighted-average common
shares outstanding............. 23,193,147 22,117,852
Assumed exercise of stock
options........................ 49,366 --
---------- ----------
Weighted-average common
shares outstanding
assuming dilution.............. 23,242,513 22,117,852
========== ==========
The following stock options and warrants were outstanding during the three
months ended March 31, 2005 and 2004, 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 March 31,
-----------------------------
2005 2004
---------- ----------
Number of stock options........... -- 165,333
---------- ----------
Weighted-average exercise price... -- $ 4.79
---------- ==========
Number of warrants (expired
June 14, 2004)................ -- 17,867,438
---------- ----------
Weighted-average exercise price... -- $ 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.
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
-8-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
noncontrolling investment in a limited liability company should be
accounted for using the cost method or the equity method. Companies were
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.
In 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment"
("SFAS No. 123R"). SFAS No. 123R requires companies to measure compensation
cost for share-based payments at fair value. The Company will adopt this
new standard prospectively, on January 1, 2006, and has not yet determined
the impact that SFAS No. 123 (revised 2004) will have on the Company's
financial position or results of operations.
2. Investment in Real Estate Held for Sale and Mortgage Note Payable
In February 2005, New Valley completed the sale of its two commercial
office buildings in Princeton, N.J. for an aggregate purchase price of
$71,500 and recorded a gain of $8,290, net of income taxes of $6,395, in
the first quarter of 2005, which has been classified as "Gain on
disposal of discontinued operations" in the accompanying condensed
consolidated financial statements. The properties were subject to a
nonrecourse mortgage loan due in December 2006, of which $39,213 was
outstanding at December 31, 2004. New Valley retired the mortgage at
closing with the proceeds of the sale. As a result of the sale, New
Valley's real estate leasing operations, which were the primary source of
New Valley's revenues for 2003, 2004 and the three months ended March 31,
2005, have been treated as discontinued operations in the accompanying
condensed consolidated financial statements (see Note 14).
3. Investments in Non-Consolidated Real Estate Businesses
Residential Brokerage Business
During 2000 and 2001, New Valley acquired for $1,744 a 37.2% ownership
interest in B&H Associates of NY, doing business as Prudential Douglas
Elliman Real Estate ("Realty"), formerly known as Prudential Long Island
Realty, a residential real estate brokerage company on Long Island, and a
minority interest in an affiliated mortgage company. On December 19, 2002,
New Valley and the other owners of Realty contributed their interests in
Realty to Douglas Elliman Realty, formerly known as Montauk Battery Realty,
LLC, a newly formed entity. New Valley acquired a 50% interest in Douglas
Elliman Realty as a result of an additional investment of $1,413 by New
Valley and the redemption by Realty of various ownership interests. As part
of the transaction, Realty renewed for a ten-year term its franchise
agreement with The Prudential Real Estate Affiliates, Inc. The owners of
Realty also agreed, upon receipt of the required regulatory approvals, to
contribute to Douglas Elliman Realty their interests in the related
mortgage company. In 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 has a principal amount of $9,500,
bears interest at 12% per annum and is due in March 2013. Interest income
earned by New Valley on the subordinated debt is recognized in the
Company's condensed consolidated statements of operations as part of equity
income (loss) from non-consolidated real estate businesses.
New Valley accounts for its interest in Douglas Elliman Realty on the
equity method and recorded income of $1,334 and $709 for the three months
ended March 31, 2005 and 2004, respectively, associated with Douglas
Elliman Realty. New Valley's equity income from Douglas Elliman Realty for
the three months ended
-9-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
March 31, 2005 includes $315 of interest income earned by New Valley on the
subordinated debt. New Valley's equity income from Douglas Elliman Realty
for the three months ended March 31, 2004 includes $312 of interest income
earned by New Valley on the subordinated debt and a loss of $58, which
represented 44% of the mortgage company's loss from operations.
Summarized financial information as of March 31, 2005 and December 31, 2004
and for the three months ended March 31, 2005 and 2004, respectively, for
Douglas Elliman Realty is presented below.
March 31, 2005 December 31, 2004
-------------- -----------------
Cash ............................. $20,446 $21,375
Other current assets ............. 4,828 4,726
Property, plant and equipment, net 15,694 15,520
Trademarks ....................... 21,663 21,663
Goodwill ......................... 36,687 36,676
Other intangible assets, net ..... 2,578 2,748
Other noncurrent assets .......... 1,029 1,112
Notes payable - current .......... 4,820 4,998
Other current liabilities ........ 18,274 18,264
Notes payable - long term ........ 64,138 66,710
Other long-term liabilities ...... 3,083 3,125
Members' equity .................. 12,610 10,723
Three Months Three Months
Ended Ended
March 31, 2005 March 31, 2004
-------------- --------------
Revenues ........................ $71,402 $53,520
Costs and expenses .............. 66,325 49,772
Depreciation expense............. 1,126 1,096
Amortization expense............. 184 299
Interest expense, net............ 1,548 1,443
Income tax expense .............. 181 --
------- -------
Net income ...................... $ 2,038 $ 910
======= =======
The Company received cash distributions from Douglas Elliman Realty of $234
for the three months ended March 31, 2005 and $159 for the three months
ended March 31, 2004. The cash distributions consisted of interest payments
received on the subordinated note.
-10-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
Hawaiian Hotel
In 2001, together with developer Brickman Associates and other investors,
New Valley acquired control of the former Kona Surf Hotel in Kailua-Kona,
Hawaii. The Company, which holds a 50% interest in Koa Investors LLC, the
owner of the hotel, had invested $11,900 in the project and had committed
to make additional investments of up to $600 at March 31, 2005. Following
a major renovation, the property reopened in the fourth quarter 2004 as
the Sheraton Keauhou Bay Resort & Spa, a four star resort with 521 rooms.
In April 2004, a subsidiary of Koa Investors closed on a $57,000
construction loan to finance the renovation.
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 $1,640 and $63 for the three months ended
March 31, 2005 and 2004, respectively, associated with the property. Koa
Investors capitalized 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.
Summarized financial information as of March 31, 2005 and December 31,
2004 and for the three months ended March 31, 2005 and 2004, respectively,
for Koa Investors is presented below.
March 31, 2005 December 31, 2004
-------------- -----------------
Cash ......................................... $ 381 $ 2,062
Restricted assets ............................ 3,254 5,538
Other current assets ......................... 2,555 988
Property, plant and equipment, net ........... 74,742 77,339
Deferred financing costs, net ................ 1,531 1,724
Accounts payable and other current liabilities 9,146 11,064
Notes payable ................................ 60,366 60,356
Members' equity .............................. 12,951 16,231
Three Months Three Months
Ended Ended
March 31, 2005 March 31, 2004
-------------- --------------
Revenues ..................................... $ 5,530 $ --
Costs and operating expenses ................. 5,754 --
Management fees .............................. 30 125
Depreciation expense ......................... 1,319 --
Amortization expense ......................... 208 --
Interest expense, net ........................ 1,499 --
-------- --------
Net loss ..................................... $ (3,280) $ (125)
======== ========
-11-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
The Company did not receive cash distributions from Koa Investors for the
three months ended March 31, 2005 and 2004.
4. Investment Securities Available For Sale
Investment securities classified as available for sale are carried at fair
value, with net unrealized gains included as a component of stockholders'
equity. The Company had realized gains on sales of investment securities
available for sale of $1,441 for the three months ended March 31, 2005.
The components of investment securities available for sale at March 31,
2005 are as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Gain Loss Value
-------- ---------- ---------- ----------
Marketable equity securities.............. $ 10,493 $ 3,342 $ 462 $ 13,373
5. Ladenburg Thalmann Financial Services
In 2002, Ladenburg Thalmann Financial Services Inc. ("LTS"), the Company's
majority-owned subsidiary until December 2001, borrowed a total of $5,000
from New Valley. The loans, which bear interest at 1% above the prime rate,
were due on the earlier of December 31, 2003 or the completion of one or
more equity financings where LTS receives at least $5,000 in total
proceeds. In November 2002, New Valley agreed, in connection with a $3,500
loan to LTS by an affiliate of its clearing broker, to extend the maturity
of its notes to December 31, 2006 and to subordinate its notes to the
repayment of the loan from the clearing broker.
New Valley evaluated its ability to collect $13,198 of notes receivable and
related interest from LTS at September 30, 2002. These notes receivable
included the $5,000 of notes issued in 2002 and an $8,010 convertible note
issued to New Valley in May 2001. New Valley determined, based on the then
current trends in the broker-dealer industry and LTS's operating results
and liquidity needs, that a reserve for uncollectibility should be
established against these notes and interest receivable. As a result, New
Valley recorded a charge of $13,198 in the third quarter of 2002.
In November 2004, New Valley and the other holder of the convertible notes
of LTS entered into a debt conversion agreement with LTS. 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
LTS. Pursuant to the debt conversion agreement, the conversion price of the
notes held by New Valley was reduced from the previous conversion price of
approximately $2.08 to $0.50 per share, and New Valley and the other holder
each agreed to purchase $5,000 of LTS common stock at $0.45 per share.
The note conversion transaction was approved by the LTS shareholders in
January 2005 and closed on March 11, 2005. At the closing, New Valley's
note, representing approximately $9,938 of principal and accrued interest,
was converted into 19,876,358 shares of LTS common stock and New Valley
purchased 11,111,111 LTS shares. New Valley recorded a gain from the
conversion of $9,461, which represented the fair value of the converted
shares as determined by an independent appraisal firm.
LTS borrowed $1,750 from New Valley in 2004 and an additional $1,750 in the
first quarter 2005. At the closing of the note conversion agreement, New
Valley delivered these notes for cancellation as partial payment for its
purchase of LTS common stock.
-12-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
On March 30, 2005, New Valley distributed the 19,876,358 shares of LTS
common stock it acquired from the conversion of the notes to the holders of
New Valley's Common Shares through a special distribution. New Valley
stockholders of record as of March 18, 2005 received 0.852 of a LTS share
for each share of New Valley.
New Valley accounted for its interest in LTS from March 11, 2005 to March
30, 2005 (date of distribution) using the equity method of accounting
because its ownership in LTS exceeded 20% and recorded a loss of $299
associated with LTS's operations during the period. New Valley recorded a
reduction in equity of $9,162, which represented its carrying value of the
LTS stock distributed at March 30, 2005.
Following the distribution, New Valley continued to hold the 11,111,111
shares of LTS common stock (approximately 9% of the outstanding shares),
the $5,000 of notes due December 31, 2006 and a warrant to purchase 100,000
shares of its common stock at $1.00 per share. The 11,111,111 common shares
have been accounted for as investment securities available for sale in the
Company's condensed consolidated balance sheet at March 31, 2005.
6. Long-Term Investments
At March 31, 2005, long-term investments consisted primarily of investments
in limited partnerships of $2,454 which are accounted for at historical
cost. The Company believes the fair value of the limited partnerships
exceeds their carrying amount by approximately $12,715 based on the
indicated market values of the underlying investment portfolio provided by
the partnerships based on the indicated market values of the underlying
assets or investment portfolio. The Company's estimates of the fair value
of its long-term investments are subject to judgment and are not
necessarily indicative of the amounts that could be realized in the current
market. The Company is required to make additional investments in one of
its limited partnerships of up to an aggregate of $688 at March 31, 2005.
In addition, the investments in limited partnerships are illiquid, and the
ultimate realization of these investments is subject to the performance of
the underlying partnership and its management by the general partners.
7. Other Long-Term Liabilities
The components of other long-term liabilities at March 31, 2005 are as
follows:
Long-term Current
Portion Portion
--------- -------
Retiree and disability obligations .. $2,322 $ 500
Other long-term liabilities ......... 20 --
------ ------
Total other long-term liabilities $2,342 $ 500
====== ======
The retiree and disability obligations represent amounts recorded in
connection with employee benefit accruals originating from the Company's
former Western Union business. The amounts have been computed based on
estimates of future benefits payable and may be subject to future
adjustments based on actual payments.
8. Contingencies
In March 1997, a stockholder derivative suit was filed against the Company,
as a nominal defendant, its directors and Brooke Group Holding Inc.
("Brooke Group Holding"), an indirect wholly-owned subsidiary of Vector, in
the Delaware Chancery Court by a stockholder of the Company. The suit
alleges that the Company's purchase in January 1997 of the shares of
BrookeMil Ltd., which was engaged in the real estate business in Russia,
from Brooke (Overseas) Ltd., an indirect subsidiary of Brooke Group
Holding, constituted a self-dealing transaction which involved the payment
of excessive consideration by the Company. The plaintiff seeks a
-13-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
declaration that the Company's directors breached their fiduciary duties
and Brooke Group Holding aided and abetted such breaches and that damages
be awarded to the Company. In December 1999, another stockholder of the
Company commenced an action in Delaware Chancery Court substantially
similar to the March 1997 action. This stockholder alleges, among other
things, that the consideration paid by the Company for the BrookeMil shares
was excessive, unfair and wasteful, that the special committee of the
Company's board lacked independence, and that the appraisal and fairness
opinion were flawed. By order of the court, both actions were consolidated.
In January 2001, the court denied a motion to dismiss the consolidated
action. In March 2005, New Valley, its directors and Brooke Group Holding
entered into an agreement to settle the consolidated action. The defendants
did not admit any wrongdoing as part of the settlement, which is subject to
court approval. Under the agreement, Vector will pay to New Valley $7,000,
which will be recorded by New Valley upon receipt as additional
paid-in-capital, and New Valley will pay legal fees and expenses, of up to
$2,150, which were charged to general and administrative expenses in New
Valley's consolidated statement of operations for the year ended December
31, 2004. A hearing on the proposed settlement is scheduled for June 14,
2005.
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. Oral
argument on the summary judgment motion was held in February 2005.
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 condensed consolidated
financial position, results of operations or cash flows.
In 1994, the Company commenced an action against the United States
government seeking damages for breach of a launch services agreement
covering the launch of one of the Westar satellites owned by New Valley's
former Western Union satellite business. The Company had a contract with
NASA to launch two Westar satellites. The first satellite was launched in
1984, and the second was scheduled to be launched in 1986. Following the
explosion of the space shuttle Challenger in January 1986, the President of
the United States announced a change in the government's policy regarding
commercial satellite launches, and the Company's satellite was not
launched. As a result, the Company sued the government for breach of
contract seeking damages of approximately $34,000. In 1995, the United
States Court of Federal Claims granted the government's motion to dismiss
and, in 1997, the United States Court of Appeals for the Federal Circuit
reversed and remanded the case. Trial of the case was completed in New York
federal court in August 2004 and the parties are awaiting the ruling of the
court.
Other
As of March 31, 2005, New Valley had $300 of prepetition bankruptcy-related
claims and restructuring accruals. The remaining claims may be subject to
future adjustments based on potential settlements or decisions of the
court.
In December 2001, New Valley's subsidiary, Western Realty Development LLC,
sold all the membership interests in 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
-14-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
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.
9. Restricted Stock Grant
On January 10, 2005, New Valley's President and Chief Operating Officer was
awarded a restricted stock grant of 1,250,000 Common Shares pursuant to the
Company's 2000 Long-Term Incentive Plan. Under the terms of the award,
one-seventh of the shares vest on July 15, 2005, with an additional
one-seventh vesting on each of the five succeeding one-year anniversaries
of the first vesting date through July 15, 2010 and an additional
one-seventh vesting on January 15, 2011. In the event the President and
Chief Operating Officer's employment with New Valley is terminated for any
reason other than his death, his disability or a change of control of New
Valley or Vector, any remaining balance of the shares not previously vested
will be forfeited by the President and Chief Operating Officer. New Valley
recorded deferred compensation of $8,875 representing the fair market value
of the restricted shares on the date of the grant. The deferred
compensation will be amortized over the vesting period as a charge to
compensation expense. New Valley anticipates recording $1,855 in
compensation expense in 2005, $1,268 as compensation expense in each of the
years from 2006 to 2009, $1,896 in 2010 and $52 in 2011. The Company
recorded an expense of $545 associated with the grant in the first quarter
of 2005.
10. Income Tax Expense
Income tax expense for the three months ended March 31, 2005 was $9,500,
which consisted of the utilization of deferred tax assets of $9,000,
alternative minimum tax expense and state income taxes. An intraperiod
allocation of income tax expense was performed and $2,927 of the expense
was allocated to income from continuing operations and $6,573 was allocated
to income from discontinued operations. The income tax provision from
continuing operations for the three months ended March 31, 2005 did not
bear a customary relationship with pre-tax accounting income from
continuing operations principally as a consequence of utilization of net
operating loss carryfowards, alternative minimum and state income tax
expense and the impact of expenses not deductible for income tax purposes.
For the three months ended March 31, 2004, the Company performed an
intraperiod allocation of income tax expense between income from continuing
operations and income from discontinued operations, which resulted in an
income tax benefit from continuing operations of $244 and an income tax
expense from discontinued operations of $244. The income tax provision from
continuing operations for the three months ended March 31, 2004 did not
bear a customary relationship with pre-tax accounting income from
continuing operations principally as a consequence of utilization of net
operating loss carryfowards and the impact of expenses not deductible for
income tax purposes.
11. Business Segment Information
The following table presents certain financial information of the Company's
operations before taxes as of and for the three months ended March 31, 2005
and 2004. As a result of the sale of the office buildings, New Valley's
real estate leasing operations, which were the primary source of New
Valley's revenues for 2003, 2004 and the three months ended March 31, 2005,
have been treated as discontinued operations and are not reflected in the
table.
Corporate
Real Estate and Other Total
----------- --------- ----------
THREE MONTHS ENDED MARCH 31, 2005
Revenues................................ $ -- $ -- $ --
Other income............................ (306) 11,086 10,780
Income (loss) from operations
before taxes......................... (306) 7,720 7,414
Identifiable assets..................... 26,620 111,438 138,058
Depreciation and amortization........... -- -- --
Capital expenditures.................... -- -- --
THREE MONTHS ENDED MARCH 31, 2004
Revenues................................ $ -- $ -- $ --
Other income............................ 646 244 890
Income (loss) from operations
before taxes......................... 646 (2,170) (1,524)
Identifiable assets..................... 76,382 (a) 87,191 163,573
Depreciation and amortization........... -- -- --
Capital expenditures.................... -- -- --
- --------------
(a) Identifiable assets in the real estate segment include $55,677 at
March 31, 2004 of assets attributable to discontinued real estate
operations.
-15-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
12. Comprehensive Income
Comprehensive income of the Company includes net income (loss) and changes
in the value of investment securities available for sale that have not been
included in net income (loss). Comprehensive income applicable to Common
Shares for the three months ended March 31, 2005 and 2004 is as follows:
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
-------------- --------------
Net income (loss).......................................... $ 13,008 $ (922)
Net unrealized gains on investment
securities available for sale:
Change in net unrealized gain ............................. 2,368 4,108
Net unrealized gains reclassified into net income (loss)... (1,441) --
---------- ---------
Change in unrealized gain on investment securities........ 927 4,108
--------- ---------
Total comprehensive income ................................ $ 13,935 $ 3,186
========= =========
The components of accumulated other comprehensive income were as follows as
of March 31, 2005 and December 31, 2004:
March 31, 2005 December 31, 2004
-------------- -----------------
Net unrealized gains on investment
securities available for sale ... $2,880 $1,953
====== ======
Accumulated other comprehensive income $2,880 $1,953
====== ======
13. Stock Option Plans
The Company accounts for its stock-based employee compensation plans under
the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. No stock-based employee compensation cost is reflected in
net income to the extent options granted under these plans had an exercise
price equal to the market value of the underlying common stock on the date
of the grant. The Company recorded $545 of compensation expense for the
three months ended March 31, 2005 related to the amortization of a
restricted stock grant award in January 2005 to its President and Chief
Operating Officer. See Note 9 to the condensed consolidated financial
statements. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS 123, "Accounting for Stock-Based Compensation", to
stock-based employee compensation for the three months ended March 31, 2005
and 2004.
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
-------------- --------------
Net income (loss) applicable to Common Shares, as reported.. $ 13,008 $ (922)
Add: Employee stock compensation expense included
in net income (loss), as reported..................... 545 --
Deduct: Amortization of fair value of New Valley
restricted stock grant.................................... (545) --
Deduct: Amortization of fair value of New Valley
option grants............................................. (12) (13)
-------- --------
Net loss applicable to Common Shares, as adjusted........... $ 12,996 $ (935)
======== ========
Adjusted net income (loss) per share - basic and diluted.... $ 0.56 $ (0.04)
======== ========
-16-
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
14. Discontinued Operations
Real Estate Leasing. In February 2005, New Valley completed the sale for
$71,500 of its two office buildings in Princeton, N.J. As a result of the
sale, the condensed consolidated financial statements of New Valley reflect
its real estate operations as discontinued operations for the three months
ended March 31, 2005 and 2004. Accordingly, revenues, costs and expenses,
and cash flows of the discontinued operations have been excluded from the
respective captions in the condensed consolidated statements of operations
and condensed consolidated statements of cash flows. The net operating
results of the discontinued operations have been reported, net of
applicable income taxes and minority interests, as "Income from
discontinued operations," and the net cash flows of the discontinued
operations have been reported as "Net cash provided from discontinued
operations." The assets of the discontinued operations were recorded at
December 31, 2004 as "Investment in real estate held for sale" in the
condensed consolidated balance sheet.
Summarized operating results of the discontinued real estate leasing
operations for the three months ended March 31, 2005 and 2004,
respectively, are as follows:
Three Months Ended March 31,
----------------------------
2005 2004
------ ------
Revenues ................................................ $ 924 $1,781
Expenses ................................................ 515 1,179
------ ------
Income from discontinued operations before income taxes . 409 602
Income tax expense from discontinued operations ......... 178 244
------ ------
Income from discontinued operations ..................... $ 231 $ 358
====== ======
The Company recorded a gain in connection with the sale of $8,290, net of
income taxes of $6,395, in the first quarter of 2005, which has been
classified as "Gain on disposal of discontinued operations" in the
accompanying condensed consolidated financial statements.
Other. In February 2005, a state tax hearing officer reduced an assessment
for the amount due for taxes associated with the 1994 sale of the Company's
money transfer business to $1,589, which included interest of $885. In
March 2005, the Company paid the $1,589 under protest. The Company intends
to challenge the notice of proposed assessment in an additional
administrative hearing or in court. No assurances can be given that the
Company will prevail in this matter. The payment has been classified, along
with the $30,023 provided from the sale and operations of the office
buildings, in "Net cash provided from discontinued operations" in the
condensed consolidated statements of cash flows.
-17-
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
holds a 50% interest in Douglas Elliman Realty, LLC, which operates a
residential real estate brokerage company in the New York metropolitan area. New
Valley also owns, through its New Valley Realty Division, a 50% interest in Koa
Investors LLC, which owns the Sheraton Keauhou Bay Resort & Spa in Kailua-Kona,
Hawaii.
Recent Developments
Sale of Office Buildings. In February 2005, New Valley completed the
sale of the two commercial office buildings in Princeton, N.J. for an aggregate
purchase price of $71,500 and recorded a gain of $8,290, net of income taxes of
$6,395, in the first quarter of 2005, which has been classified as "Gain on
disposal of discontinued operations" in the accompanying condensed consolidated
financial statements. The properties were subject to a nonrecourse mortgage loan
due in December 2006, of which $39,213 was outstanding at December 31, 2004. New
Valley retired the mortgage at closing with the proceeds of the sale. As a
result of the sale, New Valley's real estate leasing operations, which were the
primary source of New Valley's revenues for 2003, 2004 and the three months
ended March 31, 2005, have been treated as discontinued operations in the
accompanying condensed consolidated financial statements.
Restricted Share Award. In January 2005, Howard M. Lorber, the
President and Chief Operating Officer of New Valley, was awarded a restricted
stock grant of 1,250,000 Common Shares pursuant to New Valley's 2000 Long-Term
Incentive Plan. Under the terms of the award, one-seventh of the shares vest on
July 15, 2005, with an additional one-seventh vesting on each of the five
succeeding one-year anniversaries of the first vesting date through July 15,
2010 and an additional one-seventh vesting on January 15, 2011. In the event Mr.
Lorber's employment with New Valley is terminated for any reason other than his
death, his disability or a change of control of New Valley or Vector, any
remaining balance of the shares not previously vested will be forfeited by Mr.
Lorber.
Lawsuit Settlement. In March 2005, New Valley, its directors and Vector
Group settled a stockholder derivative suit that alleged, among other things,
that New Valley paid excessive consideration to acquire Vector's BrookeMil Ltd.
subsidiary in 1997. The defendants did not admit any wrongdoing as part of the
settlement, which is subject to court approval. Under the settlement, Vector
Group will pay New Valley $7,000, and New Valley will pay legal fees and
expenses of up to $2,150, which were charged to general and administrative
expenses in New Valley's consolidated statement of operations for the year ended
December 31, 2004. A hearing on the settlement is scheduled for June 14, 2005.
Ladenburg Convertible Notes. In November 2004, New Valley and the other
holder of the convertible notes of Ladenburg Thalmann Financial Services Inc.
("LTS") entered into a debt conversion agreement with LTS. 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 LTS.
Pursuant to the debt conversion agreement, the conversion price of the note held
by New Valley was reduced from the previous conversion price of approximately
$2.08 to $0.50 per share, and New Valley and the other holder each agreed to
purchase $5,000 of LTS common stock at $0.45 per share.
The note conversion transaction was approved by the LTS shareholders in
January 2005 and closed on March 11, 2005. At the closing, New Valley's note,
representing approximately $9,938 of principal and accrued interest, was
converted into 19,876,358 shares of LTS common stock and New Valley purchased
11,111,111 LTS shares. New Valley recorded a gain from the conversion of $9,461,
which represented the fair value of the converted shares as determined by an
independent appraisal firm.
-18-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------
LTS borrowed $1,750 from New Valley in 2004 and an additional $1,750 in
the first quarter 2005. At the closing of the debt conversion agreement, New
Valley delivered these notes for cancellation as partial payment for its
purchase of LTS common stock.
On March 30, 2005, New Valley distributed the 19,876,358 shares of LTS
common stock it acquired from the conversion of the note to the holders of New
Valley's Common Shares through a special distribution. New Valley stockholders
of record as of March 18, 2005 received 0.852 of a LTS share for each share of
New Valley.
New Valley accounted for its interest in LTS from March 11, 2005 to
March 30, 2005 (date of distribution) using the equity method of accounting
because its ownership in LTS exceeded 20% and recorded a loss of $299 associated
with LTS's operations during the period. New Valley recorded a reduction in
equity of $9,162, which represented its carrying value of the LTS stock
distributed at March 30, 2005.
Following the distribution, New Valley continued to hold the 11,111,111
shares of LTS common stock (approximately 9% of the outstanding shares), $5,000
of LTS's notes due December 31, 2006, which are carried at $0 in New Valley's
condensed consolidated balance sheet as of March 31, 2005, and a warrant to
purchase 100,000 shares of its common stock at $1.00 per share.
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 reopened in the fourth quarter of 2004 as a four
star resort with 521 rooms. Koa Investors anticipates that the hotel will
experience operating losses during its opening phase.
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, LLC, 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 has a principal amount of $9,500, bears interest at 12%
per annum and is due in March 2013.
New Valley accounts for its interest in Douglas Elliman Realty on the
equity method. New Valley's equity income from Douglas Elliman Realty includes
interest earned by New Valley on the subordinated debt and, prior to October 1,
2004, 44% of 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,
-19-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
Investment Securities Available for Sale. At March 31, 2005, New Valley
had investment securities available for sale of $13,373. New Valley classifies
investments in debt and marketable equity securities as either available for
sale or held to maturity. Investments classified as available for sale are
carried at fair value, with net unrealized gains and losses included as a
separate component of stockholders' equity. Realized gains and losses are
included in other results from continuing operations. The cost of securities
sold is determined based on average cost. Gains are recognized when realized in
New Valley's condensed 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 condensed consolidated statements of
operations. During the first quarter of 2005, New Valley experienced net
increases to unrealized gains on investment securities of $927, which have been
included in accumulated other comprehensive income in the Company's condensed
consolidated statement of changes in stockholders' equity.
Investments in Non-Consolidated Real Estate Businesses. New Valley
accounts for its 50% interest in Douglas Elliman Realty and in Koa Investors on
the equity method because it has a significant, but less than controlling,
interest in these entities. New Valley records its investments in these entities
in its condensed consolidated balance sheets as "Investments in non-consolidated
real estate businesses" and its share of the entities' income or loss as "Equity
income (loss) from non-consolidated real estate businesses". Judgment is
required in determining controlling interest. Factors considered by New Valley
in determining whether it has significant influence or has control include risk
and reward sharing, experience and financial condition of the other investors,
voting rights, involvement in day-to-day capital and operating decisions and
continuing involvement. The difference between consolidation and the equity
method impacts certain financial ratios because of the presentation of the
detailed line items reported in the financial statements. However, New Valley's
consolidated net income or loss for the period and its stockholders' equity at
the end of the period are the same whether its investments in these entities are
accounted for under the equity method or these entities are consolidated.
Because New Valley does not control the decision-making process or business
management practices of these entities, it relies on management of these
entities and their independent accountants to provide it with accurate financial
information prepared in accordance with generally accepted accounting principles
that New Valley uses in the application of the equity method. New Valley is not
aware, however, of any errors in or possible misstatements of the financial
information provided by these entities that would have a material effect on New
Valley's condensed consolidated financial statements.
Long-Term Investments. At March 31, 2005, New Valley had long-term
investments of $2,454, which principally represented investments in various
limited partnerships. The principal business of the limited partnerships is
investing in real estate and investment securities. These long-term investments
are illiquid, and the value of the investments is dependant on the performance
of the underlying partnership and its management by the general partners. In
assessing potential impairment for these investments, New Valley considers the
external markets for these types of investments as well as the forecasted
financial performance of its investees. If these forecasts are not met, New
Valley may have to recognize an impairment charge in its condensed consolidated
statements of operations.
Income Taxes. The years 2000 and 2004 were the only years 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 $141,000 as of March 31, 2005, which expire
at various dates from 2006 through 2023. New Valley also has approximately
$13,900 of alternative minimum tax credit carry forwards as of March 31, 2005,
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 assets associated with these loss carry
forwards if it is "more likely than not" that New Valley will not be able to
utilize its deferred tax assets to offset future taxes. Prior to December 31,
2004, 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
-20-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------
operating companies and real estate properties, New Valley had not recognized
any of these net deferred tax assets. In 2004, New Valley recognized $9,000 of
deferred tax assets based on management's belief that it is more likely than not
such deferred tax assets will be realized based upon a projection of taxable
income for 2005. The amount was expensed in the first quarter of 2005 in
connection with New Valley's income for the three months ended March 31, 2005.
Management will continue to monitor the Company's unrealized deferred tax assets
in the future and determine whether any additional adjustments to the valuation
allowance are warranted. For example, it is possible that New Valley could
report additional profits in the future at levels which cause management to
conclude that it is more likely than not that it will realize additional amounts
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 41% under
current tax rates. It is also possible that New Valley may not realize in the
future deferred tax assets that may be recorded on its balance sheet. Upon
reaching such a conclusion, New Valley will immediately reduce the value of the
deferred tax assets at that time and then record an income tax provision
equaling the amount of the impaired deferred tax assets. Thus, subsequent
revisions to the estimated net realizable value of the deferred tax assets 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. New Valley's current tax
provision consists of amounts due for current taxable income, which is primarily
associated with state income taxes and the federal alternative minimum tax.
Results of Operations
For the first quarter of 2005 and 2004, New Valley's results of
operations include the accounts of its 50% interests in Douglas Elliman Realty
and Koa Investors, which are included in other income (loss) from real estate
activities. As a result of the sale of the office buildings, New Valley's real
estate leasing operations, which were the primary source of New Valley's
revenues for 2003, 2004 and the three months ended March 31, 2005, have been
treated as discontinued operations and are not reflected in the table.
Three Months Ended March 31,
---------------------------
2005 2004
-------- --------
Real estate:
Revenues ........................... $ -- $ --
Expenses ........................... -- --
Other (loss) income ................ (306) 646
-------- --------
Operating (loss) income before taxes $ (306) $ 646
======== ========
Corporate and other:
Revenues ........................... $ -- $ --
Expenses ........................... 3,366 2,414
Other income ....................... 11,086 244
-------- --------
Operating income (loss) before taxes $ 7,720 $ (2,170)
======== ========
Income (loss) from continuing
operations before income taxes ...... $ 7,414 $ (1,524)
======== ========
-21-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------
Real Estate
Other income from real estate activities for the three months ended
March 31, 2005 consisted of equity losses from non-consolidated real estate
businesses of $306. The equity losses resulted from losses of $1,640 related to
New Valley's investment in Koa Investors, which owns the Sheraton Keauhou Bay
Resort & Spa in Kailua-Kona, Hawaii, offset by income of $1,334 from Douglas
Elliman Realty. Other income from real estate activities in the 2004 period
consisted of equity income from non-consolidated real estate businesses of $646.
The equity income resulted from income of $709 from Douglas Elliman Realty
offset by a loss of $63 related to New Valley's investment in Koa Investors.
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 2004 and 2005 periods. 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 in the 2005 first quarter primarily consisted of
losses from operations of the Sheraton Keauhou Bay Resort & Spa. Koa Investors'
loss in the 2004 period primarily consisted of management fees and losses from
operations of the hotel. Koa Investors capitalized 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.
Corporate and others
Corporate and other expenses of $3,366 for the first quarter of 2005
consisted primarily of employee compensation and benefits of $1,963, non-cash
compensation expense of $545 associated with the amortization of a restricted
stock grant and legal expense of $181. Corporate and other expenses of $2,414
for the first quarter of 2004 consisted primarily of employee compensation and
benefits of $1,568 and legal expense of $143. The increase in corporate expenses
in 2005 was primarily due to increased compensation expense.
For the first quarter of 2005, New Valley's income of $11,086 from
corporate and other activities consisted primarily of the gain from the
conversion of the LTS notes of $9,461, gains from the sale of investments of
$1,441, and interest and dividends income of $486 offset by equity losses from
the operations of LTS of $299. For the first quarter of 2004, New Valley's
income of $244 from corporate and other activities consisted primarily of
interest and dividends income of $249.
The income tax expense from continuing operations for the three months
ended March 31, 2005 was $2,927. This amount consisted of the utilization of
deferred tax assets of $2,875, alternative minimum tax expense and state income
taxes. This provision did not bear a customary relationship with pre-tax
accounting income from continuing operations principally as a consequence of
utilization of net operating loss carryfowards, alternative minimum and state
income tax expense and the impact of expenses not deductible for income tax
purposes. The benefit for income taxes for the three months ended March 31, 2004
resulted from an intraperiod allocation between income from discontinued
operations and income from continuing operations.
-22-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------
Discontinued Operations
Real Estate Leasing. In February 2005, New Valley completed the sale
for $71,500 of its two office buildings in Princeton, N.J. As a result of the
sale, the condensed consolidated financial statements of New Valley reflect its
real estate operations as discontinued operations for the three months ended
March 31, 2005 and 2004. Accordingly, revenues, costs and expenses, and cash
flows of the discontinued operations have been excluded from the respective
captions in the condensed consolidated statements of operations and condensed
consolidated statements of cash flows. The net operating results of the
discontinued operations have been reported, net of applicable income taxes and
minority interests, as "Income from discontinued operations," and the net cash
flows of the discontinued operations have been reported as "Net cash provided
from discontinued operations." The assets of the discontinued operations were
recorded at December 31, 2004 as "Investment in real estate held for sale" in
the condensed consolidated balance sheet.
Summarized operating results of the discontinued real estate leasing
operations for the three months ended March 31, 2005 and 2004, respectively, are
as follows:
Three Months Ended March 31,
----------------------------
2005 2004
------ ------
Revenues ................................................ $ 924 $1,781
Expenses ................................................ 515 1,179
------ ------
Income from discontinued operations before income taxes . 409 602
Income tax expense from discontinued operations ......... 178 244
------ ------
Income from discontinued operations ..................... $ 231 $ 358
====== ======
New Valley recorded a gain in connection with the sale of $8,290, net
of income taxes of $6,395, in the first quarter of 2005, which has been
classified as "Gain on disposal of discontinued operations" in the
accompanying condensed consolidated financial statements.
Other. In February 2005, a state tax hearing officer reduced an
assessment for the amount due for taxes associated with the 1994 sale of the
Company's money transfer business to $1,589, which included interest of $885. In
March 2005, the Company paid the $1,589 under protest. The Company intends to
challenge the notice of proposed assessment in an additional administrative
hearing or in court. No assurances can be given that the Company will prevail in
this matter. The payment has been classified, along with the $30,023 provided
from the sale and operations of the office buildings, in "Net cash provided from
discontinued operations" in the condensed consolidated statements of cash flows.
Liquidity and Capital Resources
During the first quarter 2005, New Valley's cash and cash equivalents
increased from $70,688 to $94,682 due primarily to cash provided from the sale
of the office buildings.
Cash used for operating activities for the three months ended March 31,
2004 was $3,818 compared to $3,436 in the prior year. The difference is
primarily due to increases in other assets in the 2005 period as compared to the
2004 period.
-23-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------
Cash used for investing activities for the three months ended March 31,
2005 was $635 compared to $1,580 for the three months ended March 31, 2004. The
decrease is primarily attributable to the investment in LTS notes receivable and
common stock of $3,250 in the 2005 period offset by net sales of marketable
securities of $2,615 in the 2005 period versus net purchases of $80 in the 2004
period and investments in non-consolidated real estate businesses of $1,500 in
the 2004 period.
During 2000 and 2001, New Valley acquired for approximately $1,744 a
37.2% ownership interest in Prudential Douglas Elliman Real Estate, the largest
independently owned and operated real estate brokerage company on Long Island,
New York and a minority interest in an affiliated mortgage company. On December
19, 2002, New Valley and the other owners of Prudential Douglas Elliman Real
Estate contributed their interests in Prudential Douglas Elliman Real Estate to
Douglas Elliman Realty, a newly formed entity. New Valley acquired a 50%
interest in Douglas Elliman Realty as a result of an additional investment of
$1,413 by New Valley and the redemption by Prudential Douglas Elliman Real
Estate of various ownership interests.
In March 2003, Douglas Elliman Realty purchased the leading New York
City-based residential brokerage firm, Douglas Elliman, and an affiliated
property management company, for $71,250. New Valley invested an additional
$9,500 in subordinated debt and equity of Douglas Elliman Realty to help fund
the acquisition. The subordinated debt, which has a principal amount of $9,500,
bears interest at 12% per annum and is due in March 2013.
New Valley holds a 50% interest in Koa Investors which owns the
Sheraton Keauhou Bay Resort & Spa in Kailua-Kona, Hawaii. Following a major
renovation, the property reopened in the fourth quarter of 2004 as a four star
resort with 521 rooms. In April 2004, a subsidiary of Koa Investors closed on a
$57,000 construction loan to finance the renovation. New Valley had invested
$11,900 in the project and had committed to make additional investments of up to
$600 at March 31, 2005. 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 $689 at March 31, 2005.
In November 2004, New Valley entered into a debt conversion agreement
with LTS where it agreed to convert its convertible note into common stock and
to purchase an additional $5,000 of LTS shares. The closing of these
transactions occurred on March 11, 2005. See Note 5 to the condensed
consolidated financial statements. LTS borrowed a total of $1,750 from New
Valley in 2004 and an additional $1,750 in 2005. At the closing of the note
conversion agreement, New Valley delivered these notes for cancellation as
partial payment for its purchase of LTS shares. New Valley recorded a gain from
the conversion of $9,461, which represented the fair value of the converted
shares as determined by an independent appraisal firm. On March 30, 2005, New
Valley distributed to its stockholders of record as of March 18, 2005 the LTS
shares received on conversion. New Valley recorded a reduction in equity of
$9,162, which represented its carrying value of the LTS stock distributed on
that date.
Cash flows provided from financing activities were $13 for the three
months ended March 31, 2005 in connection with the par value received for the
issuance of 1,250,000 shares of restricted stock.
Cash flows provided from discontinued operations were $28,434 for the
three months ended March 31, 2005, which consisted of $30,023 provided from the
sale and operations of the office buildings and $1,589 in connection with the
payment of a state income tax assessment discussed below.
-24-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------
As of March 31, 2005, New Valley had $300 of prepetition
bankruptcy-related claims. These remaining claims may be subject to future
adjustments based on potential settlements or decisions of the court.
As of March 31, 2005, New Valley accrued liabilities had recorded
$2,822 of liabilities ($500 of which are classified as current accrued
liabilities and $2,322 of which are classified as long-term liabilities) related
to retiree and disability obligations in connection with employee benefit
accruals originating from the Company's former Western Union business. The
liabilities have been computed based on estimates of future benefits payable and
may be subject to future adjustments based on actual payments.
In February 2005, a state tax hearing officer reduced an assessment for
the amount due for taxes associated with the 1994 sale of the Company's money
transfer business to $1,589, which included interest of $885. In March 2005, the
Company paid $1,589 under protest and intends to challenge the notice of
proposed assessment in an additional administrative hearing or challenging the
notice of proposed assessment in court. No assurances can be given that the
Company will prevail in this matter. The payment has been classified in "Net
cash provided from discontinued operations" in the condensed consolidated
statements of cash flows.
On October 5, 1999, New Valley's Board of Directors authorized the
repurchase of up to 2,000,000 Common Shares from time to time on the open market
or in privately negotiated transactions depending on market conditions. As of
May 9, 2005, New Valley had repurchased 1,229,515 shares for approximately
$4,897.
New Valley expects that its available capital resources will be
sufficient to fund its currently anticipated cash requirements for 2005,
including the currently anticipated cash requirements of its operating
businesses, investments and commitments.
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 were 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.
In 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"). SFAS No. 123R requires companies to measure
compensation cost for share-based payments at fair value. The Company will adopt
this new standard prospectively, on January 1, 2006, and has not yet determined
the impact that SFAS No. 123 (revised 2004) will have 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 made by it. It is not
possible to predict the maximum potential amount of future payments under these
-25-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------
indemnification agreements due to the conditional nature of New Valley's
obligations and the unique facts of each particular agreement. Historically,
payments made by New Valley under these agreements have not been material. As of
March 31, 2004, New Valley was not aware of any indemnification agreements that
would or are reasonably likely to have a current or future material adverse
effect on its financial position, results of operations or cash flows.
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.
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
$13,373 at March 31, 2005. 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.
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, 2004 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 Consolidated Financial
Statements in Part I, Item 1 of this Report.
Item 6. EXHIBITS
(a) Exhibits
10.1 Restricted Share Award Agreement, dated as of January 10,
2005, between New Valley Corporation and Howard M. Lorber.
(incorporated by reference to Exhibit 10.1 in the Company's
Current Report on Form 8-K dated January 10, 2005).
10.2 Stipulation and Agreement of Settlement, dated March 11,
2005, entered into on behalf of Vector and New Valley,
relating to Goodwin v. New Valley Corporation (incorporated
by reference to Exhibit 10.1 in Vector's Quarterly Report
on Form 10-Q for the quarterly period ended March 31,
2005).
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: May 10, 2005 By: /s/ J. Bryant Kirkland III
-------------------------------------
J. Bryant Kirkland III
Vice President, Treasurer
and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
-29-