<PAGE> 1
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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, 1996
COMMISSION FILE NUMBER 1-2493
New Valley Corporation
(Exact name of registrant as specified in its charter)
NEW YORK 13-5482050
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 S.E. SECOND STREET
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 HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES X NO
--- ---
AS OF MAY 10, 1996, THERE WERE OUTSTANDING 191,552,476 OF THE REGISTRANT'S
COMMON SHARES, $.01 PAR VALUE.
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<PAGE> 2
NEW VALLEY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
----
<S> <C> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1996 and
December 31, 1995......................................... 3
Consolidated Statements of Operations for the three months
ended March 31, 1996 and 1995............................. 4
Consolidated Statement of Changes in Non-Redeemable
Preferred Shares, Common Shares and Other Capital
(Deficit) for the three months ended March 31, 1996....... 5
Consolidated Statements of Cash Flows for the three months
ended March 31, 1996 and 1995............................. 6
Notes to the Quarterly Consolidated Financial Statements.... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 16
Item 3. Defaults Upon Senior Securities............................. 16
Item 6. Exhibits and Reports on Form 8-K............................ 16
SIGNATURE............................................................ 17
</TABLE>
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<PAGE> 3
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
-----------------------
1996 1995
ASSETS -----------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,458 $ 51,742
Investment securities 244,113 241,526
Restricted assets 35,388 22,919
Receivable from clearing brokers 15,247 13,752
Other current assets 18,560 3,546
-------- --------
Total current assets 326,766 333,485
-------- --------
Investment in real estate 183,874
Investment securities 499 517
Restricted assets 15,143 15,086
Long-term investments 15,625 29,512
Other assets 10,962 7,222
-------- --------
Total assets $552,869 $385,822
======== ========
LIABILITIES AND CAPITAL (DEFICIT)
Current liabilities:
Margin loans payable $ 92,374 $ 75,119
Accounts payable and accrued liabilities 35,792 27,712
Prepetition claims and restructuring accruals 32,884 33,392
Income taxes 16,810 20,283
Securities sold, not yet purchased 20,531 13,047
Current portion of long-term obligations 10,125 8,367
-------- --------
Total current liabilities 208,516 177,920
-------- --------
Notes payable 159,653
Other long-term obligations 19,180 11,967
Redeemable preferred shares 211,759 226,396
Non-redeemable preferred shares, Common Shares and
capital (deficit):
Cumulative preferred shares; liquidation preference of
$69,769, dividends in arrears; $100,053 and $95,118 279 279
Common Shares, $.01 par value; 850,000,000 shares
authorized; 191,552,476 and 191,551,586 shares
outstanding 1,916 1,916
Additional paid-in capital 672,811 679,058
Accumulated deficit (719,248) (714,364)
Unrealized appreciation (depreciation) on investment
securities, net of taxes (1,997) 2,650
-------- --------
Total non-redeemable preferred shares, Common
Shares and other capital (deficit) (46,239) (30,461)
-------- --------
Total liabilities and capital (deficit) $552,869 $385,822
======== ========
</TABLE>
See accompanying Notes to Quarterly Consolidated Financial Statements
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<PAGE> 4
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
----------------------------
<S> <C> <C>
Revenues:
Principal transactions, net $ 8,738
Commissions 3,863
Real estate leasing 5,706
Computer sales and service 4,699
Interest and dividends 5,184 $ 6,631
Other income 8,494 1,038
-------- --------
Total revenues 36,684 7,669
-------- --------
Cost and expenses:
Operating, general and administrative 37,144 2,342
Interest 4,524
Reversal of restructuring accruals (2,044)
-------- --------
Total costs and expenses 41,668 298
-------- --------
(Loss) income from continuing operations before income taxes (4,984) 7,371
(Benefit) provision for income taxes (100) 740
-------- --------
(Loss) income from continuing operations (4,884) 6,631
Discontinued operations:
Income from discontinued operations,
net of income taxes of $155 1,398
-------- --------
Net (loss) income (4,884) 8,029
Dividends on preferred shares - undeclared (15,462) (20,411)
Excess of carrying value of redeemable preferred
shares over cost of shares purchased 4,279 7,358
-------- --------
Net loss applicable to Common Shares $(16,067) $(5,024)
======== ========
Loss per common and equivalent share:
From continuing operations $ (.08) $ (.04)
======== ========
Discontinued operations $ 01
========
Net loss per Common Share $ (.08) $ (.03)
======== ========
Number of shares used in computation 191,552 189,585
======== ========
Supplemental information:
Additional interest absent Chapter 11 filing $ 2,314
========
</TABLE>
See accompanying Notes to Quarterly Consolidated Financial Statements
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<PAGE> 5
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NON-REDEEMABLE PREFERRED
SHARES, COMMON SHARES AND OTHER CAPITAL (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
$3.00 Class B
Preferred Shares Common Shares Additional Unrealized
---------------- ---------------- Paid-In Accumulated Appreciation
Shares Amount Shares Amount Capital Deficit (Depreciation)
------ ------ ------- ------ --------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 2,791 $279 191,551 $1,916 $679,058 $(714,364) $ 2,650
Net loss (4,884)
Undeclared dividends and accretion
on redeemable preferred shares (10,526)
Purchase of redeemable preferred
shares 4,279
Unrealized depreciation in marketable
securities (4,647)
Conversion of preferred shares 1
----- ---- ------- ------ -------- --------- -------
Balance, March 31, 1996 2,791 $279 191,552 $1,916 $672,811 $(719,248) $(1,997)
===== ==== ======= ====== ======== ========= =======
</TABLE>
See accompanying Notes to Quarterly Consolidated Financial Statements
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<PAGE> 6
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1996 1995
----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,884) $ 8,029
Adjustments to reconcile net income to net
cash used for operating activities:
Income from discontinued operations (1,398)
Depreciation and amortization 1,090
Reversal of restructuring accruals (2,044)
Changes in assets and liabilities, net of effects
from acquisition:
Decrease (increase) in receivables and other assets (7,420) 6,484
Decrease in income taxes (3,473) (29,541)
Increase in accounts payable and accrued liabilities 9,652 2,773
------- --------
Net cash used for operating activities (5,035) (15,697)
------- --------
Cash flows from investing activities:
Purchase of real estate (24,732)
Payment of prepetition claims (508) (564,551)
Collection of contract receivable 300,000
Decrease (increase) in restricted assets (12,526) 332,229
Sale or maturity of investment securities 8,627
Purchase of investment securities (15,844) (175,091)
Sale or liquidation of long-term investments 13,887
Purchase of long-term investments (54,086)
Payment for acquisition, net of cash acquired 1,915
------- --------
Net cash used for investing activities (29,181) (161,499)
------- --------
Cash flows from financing activities:
Payment of preferred dividends (10,354) (75,041)
Purchase of Class A preferred stock (10,530) (4,356)
Increase in margin loans payable 17,255
Repayment of other obligations (439) (8,719)
Exercise of stock options 335
------- --------
Net cash used for financing activities (4,068) (87,781)
------- --------
Net cash provided from discontinued operations 376
------- --------
Net decrease in cash and cash equivalents (38,284) (264,601)
Cash and cash equivalents, beginning of period 51,742 376,170
------- --------
Cash and cash equivalents, end of period $13,458 $111,569
======= ========
Supplemental Cash Flow Information:
Cash payments for income taxes $ 3,773 $ 30,476
======= ========
</TABLE>
See accompanying Notes to Quarterly Consolidated Financial Statements
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<PAGE> 7
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
The consolidated financial statements include the accounts of New Valley
Corporation and Subsidiaries (the "Company"). The consolidated financial
statements as of March 31, 1996 presented herein have been prepared by the
Company without an audit. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial position as of March 31, 1996 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 an entire
year.
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.
These financial statements should be read in conjunction with the
consolidated financial statements in the Company's Annual Report on Form
10-K for the year ended December 31, 1995, as filed with the Securities and
Exchange Commission.
Real Estate Leasing Revenues. The real estate properties are being leased
to tenants under operating leases. Base rental revenue is generally
recognized on a straight-line basis over the term of the lease. The lease
agreements for certain properties generally contain provisions which provide
for reimbursement of real estate taxes and operating expenses over base year
amounts, and in certain cases as fixed increases in rent. In addition, the
lease agreements for certain tenants provide additional rentals based upon
revenues in excess of base amounts.
Revenue Recognition of Computer Sales and Services. Product revenues are
recognized when the equipment is shipped or, in certain circumstances, upon
product acceptance by the customer if it occurs prior to shipment. Contract
revenues are recognized as the related costs are incurred. Service revenues
are recognized over the period in which the services are provided.
2. ACQUISITIONS
On January 10 and January 11, 1996, the Company acquired four commercial
office buildings (the "Office Buildings") and eight shopping centers (the
"Shopping Centers") for an aggregate purchase price of $183,900, consisting
of $23,900 in cash and $160,000 in non-recourse mortgage financing. In
addition, the Company has capitalized approximately $800 in costs related to
the acquisition. The Company paid $11,400 in cash and executed four
promissory notes aggregating $100,000 for the Office Buildings. The Office
Building notes bear interest at 7.5% and have terms of ten to fifteen years.
These Office Buildings consist of two adjacent commercial office buildings
in Troy, Michigan and two adjacent commercial office buildings in Bernards
Township, New Jersey. The Shopping Centers were acquired for an aggregate
purchase price of $72,500, consisting of $12,500 in cash and $60,000 in
eight promissory notes. Each Shopping Center note has a term of five years,
and
-7-
<PAGE> 8
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
bears interest at the rate of 8% for the first two and one-half years and at
the rate of 9% for the remainder of the term. The Shopping Centers are
located in Marathon and Royal Palm Beach, Florida; Lincoln, Nebraska; Santa
Fe, New Mexico; Milwaukee, Oregon; Richland and Marysville, Washington; and
Charleston, West Virginia.
The components of the Company's investment in real estate at March 31, 1996
are as follows:
<TABLE>
<C> <C>
Land $ 38,921
Buildings 145,789
Construction in progress 22
--------
Total 184,732
Less: accumulated depreciation (858)
--------
Net investment in real estate $183,874
========
</TABLE>
On January 11, 1996, the Company provided a $10,600 convertible bridge loan
to finance Thinking Machines Corporation ("TMC"), a developer and marketer
of parallel software of high-end and networked computer systems. In
February 1996, the bridge loan was converted into a controlling interest in
a partnership which holds 3.3 million common shares of TMC which represent
61.4% of the outstanding shares. The acquisition of TMC through the
conversion of the bridge loan was accounted for as a purchase for financial
reporting purposes, and accordingly, the operations of TMC subsequent to
January 31, 1996 are included in the operations of the Company. The fair
value of assets acquired, including goodwill of $1,726, was $27,301 and
liabilities assumed totaled $16,705, including minority interest of $9,082.
The following table presents unaudited pro forma results of continuing
operations as if the acquisitions of Ladenburg, Thalmann & Co., Inc., TMC,
and the Office Buildings and Shopping Centers, had occurred on January 1,
1995. These pro-forma results have been prepared for comparative purposes
only and do not purport to be indicative of what would have occurred had
each of these acquisitions been consummated as of such date.
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
1996 1995
------------------------
<S> <C> <C>
Revenues $ 38,115 $ 37,709
======== ========
Net (loss) income $ (5,268) $ 6,920
======== ========
Net loss applicable to common shares $(16,451) $ (6,133)
======== ========
Net loss per common share $ (.09) $ (.03)
======== ========
</TABLE>
3. DISCONTINUED OPERATIONS
Effective October 1, 1995, the Company sold its messaging services business.
Accordingly, the financial statements reflect the financial position and
the results of operations of the messaging services business as discontinued
operations for the periods prior to the sale.
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<PAGE> 9
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Operating results of the messaging services business for the three months
ended March 31, 1995 were as follows: revenues - $12,027, operating income -
$1,553, and net income - $1,398.
4. INCOME TAXES
At March 31, 1996, the Company had net operating loss carryforwards of
approximately $190,000 which expire at various dates through 2007. A
valuation allowance has been provided against the amount as it is deemed
more likely than not that the benefit of the tax asset will not be utilized.
The Company continues to evaluate the realizability of the deferred tax
assets. The provision (benefit) for income taxes, which represented the
effects of the alternative minimum tax and state income taxes, for the three
months ended March 31, 1996 and 1995, does not bear a customary relationship
with pre-tax accounting income principally as a consequence of the change in
the valuation allowance relating to deferred tax assets.
5. INVESTMENT SECURITIES
Investment securities classified as available for sale are carried at fair
value, with net unrealized losses of $1,997 ($351 of unrealized gains and
$2,348 of unrealized losses) included as a separate component of
stockholders' equity (deficit). The Company had net realized gains on sales
of investment securities available for sale of $3,134 for the three months
ended March 31, 1996.
In August 1995, the Company received approval from the Federal Trade
Commission to purchase up to 15% of the voting securities of RJR Nabisco
Holdings Corp. ("RJR Nabisco"). As of March 31, 1996, the Company, through
a wholly-owned subsidiary, held approximately 5.16 million shares of RJR
Nabisco common stock, par value $.01 per share (the "RJR Nabisco Common
Stock"), with a market value of $156,143 (cost of $158,225). The Company's
investment in RJR Nabisco collateralizes margin loan financing of $83,535 at
March 31, 1996. This margin loan bears interest at .25% below the broker's
call rate (6.0% at March 31, 1996). In addition, the Company's investment
in certain U.S. government securities collateralizes margin loan financing
of $8,839 which loan was repaid in April 1996 upon maturity of the U.S.
government securities.
During 1996, the Company has expensed $6,854 relating to the RJR Nabisco
investment. Included in this amount is $58 owed to Brooke pursuant to the
December 27, 1995 agreement with Brooke pursuant to which the Company
agreed, among other things, to pay directly or reimburse Brooke and its
subsidiaries for out-of-pocket expenses in connection with Brooke's
solicitation of consents and proxies from the shareholders of RJR Nabisco.
At March 31, 1996, the Company owed Brooke and its subsidiaries a total of
$1,042 pursuant to the Brooke agreement, which amount was expensed in 1995.
The Company's investment in RJR Nabisco decreased from a $1,440 unrealized
gain at December 31, 1995 to an unrealized loss of $2,082 and $4,663 at
March 31, 1996 and May 3, 1996, respectively.
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<PAGE> 10
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The details of the investment categories by type of security at March 31,
1996 are as follows:
<TABLE>
Fair
Cost Value
-------------------------
<S> <C> <C>
Available for Sale:
Marketable equity securities:
RJR Nabisco Common Stock $158,225 $156,143
Other marketable securities 2,142 2,227
-------- --------
Total marketable securities 160,367 158,370
U.S. government securities 49,949 49,949
Marketable debt securities (long-term) 499 499
-------- --------
Total securities available for sale 210,815 208,818
-------- --------
Trading Securities (Ladenburg):
Marketable equity securities 22,189 21,925
Equity and index options 11,370 11,172
Other securities 2,443 2,697
-------- --------
Total trading securities 36,002 35,794
-------- --------
Total Investment securities 246,817 244,612
Less long-term portion of investment securities 499 499
-------- --------
Investment securities - current portion $246,318 $244,113
======== ========
</TABLE>
The long-term portion of investment securities at cost consists of
marketable debt securities which mature in three years.
Long-Term Investments. At March 31, 1996, long-term investments included
investments in limited partnerships of $4,828, equity in a joint venture of
$3,796, equity investments in foreign corporations of $6,000 and a software
company of $1,001. During the three months ended March 31, 1996, the
Company liquidated its position in two limited partnerships with an
aggregate carrying amount of $14,500 and recognized a gain on such
liquidations of $4,086. The fair value of the Company's long-term
investments approximates its carrying amount. The Company's estimate of the
fair value of its long-term investments are subject to judgment and are not
necessarily indicative of the amounts that could be realized in the current
market.
RJR Nabisco Equity Swap. On February 29, 1996, New Valley entered into a
total return equity swap transaction with an unaffiliated company (the
"Counterparty") relating to 1,000,000 shares of RJR Nabisco Common Stock.
The transaction is for a period of up to six months, subject to earlier
termination at the election of New Valley, and provides for New Valley to
make a payment to the Counterparty of $1,537 upon commencement of the swap.
At the termination of the transaction, if the price of the RJR Nabisco
Common Stock during a specified period prior to such date (the "Final
Price") exceeds $34.42, the price of the RJR Nabisco Common Stock during a
specified period following the commencement of the swap (the "Initial
Price"), the Counterparty will pay New Valley an amount in cash equal to the
amount of such appreciation with respect to 1,000,000 shares of RJR Nabisco
Common Stock plus the value of any dividends with a record date occurring
during the swap period. If the Final Price is less than the Initial Price,
then New Valley will pay the Counterparty at the termination of the
transaction an amount in cash equal to the amount of such decline with
respect to 1,000,000 shares of RJR Nabisco Common Stock, offset by the value
of any
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<PAGE> 11
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
dividends, provided that, with respect to approximately 225,000
shares of RJR Nabisco Common Stock, New Valley will not be required to pay
any amount in excess of an approximate 25% decline in the value of the
shares. The potential obligations of the Counterparty under the swap are
being guaranteed by the Counterparty's parent, a large foreign bank, and New
Valley has pledged certain collateral in respect of its potential
obligations under the swap and has agreed to pledge additional collateral
under certain conditions. At March 31, 1996, the Company marked its
obligation with respect to the equity swap to fair value which resulted in
a charge to operations of $3,964 representing the unrealized loss on this
swap transaction. The Company has pledged U.S. government securities of
$11,806 at March 31, 1996 as collateral for this transaction.
6. REDEEMABLE PREFERRED SHARES
At March 31, 1996, the Company had authorized and outstanding 2,000,000 and
1,035,462, respectively, of its Class A Senior Preferred Shares. At March
31, 1996 and December 31, 1995, respectively, the carrying value of such
shares amounted to $211,759 and $226,396, including undeclared dividends of
$113,938 and $121,893, or $110.04 and $110.06 per share.
In January and February, 1996, the Company repurchased 72,104 of such shares
for $10,530. The repurchase of the Class A Senior Preferred Shares
increased the Company's additional paid-in capital by $4,279 for the 72,104
shares acquired.
As of March 31, 1996, the unamortized discount on the Class A Senior
Preferred Shares was $5,700.
In March 1996, Company declared and paid a dividend on the Class A Senior
Preferred Shares of $10.00 per share.
7. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS
The undeclared dividends, as adjusted for conversions of Class B Preferred
Shares into Common Shares, cumulatively amounted to $100,053 and $95,118 at
March 31, 1996 and December 31, 1995, respectively. These undeclared
dividends represent $35.85 and $34.08 per share as of the end of each
period. No accrual was recorded for such undeclared dividends as the Class
B Preferred Shares are not mandatorily redeemable.
8. RESTRICTED ASSETS
The current and noncurrent portions of restricted assets consist primarily
of the remaining $28,508 held in escrow pursuant to the sale of the
Company's money transfer business on November 15, 1994, which have been
classified based on the terms of the related purchase agreement and the
anticipated release of the escrow, and the $11,802 pledged as collateral
for the RJR Nabisco equity swap as described in Note 5.
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<PAGE> 12
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
9. PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS
Those liabilities that are expected to be resolved as part of the Company's
First Amended Joint Chapter 11 Plan of Reorganization, as amended (the
"Joint Plan"), are classified in the Consolidated Balance Sheets as
prepetition claims and restructuring accruals. On January 18, 1995,
approximately $550 million of prepetition claims were paid pursuant to the
Joint Plan. As of March 31, 1996 and December 31, 1995, the Company had
$32,884 and $33,392, respectively, of prepetition claims and restructuring
accruals. The prepetition claims remaining as of March 31, 1996 may be
subject to future adjustments depending on pending discussions with the
various parties and the decisions of the Bankruptcy Court.
10. CONTINGENCIES
Litigation
The Company is a defendant in various lawsuits and may be subject to
unasserted claims primarily in connection with its activities as a
securities broker-dealer and participation in public underwritings. These
lawsuits involve claims for substantial or indeterminate amounts and are in
varying stages of legal proceedings. In the opinion of management, after
consultation with counsel, the ultimate resolution of these matters will not
have a material adverse effect on the Company's consolidated financial
position or results of operations.
Investment Company Act
The Investment Company Act of 1940, as amended (the "Investment Company
Act") and the rules and regulations thereunder require the registration of,
and impose various substantive restrictions on, companies that engage
primarily in the business of investing, reinvesting or trading in securities
or engage in the business of investing, reinvesting, owning, holding or
trading in securities and own or propose to acquire "investment securities"
having a "value" in excess of 40% of a company's "total assets" (exclusive
of Government securities and cash items) on an unconsolidated basis.
Following dispositions of its then operating businesses pursuant to the
Joint Plan, the Company was above this threshold and relied on the one-year
exemption from registration under the Investment Company Act provided by
Rule 3a-2 thereunder, which exemption expired on January 18, 1996. Prior to
such date, through the Company's acquisition of the investment banking and
brokerage business of Ladenburg and its acquisition of the Office Buildings
and Shopping Centers (see Note 2), the Company was engaged primarily in a
business or businesses other than that of investing, reinvesting, owning,
holding or trading in securities, and the value of its investment securities
was below the 40% threshold. Under the Investment Company Act, the Company
is required to determine the value of its total assets for purposes of the
40% threshold based on "market" or "fair" values, depending on the nature of
the asset, at the end of the last preceding fiscal quarter and based on cost
for assets acquired since that date. If the Company were required to
register under the Investment Company Act, it would be subject to a number
of material restrictions on its operations, capital structure and
management, including without limitation its ability to enter into
transactions with affiliates.
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<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------
INTRODUCTION
The Company's Consolidated Financial Statements include the accounts of
Ladenburg, Thalmann & Co. Inc. ("Ladenburg"), Thinking Machines Corporation
("TMC") and other subsidiaries.
On January 19, 1995, the Company emerged from bankruptcy reorganization
proceedings and completed substantially all distributions to creditors under
its First Amended Joint Chapter 11 Plan of Reorganization, as amended (the
"Joint Plan"). The Joint Plan provided for, among other things, the sale of
the Company's money transfer business, the payment of all allowed claims, a $50
per share cash dividend to holders of Class A Senior Preferred Shares and a
tender offer by the Company for up to 150,000 Class A Senior Preferred Shares
at a purchase price of $80 per share. Pursuant to the Joint Plan, the Company
sold its interest in the money transfer business on November 15, 1994 to First
Financial Management Corporation ("FFMC"). In addition, the Company received
an option to sell to FFMC, and FFMC received an option to purchase, the
Company's messaging services business for $20,000 in cash, which was exercised
during the fourth quarter of 1995.
ACQUISITIONS
On May 31, 1995, the Company consummated its acquisition of all of the
outstanding shares of Ladenburg for $25,750, net of cash acquired. The
acquisition was accounted for as a purchase for financial reporting purposes,
and accordingly, the operations of Ladenburg subsequent to May 31, 1995 are
included in the operations of the Company .
On January 10 and January 11, 1996, the Company acquired four commercial office
buildings (the "Office Buildings") and eight shopping centers (the "Shopping
Centers") for an aggregate purchase price of $183,900, consisting of $23,900 in
cash and $160,000 in non-recourse mortgage financing. In addition, the Company
has capitalized approximately $800 in costs related to the acquisition. The
Company paid $11,400 in cash and executed four promissory notes aggregating
$100,000 for the Office Buildings. The Office Building notes bear interest at
7.5% and have terms of ten to fifteen years. These Office Buildings consist of
two adjacent commercial office buildings in Troy, Michigan and two adjacent
commercial office buildings in Bernards Township, New Jersey. The Shopping
Centers were acquired for an aggregate purchase price of $72,500, consisting of
$12,500 in cash and $60,000 in eight promissory notes. Each Shopping Center
note has a term of five years, and bears interest at the rate of 8% for the
first two and one-half years and at the rate of 9% for the remainder of the
term. The Shopping Centers are located in Marathon and Royal Palm Beach,
Florida; Lincoln, Nebraska; Santa Fe, New Mexico; Milwaukee, Oregon; Richland
and Marysville, Washington; and Charleston, West Virginia.
On January 11, 1996, the Company, through Ladenburg's merchant banking
affiliate, provided a $10,600 convertible bridge loan to finance TMC, a
developer and marketer of parallel software of high-end and networked computer
systems, in connection with its emergence from bankruptcy proceedings.
Effective February 1, 1996, the bridge loan was converted into a controlling
interest in a partnership which holds 3.3 million common shares of TMC which
represent 61.4% of the outstanding shares. The acquisition of TMC through the
conversion of the bridge loan was accounted for as a purchase for financial
reporting purposes, and accordingly, the operations of TMC subsequent to
January 31, 1996 are included in the operations of the Company. The fair value
of assets acquired, including goodwill of $1,726, was $27,301 and liabilities
assumed totaled $16,705, including minority interest of $9,082.
-13-
<PAGE> 14
RESULTS OF OPERATIONS
Consolidated total revenues were $36,684 for the three months ended March 31,
1996 versus $7,669 for the same period last year. The increase in revenues of
$29,015 is attributable primarily to the acquisitions of Ladenburg, the Office
Buildings and Shopping Centers and Thinking Machines. For the first quarter of
1995, the Company's revenues consisted of only interest and other income.
For the first quarter of 1996, the results of operations of the Company's
primary operating units, which include Ladenburg (broker-dealer), the Office
Buildings and Shopping Centers (real estate operations), and TMC (computer
sales and service), were as follows:
<TABLE>
<CAPTION>
Computer
Broker Real Estate Sales Corporate
Dealer Operations and Service and Other Total
------- ---------- ----------- --------- -----
<S> <C> <C> <C> <C> <C>
Revenues $19,117 $5,706 $4,775 $ 7,086 $36,684
Expenses 18,623 5,907 4,833 12,305 41,668
------- ------ ------ ------- -------
Operating income (loss)
before taxes $ 494 $ (201) $ (58) $(5,219) $(4,984)
======= ====== ====== ======= =======
</TABLE>
Ladenburg's revenues for the first quarter of 1996 consisted of principal
transactions of $8,738, commissions of $3,862, corporate finance fees of
$2,871, syndicate and underwriting income of $1,533, and other income of
$2,113. Expenses of Ladenburg consisted of employee compensation and benefits
of $12,216 and other expenses of $6,407.
Revenues from the Office Buildings and Shopping Centers for the first quarter
of 1996 were $3,649 and $2,057, respectively. Expenses of the Office Buildings
and Shopping Centers included interest and depreciation of $3,088 and $858,
respectively.
TMC had product and software sales of $2,403 and contract and service revenues
of $2,296 for the two months ended March 31, 1996. Direct costs of these
revenues were $2,534 for the same period. Operating expenses of TMC consisted
of selling, general and administrative of $1,543 and research and development of
$756 for the two months ended March 31, 1996.
For the first quarter of 1996, the Company's revenues of $7,086 related
to corporate and other activities consisted of gains on investments of $3,256
and interest and dividend income of $3,830 as compared to interest and dividend
income of $6,631 for the same period in the prior year. Net gains on
investments of $3,256 consisted of gains on sales of investment securities held
for sale of $3,134 and on the liquidation of two limited partnerships of $4,086,
net of an unrealized loss on the RJR Nabisco equity swap of $3,964.
Operating, general and administrative expenses for the first quarter of 1996
consisted primarily of employee compensation and benefits of $15,577, expenses
related to the RJR Nabisco investment of $6,063, and interest expense of
$4,524. Operating, general and administrative expenses for the first quarter
of 1995 consisted primarily of employee compensation and benefits of $995. The
reversal of restructuring accruals of $2,044 in the 1995 period resulted from
the Company settling certain claims at amounts below the accrued liability.
Income tax benefit for the first quarter of 1996 was $100 versus income tax
expense of $740 for the first quarter of 1995. The effective tax rate does not
bear a customary relationship with pre-tax accounting income principally as a
consequence of the change in the valuation allowance relating to deferred tax
assets.
-14-
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased from $155,565 at December 31, 1995 to
$118,250 at March 31, 1996 primarily as a result of the purchase of the Office
Building and Shopping Centers for $24,732, the repurchase of Class A Senior
Preferred Shares for $10,530, and the payment of preferred dividends of
$10,354, offset by the liquidation of long-term investments of $13,887.
During the first quarter 1996, the Company's cash and cash equivalents
decreased from $51,742 to $13,458 due primarily to the acquisitions during the
period, and dividends on and repurchases of the Class A Senior Preferred
Shares. The Company expects to fund any cash requirements of the operating
businesses and possible future acquisitions primarily through the sale or
maturity of its investment securities.
In 1995, the Company's Board of Directors authorized the Company to repurchase
as many as 500,000 shares of its Class A Senior Preferred Shares. As of March
31, 1996, the Company had repurchased 411,504 of such shares.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company and its representatives may from time to time make oral or written
"forward-looking statements" within the meaning of the Private Securities
Reform Act of 1995 (the "Reform Act"), 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 shareholders,
which represent the Company'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 Reform Act, the Company is hereby identifying important
factors that could cause actual results to differ materially from those
contained in any forward-looking statements made by or on behalf of the
Company. Each of the Company's operating businesses, Ladenburg, TMC, and New
Valley Realty, are subject to intense competition, changes in consumer
preferences, and local economic conditions. Ladenburg is further subject to
uncertainties endemic to the securities industry including, without limitation,
the volatility of domestic and international financial, bond and stock markets,
governmental regulation and litigation. TMC is also subject to uncertainties
relating to, without limitation, the development and marketing of computer
products, including customer acceptance and required funding, technological
changes, capitalization, and the ability to utilize and exploit its
intellectual property and propriety software technology. New Valley Realty is
additionally subject to the uncertainties relating to, without limitation,
required capital improvements to its facilities, local real estate market
conditions and federal, state, city and municipal laws and regulations
concerning, among others, zoning and environmental matters. Uncertainties
affecting the Company generally include, without limitation, the effect of
market conditions on the salability of the Company's investment securities and,
thus, the sufficiency of the Company's future liquidity, the uncertainty of
other potential acquisitions and investments by the Company, developments
relating to the Company's investment in RJR Nabisco, the effects of
governmental regulation on the Company's ability to target and/or consummate
any such acquisitions and the effects of limited management experience in areas
in which the Company may become involved. Results actually achieved may differ
materially from expected results included in these 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. The Company
does not undertake to update any forward-looking statement that may be made
from time to time by or on behalf of the Company.
-15-
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to pending claims which have arisen in the
ordinary course of its business. Management, after review and
consultation with counsel, considers that any liability from the
disposition of such lawsuits in the aggregate would not have a
material adverse effect on the consolidated financial position,
results of operations, or cash flows of the Company.
See Note 10 to the "Notes to the Quarterly Consolidated Financial
Statements" in Part I, Item 1 to this Report.
Item 3. Defaults Upon Senior Securities
See Notes 6 and 7 to the "Notes to the Quarterly Consolidated
Financial Statements" in Part I, Item 1 to this Report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the first
quarter of 1996:
<TABLE>
<CAPTION>
Date Items Financial Statements
---- ----- --------------------
<S> <C> <C>
January 10, 1996 2,7 None
January 10, 1996 7 Financial statements prepared
(Amendment No. 1) pursuant to Rule 3-14 of
Regulation S-X
</TABLE>
-16-
<PAGE> 17
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 15, 1996 By: /s/ Robert M. Lundgren
-------------------- ----------------------------
Robert M. Lundgren
Vice President, Treasurer
and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 13,458
<SECURITIES> 279,501
<RECEIVABLES> 15,247
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 326,766
<PP&E> 183,874
<DEPRECIATION> 0
<TOTAL-ASSETS> 552,869
<CURRENT-LIABILITIES> 208,516
<BONDS> 0
211,759
279
<COMMON> 1,916
<OTHER-SE> (48,434)
<TOTAL-LIABILITY-AND-EQUITY> 552,869
<SALES> 0
<TOTAL-REVENUES> 36,684
<CGS> 0
<TOTAL-COSTS> 41,668
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,984)
<INCOME-TAX> (100)
<INCOME-CONTINUING> (4,884)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,884)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
