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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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
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 NOVEMBER 13, 1998, THERE WERE OUTSTANDING 9,577,624 OF THE
REGISTRANT'S COMMON SHARES, $.01 PAR VALUE.
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NEW VALLEY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30,
1998 and December 31, 1997.................................... 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 1998
and 1997...................................................... 4
Condensed Consolidated Statement of Changes in
Stockholders' Deficiency for the nine months
ended September 30, 1998...................................... 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997................. 6
Notes to the Condensed 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................................................. 20
Item 3. Defaults Upon Senior Securities................................... 20
Item 6. Exhibits and Reports on Form 8-K.................................. 20
SIGNATURE............................................................................. 21
</TABLE>
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NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................... $ 25,463 $ 11,606
Investment securities available for sale ....................... 26,420 51,993
Trading securities owned ....................................... 15,703 49,988
Restricted assets .............................................. 1,843 232
Receivable from clearing brokers ............................... 1,854 1,205
Other current assets ........................................... 2,581 3,618
---------- ----------
Total current assets ...................................... 73,864 118,642
---------- ----------
Investment in real estate, net ..................................... 80,479 256,645
Furniture and equipment, net ....................................... 10,845 12,194
Restricted assets .................................................. 5,767 5,484
Long-term investments, net ......................................... 9,689 27,224
Investment in joint venture ........................................ 63,713 --
Other assets ....................................................... 6,524 21,202
---------- ----------
Total assets .............................................. $ 250,881 $ 441,391
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Margin loan payable ............................................ $ 1,470 $ 13,012
Current portion of notes payable and other long-term obligations -- 760
Accounts payable and accrued liabilities ....................... 31,466 57,722
Prepetition claims and restructuring accruals .................. 12,379 12,611
Income taxes ................................................... 18,715 18,413
Securities sold, not yet purchased ............................. 3,208 25,610
---------- ----------
Total current liabilities ................................. 67,238 128,128
---------- ----------
Notes payable ...................................................... 55,083 173,814
Other long-term obligations ........................................ 20,571 11,210
Redeemable preferred shares ........................................ 300,711 258,638
Commitments and Contingencies ...................................... -- --
Stockholders' deficiency:
Cumulative preferred shares; liquidation preference of $69,769;
dividends in arrears, $158,908 and $139,412 ................. 279 279
Common Shares, $.01 par value; 850,000,000 shares authorized;
9,577,624 shares outstanding ................................ 96 96
Additional paid-in capital ..................................... 564,234 604,215
Accumulated deficit ............................................ (750,145) (742,427)
Unearned compensation on stock options ......................... (15) (158)
Accumulated other comprehensive income ......................... (7,171) 7,596
---------- ----------
Total stockholders' deficiency ............................ (192,722) (130,399)
---------- ----------
Total liabilities and stockholders' deficiency ............ $ 250,881 $ 441,391
========== ==========
</TABLE>
See accompanying Notes to Quarterly Condensed Consolidated Financial Statements
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NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Principal transactions, net ........................... $ (860) $ 6,131 $ 7,476 $ 11,857
Commissions ........................................... 6,510 4,235 20,663 11,059
Corporate finance fees ................................ 259 3,555 4,541 8,202
Gain on sale of investments, net ...................... 1,815 1,466 10,377 8,518
Loss in joint venture ................................. (1,746) -- (2,233) --
Real estate leasing ................................... 4,767 7,079 18,488 19,664
Gain on sale of real estate ........................... 4,682 -- 4,682 --
Interest and dividends ................................ 2,033 2,554 7,424 6,677
Computer sales and service ............................ 40 70 499 3,750
Other income .......................................... 1,940 1,614 6,635 6,925
----------- ----------- ----------- -----------
Total revenues .................................... 19,440 26,704 78,552 76,652
----------- ----------- ----------- -----------
Cost and expenses:
Operating, general and administrative ................. 25,109 29,553 84,466 84,090
Interest .............................................. 3,555 4,229 11,167 12,134
Provision for loss on long-term investment ............ -- -- -- 3,796
----------- ----------- ----------- -----------
Total costs and expenses .......................... 28,664 33,782 95,633 100,020
----------- ----------- ----------- -----------
Loss from continuing operations before income taxes
and minority interests ................................ (9,224) (7,078) (17,081) (23,368)
Income tax provision ....................................... 10 24 31 119
Minority interests in loss from continuing operations
of consolidated subsidiaries .......................... 495 528 1,654 1,543
----------- ----------- ----------- -----------
Loss from continuing operations ............................ (8,739) (6,574) (15,458) (21,944)
Discontinued operations:
Gain on disposal of discontinued operations ........... 6,860 -- 7,740 --
----------- ----------- ----------- -----------
Income from discontinued operations ................... 6,860 -- 7,740 --
----------- ----------- ----------- -----------
Net loss ................................................... (1,879) (6,574) (7,718) (21,944)
Dividend requirements on preferred shares .................. (20,743) (17,567) (59,333) (50,297)
----------- ----------- ----------- -----------
Net loss applicable to Common Shares ....................... $ (22,622) $ (24,141) $ (67,051) $ (72,241)
=========== =========== =========== ===========
Loss per Common Share (basic and diluted):
Continuing operations ................................. $ (3.08) $ (2.52) $ (7.81) $ (7.54)
Discontinued operations ............................... 0.72 -- .81 --
----------- ----------- ----------- -----------
Net loss per Common Share ............................. $ (2.36) $ (2.52) $ (7.00) $ (7.54)
=========== =========== =========== ===========
Number of shares used in computation ....................... 9,577,624 9,577,624 9,577,624 9,577,624
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Quarterly Condensed Consolidated Financial Statements
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NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' DEFICIENCY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Unearned
Class B Compensation
Preferred Common Paid-In Accumulated on Stock Unrealized
Shares Shares Capital Deficit Options Gain
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 .......... $ 279 $ 96 $ 604,215 $(742,427) $ (158) $ 7,596
Net loss ......................... (7,718)
Undeclared dividends and accretion
on redeemable preferred shares . (39,838)
Unrealized gain on investment
securities ..................... (14,767)
Adjustment to unearned
compensation on stock options .. -- -- (143) -- 143 --
--------- --------- --------- --------- --------- ---------
Balance, September 30, 1998 ......... $ 279 $ 96 $ 564,234 $(750,145) $ (15) $ (7,171)
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Quarterly Condensed Consolidated Financial Statements
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NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................... $ (7,718) $ (21,944)
Adjustments to reconcile net loss to net cash
used for operating activities:
Income from discontinued operations ....................................... (7,740) --
Loss in joint venture ..................................................... 2,233 --
Depreciation and amortization ............................................. 5,472 6,635
Provision for loss on long-term investment ................................ -- 3,796
Gain on sales of real estate and liquidation of long-term investments ..... (9,452) --
Stock based compensation expense .......................................... 2,215 2,213
Changes in assets and liabilities, net of effects from
acquisitions and dispositions:
Decrease (increase) in receivables and other assets .................... 39,804 (6,881)
Increase in income taxes payable ....................................... 409 86
(Decrease) increase in accounts payable and accrued liabilities ........ (35,831) 5,951
---------- ----------
Net cash used for continuing operations ........................................ (10,608) (10,144)
Net cash provided from discontinued operations ................................. 7,740 --
---------- ----------
Net cash used for operating activities ......................................... (2,868) (10,144)
---------- ----------
Cash flows from investing activities:
Sale or maturity of investment securities ................................. 21,286 37,697
Purchase of investment securities ......................................... (13,352) (20,999)
Sale or liquidation of long-term investments .............................. 25,895 2,807
Purchase of long-term investments ......................................... (8,590) (11,404)
Sale of real estate, net of closing costs ................................. 111,292 --
Purchase of real estate ................................................... (18,387) (6,208)
Sale of other assets ...................................................... 226 5,561
Payment of prepetition claims ............................................. (676) (1,199)
Return of prepetition claims paid ......................................... -- 1,396
Decrease in restricted assets ............................................. (1,894) 2,251
Cash transferred to joint venture ......................................... (487) --
Other ..................................................................... (1,411) --
Payment for acquisitions, net of cash acquired ............................ -- (20,014)
---------- ----------
Net cash provided from (used for) investing activities ......................... 113,902 (10,112)
---------- ----------
Cash flows from financing activities:
Increase in margin loan payable, net ...................................... (11,541) --
Sale of subsidiary's common stock ......................................... -- 5,417
Proceeds from participating loan .......................................... 14,300 --
Proceeds from notes payable ............................................... -- 19,993
Repayment of notes payable to related party ............................... -- (21,500)
Repayment of notes payable ................................................ (99,373) (20,703)
Repayment of other obligations ............................................ (563) (3,526)
---------- ----------
Net cash used for financing activities ......................................... (97,177) (20,319)
---------- ----------
Net increase (decrease) in cash and cash equivalents ........................... 13,857 (40,575)
Cash and cash equivalents, beginning of period ................................. 11,606 57,282
---------- ----------
Cash and cash equivalents, end of period ....................................... $ 25,463 $ 16,707
========== ==========
</TABLE>
See accompanying Notes to Quarterly Condensed Consolidated Financial Statements
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NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED 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 September 30, 1998 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 September 30, 1998 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, as amended, for the year ended December 31, 1997 as filed with the
Securities and Exchange Commission (Commission File No. 1-2493).
Certain reclassifications have been made to prior interim period
financial information to conform with current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). The Statement, which the Company adopted in
the first quarter of 1998, establishes standards for reporting and
displaying comprehensive income and its components in a full set of
general-purpose financial statements. Where applicable, earlier periods
have been restated to conform to the standards established by SFAS No.
130. The adoption of SFAS 130 did not have a material impact on the
Company's financial statements.
For transactions entered into in fiscal years beginning after December
15, 1997, the Company adopted and is reporting in accordance with SOP
97-2, "Software Revenue Recognition". The adoption of SOP 97-2 did not
have a material impact on the Company's financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1
provides guidance that the carrying value of software developed or
obtained for internal use is assessed based upon an analysis of
estimated future cash flows on an undiscounted basis and before interest
charges. SOP 98-1 is effective for transactions entered into in fiscal
years beginning after December 15, 1998. The Company believes that
adoption of SOP 98-1 will not have a material impact on the Company's
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which establishes standards
for the way that public business enterprises report information about
operating segments. SFAS No. 131 is effective for financial statements
for fiscal years beginning after December 15, 1997. The Company is
currently reviewing its operating segment disclosures and will adopt
SFAS No. 131 in the fourth quarter of 1998.
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In June, 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS
133 requires that all derivative instruments be recorded on the balance
sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. The Company
has not yet determined the impact that the adoption of SFAS 133 will
have on its earnings or statement of financial position.
2. WESTERN REALTY
On January 31, 1997, the Company entered into a stock purchase agreement
with Brooke (Overseas) Ltd. ("Brooke (Overseas)"), a wholly-owned
subsidiary of Brooke Group Ltd. ("Brooke"), an affiliate of the Company,
pursuant to which the Company acquired 10,483 shares (the "BML Shares")
of the common stock of BrookeMil Ltd. ("BML") from Brooke (Overseas) for
a purchase price of $55,000, consisting of $21,500 in cash and a $33,500
9% promissory note of the Company (the "Note"). The BML Shares comprise
99.1% of the outstanding shares of BML, a real estate development
company in Russia. The Note, which was collateralized by the BML Shares,
was paid during 1997.
WESTERN REALTY DEVELOPMENT LLC
In February 1998, the Company and Apollo Real Estate Investment Fund
III, L.P. ("Apollo") organized Western Realty Development LLC ("Western
Realty Ducat") to make real estate and other investments in Russia. In
connection with the formation of Western Realty Ducat, the Company
agreed, among other things, to contribute the real estate assets of BML,
including Ducat Place II and the site for Ducat Place III, to Western
Realty Ducat and Apollo agreed to contribute up to $58,750, including
the investment in Western Realty Repin discussed below. Through
September 30, 1998, Apollo had funded $30,550 of its investment in
Western Realty Ducat.
The ownership and voting interests in Western Realty Ducat will be held
equally by Apollo and the Company. Apollo will be entitled to a
preference on distributions of cash from Western Realty Ducat to the
extent of its investment ($40,000), together with a 15% annual rate of
return, and the Company will then be entitled to a return of $16,300 of
BML-related expenses incurred and cash invested by the Company since
March 1, 1997, together with a 15% annual rate of return; subsequent
distributions will be made 70% to the Company and 30% to Apollo. Western
Realty Ducat will be managed by a Board of Managers consisting of an
equal number of representatives chosen by Apollo and the Company. All
material corporate transactions by Western Realty Ducat will generally
require the unanimous consent of the Board of Managers. Accordingly, the
Company has accounted for its non-controlling interest in Western Realty
Ducat using the equity method of accounting.
The Company recorded its basis in the investment in the joint venture in
the amount of $60,169 based on the carrying value of assets less
liabilities transferred. There was no difference between the carrying
value of the investment and the Company's proportionate interest in the
underlying value of net assets of the joint venture.
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Western Realty Ducat will seek to make additional real estate and other
investments in Russia. Western Realty Ducat has made a $26,300
participating loan to, and payable out of a 30% profits interest in, a
company organized by Brooke (Overseas) which, among other things, owns
an industrial site and manufacturing facility being constructed on the
outskirts of Moscow by a subsidiary of Brooke (Overseas).
WESTERN REALTY REPIN LLC
In June 1998, the Company and Apollo organized Western Realty Repin LLC
("Western Realty Repin") to make a $25,000 participating loan (the
"Repin Loan") to BML. The proceeds of the loan will be used by BML for
the acquisition and preliminary development of two adjoining sites
totaling 10.25 acres (the "Kremlin Sites") located in Moscow across the
Moscow River from the Kremlin. BML, which is planning the development of
a 1.1 million sq. ft. hotel, office, retail and residential complex on
the Kremlin Sites, owned 94.6% of one site and 52% of the other site at
September 30, 1998. Apollo will be entitled to a preference on
distributions of cash from Western Realty Repin to the extent of its
investment ($18,750), together with a 20% annual rate of return, and the
Company will then be entitled to a return of its investment ($6,250),
together with a 20% annual rate of return; subsequent distributions will
be made 50% to the Company and 50% to Apollo. Western Realty Repin will
be managed by a Board of Managers consisting of an equal number of
representatives chosen by Apollo and the Company. All material corporate
transactions by Western Realty Repin will generally require the
unanimous consent of the Board of Managers.
Through September 30, 1998, Western Realty Repin has advanced $19,067
(of which $14,300 was funded by Apollo) under the Repin Loan to BML,
which is classified in other long-term obligations on the condensed
consolidated balance sheet at September 30, 1998. The Repin Loan, which
bears no fixed interest, is payable only out of 100% of the
distributions, if made, by the entities owning the Kremlin Sites to BML.
Such distributions shall be applied first to pay the principal of the
Repin Loan and then as contingent participating interest on the Repin
Loan. Any rights of payment on the Repin Loan are subordinate to the
rights of all other creditors of BML. BML used a portion of the proceeds
of the Repin Loan to repay the Company for certain expenditures on the
Kremlin Sites previously incurred. The Repin Loan is due and payable upon
the dissolution of BML and is collateralized by a pledge of the Company's
shares of BML.
As of September 30, 1998, BML had invested $15,171 in the Kremlin Sites
and held $809, in cash, which was restricted for future investment. In
connection with the acquisition of its interest in one of the Kremlin
Sites, BML has agreed with the City of Moscow to invest an additional
$6,000 in 1998 and $22,000 in 1999 in the development of the property.
The development of Ducat Place III and the Kremlin Sites will require
significant amounts of debt and other financing. The Company is actively
pursuing various financing alternatives on behalf of Western Realty
Ducat and BML. However, in light of the recent economic turmoil in
Russia, no assurance can be given that such financing will be available
on acceptable terms. Failure to obtain sufficient capital for the
projects would force Western Realty Ducat and BML to curtail or delay
the planned development of Ducat Place III and the Kremlin Sites.
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3. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at
fair value, with net unrealized gains included as a separate component
of stockholders' deficiency. The Company had realized gains on sales of
investment securities available for sale of $191 and $5,725 for the
three and nine months ended September 30, 1998, respectively.
The components of investment securities available for sale at September
30, 1998 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Short-term investments ..... $ 10 $ -- $ -- $ 10
Marketable equity securities 30,396 364 6,181 24,579
Marketable ................. -- 1,831 -- 1,831
warrants
Marketable debt securities . 3,185 -- 3,185 --
---------- ---------- ---------- ----------
Investment securities ...... $ 33,591 $ 2,195 $ 9,366 $ 26,420
========== ========== ========== ==========
</TABLE>
4. LONG-TERM INVESTMENTS
At September 30, 1998, long-term investments consisted primarily of
investments in limited partnerships of $9,689. The Company believes the
fair value of the limited partnerships exceeds its carrying amount by
approximately $2,500 based on the indicated market values of the
underlying investment portfolio provided by the partnerships. The
Company recognized gains of $1,624 and $4,652 on liquidations of
investments of certain limited partnerships for the three and nine
months ended September 30, 1998, respectively. The Company's investments
in limited partnerships are illiquid and the ultimate realizations of
these investments are subject to the performance of the underlying
partnership and its management by the general partners. The Company sold
an interest in a limited partnership in September, 1998 and may sell or
liquidate certain other limited partnership interests in the future. Any
sale of such interests would be subject to the approval of the general
partner.
In the first quarter of 1997, the Company determined that an other than
temporary impairment in the value of its investment in a joint venture
had occurred and wrote down this investment to zero with a charge to
operations of $3,796 for the three month period. 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.
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5. REAL ESTATE
On September 28, 1998, the Company completed a sale to institutional
investors of four commercial office buildings (the "Office Buildings")
located in Troy, Michigan and Bernards Township, New Jersey for an
aggregate purchase price of $112.4 million before closing adjustments
and expenses. The Company received approximately $13.0 million in cash
from the transaction before closing adjustments and expenses. The Office
Buildings were subject to approximately $99.0 million of mortgage
financing which was retired at closing. The Company recorded a gain of
$4,682 associated with the sale of the Office Buildings. The Company may
seek to dispose of other U.S. real estate holdings in the future.
6. INCOME FROM DISCONTINUED OPERATIONS
The Company recorded a gain on disposal of discontinued operations of
$6,860 and $7,740 for the three and nine months ended September 30, 1998
related to the settlement of a lawsuit originally initiated by the
Company's predecessor, Western Union Telegraph Company.
7. REDEEMABLE PREFERRED SHARES
At September 30, 1998, the Company had authorized and outstanding
2,000,000 and 1,071,462, respectively, of its Class A Senior Preferred
Shares. At September 30, 1998 and December 31, 1997, respectively, the
carrying value of such shares amounted to $300,711 and $258,638,
including undeclared dividends of $204,050 and $163,302 or $190.44 and
$152.41 per share. As of September 30, 1998, the unamortized discount on
the Class A Senior Preferred Shares was $7,090.
For the three and nine months ended September 30, 1998, the Company
recorded $757 and $2,215 in compensation expense, respectively, related
to certain Class A Senior Preferred Shares awarded to an officer of the
Company in 1996. At September 30, 1998, the balance of the deferred
compensation and the unamortized discount related to these award shares
was $3,396 and $2,628, respectively.
8. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS
The undeclared dividends cumulatively amounted to $158,908 and $139,412
at September 30, 1998 and December 31, 1997, respectively. These
undeclared dividends represent $56.94 and $49.95 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.
9. CONTINGENCIES
LITIGATION
On or about March 13, 1997, a shareholder derivative suit was filed
against the Company, as a nominal defendant, its directors and Brooke in
the Delaware Chancery Court, by a shareholder of the Company. The suit
alleges that the Company's purchase of the BML Shares constituted a
self
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<PAGE> 12
dealing transaction which involved the payment of excessive
consideration by the Company. The plaintiff seeks (i) a declaration that
the Company's directors breached their fiduciary duties, Brooke aided
and abetted such breaches and such parties are therefore liable to the
Company, and (ii) unspecified damages to be awarded to the Company. The
Company's time to respond to the complaint has not yet expired. The
Company believes that the allegations were without merit. Although there
can be no assurances, management is of the opinion, after consultation
with counsel, that the ultimate resolution of this matter will not have
a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
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, results of operations or cash flows.
PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS
The prepetition claims remaining as of September 30, 1998 of $12,379 may
be subject to future adjustments depending on pending discussions with
the various parties and the decisions of the Bankruptcy Court.
-12-
<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"), BrookeMil Ltd. ("BML"), Thinking
Machines Corporation ("Thinking Machines") 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 and the payment of all allowed claims.
WESTERN REALTY DUCAT. In February 1998, the Company and Apollo Real Estate
Investment Fund III, LP ("Apollo") organized Western Realty Development LLC
("Western Realty Ducat") to make real estate and other investments in Russia.
In connection with the formation of Western Realty Ducat, the Company agreed,
among other things, to contribute the real estate assets of BML, including
Ducat Place II and the site for Ducat Place III, to Western Realty Ducat and
Apollo agreed to contribute up to $58,750, including the investment in Western
Realty Repin discussed below. See Note 2 to the Condensed Quarterly
Consolidated Financial Statements.
THE KREMLIN SITES. BML is planning the development of two adjoining sites
totaling 10.25 acres (the "Kremlin Sites") located in Moscow across the Moscow
River from the Kremlin. BML, which is planning to develop a 1.1 million sq. ft.
hotel, office, retail and residential complex on the Kremlin Sites, owned 94.6%
of one site and 52% of the other site at September 30, 1998. In June 1998, the
Company and Apollo organized Western Realty Repin LLC ("Western Realty Repin")
to make a $25,000 participating loan to BML. The proceeds of the loan will be
used by BML for the acquisition and preliminary development of the Kremlin
Sites, including the repayment to the Company for certain expenditures on the
Kremlin Sites previously incurred (see Note 2 to the Condensed Quarterly
Consolidated Financial Statements). As of September 30, 1998, BML had invested
$15,171 in the Kremlin Sites and held $809, in cash, which was restricted for
future investment.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." The Statement, which the Company adopted in
the first quarter of 1998, establishes standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements. Where applicable, earlier periods have been restated to
conform to the standards established by SFAS No. 130. The adoption of SFAS 130
did not have a material impact on the Company's financial statements.
For transactions entered into in fiscal years beginning after December 15,
1997, the Company adopted and is reporting in accordance with SOP 97-2,
"Software Revenue Recognition". The adoption of SOP 97-2 did not have a
material impact on the Company's financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance
that the carrying value of software developed or obtained for internal use is
assessed based upon an analysis of estimated future cash flows on an
undiscounted basis and before interest charges. SOP 98-1 is effective for
transactions entered into in fiscal years beginning after December 15, 1998.
The Company believes that adoption of SOP 98-1 will not have a material impact
on the Company's financial statements.
-13-
<PAGE> 14
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes standards for the way
that public business enterprises report information about operating segments.
SFAS No. 131 is effective for financial statements for fiscal years beginning
after December 15, 1997. The Company is currently reviewing its operating
segment disclosures and will adopt SFAS No. 131 in the fourth quarter of 1998.
In June, 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS No. 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999. SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings
or other comprehensive income, depending on whether a derivative is designated
as part of a hedge transaction and, if it is, the type of hedge transaction.
The Company has not yet determined the impact that the adoption of SFAS 133
will have on its earnings or statement of financial position.
The SEC recently issued new rules which will require the Company, commencing
with filings which include financial statements for fiscal year 1998, to
provide disclosure of quantitative and qualitative information relating to
derivative financial instruments, derivative commodity instruments and other
financial instruments. These disclosures are intended to provide investors with
information relating to market risk exposure, including the Company's
objectives, strategies and instruments used to manage exposures. The
disclosures are required to be presented outside of, and not incorporated into,
the Company's consolidated financial statements. This disclosure requirement
will be applicable principally to the Company's Ladenburg broker-dealer
subsidiary. The impact of the implementation of this new disclosure requirement
is not yet determinable.
YEAR 2000 COSTS. The "Year 2000 issue" is the result of computer programs that
were written using two digits rather than four digits to define the applicable
year. If the Company's or its subsidiaries' computer programs with
date-sensitive functions are not Year 2000 compliant, they may recognize a date
using "00" as the Year 1900 rather than the Year 2000. This could result in
system failure or miscalculations causing disruption to operations, including,
among other things, an inability to process transactions or engage in similar
normal business activities.
CORPORATE AND BML - Both the Company and BML use personal computers for all
transactions. All such computers and related systems and software are less than
three years old and are Year 2000 compliant. As a result, the Company believes
the Company and BML are Year 2000 compliant.
THINKING MACHINES - Thinking Machines' payroll processing system is not Year
2000 compliant. Thinking Machines has identified replacements for its payroll
system and anticipates being Year 2000 compliant by mid-1999. Thinking
Machines' converted its accounting system to a Year-2000 compliant system in
1998. Thinking Machines anticipates the costs of these systems will not exceed
$50.
LADENBURG - Ladenburg has recently completed a plan to address Year 2000
compliance. Ladenburg's plan addresses external interfaces with third party
computer systems necessary in the broker-dealer industry. It also addresses
internal operations software necessary to continue operations on a daily basis.
Ladenburg anticipates that its Year 2000 plan will be complete by March 1999
and will cost approximately $350. The cost is inclusive of hardware and
software upgrades and replacements as well as consulting and internal
soft-dollar personnel costs. Ladenburg anticipates that the remaining costs
will be incurred between October 1998 and March 1999.
EXTERNAL SERVICE PROVIDERS - The modifications for Year 2000 compliance by the
Company and its subsidiaries are proceeding according to plan and are expected
to be completed by 1999. However, the failure of the Company's service
providers to resolve their own processing issues in a timely manner could
result in a material financial risk. The most significant outside service
provider is Ladenburg's
-14-
<PAGE> 15
clearing agent. Ladenburg has been informed by its clearing agent that it has
initiated an extensive effort to ensure it is Year 2000 compliant. Ladenburg
has been informed by its clearing agent that it completed the remediation
process in July 1998 and anticipates completion of internal testing of its Year
2000 compliant software in December 1998. The clearing agent has informed
Ladenburg that it will conduct system-wide testing of its Year 2000 software
throughout 1999.
Although the Company and its subsidiaries are in the process of confirming that
its service providers are adequately addressing Year 2000 issues, there can be
no complete assurance of success, or that interaction with other service
providers will not impair the Company's or its subsidiaries' services.
RESULTS OF OPERATIONS
Consolidated total revenues were $78,552 for the nine months ended September
30, 1998 versus $76,652 for the same period last year. The increase in revenues
of $1,900 is attributable primarily to the gain on the sale of the Office
Buildings and the increase in revenues of Ladenburg as a result of higher
commissions offset by lower principal transactions and corporate finance fees.
For the three months and nine months ended September 30, 1998 and 1997, the
results of continuing operations of the Company's primary operating units,
which include Ladenburg (broker-dealer), the Company's U.S. office buildings
and shopping centers and BML (real estate), and Thinking Machines (computer
software), were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Broker-dealer:
Revenues ........................... $ 9,454 $ 16,900 $ 44,712 $ 38,756
Expenses ........................... 15,090 17,926 55,056 44,758
---------- ---------- ---------- ----------
Operating loss before taxes
and minority interests .......... $ (5,636) $ (1,026) $ (10,344) $ (6,002)
========== ========== ========== ==========
Real estate:
Revenues ........................... $ 9,448 $ 7,079 $ 23,169 $ 19,664
Expenses ........................... 7,639 8,933 22,175 25,650
---------- ---------- ---------- ----------
Operating income (loss) before
taxes and minority interests .... $ 1,809 $ (1,854) $ 994 $ (5,986)
========== ========== ========== ==========
Computer software:
Revenues ........................... $ 40 $ 326 $ 499 $ 3,750
Expenses ........................... 1,770 1,933 5,081 9,774
---------- ---------- ---------- ----------
Operating loss before taxes
and minority interests .......... $ (1,730) $ (1,607) $ (4,582) $ (6,024)
========== ========== ========== ==========
Corporate and other:
Revenues ........................... $ 498 $ 2,399 $ 10,172 $ 14,482
Expenses ........................... 4,165 4,990 13,321 19,838
---------- ---------- ---------- ----------
Operating loss before taxes
and minority interests .......... $ (3,667) $ (2,591) $ (3,149) $ (5,356)
========== ========== ========== ==========
</TABLE>
-15-
<PAGE> 16
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1997
Ladenburg's revenues for the third quarter of 1998 decreased $7,446 as compared
to revenues for the third quarter of 1997 due to lower principal transactions
of $7,180 and corporate finance fees of $3,296. Ladenburg's expenses for the
third quarter of 1998 decreased $2,836 as compared to expenses for the third
quarter of 1998 due primarily to a decrease in performance-based compensation
expense associated with lower revenues.
Revenues from the real estate operations for the third quarter of 1998
increased $2,369 primarily due to the gain on the sale of the Office Buildings
offset by the effect of the sale of one shopping center in the fourth quarter
of 1997. Expenses of the real estate operations decreased $1,294 due primarily
to the absence of significant expenses associated with Ducat Place II and Ducat
Place III from BML ($2,686 for the third quarter of 1997) resulting from the
contribution of the properties to Western Realty. In the third quarter of 1998,
BML incurred expenses of $2,371, which were related to the acquisition of the
Kremlin Sites. A foreign currency loss of $2,256, which resulted from the
devaluation of rubles held in an escrow account, was included in BML's expenses
for the third quarter of 1998. The currency loss will be offset by lower future
expenditures in the development of the Kremlin Sites.
To date, Thinking Machines has had only minimal revenues from the sale or
leasing of such software and services. Thinking Machines is developing and
marketing a data mining software product. Operating expenses of Thinking
Machines consisted of costs of sales, selling, general and administrative and
research and development of $201, $666 and $903, respectively, for the third
quarter of 1998 as compared to $0, $885 and $1,048, respectively, for the third
quarter of 1997.
For the third quarter of 1998, the Company's revenues of $498 related to
corporate and other activities consisted primarily of net gains on investments
of $1,815 and interest and dividend income of $455 offset by $1,746 of loss in
joint venture. This compares to gains on investments of $1,466 and interest and
dividend income of $808 for the same period in the prior year.
Corporate and other expenses of $4,165 for the third quarter of 1998 consisted
primarily of employee compensation and benefits of $2,019 and expenses of
certain non-significant subsidiaries of $552. Corporate and other expenses of
$4,990 for the third quarter of 1997 consisted primarily of employee
compensation and benefits of $2,157 and expenses of certain non-significant
subsidiaries of $963.
Income tax expense for the third quarter of 1998 was $10 versus $24 for the
third quarter of 1997. The income tax expense relates principally to state
income taxes of Ladenburg. 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.
The Company recorded a gain on disposal of discontinued operations of $6,860 in
the 1998 period related to the settlement of a lawsuit originally initiated by
the Company's predecessor, Western Union Telegraph Company. See Note 6 to the
Condensed Quarterly Consolidated Financial Statements
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1997
Ladenburg's revenues for the first nine months of 1998 increased $5,956 as
compared to revenues for the first nine months of 1997 primarily due to
increased commissions of $9,604 offset by decreases in principal transactions
of $4,791 and corporate finance fees of $3,661. Ladenburg's expenses for the
first nine months of 1998 increased $10,298 as compared to expenses for the
first nine months of 1997 due primarily to an increase in performance-based
compensation expense associated with higher commissions and an increase in
personnel.
-16-
<PAGE> 17
Revenues from the real estate operations for the first nine months of 1997
increased $3,505 primarily due to the gain on the sale of Office Buildings of
$4,682, which was offset by the effect of the sale of a shopping center in the
fourth quarter of 1997 and lower revenues associated with BML. Expenses of the
real estate operations decreased $3,475 due primarily to lower expenses
($2,558) of BML resulting from its contribution of Ducat Place II and Ducat
Place III to Western Realty Ducat. A foreign currency loss of $2,256, which
resulted from the devaluation of rubles held in an escrow accounts, is included
in BML's expenses during the 1998 period. The above-referenced currency loss
will be offset by lower future expenditures in the development of the Kremlin
Site.
Operating expenses of Thinking Machines consisted of costs of sales, selling,
general and administrative expenses and research and development expenses of
$585, $2,516 and $1,980 for the nine months ended September 30, 1998 compared
to $702, $6,164 and $2,908 for the nine months ended September 30, 1997. The
reduction in Thinking Machines' revenues and operating expenses during the 1998
period reflects the sale of its parallel processing service business in April
1997.
For the first nine months of 1998, the Company's revenues of $10,172 related to
corporate and other activities consisted primarily of net gains on investments
of $10,377 and interest and dividend income of $1,632 offset by $2,233 of loss
in a joint venture. For the 1997 period, the Company's revenues of $14,482
related to corporate and other activities consisted primarily of net gains on
investments of $8,518 and interest and dividend income of $3,124.
Corporate and other expenses of $13,321 for the first nine months of 1998
consisted primarily of employee compensation and benefits of $6,070 and
expenses of non-significant subsidiaries of $2,583. Corporate and other
expenses of $19,838 for the first nine months of 1997 consisted primarily of
employee compensation and benefits of $7,171, expenses of non-significant
subsidiaries of $2,171 and a $3,796 provision for loss on a long-term
investment.
Income tax expense for the first nine months of 1998 was $31 versus $119 for
the first nine months of 1997. 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.
The Company recorded a gain on disposal of discontinued operations of $7,740 in
the 1998 period related to the settlement of a lawsuit originally initiated by
the Company's predecessor, Western Union Telegraph Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to $6,626 at September 30, 1998 from a
working capital deficit at $9,486 at December 31, 1997 primarily as a result of
the sale of the Office Buildings, the liquidations of various long-term
investments and the contribution of Ducat Place II and Ducat Place III (and the
liabilities associated therewith) to Western Realty Ducat. The amount was
offset by changes in the Company's unrealized loss on marketable securities.
During the first nine months of 1998, the Company's cash and cash equivalents
increased from $11,606 to $25,463 due primarily to the sale of the Office
Buildings and liquidations of long-term investments offset by capital
expenditures of $18,387 and net sales of investments of $7,934.
The capital expenditures for the nine months ended September 30, 1998 related
principally to the development of the Kremlin Sites ($15,171 at September 30,
1998). BML also held $809, in restricted cash, at September 30, 1998, which is
restricted for future investment in the Kremlin Sites. In connection with the
acquisition of its interest in one of the Kremlin Sites, BML has agreed with
the City of Moscow to invest an additional $6,000 in 1998 and $22,000 in 1999
in the development of the property.
-17-
<PAGE> 18
In June 1998, the Company and Apollo organized Western Realty Repin to make a
$25,000 participating loan to BML (the "Repin Loan"). The proceeds from the
Repin Loan will be used by BML for the acquisition and preliminary development
of the Kremlin Sites. Through September 30, 1998, Western Realty Repin has
advanced $14,300 (funded by Apollo) to BML. The Repin Loan, which bears no
fixed interest, is payable only out of 100% of distributions, if made, by the
entities owning the Kremlin Sites to BML. Such distributions will be applied
first to pay the principal of the Repin Loan and then as contingent
participating interest on the Repin Loan. Any rights of payment on the loan are
subordinate to the rights of all other creditors of BML. BML used the proceeds
of the Repin Loan to repay the Company for certain expenditures on the Kremlin
Sites previously incurred.
The development of Ducat Place III and the Kremlin Sites will require
significant amounts of debt and other financing. The Company is actively
pursuing various financing alternatives on behalf of Western Realty Ducat and
BML. However, in light of the recent economic turmoil in Russia, no assurance
can be given that such financing will be available on acceptable terms. Failure
to obtain sufficient capital for the projects would force Western Realty Ducat
and BML to curtail or delay the planned development of Ducat Place III and the
Kremlin Sites.
On September 28, 1998, the Company completed a sale to institutional investors
of the Office Buildings for an aggregate purchase price of $112.4 million
before closing adjustments and expenses. The Company received approximately
$13.0 million in cash from the transaction before closing adjustments and
expenses. The Office Buildings were subject to approximately $99.0 million of
mortgage financing, which was retired at closing. The Company recorded a gain
of $4,682 associated with the sale of the Office Buildings. The Company may
seek to dispose of other U.S. real estate holdings in the future.
In September 1998, the Company made a $2,000 loan due December 31, 1999 to its
73% owned subsidiary Thinking Machines and acquired warrants to purchase
additional shares pursuant to a rights offering by Thinking Machines to its
existing shareholders. In September 1998, the Company made a one-year $950,000
loan to BGLS Inc., an affiliate of the Company, which bears interest at 14% per
annum.
Cash used for operating activities for the nine months ended September 30, 1998
decreased to $2,868 as compared to $10,144 from the prior year. The difference
is primarily due to cash provided from discontinued operations of $7,740, a
decrease in the Company's loss from continuing operations of $6,486 and an
$11,883 decrease in Ladenburg's net trading securities owned for the 1998
period versus an $15,090 increase for the 1997 period. These amounts were
offset by gains on the sale of the Office Buildings and other long-term
investments of $9,452 in 1998, the non-cash charge of $3,796 to operations in
1997 and decreases in accrued liabilities, principally resulting from the
contribution of Ducat II and Ducat III to Western Realty Ducat.
Cash flows provided from investing activities for the nine months ended
September 30, 1998 were $113,902 compared to cash flows used for investing
activities of $10,112 for the nine months ended September 30, 1997. The
difference is primarily attributable to the sale of the Office Buildings of
$111,292 in 1998, the net liquidation of long-term investments in 1998 of
$17,305 and $20,014 used to acquire the BML stock in the 1997 period. The
amount is offset primarily due by capital expenditures in 1998 of $18,387
compared with $6,208 in 1997 and greater net sales of investments in the 1997
period.
Cash flows used for financing activities increased to $97,177 for the nine
months ended September 30, 1998 compared to $20,319 in the 1997 period. The
difference consisted of the retirement of notes payable associated with the
sale of the Office Buildings and was offset by the fundings of the Repin Loan
in the 1998 period and the payment of $21,500 of notes payable in the 1997
period.
The Company expects that its available working capital will be sufficient to
fund its currently anticipated cash requirements for 1998 and currently
anticipated cash requirements of its operating businesses, investments,
commitments, and payments of principal and interest on its outstanding
indebtedness.
-18-
<PAGE> 19
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, New Valley Realty, BML
and Thinking Machines and its interests in Western Realty Ducat and Western
Realty Repin ("Western 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. The operations of BML
and Western Realty in Russia are also subject to a high level of risk in light
of Russia's substantial political transformation from a centrally controlled
economy under communist rule to the early stages of a pluralist market-oriented
democracy. In connection therewith, Russia has experienced dramatic political,
social and economic reform although there is no assurance that further reforms
necessary to complete such transformation will occur. The Russian economy
remains characterized by, among others, significant inflation, declining
industrial productions, rising unemployment and underemployment, and an
unstable currency. In addition to the foregoing, BML and Western Realty may be
affected unfavorably by political or diplomatic developments, regional
tensions, currency repatriation restrictions, foreign exchange fluctuations, a
relatively untested judicial system, a still evolving taxation system subject
to constant changes which may be retroactive in effect, and other developments
in the law or regulations in Russia and, in particular, the risks of
expropriation, nationalization and confiscation of assets and changes in
legislation relating to foreign ownership. In addition, the system of
commercial laws, including the laws governing registration of interests in real
estate and the establishment and enforcement of security interests, is not well
developed and, in certain circumstances, inconsistent and adds to the risk of
investment in the real estate development business in Russia. In addition, the
uncertainties in Russia and Russia's recent economic turmoil may effect BML's
and Western Realty's ability to consummate planned financing and investing
activities. Western Realty and the Company are additionally subject to the
uncertainties relating to the real estate business, including, without
limitation, required capital improvements to facilities, local real estate
market conditions and federal, state, city and municipal laws and regulations
concerning, among others, zoning and environmental matters. Thinking Machines
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. Uncertainties affecting the Company generally include, without
limitation, the effect of market conditions on the salability of the Company's
investment securities, the uncertainty of other potential acquisitions and
investments by the Company, 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 on behalf of the
Company.
-19-
<PAGE> 20
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 9 to the "Notes to the Condensed Quarterly Consolidated
Financial Statements" in Part I, Item 1 to this Report.
Item 3. DEFAULTS UPON SENIOR SECURITIES
See Notes 7 and 8 to the "Notes to the Condensed Quarterly
Consolidated Financial Statements" in Part I, Item 1 to this Report.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Sale-Purchase Agreement, dated as of September 2, 1998, by
and between the Company and PW/MS OP Sub I, LLC
(incorporated by reference to Exhibit 2.1 in the Company's
Current Report on Form 8-K dated September 28, 1998).
27 Financial Data Schedule (for SEC use only)
(b) REPORTS ON FORM 8-K
DATE ITEMS FINANCIAL STATEMENTS
September 28, 1998 2, 7 None
-20-
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW VALLEY CORPORATION
(Registrant)
Date: November 13, 1998 By: /s/ J. Bryant Kirkland III
--------------------------
J. Bryant Kirkland III
Vice President, Treasurer
and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 25,463
<SECURITIES> 42,123
<RECEIVABLES> 1,843
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 73,864
<PP&E> 99,330
<DEPRECIATION> 8,006
<TOTAL-ASSETS> 250,881
<CURRENT-LIABILITIES> 67,238
<BONDS> 55,083
300,711
279
<COMMON> 96
<OTHER-SE> (193,097)
<TOTAL-LIABILITY-AND-EQUITY> 250,881
<SALES> 0
<TOTAL-REVENUES> 78,552
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 84,466
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,167
<INCOME-PRETAX> (17,081)
<INCOME-TAX> 31
<INCOME-CONTINUING> (15,458)
<DISCONTINUED> 7,740
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,718)
<EPS-PRIMARY> (7.00)
<EPS-DILUTED> (7.00)
</TABLE>
