<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 SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 1-2493
New Valley Corporation
(Exact name of registrant as specified in its charter)
DELAWARE 13-5482050
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 S.E. SECOND STREET, 32ND FLOOR
MIAMI, FLORIDA 33131
(Address of principal executive offices) (Zip Code)
(305) 579-8000
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT 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 12, 1999, THERE WERE OUTSTANDING 23,312,768 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 SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
----
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30,
1999 and December 31, 1998.................................... 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30,
1999 and 1998................................................. 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity (Deficiency) for the nine
months ended September 30, 1999............................... 5
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 1999 and 1998............. 6
Notes to the Condensed Quarterly Consolidated Financial
Statements .................................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 24
Item 2. Changes in Securities and Use of Proceeds......................... 24
Item 3. Defaults Upon Senior Securities................................... 24
Item 6. Exhibits and Reports on Form 8-K.................................. 24
SIGNATURE........................................................................... 25
</TABLE>
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<PAGE> 3
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
<S> <C> <C>
--------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 3,758 $ 16,444
Investment securities available for sale.............................. 41,378 37,567
Trading securities owned.............................................. 9,779 8,984
Restricted assets..................................................... 1,113 1,220
Receivable from clearing brokers...................................... 10,705 22,561
Other current assets.................................................. 1,507 4,675
--------- ---------
Total current assets.............................................. 68,240 91,451
--------- ---------
Investment in real estate, net............................................. 52,842 82,875
Furniture and equipment, net............................................... 8,557 10,444
Restricted assets.......................................................... 8,919 6,082
Long-term investments, net................................................. 7,149 9,226
Investment in joint venture................................................ 62,122 65,193
Other assets............................................................... 4,671 7,451
--------- ---------
Total assets...................................................... $ 213,000 $ 272,722
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Margin loans payable.................................................. $ 955 $ 13,088
Current portion of notes payable and long-term obligations............ 2,635 2,745
Accounts payable and accrued liabilities.............................. 28,778 32,047
Prepetition claims and restructuring accruals......................... 12,297 12,364
Income taxes.......................................................... 16,302 18,702
Securities sold, not yet purchased.................................... 2,697 4,635
--------- ---------
Total current liabilities......................................... 63,664 83,581
--------- ---------
Notes payable.............................................................. 19,881 54,801
Other long-term liabilities................................................ 27,681 23,450
Commitments and contingencies.............................................. -- --
Redeemable preferred shares................................................ -- 316,202
Stockholders' equity (deficiency):
Preferred shares, $1.00 par value; 10,000,000 shares authorized.......
Cumulative preferred shares; liquidation preference of $0
and $69,769, dividends in arrears: $0 and $165,856.................. -- 279
Common Shares, $.01 par value; 100,000,000 and 850,000,000 shares
authorized; 23,317,262 and 9,577,624 shares outstanding............. 233 96
Additional paid-in capital............................................ 868,469 550,119
Accumulated deficit................................................... (765,659) (758,016)
Unearned compensation on stock options................................ (85) (475)
Accumulated other comprehensive income................................ (1,184) 2,685
--------- ---------
Total stockholders' equity (deficiency)........................... 101,774 (205,312)
--------- ---------
Total liabilities and stockholders' equity (deficiency)........... $ 213,000 $ 272,722
========= =========
</TABLE>
See accompanying notes to condensed
consolidated financial statements
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<PAGE> 4
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,
------------------------ -----------------------
1999 1998 1999 1998
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Principal transactions, net................................ $ 2,223 $ (860) $ 14,036 $ 7,476
Commissions................................................ 7,368 6,510 29,189 20,663
Corporate finance fees..................................... 522 259 4,562 4,541
Gain on sale of investments, net........................... 151 1,815 2,110 10,377
Income (loss) in joint venture............................. 1,125 (1,746) (3,072) (2,233)
Real estate leasing........................................ 1,576 4,767 6,000 18,488
Gain on sale of real estate................................ 3,849 4,682 3,849 4,682
Interest and dividends..................................... 1,424 2,033 4,308 7,424
Computer sales and service................................. -- 40 317 499
Gain on sale of assets..................................... -- -- 4,028 --
Other income............................................... 1,174 1,940 3,785 6,635
--------- --------- --------- ---------
Total revenues......................................... 19,412 19,440 69,112 78,552
--------- --------- --------- ---------
Cost and expenses:
Selling, general and administrative........................ 19,482 25,109 73,606 84,466
Interest................................................... 2,209 3,555 6,920 11,167
--------- --------- --------- ---------
Total costs and expenses............................... 21,691 28,664 80,526 95,633
--------- --------- --------- ---------
Loss from continuing operations before income taxes
and minority interests..................................... (2,279) (9,224) (11,414) (17,081)
Income tax provision............................................ 30 10 90 31
Minority interests in loss (income) from continuing operations
of consolidated subsidiaries............................... 13 495 (239) 1,654
--------- --------- -------- --------
Loss from continuing operations................................. (2,296) (8,739) (11,743) (15,458)
Discontinued operations:
Gain on disposal of discontinued operations................ -- 6,860 4,100 7,740
--------- --------- --------- ---------
Income from discontinued operations........................ -- 6,860 4,100 7,740
--------- --------- --------- ---------
Net loss........................................................ (2,296) (1,879) (7,643) (7,718)
Dividend requirements on preferred shares....................... -- (20,743) (32,878) (59,333)
--------- --------- --------- ---------
Net loss applicable to Common Shares............................ $ (2,296) $ (22,622) $ (40,521) $ (67,051)
========= ========= ========= =========
Loss per Common Share (basic and diluted):
Continuing operations...................................... $ (0.10) $ (3.08) $ (2.84) $ (7.81)
Discontinued operations.................................... -- 0.72 .26 .81
---------- --------- --------- ---------
Net loss per Common Share.................................. $ (0.10) $ (2.36) $ (2.58) $ (7.00)
========== ========= ========= =========
Number of shares used in computation............................ 23,317,261 9,577,624 15,684,128 9,577,624
========== ========= ========== =========
</TABLE>
See accompanying notes to condensed
consolidated financial statements
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<PAGE> 5
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Unearned Accumulated
Class B Compensation Other
Preferred Common Paid-In Accumulated on Stock Comprehensive
Shares Shares Capital Deficit Options Income Total
--------- ------ ------- ----------- ------------ ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998...... $ 279 $ 96 $550,119 $(758,016) $(475) $ 2,685 $(205,312)
Net loss..................... (7,643) (7,643)
Undeclared dividends and
accretion on redeemable
preferred shares........... (25,830) (25,830)
Unrealized loss on
investment securities...... (3,869) (3,869)
Effect of recapitalization
and reverse stock split.... (279) 137 142 --
Expenses related to
recapitalization........... (600) (600)
Conversion of redeemable
preferred shares to
common shares.............. 343,435 343,435
Effect of purchase of
subsidiary's preferred
stock...................... 1,542 1,542
Adjustment to unearned
compensation on
stock options.............. (390) 390 --
Compensation expense
on stock option grants..... 105 105
Other, net................... (54) (54)
----- ---- -------- --------- ------ ------- ---------
Balance, September 30, 1999..... $ -- $233 $868,469 $(765,659) $ (85) $(1,184) $ 101,774
===== ==== ======== ========= ===== ======= =========
</TABLE>
See accompanying notes to condensed
consolidated financial statements
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<PAGE> 6
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,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................ $ (7,643) $ (7,718)
Adjustments to reconcile net loss to net cash used for
operating activities:
Income from discontinued operations................................... (4,100) (7,740)
Loss in joint venture................................................. 3,072 2,233
Depreciation and amortization......................................... 2,465 5,472
Gain on sale of assets................................................ (4,028) --
Gain on sales of real estate and liquidation of long-term investments. (5,959) (9,452)
Stock-based compensation expense...................................... 1,647 2,215
Changes in assets and liabilities, net of effects of dispositions:
Decrease in receivables and other assets........................... 18,224 39,804
Decrease in accounts payable and accrued liabilities............... (3,336) (35,422)
---------- ----------
Net cash provided from (used for) continuing operations.................... 342 (10,608)
Net cash provided from discontinued operations............................. 4,100 7,740
---------- ----------
Net cash provided from (used for) operating activities..................... 4,442 (2,868)
---------- ----------
Cash flows from investing activities:
Sale or maturity of investment securities............................. 9,010 21,286
Purchase of investment securities..................................... (17,681) (13,352)
Sale or liquidation of long-term investments.......................... 5,810 25,895
Purchase of long-term investments..................................... (5,000) (8,590)
Sale of real estate, net of closing costs............................. 46,208 111,292
Purchase of real estate............................................... (13,661) (18,387)
Purchase of furniture and fixtures.................................... (695) (462)
Sale of other assets.................................................. 5,857 226
Payment of prepetition claims......................................... (67) (676)
Increase in restricted assets......................................... (2,837) (1,894)
Cash transferred to joint venture..................................... -- (487)
Other................................................................. -- (949)
---------- ----------
Net cash provided from investing activities................................ 26,944 113,902
---------- ----------
Cash flows used for financing activities:
Decrease in margin loans payable, net................................. (12,133) (11,541)
Purchase of subsidiary's preferred stock.............................. (1,509) --
Proceeds from participating loan...................................... 4,473 14,300
Repayment (issuance) of note receivable to related party.............. 950 (950)
Repayment of notes payable............................................ (35,133) (99,373)
Expenses associated with the recapitalization......................... (600) --
Other, net............................................................ (120) 387
---------- ----------
Net cash used for financing activities..................................... (44,072) (97,177)
---------- ----------
Net (decrease) increase in cash and cash equivalents....................... (12,686) 13,857
Cash and cash equivalents, beginning of period............................. 16,444 11,606
---------- ----------
Cash and cash equivalents, end of period................................... $ 3,758 $ 25,463
========== ==========
</TABLE>
See accompanying notes to condensed
consolidated financial statements
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<PAGE> 7
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
The consolidated financial statements include the accounts of New Valley
Corporation and its majority-owned subsidiaries (the "Company"). The
consolidated financial statements presented herein have been prepared by
the Company and are unaudited. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary
to present fairly the financial position as of September 30, 1999 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.
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, 1998 as filed with the Securities
and Exchange Commission (Commission File Number 1-2493).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to prior interim period
financial information to conform with current year presentation.
Recapitalization Plan
On June 4, 1999, the Company consummated a plan of recapitalization
following approval by the Company's stockholders. Under the
recapitalization plan, each of the Company's Class A Senior Preferred
Shares was reclassified and changed into 20 Common Shares and one Warrant
to purchase Common Shares. Each of the Class B Preferred Shares was
reclassified and changed into one-third of a Common Share and five
Warrants. Each outstanding Common Share was reclassified and changed into
one-tenth of a Common Share and three-tenths of a Warrant. The authorized
number of Common Shares were reduced from 850,000,000 to 100,000,000. The
Warrants issued as part of the recapitalization plan have an exercise
price of $12.50 per share subject to adjustment in certain circumstances
and are exercisable until June 14, 2004. The Warrants are not callable by
the Company for a three-year period.
The recapitalization had a significant effect on the Company's financial
position and results of operations. As a result of the recapitalization,
the carrying value and dividend arrearages of $343,435 of redeemable
preferred stock were eliminated. Furthermore, the recapitalization
resulted in the elimination of the existing redeemable preferred shares
of New Valley and the on-going dividend accruals thereon, as well as the
redemption obligation for the Class A Senior Preferred Shares in January
2003. Also, as a result of the recapitalization, the number of
outstanding Common Shares more than doubled, and additional Common Shares
were reserved for issuance upon exercise of the Warrants. In addition,
Brooke Group Ltd. ("Brooke"), the Company's principal stockholder,
increased its ownership of the outstanding Common Shares from 42.3% to
55.1%, and its total voting power from 42% to 55.1%.
-7-
<PAGE> 8
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("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,
2000. 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. INVESTMENT IN WESTERN REALTY
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. The Company
agreed to contribute the real estate assets of BrookeMil Ltd. ("BML"),
including Ducat Place II and the site for Ducat Place III, to Western
Realty Ducat and Apollo agreed to contribute up to $65,875, including the
investment in Western Realty Repin discussed below.
The ownership and voting interests in Western Realty Ducat are 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 commitment of $40,000, of which $39,581 had been
funded through September 30, 1999, together with a 15% annual rate of
return. The Company will then be entitled to a return of $20,000 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 is managed by a Board of Managers consisting of an equal
number of representatives chosen by Apollo and the Company. Material
corporate transactions by Western Realty Ducat generally require the
unanimous consent of the Board of Managers. Accordingly, the Company
accounts for its non-controlling interest in Western Realty Ducat on 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. The Company
recognizes losses in its investment in Western Realty Ducat to the extent
that cumulative earnings of Western Realty Ducat are not sufficient to
satisfy Apollo's preferred return.
Western Realty Ducat may seek additional real estate and other
investments in Russia. Western Realty Ducat has made a $30,000
participating loan to, and payable out of a 30% profits interest in,
Western Tobacco Investments LLC ("WTI"), which holds the interests of
Brooke (Overseas) Ltd., a subsidiary of Brooke, in Liggett-Ducat Ltd. and
the new factory constructed by Liggett-Ducat Ltd. on the outskirts of
Moscow. Western Realty Ducat is entitled to receive a 15% annual rate of
return on amounts advanced as the loan under certain circumstances in the
event of a sale or refinancing of WTI or the new factory. Western Realty
Ducat has recognized as other income $4,218 and $4,479, which represent
the 15% return on the loan plus 30% of any net income applicable to
common interests of WTI for the three and nine months ended September 30,
1999, respectively.
Summarized financial information as of September 30, 1999 and December
31, 1998 and for the three and nine month periods ended September 30,
1999 and for the period from February 20, 1998 (date of inception) to
September 30, 1998 for Western Realty Ducat follows:
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<PAGE> 9
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Current assets.................................. $ 5,174 $ 857
Participating loan receivable................... 36,470 31,991
Real estate, net................................ 85,519 85,761
Furniture and fixtures, net..................... 335 179
Noncurrent assets............................... 371 631
Goodwill, net................................... 5,778 7,636
Notes payable - current......................... 6,192 4,999
Other current liabilities....................... 6,939 5,802
Notes payable - long-term....................... 9,915 14,656
Long-term liabilities........................... 753 756
Members' equity................................. 109,848 100,842
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS FEBRUARY 20, 1998
ENDED ENDED ENDED (DATE OF INCEPTION)
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 TO SEPTEMBER 30, 1998
------------------ ------------------ ------------------ ---------------------
<S> <C> <C> <C> <C>
Revenues............. $ 2,194 $ 2,658 $ 8,072 $ 7,266
Costs and expenses... 3,551 4,404 10,787 9,499
Other income......... 4,218 -- 4,479 --
Net income (loss).... 2,861 (1,746) 1,764 (2,233)
</TABLE>
Western Realty Repin LLC
In June 1998, the Company and Apollo organized Western Realty Repin LLC
("Western Realty Repin") to make a loan to BML. The proceeds of the loan
will be used by BML for the acquisition and preliminary development of
the Kremlin sites, two adjoining sites totaling 10.25 acres located in
Moscow across the Moscow River from the Kremlin. BML is planning the
development of a hotel, office, retail and residential complex on the
Kremlin sites. In May 1999, BML acquired an additional 48% interest in
the second Kremlin site and the related land lease rights. BML owned
95.9% of one site and 100% of the other site at September 30, 1999.
Apollo will be entitled to a preference on distributions of cash from
Western Realty Repin to the extent of its investment of $25,875, together
with a 20% annual rate of return, and the Company will then be entitled
to a return of its investment of $10,525, together with a 20% annual rate
of return. Subsequent distributions will be made 50% to the Company and
50% to Apollo. Western Realty Repin is managed by a Board of Managers
consisting of an equal number of representatives chosen by Apollo and the
Company. Material corporate transactions by Western Realty Repin will
generally require the unanimous consent of the Board of Managers.
Through September 30, 1999, Western Realty Repin has advanced $29,298, of
which $18,773 was funded by Apollo under the Western Realty Repin loan.
Apollo funded an additional advance of $7,125 under the Repin loan on
October 1, 1999. The loan bears no fixed interest and is payable only out
of distributions by the entities owning the Kremlin sites to BML. Such
distributions shall be applied first to pay the principal of the loan and
then as contingent participating interest on the loan. Any rights of
payment on the loan are subordinate to the rights of all other creditors
of BML. BML used a portion of the proceeds of the loan, including the
$7,125 advance in October 1999, to repay the Company for expenditures on
the Kremlin sites previously incurred. The loan is due and payable upon
the dissolution of BML and is collateralized by a pledge of the Company's
shares of BML.
-9-
<PAGE> 10
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
As of September 30, 1999, BML had invested $31,651 in the Kremlin sites
and held $1,999 in cash and $1,392 in receivables from Western Realty
Ducat, both of which were restricted for future investment. In acquiring
its interest in one of the Kremlin sites, BML has agreed with the City of
Moscow to invest an additional $22,000 by May 2000 in the development of
the property. Failure to make the required investment could result in
forfeiture of a 34.8% interest in the site.
The Company has accounted for the formation of Western Realty Repin as a
financing by Apollo and a contribution of assets into a consolidated
subsidiary by New Valley which is eliminated in consolidation. The
Western Realty Repin loan is classified in other long-term obligations on
the consolidated balance sheet at September 30, 1999. Based on the
distribution terms contained in the Western Realty Repin LLC agreement,
the 20% annual rate of return preference to be received by Apollo on
funds invested in Western Realty Repin is treated as interest expense in
the consolidated statement of operations.
The development of Ducat Place III and the Kremlin sites will require
significant amounts of debt and other financing. The Company is
considering potential 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.
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 component of
accumulated other comprehensive income. The Company had realized gains on
sales of investment securities available for sale of $98 and $2,057 for
the three and nine months ended September 30, 1999 and $191 and $5,725
for the three and nine months ended September 30, 1998.
The components of investment securities available for sale at September
30, 1999 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Marketable equity securities................... $40,482 $ 2,668 $ 8,980 $34,170
Notes receivable............................... 2,080 -- -- 2,080
Marketable warrants............................ -- 5,128 -- 5,128
------- -------- -------- -------
Investment securities......................... $42,562 $ 7,796 $ 8,980 $41,378
======= ======== ======== =======
</TABLE>
4. LADENBURG, THALMANN & CO. INC.
On September 14, 1999, the Company agreed to sell for $10,200 a 19.9%
interest in its subsidiary Ladenburg, Thalmann & Co. Inc. ("Ladenburg")
to Berliner Effektengesellschaft AG ("BEAG"). Pursuant to the agreement,
BEAG will also acquire a three-year option to purchase additional
interests in Ladenburg subject to certain conditions. Consummation of the
transaction is subject to the approval of the New York Stock Exchange and
other closing conditions.
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<PAGE> 11
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
5. U.S. SHOPPING CENTERS
On August 30, 1999, the Company completed the sale to entities affiliated
with P.O'B. Montgomery & Company of five shopping centers for an
aggregate purchase price of $46,125 before closing adjustments and
expenses. The shopping centers were subject to approximately $35,023 of
mortgage financing, which was assumed by the purchasers at closing. In
connection with the transaction, the Company recorded a gain of $3,849
for the three and nine months ended September 30, 1999.
The shopping centers were located in Richland, Washington, Santa Fe, New
Mexico, Milwaukee, Oregon, Marysville, Washington and Lincoln, Nebraska.
In connection with the sale of the shopping centers, the Company
refinanced the notes payable on its two remaining shopping centers in
Royal Palm Beach, Florida and Kanawha, West Virginia and transferred the
Kanawha shopping center to a 99.0% owned limited liability company. The
Royal Palm Beach, Florida shopping center is now subject to a $6,950
senior mortgage note due September 2016 which is callable by the lender
after March 2001 and bears interest at 7.5% per annum and a $1,560 junior
mortgage note due on the earlier of September 2002 or the due date of the
senior loan which bears interest at 9.0% per annum. The Kanawha, West
Virginia shopping center is now subject to a $7,000 senior mortgage note
due September 2024 which bears interest at 9.03% per annum for the first
seven years and at floating rates thereafter (or 11.03% per annum if the
loan is still in a securitization) and a $4,388 subordinated note due
September 2006 which bears interest at 9.0% per annum. The financing on
the two remaining shopping centers is non-recourse to the Company, except
for misappropriations of insurance and certain other proceeds, failures
to apply rent and other income to required maintenance and taxes,
environmental liabilities and certain other matters.
6. LONG-TERM INVESTMENTS
At September 30, 1999, long-term investments consisted primarily of
investments in limited partnerships of $7,649. The Company believes the
fair value of the limited partnerships exceeds their carrying amount by
approximately $4,413 based on the indicated market values of the
underlying investment portfolio provided by the partnerships. The
Company's investments in limited partnerships are illiquid and the
ultimate realization of these investments is subject to the performance
of the underlying partnership and its management by the general partners.
Also included in long-term investments are various Internet-related
businesses which are carried at $4,516 at September 30, 1999. These
investments include an approximate 10% interest in Orchard/JFAX Investors
LLC, which is the beneficial owner of 40.6% of JFAX.COM, Inc. JFAX is an
Internet-based messaging and communications services provider to
individuals and businesses, which completed an initial public offering in
July 1999. The Company also has invested $4,500 for a 33.33% interest in
AtomicPop at September 30, 1999, which is engaged in the online music
industry and operates the Internet site www.atomicpop.com. The Company
has an option to increase its interest in AtomicPop to 37.5% for an
additional $2,500 investment. The Company also owns smaller interests in
other Internet companies.
7. SALE OF THINKING MACHINES' ASSETS
On June 2, 1999, Thinking Machines sold substantially all of its assets
consisting of its Darwin(R) software and services business to Oracle
Corporation. The purchase price was $4,700 in cash at the closing of the
sale and up to an additional $20,300, payable in cash on January 31 in
each of the years 2001 through 2003, based on sales by Oracle of Darwin
product above specified sales targets. The Company recorded a gain of
$3,801 in connection with the sale for the nine months ended September
30, 1999. The operations and related gain associated with Thinking
Machines have not been classified as discontinued operations based on the
fact that substantial revenues were not realized from the Darwin(R)
product.
At the closing of the Oracle sale, $4,136 of loans, including interest,
were repaid by Thinking Machines to the Company and the Company offered to
purchase all of Thinking Machines outstanding preferred stock for $1,950.
Approximately 77% of Thinking Machines' preferred stockholders tendered
their stock to New Valley in the third quarter of 1999. In connection with
the repurchase, the Company recorded an increase to equity of $1,542 in
the third quarter of 1999, which represented the difference between the
purchase price and carrying value of the stock.
-11-
<PAGE> 12
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
8. CONTINGENCIES
Lawsuits
In March 1997, a stockholder derivative suit was filed in the Delaware
Chancery Court against the Company, as a nominal defendant, its directors
and Brooke. The suit alleges that the Company's purchase in January 1997
of the shares of BML from Brooke (Overseas) Ltd. constituted a
self-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 are without merit. Although there
can be no assurances, in the opinion of management, after consultation
with counsel, 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.
In July 1999, a purported class action was commenced on behalf of New
Valley's former Class B preferred shareholders against New Valley, Brooke
and certain directors and officers of New Valley in Delaware Chancery
Court. The complaint alleges that the recapitalization, approved by a
majority of each class of New Valley's stockholders in May 1999, was
fundamentally unfair to the Class B preferred shareholders, the proxy
statement relating to the recapitalization was materially deficient and
the defendants breached their fiduciary duties to the Class B preferred
shareholders in approving the transaction. The plaintiffs seek class
certification of the action and an award of unspecified compensatory
damages as well as all costs and fees. Although there can be no
assurances, in the opinion of management, after consultation with
counsel, 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. Although there can be no
assurances, in the opinion of management, after consultation with
counsel, the ultimate resolution of these matters will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
Russian Operations
During 1998, the economy of the Russian Federation entered a period of
economic instability which has continued in 1999. The impact includes,
but is not limited to, a steep decline in prices of domestic debt and
equity securities, a severe devaluation of the currency, a moratorium on
foreign debt repayments, an increasing rate of inflation and increasing
rates on government and corporate borrowings. The return to economic
stability is dependent to a large extent on the effectiveness of the
fiscal measures taken by government and other actions beyond the control
of companies operating in the Russian Federation. The operations of BML
and Western Realty Ducat may be significantly affected by these factors
for the foreseeable future.
-12-
<PAGE> 13
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Russian Taxation: Russian taxation is subject to varying interpretations
and constant changes. Furthermore, the interpretation of tax legislation
by tax authorities as applied to the transactions and activity of BML and
Western Realty Ducat may not coincide with that of management. As a
result, transactions may be challenged by tax authorities and BML and
Western Realty Ducat may be assessed additional taxes, penalties and
interest, which can be significant.
Management regularly reviews the Company's taxation compliance with
applicable legislation, laws and decrees and current interpretations and
from time to time potential exposures are identified. At any point in
time a number of open matters may exist, however, management believes
that adequate provision has been made for all material liabilities. Tax
years remain open to review by the authorities for six years.
Year 2000: It is unclear whether the Russian government and other
organizations who provide significant infrastructure services have
addressed the Year 2000 problem sufficiently to mitigate potential
substantial disruption to these infrastructure services. The substantial
disruption of these services would have an adverse affect on the
operations of BML and Western Realty Ducat. Furthermore, the current
financial crisis could affect the ability of the government and other
organizations to fund Year 2000 compliance programs.
9. BUSINESS SEGMENT INFORMATION
The following table presents certain financial information of the
Company's continuing operations before taxes and minority interests as of
and for the three and nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
BROKER- COMPUTER CORPORATE
DEALER REAL ESTATE SOFTWARE AND OTHER TOTAL
--------- ----------- ---------- ----------- ------
<S> <C> <C> <C> <C> <C>
Three months ended September 30, 1999
Revenues............................... $ 12,708 $ 5,423 $ -- $ 1,281 $ 19,412
Operating (loss) income ............... (2,424) 1,683 (89) (1,449) (2,279)
Depreciation and amortization.......... 244 450 -- 8 702
Three months ended September 30, 1998
Revenues............................... $ 9,454 $ 9,448 $ 40 $ 498 $ 19,440
Operating (loss) income................ (5,636) 1,809 (1,730) (3,667) (9,224)
Depreciation and amortization.......... 239 1,099 189 61 1,588
Nine months ended September 30, 1999
Revenues............................... $ 54,295 $ 9,848 $ 317 $ 4,652 $ 69,112
Operating (loss) income................ (873) (847) (3,123) (6,571) (11,414)
Identifiable assets.................... 39,841 59,872 514 112,773 213,000
Depreciation and amortization.......... 681 1,487 199 98 2,465
Capital expenditures................... 373 13,661 30 292 14,356
Nine months ended September 30, 1998
Revenues............................... $ 44,712 $ 23,169 $ 499 $ 10,172 $ 78,552
Operating (loss) income................ (10,344) 994 (4,582) (3,149) (17,081)
Depreciation and amortization.......... 832 3,913 551 176 5,472
Capital expenditures................... 50 18,709 42 48 18,849
</TABLE>
-13-
<PAGE> 14
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
10. INCOME FROM DISCONTINUED OPERATIONS
The Company recorded a gain on disposal of discontinued operations of $0,
$6,860, $4,100 and $7,740 for the three and nine months ended September
30, 1999 and 1998, respectively, related to the settlement of a lawsuit
originally initiated by the Company's former Western Union telegraph
business.
11. PRO FORMA FINANCIAL INFORMATION
The following table presents unaudited pro forma results from continuing
operations as if the recapitalization, the Thinking Machines sale, the
sale of the five U.S. shopping centers and the sale of the office
buildings in September 1998 had occurred on January 1, 1998. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had these
transactions been consummated as of such date.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- --------------------------
1999 1998 1999 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues............................ $14,707 $ 10,824 $ 57,700 $ 59,298
======= ======== ======== ========
Loss from continuing operations..... $(5,821) $(11,815) $(15,338) $(16,219)
======= ======== ======== ========
Loss from continuing operations
applicable to common shares...... $(5,821) $(11,815) $(15,338) $(16,219)
======= ======== ======== ========
Loss from continuing operations
per common share................. $ (0.25) $ (0.51) $ (0.66) $ (0.70)
======= ======== ======== ========
</TABLE>
12. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for the
reporting and disclosure of comprehensive income and its components.
Comprehensive income is a measure that reflects all changes in
stockholders' equity, except those resulting from transactions with
stockholders. For the Company, comprehensive income includes net income
and changes in the value of equity securities that have not been included
in net income. Comprehensive loss applicable to Common Shares for the
three and nine months ended September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- --------------------------
1999 1998 1999 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss applicable to
common shares.................... $ (2,296) $(22,622) $(40,521) $(67,051)
Unrealized loss on
investment securities............ (6,210) (7,071) (3,869) (14,767)
-------- -------- -------- -------
Total comprehensive loss............ $ (8,506) $(29,693) $(44,390) $(81,818)
======== ======== ======== ========
</TABLE>
-14-
<PAGE> 15
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
13. SUBSEQUENT EVENT
On October 5, 1999, the Company's Board of Directors authorized the
repurchase up to 2,000,000 Common Shares from time to time on the open
market or in privately negotiated transactions, depending on market
conditions.
-15-
<PAGE> 16
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 Condensed Consolidated Financial Statements include the accounts
of Ladenburg, Thalmann & Co. Inc. ("Ladenburg"), BrookeMil Ltd. ("BML"),
Thinking Machines Corporation ("Thinking Machines") and other subsidiaries.
RECENT DEVELOPMENTS
Plan of Recapitalization. The Company consummated the plan of recapitalization
on June 4, 1999, following approval by the Company's stockholders. Pursuant to
the plan of recapitalization:
o each Class A Senior Preferred Share was reclassified into 20 Common
Shares and one Warrant to purchase a Common Share at $12.50 per share
exercisable for five years,
o each Class B Preferred Share was reclassified into 1/3 of a Common
Share and five Warrants, and
o each outstanding Common Share was reclassified into 1/10 of a Common
Share and 3/10 of a Warrant.
The plan of recapitalization had a significant effect on the Company's
financial position and results of operations. As a result of the
recapitalization, the carrying value and dividend arrearages of $343,435
redeemable preferred stock were eliminated. Furthermore, the recapitalization
resulted in the elimination of the existing redeemable preferred shares of the
Company and the on-going dividend accruals thereon, as well as the redemption
obligation for the Class A Senior Preferred Shares in January 2003. Also, as a
result of the recapitalization, the number of outstanding Common Shares more
than doubled, and additional Common Shares were reserved for issuance upon
exercise of the Warrants. In addition, Brooke Group Ltd., the Company's
principal stockholder, increased its ownership of the outstanding Common Shares
from 42.3% to 55.1%, and its total voting power from 42% to 55.1%.
On October 5, 1999, the Company's Board of Directors authorized the repurchase
of up to 2,000,000 Common Shares from time to time on the open market or in
privately negotiated transactions depending on market conditions.
Thinking Machines. On June 2, 1999, Thinking Machines sold substantially all
its assets consisting of its Darwin(R) software and services business to Oracle
Corporation. The purchase price was $4,700 in cash at the closing of the sale
and up to an additional $20,300, payable in cash on January 31 in each of the
years 2001 through 2003, based on sales by Oracle of Darwin product above
specified sales targets.
New Valley Shopping Centers. On August 30, 1999, the Company completed the sale
of five of its shopping centers for an aggregate purchase price of $46,125
($45,288 after closing adjustments and expenses) including the assumption of
$35,023 of mortgage financing. The Company received approximately $10,265 in
cash from the transaction after closing adjustments and expenses and recorded a
gain of $3,849 for the three and nine months ended September 30, 1999.
Ladenburg. On September 14, 1999, the Company agreed to sell for $10,200 a
19.9% interest in Ladenburg to Berliner Effektengesellschaft AG ("BEAG").
Pursuant to the agreement, BEAG will also acquire a three-year option to
purchase additional interests in Ladenburg subject to certain conditions.
Consummation of the transaction is subject to the approval of the New York Stock
Exchange and other closing conditions.
RESULTS OF OPERATIONS
For the three months and nine months ended September 30, 1999 and 1998, 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:
-16-
<PAGE> 17
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- --------------------------
1999 1998 1999 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Broker-dealer:
Revenues.......................... $12,708 $ 9,454 $54,295 $ 44,712
Expenses.......................... 15,132 15,090 55,168 55,056
------ ------- ------- --------
Operating loss before taxes
and minority interests......... $(2,424) $(5,636) $ (873) $(10,344)
======= ======= ======= ========
Real estate:
Revenues.......................... $ 5,423 $ 9,448 $ 9,848 $ 23,169
Expenses.......................... 3,740 7,639 10,695 22,175
------- ------- ------- --------
Operating income (loss) before
taxes and minority interests... $ 1,683 $ 1,809 $ (847) $ 994
======= ======= ======= ========
Computer software:
Revenues.......................... $ -- $ 40 $ 317 $ 499
Expenses.......................... 89 1,770 3,440 5,081
------- ------- ------- --------
Operating loss before taxes
and minority interests......... $ (89) $(1,730) $(3,123) $ (4,582)
======= ======= ======= ========
Corporate and other:
Revenues.......................... $ 1,281 $ 498 $ 4,652 $ 10,172
Expenses.......................... 2,730 4,165 11,223 13,321
------- ------- ------- --------
Operating loss before taxes
and minority interests......... $(1,449) $(3,667) $(6,571) $ (3,149)
======= ======= ======= ========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1998
Consolidated total revenues were $19,412 for the three months ended September
30, 1999 versus $19,440 for the same period last year. The decrease in revenues
of $28 is attributable primarily to the decrease in real estate revenues of
$4,025 from the sale of the office buildings and shopping centers and lower
gains on the sale of investments of $1,664 offset by Ladenburg's increased
revenues of $3,254.
Ladenburg's revenues for the third quarter of 1999 increased $3,254 as compared
to revenues for the third quarter of 1998 primarily as a result of an increase
in commissions of $858 and principal transactions of $3,083. Ladenburg's
expenses for the third quarter of 1999 increased $42 as compared to expenses
for the third quarter of 1998.
Revenues from the real estate operations for the third quarter of 1999
decreased $4,025 from the third quarter of 1998. The decline was primarily due
to the sale of the Company's four U.S. office buildings in September 1998 and
the sale of five of the Company's seven U.S. shopping centers on August 30,
1999. Expenses of the real estate operations decreased $3,899 due primarily to
the sale of the office buildings and shopping centers. BML incurred expenses of
$1,771 for the three months ended September 30, 1999, which were related to the
Kremlin sites. The expenses consisted primarily of accrued interest expense of
$1,124 associated with the Western Realty Repin loan and a foreign currency loss
of $450 on cash restricted for future investments in the Kremlin sites.
On June 2, 1999, Thinking Machines sold substantially all its assets consisting
of its Darwin(R) software and services business to Oracle Corporation.
Prior to the sale, Thinking Machines had only minimal revenues from continuing
operations. Operating expenses of Thinking Machines consisted of general and
administrative expenses of $89 for the third quarter of 1999. For the three
months ended September 30, 1998, operating expenses of Thinking Machines
consisted of costs of sales of $201, selling, general and administrative
expenses of $666 and research and development expenses of $903.
-17-
<PAGE> 18
For the third quarter of 1999, the Company's revenues of $1,281 related to
corporate and other activities consisted primarily of the $1,125 income in
joint venture. Corporate and other revenues for the third quarter of 1998
consisted primarily of net gains on investments of $1,815 and interest and
dividend income of $455, offset by the $1,746 loss in joint venture.
Corporate and other expenses of $2,730 for the third quarter of 1999 consisted
primarily of employee compensation and benefits of $1,419, interest expense of
$102 and expenses of certain non-significant subsidiaries of $112. 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.
Income tax expense for the third quarter of 1999 was $30 versus $10 for the
third quarter of 1998. 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 former Western Union telegraph business.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998
Consolidated total revenues were $69,112 for the nine months ended September
30, 1999 versus $78,552 for the same period last year. The decrease in revenues
of $9,440 is attributable primarily to the decrease in real estate revenues of
$13,321 from the sale of the office buildings and shopping centers on as well
as lower gains on the sale of investments of $8,267. The amount was offset by
an increase in Ladenburg's revenues of $9,583.
Ladenburg's revenues for the first nine months of 1999 increased $9,583 as
compared to revenues for the first nine months of 1998 primarily due to
increases in commissions of $8,526 and principal transactions of $6,560, offset
by a decrease in other revenues of $2,566. Ladenburg's expenses for the first
nine months of 1999 increased $112 as compared to expenses for the first nine
months of 1998 due primarily to an increase in compensation expense of $2,380
offset by a decrease in other general and administrative expenses of $2,056.
Compensation expense increased due to an increase in performance-based
compensation offset by a decrease in administrative overhead.
Revenues from the real estate operations for the first nine months of 1999
decreased $13,321 primarily due to the sale of the office buildings in
September 1998 and the sale of five of the Company's seven U.S. shopping
centers on August 30, 1999. Expenses of the real estate operations decreased
$11,480 due primarily to the sale of the office buildings and shopping centers.
BML incurred expenses of $3,875 for the nine months ended September 30, 1999,
which were related to the Kremlin sites. The expenses consisted of accrued
interest expense of $3,162 associated with the Western Realty Repin loan and a
foreign currency loss of $430 on cash restricted for future investments in the
Kremlin sites.
On June 2, 1999, Thinking Machines sold substantially all of its assets
consisting of the Darwin(R) software and services business. The Company
recorded a $3,801 gain in the second quarter related to the disposal of such
assets.
Prior to the sale, Thinking Machines had minimal revenues from continuing
operations. Operating expenses of Thinking Machines consisted primarily of
costs of sales of $90, selling, general and administrative expenses of $1,452
and research and development expenses of $1,756 for the nine months ended
September 30, 1999. Operating expenses of Thinking Machines consisted of costs
of sales of $585, selling, general and administrative expenses of $2,516 and
research and development expenses of $1,980 for the nine months ended September
30, 1998.
For the first nine months of 1999, the Company's revenues of $4,652 related to
corporate and other activities consisted primarily of a gain on the sale of
Thinking Machines assets of $3,801, a net gain on investments of $2,110 and
interest and dividend income of $1,679, partially offset by a loss in joint
venture of $3,072. 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,
partially offset by a loss in joint venture of $2,233.
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<PAGE> 19
Corporate and other expenses of $11,223 for the first nine months of 1999
consisted primarily of employee compensation and benefits of $5,682 and
expenses of certain non-significant subsidiaries of $851. 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 certain
non-significant subsidiaries of $2,583.
Income tax expense for the first nine months of 1999 was $90 versus $31 for the
first nine months of 1998. 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 $4,100 in
the 1999 period and $7,740 in the 1998 period related to the settlement of
lawsuits originally initiated by the Company's former Western Union telegraph
business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net working capital decreased to $4,576 at September 30, 1999
from $7,870 at December 31, 1998 primarily as a result of a $3,869 decrease in
the market value of the Company's investments held for sale.
During the first nine months of 1999, the Company's cash and cash equivalents
decreased from $16,444 to $3,758 due primarily to purchases of real estate
(primarily the Kremlin sites) of $13,661, net purchases of $7,861 of marketable
securities and long-term investments and a decrease in the Company's margin
loans payable of $12,133. The amounts were offset by the sale of the shopping
centers for $45,288, net of closing costs and adjustments, the issuance of the
Western Realty Repin loan of $4,473 and the sale of Thinking Machines assets
for $4,300.
Cash provided from operations for the nine months ended September 30, 1999 was
$4,442 as compared to cash used for operations of $2,868 from the prior year.
The difference was primarily due to a decrease of $11,856 in receivables from
clearing brokers in 1999 and a decrease in Ladenburg's payables of $2,858 in
1999 versus $7,262 in 1998 offset by $2,733 increase in Ladenburg's net trading
securities owned for the 1999 period versus an $11,883 decrease for the 1998
period.
Cash flows provided from investing activities for the nine months ended
September 30, 1999 were $26,944 compared to $113,902 for the nine months ended
September 30, 1998. The difference is primarily attributable to the sales of
U.S. real estate in both 1998 and 1999, the $7,861 used to acquire marketable
securities and long-term investments in 1999 compared to net sales of
investments of $25,239 in 1998.
The capital expenditures for the nine months ended September 30, 1999 related
principally to the Kremlin sites ($13,638), including the acquisition in May
1999 of an additional 48% interest in the second Kremlin site and related land
lease rights. BML also held $1,999 in restricted cash and $1,392 in receivables
from Western Realty, at September 30, 1999, both of which are 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 $22,000 by May 2000 in the development of the
property. Failure to make the required investment could result in forfeiture of
a 34.8% interest in the site.
In June 1998, the Company and Apollo organized Western Realty Repin to make a
loan to BML. The proceeds from the loan will be used by BML for the acquisition
and preliminary development of the Kremlin sites. Through September 30, 1999,
Western Realty Repin has advanced $29,298 (of which $18,773 has been funded by
Apollo) to BML. Apollo funded an additional advance of $7,125 under the Repin
loan on October 1, 1999. The loan bears no fixed interest and is payable out of
100% of distributions by the entities owning the Kremlin sites to BML. Such
distributions will be applied first to pay the principal of the loan and then
as contingent participating interest on the loan. Any rights of payment on the
loan are subordinate to the rights of all other creditors of BML. BML used a
portion of the proceeds of the loan, including the $7,125 advance in October
1999, 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 considering
potential financing alternatives on behalf of Western Realty Ducat and BML.
However, in light of the recent economic turmoil in Russia, no assurance can be
-19-
<PAGE> 20
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.
Cash flows used for financing activities were $44,072 for the nine months ended
September 30, 1999 as compared to $97,177 used for financing activities for the
nine months ended September 30, 1998. The difference was primarily due to the
repayments of debt associated with the sales of U.S. real estate of $35,023 in
1999 and $99,373 in 1998, the purchase of 77% of the preferred stock of
Thinking Machines for $1,509 offset by the issuance of a $14,300 participating
loan in 1998 to Western Realty versus $4,473 in 1999.
On September 28, 1998, the Company completed the sale of its four U.S. office
buildings for an aggregate purchase price of $112,400. On August 30, 1999, the
Company completed the sale of five of its shopping centers for an aggregate
purchase price of $46,125 ($45,288 after closing adjustments and expenses)
including the assumption of $35,023 of mortgage financing. The Company received
approximately $10,265 in cash from the transaction.
On June 2, 1999, Thinking Machines sold substantially all of its assets, which
consisted primarily of its Darwin(R) software and services business, to Oracle
Corporation. At the closing of the Oracle sale, $4,136 of loans, including
interest, were repaid by Thinking Machines to the Company and the Company
offered to purchase all of Thinking Machines' outstanding preferred stock for
$1,950. Approximately 77% of Thinking Machines' preferred stockholders tendered
their stock to New Valley in the third quarter of 1999. In connection with the
repurchase, the Company recorded an increase to equity of $1,542 in the third
quarter of 1999, which represented the difference between the purchase price
and carrying value of the stock.
In September 1998, the Company made a one-year $950 loan to BGLS Inc., an
affiliate of the Company, bearing interest at 14% per annum, which has been
repaid in full.
On October 5, 1999, the Company's Board of Directors authorized the repurchase
of up to 2,000,000 Common Shares from time to time on the open market or in
privately negotiated transactions depending on market conditions.
The Company expects that its available working capital will be sufficient to
fund its currently anticipated cash requirements for 1999 and currently
anticipated cash requirements of its operating businesses, investments,
commitments, and payments of principal and interest on its outstanding
indebtedness.
MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates, equity and commodity
prices, changes in the implied volatility of interest rate, foreign exchange
rate, equity and commodity prices and also changes in the credit ratings of
either the issuer or its related country of origin. Market risk is inherent to
both derivative and non-derivative financial instruments, and accordingly, the
scope of the Company's market risk management procedures extends beyond
derivatives to include all market risk sensitive financial instruments.
Current and proposed underwriting, corporate finance, merchant banking and
other commitments are subject to due diligence reviews by Ladenburg's senior
management, as well as professionals in the appropriate business and support
units involved. Credit risk related to various financing activities is reduced
by the industry practice of obtaining and maintaining collateral. The Company
monitors its exposure to counterparty risk through the use of credit exposure
information, the monitoring of collateral values and the establishment of
credit limits.
Equity Price Risk
Ladenburg maintains inventories of trading securities at September 30, 1999
with fair values of $9,779 in long positions and $2,697 in short positions.
Ladenburg performed an entity-wide analysis of the its financial instruments
and assessed the related risk and materiality. Based on this analysis, in the
opinion of management, the market risk associated with the Ladenburg's
financial instruments at September 30, 1999 will not have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
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<PAGE> 21
The Company holds investment securities available for sale totaling $41,378 at
September 30, 1999. Approximately 38% of these securities represent an
investment in RJ Reynolds Tobacco Holdings and Nabisco Group Holdings, which
are defendants in numerous tobacco products-related litigation, claims and
proceedings. The effect of an adverse lawsuit against these companies could
have a significant effect on the value of the Company's investment.
The Company also holds long-term investments in limited partnerships and
limited liability companies. The Company's investments in limited partnerships
are illiquid, and the ultimate realization of these investments is subject to
the performance of the underlying partnership and its management by general
partners.
Foreign Market Risk
BML's and Western Realty Ducat's operations are conducted in Russia. During
1998, the economy of the Russian Federation entered a period of economic
instability, which has continued in 1999. The impact includes, but is not
limited to, a steep decline in prices of domestic debt and equity securities, a
severe devaluation of the currency, a moratorium on foreign debt repayments, an
increasing rate of inflation and increasing rates on government and corporate
borrowings. The return to economic stability is dependent to a large extent on
the effectiveness of the fiscal measures taken by government and other actions
beyond the control of companies operating in the Russian Federation. The
operations of BML and Western Realty Ducat may be significantly affected by
these factors for the foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS
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, 2000. 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.
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 rater 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.
The Company 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.
It is unclear whether the Russian government and other organizations who
provide significant infrastructure services have addressed the Year 2000
problem sufficiently to mitigate potential substantial disruption of these
infrastructure services. The substantial disruption of these services would
have an adverse affect on the operations of BML and Western Realty Ducat.
Furthermore, the current financial crisis could affect the ability of the
Russian government and other organizations to fund Year 2000 compliance
programs.
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 believes that all phases of its Year 2000 plan have been completed
and cost approximately $650. The cost was inclusive of hardware and software
upgrades and replacements as well as consulting. All costs were incurred by
July 1999. Ladenburg completed the contingency planning phase in May 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
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<PAGE> 22
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 clearing agent. Ladenburg has been informed by its
clearing agent that it has initiated an extensive effort to ensure that it is
Year 2000 compliant. Ladenburg has been informed by its clearing agent that it
completed the remediation process in July 1998 and internal testing of its Year
2000 compliant software in June 1999. 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
their 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.
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 stockholders,
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, BML and New Valley
Realty, 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 its on-going
transition from a centrally-controlled command economy under communist rule,
Russia has experienced dramatic political, social and economic upheaval. There
is a risk that further reforms necessary to complete this transition will not
occur. During 1998, the economy entered a period of even greater economic
instability which has continued in 1999. The Russian economy suffers from
significant inflation, declining industrial productions, rising unemployment,
and an unstable currency. In addition, 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, an evolving taxation system subject to constant
changes which may be applied retroactively and subject to varying
interpretations by tax authorities which may not coincide with that of
management and can result in assessments of additional taxes, penalties and
interest, which can be significant, and other legal developments 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. The uncertainties in Russia and Russia's recent economic turmoil may
also effect BML's and Western Realty's ability to consummate planned financing
and investing activities. BML, Western Realty and New Valley Realty 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.
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. The
failure of the Company or its significant suppliers and customers, especially
Ladenburg's clearing agent, to adequately address the "Year 2000" issue could
result in misstatement of reported financial information or could adversely
affect its business.
Results actually achieved may differ materially from expected results included
in these forward-looking statements as a result of these or other factors. Due
to such uncertainties and risks, readers are cautioned not to place undue
reliance on such forward-looking statements, which speak only as of the date on
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<PAGE> 23
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Market Risk" is incorporated
herein by reference.
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<PAGE> 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 8 to the "Notes to the Condensed Quarterly Consolidated
Financial Statements" in Part I, Item 1 to this Report.
Item 2. Changes in Securities and Use of Proceeds
On June 4, 1999, the Company consummated a recapitalization under
which its outstanding Class A Senior Preferred Shares, Class B
Preferred Shares and Common Shares were exchanged for new Common
Shares and warrants. As a result of the recapitalization, all accrued
and unpaid dividends on the preferred shares were eliminated.
Item 3. Defaults Upon Senior Securities
See Item 2 above.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Purchase and Sale Agreement (the "Purchase Agreement")
dated as of June 23, 1999 between the Company and P.O'B
Montgomery & Company (incorporated by reference to Exhibit
2.1 to the Company's current report on Form 8-K dated
August 30, 1999).
10.2 Amendment to Purchase Agreement dated as of August 9, 1999
(incorporated by reference to Exhibit 2.2 to the Company's
current report on Form 8-K dated August 30, 1999).
10.3 Amendment to Purchase Agreement dated as of August 16, 1999
(incorporated by reference to Exhibit 2.3 to the Company's
current report on Form 8-K dated August 30, 1999).
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
Date Items Financial Statements
---- ----- --------------------
August 30, 1999 2, 7 None
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<PAGE> 25
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 15, 1999 By: /s/ J. Bryant Kirkland III
------------------------------
J. Bryant Kirkland III
Vice President, Treasurer
and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
-25-
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