<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, 2000
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 [ ]
AS OF NOVEMBER 13, 2000, THERE WERE OUTSTANDING 22,890,663 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, 2000
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,
2000 and December 31, 1999.................................... 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30,
2000 and 1999................................................. 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity for the nine months ended
September 30, 2000............................................ 5
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2000 and 1999............. 6
Notes to the Condensed Consolidated Financial Statements.......... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 21
Item 2. Changes in Securities and Use of Proceeds......................... 21
Item 6. Exhibits and Reports on Form 8-K.................................. 21
SIGNATURE....................................................................... 22
</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,
---------------- -----------------
2000 1999
---------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 68,181 $ 11,512
Investment securities available for sale.............................. 45,465 48,722
Trading securities owned.............................................. 12,599 15,707
Restricted assets..................................................... 988 3,239
Receivable from clearing brokers...................................... 20,185 10,903
Other current assets.................................................. 1,019 1,360
--------- ---------
Total current assets.............................................. 148,437 91,443
------- --------
Investment in real estate, net............................................. 55,342 53,353
Furniture and equipment, net............................................... 8,093 8,409
Restricted assets.......................................................... 4,017 5,195
Long-term investments, net................................................. 6,506 8,730
Investment in joint venture................................................ 45,675 48,680
Other assets............................................................... 5,305 4,858
--------- ---------
Total assets...................................................... $273,375 $220,668
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Margin loans payable.................................................. $ 6,195 $ 983
Current portion of notes payable...................................... 8,367 294
Accounts payable and accrued liabilities.............................. 30,862 30,963
Prepetition claims and restructuring accruals......................... 11,915 12,279
Income taxes.......................................................... 15,001 16,285
Securities sold, not yet purchased.................................... 4,913 7,625
--------- ---------
Total current liabilities......................................... 77,253 68,429
-------- --------
Notes payable.............................................................. 11,236 19,519
Other long-term liabilities................................................ 47,131 41,341
Commitments and contingencies..............................................
Stockholders' equity:
Common Shares, $.01 par value; 100,000,000 shares
authorized; 22,942,663 and 23,192,862 shares outstanding............ 229 232
Additional paid-in capital............................................ 868,023 868,673
Accumulated deficit................................................... (734,817) (779,639)
Unearned compensation on stock options................................ (72) (333)
Accumulated other comprehensive income................................ 4,392 2,446
--------- ---------
Total stockholders' equity................................................. 137,755 91,379
------- --------
Total liabilities and stockholders' equity........................ $273,375 $220,668
======= =======
</TABLE>
See accompanying notes to condensed
consolidated financial statements
-3-
<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,
---------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Principal transactions, net ............................. $ 5,051 $ 2,223 $ 20,770 $ 14,036
Commissions ............................................. 6,533 7,368 28,061 29,189
Corporate finance fees .................................. 4,130 522 12,774 4,562
Gain on sale of investments, net ........................ 108 151 6,299 2,110
Income (loss) from joint venture ........................ 52,427 1,125 52,412 (3,072)
Real estate leasing ..................................... 778 1,576 2,369 6,000
Gain on sale of real estate ............................. -- 3,849 -- 3,849
Interest and dividends .................................. 2,527 1,424 5,641 4,308
Computer sales and service .............................. -- -- -- 317
Gain on sale of assets .................................. -- -- 150 4,028
Other (loss) income ..................................... (571) 1,174 448 3,785
------------ ------------ ----------- ------------
Total revenues ...................................... 70,983 19,412 128,924 69,112
------------ ------------ ----------- ------------
Cost and expenses:
Selling, general and administrative ..................... 22,577 19,482 77,816 73,606
Interest ................................................ 1,281 2,209 5,449 6,920
------------ ------------ ----------- ------------
Total costs and expenses ............................ 23,858 21,691 83,265 80,526
------------ ------------ ----------- ------------
Income (loss) from continuing operations before income taxes
and minority interests .................................. 47,125 (2,279) 45,659 (11,414)
Income tax (benefit) provision ............................... (13) 30 2 90
Minority interests in (loss) income from continuing operations
of consolidated subsidiaries ............................ (86) (13) 835 239
------------ ------------ ----------- ------------
Income (loss) from continuing operations ..................... 47,224 (2,296) 44,822 (11,743)
Discontinued operations:
Gain on disposal of discontinued operations ............. -- -- -- 4,100
------------ ------------ ----------- ------------
Income from discontinued operations ..................... -- -- -- 4,100
------------ ------------ ----------- ------------
Net income (loss) ............................................ 47,224 (2,296) 44,822 (7,643)
Dividend requirements on preferred shares .................... -- -- -- (37,759)
------------ ------------ ----------- ------------
Net income (loss) applicable to Common Shares ................ $ 47,224 $ (2,296) $ 44,822 $ (45,402)
============ ============ =========== ============
Income (loss) per Common Share (basic):
Continuing operations ................................... $ 2.06 $ (0.10) $ 1.94 $ (3.15)
Discontinued operations ................................. -- -- -- .26
------------ ------------ ----------- ------------
Net income (loss) per Common Share ...................... $ 2.06 $ (0.10) $ 1.94 $ (2.89)
============ ============ =========== ============
Number of shares used in computation ......................... 22,977,696 23,317,261 23,089,108 15,684,128
============ ============ =========== ============
Income (loss) per Common Share (diluted):
Continuing operations ................................... $ 2.05 $ (0.10) $ 1.94 $ (3.15)
Discontinued operations ................................. -- -- -- .26
------------ ------------ ----------- ------------
Net income (loss) per Common Share ...................... $ 2.05 $ (0.10) $ 1.94 $ (2.89)
============ ============ =========== ============
Number of shares used in computation ......................... 23,083,308 23,317,261 23,127,455 15,684,128
============ ============ =========== ============
</TABLE>
See accompanying notes to condensed
consolidated financial statements
-4-
<PAGE> 5
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
UNEARNED ACCUMULATED
COMPENSATION OTHER
COMMON PAID-IN ACCUMULATED ON STOCK COMPREHENSIVE
SHARES CAPITAL DEFICIT OPTIONS INCOME TOTAL
------ -------- ----------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999...... $232 $868,673 $(779,639) $(333) $2,446 $91,379
Net income................... 44,822 44,822
Net change in unrealized
gain on investment
securities.................. 1,946 1,946
Repurchase of Common
Shares..................... (3) (951) (954)
Adjustment to unearned
compensation on
stock options.............. (261) 261 --
Compensation expense
on stock option grants..... 562 562
---- -------- --------- ------ ------ --------
Balance, September 30, 2000..... $229 $868,023 $(734,817) $ (72) $4,392 $137,755
==== ======== ========= ====== ====== ========
</TABLE>
See accompanying notes to condensed
consolidated financial statements
-5-
<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,
------------------------------------
2000 1999
------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................... $ 44,822 $ (7,643)
Adjustments to reconcile net income (loss) to net cash (used for)
provided from operating activities:
Income from discontinued operations................................. -- (4,100)
(Income) loss from joint venture.................................... (52,412) 3,072
Depreciation and amortization....................................... 1,347 2,465
Stock-based compensation expense.................................... 562 1,647
Gain on sale of investments......................................... (6,299) (2,110)
Gain on sale of assets.............................................. (150) (4,028)
Gain on sales of real estate and liquidation of long-term investments.... -- (5,959)
Minority interests in income from continuing operations
of consolidated subsidiaries...................................... 835 239
Changes in assets and liabilities, net of effects of dispositions:
(Increase) decrease in receivables and other assets............... (1,561) 20,334
Increase (decrease) in accounts payable and accrued liabilities... 473 (3,575)
--------- ----------
Net cash (used for) provided from continuing operations.................... (12,383) 342
Net cash provided from discontinued operations............................. -- 4,100
--------- ----------
Net cash (used for) provided from operating activities..................... (12,383) 4,442
--------- ----------
Cash flows from investing activities:
Sale or maturity of investment securities............................. 35,561 9,010
Purchase of investment securities..................................... (24,059) (17,681)
Sale or liquidation of long-term investments.......................... -- 5,810
Purchase of long-term investments..................................... (2,358) (5,000)
Sale of real estate, net of closing costs............................. -- 46,208
Purchase of real estate............................................... (2,668) (13,661)
Sale of other assets.................................................. 150 5,857
Purchase of furniture and fixtures.................................... (340) (695)
Payment of prepetition claims and restructuring accruals.............. (363) (67)
Decrease (increase) in restricted assets.............................. 3,477 (2,837)
Investment in joint venture........................................... (1,916) --
Distribution from joint venture....................................... 57,208 --
--------- ----------
Net cash provided from investing activities................................ 64,692 26,944
--------- ----------
Cash flows used for financing activities:
Increase (decrease) in margin loans payable........................... 5,212 (12,133)
Purchase of subsidiary's preferred stock.............................. -- (1,509)
Proceeds from participating loan...................................... 312 4,473
Repayment of note receivable to related party......................... -- 950
Repayment of notes payable............................................ (210) (35,133)
Repurchase of Common Shares........................................... (954) --
Expenses associated with recapitalization............................. -- (600)
Other, net............................................................ -- (120)
--------- ----------
Net cash provided from (used for) financing activities..................... 4,360 (44,072)
--------- ----------
Net increase (decrease) in cash and cash equivalents....................... 56,669 (12,686)
Cash and cash equivalents, beginning of period............................. 11,512 16,444
--------- ----------
Cash and cash equivalents, end of period................................... $ 68,181 $ 3,758
========= ==========
</TABLE>
See accompanying notes to condensed
consolidated financial statements
-6-
<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 ("New Valley" or the
"Company"). The consolidated financial statements as of September 30, 2000
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, 2000 and the results of operations and cash flows for
all periods presented have been made. Results for the interim periods are
not necessarily indicative of the results for the entire year.
These financial statements should be read in conjunction with the
consolidated financial statements in the Company's Annual Report on Form
10-K for the year ended December 31, 1999 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 to the current interim period presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board 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
Development") to make real estate and other investments in Russia. The
Company agreed to contribute the real estate assets of BrookeMil,
including Ducat Place II and the site for Ducat Place III, to Western
Realty Development and Apollo agreed to contribute up to $72,021,
including the investment in Western Realty Repin discussed below.
-7-
<PAGE> 8
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The ownership and voting interests in Western Realty Development are held
equally by Apollo and the Company. Apollo is entitled to a preference on
distributions of cash from Western Realty Development to the extent of its
investment commitment of $43,750, of which $41,916 had been funded,
$41,266 was returned in connection with the sale of Western Tobacco
Investments (discussed below) and $650 was outstanding as of September 30,
2000, together with a 15% annual rate of return. The Company is then
entitled to a return of its investment commitment of $23,750, of which
$21,916 has been funded, $21,266 was returned in connection with the sale
of Western Tobacco Investments and $650 was outstanding as of September
30, 2000, together with a 15% annual rate of return; subsequent
distributions are made 70% to the Company and 30% to Apollo. Western
Realty Development 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 Development will generally
require the unanimous consent of the Board of Managers. Accordingly, the
Company has accounted for its non-controlling interest in Western Realty
Development using the equity method of accounting. The Company recognizes
losses incurred by Western Realty Development to the extent that
cumulative earnings of Western Realty Development are not sufficient to
satisfy Apollo's preferred return.
Western Realty Development made a $30,000 participating loan to, and
payable out of a 30% profits interest in, Western Tobacco Investments LLC
("Western Tobacco Investments"), which held the interests of Brooke
(Overseas) Ltd., a subsidiary of Vector Group Ltd. ("Vector"), the
Company's principal stockholder, in Liggett-Ducat Ltd. and the new factory
constructed by Liggett-Ducat Ltd. on the outskirts of Moscow. As a result
of the sale of Western Tobacco Investments, Western Realty Development was
entitled to receive the return of all amounts advanced on the loan,
together with a 15% annual rate of return, and 30% of subsequent
distributions. Western Realty Development recognized income of $584 and
$3,460, which represented the 15% return on the loan plus 30% of any net
income applicable to common interests of Western Tobacco Investments, for
the three and nine months ended September 30, 2000. The loan, together
with the 15% annual rate of return thereon, was repaid and terminated in
connection with the sale of Western Tobacco Investments in August 2000.
On August 4, 2000, Vector completed the sale of Western Tobacco
Investments to Gallaher Group Plc for $334,100 in cash and $64,400 of
assumed debt and capital commitments. The cash proceeds from the
transaction after estimated closing expenses were divided among Vector and
Western Realty Development in accordance with the participating loan,
which was terminated at the closing. Through their investments in Western
Realty Development, the Company received $57,208 in cash proceeds from the
sale and Apollo received $68,338. These amounts are subject to adjustment
based on final closing expenses. The Company recorded a gain of $52,512 in
connection with the transaction in the third quarter of 2000.
Summarized financial information as of September 30, 2000 and December 31,
1999 and for the three and nine month periods ended September 30, 2000 and
1999, respectively, for Western Realty Development follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Current assets.................................. $ 3,873 $ 3,557
Participating loan receivable................... -- 37,849
Real estate, net................................ 76,763 77,988
Furniture and fixtures, net..................... 181 249
Other noncurrent assets......................... 186 320
Goodwill, net................................... 462 722
Other notes payable - current................... 7,233 6,445
Other current liabilities....................... 5,121 7,067
Notes payable - long-term....................... 2,682 8,211
Other long-term liabilities..................... 799 752
Members' equity................................. 65,630 98,210
</TABLE>
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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>
THREE MONTHS THREE MONTHS NINE MONTHS FEBRUARY 20, 1998
ENDED ENDED ENDED (DATE OF INCEPTION)
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 TO SEPTEMBER 30, 1999
------------------ ------------------ ------------------ ---------------------
<S> <C> <C> <C> <C>
Revenues............. $ 2,174 $ 2,194 $ 7,558 $ 8,072
Costs and expenses... 2,197 3,551 6,655 10,787
Other income......... 85,001 4,218 87,877 4,479
Net income (loss).... 84,978 2,861 88,780 1,764
</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 BrookeMil Ltd. ("BrookeMil"), a
wholly-owned subsidiary of the Company. The proceeds of the loan have been
used by BrookeMil for the acquisition and preliminary development of two
adjoining sites totaling 10.25 acres located in Moscow across the Moscow
River from the Kremlin. BrookeMil is planning the development of a hotel,
office, retail and residential complex on the Kremlin sites. BrookeMil
owned 96.8% of one site and 100% of the other site at September 30, 2000.
Western Realty Repin has three classes of equity: Class A Interests, of
which $18,750 were outstanding at September 30, 2000 and are owned by
Apollo; Class B Interests, of which $6,250 were outstanding at September
30, 2000 and are owned by New Valley; and Class C Interests, of which
Apollo had subscribed for $9,521 ($7,437 funded) and New Valley had
subscribed for $5,712 ($4,463 funded) at September 30, 2000. Apollo and
New Valley are entitled to receive on a pro-rata basis an amount equal to
each party's investment in Class C interests, together with a 20% annual
return. After the distributions to the Class C interests have been made,
Apollo will be entitled to a preference on distributions of cash from
Western Realty Repin to the extent of its investment of $18,750 in Class A
interests, together with a 20% annual rate of return. The Company will
then be entitled to a return of its investment of $6,250 in Class B
interests, 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, 2000, Western Realty Repin had advanced $36,900 to
BrookeMil, of which $26,188 was funded by Apollo and was classified in
other long-term obligations on the consolidated balance sheet at September
30, 2000. The loan bears no fixed interest and is payable only out of
distributions by the entities owning the Kremlin sites to BrookeMil. Such
distributions must 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 BrookeMil. BrookeMil used a portion of the proceeds of the loan to
repay the Company for certain expenditures on the Kremlin sites previously
incurred. The loan is due and payable upon the dissolution of BrookeMil
and is collateralized by a pledge of the Company's shares of BrookeMil.
As of September 30, 2000, BrookeMil had invested $34,669 in the Kremlin
sites and held $1,304 in cash and receivables from an affiliate, which
were restricted for future investment in the Kremlin sites. In connection
with the acquisition of a 34.8% interest in one of the Kremlin sites,
BrookeMil agreed with the City of Moscow to invest an additional $22,000
by May 2000 in the development of the property. In April 2000, Western
Realty Repin arranged short-term financing to fund the investment. Under
the terms of the investment, BrookeMil is required to make additional
construction expenditures on the site of $22,000 by June 2002. Failure to
make the expenditures could result in forfeiture of the 34.8% interest in
the site.
-9-
<PAGE> 10
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 the Company, which is eliminated in consolidation. 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 advanced to Western Realty is treated as interest cost in
the consolidated statement of operations to the extent of the Company's
net investment in the Kremlin sites. Because BrookeMil's investment of
$35,973 in the Kremlin sites was less than the balance of the
participating loan of $37,482 due to Apollo at September 30, 2000, the
Company will recognize future interest costs associated with the
participating loan concurrently with future investments in the Kremlin
sites.
In connection with the sale of Western Tobacco Investments, Gallaher also
agreed for $1,500 to purchase from a subsidiary of BrookeMil additional
land adjacent to the Liggett-Ducat manufacturing facility outside Moscow,
Russia. Closing of the sale is subject to satisfaction of various
regulatory requirements.
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
Development and BrookeMil. However, in light of the recent economic
turmoil in Russia, there is a risk that such financing will not be
available on acceptable terms. Failure to obtain sufficient capital for
the projects would force Western Realty Development and BrookeMil 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 stockholders'
equity. The Company had realized gains on sales of investment securities
available for sale of $108 and $6,299 for the three and nine months ended
September 30, 2000, respectively, and $151 and $2,110 for the three and
nine months ended September 30, 1999, respectively.
The components of investment securities available for sale at
September 30, 2000 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---------- ---------- -----
<S> <C> <C> <C> <C>
Marketable equity securities...................$34,973 $ 4,301 $ 3,897 $35,377
Marketable debt securities..................... 6,100 250 -- 6,350
Marketable warrants............................ -- 3,738 -- 3,738
------ ------- ------- ------
Investment securities..........................$41,073 $ 8,289 $ 3,897 $45,465
====== ======= ======= ======
</TABLE>
4. LONG-TERM INVESTMENTS
At September 30, 2000, long-term investments consisted primarily of
investments in limited partnerships of $4,133. The Company believes the
fair value of the limited partnerships exceeds their carrying amount by
approximately $5,452 based on the indicated market values of the
underlying investment portfolio provided by the partnerships. The
Company's estimate of the fair value of its long-term investments are
subject to judgment and are not necessarily indicative of the amounts that
could be realized in the current market. The Company'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 investments in various
Internet-related businesses that are carried at $2,373 at September 30,
2000. During the third quarter of 2000, an investee engaged in the online
music industry ceased operations and the Company wrote down to zero the
remaining $1,054 carrying value of its investment. The Company accounts
for its investment in one Internet company under the equity method.
-10-
<PAGE> 11
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
5. REDEEMABLE PREFERRED SHARES
In connection with the Company's recapitalization in June 1999, 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. The
Company reflected dividend arrearages on such shares of $25,829 in the
consolidated statement of operations for the nine months ended September
30, 1999. For the nine months ended September 30, 1999, the Company also
recorded $1,404 in compensation expense related to Class A Senior
Preferred Shares awarded to an officer of the Company in 1996.
6. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS
In connection with the Company's recapitalization in September 1999, each
of the Company's Class B Preferred Shares was reclassified and changed
into one-third of a Common Share and five Warrants to purchase Common
Shares. The Company reflected dividend arrearages on such shares of
$11,930 in the consolidated statement of operations for the nine months
ended September 30, 1999.
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. In June
2000, Thinking Machines recognized a $150 gain related to Oracle's payment
of the first installment of $150 from the $400 of the purchase price
escrowed in connection with the sale.
8. CONTINGENCIES
LAWSUITS
In March 1997, a stockholder derivative suit was filed against the
Company, as a nominal defendant, its directors and Vector in the Delaware
Chancery Court by a stockholder of the Company. The suit alleges that the
Company's purchase of the BrookeMil shares from Brooke (Overseas) Ltd. in
January 1997 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, Vector aided and abetted such breaches and such parties are
therefore liable to the Company, and (ii) unspecified damages to be
awarded to the Company. In December 1999, another stockholder of the
Company commenced an action in Delaware Chancery Court substantially
similar to the March 1997 action. This stockholder alleges, among other
things, that the consideration paid by the Company for the BrookeMil
shares was excessive, unfair and wasteful, that the special committee of
the Company's board lacked independence, and that the appraisal by the
independent appraisal firm and the fairness opinion by the independent
investment bank were flawed. Vector and the Company believe that the
allegations in both cases are without merit. By order of the court, both
actions were consolidated. Vector and the Company recently filed a motion
to dismiss the consolidated action. Oral argument is scheduled for
November 30, 2000. 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.
-11-
<PAGE> 12
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
In July 1999, a purported class action was commenced on behalf of the
Company's former Class B preferred shareholders against the Company,
Vector and certain directors and officers of the Company in Delaware
Chancery Court. The complaint alleges that the recapitalization, approved
by a majority of each class of the Company's stockholders in May 1999, was
fundamentally unfair to the Class B preferred shareholders, the proxy
statement relating to the recapitalization was materially deficient and
the defendants breached their fiduciary duties to the Class B preferred
shareholders in approving the transaction. The plaintiffs seek class
certification of the action and an award of unspecified compensatory
damages as well as all costs and fees. Vector and the Company believe that
the allegations are without merit. The Court, on the defendants' motion,
recently dismissed six of plaintiff's nine claims alleging inadequate
disclosure in the proxy statement. The surviving claims are plaintiff's
allegations that (i) the fact that the fairness opinion did not cover the
relative fairness to each class of shares should have been expressly
disclosed; (ii) failure to disclose the identity of shareholders who
suggested the recapitalization and their respective holdings, broken down
by share class, was a material omission; and (iii) the disclosure in the
proxy statement was inadequate because it did not reveal the value of the
Company's lines of business or its assets. The Court speculated that facts
might exist under which one or more of the foregoing alleged
non-disclosures might be material and, therefore, the motion to dismiss as
to these three allegations was denied. An answer has been filed as to the
surviving claims. 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.
As of September 30, 2000, New Valley had $11,915 of prepetition
bankruptcy-related claims and restructuring accruals including claims for
lease rejection damages and for unclaimed monies that certain states are
seeking on behalf of money transfer customers. The remaining claims may be
subject to future adjustments based on potential settlements or decisions
of the court.
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 and claims involve 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.
RUSSIAN OPERATIONS
The Russian Federation continues to experience economic difficulties
following the financial crisis of August 1998. Consequently, the country's
currency continues to devalue, there is continued volatility in the debt
and equity markets, hyperinflation persists, confidence in the banking
sector has yet to be restored and there continues to be a general lack of
liquidity in the economy. In addition, laws and regulations affecting
businesses operating within the Russian Federation continue to evolve.
The Russian Federation's return to economic stability is dependent to a
large extent on the effectiveness of the measures taken by the government,
decisions of international lending organizations, and other actions,
including regulatory and political developments, which are beyond the
Company's control.
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 the
Company may not coincide with that of management. As a result,
transactions may be challenged by tax authorities and the Company 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
-12-
<PAGE> 13
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 three years.
9. STOCK OPTION PLANS
On March 22, 2000, the Company granted incentive and non-qualified stock
options to purchase a total of 1,196,299 Common Shares. The grant of these
options was conditioned upon the approval of the plan by the Company's
stockholders, which occurred at the annual meeting held on May 24, 2000.
The recipients of the options were approximately 100 employees of
Ladenburg. The exercise price of the options was $3.875 per share, the
fair market value on the date of grant. The options have terms of between
seven and ten years and vest over periods of three to five years after the
date of grant.
10. 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 months ended September 30, 2000 and 1999. The operations
of BrookeMil are included in real estate operations, while the Company's
interest in Western Realty Development, which is accounted for on the
equity method, is included in corporate and other activities.
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, 2000 and 1999:
<TABLE>
<CAPTION>
BROKER- COMPUTER CORPORATE
DEALER REAL ESTATE SOFTWARE AND OTHER TOTAL
------ ----------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 2000
Revenues ............................ $ 18,556 $ 778 $ -- $ 51,649 $ 70,983
Operating income (loss) ............. 80 (1,114) (41) 48,200 47,125
Depreciation and amortization ....... 210 147 -- 7 364
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenues ............................ $ 12,708 $ 5,425 $ -- $ 1,279 $ 19,412
Operating (loss) income ............. (2,424) 1,685 (89) (1,451) (2,279)
Depreciation and amortization ....... 244 450 -- 8 702
NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenues ............................ $ 69,874 $ 2,369 $ 150 $ 56,531 $ 128,924
Operating income (loss) ............. 5,126 (5,210) 34 45,709 45,659
Identifiable assets ................. 49,051 59,195 259 164,870 273,375
Depreciation and amortization ....... 647 679 -- 21 1,347
Capital expenditures ................ 340 2,668 -- -- 3,008
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues ............................ $ 54,295 $ 9,848 $ 317 $ 4,652 $ 69,112
Operating loss ...................... (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
</TABLE>
-13-
<PAGE> 14
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
11. INCOME FROM DISCONTINUED OPERATIONS
The Company recorded a gain on disposal of discontinued operations of
$4,100 for the nine months ended September 30, 1999 related to the
settlement of a lawsuit originally initiated by the Company's former
Western Union telegraph business.
12. PRO FORMA FINANCIAL INFORMATION
The following table presents unaudited pro forma results from continuing
operations as if the recapitalization, the sale of Thinking Machines'
assets in June 1999 and the sale of five U.S. shopping centers in August
1999 had occurred on January 1, 1999. 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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Revenues.............................. $ 14,707 $ 57,700
======== ========
Loss from continuing operations....... $ (5,821) $(15,338)
======== ========
Loss from continuing operations
applicable to common shares....... $ (5,821) $(15,338)
======== ========
Loss from continuing operations
per common share.................. $ (0.25) $ (0.66)
======== ========
</TABLE>
13. COMPREHENSIVE INCOME
Comprehensive income of the Company includes net income and changes in the
value of investment securities available for sale that have not been
included in net income. Comprehensive income (loss) applicable to Common
Shares for the three and nine months ended September 30, 2000 and 1999 is
as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) applicable to
common shares.................... $ 47,224 $ (2,296) $ 44,822 $(45,402)
Net change in unrealized (loss)
gain on investment securities.... (3,290) (6,210) 1,946 (3,869)
--------- ------- --------- --------
Total comprehensive income (loss)... $ 43,934 $ (8,506) $ 46,768 $(49,271)
======== ======= ======== =======
</TABLE>
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<PAGE> 15
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"), an 80.1%-owned subsidiary,
BrookeMil Ltd. ("BrookeMil"), a wholly-owned subsidiary, Thinking Machines
Corporation ("Thinking Machines"), a 72.7%-owned subsidiary, and other
subsidiaries.
RECENT DEVELOPMENTS
SALE OF WESTERN TOBACCO INVESTMENTS. On August 4, 2000, Vector completed the
sale of Western Tobacco Investments to a subsidiary of Gallaher Group Plc for
$334,100 in cash and $64,400 in assumed debt and capital commitments. The cash
proceeds from the transaction after estimated closing expenses were divided
among Vector and Western Realty Development in accordance with the terms of the
participating loan, which was terminated at the closing. Through their
investments in Western Realty Development, the Company received $57,208 in cash
proceeds from the sale and Apollo received $68,338. These amounts are subject to
adjustment based on final closing expenses. The Company recorded a gain of
$52,512 in connection with the transaction in the third quarter of 2000.
RESULTS OF OPERATIONS
For the three months and nine months ended September 30, 2000 and 1999, 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 BrookeMil (real estate), and Thinking Machines (computer
software), were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Broker-dealer:
Revenues ...................... $ 18,556 $ 12,708 $ 69,874 $ 54,295
Expenses ...................... 18,476 15,132 64,748 55,168
-------- -------- -------- --------
Operating income (loss) before
taxes and minority interests $ 80 $ (2,424) $ 5,126 $ (873)
======== ======== ======== ========
Real estate:
Revenues ...................... $ 778 $ 5,425 $ 2,369 $ 9,848
Expenses ...................... 1,892 3,740 7,579 10,695
-------- -------- -------- --------
Operating (loss) income before
taxes and minority interests $ (1,114) $ 1,685 $ (5,210) $ (847)
======== ======== ======== ========
Computer software:
Revenues ...................... $ -- $ -- $ 150 $ 317
Expenses ...................... 41 89 116 3,440
-------- -------- -------- --------
Operating (loss) income before
taxes and minority interests $ (41) $ (89) $ 34 $ (3,123)
======== ======== ======== ========
Corporate and other:
Revenues ...................... $ 51,649 $ 1,279 $ 56,531 $ 4,652
Expenses ...................... 3,449 2,730 10,822 11,223
-------- -------- -------- --------
Operating income (loss) before
taxes and minority interests $ 48,200 $ (1,451) $ 45,709 $ (6,571)
======== ======== ======== ========
</TABLE>
-15-
<PAGE> 16
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1999
Consolidated total revenues were $70,983 for the three months ended September
30, 2000 versus $19,412 for the same period last year. The increase in revenues
of $51,571 was attributable primarily to income from joint venture of $52,427
and Ladenburg's increased revenues of $5,848 offset by a decrease in real estate
revenues of $4,647 from the sale of the shopping centers in August 1999.
Ladenburg's revenues for the third quarter of 2000 increased $5,848 as compared
to revenues for the third quarter of 1999 primarily as a result of an increase
in principal transactions of $2,828 and an increase of $3,608 in corporate
finance fees offset by a decrease in commissions of $835. Ladenburg's expenses
for the third quarter of 2000 increased $3,344 as compared to expenses for the
third quarter of 1999 due primarily to increases in compensation expense of
$3,252. Compensation expense increased due to an increase in performance-based
compensation.
Revenues from the real estate operations for the third quarter of 2000 decreased
$4,647 from the third quarter of 1999. The decline was primarily due to the gain
of $3,849 in the 1999 period related to the sale of the Company's five U.S.
shopping centers in August 1999. Expenses of the real estate operations
decreased $1,848 due primarily to the sale of the shopping centers. BrookeMil
incurred expenses of $906 and $1,771 for the three months ended September 30,
2000 and 1999, respectively, which were related to the Kremlin sites. The
expenses consisted primarily of accrued interest expense of $698 in the 2000
period and $1,124 in the 1999 period associated with the Western Realty Repin
loan. BrookeMil also experienced a foreign currency loss of $450 in the 1999
period on cash restricted for future investments in the Kremlin sites. Because
BrookeMil's investment of $35,973 in the Kremlin sites was less than the balance
of the participating loan of $37,482 due to Apollo at September 30, 2000, the
Company will recognize future interest costs associated with the Western Realty
Repin loan concurrently with 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 and interest expense of $41 and $89 for the third
quarter of 2000 and 1999, respectively.
Corporate and other revenues of $51,649 for the third quarter of 2000 consisted
primarily of income from joint venture of $52,427 and interest and dividend
income of $1,099. Corporate revenues in the 2000 period were offset by $1,015 of
losses associated with losses from the operations of certain Internet-related
investees accounted for on the equity method and a write down of the remaining
$1,054 of carrying value related to the Company's investment in an
Internet-related business which ceased operations in the third quarter of 2000,
both of which have been reported as a reduction to other income in the Company's
Statement of Operations. For the third quarter of 1999, the Company's revenues
of $1,279 related to corporate and other activities consisted primarily of the
$1,125 income from joint venture.
Corporate and other expenses of $3,449 for the third quarter of 2000 consisted
primarily of employee compensation and benefits of $1,651 and expenses of
certain non-significant subsidiaries of $117. 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.
Income tax benefit for the third quarter of 2000 was $13 versus income tax
expense of $30 for the third quarter of 1999. The income taxes related
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.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1999
Consolidated total revenues were $128,924 for the nine months ended September
30, 2000 versus $69,112 for the same period last year. The increase in revenues
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<PAGE> 17
of $59,812 was attributable primarily to income from joint venture of $52,412
and Ladenburg's increased revenues of $15,579 offset by a decrease in real
estate revenues of $7,479 from the sale of the shopping centers in August 1999.
Ladenburg's revenues for the first nine months of 2000 increased $15,579 as
compared to revenues for the first nine months of 1999 primarily due to
increases in corporate finance fees of $8,212 and principal transactions of
$6,734. Ladenburg's expenses for the first nine months of 2000 increased $9,580
as compared to expenses for the first nine months of 1999 due primarily to an
increase in compensation expense of $9,396. Compensation expense increased due
to an increase in performance-based compensation.
Revenues from the real estate operations for the first nine months of 2000
decreased $7,479 primarily due to the sale of the shopping centers in August
1999 and gain of $3,849 associated with such sale. Expenses of the real estate
operations decreased $3,116 due primarily to the sale of the shopping centers.
BrookeMil incurred expenses of $4,198 and $3,875 for the nine months ended
September 30, 2000 and 1999, respectively, which were related to the Kremlin
sites. The expenses consisted primarily of accrued interest expense of $3,571 in
the 2000 period and $3,162 in the 1999 period associated with the Western Realty
Repin loan. BrookeMil also experienced a foreign currency loss of $430 on cash
restricted for future investments in the Kremlin sites in the 1999 period.
On June 2, 1999, Thinking Machines sold substantially all of its assets
consisting of the Darwin(R) software and services business to Oracle
Corporation. In June 2000, Thinking Machines recognized a $150 gain related to
Oracle's payment of the first installment of $150 from the $400 of the purchase
price escrowed in connection with the sale. Prior to the sale, Thinking Machines
had minimal revenues from continuing operations. Operating expenses of Thinking
Machines consisted 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. Since the sale, operating expenses have
consisted of general and administrative expenses and interest expense.
For the first nine months of 2000, the Company's revenues of $56,531 related to
corporate and other activities consisted primarily of income from joint venture
of $52,412, net gains on investments of $6,299 and interest and dividend income
of $1,769. Corporate revenues in the 2000 period were offset by $3,828 of losses
associated with losses from the operations of certain Internet-related investees
accounted for on the equity method and a write down of the remaining $1,054 of
carrying value related to the Company's investment in an Internet-related
business which ceased operations in the third quarter of 2000, both of which
have been reported as a reduction of other income in the Company's Statement of
Operations. 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, net gains on investments of $2,110
and interest and dividend income of $1,679, partially offset by a loss from
joint venture of $3,072.
Corporate and other expenses of $10,822 for the first nine months of 2000
consisted primarily of employee compensation and benefits of $4,884 and expenses
of certain non-significant subsidiaries of $303. 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.
Income tax expense for the nine six months of 2000 was $2 versus $90 for the
first nine months of 1999. The income taxes related 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 $4,100 in
the 1999 period related to the settlement of a lawsuit originally initiated by
the Company's former Western Union telegraph business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased from $11,512 to $68,181 in the
first nine months of 2000 due primarily to a $57,208 distribution from joint
venture related to the Western Tobacco Investments sale and net sales of $9,144
of marketable securities and long-term investments.
Cash used for operating activities for the nine months ended September 30, 2000
was $12,383 as compared to cash provided from operating activities of $4,442
from the prior year. The difference is primarily due to an increase in income
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<PAGE> 18
from joint venture of $55,484 and an increase of $9,282 in receivables from
clearing brokers versus a decrease of $11,856 in the 1999 period offset by
increased net income of $52,465.
Cash provided from investing activities for the nine months ended September 30,
2000 was $64,692 compared to $26,944 for the nine months ended September 30,
1999. The difference is primarily attributable to a distribution from joint
venture of $57,208, net sales of $9,144 of marketable securities and long-term
investments in the 2000 period versus net purchases of $7,861 in the 1999 period
offset by $46,208 of cash received from the sale of the Company's five U.S.
shopping centers in the 1999 period. The difference is also attributable to a
decrease in restricted assets of $3,477 for the nine months ended September 30,
2000 versus an increase in restricted assets of $2,837 in the 1999 period. The
decrease in restricted assets during nine months ended September 30, 2000 was
primarily the result of a $2,516 reduction in a letter of credit which
collateralizes a long-term lease of commercial office space.
The capital expenditures of $2,668 for the nine months ended September 30, 2000
related to the development of the Kremlin sites. BrookeMil also held $1,304 in
restricted cash and receivables from an affiliate, at September 30, 2000, which
is restricted for future investment in the Kremlin sites. The capital
expenditures of $13,661 for the nine months ended September 30, 1999 related
principally to the development of the Kremlin sites.
In connection with the acquisition of a 34.8% interest in one of the Kremlin
sites, BrookeMil agreed with the City of Moscow to invest an additional $22,000
by May 2000 in the development of the property. In April 2000, Western Realty
Repin arranged short-term financing to fund the investment. Under the terms of
the investment, BrookeMil is required to make additional construction
expenditures on the site of $22,000 by June 2002. Failure to make the
expenditures could result in forfeiture of the 34.8% interest in the site.
In June 1998, New Valley and Apollo organized Western Realty Repin to make a
loan to BrookeMil. The proceeds from the loan will be used by BrookeMil for the
acquisition and preliminary development of the Kremlin sites. Through September
30, 2000, Western Realty Repin has advanced $36,900 to BrookeMil, of which
Apollo has funded $26,188. The loan bears no fixed interest and is payable only
out of distributions by the entities owning the Kremlin sites to BrookeMil. The
loan is due and payable upon the dissolution of BrookeMil and is collateralized
by a pledge of New Valley's shares of BrookeMil. Such distributions must 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 BrookeMil. BrookeMil used a
portion of the proceeds to repay New Valley for certain expenditures on the
Kremlin sites previously incurred.
In connection with the sale of Western Tobacco Investments, Gallaher also agreed
for $1,500 to purchase from a subsidiary of BrookeMil additional land adjacent
to the Liggett-Ducat manufacturing facility outside Moscow, Russia. Closing of
the sale is subject to satisfaction of various regulatory requirements.
The development of Ducat Place III and the Kremlin sites will require
significant amounts of debt and other financing. New Valley is considering
potential financing alternatives on behalf of Western Realty Development and
BrookeMil. However, in light of the recent economic turmoil in Russia, there is
a risk that such financing will not be available on acceptable terms. Failure to
obtain sufficient capital for the projects would force Western Realty
Development and BrookeMil to curtail or delay the planned development of Ducat
Place III and the Kremlin sites.
Cash flows provided from financing activities were $4,360 for the nine months
ended September 30, 2000 as compared to cash used for financing activities of
$44,072 for the nine months ended September 30, 1999. The increase was primarily
due to $35,023 of debt repayments associated with the sales of the Company's
five U.S. shopping centers in the 1999 period and an increase of $5,212 in the
Company's margin loans versus a $12,133 net payment on the Company's margin
loans in the 1999 period. The increase was offset by the issuance of $4,473 of
the participating loan in the 1999 period.
New Valley has lent Thinking Machines an additional $723, net of repayments,
bearing interest at 15% per annum, since Thinking Machines sold its Darwin(R)
software and services business to Oracle Corporation in June 1999.
On October 5, 1999, New Valley's Board of Directors authorized the repurchase of
up to 2,000,000 Common Shares from time to time on the open market or in
privately negotiated transactions depending on market conditions. As of November
13, 2000, New Valley had repurchased 344,400 shares for approximately $1,354.
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<PAGE> 19
The Company expects that its available working capital will be sufficient to
fund its currently anticipated cash requirements for 2000, including the
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 maintained inventories of trading securities at September 30, 2000
with fair values of $12,599 in long positions and $4,913 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, 2000 will not have a material adverse effect on the
consolidated financial position or results of operations of the Company.
The Company held investment securities available for sale totaling $45,465 at
September 30, 2000. Approximately 29% of these securities represent an
investment in Nabisco Group Holdings Corp., which is a defendant in numerous
tobacco products-related litigation, claims and proceedings. An adverse outcome
in any of these proceedings 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 investee entities.
Foreign Market Risk
BrookeMil's and Western Realty Development's operations are conducted in Russia.
The Russian Federation continues to experience economic difficulties following
the financial crisis of August 1998. Consequently, the country's currency
continues to devalue, there is continued volatility in the debt and equity
markets, hyperinflation persists, confidence in the banking sector has yet to be
restored and there continues to be a general lack of liquidity in the economy.
In addition, laws and regulations affecting businesses operating within the
Russian Federation continue to evolve.
The Russian Federation's return to economic stability is dependent to a large
extent on the effectiveness of the measures taken by the government, decisions
of international lending organizations, and other actions, including regulatory
and political developments, which are beyond the control of companies operating
in the Russian Federation. The operations of BrookeMil and Western Realty
Development may be significantly affected by these factors for the foreseeable
future.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
New Valley and its representatives may from time to time make oral or written
"forward-looking statements" within the meaning of the Private Securities Reform
Act of 1995, including any statements that may be contained in the foregoing
"Management's Discussion and Analysis of Financial Condition and Results of
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Operations", in this report and in other filings with the Securities and
Exchange Commission and in its reports to stockholders, which represent New
Valley's expectations or beliefs with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties and, in connection with the "safe-harbor" provisions of the
Private Securities Reform Act, New Valley has identified under "Risk Factors" in
Item 1 of the Company's Form 10-K for the year ended December 31, 1999 filed
with the Securities and Exchange Commission and in this section important
factors that could cause actual results to differ materially from those
contained in any forward-looking statements made by or on behalf of New Valley.
Each of New Valley's operating businesses, Ladenburg, BrookeMil and New Valley
Realty, and its interests in Western Realty Development and Western Realty
Repin, are subject to intense competition, changes in consumer preferences, and
local economic conditions. BrookeMil, Western Realty Development, Western Realty
Repin 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 New Valley
generally include, without limitation, the effect of market conditions on the
salability of New Valley's investment securities, the uncertainty of other
potential acquisitions and investments by New Valley, the effects of
governmental regulation on New Valley's ability to target and/or consummate any
such acquisitions and the effects of limited management experience in areas in
which New Valley may become involved.
Results actually achieved may differ materially from expected results included
in these forward-looking statements as a result of these or other factors. Due
to such uncertainties and risks, readers are cautioned not to place undue
reliance on such forward-looking statements, which speak only as of the date on
which such statements are made. New Valley does not undertake to update any
forward-looking statement that may be made from time to time on behalf of New
Valley.
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> 21
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
No securities of the Company which were not registered under the
Securities Act of 1933, as amended, have been issued or sold by the
Company during the three months ended September 30, 2000.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule (for SEC use only)
(b) REPORTS ON FORM 8-K
DATE ITEMS FINANCIAL STATEMENTS
---- ----- --------------------
September 21, 2000 7 None
September 25, 2000 5,7 None
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<PAGE> 22
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, 2000 By: /s/ J. BRYANT KIRKLAND III
------------------------------
J. Bryant Kirkland III
Vice President, Treasurer
and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
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