<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 1-2493
NEW VALLEY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-5482050
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
100 S.E. SECOND STREET, 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 MAY 11, 1998, THERE WERE OUTSTANDING 9,577,624 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 THREE MONTHS ENDED MARCH 31, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Item 1. Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of March 31,
1998 and December 31, 1997.................................... 3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 1998 and 1997................ 4
Condensed Consolidated Statement of Changes in
Shareholders' Deficiency for the three months
ended March 31, 1998.......................................... 5
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1998 and 1997................ 6
Notes to the Condensed Consolidated Financial 7
Statements ..................................................
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 16
Item 3. Defaults Upon Senior Securities................................... 16
Item 6. Exhibits and Reports on Form 8-K.................................. 16
SIGNATURE........................................................................... 17
</TABLE>
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<PAGE> 3
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 9,899 $ 11,606
Investment securities available for sale...................... 41,960 51,993
Trading securities owned...................................... 56,028 49,988
Restricted assets............................................. 236 232
Receivable from clearing brokers.............................. 1,402 1,205
Other current assets.......................................... 5,466 3,618
--------- ----------
Total current assets..................................... 114,991 118,642
--------- ----------
Investment in real estate, net.................................... 170,811 256,645
Furniture and equipment, net...................................... 11,768 12,194
Restricted assets................................................. 5,548 5,484
Long-term investments, net........................................ 26,292 27,224
Investment in joint venture....................................... 59,340 --
Other assets...................................................... 14,489 21,202
--------- ----------
Total assets............................................. $ 403,239 $ 441,391
========= ==========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Margin loan payable........................................... $ 10,170 $ 13,012
Current portion of notes payable and long-term obligations ... 349 760
Accounts payable and accrued liabilities...................... 42,310 57,722
Prepetition claims and restructuring accruals................. 12,452 12,611
Income taxes.................................................. 18,746 18,413
Securities sold, not yet purchased............................ 29,683 25,610
--------- ----------
Total current liabilities................................ 113,710 128,128
--------- ----------
Notes payable..................................................... 154,027 173,814
Other long-term obligations....................................... 9,095 11,210
Redeemable preferred shares....................................... 271,924 258,638
Shareholders' deficiency:
Cumulative preferred shares; liquidation preference of $69,769;
dividends in arrears, $145,671 and $139,412................ 279 279
Common Shares, $.01 par value; 850,000,000 shares authorized;
9,577,624 shares outstanding............................... 96 96
Additional paid-in capital.................................... 592,004 604,215
Accumulated deficit........................................... (742,270) (742,427)
Unearned compensation on stock options........................ (405) (158)
Accumulated other comprehensive income........................ 4,779 7,596
--------- ----------
Total shareholders' deficiency........................... (145,517) (130,399)
--------- ----------
Total liabilities and shareholders' deficiency........... $ 403,239 $ 441,391
========= ==========
</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 March 31,
------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues:
Principal transactions, net................................ $ 5,893 $ 2,499
Commissions................................................ 6,676 3,393
Corporate finance fees..................................... 3,238 1,132
Gain on sale of investments................................ 5,596 3,694
Loss from joint venture.................................... (329) --
Real estate leasing........................................ 7,776 6,282
Interest and dividends..................................... 2,849 1,541
Computer sales and service................................. 413 3,283
Other income............................................... 1,728 1,029
--------- ---------
Total revenues......................................... 33,840 22,853
--------- ---------
Cost and expenses:
Operating, general and administrative...................... 30,100 25,946
Interest................................................... 4,160 3,862
Provision for loss on long-term investment................. -- 3,796
--------- ---------
Total costs and expenses............................... 34,260 33,604
--------- ---------
Loss before income taxes and minority interests................. (420) (10,751)
Income tax provision............................................ 6 50
Minority interest in loss of consolidated subsidiaries.......... 583 460
--------- ---------
Net income (loss)............................................... 157 (10,341)
Dividend requirements on preferred shares....................... (18,832) (15,980)
--------- ---------
Net loss applicable to Common Shares............................ $ (18,675) $ (26,321)
========= =========
Loss per Common Share (basic and diluted):
Net loss per Common Share.................................. $ (1.95) $ (2.75)
========= =========
Number of shares used in computation............................ 9,578,000 9,578,000
========= =========
</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 SHAREHOLDERS'
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
--------- ------ ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997............ $279 $96 $604,215 $(742,427) $(158) $ 7,597
Net income......................... 157
Undeclared dividends and accretion
on redeemable preferred shares... (12,574)
Unrealized loss on investment
securities....................... (2,818)
Adjustment to unearned compensation
on stock options................. 363 (363)
Compensation expense on stock
option grants.................... 116
---- --- --------- --------- ----- -------
Balance, March 31, 1998............... $279 $96 $ 592,004 $(742,270) $(405) $ 4,779
==== === ========= ========= ===== =======
</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>
Three Months Ended
March 31,
-------------------------
1998 1997
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................... $ 157 $(10,341)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Loss from joint venture............................................... 329 --
Depreciation and amortization......................................... 2,344 2,009
Provision for loss on long-term investment............................ -- 3,796
Stock based compensation expense...................................... 828 847
Changes in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in receivables and other assets................ (9,586) 14,313
Increase in income taxes........................................... 440 759
Increase (decrease) in accounts payable and accrued liabilities.... 2,766 (12,905)
------- --------
Net cash used for operating activities..................................... (2,722) (1,522)
------- --------
Cash flows from investing activities:
Sale or maturity of investment securities............................. 8,129 23,193
Purchase of investment securities..................................... (913) (3,963)
Sale or liquidation of long-term investments.......................... 1,901 2,807
Purchase of long-term investments..................................... (1,951) (4,400)
Purchase of real estate............................................... (1,419) --
Purchase of furniture and fixtures.................................... (197) --
Payment of prepetition claims......................................... (847) (58)
Return of prepetition claims paid..................................... -- 1,396
(Increase) decrease in restricted assets.............................. (68) 82
Net cash transferred to joint venture................................. (487) --
Payment for acquisitions, net of cash acquired........................ -- (20,014)
------- --------
Net cash provided from (used for) investing activities..................... 4,148 (957)
------- --------
Cash flows from financing activities:
Decrease in margin loan payable....................................... (2,842) --
Prepayment of notes payable........................................... (291) (114)
Repayment of other obligations........................................ -- (207)
------- --------
Net cash used for financing activities..................................... (3,133) (321)
------- --------
Net decrease in cash and cash equivalents.................................. (1,707) (2,800)
Cash and cash equivalents, beginning of period............................. 11,606 57,282
------- --------
Cash and cash equivalents, end of period................................... $ 9,899 $ 54,482
======= ========
</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 as of March 31, 1998 presented herein
have been prepared by the Company without an audit. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position as of
March 31, 1998 and the results of operations and cash flows for all
periods presented have been made. Results for the interim periods are not
necessarily indicative of the results for an entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
These financial statements should be read in conjunction with the
consolidated financial statements in the Company's Annual Report on Form
10-K, as amended, for the year ended December 31, 1997, as filed with the
Securities and Exchange Commission.
Certain reclassifications have been made to prior interim period
financial information to conform with current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." The Statement, which the Company adopted in the first quarter of
1998, establishes standards for reporting and displaying comprehensive
income and its components in a full set of general-purpose financial
statements. Where applicable, earlier periods have been restated to
conform to the standards established by SFAS No. 130. The adoption of
SFAS 130 did not have a material impact on the Company's financial
statements.
For transactions entered into in fiscal years beginning after December 15,
1997, the Company adopted and is reporting in accordance with SOP 97-2,
"Software Revenue Recognition". The adoption of SOP 97-2 did not have a
material impact on the Company's financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1
provides guidance that the carrying value of software developed or
obtained for internal use is assessed based upon an analysis of estimated
future cash flows on an undiscounted basis and before interest charges.
SOP 98-1 is effective for transactions entered into in fiscal years
beginning after December 15, 1998. The Company believes that adoption of
SOP 98-1 will not have a material impact on the Company's financial
statements.
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<PAGE> 8
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which establishes standards for
the way that public business enterprises report information about
operating segments. SFAS No. 131 is effective for financial statements for
fiscal years beginning after December 15, 1997. The Company is currently
reviewing its operating segment disclosures and will adopt SFAS No. 131 in
the fourth quarter of 1998.
2. INVESTMENT IN WESTERN REALTY
On January 31, 1997, the Company entered into a stock purchase agreement
(the "Purchase Agreement") with Brooke (Overseas) Ltd. ("Brooke
(Overseas)"), a wholly-owned subsidiary of Brooke Group Ltd. ("Brooke"),
an affiliate of the Company, pursuant to which the Company acquired 10,483
shares (the "BML Shares") of the common stock of BrookeMil Ltd. ("BML")
from Brooke (Overseas) for a purchase price of $55,000, consisting of
$21,500 in cash and a $33,500 9% promissory note of the Company (the
"Note"). The BML Shares comprise 99.1% of the outstanding shares of BML, a
real estate development company in Russia. The Note, which was
collateralized by the BML Shares, was paid during 1997.
In February 1998, the Company and Apollo Real Estate Investment Fund III,
L.P. ("Apollo") organized Western Realty Development LLC ("Western
Realty") to make real estate and other investments in Russia. In
connection with the formation of Western Realty, the Company agreed, among
other things, to contribute the real estate assets of BML, including Ducat
Place II and the site for Ducat Place III, to Western Realty and Apollo
agreed to contribute up to $58,000.
Under the terms of the agreement governing Western Realty ("the LLC
Agreement"), the ownership and voting interests in Western Realty will be
held equally by Apollo and the Company. Apollo will be entitled to a
preference on distributions of cash from Western Realty to the extent of
its investment, together with a 15% annual rate of return, and the Company
will then be entitled to a return of $10,000 of BML-related expenses
incurred 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 will be managed by a Board of Managers
consisting of an equal number of representatives chosen by Apollo and the
Company. All material corporate transactions by Western Realty will
generally require the unanimous consent of the Board of Managers.
Accordingly, the Company has accounted for its non-controlling interest in
Western Realty using the equity method of accounting.
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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)
On February 27, 1998, at an initial closing under the LLC Agreement,
Apollo made a $11,000 loan (the "Loan") to Western Realty. The Loan, which
bore interest at the rate of 15% per annum and was due September 30, 1998,
was collateralized by a pledge of the Company's shares of BML. On April
28, 1998, the Loan and the accrued interest thereon were converted into a
capital contribution by Apollo to Western Realty and the BML pledge was
released.
The Company recorded its basis in the investment in the joint venture in
the amount of $59,669 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.
Western Realty will seek to make additional real estate and other
investments in Russia. The Company and Apollo have agreed to invest,
through Western Realty or another entity, up to $25,000 in the aggregate
for the potential development of a real estate project in Moscow. In
addition, Western Realty has made a $20,000 participating loan to, and
payable out of a 30% profits interest in, a company organized by Brooke
(Overseas) which will, among other things, acquire an interest in an
industrial site and manufacturing facility being constructed on the
outskirts of Moscow by a subsidiary of Brooke (Overseas).
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at fair
value, with net unrealized gains included as a separate component of
shareholders' equity (deficit). The Company had realized gains on sales of
investment securities available for sale of $ 4,588 for the three months
ended March 31, 1998.
The components of investment securities available for sale at March 31,
1998 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Short-term investments...................... $ 3,798 $ -- $ -- $ 3,798
Marketable equity securities................ 29,698 1,147 611 30,234
Marketable warrants......................... -- 7,103 -- 7,103
Marketable debt securities ................. 3,685 -- 2,860 825
--------- -------- ------- --------
Investment securities....................... $ 37,181 $ 8,250 $ 3,471 $ 41,960
========= ======== ======= ========
</TABLE>
4. LONG-TERM INVESTMENTS
At March 31, 1998, long-term investments consisted primarily of
investments in limited partnerships of $26,100. The Company is required
under certain limited partnership agreements to make additional
investments up to an aggregate of $6,700 at March 31, 1998. The Company
believes the fair value of the limited partnerships exceeds its carrying
amount by approximately $7,500 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 are subject to the performance
of the underlying partnership and its management by the general partners.
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<PAGE> 10
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
In the first quarter of 1997, the Company determined that an other than
temporary impairment in the value of its investment in a joint venture had
occurred and wrote down this investment to zero with a charge to
operations of $3,796 for the three month period. The Company's estimates
of the fair value of its long-term investments are subject to judgment and
are not necessarily indicative of the amounts that could be realized in
the current market.
5. REDEEMABLE PREFERRED SHARES
At March 31, 1998, the Company had authorized and outstanding 2,000,000
and 1,071,462, respectively, of its Class A Senior Preferred Shares. At
March 31, 1998 and December 31, 1997, respectively, the carrying value of
such shares amounted to $271,924 and $258,638, including undeclared
dividends of $176,161 and $163,302 or $164.41 and $152.41 per share. As of
March 31, 1998, the unamortized discount on the Class A Senior Preferred
Shares was $7,534.
For the three months ended March 31, 1998, the Company recorded $712 in
compensation expense related to certain Class A Senior Preferred Shares
awarded to an officer of the Company in 1996. At March 31, 1998, the
balance of the deferred compensation and the unamortized discount related
to these award shares was $3,849 and $2,760, respectively.
6. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS
The undeclared dividends, as adjusted for conversions of Class B Preferred
Shares into Common Shares, cumulatively amounted to $145,671 and $139,412
at March 31, 1998 and December 31, 1997, respectively. These undeclared
dividends represent $52.20 and $49.95 per share as of the end of each
period. No accrual was recorded for such undeclared dividends as the Class
B Preferred Shares are not mandatorily redeemable.
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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)
7. CONTINGENCIES
LITIGATION
On or about March 13, 1997, a shareholder derivative suit was filed
against the Company, as a nominal defendant, its directors and Brooke in
the Delaware Chancery Court, by a shareholder of the Company. The suit
alleges that the Company's purchase of the BML Shares constituted a
self-dealing transaction which involved the payment of excessive
consideration by the Company. The plaintiff seeks (i) a declaration that
the Company's directors breached their fiduciary duties, Brooke aided and
abetted such breaches and such parties are therefore liable to the
Company, and (ii) unspecified damages to be awarded to the Company. The
Company's time to respond to the complaint has not yet expired. The
Company believes that the allegations were without merit. Although there
can be no assurances, management is of the opinion, after consultation
with counsel, that the ultimate resolution of this matter will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
The Company is a defendant in various lawsuits and may be subject to
unasserted claims primarily in connection with its activities as a
securities broker-dealer and participation in public underwritings. These
lawsuits involve claims for substantial or indeterminate amounts and are
in varying stages of legal proceedings. In the opinion of management,
after consultation with counsel, the ultimate resolution of these matters
will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS
The prepetition claims remaining as of March 31, 1998 of $12,452 may be
subject to future adjustments depending on pending discussions with the
various parties and the decisions of the Bankruptcy Court.
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<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTRODUCTION
The Company's Consolidated Financial Statements include the accounts of
Ladenburg Thalmann & Co. Inc. ("Ladenburg"), BrookeMil Ltd. ("BML"), Thinking
Machines Corporation ("Thinking Machines") and other subsidiaries.
On January 19, 1995, the Company emerged from bankruptcy reorganization
proceedings and completed substantially all distributions to creditors under its
First Amended Joint Chapter 11 Plan of Reorganization, as amended (the "Joint
Plan"). The Joint Plan provided for, among other things, the sale of the
Company's money transfer business and the payment of all allowed claims.
WESTERN REALTY. In February 1998, the Company and Apollo Real Estate Investment
Fund III, LP ("Apollo") organized Western Realty Development LLC ("Western
Realty") to make real estate and other investments in Russia. In connection with
the formation of Western Realty, the Company agreed, among other things, to
contribute the real estate assets of BML, including Ducat Place II and the site
for Ducat Place III, to Western Realty and Apollo agreed to contribute up to
$58,000. The Company has accounted for its non-controlling interest in Western
Realty on the equity method. See Note 2 of the accompanying financial statements
for the three months ended March 31, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
The Statement, which the Company adopted in the first quarter of 1998,
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. Where
applicable, earlier periods have been restated to conform to the standards
established by SFAS No. 130. The adoption of SFAS 130 did not have a material
impact on the Company's financial statements.
For transactions entered into in fiscal years beginning after December 15, 1997,
the Company adopted and is reporting in accordance with SOP 97-2, "Software
Revenue Recognition". The adoption of SOP 97-2 did not have a material impact on
the Company's financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance
that the carrying value of software developed or obtained for internal use is
assessed based upon an analysis of estimated future cash flows on an
undiscounted basis and before interest charges. SOP 98-1 is effective for
transactions entered into in fiscal years beginning after December 15, 1998. The
Company believes that adoption of SOP 98-1 will not have a material impact on
the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes standards for the way
that public business enterprises report information about operating segments.
SFAS No. 131 is effective for financial statements for fiscal years beginning
after December 15, 1997. The Company is currently reviewing its operating
segment disclosures and will adopt SFAS No. 131 in the fourth quarter of 1998.
The SEC recently issued new rules which will require the Company, commencing
with filings which include financial statements for fiscal year 1998, to provide
disclosure of quantitative and qualitative information relating to derivative
financial instruments, derivative commodity instruments and other financial
instruments. These disclosures are intended to provide investors with
information relating to market risk exposure, including the Company's
objectives, strategies and instruments used to manage exposures. The disclosures
are required to be presented outside of, and not incorporated into, the
Company's consolidated financial statements. This disclosure requirement will be
applicable principally to the Company's Ladenburg Thalmann broker-dealer
subsidiary. The impact of the implementation of this new disclosure requirement
is not yet determinable.
-12-
<PAGE> 13
YEAR 2000 COSTS. The Company is in the process of completing a Year 2000 risk
analysis to determine the Company's need to modify or replace a significant
portion of its software so that its computer systems will properly utilize dates
beyond December 31, 1999. Although such costs may be a factor in describing
changes in operating profit for one or more of the Company's business segments
in any given reporting period, the Company currently does not believe that the
anticipated costs of year 2000 systems conversions will have a material impact
on its future consolidated results of operations. However, due to the
interdependent nature of computer systems, the Company may be adversely impacted
in the year 2000 depending on whether it or entities not affiliated with the
Company have addressed this issue successfully.
RESULTS OF OPERATIONS
Consolidated total revenues were $33,840 for the three months ended March 31,
1998 versus $22,853 for the same period last year. The increase in revenues of
$10,987 is attributable primarily to the $10,713 increase in revenues of
Ladenburg as a result of an increase in net principal transactions of $3,394,
increase in commissions of $3,283 and corporate finance fees of $2,106.
For the first quarters of 1998 and 1997, the results of operations of the
Company's primary operating units, which include Ladenburg (broker-dealer), the
Company's U.S. office buildings and shopping centers and BML (real estate), and
Thinking Machines (computer software), were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
-------- --------
<S> <C> <C>
Broker-dealer:
Revenues............................................... $ 19,425 $ 8,712
Expenses............................................... 20,649 12,791
-------- --------
Operating loss before taxes............................ $ (1,224) $ (4,079)
======== ========
Real estate:
Revenues............................................... $ 7,776 $ 6,282
Expenses............................................... 7,796 7,869
-------- --------
Operating loss before taxes............................ $ (20) $ (1,587)
======== ========
Computer software:
Revenues............................................... $ 413 $ 3,283
Expenses............................................... 1,662 4,561
-------- --------
Operating loss before taxes
and minority interests............................. $ (1,249) $ (1,278)
======== ========
Corporate and other:
Revenues............................................... $ 6,226 $ 4,576
Expenses............................................... 4,153 8,383
-------- --------
Operating income (loss) before taxes................... $ 2,073 $ (3,807)
======== ========
</TABLE>
Ladenburg's revenues for the first quarter of 1998 increased $10,713 as compared
to revenues for the first quarter of 1997. Ladenburg's expenses for the first
quarter of 1998 increased $7,858 as compared to expenses for the first quarter
of 1997 due primarily to an increase in performance-based compensation expense
associated with higher revenues.
Revenues from the real estate operations for the first quarter of 1998 increased
$1,494 primarily due to $1,831 in revenues of BML. Expenses of the real estate
operations decreased $ 71 in the 1998 period due primarily to $ 82 in lower
interest expense associated with the U.S. real estate operations.
-13-
<PAGE> 14
Thinking Machines had revenues of $413 for the three months ended March 31,
1998. Direct costs of these revenues were $185 for the period. Operating
expenses of Thinking Machines consisted of selling, general and administrative
of $661 and research and development of $816 for the three months ended March
31, 1998.
Thinking Machines' revenues for the first quarter of 1997 consisted of $183 of
revenues from computer software sales and $ 3,100 of parallel processing
computer sales and service. Thinking Machines' expenses for the three months
ended March 31, 1997 consisted of selling, general and administrative of $1,964,
research and development of $918 and expenses associated with parallel
processing computer sales and service of $1,697. In April, 1997 Thinking
Machines sold the remaining part of its parallel processing computer sales and
service business.
For the first quarter of 1998, the Company's revenues of $6,226 related to
corporate and other activities primarily consisted of net gains on investments
of $5,596 and interest and dividend income of $596 as compared to net gains on
investments of $3,694 and interest and dividend income of $790 for the same
period in the prior year.
Corporate and other expenses of $4,153 for the first quarter of 1998 consisted
primarily of employee compensation and benefits of $1,849 and expenses
associated with a 50.1% consolidated subsidiary of $613. Corporate and other
expenses for the first quarter of 1997 of $8,383 consisted primarily of employee
compensation and benefits of $2,737 and a $3,796 provision for loss on a
long-term investment.
Income tax for the first quarter of 1998 was $6 versus $50 for the first quarter
of 1997 due to state tax expense. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net working capital increased to $1,281 at March 31, 1998 from a
deficit of $9,486 at December 31, 1997 primarily as a result of the contribution
of BML's real estate operations to Western Realty. The Company is required under
certain limited partnership agreements to make additional investments for an
aggregate of $6,700 at March 31, 1998.
During the first quarter 1998, the Company's cash and cash equivalents decreased
from $11,606 to $9,899 due primarily to capital expenditures of $1,419
associated with the Company's real estate operations.
Cash used for operating activities for the three months ended March 31, 1998
increased from $1,522 to $2,722 from the prior year. The difference is primarily
due to the $1,967 increase in Ladenburg's net trading securities owned for the
1998 period versus an $11,788 decrease for the 1997 period offset by an increase
in net income of $10,498 and the non-cash charge to operations of $3,796 in 1997
relating to the write down of a long-term investment.
Cash flows provided from investing activities for the three months ended March
31, 1998 were $4,148 compared to cash flows used for investing activities of
$957 for the three months ended March 31, 1997. The difference is primarily
attributable to the $20,014 used to acquire the BML stock in 1997 offset by net
lower investment sales of $12,014, increased capital expenditures of $1,616 and
increased payments of pre-petition bankruptcy claims of $789 in 1998.
Cash flows used for financing activities decreased to $3,133 for the three
months ended March 31, 1998 from $321 for the three months ended March 31, 1997
primarily due to the $2,842 net payment on the Company's margin loan.
-14-
<PAGE> 15
The Company expects that its available working capital will be sufficient to
fund its currently anticipated cash requirements for 1998 and currently
anticipated cash requirements of its operating businesses, investments,
commitments, and payments of principal and interest on its outstanding
indebtedness.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company and its representatives may from time to time make oral or written
"forward-looking statements" within the meaning of the Private Securities Reform
Act of 1995 (the "Reform Act"), including any statements that may be contained
in the foregoing "Management's Discussion and Analysis of Financial Condition
and Results of Operations", in this report and in other filings with the
Securities and Exchange Commission and in its reports to shareholders, which
represent the Company's expectations or beliefs with respect to future events
and financial performance. These forward-looking statements are subject to
certain risks and uncertainties and, in connection with the "safe-harbor"
provisions of the Reform Act, the Company is hereby identifying important
factors that could cause actual results to differ materially from those
contained in any forward-looking statements made by or on behalf of the Company.
Each of the Company's operating businesses, Ladenburg, New Valley Realty, and
Thinking Machines and its interest in Western Realty are subject to intense
competition, changes in consumer preferences, and local economic conditions.
Ladenburg is further subject to uncertainties endemic to the securities industry
including, without limitation, the volatility of domestic and international
financial, bond and stock markets, governmental
regulation and litigation. The operations of BML and Western Realty in Russia
are also subject to a high level of risk in light of Russia's substantial
political transformation from a centrally-controlled economy under communist
rule to the early stages of a pluralist market-oriented democracy. In connection
therewith, Russia has experienced dramatic political, social and economic reform
although there is no assurance that further reforms necessary to complete such
transformation will occur. The Russian economy remains characterized by, among
others, significant inflation, declining industrial productions, rising
unemployment and underemployment, and an unstable currency. In addition to the
foregoing, BML and Western Realty may be affected unfavorably by political or
diplomatic developments, regional tensions, currency repatriation restrictions,
foreign exchange fluctuations, a relatively untested judicial system, a still
evolving taxation system subject to constant changes which may be retroactive in
effect, and other developments in the law or regulations in Russia and, in
particular, the risks of expropriation, nationalization and confiscation of
assets and changes in legislation relating to foreign ownership. In addition,
the system of commercial laws, including the laws governing registration of
interests in real estate and the establishment and enforcement of security
interests, is not well developed and, in certain circumstances, inconsistent and
adds to the risk of investment in the real estate development business in
Russia. Western Realty and the Company are additionally subject to the
uncertainties relating to the real estate business, including, without
limitation, required capital improvements to facilities, local real estate
market conditions and federal, state, city and municipal laws and regulations
concerning, among others, zoning and environmental matters. Thinking Machines is
also subject to uncertainties relating to, without limitation, the development
and marketing of computer products, including customer acceptance and required
funding, technological changes, capitalization, and the ability to utilize and
exploit its intellectual property and propriety software technology.
Uncertainties affecting the Company generally include, without limitation, the
effect of market conditions on the salability of the Company's investment
securities, the uncertainty of other potential acquisitions and investments by
the Company, the effects of governmental regulation on the Company's ability to
target and/or consummate any such acquisitions and the effects of limited
management experience in areas in which the Company may become involved.
Results actually achieved may differ materially from expected results included
in these statements as a result of these or other factors. Due to such
uncertainties and risks, readers are cautioned not to place undue reliance on
such forward-looking statements, which speak only as of the date on which such
statements are made. The Company does not undertake to update any
forward-looking statement that may be made from time to time on behalf of the
Company.
-15-
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 7 to the "Notes to the Condensed Consolidated Financial
Statements" in Part I, Item 1 to this Report.
Item 3. DEFAULTS UPON SENIOR SECURITIES
See Notes 5 and 6 to the "Notes to the Condensed Consolidated Financial
Statements" in Part I, Item 1 to this Report.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule (for SEC use only)
(b) REPORTS ON FORM 8-K
The Company filed the following report on Form 8-K during the
first quarter of 1998:
DATE ITEMS FINANCIAL STATEMENTS
- ---- ----- --------------------
February 20, 1998 2,7 None
-16-
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW VALLEY CORPORATION
(Registrant)
Date: May 20, 1998 By: /s/ J. Bryant Kirkland III
--------------------------------
J. Bryant Kirkland III
Vice President, Treasurer
and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
-17-
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 9,889
<SECURITIES> 97,988
<RECEIVABLES> 1,402
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 114,991
<PP&E> 194,759
<DEPRECIATION> 12,180
<TOTAL-ASSETS> 403,239
<CURRENT-LIABILITIES> 113,710
<BONDS> 154,027
271,924
279
<COMMON> 96
<OTHER-SE> (145,892)
<TOTAL-LIABILITY-AND-EQUITY> 403,239
<SALES> 0
<TOTAL-REVENUES> 33,840
<CGS> 0
<TOTAL-COSTS> 0
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<INTEREST-EXPENSE> 4,160
<INCOME-PRETAX> (420)
<INCOME-TAX> 6
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<NET-INCOME> 157
<EPS-PRIMARY> (1.95)
<EPS-DILUTED> (1.95)
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