<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, 1999
COMMISSION FILE NUMBER 1-2493
New Valley Corporation
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-5482050
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
100 S.E. SECOND STREET, 32ND FLOOR
MIAMI, FLORIDA 33131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(305) 579-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
---- ---
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES X NO
---- ----
AS OF MAY 14, 1999, 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, 1999
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
----
<S> <C>
Item 1. Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31,
1999 and December 31, 1998.................................... 3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 1999 and 1998................ 4
Condensed Consolidated Statement of Changes in
Stockholders' Deficiency for the three months
ended March 31, 1999.......................................... 5
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1999 and 1998................ 6
Notes to the Condensed Consolidated Financial
Statements .................................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 22
Item 3. Defaults Upon Senior Securities................................... 22
Item 6. Exhibits and Reports on Form 8-K.................................. 22
SIGNATURE............................................................................. 23
</TABLE>
<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,
--------------- -----------------
1999 1998
--------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 10,312 $ 16,444
Investment securities available for sale.............................. 36,563 37,567
Trading securities owned.............................................. 6,562 8,984
Restricted assets..................................................... 1,192 1,220
Receivable from clearing brokers...................................... 12,575 22,561
Other current assets.................................................. 3,647 4,675
--------- ----------
Total current assets.............................................. 70,851 91,451
--------- ----------
Investment in real estate, net............................................. 83,049 82,875
Furniture and equipment, net............................................... 10,393 10,444
Restricted assets.......................................................... 8,909 6,082
Long-term investments, net................................................. 11,726 9,226
Investment in joint venture................................................ 63,690 65,193
Other assets............................................................... 6,020 7,451
--------- ----------
Total assets...................................................... $ 254,638 $ 272,722
========= ==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Margin loan payable................................................... $ 4,044 $ 13,088
Current portion of notes payable and long-term obligations............ 2,708 2,745
Accounts payable and accrued liabilities.............................. 26,863 32,047
Prepetition claims and restructuring accruals......................... 12,340 12,364
Income taxes.......................................................... 18,361 18,702
Securities sold, not yet purchased.................................... 2,659 4,635
--------- ----------
Total current liabilities......................................... 66,975 83,581
--------- ----------
Notes payable.............................................................. 54,801 54,801
Other long-term liabilities................................................ 28,200 23,450
Commitments and contingencies.............................................. -- --
Redeemable preferred shares................................................ 332,198 316,202
Stockholders' deficiency:
Cumulative preferred shares; liquidation preference of $69,769,
dividends in arrears: $172,905 and $165,856......................... 279 279
Common Shares, $.01 par value; 850,000,000 shares
authorized; 9,577,624 shares outstanding............................ 96 96
Additional paid-in capital............................................ 534,568 550,119
Accumulated deficit................................................... (759,598) (758,016)
Unearned compensation on stock options................................ (148) (475)
Accumulated other comprehensive income................................ (2,733) 2,685
--------- ----------
Total stockholders' deficiency.................................... (227,536) (205,312)
--------- ----------
Total liabilities and stockholders'deficiency..................... $ 254,638 $ 272,722
========= ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Stctements.
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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,
-----------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Revenues:
Principal transactions, net................................ $ 4,776 $ 5,893
Commissions................................................ 11,126 6,676
Corporate finance fees..................................... 1,438 3,238
Gain on sale of investments, net........................... 499 5,596
Loss from joint venture.................................... (1,503) (329)
Real estate leasing........................................ 2,230 7,776
Computer sales and service................................. 251 413
Interest and dividends..................................... 1,261 2,849
Other income............................................... 2,692 1,728
---------- ----------
Total revenues......................................... 22,770 33,840
---------- ----------
Cost and expenses:
Selling, general and administrative........................ 26,592 30,100
Interest................................................... 2,325 4,160
---------- ----------
Total costs and expenses............................... 28,917 34,260
---------- ----------
Loss from continuing operations before income taxes
and minority interests..................................... (6,147) (420)
Income tax provision............................................ 15 6
Minority interest in loss of consolidated subsidiaries.......... 480 583
---------- ----------
(Loss) income from continuing operations........................ (5,682) 157
Discontinued operations:
Gain on disposal of discontinued operations................ 4,100 --
---------- ----------
Income from discontinued operations........................ 4,100 --
---------- ----------
Net (loss) income...................................... (1,582) 157
Dividend requirements on preferred shares....................... (22,219) (18,832)
---------- ----------
Net loss applicable to Common Shares............................ $ (23,801) $ (18,675)
========== ==========
Loss per Common Share (basic and diluted):
Continuing operations...................................... $ (2.92) $ (1.95)
Discontinued operations.................................... .43 --
---------- ----------
Net loss per Common Share.................................. $ (2.49) $ (1.95)
========== ==========
Number of shares used in computation............................ 9,577,624 9,577,624
========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE> 5
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' 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, 1998............ $279 $96 $550,119 $(758,016) $ (475) $ 2,685
Net income......................... (1,582)
Undeclared dividends and accretion
on redeemable preferred shares... (15,171)
Unrealized loss on investment
securities....................... (5,418)
Adjustment to unearned compensation
on stock options................. (327) 327
Compensation expense on stock
option grants....................
(53)
--- -- ------- -------- ------ -------
Balance, March 31, 1999............... $279 $96 $534,568 $(759,598) $ (148) $ (2,733)
=== == ======= ======== ====== =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Stctements.
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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,
----------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income....................................................... $ (1,582) $ 157
Adjustments to reconcile net (loss) income to net cash provided from
(used for) operating activities:
Income from discontinued operations................................... (4,100) --
Loss from joint venture............................................... 1,503 329
Depreciation and amortization......................................... 898 2,344
Stock based compensation expense...................................... 774 828
Changes in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in receivables and other assets................ 14,375 (9,586)
(Decrease) increase in income taxes................................ (340) 440
(Decrease) increase in accounts payable and accrued liabilities.... (6,884) 2,766
--------- --------
Net cash provided from (used for) continuing operations............... 4,644 (2,722)
Net cash provided from discontinued operations........................ 4,100 --
--------- --------
Net cash provided from (used for) operating activities..................... 8,744 (2,722)
--------- --------
Cash flows from investing activities:
Sale or maturity of investment securities............................. 2,947 8,129
Purchase of investment securities..................................... (6,858) (913)
Sale or liquidation of long-term investments.......................... -- 1,901
Purchase of long-term investments..................................... (2,500) (1,951)
Sale of real estate................................................... 920 --
Purchase of real estate............................................... (1,615) (1,419)
Purchase of furniture and fixtures.................................... (312) (197)
Payment of prepetition claims......................................... (24) (847)
Increase in restricted assets......................................... (2,827) (68)
Net cash transferred to joint venture................................. -- (487)
--------- --------
Net cash (used for) provided from investing activities..................... (10,269) 4,148
--------- --------
Cash flows from financing activities:
Decrease in margin loan payable....................................... (9,044) (2,842)
Proceeds from participating loan...................................... 4,473 --
Prepayment of notes payable........................................... (36) (291)
--------- --------
Net cash used for financing activities..................................... (4,607) (3,133)
--------- --------
Net decrease in cash and cash equivalents.................................. (6,132) (1,707)
Cash and cash equivalents, beginning of period............................. 16,444 11,606
--------- --------
Cash and cash equivalents, end of period................................... $ 10,312 $ 9,899
========= ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Stctements.
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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, 1999 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
March 31, 1999 and the results of operations and cash flows for all
periods presented have been made. Results for the interim periods are not
necessarily indicative of the results for an entire year.
These financial statements should be read in conjunction with the
consolidated financial statements in the Company's Annual Report on Form
10-K for the year ended December 31, 1998 as filed with the Securities and
Exchange Commission (Commission File Number 1-2493).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior interim period financial
information to conform with current year presentation.
PROPOSED RECAPITALIZATION PLAN
The Company has submitted for approval of its stockholders at its 1999
annual meeting, which will be held on May 21, 1999, a proposed
recapitalization of its capital stock (the "Recapitalization Plan"). Under
the Recapitalization Plan, each of the Company's outstanding Class A
Senior Preferred Shares would be reclassified and changed into 20 Common
Shares and one Warrant to purchase Common Shares (the "Warrants"). Each of
the Class B Preferred Shares would be reclassified and changed into
one-third of a Common Share and five Warrants. The existing Common Shares
would be reclassified and changed into one-tenth of a Common Share and
three-tenths of a Warrant. The authorized number of Common Shares would be
reduced from 850,000,000 to 100,000,000. The Warrants to be issued as part
of the Recapitalization Plan would have an exercise price of $12.50 per
share subject to adjustment in certain circumstances and be exercisable
for five years following the effective date of the Company's Registration
Statement covering the underlying Common Shares. The Warrants would not be
callable by the Company for a three-year period. Upon completion of the
Recapitalization Plan, the Company will apply for listing of the Common
Shares and Warrants on NASDAQ.
Completion of the Recapitalization Plan would be subject to, among other
things, approval by the required holders of the various classes of the
Company's shares. Brooke Group Ltd. ("Brooke"), the Company's principal
stockholder, has agreed to vote all of its shares in the Company in favor
of the Recapitalization Plan. As a result of the Recapitalization Plan and
assuming no warrant holder
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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)
exercises its Warrants, Brooke will increase its ownership of the
outstanding Common Shares of the Company from 42.3% to 55.1% and its total
voting power from 42% to 55.1%.
The Company believes the proposed Recapitalization Plan will simplify the
current capital structure of the Company by replacing it with a single
class of equity securities. The exchange of the Preferred Shares for
Common Shares will eliminate dividend arrearages, thus increasing the net
worth of the Company by approximately $332,198 on a pro forma basis as of
March 31, 1999. It will also remove the need to redeem the Class A Senior
Preferred Shares in 2003. The resulting improvement in the net worth of
the Company, along with a hoped for increase in the price of the Common
Shares, should increase the likelihood of having the Common Shares quoted
on NASDAQ. This, along with a more transparent capital structure, should
increase the liquidity of the Company's securities, improve the valuation
of the Common Shares and provide a currency for acquisitions and
financings. Finally, the recapitalization will allow the voting rights of
stockholders to properly reflect the economic interest of such
stockholders.
NEW ACCOUNTING PRONOUNCEMENTS.
In June, 1998, FASB issued Statement of Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. SFAS 133 requires that all derivative instruments be
recorded on the balance sheet at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
The Company has not yet determined the impact that the adoption of SFAS
133 will have on its earnings or statement of financial position.
2. INVESTMENT IN WESTERN REALTY
WESTERN REALTY DEVELOPMENT LLC
In February 1998, the Company and Apollo Real Estate Investment Fund III,
L.P. ("Apollo") organized Western Realty Development LLC ("Western Realty
Ducat") to make real estate and other investments in Russia. In connection
with the formation of Western Realty Ducat, the Company agreed, among
other things, to contribute the real estate assets of BML, including Ducat
Place II and the site for Ducat Place III, to Western Realty Ducat and
Apollo agreed to contribute up to $58,750, including the investment in
Western Realty Repin discussed below. Through March 31, 1999, Apollo had
funded $36,529 of its investment in Western Realty Ducat.
The ownership and voting interests in Western Realty Ducat are held
equally by Apollo and the Company. Apollo will be entitled to a preference
on distributions of cash from Western Realty Ducat to the extent of its
investment ($40,000), together with a 15% annual rate of return, and the
Company will then be entitled to a return of $20,000 of BML-related
expenses incurred and cash invested by the Company since March 1, 1997,
together with a 15% annual rate of return; subsequent distributions will
be made 70% to the Company and 30% to Apollo. Western Realty Ducat will be
managed by a Board of Managers consisting of an equal number of
representatives chosen by Apollo and the Company. All material corporate
transactions by Western Realty Ducat will generally require the unanimous
consent of the Board of Managers. Accordingly, the Company has accounted
for its non-controlling interest in Western Realty Ducat using the equity
method of accounting.
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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)
The Company recorded its basis in the investment in the joint venture in
the amount of $60,169 based on the carrying value of assets less
liabilities transferred. There was no difference between the carrying
value of the investment and the Company's proportionate interest in the
underlying value of net assets of the joint venture. The Company
recognizes losses incurred by Western Realty Ducat to the extent that
cumulative earnings of Western Realty Ducat are not sufficient to satisfy
Apollo's preferred return.
Western Realty Ducat will seek to make additional real estate and other
investments in Russia. Western Realty Ducat has made a $30,000
participating loan to, and payable out of a 30% profits interest in
Western Tobacco Investments LLC ("WTI"), a company organized by Brooke
(Overseas) Ltd., a subsidiary of Brooke, which, among other things, holds
the interests of Brooke (Overseas) Ltd. in Liggett-Ducat Ltd. and the new
factory being constructed by Liggett-Ducat Ltd. on the outskirts of
Moscow. Western Realty Ducat has recognized as other income $1,002, which
represents 30% of WTI's net income for the three months ended March 31,
1999.
Summarized financial information as of March 31, 1999 and December 31,
1998 and for the three month period ended March 31, 1999 and for the
period from February 20, 1998 (date of inception) to March 31, 1998 for
Western Realty Ducat follows:
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
Current assets................................ $ 2,939 $ 857
Participating loan receivable................. 32,993 31,991
Real estate, net.............................. 86,307 85,761
Furniture and fixtures, net................... 230 179
Noncurrent assets............................. 538 631
Goodwill, net................................. 7,016 7,636
Notes payable - current....................... 5,703 4,999
Current liabilities........................... 5,445 5,802
Notes payable................................. 13,143 14,656
Long-term liabilities......................... 756 756
Members' equity............................... 104,976 100,842
</TABLE>
<TABLE>
<CAPTION>
February 20, 1998
Three months ended (date of inception)
March 31, 1999 to March 31, 1998
-------------- -----------------
<S> <C> <C>
Revenues...................................... $ 3,448 $ 927
Costs and expenses............................ 4,425 1,256
Other income.................................. 1,002 --
Income tax provision.......................... 16 --
Net loss...................................... 9 (329)
</TABLE>
WESTERN REALTY REPIN LLC
In June 1998, the Company and Apollo organized Western Realty Repin LLC
("Western Realty Repin") to make a $25,000 participating loan (the "Repin
Loan") to BML. The proceeds of the loan will be used by BML for the
acquisition and preliminary development of two adjoining sites
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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)
totaling 10.25 acres (the "Kremlin Sites") located in Moscow across the
Moscow River from the Kremlin. BML, which is planning the development of a
1.1 million sq. ft. hotel, office, retail and residential complex on the
Kremlin Sites, owned 95.2% of one site and 52% of the other site at March
31, 1999. Apollo will be entitled to a preference on distributions of cash
from Western Realty Repin to the extent of its investment ($18,750),
together with a 20% annual rate of return, and the Company will then be
entitled to a return of its investment ($6,250), together with a 20%
annual rate of return; subsequent distributions will be made 50% to the
Company and 50% to Apollo. Western Realty Repin will be managed by a Board
of Managers consisting of an equal number of representatives chosen by
Apollo and the Company. All material corporate transactions by Western
Realty Repin will generally require the unanimous consent of the Board of
Managers.
Through March 31, 1999, Western Realty Repin has advanced $25,000 under
the Repin Loan to BML, of which $18,773 was funded by Apollo and is
classified in other long-term obligations on the consolidated balance
sheet at March 31, 1999. The Repin Loan, which bears no fixed interest, is
payable only out of 100% of the distributions, if made, by the entities
owning the Kremlin Sites to BML. Such distributions shall be applied first
to pay the principal of the Repin Loan and then as contingent
participating interest on the Repin Loan. Any rights of payment on the
Repin Loan are subordinate to the rights of all other creditors of BML.
BML used a portion of the proceeds of the Repin Loan to repay the Company
for certain expenditures on the Kremlin Sites previously incurred. The
Repin Loan is due and payable upon the dissolution of BML and is
collateralized by a pledge of the Company's shares of BML.
As of March 31, 1999, BML had invested $19,621 in the Kremlin Sites and
held $3,525, in cash, which was restricted for future investment. In
connection with the acquisition of its interest in one of the Kremlin
Sites, BML has agreed with the City of Moscow to invest an additional
$6,000 (which has been funded) in 1999 and $22,000 in 2000 in the
development of the property.
The Company has accounted for the formation of Western Realty Repin as a
financing by Apollo and a contribution of assets into a consolidated
subsidiary by New Valley which is eliminated in consolidation. 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 Repin is treated as interest
cost in the consolidated statement of operations.
The development of Ducat Place III and the Kremlin Sites will require
significant amounts of debt and other financing. The Company is actively
pursuing various financing alternatives on behalf of Western Realty Ducat
and BML. However, in light of the recent economic turmoil in Russia, no
assurance can be given that such financing will be available on acceptable
terms. Failure to obtain sufficient capital for the projects would force
Western Realty Ducat and BML to curtail or delay the planned development
of Ducat Place III and the Kremlin Sites.
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<PAGE> 11
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at fair
value, with net unrealized gains included as a component of accumulated
other comprehensive income. The Company had realized gains on sales of
investment securities available for sale of $499 for the three months
ended March 31, 1999.
The components of investment securities available for sale at March 31,
1999 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
<S> <C> <C> <C> <C>
Marketable equity securities................. $39,297 $ 254 $ 6,444 $33,107
Marketable warrants.......................... -- 3,456 -- 3,456
------- ------- -------- -------
Investment securities........................ $39,297 $ 3,710 $ 6,444 $36,563
======= ======= ======== =======
</TABLE>
4. LONG-TERM INVESTMENTS
At March 31, 1999, long-term investments consisted primarily of
investments in limited partnerships of $11,726. The Company believes the
fair value of the limited partnerships exceeds their carrying amount by
approximately $2,600 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.
5. REDEEMABLE PREFERRED SHARES
At March 31, 1999, the Company had authorized and outstanding 2,000,000
and 1,071,462, respectively, of its Class A Senior Preferred Shares. At
March 31, 1999 and December 31, 1998, respectively, the carrying value of
such shares amounted to $332,198 and $316,202, including undeclared
dividends of $234,581 and $219,068 or $218.94 and $204.46 per share. As of
March 31, 1999, the unamortized discount on the Class A Senior Preferred
Shares was $6,586.
For the three months ended March 31, 1999 and 1998, the Company recorded
$774 and $828 in compensation expense related to certain Class A Senior
Preferred Shares awarded to an officer of the Company in 1996. At March
31, 1999 and December 31, 1998, the balance of the deferred compensation
and the unamortized discount related to these award shares was $5,416 and
$5,721, 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 $172,905 and $165,856
at March 31, 1999 and December 31, 1998, respectively. These undeclared
dividends represent $61.96 and $59.43 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.
-11-
<PAGE> 12
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
7. CONTINGENCIES
LAWSUITS
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 stockholder of the Company. The suit
alleges that the Company's purchase in January 1997 of the shares of BML
from Brooke (Overseas) Ltd. constituted a self-dealing transaction which
involved the payment of excessive consideration by the Company. The
plaintiff seeks (i) a declaration that the Company's directors breached
their fiduciary duties, Brooke aided and abetted such breaches and such
parties are therefore liable to the Company, and (ii) unspecified damages
to be awarded to the Company. The Company's time to respond to the
complaint has not yet expired. The Company believes that the allegations
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.
RUSSIAN OPERATIONS
During 1998, the economy of the Russian Federation entered a period of
economic instability. The impact includes, but is not limited to, a steep
decline in prices of domestic debt and equity securities, a severe
devaluation of the currency, a moratorium on foreign debt repayments, an
increasing rate of inflation and increasing rates on government and
corporate borrowings. The return to economic stability is dependent to a
large extent on the effectiveness of the fiscal measures taken by
government and other actions beyond the control of companies operating in
the Russian Federation. The operations of BML and Western Realty Ducat may
be significantly affected by these factors for the foreseeable future.
Russian Taxation: Russian taxation is subject to varying interpretations
and constant changes. Furthermore, the interpretation of tax legislation
by tax authorities as applied to the transactions and activity of BML and
Western Realty Ducat may not coincide with that of management. As a
result, transactions may be challenged by tax authorities and BML and
Western Realty Ducat may be assessed additional taxes, penalties and
interest, which can be significant.
Management regularly reviews the Company's taxation compliance with
applicable legislation, laws and decrees and current interpretations and
from time to time potential exposures are identified. At any point in time
a number of open matters may exist, however, management believes that
adequate provision has been made for all material liabilities. Tax years
remain open to review by the authorities for six years.
-12-
<PAGE> 13
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
Year 2000: It is unclear whether the Russian government and other
organizations who provide significant infrastructure services have
addressed the Year 2000 Problem sufficiently to mitigate potential
substantial disruption to these infrastructure services. The substantial
disruption of these services would have an adverse affect on the
operations of BML and Western Realty Ducat. Furthermore, the current
financial crisis could affect the ability of the government and other
organizations to fund Year 2000 compliance programs.
8. 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 March 31, 1999 and 1998:
<TABLE>
<CAPTION>
BROKER- COMPUTER CORPORATE
DEALER REAL ESTATE SOFTWARE AND OTHER TOTAL
------ ----------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
1999
----
Revenues.................... $19,030 $ 2,323 $ 251 $ 1,166 $ 22,770
Operating (loss) income..... 25 (1,225) (1,601) (3,346) (6,147)
Identifiable assets......... 38,957 91,091 985 123,605 254,638
Depreciation and
amortization............. 198 532 120 48 898
Capital expenditures........ -- 1,615 26 286 1,927
1998
----
Revenues.................... $19,425 $ 7,776 $ 413 $ 6,226 $ 33,840
Operating (loss) income..... (1,224) (20) (1,249) 2,073 (420)
Depreciation and
amortization............. 304 1,746 236 58 2,344
Capital expenditures........ 112 1,419 27 58 1,616
</TABLE>
9. INCOME FROM DISCONTINUED OPERATIONS
The Company recorded a gain on disposal of discontinued operations of
$4,100 for the three months ended March 31, 1999 related to the settlement
of a lawsuit originally initiated by the Company's former Western Union
telegraph business.
10. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for the
reporting and disclosure of comprehensive income and its components.
Comprehensive income is a measure that reflects all changes in
stockholders' equity, except those resulting from transactions with
stockholders. For the Company, comprehensive income includes net income
and changes in the value of equity securities that have not been included
in net income. For the three months ended March 31, 1999 and 1998,
comprehensive loss applicable to Common Shares was $29,219 and $21,493,
respectively.
-13-
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------
INTRODUCTION
- ------------
The Company's Condensed Consolidated Financial Statements include the accounts
of Ladenburg Thalmann & Co. Inc. ("Ladenburg"), BrookeMil Ltd. ("BML"), Thinking
Machines Corporation ("Thinking Machines") and other subsidiaries.
RECENT DEVELOPMENTS
- -------------------
PROPOSED RECAPITALIZATION PLAN. The Company has submitted the proposed
Recapitalization Plan to its stockholders at the 1999 annual meeting of
stockholders which will be held on May 21, 1999. The Recapitalization Plan, if
implemented, will have a significant effect on the Company's financial position
and results of operations. See Note 1 to the Quarterly Condensed Consolidated
Financial Statements.
WESTERN REALTY DUCAT. In February 1998, the Company and Apollo Real Estate
Investment Fund III, L.P. ("Apollo") organized Western Realty Development LLC
("Western Realty Ducat") to make real estate and other investments in Russia. In
connection with the formation of Western Realty Ducat, the Company agreed, among
other things, to contribute certain real estate assets of BML, including Ducat
Place II and the site for Ducat Place III, to Western Realty Ducat, and Apollo
agreed to contribute up to $58,750, including the investment in Western Realty
Repin discussed below. The Company accounts for its non-controlling interest in
Western Realty Ducat by the equity method. See Note 2 to the Quarterly Condensed
Consolidated Financial Statements.
Western Realty Ducat will seek to make additional real estate and other
investments in Russia. Western Realty Ducat has made a $30,000 participating
loan to, and payable out of a 30% profits interest in, a company organized by
Brooke (Overseas) which, among other things, holds the interests of Brooke
(Overseas) in Liggett-Ducat Ltd. and the new factory being constructed by
Liggett-Ducat Ltd. on the outskirts of Moscow.
THE KREMLIN SITES. BML is planning the development of two adjoining sites
totaling 10.25 acres (the "Kremlin Sites") located in Moscow across the Moscow
River from the Kremlin Sites. BML, which is planning to develop a 1.1 million
sq. ft. hotel, office, retail and residential complex on the Kremlin Sites,
owned 95.2% of one site and 52% of the other site at March 31, 1999. In June
1998, the Company and Apollo organized Western Realty Repin LLC ("Western Realty
Repin") to make a $25,000 participating loan to BML (the "Repin Loan"). The
proceeds of the Repin Loan will be used by BML for the acquisition and
preliminary development of the Kremlin Sites (see Note 2 to the Consolidated
Financial Statements). As of March 31, 1999, BML had invested $19,621 in the
Kremlin Sites and held $3,525, in cash, which was restricted for future
investment.
SALE OF OFFICE BUILDINGS. On September 28, 1998, the Company completed the sale
of its four U.S. office buildings for an aggregate purchase price of $112,400.
-14-
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NEW ACCOUNTING PRONOUNCEMENTS. In June, 1998, FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. SFAS 133 requires that all derivative instruments be recorded on the
balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. The Company has not yet determined
the impact that the adoption of SFAS 133 will have on its earnings or statement
of financial position.
YEAR 2000 COSTS. The "Year 2000 issue" is the result of computer programs that
were written using two digits rather than four digits to define the applicable
year. If the Company's or its subsidiaries' computer programs with
date-sensitive functions are not Year 2000 compliant, they may recognize a date
using "00" as the Year 1900 rater than the Year 2000. This could result in
system failure or miscalculations causing disruption to operations, including,
among other things, an inability to process transactions or engage in similar
normal business activities.
THE COMPANY AND BML. Both the Company and BML use personal computers for all
transactions. All such computers and related systems and software are less than
three years old and are Year 2000 compliant. As a result, the Company believes
the Company and BML are Year 2000 compliant.
It is unclear whether the Russian government and other organizations who provide
significant infrastructure services have addressed the Year 2000 problem
sufficiently to mitigate potential substantial disruption of these
infrastructure services. The substantial disruption of these services would have
an adverse affect on the operations of BML and Western Realty Ducat.
Furthermore, the current financial crisis could affect the ability of the
Russian government and other organizations to fund Year 2000 compliance
programs.
THINKING MACHINES. Thinking Machines' payroll processing system is not Year 2000
compliant. Thinking Machines has identified replacements for its payroll system
and anticipates being Year 2000 compliant by mid-1999. Thinking Machines
converted its accounting system to a Year-2000 compliant system in 1998.
Thinking Machines anticipates the costs of these systems were approximately $50.
LADENBURG. Ladenburg has recently completed a plan to address Year 2000
compliance. Ladenburg's plan addresses external interfaces with third party
computer systems necessary in the broker-dealer industry. It also addresses
internal operations software necessary to continue operations on a daily basis.
Ladenburg anticipates that all phases of its Year 2000 plan except for the
contingency planning phase will be complete by July 1999 and will cost
approximately $650. The cost is inclusive of hardware and software upgrades and
replacements as well as consulting. Ladenburg anticipates that the remaining
costs will be incurred by July 1999. Ladenburg anticipates completing the
contingency planning phase in May 1999.
EXTERNAL SERVICE PROVIDERS. The modifications for Year 2000 compliance by the
Company and its subsidiaries are proceeding according to plan and are expected
to be completed by 1999. However, the failure of the Company's service providers
to resolve their own processing issues in a timely manner could result in a
material financial risk. The most significant outside service provider is
Ladenburg's clearing agent. Ladenburg has been informed by its clearing agent
that it has initiated an extensive effort to ensure that it is Year 2000
compliant. Ladenburg has been informed by its clearing agent that it completed
the remediation process in July 1998 and anticipates completion of internal
testing of its Year 2000 compliant software in June 1999. The clearing agent has
informed Ladenburg that it will conduct system-wide testing of its Year 2000
software throughout 1999.
-15-
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Although the Company and its subsidiaries are in the process of confirming that
their service providers are adequately addressing Year 2000 issues, there can be
no complete assurance of success, or that interaction with other service
providers will not impair the Company's or its subsidiaries' services.
RESULTS OF OPERATIONS
Consolidated total revenues were $22,770 for the three months ended March 31,
1999 versus $33,840 for the same period last year. The decrease in revenues of
$11,070 is attributable primarily to the $5,453 decrease in revenues from the
real estate operations as a result of the sale of the U.S. office buildings in
September 1998 and the contribution of Ducat Place II to Western Realty Ducat in
February 1998. Revenues were also lower as a result of decreased gains on
investments of $4,158 in 1999.
For the first quarters of 1999 and 1998, 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,
1999 1998
-------------- -------------
<S> <C> <C>
Broker-dealer:
Revenues............................................... $19,030 $19,425
Expenses............................................... 19,005 20,649
--------- --------
Operating income (loss) before taxes and
minority interests................................... $ 25 $ (1,224)
========= ========
Real estate:
Revenues............................................... $ 2,323 $ 7,776
Expenses............................................... 3,548 7,796
--------- --------
Operating loss before taxes and minority interests..... $ (1,225) $ (20)
========= ========
Computer software:
Revenues............................................... $ 251 $ 413
Expenses............................................... 1,852 1,662
--------- --------
Operating loss before taxes
and minority interests............................. $ (1,601) $ (1,249)
========= ========
Corporate and other:
Revenues............................................... $ 1,166 $ 6,226
Expenses............................................... 4,512 4,153
--------- --------
Operating (loss) income before taxes and
minority interests................................. $ (3,346) $ 2,073
========= ========
</TABLE>
Ladenburg's revenues for the first quarter of 1999 decreased $395 as compared to
revenues for the first quarter of 1998. Ladenburg's expenses for the first
quarter of 1999 decreased $1,644 as compared to expenses for the first quarter
of 1998 due primarily to a decrease in administrative overhead.
-16-
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues from the real estate operations for the first quarter of 1999 decreased
$5,453 primarily due to the sale of the office buildings in September 1998 and
the contribution of Ducat Place II to Western Realty Ducat in February 1998.
Expenses of the real estate operations decreased $4,248 in the 1999 period due
primarily to the sale of the office buildings. In the first quarter of 1999, BML
incurred expenses of $1,391, which were related to the acquisition of the
Kremlin Sites. A foreign currency loss of $236, which resulted from the
devaluation of rubles held in an escrow account, was included in BML's expenses
for the first quarter of 1999. The currency loss will be offset by lower future
expenditures in the development of the Kremlin Sites. BML also incurred interest
expense associated with the Repin Loan of $978.
Thinking Machines had revenues of $251 for the three months ended March 31,
1999. Direct costs of these revenues were $90 for the period. Operating expenses
of Thinking Machines consisted of primarily selling, general and administrative
of $684 and research and development of $1,000 for the three months ended March
31, 1999.
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.
For the first quarter of 1999, the Company's revenues of $1,165 related to
corporate and other activities primarily consisted of net gains on investments
of $499 and interest and dividends income of $492 as compared to net gains on
investments of $5,596 and interest and dividends income of $596 for the same
period in the prior year. Corporate revenues in 1999 were offset by $1,503 of
loss in joint venture.
Corporate and other expenses of $4,511 for the first quarter of 1999 consisted
primarily of employee compensation and benefits of $2,280 and expenses of a
certain non-significant consolidated subsidiary of $493. Corporate and other
expenses for the first quarter of 1998 of $4,153 consisted primarily of employee
compensation and benefits of $1,849 and expenses associated with a 50.1%
consolidated subsidiary of $613.
Income tax for the first quarter of 1999 was $15 versus $6 for the first quarter
of 1998 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 decreased to $3,876 at March 31, 1999 from
$7,870 at December 31, 1998 primarily as a result of a $5,418 decline in the
market value of the Company's investments held for sale.
During the first quarter 1999, the Company's cash and cash equivalents decreased
from $16,444 to $10,312 due primarily to net purchases of $6,411 of marketable
securities and long-term investments and a decrease in the Company's margin
loans payable of $9,044. The amounts were offset by the issuance of the Repin
Loan of $4,473.
-17-
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Cash provided from operating activities for the three months ended March 31,
1999 was $8,744 as compared to cash used for operating activities of $2,722 from
the prior year. The difference is primarily due to a decrease of $9,986 in
receivables from clearing brokers in 1999 and the $446 decrease in Ladenburg's
net trading securities owned for the 1999 period versus an $1,967 increase for
the 1998 period. The amount was offset by a decrease in net income of $1,739.
Cash flows used for investing activities for the three months ended March 31,
1999 were $10,269 compared to cash flows provided from investing activities of
$4,148 for the three months ended March 31, 1998. The difference is primarily
attributable to the $6,411 used to acquire marketable securities and long-term
investments in 1999 compared to net sales of investments of $7,166.
The capital expenditures for the three months ended March 31, 1999 related
principally to the development of the Kremlin Sites ($1,608). BML also held
$3,525, in restricted cash, at March 31, 1999, which is restricted for future
investment in the Kremlin Sites. In connection with the acquisition of its
interest in one of the Kremlin Sites, BML has agreed with the City of Moscow to
invest an additional $6,000 in 1999 (which has been funded) and $22,000 in 2000
in the development of the property.
In June 1998, the Company and Apollo organized Western Realty Repin to make the
$25,000 Repin Loan to BML. The proceeds from the Repin Loan will be used by BML
for the acquisition and preliminary development of the Kremlin Sites. Through
March 31, 1999, Western Realty Repin has advanced $25,000 (of which $18,773 has
been funded by Apollo) to BML. The Repin Loan, which bears no fixed interest, is
payable only out of 100% of distributions, if made, by the entities owning the
Kremlin Sites to BML. Such distributions will be applied first to pay the
principal of the Repin Loan and then as contingent participating interest on the
Repin Loan. Any rights of payment on the loan are subordinate to the rights of
all other creditors of BML. BML used the proceeds of the Repin Loan to repay the
Company for certain expenditures on the Kremlin Sites previously incurred.
The development of Ducat Place III and the Kremlin Sites will require
significant amounts of debt and other financing. The Company is actively
pursuing various financing alternatives on behalf of Western Realty Ducat and
BML. However, in light of the recent economic turmoil in Russia, no assurance
can be given that such financing will be available on acceptable terms. Failure
to obtain sufficient capital for the projects would force Western Realty Ducat
and BML to curtail or delay the planned development of Ducat Place III and the
Kremlin Sites.
Cash flows used for financing activities increased to $4,607 for the three
months ended March 31, 1999 from $3,133 for the three months ended March 31,
1998 primarily due to the $9,044 net payment on the Company's margin loan offset
by the issuance of a $4,473 Participating Loan to Western Realty Repin.
On September 28, 1998, the Company completed the sale of its four U.S. office
buildings for an aggregate purchase price of $112,400. The Company may seek to
dispose of other U.S. real estate holdings in the future.
-18-
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In the first quarter of 1999, the Company lent $1,250 due January 26, 2000 to
its 73%-owned subsidiary Thinking Machines. As of May 14, 1999, the Company has
lent an additional $450 to Thinking Machines. The amounts bear interest at 15%
per annum.
In September 1998, the Company made a one-year $950 loan to BGLS, Inc., an
affiliate of the Company, which bears interest at 14% per annum. At March 31,
1999, the amount outstanding, including interest, on the BGLS loan was $1,019.
The Company expects that its available working capital will be sufficient to
fund its currently anticipated cash requirements for 1999 and currently
anticipated cash requirements of its operating businesses, investments,
commitments, and payments of principal and interest on its outstanding
indebtedness.
MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates, equity and commodity
prices, changes in the implied volatility of interest rate, foreign exchange
rate, equity and commodity prices and also changes in the credit ratings of
either the issuer or its related country of origin. Market risk is inherent to
both derivative and non-derivative financial instruments, and accordingly, the
scope of the Company's market risk management procedures extends beyond
derivatives to include all market risk sensitive financial instruments.
Current and proposed underwriting, corporate finance, merchant banking and other
commitments are subject to due diligence reviews by Ladenburg's senior
management, as well as professionals in the appropriate business and support
units involved. Credit risk related to various financing activities is reduced
by the industry practice of obtaining and maintaining collateral. The Company
monitors its exposure to counterparty risk through the use of credit exposure
information, the monitoring of collateral values and the establishment of credit
limits.
EQUITY PRICE RISK
Ladenburg maintains inventories of trading securities at March 31, 1999 with
fair values of $6,562 in long positions and $2,659 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 March 31, 1999 will not have a material adverse effect on the
consolidated financial position or results of operations of the Company.
The Company holds investment securities available for sale totaling $36,563 at
March 31, 1999. Approximately 45% of these securities represent an investment in
RJR Nabisco, which is a defendant in numerous tobacco products-related
litigation, claims and proceedings. The effect of an adverse lawsuit against RJR
Nabisco could have a significant effect on the value of the Company's
investment.
The Company also holds long-term investments in limited partnerships and limited
liability companies. The Company's investments in limited partnerships are
illiquid, and the ultimate realization of these investments is subject to the
performance of the underlying partnership and its management by general
partners.
-19-
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOREIGN MARKET RISK
BML's and Western Realty Ducat's operations are conducted in Russia. During
1998, the economy of the Russian Federation entered a period of economic
instability. The impact includes, but is not limited to, a steep decline in
prices of domestic debt and equity securities, a severe devaluation of the
currency, a moratorium on foreign debt repayments, an increasing rate of
inflation and increasing rates on government and corporate borrowings. The
return to economic stability is dependent to a large extent on the effectiveness
of the fiscal measures taken by government and other actions beyond the control
of companies operating in the Russian Federation. The operations of BML and
Western Realty Ducat may be significantly affected by these factors for the
foreseeable future.
Russian taxation is subject to varying interpretations and constant changes.
Furthermore, the interpretation of tax legislation by tax authorities as applied
to the transactions and activity of BML and Western Realty Ducat may not
coincide with that of management. As a result, transactions may be challenged by
tax authorities and BML and Western Realty Ducat may be assessed additional
taxes, penalties and interest, which can be significant. Management regularly
reviews the Company's taxation compliance with applicable legislation, laws and
decrees and current interpretations and from time to time potential exposures
are identified. At any point in time a number of open matters may exist,
however, management believes that adequate provision has been made for all
material liabilities. Tax years remain open to review by the authorities for six
years.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company and its representatives may from time to time make oral or written
"forward-looking statements" within the meaning of the Private Securities Reform
Act of 1995 (the "Reform Act"), including any statements that may be contained
in the foregoing "Management's Discussion and Analysis of Financial Condition
and Results of Operations", in this report and in other filings with the
Securities and Exchange Commission and in its reports to stockholders, which
represent the Company's expectations or beliefs with respect to future events
and financial performance. These forward-looking statements are subject to
certain risks and uncertainties and, in connection with the "safe-harbor"
provisions of the Reform Act, the Company is hereby identifying important
factors that could cause actual results to differ materially from those
contained in any forward-looking statements made by or on behalf of the Company.
Each of the Company's operating businesses, Ladenburg, BML, New Valley Realty
and Thinking Machines, and its interests in Western Realty Ducat and Western
Realty Repin ("Western Realty"), are subject to intense competition, changes in
consumer preferences, and local economic conditions. Ladenburg is further
subject to uncertainties endemic to the securities industry including, without
limitation, the volatility of domestic and international financial, bond and
stock markets, governmental regulation and litigation. The operations of BML and
Western Realty in Russia are also subject to a high level of risk in light of
Russia's substantial political transformation from a centrally-controlled
command 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
-20-
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
foreign ownership. In addition, the system of commercial laws, including the
laws governing registration of interests in real estate and the establishment
and enforcement of security interests, is not well developed and, in certain
circumstances, inconsistent and adds to the risk of investment in the real
estate development business in Russia. The uncertainties in Russia and Russia's
recent economic turmoil may also effect BML's and Western Realty's ability to
consummate planned financing and investing activities. BML, Western Realty and
New Valley Realty are additionally subject to the uncertainties relating to the
real estate business, including, without limitation, required capital
improvements to facilities, local real estate market conditions and federal,
state, city and municipal laws and regulations concerning, among others, zoning
and environmental matters. 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. The failure of the Company or its
significant suppliers and customers to adequately address the "Year 2000" issue
could result in misstatement of reported financial information or could
adversely affect its business.
Results actually achieved may differ materially from expected results included
in these forward-looking statements as a result of these or other factors. Due
to such uncertainties and risks, readers are cautioned not to place undue
reliance on such forward-looking statements, which speak only as of the date on
which such statements are made. The Company does not undertake to update any
forward-looking statement that may be made from time to time on behalf of the
Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Market Risk" is incorporated
herein by reference.
-21-
<PAGE> 22
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
None
-22-
<PAGE> 23
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 14, 1999 By: /s/ J. Bryant Kirkland III
-------------------------------------
J. Bryant Kirkland III
Vice President, Treasurer
and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
-23-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
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332,198
279
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