<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 JUNE 30, 1999
COMMISSION FILE NUMBER 1-2493
NEW VALLEY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-5482050
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 S.E. SECOND STREET, 32ND FLOOR
MIAMI, FLORIDA 33131
(Address of principal executive offices) (Zip Code)
(305) 579-8000
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO
----- ----
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES /X/ NO
----- -----
AS OF AUGUST 16, 1999, THERE WERE OUTSTANDING 23,317,262 OF THE
REGISTRANT'S COMMON SHARES, $.01 PAR VALUE.
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NEW VALLEY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
----
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of June 30,
1999 and December 31, 1998.................................... 3
Condensed Consolidated Statements of Operations for the
three months and six months ended June 30, 1999 and 4
1998..........................................................
Condensed Consolidated Statement of Changes in
Stockholders' Equity (Deficiency) for the six
months ended June 30, 1999.................................... 5
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998............... 6
Notes to the Condensed Quarterly Consolidated Financial
Statements .................................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 22
Item 2. Changes in Securities and Use of Proceeds......................... 22
Item 3. Defaults Upon Senior Securities................................... 22
Item 4. Submission of Matters to a Vote of Security Holders............... 22
Item 6. Exhibits and Reports on Form 8-K.................................. 24
SIGNATURE........................................................................... 25
</TABLE>
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NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
--------------- -----------------
1999 1998
--------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 4,033 $ 16,444
Investment securities available for sale.............................. 48,114 37,567
Trading securities owned.............................................. 11,695 8,984
Restricted assets..................................................... 3,266 1,220
Receivable from clearing brokers...................................... 13,427 22,561
Other current assets.................................................. 2,942 4,675
-------- ---------
Total current assets.............................................. 83,477 91,451
-------- ---------
Investment in real estate, net............................................. 92,887 82,875
Furniture and equipment, net............................................... 8,762 10,444
Restricted assets.......................................................... 8,310 6,082
Long-term investments, net................................................. 5,762 9,226
Investment in joint venture................................................ 60,996 65,193
Other assets............................................................... 5,371 7,451
-------- ---------
Total assets...................................................... $265,565 $ 272,722
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Margin loan payable................................................... $ 4,852 $ 13,088
Current portion of notes payable and long-term obligations............ 2,672 2,745
Accounts payable and accrued liabilities.............................. 31,135 32,047
Prepetition claims and restructuring accruals......................... 12,388 12,364
Income taxes.......................................................... 18,365 18,702
Securities sold, not yet purchased.................................... 2,979 4,635
--------- ---------
Total current liabilities......................................... 72,391 83,581
--------- ---------
Notes payable.............................................................. 54,801 54,801
Other long-term liabilities................................................ 29,773 23,450
Commitments and contingencies.............................................. -- --
Redeemable preferred shares................................................ -- 316,202
Stockholders' equity (deficiency):
Preferred shares, $1.00 par value; 10,000,000 shares authorized.......
Cumulative preferred shares; liquidation preference of $0
and $69,769, dividends in arrears: $0 and $165,856.................. -- 279
Common Shares, $.01 par value; 100,000,000 and 850,000,000 shares
authorized; 23,317,261 and 9,577,624 shares outstanding............. 233 96
Additional paid-in capital............................................ 866,955 550,119
Accumulated deficit................................................... (763,363) (758,016)
Unearned compensation on stock options................................ (251) (475)
Accumulated other comprehensive income................................ 5,026 2,685
--------- ---------
Total stockholders' equity (deficiency)........................... 108,600 (205,312)
--------- ---------
Total liabilities and stockholders' equity (deficiency)........... $ 265,565 $ 272,722
========= =========
</TABLE>
See accompanying notes to condensed
consolidated financial statements
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<PAGE> 4
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -------------------------
1999 1998 1999 1998
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Revenues:
Principal transactions, net................................ $ 7,037 $ 2,443 $ 11,813 $ 8,336
Commissions................................................ 10,695 7,477 21,821 14,153
Corporate finance fees..................................... 2,602 1,044 4,040 4,282
Gain on sale of investments, net........................... 1,460 2,966 1,959 8,562
Loss in joint venture...................................... (2,694) (158) (4,197) (487)
Real estate leasing........................................ 2,194 5,945 4,424 13,721
Interest and dividends..................................... 1,623 2,542 2,884 5,391
Computer sales and service................................. 66 46 317 459
Gain on sale of assets..................................... 4,028 -- 4,028 --
Other income............................................... (81) 2,967 2,611 4,695
---------- --------- ---------- ---------
Total revenues......................................... 26,930 25,272 49,700 59,112
---------- --------- ---------- ---------
Cost and expenses:
Selling, general and administrative........................ 27,532 29,257 54,124 59,357
Interest................................................... 2,386 3,452 4,711 7,612
---------- --------- ---------- ---------
Total costs and expenses............................... 29,918 32,709 58,835 66,969
---------- --------- ---------- ---------
Loss from continuing operations before income taxes
and minority interests..................................... (2,988) (7,437) (9,135) (7,857)
Income tax provision............................................ 45 15 60 21
Minority interests in (income) loss from continuing operations
of consolidated subsidiaries............................... (732) 576 (252) 1,159
--------- --------- ---------- ---------
Loss from continuing operations................................. (3,765) (6,876) (9,447) (6,719)
Discontinued operations:
Gain on disposal of discontinued operations................ -- 880 4,100 880
---------- --------- ---------- ---------
Income from discontinued operations........................ -- 880 4,100 880
---------- --------- ---------- ---------
Net loss........................................................ (3,765) (5,996) (5,347) (5,839)
Dividend requirements on preferred shares....................... (10,659) (19,758) (32,878) (38,590)
---------- --------- ---------- ---------
Net loss applicable to Common Shares............................ $ (14,424) $ (25,754) $ (38,225) $ (44,429)
========= ========= ========== =========
Loss per Common Share (basic and diluted):
Continuing operations...................................... $ (1.02) $ (2.78) $ (3.57) $ (4.73)
Discontinued operations.................................... -- .09 .35 .09
---------- --------- ---------- ---------
Net loss per Common Share.................................. $ (1.02) $ (2.69) $ (3.22) $ (4.64)
========== ========= ========== =========
Number of shares used in computation............................ 14,157,503 9,577,624 11,867,564 9,577,624
========== ========= ========== =========
</TABLE>
See accompanying notes to condensed
consolidated financial statements
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NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Unearned Accumulated
Class B Compensation Other
Preferred Common Paid-In Accumulated on Stock Comprehensive
Shares Shares Capital Deficit Options Income Total
--------- ------ ------- ----------- ------------ ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998...... $279 $ 96 $550,119 $(758,016) $(475) $2,685 $(205,312)
Net loss..................... (5,347) (5,347)
Undeclared dividends and
accretion on redeemable
preferred shares........... (25,830) (25,830)
Unrealized gain on
investment securities...... 2,341 2,341
Effect of recapitalization
and reverse stock split.... (279) 137 142 --
Expenses related to
recapitalization........... (600) (600)
Conversion of redeemable
preferred shares to
common shares.............. 343,435 343,435
Adjustment to unearned
compensation on
stock options.............. (224) 224 --
Compensation expense
on stock option grants..... (87) (87)
----- ---- -------- --------- ----- ------ --------
Balance, June 30, 1999.......... $ -- $233 $866,955 $(763,363) $(251) $5,026 $108,600
===== ==== ======== ========= ===== ====== ========
</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>
Six Months Ended
June 30,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................ $ (5,347) $ (5,839)
Adjustments to reconcile net loss to net cash provided from
(used for) operating activities:
Income from discontinued operations................................... (4,100) (880)
Loss in joint venture................................................. 4,197 487
Depreciation and amortization......................................... 1,763 3,884
Gain on sale of assets................................................ (4,028) --
Stock-based compensation expense...................................... 1,494 1,436
Changes in assets and liabilities, net of effects of dispositions and
acquisitions:
Decrease in receivables and other assets........................ 7,186 5,725
(Decrease) increase in income taxes payable..................... (336) 430
Increase in accounts payable and accrued liabilities............ (919) (11,590)
--------- --------
Net cash used for continuing operations............................... (90) (6,347)
Net cash provided from discontinued operations........................ 4,100 880
--------- ---------
Net cash provided from (used for) operating activities..................... 4,010 (5,467)
--------- ---------
Cash flows from investing activities:
Sale or maturity of investment securities............................. 6,267 16,259
Purchase of investment securities..................................... (13,475) (8,677)
Sale or liquidation of long-term investments.......................... 5,723 8,269
Purchase of long-term investments..................................... (2,500) (1,714)
Purchase of real estate............................................... (11,961) (17,317)
Sale of real estate................................................... 920 --
Sale of other assets.................................................. 5,940 1,056
Purchase of furniture and fixtures.................................... (659) (100)
Payment of prepetition claims......................................... (24) (653)
Increase in restricted assets......................................... (2,227) (4,372)
Cash transferred to joint venture..................................... -- (487)
Other................................................................. -- (949)
-------- ---------
Net cash used for investing activities..................................... (11,996) (8,685)
-------- ---------
Cash flows from financing activities:
Decrease in margin loans payable, net................................. (8,235) (638)
Proceeds from participating loan...................................... 4,473 9,000
Prepayment of notes payable........................................... (63) (210)
Expenses associated with recapitalization............................. (600) --
-------- ---------
Net cash (used for) provided from financing activities..................... (4,425) 8,152
-------- ---------
Net decrease in cash and cash equivalents.................................. (12,411) (6,000)
Cash and cash equivalents, beginning of period............................. 16,444 11,606
-------- ---------
Cash and cash equivalents, end of period................................... $ 4,033 $ 5,606
======== =========
</TABLE>
See accompanying notes to condensed
consolidated financial statements
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<PAGE> 7
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
The consolidated financial statements include the accounts of New Valley
Corporation and its majority-owned subsidiaries (the "Company"). The
consolidated financial statements presented herein have been prepared by
the Company and are unaudited. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary
to present fairly the financial position as of June 30, 1999 and the
results of operations and cash flows for all periods presented have been
made. Results for the interim periods are not necessarily indicative of
the results for an entire year.
These financial statements should be read in conjunction with the
consolidated financial statements in the Company's Annual Report on Form
10-K for the year ended December 31, 1998 as filed with the Securities
and Exchange Commission (Commission File Number 1-2493).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to prior interim period
financial information to conform with current year presentation.
Recapitalization Plan
On June 4, 1999, the Company consummated a plan of recapitalization
following approval by the Company's stockholders. Under the
recapitalization plan, each of the Company's Class A Senior Preferred
Shares was reclassified and changed into 20 Common Shares and one Warrant
to purchase Common Shares. Each of the Class B Preferred Shares was
reclassified and changed into one-third of a Common Share and five
Warrants. Each outstanding Common Share was reclassified and changed into
one-tenth of a Common Share and three-tenths of a Warrant. The authorized
number of Common Shares were reduced from 850,000,000 to 100,000,000. The
Warrants issued as part of the recapitalization plan have an exercise
price of $12.50 per share subject to adjustment in certain circumstances
and are exercisable until July 14, 2004. The Warrants are not callable by
the Company for a three-year period.
The recapitalization had a significant effect on the Company's financial
position and results of operations. As a result of the recapitalization,
the carrying value and dividend arrearages of $343,435 of redeemable
preferred stock were eliminated. Furthermore, the recapitalization
resulted in the elimination of the existing redeemable preferred shares
of New Valley and the on-going dividend accruals thereon, as well as the
redemption obligation for the Class A Senior Preferred Shares in January
2003. Also, as a result of the recapitalization, the number of
outstanding Common Shares more than doubled, and additional Common Shares
were reserved for issuance upon exercise of the Warrants. In addition,
Brooke Group Ltd. ("Brooke"), the Company's principal stockholder,
increased its ownership of the outstanding Common Shares from 42.3% to
55.1%, and its total voting power from 42% to 55.1%.
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<PAGE> 8
New Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 is effective
for all fiscal quarters of all fiscal years beginning after June 15,
2000. SFAS 133 requires that all derivative instruments be recorded on
the balance sheet at fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a
hedge transaction and, if it is, the type of hedge transaction. The
Company has not yet determined the impact that the adoption of SFAS 133
will have on its earnings or statement of financial position.
2. INVESTMENT IN WESTERN REALTY
Western Realty Development LLC
In February 1998, the Company and Apollo Real Estate Investment Fund III,
L.P. ("Apollo") organized Western Realty Development LLC ("Western Realty
Ducat") to make real estate and other investments in Russia. The Company
agreed to contribute the real estate assets of BrookeMil Ltd. ("BML"),
including Ducat Place II and the site for Ducat Place III, to Western
Realty Ducat and Apollo agreed to contribute up to $58,750, including the
investment in Western Realty Repin discussed below.
The ownership and voting interests in Western Realty Ducat are held
equally by Apollo and the Company. Apollo will be entitled to a
preference on distributions of cash from Western Realty Ducat to the
extent of its investment commitment of $40,000, of which $38,494 had been
funded through June 30, 1999, together with a 15% annual rate of return.
The Company will then be entitled to a return of $20,000 of BML-related
expenses incurred and cash invested by the Company since March 1, 1997,
together with a 15% annual rate of return. Subsequent distributions will
be made 70% to the Company and 30% to Apollo. Western Realty Ducat is
managed by a Board of Managers consisting of an equal number of
representatives chosen by Apollo and the Company. Material corporate
transactions by Western Realty Ducat generally require the unanimous
consent of the Board of Managers. Accordingly, the Company accounts for
its non-controlling interest in Western Realty Ducat on the equity method
of accounting.
The Company recorded its basis in the investment in the joint venture in
the amount of $60,169 based on the carrying value of assets less
liabilities transferred. There was no difference between the carrying
value of the investment and the Company's proportionate interest in the
underlying value of net assets of the joint venture. The Company
recognizes losses in its investment in Western Realty Ducat to the extent
that cumulative earnings of Western Realty Ducat are not sufficient to
satisfy Apollo's preferred return.
Western Realty Ducat may seek additional real estate and other
investments in Russia. Western Realty Ducat has made a $30,000
participating loan to, and payable out of a 30% profits interest in,
Western Tobacco Investments LLC ("WTI"), which holds the interests of
Brooke (Overseas) Ltd., a subsidiary of Brooke, in Liggett-Ducat Ltd. and
the new factory constructed by Liggett-Ducat Ltd. on the outskirts of
Moscow. Western Realty Ducat has recognized as other income (expense)
$(741) and $261, which represents 30% of WTI's net income (loss) for the
three and six months ended June 30, 1999, respectively.
Summarized financial information as of June 30, 1999 and December 31,
1998 and for the three and six month periods ended June 30, 1999 and for
the period from February 20, 1998 (date of inception) to June 30, 1998
for Western Realty Ducat follows:
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<PAGE> 9
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Current assets.................................. $ 4,873 $ 857
Participating loan receivable................... 32,242 31,991
Real estate, net................................ 85,910 85,761
Furniture and fixtures, net..................... 169 179
Noncurrent assets............................... 450 631
Goodwill, net................................... 6,398 7,636
Notes payable - current......................... 5,938 4,999
Current liabilities............................. 5,940 5,802
Notes payable - long-term....................... 11,561 14,656
Long-term liabilities........................... 759 756
Members' equity................................. 105,844 100,842
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months Six Months February 20, 1998
Ended Ended Ended (Date of Inception)
June 30, 1999 June 30, 1998 June 30, 1999 to June 30, 1998
------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Revenues................... $2,430 $3,681 $5,878 $4,608
Costs and expenses......... 2,811 3,839 7,236 5,095
Other income............... (741) -- 261 --
Income tax provision....... (16) -- -- --
Net loss................... (1,106) (158) (1,097) (487)
</TABLE>
Western Realty Repin LLC
In June 1998, the Company and Apollo organized Western Realty Repin LLC
("Western Realty Repin") to make a loan to BML. The proceeds of the loan
will be used by BML for the acquisition and preliminary development of the
Kremlin sites, two adjoining sites totaling 10.25 acres located in Moscow
across the Moscow River from the Kremlin. BML is planning the development
of a 1.1 million sq. ft. hotel, office, retail and residential complex on
the Kremlin sites. In May 1999, BML acquired an additional 48% interest in
the second Kremlin site and the related land lease rights. BML owned 95.9%
of one site and 100% of the other site at June 30, 1999. Apollo will be
entitled to a preference on distributions of cash from Western Realty
Repin to the extent of its investment of $18,750, together with a 20%
annual rate of return, and the Company will then be entitled to a return
of its investment of $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 is managed by a Board of Managers consisting
of an equal number of representatives chosen by Apollo and the Company.
Material corporate transactions by Western Realty Repin will generally
require the unanimous consent of the Board of Managers.
Through June 30, 1999, Western Realty Repin has advanced $25,000, of
which $18,773 was funded by Apollo under the Western Realty Repin loan.
The loan bears no fixed interest and is payable only out of 100% of
distributions by the entities owning the Kremlin sites to BML. Such
distributions shall be applied first to pay the principal of the loan and
then as contingent participating interest on the loan. Any rights of
payment on the loan are subordinate to the rights of all other creditors
of BML. BML used a portion of the proceeds of the loan to repay the
Company for certain expenditures on the Kremlin sites previously
incurred. The loan is due and payable upon the dissolution of BML and is
collateralized by a pledge of the Company's shares of BML.
As of June 30, 1999, BML had invested $29,940 in the Kremlin sites and
held $2,852, in cash, which was restricted for future investment. In
acquiring its interest in one of the Kremlin sites, BML 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. Failure
to make the required investment could result in forfeiture of a 34.8%
interest in the site.
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<PAGE> 10
The Company has accounted for the formation of Western Realty Repin as a
financing by Apollo and a contribution of assets into a consolidated
subsidiary by New Valley which is eliminated in consolidation. The
Western Realty Repin loan is classified in other long-term obligations on
the consolidated balance sheet at June 30, 1999. Based on the
distribution terms contained in the Western Realty Repin LLC agreement,
the 20% annual rate of return preference to be received by Apollo on
funds invested in Western Realty Repin is treated as interest 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
considering potential financing alternatives on behalf of Western Realty
Ducat and BML. However, in light of the recent economic turmoil in Russia,
no assurance can be given that such financing will be available on
acceptable terms. Failure to obtain sufficient capital for the projects
would force Western Realty Ducat and BML to curtail or delay the planned
development of Ducat Place III and the Kremlin sites.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at
fair value, with net unrealized gains included as a component of
accumulated other comprehensive income. The Company had realized gains on
sales of investment securities available for sale of $1,460 and $1,959
for the three and six months ended June 30, 1999.
The components of investment securities available for sale at June 30,
1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gain Loss Value
------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Marketable equity securities................... $41,083 $ 3,952 $3,508 $41,527
Notes receivable............................... 2,005 -- -- 2,005
Marketable warrants............................ -- 4,582 -- 4,582
--------- ------- --------- -----
Investment securities.......................... $43,088 $ 8,534 $ 3,508 $48,114
====== ======= ======= ======
</TABLE>
4. LONG-TERM INVESTMENTS
At June 30, 1999, long-term investments consisted primarily of
investments in limited partnerships of $3,161. The Company believes the
fair value of the limited partnerships exceeds their carrying amount by
approximately $3,889 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.
Also included in long-term investments are various Internet-related
businesses which are carried at $2,600 at June 30, 1999. These
investments include an approximate 10% interest in Orchard/JFAX Investors
LLC, which is the beneficial owner of 40.6% of JFAX.COM, Inc. JFAX is an
Internet-based messaging and communications services provider to
individuals and businesses, which completed an initial public offering in
July 1999. The Company also holds a 45% interest in Ant 21, LLC, which is
engaged in the online music industry and operates the Internet site
www.atomicpop.com.
5. SALE OF THINKING MACHINES' ASSETS
On June 2, 1999, Thinking Machines sold substantially all of its assets
consisting of its Darwin(R) software and services business to Oracle
Corporation. The purchase price was $4,700 in cash at the closing of the
sale and up to an additional $20,300, payable in cash on January 31 in
each of the years 2001 through 2003, based on sales by Oracle of Darwin
product above specified sales targets. The Company recorded a gain of
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<PAGE> 11
$3,801 in connection with the sale for the three and six months ended
June 30, 1999. The operations and related gain associated with Thinking
Machines have not been classified as discontinued operations based on the
fact that substantial revenues were not realized from the Darwin(R)
product.
6. CONTINGENCIES
Lawsuits
In March 1997, a stockholder derivative suit was filed in the Delaware
Chancery Court against the Company, as a nominal defendant, its directors
and Brooke. The suit alleges that the Company's purchase in January 1997
of the shares of BML from Brooke (Overseas) Ltd. constituted a
self-dealing transaction which involved the payment of excessive
consideration by the Company. The plaintiff seeks (i) a declaration that
the Company's directors breached their fiduciary duties, Brooke aided and
abetted such breaches and such parties are therefore liable to the
Company, and (ii) unspecified damages to be awarded to the Company. The
Company's time to respond to the complaint has not yet expired. The
Company believes that the allegations are without merit. Although there
can be no assurances, in the opinion of management, after consultation
with counsel, the ultimate resolution of this matter will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
In July 1999, a purported class action was commenced on behalf of New
Valley's former Class B preferred shareholders against New Valley, Brooke
and certain directors and officers of New Valley in Delaware Chancery
Court. The complaint alleges that the recapitalization, approved by a
majority of each class of New Valley's stockholders in May 1999, was
fundamentally unfair to the Class B preferred shareholders, the proxy
statement relating to the recapitalization was materially deficient and
the defendants breached their fiduciary duties to the Class B preferred
shareholders in approving the transaction. The plaintiffs seek class
certification of the action and an award of unspecified compensatory
damages as well as all costs and fees. Although there can be no
assurances, in the opinion of management, after consultation with counsel,
the ultimate resolution of this matter will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or cash flows.
The Company is a defendant in various lawsuits and may be subject to
unasserted claims primarily in connection with its activities as a
securities broker-dealer and participation in public underwritings. These
lawsuits involve claims for substantial or indeterminate amounts and are
in varying stages of legal proceedings. Although there can be no
assurances, in the opinion of management, after consultation with counsel,
the ultimate resolution of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or cash flows.
Russian Operations
During 1998, the economy of the Russian Federation entered a period of
economic instability which has continued in 1999. The impact includes, but
is not limited to, a steep decline in prices of domestic debt and equity
securities, a severe devaluation of the currency, a moratorium on foreign
debt repayments, an increasing rate of inflation and increasing rates on
government and corporate borrowings. The return to economic stability is
dependent to a large extent on the effectiveness of the fiscal measures
taken by government and other actions beyond the control of companies
operating in the Russian Federation. The operations of BML and Western
Realty Ducat may be significantly affected by these factors for the
foreseeable future.
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.
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<PAGE> 12
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.
7. BUSINESS SEGMENT INFORMATION
The following table presents certain financial information of the
Company's continuing operations before taxes and minority interests as of
and for the three and six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Broker- Computer Corporate
Dealer Real Estate Software and Other Total
------- ----------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
Three months ended June 30, 1999
Revenues......................... $ 22,557 $ 2,102 $ 66 $ 2,205 $ 26,930
Operating income (loss).......... 1,526 (1,305) (1,433) (1,776) (2,988)
Depreciation and
amortization.................. 239 505 79 42 865
Three months ended June 30, 1998
Revenues......................... $ 15,833 $ 5,945 $ 46 $ 3,448 $ 25,272
Operating loss................... (3,484) (795) (1,603) (1,555) (7,437)
Depreciation and
amortization.................. 289 1,068 126 57 1,540
Six months ended June 30, 1999
Revenues......................... $ 41,587 $ 4,425 $ 317 $ 3,371 $ 49,700
Operating income (loss).......... 1,551 (2,530) (3,034) (5,122) (9,135)
Identifiable assets.............. 44,390 100,360 551 120,264 265,565
Depreciation and
amortization.................. 437 1,037` 199 90 1,763
Capital expenditures............. 327 11,961 30 302 12,609
Six months ended June 30, 1998
Revenues......................... $ 35,258 $ 13,721 $ 459 $ 9,674 $ 59,112
Operating (loss) income.......... (4,708) (815) (2,852) 518 (7,857)
Depreciation and
amortization.................. 593 2,814 362 115 3,884
Capital expenditures............. -- 17,335 40 42 17,417
</TABLE>
8. INCOME FROM DISCONTINUED OPERATIONS
The Company recorded a gain on disposal of discontinued operations of
$4,100 for the six months ended June 30, 1999 related to the settlement
of a lawsuit originally initiated by the Company's former Western Union
telegraph business.
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<PAGE> 13
9. PRO FORMA FINANCIAL INFORMATION
The following table presents the unaudited pro forma results from
continuing operations as if the recapitalization, the Thinking Machines
sale and the sale of the office buildings in September 1998 had occurred
on January 1, 1998. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what
would have occurred had these transactions been consummated as of such
date.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues........................ $ 23,063 $ 21,385 $ 45,582 $ 51,100
========= ========= ========= =========
Loss from continuing operations. $ (2,332) $ (5,189) $ (10,214) $ (3,837)
========= ========= ========= =========
Loss from continuing operations
applicable to common shares.. $ (2,332) $ (5,189) $ (10,214) $ (3,837)
========= ========= ========= =========
Loss from continuing operations
per common share............. $ (0.26) $ (0.22) $ (0.44) $ (0.16)
========= ========= ========= =========
</TABLE>
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. Comprehensive loss applicable to Common Shares for the
three months ended June 30, 1999 is as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss applicable to shares... $(14,424) $(25,754) $(38,225) $(44,429)
Unrealized gain (loss) on
Investment securities........ 7,759 (4,878) 2,341 (7,696)
-------- -------- -------- --------
Total comprehensive loss........ $ (6,665) $(30,632) $(35,884) $(52,125)
======== ======== ======== ========
</TABLE>
11. SUBSEQUENT EVENT
In July 1999, New Valley agreed to sell five of its shopping centers for
an aggregate purchase price of $46,100 (before closing adjustments and
expenses) including the assumption of $35,000 of mortgage financing.
Closing of the sale is subject to completion of due diligence and other
customary conditions.
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<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
Plan of Recapitalization. The Company consummated the plan of recapitalization
on June 4, 1999, following approval by the Company's stockholders. Pursuant to
the plan of recapitalization:
o each Class A Senior Preferred Share was reclassified into 20 Common
Shares and one Warrant,
o each Class B Preferred Share was reclassified into 1/3 of a Common
Share and five Warrants, and
o each outstanding Common Share was reclassified into 1/10 of a Common
Share and 3/10 of a Warrant.
The plan of recapitalization will have a significant effect on the Company's
financial position and results of operations. As a result of the
recapitalization, the carrying value and dividend arrearages of $343,435
redeemable preferred stock were eliminated. Furthermore, the recapitalization
resulted in the elimination of the existing redeemable preferred shares of the
Company and the on-going dividend accruals thereon, as well as the redemption
obligation for the Class A Senior Preferred Shares in January 2003. Also, as a
result of the recapitalization, the number of outstanding Common Shares more
than doubled, and additional Common Shares were reserved for issuance upon
exercise of the Warrants. In addition, Brooke Group Ltd., the Company's
principal stockholder, increased its ownership of the outstanding Common Shares
from 42.3% to 55.1%, and its total voting power from 42% to 55.1%.
Thinking Machines. On June 2, 1999, Thinking Machines sold substantially all its
assets consisting of its Darwin(R) software and services business to Oracle
Corporation. The purchase price was $4,700 in cash at the closing of the sale
and up to an additional $20,300, payable in cash on January 31 in each of the
years 2001 through 2003, based on sales by Oracle of Darwin product above
specified sales targets.
New Valley Shopping Centers. In July 1999, New Valley agreed to sell five of
its shopping centers for an aggregate purchase price of $46,100 (before closing
adjustments and expenses) including the assumption of $35,000 of mortgage
financing. Closing of the sale is subject to completion of due diligence and
other customary conditions.
RESULTS OF OPERATIONS
For the three months and six months ended June 30, 1999 and 1998, the results
of continuing operations of the Company's primary operating units, which
include Ladenburg (broker-dealer), the Company's U.S. office buildings and
shopping centers and BML (real estate), and Thinking Machines (computer
software), were as follows:
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<PAGE> 15
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Broker-dealer:
Revenues.......................... $22,557 $15,833 $41,857 $35,258
Expenses.......................... 21,031 19,317 40,306 39,966
------- ------- ------- -------
Operating income (loss) before
taxes and minority interests... $ 1,526 $(3,484) $ 1,551 $(4,708)
======= ======= ======= =======
Real estate:
Revenues.......................... $ 2,102 $ 5,945 $ 4,425 $13,721
Expenses.......................... 3,407 6,740 6,955 14,536
------- ------- ------- ------
Operating loss before taxes
and minority interests......... $(1,305) $ (795) $(2,530) $ (815)
======= ======= ======= =======
Computer software:
Revenues.......................... $ 66 $ 46 $ 317 $ 459
Expenses.......................... 1,499 1,649 3,351 3,311
------- ------- ------- -------
Operating loss before taxes
and minority interests......... $(1,433) $(1,603) $(3,034) $(2,852)
======= ======= ======= =======
Corporate and other:
Revenues.......................... $ 2,205 $ 3,448 $ 3,371 $ 9,674
Expenses.......................... 3,981 5,003 8,493 9,156
------- ------- ------- -------
Operating (loss) income before
taxes and minority interests... $(1,776) $(1,555) $(5,122) $ 518
======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998
Consolidated total revenues were $26,930 for the three months ended June 30,
1999 versus $25,272 for the same period last year. The increase in revenues of
$1,658 is attributable primarily to Ladenburg's increased revenues of $6,724
offset by the decrease in real estate revenues of $3,843 from the sale of the
office buildings in September 1998 and lower gains on the sale of investments
of $1,506.
Ladenburg's revenues for the second quarter of 1999 increased $6,724 as
compared to revenues for the second quarter of 1998 primarily as a result of an
increase in commissions of $3,218 and principal transactions of $4,594.
Ladenburg's expenses for the second quarter of 1999 increased $1,714 as
compared to expenses for the second quarter of 1998 due primarily to increases
in compensation expense of $1,705. Compensation expense increased due to an
increase in performance-based compensation offset by a decrease in
administrative overhead.
Revenues from the real estate operations for the second quarter of 1999
decreased $3,843 from the second quarter of 1998. The decline was primarily due
to the sale of the Company's four U.S. office buildings in September 1998.
Expenses of the real estate operations decreased $3,333 due primarily to the
sale of the office buildings. BML incurred expenses of $713 for the three
months ended June 30, 1999, which were related to the acquisition of the
Kremlin sites. The expenses consisted of accrued interest expense of $1,059
associated with the Western Realty Repin loan, offset by a foreign currency
gain of $256 on cash restricted for future investments in the Kremlin sites.
On June 2, 1999, Thinking Machines sold substantially all its assets consisting
of its Darwin(R) software and services business to Oracle corporation. The
Company recorded a $3,801 gain in the second quarter related to the disposal of
such assets.
Prior to the sale, Thinking Machines had only minimal revenues from continuing
operations. Operating expenses of Thinking Machines consisted of costs of sales,
selling, general and administrative expenses and research and development
expenses of $0, $536 and $940, respectively, for the second quarter of 1999 as
compared to $198, $655 and $796, respectively, for the second quarter of 1998.
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<PAGE> 16
For the second quarter of 1999, the Company's revenues of $2,205 related to
corporate and other activities consisted primarily of a gain on the sale of
Thinking Machines assets of $3,801, net gains on investments of $1,460 and
interest and dividend income of $696, offset by the $2,694 loss in joint
venture. Corporate and other revenues for the second quarter of 1998 consisted
primarily of net gains on investments of $2,966 and interest and dividend
income of $582, offset by the $158 loss in joint venture.
Corporate and other expenses of $3,981 for the second quarter of 1999 consisted
primarily of employee compensation and benefits of $1,982 and expenses of
certain non-significant subsidiaries of $247. Corporate and other expenses of
$5,003 for the second quarter of 1998 consisted primarily of employee
compensation and benefits of $2,585 and expenses of certain non-significant
subsidiaries of $758.
Income tax expense for the second quarter of 1999 was $45 versus $15 for the
second quarter of 1998. The income tax expense relates principally to state
income taxes of Ladenburg. The effective tax rate does not bear a customary
relationship with pre-tax accounting income principally as a consequence of the
change in the valuation allowance relating to deferred tax assets.
The Company recorded a gain on disposal of discontinued operations of $880 in
the 1998 period related to the settlement of a lawsuit originally initiated by
the Company's former Western Union telegraph business.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
Consolidated total revenues were $49,700 for the six months ended June 30, 1999
versus $59,112 for the same period last year. The decrease in revenues of
$9,412 is attributable primarily to the decrease in real estate revenues of
$9,297 from the sale of the office buildings in September 1998 and lower gains
on the sale of investments of $6,603. The amount was offset by an increase in
Ladenburg's revenues of $6,329.
Ladenburg's revenues for the first six months of 1999 increased $6,599 as
compared to revenues for the first six months of 1998 primarily due to
increases in commissions of $7,668 and principal transactions of $3,477, offset
by a decrease in other revenues of $2,072. Ladenburg's expenses for the first
six months of 1999 increased $340 as compared to expenses for the first six
months of 1998 due primarily to an increase in compensation expense of $2,093.
Compensation expense increased due to an increase in performance-based
compensation offset by a decrease in administrative overhead.
Revenues from the real estate operations for the first six months of 1999
decreased $9,297 primarily due to the sale of the office buildings in September
1998. Expenses of the real estate operations decreased $7,581 due primarily to
the sale of the office buildings. BML incurred expenses of $2,104 for the six
months ended June 30, 1999, which were related to the acquisition of the
Kremlin sites. The expenses consisted of accrued interest expense of $2,037
associated with the Western Realty Repin loan, offset by a foreign currency
gain of $20 on cash restricted for future investments in the Kremlin sites.
On June 2, 1999, Thinking Machines sold substantially all of its assets
consisting of the Darwin(R) software and services business. Prior to the sale,
Thinking Machines had minimal revenues from continuing operations. Operating
expenses of Thinking Machines consisted of costs of sales of $90, selling,
general and administrative expenses of $1,361 and research and development
expenses of $1,756 for the six months ended June 30, 1999. Operating expenses of
Thinking Machines consisted of costs of sales of $383, selling, general and
administrative expenses of $1,316 and research and development expenses of
$1,612 for the six months ended June 30, 1998.
For the first six months of 1999, the Company's revenues of $3,371 related to
corporate and other activities consisted primarily of a gain on the sale of
Thinking Machines assets of $3,801, a net gain on investments of $1,959 and
interest and dividend income of $1,190, partially offset by a loss in joint
venture of $4,197. For the first six months of 1998, the Company's revenues of
$9,674 related to corporate and other activities consisted primarily of net
gains on investments of $8,562 and interest and dividend income of $1,177,
partially offset by a loss in joint venture of $487.
Corporate and other expenses of $8,493 for the first six months of 1999
consisted primarily of employee compensation and benefits of $4,263 and
expenses of certain non-significant subsidiaries of $739. Corporate and other
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<PAGE> 17
expenses of $9,156 for the first six months of 1998 consisted primarily of
employee compensation and benefits of $4,051 and expenses of certain
non-significant subsidiaries of $2,031.
Income tax expense for the first six months of 1999 was $60 versus $21 for the
first six months of 1998. The effective tax rate does not bear a customary
relationship with pre-tax accounting income principally as a consequence of the
change in the valuation allowance relating to deferred tax assets.
The Company recorded a gain on disposal of discontinued operations of $4,100 in
the 1999 period and $880 in the 1998 period related to the settlement of a
lawsuit originally initiated by the Company's former Western Union telegraph
business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net working capital increased to $11,086 at June 30, 1999 from
$7,870 at December 31, 1998 primarily as a result of a $2,341 increase in the
market value of the Company's investments held for sale.
During 1999, the Company's cash and cash equivalents decreased from $16,444 to
$4,033 due primarily to purchases of real estate (primarily the Kremlin sites)
of $11,961, net purchases of $3,985 of marketable securities and long-term
investments and a decrease in the Company's margin loans payable of $8,235. The
amounts were offset by the issuance of the Western Realty Repin loan of $4,473
and the sale of Thinking Machines assets for $4,300.
Cash used for continuing operations for the six months ended June 30, 1999 was
$90 as compared to $6,347 from the prior year. The difference was primarily due
to a decrease in Ladenburg's payables in 1998 of $4,919 versus $1,055 in 1999
and a $4,367 increase in Ladenburg's net trading securities owned for the 1999
period versus an $4,503 decrease for the 1998 period offset by a decrease of
$9,134 in receivables from clearing brokers in 1999.
Cash flows used for investing activities for the six months ended June 30, 1999
were $11,996 compared to $8,685 for the six months ended June 30, 1998. The
difference is primarily attributable to the $3,985 used to acquire marketable
securities and long-term investments in 1999 compared to net sales of
investments of $14,137 in 1998.
The capital expenditures for the six months ended June 30, 1999 related
principally to the development of the Kremlin sites ($11,938). BML also held
$2,852, in restricted cash, at June 30, 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. Failure to make the required investment
could result in forfeiture of a 34.8% interest in the site.
In June 1998, the Company and Apollo organized Western Realty Repin to make a
loan to BML. The proceeds from the loan will be used by BML for the acquisition
and preliminary development of the Kremlin sites. Through June 30, 1999,
Western Realty Repin has advanced $25,000 (of which $18,773 has been funded by
Apollo) to BML. The loan bears no fixed interest and is payable out of 100% of
distributions by the entities owning the Kremlin sites to BML. Such
distributions will be applied first to pay the principal of the loan and then
as contingent participating interest on the loan. Any rights of payment on the
loan are subordinate to the rights of all other creditors of BML. BML used the
proceeds of the loan to repay the Company for certain expenditures on the
Kremlin sites previously incurred.
In May 1999, BML acquired an additional 48% interest in one of the Kremlin
sites and the related land lease rights.
The development of Ducat Place III and the Kremlin sites will require
significant amounts of debt and other financing. The Company is considering
potential financing alternatives on behalf of Western Realty Ducat and BML.
However, in light of the recent economic turmoil in Russia, no assurance can be
given that such financing will be available on acceptable terms. Failure to
obtain sufficient capital for the projects would force Western Realty Ducat and
BML to curtail or delay the planned development of Ducat Place III and the
Kremlin sites.
Cash flows used for financing activities were $4,425 for the six months ended
June 30, 1999 as compared to $8,152 provided from financing activities for the
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<PAGE> 18
six months ended June 30, 1998. The difference was primarily due to the $8,235
net payment on the Company's margin loan and the issuance of a $9,000
participating loan in 1998 to Western Realty versus $4,473 in 1999.
On September 28, 1998, the Company completed the sale of its four U.S. office
buildings for an aggregate purchase price of $112,400. As discussed above under
"Recent Developments", the Company has entered into an agreement to sell five
of its shopping centers.
On June 2, 1999, Thinking Machines sold substantially all of its assets, which
consisted primarily of its Darwin(R) software and services business to Oracle
Corporation. See "Recent Developments." At the closing of the Oracle sale,
$4,136 of loans, including interest, were repaid by Thinking Machines to the
Company and the Company offered to purchase all of Thinking Machines outstanding
preferred stock for $1,950. Approximately 77% of Thinking Machines' preferred
stockholders tendered their stock to New Valley in the third quarter of 1999.
In 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 June 30,
1999, the amount outstanding, including interest, on the BGLS loan was $1,052.
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 June 30, 1999 with
fair values of $11,695 in long positions and $2,979 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 June 30, 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 $48,114 at
June 30, 1999. Approximately 43% of these securities represent an investment in
RJ Reynolds Tobacco Holdings and Nabisco Group Holdings, which are defendants
in numerous tobacco products-related litigation, claims and proceedings. The
effect of an adverse lawsuit against these companies could have a significant
effect on the value of the Company's investment.
The Company also holds long-term investments in limited partnerships and
limited liability companies. The Company's investments in limited partnerships
are illiquid, and the ultimate realization of these investments is subject to
the performance of the underlying partnership and its management by general
partners.
Foreign Market Risk
BML's and Western Realty Ducat's operations are conducted in Russia. During
1998, the economy of the Russian Federation entered a period of economic
instability, which has continued in 1999. The impact includes, but is not
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<PAGE> 19
limited to, a steep decline in prices of domestic debt and equity securities, a
severe devaluation of the currency, a moratorium on foreign debt repayments, an
increasing rate of inflation and increasing rates on government and corporate
borrowings. The return to economic stability is dependent to a large extent on
the effectiveness of the fiscal measures taken by government and other actions
beyond the control of companies operating in the Russian Federation. The
operations of BML and Western Realty Ducat may be significantly affected by
these factors for the foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings
or other comprehensive income, depending on whether a derivative is designated
as part of a hedge transaction and, if it is, the type of hedge transaction.
The Company has not yet determined the impact that the adoption of SFAS 133
will have on its earnings or statement of financial position.
YEAR 2000 COSTS
The "Year 2000 issue" is the result of computer programs that were written
using two digits rather than four digits to define the applicable year. If the
Company's or its subsidiaries' computer programs with date-sensitive functions
are not Year 2000 compliant, they may recognize a date using "00" as the Year
1900 rater than the Year 2000. This could result in system failure or
miscalculations causing disruption to operations, including, among other
things, an inability to process transactions or engage in similar normal
business activities.
The Company and BML. Both the Company and BML use personal computers for all
transactions. All such computers and related systems and software are less than
three years old and are Year 2000 compliant. As a result, the Company believes
the Company and BML are Year 2000 compliant.
It is unclear whether the Russian government and other organizations who
provide significant infrastructure services have addressed the Year 2000
problem sufficiently to mitigate potential substantial disruption of these
infrastructure services. The substantial disruption of these services would
have an adverse affect on the operations of BML and Western Realty Ducat.
Furthermore, the current financial crisis could affect the ability of the
Russian government and other organizations to fund Year 2000 compliance
programs.
Ladenburg. Ladenburg has recently completed a plan to address Year 2000
compliance. Ladenburg's plan addresses external interfaces with third party
computer systems necessary in the broker-dealer industry. It also addresses
internal operations software necessary to continue operations on a daily basis.
Ladenburg believes that all phases of its Year 2000 plan have been completed
and cost approximately $650. The cost was inclusive of hardware and software
upgrades and replacements as well as consulting. All costs were incurred by
July 1999. Ladenburg completed the contingency planning phase in May 1999.
External Service Providers. The modifications for Year 2000 compliance by the
Company and its subsidiaries are proceeding according to plan and are expected
to be completed by 1999. However, the failure of the Company's service
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
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<PAGE> 20
clearing agent that it has initiated an extensive effort to ensure that it is
Year 2000 compliant. Ladenburg has been informed by its clearing agent that it
completed the remediation process in July 1998 and internal testing of its Year
2000 compliant software in June 1999. The clearing agent has informed Ladenburg
that it will conduct system-wide testing of its Year 2000 software throughout
1999.
Although the Company and its subsidiaries are in the process of confirming that
their service providers are adequately addressing Year 2000 issues, there can
be no complete assurance of success, or that interaction with other service
providers will not impair the Company's or its subsidiaries' services.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company and its representatives may from time to time make oral or written
"forward-looking statements" within the meaning of the Private Securities
Reform Act of 1995 (the "Reform Act"), including any statements that may be
contained in the foregoing "Management's Discussion and Analysis of Financial
Condition and Results of Operations", in this report and in other filings with
the Securities and Exchange Commission and in its reports to stockholders,
which represent the Company's expectations or beliefs with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties and, in connection with the "safe-harbor"
provisions of the Reform Act, the Company is hereby identifying important
factors that could cause actual results to differ materially from those
contained in any forward-looking statements made by or on behalf of the
Company.
Each of the Company's operating businesses, Ladenburg, BML and New Valley
Realty, and its interests in Western Realty Ducat and Western Realty Repin
("Western Realty"), are subject to intense competition, changes in consumer
preferences, and local economic conditions. Ladenburg is further subject to
uncertainties endemic to the securities industry including, without limitation,
the volatility of domestic and international financial, bond and stock markets,
governmental regulation and litigation. The operations of BML and Western Realty
in Russia are also subject to a high level of risk. In its on-going transition
from a centrally-controlled command economy under communist rule, Russia has
experienced dramatic political, social and economic upheaval. There is a risk
that further reforms necessary to complete this transition will not occur.
During 1998, the economy entered a period of even greater economic instability
which has continued in 1999. The Russian economy suffers from significant
inflation, declining industrial productions, rising unemployment, and an
unstable currency. In addition, BML and Western Realty may be affected
unfavorably by political or diplomatic developments, regional tensions, currency
repatriation restrictions, foreign exchange fluctuations, a relatively untested
judicial system, an evolving taxation system subject to constant changes which
may be applied retroactively and subject to varying interpretations by tax
authorities which may not coincide with that of management and can result in
assessments of additional taxes, penalties and interest which can be
significant, and other legal developments and, in particular, the risks of
expropriation, nationalization and confiscation of assets and changes in
legislation relating to foreign ownership. In addition, the system of commercial
laws, including the laws governing registration of interests in real estate and
the establishment and enforcement of security interests, is not well developed
and, in certain circumstances, inconsistent and adds to the risk of investment
in the real estate development business in Russia. The uncertainties in Russia
and Russia's recent economic turmoil may also effect BML's and Western Realty's
ability to consummate planned financing and investing activities. BML, Western
Realty and New Valley Realty are additionally subject to the uncertainties
relating to the real estate business, including, without limitation, required
capital improvements to facilities, local real estate market conditions and
federal, state, city and municipal laws and regulations concerning, among
others, zoning and environmental matters. Uncertainties affecting the Company
generally include, without limitation, the effect of market conditions on the
salability of the Company's investment securities, the uncertainty of other
potential acquisitions and investments by the Company, the effects of
governmental regulation on the Company's ability to target and/or consummate any
such acquisitions and the effects of limited management experience in areas in
which the Company may become involved. The failure of the Company or its
significant suppliers and customers, especially Ladenburg's clearing agent, to
adequately address the "Year 2000" issue could result in misstatement of
reported financial information or could adversely affect its business.
Results actually achieved may differ materially from expected results included
in these forward-looking statements as a result of these or other factors. Due
to such uncertainties and risks, readers are cautioned not to place undue
reliance on such forward-looking statements, which speak only as of the date on
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.
-20-
<PAGE> 21
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 6 to the "Notes to the Condensed Quarterly Consolidated
Financial Statements" in Part I, Item 1 to this Report.
Item 2. Changes in Securities and Use of Proceeds
On June 4, 1999, the Company consummated a recapitalization under
which its outstanding Class A Senior Preferred Shares, Class B
Preferred Shares and Common Shares were exchanged for new Common
Shares and warrants. As a result of the recapitalization, all accrued
and unpaid dividends on the preferred shares were eliminated.
Item 3. Defaults Upon Senior Securities
See Item 2 above.
Item 4. Submission of Matters to a Vote of Security-Holders
During the second quarter of 1999, the Company submitted certain
matters to a vote of security holders at its Annual Meeting of
Stockholders held on May 21, 1999. Proxies for the Annual Meeting were
solicited pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended.
At the Annual Meeting, every holder of record of Class A Senior
Preferred Shares, Class B Preferred Shares and Common Shares of the
Company at the close of business on April 8, 1999 was entitled to
vote, in person or by proxy, .4645 of one vote for each Class A Senior
Preferred Share, .05 of one vote for each Class B Preferred Share and
one vote for each Common Share, as the case may be, held by such
holder. As of the record date, the Company had outstanding 1,071,462
Class A Senior Preferred Shares, 2,790,776 Class B Preferred Shares
and 9,577,624 Common Shares.
The holders of a majority of the outstanding shares entitled to vote
at the Annual Meeting were either present in person or represented by
proxy, and constituted a quorum for the transaction of business at the
Annual Meeting, as indicated in the following table:
<TABLE>
<CAPTION>
Present in Person or Represented by Proxy
Shares Votes Votes No. of No. of Percent
Outstanding Per Share Outstanding Shares Votes of Class
----------- --------- ----------- ------ ----- --------
<S> <C> <C> <C> <C> <C> <C>
Common Shares 9,577,624 1 9,577,624 8,533,485 8,533,485 89.1
Class A Senior 1,071,462 .4645 497,694 1,041,919 483,971 97.2
Preferred Shares
Class B 2,790,776 .05 139,538 2,536,132 126,806 90.9
Preferred Shares
Combined 13,439,862 10,214,856 12,111,536 9,144,262 89.5
</TABLE>
-22-
<PAGE> 23
1. Five nominees were elected as directors of the Company by more than
the required plurality of affirmative votes of the holders of Common
Shares, Class A Senior Preferred Shares and Class B Preferred Shares,
voting together as a single class, to serve until the next annual
stockholders' meeting:
<TABLE>
<CAPTION>
VOTED FOR DIRECTORS VOTE WITHHELD
-------------------------------- --------------------------------
No. of Votes Percent of Votes No. of Votes Percent of Votes
------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Arnold I. Burns 8,029,084 87.8 1,115,179 12.2
Ronald J. Kramer 8,029,482 87.8 1,114,781 12.2
Richard J. Lampen 8,029,835 87.8 1,111,426 12.2
Bennett S. LeBow 8,027,325 87.8 1,116,938 12.2
Howard M. Lorber 8,029,453 87.8 1,114,810 12.2
</TABLE>
2. Two nominees were elected as directors of the Company by more than the
required plurality of affirmative votes of the holders of Class A
Senior Preferred Shares, voting as a class, to serve until the earlier
of the date on which dividend arrearages have been eliminated on such
class of preferred shares or the next annual stockholders' meeting:
<TABLE>
<CAPTION>
VOTED FOR DIRECTORS VOTE WITHHELD
-------------------------------- --------------------------------
No. of Votes Percent of Votes No. of Votes Percent of Votes
------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Henry C. Beinstein 458,855 94.8 25,116 5.2
Barry W. Ridings 458,855 94.8 25,116 5.2
</TABLE>
3. Two nominees were elected as directors of the Company by more than the
required plurality of affirmative votes of the holders of Class B
Preferred Shares and Class A Senior Preferred Shares, voting together
as a single class, to serve until the earlier of the date on which
dividend arrearages have been eliminated on the Class B Preferred
Shares or the next annual stockholders' meeting:
<TABLE>
<CAPTION>
VOTED FOR DIRECTORS VOTE WITHHELD
-------------------------------- --------------------------------
No. of Votes Percent of Votes No. of Votes Percent of Votes
------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Henry C. Beinstein 579,749 94.9 31,028 5.1
Barry W. Ridings 579,749 94.9 31,028 5.1
</TABLE>
-23-
<PAGE> 24
4. The plan of recapitalization was approved by the affirmative votes of
the holders of a majority of the Common Shares, Class A Senior
Preferred Shares and Class B Preferred Shares, voting together as a
single class, and by the holders of over two-thirds of the outstanding
Class A Senior Preferred Shares and Class B Preferred Shares, each
voting as a single class, as indicated in the following table:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
------------------------ ------------------------- ------------------------
% of % of % of
No. of Outstanding No. of Outstanding No. of Outstanding
Votes Votes Votes Votes Votes Votes
----- ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Common Shares 5,099,141 53.2 1,171,898 12.2 50,885 .5
Class A Senior Preferred
Shares 411,618 82.7 44,618 9.0 1,287 .3
Class B Preferred Shares 95,747 68.6 9,820 7.0 757 .5
Combined 5,606,507 54.9 1,226,335 12.0 52,928 .5
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation dated
June 4, 1999 (incorporated by reference to Exhibit 3(a) in
New Valley's Form S-1, dated June 14, 1999, Registration
No. 333-79837).
4.1 Form of Warrant Agreement, dated as of June 4, 1999,
between American Stock Transfer & Trust Company, as Warrant
Agent, and the Company including form of warrant
(incorporated by reference to Exhibit 3(c) in New Valley's
Form S-1, dated June 14, 1999, Registration No. 333-79837).
10.1 Asset Purchase Agreement dated as of May 18, 1999, by and
between Oracle Corporation and Thinking Machines
Corporation (incorporated by reference to Exhibit 10(h)(ii)
in New Valley's Form S-1, dated June 14, 1999, Registration
No. 333-79837).
10.2 Employment Agreement dated as of August 1, 1999 between the
Company and J. Bryant Kirkland III.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None
-24-
<PAGE> 25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW VALLEY CORPORATION
(Registrant)
Date: August 16, 1999 By: /s/ J. Bryant Kirkland III
-----------------------------------
J. Bryant Kirkland III
Vice President, Treasurer
and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
-25-
<PAGE> 1
Exhibit 10.2
AGREEMENT
Agreement made as of the 1st day of August, 1999, by and
between New Valley Corporation, a corporation incorporated under the laws of
the State of Delaware, with its principal place of business at 100 Southeast
Second Street, Miami, Florida 33131 (the "Company"), and J. Bryant Kirkland
III, residing at 1666 West Avenue, Apt. 405, Miami Beach, Florida 33139 (the
"Executive").
W I T N E S S E T H :
WHEREAS, the Company desires to employ Executive as its Vice
President, Treasurer and Chief Financial Officer and Executive is willing to
serve in such capacities;
WHEREAS, the Company and Executive desire to set forth the
terms and conditions of such employment.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements herein contained, the Company and Executive
agree as follows:
1. Employment.
The Company hereby agrees to employ Executive, and Executive
agrees to be employed by the Company, on the terms and conditions herein
contained as its Vice President, Treasurer and Chief Financial Officer and in
such other executive capacities with the Company and its affiliated entities as
assigned from time to time by more senior executives of the Company. The
Executive shall devote substantially all of his business time, energy, skill
and efforts to the performance of his duties hereunder and shall faithfully and
diligently serve the Company. The foregoing shall not prevent Executive from
participating in not-for-profit activities or from managing his passive
personal investments provided that these activities do not materially interfere
with Executive's obligations hereunder.
<PAGE> 2
2. Term of Employment.
Executive's employment under this Agreement shall be for a
term commencing on August 1, 1999 (the "Effective Date") and, subject to
earlier termination as provided in Section 7 below, terminating on August 1,
2000 (the "Initial Term"). The Initial Term shall be extended for successive
one-year periods (the "Additional Terms") unless terminated at the end of the
Initial Term or any Additional Term by either party upon ninety (90) days prior
written notice given to the other party (the Initial Term and any Additional
Terms shall be referred to as the "Employment Term"). Notwithstanding anything
else herein, the provisions of Section 8 hereof shall survive and remain in
effect notwithstanding the termination of the Employment Term or a breach by
the Company of this Agreement or any of its terms.
3. Compensation.
(a) As compensation for his services under this
Agreement, the Company shall pay Executive a salary at the rate of Two Hundred
and Fifty Thousand Dollars ($250,000) per year (the "Base Salary"), payable in
equal installments (not less frequently than monthly) and subject to
withholding in accordance with the Company's normal payroll practices. The
Executive's Base Salary shall be reviewed annually by the Company and may be
increased, but not decreased, in the Company's sole discretion. (b) In addition
to the Base Salary, the Company may, in its sole discretion, pay Executive
bonuses from time to time.
4. Benefits and Fringes.
During the Employment Term, Executive shall be entitled to
such benefits and fringes, if any, as are generally provided from time to time
by the Company to its executive employees of a comparable level, including any
life or medical insurance plans and pension and other similar plans, provided
that the Executive shall be provided with life insurance at least equal to his
Base Salary (provided he is insurable at standard rates).
2
<PAGE> 3
5. Expenses.
The Company shall reimburse Executive in accordance with its
expense reimbursement policy as in effect from time to time for all reasonable
expenses including at least 40 hours of continuing professional education per
annum incurred by Executive in connection with the performance of his duties
under this Agreement upon the presentation by Executive of an itemized account
of such expenses and appropriate receipts.
6. Vacation.
During the Employment Term, Executive shall be entitled to
vacation in accordance with the Company's practices, provided that Executive
shall not be entitled to less than four weeks paid vacation in each full
contract year.
7. Earlier Termination.
(a) Executive's employment under this Agreement and
the Employment Term shall terminate prior to August 1, 2000 as follows:
(i) automatically on the date of
Executive's death.
(ii) Upon written notice given by the
Company to the Executive if Executive is unable to perform his material duties
hereunder for 180 days (whether or not continuous) during any period of 360
consecutive days by reason of physical or mental disability.
(iii) Upon written notice by the Company to
the Executive for Cause. Cause shall mean (A) the Executive's conviction
(treating a nolo contendere plea as a conviction) of a felony (whether or not
any right of appeal has been or may be exercised); (B) willful refusal to
attempt to properly perform his obligations under this Agreement, or follow the
direction of the Board of Directors of the Company (the "Board") or a more
senior executive of the Company, which in either case is not remedied promptly
after receipt by the Executive of written notice from the Company specifying
the details thereof, provided the refusal to follow a direction shall not be
Cause if the Executive in good faith believes that such direction is not legal
or ethical and promptly notifies the Company in writing of such belief; (C) the
3
<PAGE> 4
Executive's gross negligence or willful misconduct with regard to the Company
or its affiliated entities, their business, assets or employees; (D) the
Executive's breach of fiduciary duty owed to the Company or any subsidiary
thereof, including, without limitation the obligations set forth in Section 8
hereof; or (E) any other breach by the Executive of a material provision of
this Agreement that remains uncured for ten (10) days after written notice
thereof is given to the Executive. Upon a termination for Cause, the Executive
(and his representative) shall be given the opportunity to appear before the
Board to explain why the Executive believes that Cause did not occur. Such
appearance shall be scheduled on no less than twenty (20) and no more than
forty (40) days notice to Executive. In the event the Board agrees with the
Executive, which shall be a determination made in its sole discretion, the
Executive shall be retroactively reinstated in his position.
(iv) Upon written notice by the Company
without Cause.
(v) Upon the voluntary resignation of the
Executive without Good Reason upon sixty (60) days prior written notice to the
Company (which the Company may in its sole discretion make effective earlier).
(b) Upon such earlier termination of the Employment
Term the Executive shall be entitled to receive any unpaid salary and accrued
vacation through his date of termination and any benefits under any benefit
plan in accordance with the terms of said plan. In addition, if the termination
is pursuant to (a)(iv) above or non-renewal of the Employment Term by the
Company pursuant to Section 2 above, the Executive shall receive, provided he
signs a release of all claims arising out of his employment with the Company or
termination thereof (other than his right to indemnification, which shall
survive) in such form as reasonably requested by the Company, severance pay in
a lump sum equal to the amount of Base Salary he would have received if he was
employed until one year after termination of the Employment Term. Such lump sum
severance shall be paid within ten (10) business days after the Executive's
execution of the aforesaid release. In the event termination is pursuant to
(a)(ii) alone, the Executive shall receive in monthly payments for one (1) year
thereafter his Base Salary reduced by any disability benefits or worker's
compensation salary replacement he receives from any program sponsored or made
available by the Company or a governmental entity. In addition, until the
earlier of (i) Executive commencing other full-time employment or (ii) 12
months after the end of the Employment Term, to the extent the Executive or his
4
<PAGE> 5
dependents are eligible for COBRA coverage, the Company shall pay for such
coverage. The Company and its affiliated entities shall have no other
obligations to the Executive.
8. Confidential Information and Non-Competition.
(a) Executive acknowledges that as a result of his
employment by the Company, Executive will obtain secret and confidential
information as to the Company and its affiliated entities, that the Company and
its affiliated entities will suffer substantial damage, which would be
difficult to ascertain, if Executive shall enter into Competition, as defined
below, with the Company or any affiliated entity and that because of the nature
of the information that will be known to Executive it is necessary for the
Company to be protected by the prohibition against Competition set forth
herein, as well as the Confidentiality restrictions set forth herein. Executive
acknowledges that the provisions of this Agreement are reasonable and necessary
for the protection of the business of the Company and its affiliated entities
and that part of the compensation paid under this Agreement is in consideration
for the agreements in this Section 8.
(b) Competition shall mean:
(i) participating, directly or indirectly,
as an individual proprietor, partner, stockholder, officer, employee, director,
joint venturer, investor, lender, consultant or in any capacity whatsoever
(within the United States of America, Canada, or in any country where the
Company or its affiliates do business) in a business in competition with any
operating business conducted by the Company or its affiliated entities; with
regard to which Executive worked or otherwise had responsibilities or had
access to material Confidential Information while employed by the Company or
its affiliated entities or an investment opportunity within the provisions of
subpart (E) below; provided, however, that such participation shall not
include: (A) the mere ownership of not more than one percent (1%) of the total
outstanding stock of a publicly held company; (B) the performance of services
for any enterprise to the extent such services are not performed, directly or
indirectly, for a business in the aforesaid Competition; (C) any activity
engaged in with the prior written approval of the Chief Executive Officer of
the Company; (D) the practicing of accounting in an accounting firm that
represents such competing business provided that Executive does not personally
represent such competing business; or (E) investment banking activities
5
<PAGE> 6
(including without limitation with an investment entity for its own account or
a fund operated by it) provided such activities do not involve any investment
opportunity that the Company or any affiliated entity is considering or
advising on at the time of termination of the Employment Term either for its
own account, any fund managed by it or for any customer or potential customer
of the Company or such entity.
(ii) recruiting, soliciting or inducing, of
any nonclerical employee or employees of the Company or its affiliated entities
to terminate their employment with, or otherwise cease their relationship with,
the Company or its affiliated entities or hiring or assisting another person or
entity to hire any nonclerical employee of the Company or its affiliated
entities or any person who within six (6) months before had been a nonclerical
employee of the Company or any of its affiliated entities. Notwithstanding the
foregoing, if requested by an entity with which Executive is not affiliated,
Executive may serve as a reference for any person who at the time of the
request is not an employee of the Company or any of its affiliated entities.
(iii) If any restriction set forth with
regard to Competition is found by any court of competent jurisdiction, or an
arbitrator, to be unenforceable because it extends for too long a period of
time or over too great a range of activities or in too broad a geographic area,
it shall be interpreted to extend over the maximum period of time, range of
activities or geographic area as to which it may be enforceable.
(c) During and after the Employment Term, Executive
shall hold in a fiduciary capacity for the benefit of the Company and its
affiliated entities all secret or confidential information, knowledge or data
relating to the Company and its affiliates, and their respective businesses,
including any confidential information as to customers of the Company or its
affiliated entities, (i) obtained by Executive during his employment by the
Company or its affiliated entities and (ii) not otherwise public knowledge or
known within the Company's or affiliated entity's industry. Executive shall
not, without prior written consent of the Company, unless compelled pursuant to
the order of a court or other governmental or legal body having jurisdiction
over such matter, communicate or divulge any such information, knowledge or
data to anyone other than the Company and those designated by it. In the event
Executive is compelled by order of a court or other governmental or legal body
to communicate or divulge any such information, knowledge or data to anyone
6
<PAGE> 7
other than the Company and those designated by it, Executive shall promptly
notify the Company of any such order and shall cooperate fully with the Company
in protecting such information to the extent possible under applicable law.
(d) Upon termination of Executive's employment with
the Company and its affiliated entities, or at any other time as the Company
may request, Executive will promptly deliver to the Company all documents
(whether prepared by the Company, an affiliated entity, Executive or a third
party) relating to the Company or an affiliated entity or any of their
businesses or property which Executive may possess or have under his direction
or control.
(e) During the Employment Term and for one (1) year
thereafter, Executive will not enter into Competition with the Company or its
affiliated entities.
(f) In the event of a breach or potential breach of
this Section 8, Executive acknowledges that the Company and its affiliated
entities will be caused irreparable injury and that money damages may not be an
adequate remedy and agree that the Company and its affiliated entities shall be
entitled to injunctive relief (in addition to its other remedies at law) to
have the provisions of this Section 8 enforced.
9. Executive Representation
Executive represents and warrants that he is under no
contractual or other limitation from entering into this Agreement and
performing his obligations hereunder.
10. Indemnification
The Executive shall be entitled to be indemnified by the
Company for his actions as an officer, director, employee, agent or fiduciary
of the Company or its affiliated entities to the fullest extent permitted by
applicable law and shall have legal fees and other expenses paid to him in
advance of final disposition of a proceeding provided he executes an
undertaking to repay such amounts if, and to the extent, required to do so by
applicable law. The Company shall cover the Executive under any directors and
officers liability insurance policy to the same extent as its other senior
officers.
7
<PAGE> 8
11. Entire Agreement; Modification.
This Agreement constitutes the full and complete
understanding of the parties hereto and will supersede all prior agreements and
understandings, oral or written, with respect to the subject matter hereof.
Each party to this Agreement acknowledges that no representations, inducements,
promises or agreements, oral or otherwise, have been made by either party, or
anyone acting on behalf of either party, which are not embodied herein and that
no other agreement, statement or promise not contained in this Agreement shall
be valid or binding. This Agreement may not be modified or amended except by an
instrument in writing signed by the party against whom or which enforcement may
be sought.
12. Severability.
Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms of
provisions of this Agreement in any other jurisdiction.
13. Waiver of Breach.
The waiver by any party of a breach of any provisions of this
Agreement, which waiver must be in writing to be effective, shall not operate
as or be construed as a waiver of any subsequent breach.
14. Notices
All notices hereunder shall be in writing and shall be deemed
to have been duly given when delivered by hand, or one day after sending by
express mail or other "overnight mail service," or three days after sending by
certified or registered mail, postage prepaid, return receipt requested. Notice
shall be sent as follows: if to Executive, to the address as listed in the
8
<PAGE> 9
Company's records; and if to the Company, to the Company at its office or set
forth at the head of this Agreement, to the attention of the Chairman. Either
party may change the notice address by notice given as aforesaid.
15. Assignability; Binding Effect.
This Agreement shall be binding upon and inure to the benefit
of Executive and Executive's legal representatives, heirs and distributees, and
shall be binding upon and inure to the benefit of the Company, its successors
and assigns. This Agreement may not be assigned by the Executive. This
Agreement may not be assigned by the Company except in connection with a merger
or a sale by the Company of all or substantially all of its assets and then
only provided the assignee specifically assumes in writing all of the Company's
obligations hereunder.
16. Governing Law.
(a) All issues pertaining to the validity,
construction, execution and performance of this Agreement shall be construed
and governed in accordance with the laws of the State of Florida, without
giving effect to the conflict or choice of law provisions thereof.
(b) Any dispute or controversy with regard to this
Agreement, other then injunctive relief pursuant to Section 8, shall be settled
by arbitration in Miami, Florida before the American Arbitration Association
("AAA") in accordance with the rules of Commercial Arbitration of the AAA. The
decision of the arbitrators shall be final and binding upon the parties hereto
and may be entered in any court having jurisdiction. The parties shall each
bear fifty (50) percent of the cost of the AAA and the arbitrators, but each
party shall bear its or his own legal expenses.
17. Headings.
The headings in this Agreement are intended solely for
convenience or reference and shall be given no effect in the construction or
interpretation of this Agreement.
9
<PAGE> 10
18. Counterparts.
This Agreement may be executed in several counterparts, each
of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
10
<PAGE> 11
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed and Executive has hereunto set his hand as of the date first
set forth above.
NEW VALLEY CORPORATION
By: /s/ Bennett S. LeBow
-------------------------------------------
Name: Bennett S. LeBow
Title: Chairman and Chief Executive Officer
By: /s/ J. Bryant Kirkland III
-------------------------------------------
J. Bryant Kirkland III
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,033
<SECURITIES> 59,809
<RECEIVABLES> 13,427
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 83,477
<PP&E> 110,277
<DEPRECIATION> 8,628
<TOTAL-ASSETS> 265,565
<CURRENT-LIABILITIES> 72,391
<BONDS> 54,801
0
0
<COMMON> 233
<OTHER-SE> 108,367
<TOTAL-LIABILITY-AND-EQUITY> 265,565
<SALES> 0
<TOTAL-REVENUES> 49,700
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 54,124
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,711
<INCOME-PRETAX> (9,387)
<INCOME-TAX> 60
<INCOME-CONTINUING> (9,447)
<DISCONTINUED> 4,100
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,347)
<EPS-BASIC> (3.22)
<EPS-DILUTED> (3.22)
</TABLE>
