<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, 2000
COMMISSION FILE NUMBER 1-2493
New Valley Corporation
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-5482050
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
100 S.E. SECOND STREET, 32ND FLOOR
MIAMI, FLORIDA 33131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(305) 579-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
AS OF AUGUST 11, 2000, THERE WERE OUTSTANDING 22,973,663 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, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of June 30,
2000 and December 31, 1999.................................... 3
Condensed Consolidated Statements of Operations for the
three months and six months ended June 30, 2000 and 4
1999..........................................................
Condensed Consolidated Statement of Changes in
Stockholders' Equity for the six months ended
June 30, 2000................................................. 5
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2000 and 1999............... 6
Notes to the Condensed Quarterly Consolidated Financial
Statements .................................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 21
Item 2. Changes in Securities and Use of Proceeds......................... 21
Item 4. Submission of Matters to a Vote of Security Holders............... 21
Item 6. Exhibits and Reports on Form 8-K.................................. 22
SIGNATURE............................................................................. 23
</TABLE>
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<PAGE> 3
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
---------------- -----------------
June 30, December 31,
---------------- -----------------
2000 1999
---------------- -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................................... $ 27,900 $ 11,512
Investment securities available for sale ....................................... 36,756 48,722
Trading securities owned ....................................................... 13,589 15,707
Restricted assets .............................................................. 787 3,239
Receivable from clearing brokers ............................................... 13,594 10,903
Other current assets ........................................................... 1,519 1,360
--------- ---------
Total current assets ....................................................... 94,145 91,443
--------- ---------
Investment in real estate, net ...................................................... 54,665 53,353
Furniture and equipment, net ........................................................ 8,254 8,409
Restricted assets ................................................................... 4,101 5,195
Long-term investments, net .......................................................... 7,794 8,730
Investment in joint venture ......................................................... 49,931 48,680
Other assets ........................................................................ 4,395 4,858
--------- ---------
Total assets ............................................................... $ 223,285 $ 220,668
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Margin loan payable ............................................................ $ 5,397 $ 983
Current portion of notes payable ............................................... 8,419 294
Accounts payable and accrued liabilities ....................................... 29,586 30,963
Prepetition claims and restructuring accruals .................................. 11,951 12,279
Income taxes ................................................................... 16,108 16,285
Securities sold, not yet purchased ............................................. 976 7,625
--------- ---------
Total current liabilities .................................................. 72,437 68,429
--------- ---------
Notes payable ....................................................................... 11,255 19,519
Other long-term liabilities ......................................................... 45,466 41,341
Commitments and contingencies
Stockholders' equity:
Common Shares, $.01 par value; 100,000,000 shares
authorized; 23,087,663 and 23,192,862 shares outstanding ..................... 231 232
Additional paid-in capital ..................................................... 868,344 868,673
Accumulated deficit ............................................................ (782,041) (779,639)
Unearned compensation on stock options ......................................... (89) (333)
Accumulated other comprehensive income ......................................... 7,682 2,446
--------- ---------
Total stockholders' equity .......................................................... 94,127 91,379
--------- ---------
Total liabilities and stockholders' equity ................................. $ 223,285 $ 220,668
========= =========
</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,
------------------------------------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
v<S> <C> <C> <C> <C>
Revenues:
Principal transactions, net ................................... $ 4,383 $ 7,037 $ 15,719 $ 11,813
Commissions ................................................... 8,499 10,695 21,528 21,821
Corporate finance fees ........................................ 4,408 2,602 8,644 4,040
Gain on sale of investments, net .............................. 1,438 1,460 6,191 1,959
Income (loss) from joint venture .............................. 211 (2,694) (15) (4,197)
Real estate leasing ........................................... 820 2,194 1,591 4,424
Interest and dividends ........................................ 1,620 1,623 3,114 2,884
Computer sales and service .................................... -- 66 -- 317
Gain on sale of assets ........................................ 150 4,028 150 4,028
Other income .................................................. 871 (81) 1,019 2,611
------------ ------------ ------------ ------------
Total revenues ............................................ 22,400 26,930 57,941 49,700
------------ ------------ ------------ ------------
Cost and expenses:
Selling, general and administrative ........................... 24,637 27,532 55,239 54,124
Interest ...................................................... 2,001 2,386 4,168 4,711
------------ ------------ ------------ ------------
Total costs and expenses .................................. 26,638 29,918 59,407 58,835
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes
and minority interests ........................................ (4,238) (2,988) (1,466) (9,135)
Income tax (benefit) provision ..................................... (21) 45 15 60
Minority interests in (loss) income from continuing operations
of consolidated subsidiaries .................................. (19) 732 921 252
------------ ------------ ------------ ------------
Loss from continuing operations .................................... (4,198) (3,765) (2,402) (9,447)
Discontinued operations:
Gain on disposal of discontinued operations ................... -- -- -- 4,100
------------ ------------ ------------ ------------
Income from discontinued operations ........................... -- -- -- 4,100
------------ ------------ ------------ ------------
Net loss ........................................................... (4,198) (3,765) (2,402) (5,347)
Dividend requirements on preferred shares .......................... -- (15,540) -- (37,759)
------------ ------------ ------------ ------------
Net loss applicable to Common Shares ............................... $ (4,198) $ (19,305) $ (2,402) $ (43,106)
============ ============ ============ ============
Loss per Common Share (basic and diluted):
Continuing operations ......................................... $ (0.18) $ (1.36) $ (0.10) $ (3.98)
Discontinued operations ....................................... -- -- -- .35
------------ ------------ ------------ ------------
Net loss per Common Share ..................................... $ (0.18) $ (1.36) $ (0.10) $ (3.63)
============ ============ ============ ============
Number of shares used in computation ............................... 23,127,023 14,157,503 23,145,426 11,867,564
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed
consolidated financial statements
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<PAGE> 5
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Unearned Accumulated
Compensation Other
Common Paid-In Accumulated on Stock Comprehensive
Shares Capital Deficit Options Income Total
------ ------- ------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999............ $ 232 $ 868,673 $(779,639) $ (333) $ 2,446 $ 91,379
Net loss........................... (2,402) (2,402)
Unrealized gain on
investment securities............ 5,236 5,236
Repurchase of Common
Shares........................... (1) (406) (407)
Adjustment to unearned
compensation on
stock options.................... (244) 244 --
Compensation expense
on stock option grants........... 321 321
--------- --------- --------- --------- --------- ---------
Balance, June 30, 2000 ............... $ 231 $ 868,344 $(782,041) $ (89) $ 7,682 $ 94,127
========= ========= ========= ========= ========= =========
</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,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................................. $ (2,402) $ (5,347)
Adjustments to reconcile net loss to net cash (used for) provided from
operating activities:
Income from discontinued operations ..................................................... -- (4,100)
Loss from joint venture ................................................................. 15 4,197
Depreciation and amortization ........................................................... 983 1,763
Stock-based compensation expense ........................................................ 321 1,494
Gain on sale of investments ............................................................. (6,191) (1,959)
Gain on sale of assets .................................................................. (150) (4,028)
Minority interests in income from continuing operations of
consolidated subsidiaries ............................................................ 921 252
Changes in assets and liabilities, net of effects of dispositions
and acquisitions:
Decrease in receivables and other assets .......................................... 2,830 9,145
Decrease in accounts payable and accrued liabilities .............................. (5,456) (1,507)
-------- --------
Net cash used for continuing operations ................................................. (9,129) (90)
Net cash provided from discontinued operations .......................................... -- 4,100
-------- --------
Net cash (used for) provided from operating activities ....................................... (9,129) 4,010
-------- --------
Cash flows from investing activities:
Sale or maturity of investment securities ............................................... 29,126 6,267
Purchase of investment securities ....................................................... (5,732) (13,475)
Sale or liquidation of long-term investments ............................................ -- 5,723
Purchase of long-term investments ....................................................... (1,875) (2,500)
Sale of real estate ..................................................................... -- 920
Purchase of real estate ................................................................. (1,845) (11,961)
Sale of other assets .................................................................... 150 5,940
Purchase of furniture and fixtures ...................................................... (289) (659)
Payment of prepetition claims and restructuring accruals ................................ (327) (24)
Decrease (increase) in restricted assets ................................................ 3,394 (2,227)
Investment in joint venture ............................................................. (1,266) --
-------- --------
Net cash provided from (used for) investing activities ....................................... 21,336 (11,996)
-------- --------
Cash flows from financing activities:
Increase (decrease) in margin loans payable ............................................. 4,414 (8,235)
Proceeds from participating loan ........................................................ 313 4,473
Prepayment of notes payable ............................................................. (139) (63)
Repurchase of Common Shares ............................................................. (407) --
Expenses associated with Recapitalization ............................................... -- (600)
-------- --------
Net cash provided from (used for) financing activities ....................................... 4,181 (4,425)
-------- --------
Net decrease in cash and cash equivalents .................................................... 16,388 (12,411)
Cash and cash equivalents, beginning of period ............................................... 11,512 16,444
-------- --------
Cash and cash equivalents, end of period ..................................................... $ 27,900 $ 4,033
======== ========
</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 ("New Valley" or the
"Company"). The consolidated financial statements as of June 30, 2000
presented herein have been prepared by the Company and are unaudited. In
the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position
as of June 30, 2000 and the results of operations and cash flows for all
periods presented have been made. Results for the interim periods are not
necessarily indicative of the results for the entire year.
These financial statements should be read in conjunction with the
consolidated financial statements in the Company's Annual Report on Form
10-K for the year ended December 31, 1999 as filed with the Securities and
Exchange Commission (Commission File Number 1-2493).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior interim period financial
information to conform to the current interim period presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued Statement
of Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS
133 requires that all derivative instruments be recorded on the balance
sheet at fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending
on whether a derivative is designated as part of a hedge transaction and,
if it is, the type of hedge transaction. The Company has not yet
determined the impact that the adoption of SFAS 133 will have on its
earnings or statement of financial position.
2. INVESTMENT IN WESTERN REALTY
WESTERN REALTY DEVELOPMENT LLC
In February 1998, the Company and Apollo Real Estate Investment Fund III,
L.P. ("Apollo") organized Western Realty Development LLC ("Western Realty
Development") to make real estate and other investments in Russia. The
Company agreed to contribute the real estate assets of BrookeMil,
including Ducat Place II and the site for Ducat Place III, to Western
Realty Development and Apollo agreed to contribute up to $72,021,
including the investment in Western Realty Repin discussed below.
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<PAGE> 8
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The ownership and voting interests in Western Realty Development are held
equally by Apollo and the Company. Apollo is entitled to a preference on
distributions of cash from Western Realty Development to the extent of its
investment commitment of $43,750, of which $41,266 had been funded through
June 30, 2000, together with a 15% annual rate of return. The Company is
then entitled to a return of its investment commitment of $23,750, of
which $21,266 had been funded through June 30, 2000, together with a 15%
annual rate of return; subsequent distributions are made 70% to the
Company and 30% to Apollo. Western Realty Development is managed by a
Board of Managers consisting of an equal number of representatives chosen
by Apollo and the Company. Material corporate transactions by Western
Realty Development generally require the unanimous consent of the Board of
Managers. Accordingly, the Company has accounted for its non-controlling
interest in Western Realty Development using the equity method of
accounting. The Company recognizes losses incurred by Western Realty
Development to the extent that cumulative earnings of Western Realty
Development are not sufficient to satisfy Apollo's preferred return.
Western Realty Development made a $30,000 participating loan to, and
payable out of a 30% profits interest in, Western Tobacco Investments LLC
("Western Tobacco Investments"), which held the interests of Brooke
(Overseas) Ltd., a subsidiary of Vector Group Ltd. ("Vector"), the
Company's principal stockholder, in Liggett-Ducat Ltd. and the new factory
constructed by Liggett-Ducat Ltd. on the outskirts of Moscow. In the event
of a sale of Western Tobacco Investments, Western Realty Development was
entitled to receive the return of all amounts advanced on the loan,
together with a 15% annual rate of return, and 30% of subsequent
distributions. Western Realty Development recognized income of $1,464 and
$2,876, which represented the 15% return on the loan plus 30% of any net
income applicable to common interests of Western Tobacco Investments, for
the three and six months ended June 30, 2000.
On June 14, 2000, Vector entered into a definitive agreement to sell
Western Tobacco Investments to a subsidiary of Gallaher Group Plc for
$400,000 in cash and the assumption of debt and capital commitments.
Vector completed the sale on August 4, 2000. The cash proceeds from the
transaction after estimated closing expenses were divided among Vector and
Western Realty Development in accordance with the terms of the
participating loan, which was terminated at the closing. Through their
investments in Western Realty Development, the Company received $57,208 in
cash proceeds from the sale and Apollo received $68,378. These amounts are
subject to adjustment based on final closing expenses. The Company
anticipates recording a gain of approximately $52,000 in connection with
the transaction in the third quarter of 2000.
Summarized financial information as of June 30, 2000 and December 31, 1999
and for the three and six month periods ended June 30, 2000 and 1999,
respectively, for Western Realty Development follows:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Current assets.................................. $ 3,336 $ 3,557
Participating loan receivable................... 40,725 37,849
Real estate, net................................ 77,174 77,988
Furniture and fixtures, net..................... 224 249
Other noncurrent assets......................... 226 320
Goodwill, net................................... 549 722
Notes payable - current......................... 6,968 6,645
Other current liabilities....................... 4,939 7,067
Notes payable - long-term....................... 4,591 8,211
Other long-term liabilities..................... 799 752
Members' equity................................. 104,937 98,210
</TABLE>
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<PAGE> 9
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues................... $2,994 $2,430 $5,384 $5,878
Costs and expenses......... 2,288 2,811 4,458 7,236
Other income............... 1,464 (741) 2,876 261
Income tax provision....... -- (16) -- --
Net income (loss).......... 2,186 (1,106) 3,802 1,097
</TABLE>
WESTERN REALTY REPIN LLC
In June 1998, the Company and Apollo organized Western Realty Repin LLC
("Western Realty Repin") to make a loan to BrookeMil Ltd. ("BrookeMil"), a
wholly-owned subsidiary of the Company. The proceeds of the loan have been
used by BrookeMil for the acquisition and preliminary development of two
adjoining sites totaling 10.25 acres located in Moscow across the Moscow
River from the Kremlin. BrookeMil is planning the development of a hotel,
office, retail and residential complex on the Kremlin sites. BrookeMil
owned 96.8% of one site and 100% of the other site at June 30, 2000.
Western Realty Repin has three classes of equity: Class A Interests, of
which $18,750 were outstanding at June 30, 2000 and are owned by Apollo;
Class B Interests, of which $6,250 were outstanding at June 30, 2000 and
are owned by New Valley; and Class C Interests, of which Apollo had
subscribed for $9,521 ($7,437 funded) and New Valley had subscribed for
$5,712 ($4,463 funded) at June 30, 2000. Apollo and New Valley are
entitled to receive on a pro-rata basis an amount equal to each party's
investment in Class C interests, together with a 20% annual return. After
the distributions to the Class C interests have been made, Apollo will be
entitled to a preference on distributions of cash from Western Realty
Repin to the extent of its investment of $18,750 in Class A interests,
together with a 20% annual rate of return. The Company will then be
entitled to a return of its investment of $6,250 in Class B interests,
together with a 20% annual rate of return. Subsequent distributions will
be made 50% to the Company and 50% to Apollo. Western Realty Repin is
managed by a Board of Managers consisting of an equal number of
representatives chosen by Apollo and the Company. Material corporate
transactions by Western Realty Repin generally require the unanimous
consent of the Board of Managers.
Through June 30, 2000, Western Realty Repin had advanced $36,900 to
BrookeMil, of which $26,188 was funded by Apollo and was classified in
other long-term obligations on the consolidated balance sheet at June 30,
2000. The loan bears no fixed interest and is payable only out of
distributions by the entities owning the Kremlin sites to BrookeMil. Such
distributions must be applied first to pay the principal of the loan and
then as contingent participating interest on the loan. Any rights of
payment on the loan are subordinate to the rights of all other creditors
of BrookeMil. BrookeMil used a portion of the proceeds of the loan to
repay the Company for certain expenditures on the Kremlin sites previously
incurred. The loan is due and payable upon the dissolution of BrookeMil
and is collateralized by a pledge of the Company's shares of BrookeMil.
As of June 30, 2000, BrookeMil had invested $33,846 in the Kremlin sites
and held $1,430 in cash and receivables from an affiliate, which were
restricted for future investment in the Kremlin sites. In connection with
the acquisition of a 34.8% interest in one of the Kremlin sites, BrookeMil
agreed with the City of Moscow to invest an additional $22,000 by May 2000
in the development of the property. In April 2000, Western Realty Repin
arranged short-term financing to fund the investment. Under the terms of
the investment, BrookeMil is required to make additional construction
expenditures on the site of $22,000 by June 2002. Failure to make the
expenditures could result in forfeiture of the 34.8% interest in the site.
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<PAGE> 10
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The Company has accounted for the formation of Western Realty Repin as a
financing by Apollo and a contribution of assets into a consolidated
subsidiary by the Company, which is eliminated in consolidation. Based on
the distribution terms contained in the Western Realty Repin LLC
agreement, the 20% annual rate of return preference to be received by
Apollo on funds advanced to Western Realty Repin is treated as interest
cost in the consolidated statement of operations to the extent of the
Company's net investment in the Kremlin sites. Because BrookeMil's
investment of $35,276 in the Kremlin sites was less than Apollo's
preference of $35,688 in Western Realty Repin at June 30, 2000, the
Company will recognize future interest costs associated with the
participating loan concurrently with future investments by BrookeMil in
the Kremlin sites.
The development of Ducat Place III and the Kremlin sites will require
significant amounts of debt and other financing. The Company is
considering potential financing alternatives on behalf of Western Realty
Development and BrookeMil. However, in light of the recent economic
turmoil in Russia, there is a risk that such financing will not be
available on acceptable terms. Failure to obtain sufficient capital for
the projects would force Western Realty Development and BrookeMil to
curtail or delay the planned development of Ducat Place III and the
Kremlin sites.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at fair
value, with net unrealized gains included as a component of stockholders'
equity. The Company had realized gains on sales of investment securities
available for sale of $1,438 and $6,191 for the three and six months ended
June 30, 2000, respectively, and $1,460 and $1,959 for the three and six
months ended June 30, 1999, respectively.
The components of investment securities available for sale at June 30,
2000 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
<S> <C> <C> <C> <C>
Marketable equity securities............ $29,074 $ 6,000 $ 2,149 $32,925
Marketable warrants..................... -- 3,831 -- 3,831
------- -------- -------- -------
Investment securities................... $29,074 $ 9,831 $ 2,149 $36,756
======= ======== ======== =======
</TABLE>
4. LONG-TERM INVESTMENTS
At June 30, 2000, long-term investments consisted primarily of investments
in limited partnerships of $7,794. The Company believes the fair value of
the limited partnerships exceeds their carrying amount by approximately
$5,448 based on the indicated market values of the underlying investment
portfolio provided by the partnerships. The Company's estimates of the
fair value of its long-term investments are subject to judgment and are
not necessarily indicative of the amounts that could be realized in the
current market. The Company's investments in limited partnerships are
illiquid, and the ultimate realization of these investments is subject to
the performance of the underlying partnership and its management by the
general partners.
Also included in long-term investments are various internet-related
businesses that are carried at $3,659 at June 30, 2000. These investments
include an approximate 3% indirect interest in JFAX.COM, Inc. owned
through a pass-through entity and a 33.4% interest in AtomicPop LLC. JFAX
is an Internet-based messaging and communications services provider to
individuals and businesses, which completed an initial public offering in
July 1999. AtomicPop LLC is engaged in the online music industry. The
Company also owns smaller interests in other Internet companies. The
Company accounts for its investment in AtomicPop LLC and its investment in
one other Internet company under the equity method.
-10-
<PAGE> 11
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
5. REDEEMABLE PREFERRED SHARES
In connection with the Company's recapitalization in June 1999, each of
the Company's Class A Senior Preferred Shares was reclassified and changed
into 20 Common Shares and one Warrant to purchase Common Shares. The
Company reflected dividend arrearages on such shares of $10,659 and
$25,829 in the consolidated statement of operations for the three months
and six months ended June 30, 1999. For the three and six months ended
June 30, 1999, the Company also recorded $576 and $1,404 in compensation
expense related to Class A Senior Preferred Shares awarded to an officer
of the Company in 1996.
6. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS
In connection with the Company's recapitalization in June 1999, each of
the Company's Class B Preferred Shares was reclassified and changed into
one-third of a Common Share and five Warrants to purchase Common Shares.
The Company reflected dividend arrearages on such shares of $4,881 and
$11,930 in the consolidated statement of operations for the three and six
months ended June 30, 1999.
7. SALE OF THINKING MACHINES' ASSETS
On June 2, 1999, Thinking Machines sold substantially all of its assets
consisting of its Darwin(R) software and services business to Oracle
Corporation. The purchase price was $4,700 in cash at the closing of the
sale and up to an additional $20,300, payable in cash on January 31 in
each of the years 2001 through 2003, based on sales by Oracle of Darwin
product above specified sales targets. The Company recorded a gain of
$3,801 in connection with the sale for the 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. In June 2000, Thinking Machines recognized a $150 gain related to
Oracle's payment of the first installment of $150 from the $400 of the
purchase price escrowed in connection with the sale.
8. CONTINGENCIES
LAWSUITS
In March 1997, a stockholder derivative suit was filed against the
Company, as a nominal defendant, its directors and Brooke Group Holding
Inc. ("Brooke Group Holding"), a subsidiary of Vector, in the Delaware
Chancery Court by a stockholder of the Company. The suit alleges that the
Company's purchase of the BrookeMil shares from Brooke (Overseas) Ltd. in
January 1997 constituted a self-dealing transaction which involved the
payment of excessive consideration by the Company. The plaintiff seeks (i)
a declaration that the Company's directors breached their fiduciary
duties, Brooke Group Holding aided and abetted such breaches and such
parties are therefore liable to the Company, and (ii) unspecified damages
to be awarded to the Company. In December 1999, another stockholder of the
Company commenced an action in Delaware Chancery Court substantially
similar to the March 1997 action. This stockholder alleges, among other
things, that the consideration paid by the Company for the BrookeMil
shares was excessive, unfair and wasteful, that the special committee of
the Company's board lacked independence, and that the appraisal by the
independent appraisal firm and the fairness opinion by the independent
investment bank were flawed. Brooke Group Holding and the Company believe
that the allegations in both cases are without merit. By order of the
court, both actions were consolidated. Brooke Group Holding and the
Company recently filed a motion to dismiss the consolidated action.
Although there can be no assurances, management is of the opinion, after
consultation with counsel, that the ultimate resolution of this matter
will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
-11-
<PAGE> 12
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
In July 1999, a purported class action was commenced on behalf of the
Company's former Class B preferred shareholders against the Company,
Brooke Group Holding and certain directors and officers of the Company in
Delaware Chancery Court. The complaint alleges that the recapitalization,
approved by a majority of each class of the Company's stockholders in May
1999, was fundamentally unfair to the Class B preferred shareholders, the
proxy statement relating to the recapitalization was materially deficient
and the defendants breached their fiduciary duties to the Class B
preferred shareholders in approving the transaction. The plaintiffs seek
class certification of the action and an award of unspecified compensatory
damages as well as all costs and fees. Brooke Group Holding and the
Company believe that the allegations are without merit. Brooke Group
Holding and the Company recently filed a motion to dismiss the action.
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 and claims involve substantial or indeterminate amounts and are
in varying stages of legal proceedings. In the opinion of management,
after consultation with counsel, the ultimate resolution of these matters
will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
RUSSIAN OPERATIONS
The Russian Federation continues to experience economic difficulties
following the financial crisis of August 1998. Consequently, the country's
currency continues to devalue, there is continued volatility in the debt
and equity markets, hyperinflation persists, confidence in the banking
sector has yet to be restored and there continues to be a general lack of
liquidity in the economy. In addition, laws and regulations affecting
businesses operating within the Russian Federation continue to evolve.
The Russian Federation's return to economic stability is dependent to a
large extent on the effectiveness of the measures taken by the government,
decisions of international lending organizations, and other actions,
including regulatory and political developments, which are beyond the
Company's control.
Russian Taxation: Russian taxation is subject to varying interpretations
and constant changes. Furthermore, the interpretation of tax legislation
by tax authorities as applied to the transactions and activity of the
Company may not coincide with that of management. As a result,
transactions may be challenged by tax authorities and the Company may be
assessed additional taxes, penalties and interest, which can be
significant.
Management regularly reviews the Company's taxation compliance with
applicable legislation, laws and decrees and current interpretations and
from time to time potential exposures are identified. At any point in time
a number of open matters may exist, however, management believes that
adequate provision has been made for all material liabilities. Tax years
remain open to review by the authorities for three years.
9. STOCK OPTION PLANS
On March 22, 2000, the Company granted incentive and non-qualified stock
options to purchase a total of 1,196,299 Common Shares. The grant of these
options was conditioned upon the approval of the plan by the Company's
stockholders, which occurred at the annual meeting held on May 24, 2000.
The recipients of the options were approximately 100 employees of
Ladenburg. The exercise price of the options was $3.875 per share, the
fair market value on the date of grant. The options have terms of between
seven and ten years and vest over periods of three to five years after the
date of grant.
-12-
<PAGE> 13
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
10. BUSINESS SEGMENT INFORMATION
The following table presents certain financial information of the
Company's continuing operations before taxes and minority interests as of
and for the three months ended June 30, 2000 and 1999. The operations of
BrookeMil are included in real estate operations, while the Company's
interest in Western Realty Development, which is accounted for on the
equity method, is included in corporate and other activities.
The following table presents certain financial information of the
Company's continuing operations before taxes and minority interests as of
and for the three and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
BROKER- COMPUTER CORPORATE
DEALER REAL ESTATE SOFTWARE AND OTHER TOTAL
------ ----------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 2000
Revenues......................... $ 20,031 $ 820 $ 150 $ 1,399 $ 22,400
Operating income (loss).......... 163 (2,113) 115 (2,403) (4,238)
Depreciation and
amortization.................. 217 330 -- 7 554
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
SIX MONTHS ENDED JUNE 30, 2000
Revenues......................... $ 51,318 $ 1,591 $ 150 $ 4,882 $ 57,941
Operating income (loss).......... 5,046 (4,096) 75 (2,491) (1,466)
Identifiable assets.............. 44,753 58,493 260 119,779 223,285
Depreciation and
amortization.................. 437 532 -- 14 983
Capital expenditures............. 289 1,845 -- -- 2,134
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.............. 44,390 100,360 151 120,764 265,565
Depreciation and
amortization.................. 437 1,037 199 90 1,763
Capital expenditures............. 327 11,961 30 302 12,609
</TABLE>
11. 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.
-13-
<PAGE> 14
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
12. PRO FORMA FINANCIAL INFORMATION
The following table presents unaudited pro forma results from continuing
operations as if the recapitalization, the sale of Thinking Machines'
assets in June 1999 and the sale of five U.S. shopping centers in August
1999 had occurred on January 1, 1999. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative
of what would have occurred had these transactions been consummated as of
such date.
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1999
------------- -------------
Revenues ............................. $ 21,820 $ 42,993
========== ========
Loss from continuing operations ...... $ (5,088) $ (9,516)
========== ========
Loss from continuing operations
applicable to common shares ....... $ (5,088) $ (9,516)
========== ========
Loss from continuing operations
per common share .................. $ (0.22) $ (0.41)
========== ========
13. COMPREHENSIVE INCOME
Comprehensive income of the Company includes net income and net changes in
the value of investment securities available for sale that have not been
included in net income. Comprehensive income (loss) applicable to Common
Shares for the three and six months ended June 30, 2000 and 1999 is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss applicable to
Common Shares................ $ (4,198) $(19,305) $ (2,402) $(43,106)
Net change in unrealized gain
on investment securities..... 676 7,759 5,236 2,341
-------- -------- -------- --------
Total comprehensive (loss)
income....................... $ (3,522) $(11,546) $ 2,834 $(40,765)
======== ======== ======== ========
</TABLE>
-14-
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTRODUCTION
The Company's Condensed Consolidated Financial Statements include the accounts
of Ladenburg Thalmann & Co. Inc. ("Ladenburg"), an 80.1%-owned subsidiary,
BrookeMil Ltd. ("BrookeMil"), a 99.1%-owned subsidiary, Thinking Machines
Corporation ("Thinking Machines"), a 72.7%-owned subsidiary, and other
subsidiaries.
RECENT DEVELOPMENTS
SALE OF WESTERN TOBACCO INVESTMENTS. On June 14, 2000, Vector entered into a
definitive agreement to sell Western Tobacco Investments to a subsidiary of
Gallaher Group Plc for $400,000 in cash and the assumption of debt and capital
commitments. Vector completed the sale on August 4, 2000. The cash proceeds from
the transaction after estimated closing expenses were divided among Vector and
Western Realty Development in accordance with the terms of the participating
loan, which was terminated at the closing. Through their investments in Western
Realty Development, the Company received $57,208 in cash proceeds from the sale
and Apollo received $68,378. These amounts are subject to adjustment based on
final closing expenses. The Company anticipates recording a gain of
approximately $52,000 in connection with the transaction in the third quarter of
2000.
RESULTS OF OPERATIONS
For the three months and six months ended June 30, 2000 and 1999, the results of
continuing operations of the Company's primary operating units, which include
Ladenburg (broker-dealer), the Company's U.S. office buildings and shopping
centers and BrookeMil (real estate), and Thinking Machines (computer software),
were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Broker-dealer:
Revenues ....................................... $ 20,031 $ 22,557 $ 51,318 $ 41,587
Expenses ....................................... 19,868 21,031 46,272 40,036
-------- -------- -------- --------
Operating income before taxes
and minority interests ...................... $ 163 $ 1,526 $ 5,046 $ 1,551
======== ======== ======== ========
Real estate:
Revenues ....................................... $ 820 $ 2,102 $ 1,591 $ 4,425
Expenses ....................................... 2,933 3,407 5,687 6,955
-------- -------- -------- --------
Operating loss before taxes
and minority interests ...................... $ (2,113) $ (1,305) $ (4,096) $ (2,530)
======== ======== ======== ========
Computer software:
Revenues ....................................... $ 150 $ 66 $ 150 $ 317
Expenses ....................................... 35 1,499 75 3,351
-------- -------- -------- --------
Operating income (loss) before
taxes and minority interests ................ $ 115 $ (1,433) $ 75 $ (3,034)
======== ======== ======== ========
Corporate and other:
Revenues ....................................... $ 1,399 $ 2,205 $ 4,882 $ 3,371
Expenses ....................................... 3,802 3,981 7,373 8,493
-------- -------- -------- --------
Operating loss before taxes
and minority interests ...................... $ (2,403) $ (1,776) $ (2,491) $ (5,122)
======== ======== ======== ========
</TABLE>
-15-
<PAGE> 16
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1999
Consolidated total revenues were $22,400 for the three months ended June 30,
2000 versus $26,930 for the same period last year. The decrease in revenues of
$4,530 is attributable primarily to Ladenburg's decreased revenues of $2,526 and
a decrease in real estate revenues of $1,282 from the sale of the shopping
centers in August 1999.
Ladenburg's revenues for the second quarter of 2000 decreased $2,526 as compared
to revenues for the second quarter of 1999 primarily as a result of a decrease
in commissions of $2,196 and principal transactions of $2,654 offset by an
increase of $1,802 in corporate finance fees. Ladenburg's expenses for the
second quarter of 2000 decreased $1,163 as compared to expenses for the second
quarter of 1999 due primarily to decreases in compensation expense of $1,197.
Compensation expense decreased due to a decrease in performance-based
compensation.
Revenues from the real estate operations for the second quarter of 2000
decreased $1,282 from the second quarter of 1999. The decline was primarily due
to the sale of the Company's five U.S. shopping centers in August 1999. Expenses
of the real estate operations decreased $474 due primarily to the sale of the
office buildings. BrookeMil incurred expenses of $1,672 for the three months
ended June 30, 2000, which were related to the Kremlin sites. The expenses
consisted of accrued interest expense of $1,277 associated with the Western
Realty Repin loan. Because BrookeMil's investment of $35,276 in the Kremlin
sites was less than Apollo's preference of $35,688 in Western Realty Repin at
June 30, 2000, the Company will recognize future interest costs associated with
the participating loan concurrently with future investments by BrookeMil 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 of 1999 related to the
disposal of such assets. In June 2000, Thinking Machines recognized a $150 gain
related to Oracle's payment of the first installment of $150 from the $400 of
the purchase price escrowed in connection with the sale.
Prior to the sale, Thinking Machines had 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.
Corporate and other revenues of $1,399 for the second quarter of 2000 consisted
primarily of net gains on investments of $1,438, interest and dividend income of
$288 and income from joint venture of $211. Corporate revenues in the 2000
period were offset by $1,335 of losses from internet-related investees accounted
for on the equity method. 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 expenses of $3,802 for the second quarter of 2000 consisted
primarily of employee compensation and benefits of $1,698 and expenses of
certain non-significant subsidiaries of $86. 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.
Income tax benefit for the second quarter of 2000 was $21 versus income tax
expense of $45 for the second quarter of 1999. The income taxes related
principally to state income taxes of Ladenburg. The effective tax rate does not
bear a customary relationship with pre-tax accounting income principally as a
consequence of the change in the valuation allowance relating to deferred tax
assets.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999
Consolidated total revenues were $57,941 for the six months ended June 30, 2000
versus $49,700 for the same period last year. The increase in revenues of $8,241
is attributable primarily to Ladenburg's increased revenues of $9,731 and higher
gains on the sale of investments of $4,232 offset by the decrease in real estate
revenues of $2,834 from the sale of the five U.S. shopping centers in August
1999.
-16-
<PAGE> 17
Ladenburg's revenues for the first six months of 2000 increased $9,731 as
compared to revenues for the first six months of 1999 primarily due to increases
in corporate finance fees of $4,604 and principal transactions of $3,906.
Ladenburg's expenses for the first six months of 2000 increased $6,236 as
compared to expenses for the first six months of 1999 due primarily to an
increase in compensation expense of $6,144. Compensation expense increased due
to an increase in performance-based compensation.
Revenues from the real estate operations for the first six months of 2000
decreased $2,834 primarily due to the sale of the shopping centers in August
1999. Expenses of the real estate operations decreased $1,268 due primarily to
the sale of the shopping centers. BrookeMil incurred expenses of $3,290 for the
six months ended June 30, 2000, which were related to the Kremlin sites. The
expenses consisted primarily of accrued interest expense of $2,873 associated
with the Western Realty Repin loan.
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.
For the first six months of 2000, the Company's revenues of $4,882 related to
corporate and other activities consisted primarily of net gains on investments
of $6,191 and interest and dividend income of $670. Corporate revenues in the
2000 period were offset by $2,813 of losses from internet-related investees
accounted for on the equity method. 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, net gains
on investments of $1,959 and interest and dividend income of $1,190, partially
offset by a loss in joint venture of $4,197.
Corporate and other expenses of $7,373 for the first six months of 2000
consisted primarily of employee compensation and benefits of $3,233 and expenses
of certain non-significant subsidiaries of $186. 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.
Income tax expense for the first six months of 2000 was $15 versus $60 for the
first six months of 1999. The income taxes related principally to state income
taxes of Ladenburg. The effective tax rate does not bear a customary
relationship with pre-tax accounting income principally as a consequence of the
change in the valuation allowance relating to deferred tax assets.
The Company recorded a gain on disposal of discontinued operations of $4,100 in
the 1999 period related to the settlement of a lawsuit originally initiated by
the Company's former Western Union telegraph business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased from $11,512 to $27,900 in the
first six months of 2000 due primarily to net sales of $21,519 of marketable
securities and long-term investments.
Cash used for operating activities for the six months ended June 30, 2000 was
$9,129 as compared to cash provided from operating activities of $4,010 from the
prior year. The difference is primarily due to an increase of $2,691 in
receivables from clearing brokers versus a decrease of $9,134 in the 1999
period. The amount was offset by a decrease in net loss of $2,945.
Cash provided from investing activities for the six months ended June 30, 2000
was $21,336 compared to cash flows used for investing activities of $11,996 for
the six months ended June 30, 1999. The difference is primarily attributable to
net sales of $21,519 of marketable securities and long-term investments in the
2000 period versus net purchases of $3,985 in the 1999 period. The difference is
also attributable to a decrease in restricted assets of $3,394 for the six
months ended June 30, 2000 versus an increase in restricted assets of $2,227 in
the 1999 period. The decrease in restricted assets during six months ended June
30, 2000 was primarily the result of a $2,516 reduction in a letter of credit
which collateralizes a long-term lease of commercial office space.
-17-
<PAGE> 18
The capital expenditures of $1,845 for the six months ended June 30, 2000
related to the development of the Kremlin sites. BrookeMil also held $1,430 in
restricted cash and receivables from an affiliate, at June 30, 2000, which is
restricted for future investment in the Kremlin sites. The capital expenditures
of $11,961 for the six months ended June 30, 1999 related principally to the
development of the Kremlin sites.
In connection with the acquisition of a 34.8% interest in one of the Kremlin
sites, BrookeMil agreed with the City of Moscow to invest an additional $22,000
by May 2000 in the development of the property. In April 2000, Western Realty
Repin arranged short-term financing to fund the investment. Under the terms of
the investment, BrookeMil is required to make additional construction
expenditures on the site of $22,000 by June 2002. Failure to make the
expenditures could result in forfeiture of the 34.8% interest in the site.
In June 1998, New Valley and Apollo organized Western Realty Repin to make a
loan to BrookeMil. The proceeds from the loan will be used by BrookeMil for the
acquisition and preliminary development of the Kremlin sites. Through June 30,
2000, Western Realty Repin has advanced $36,900 to BrookeMil, of which $26,188
was funded by Apollo. The loan bears no fixed interest and is payable only out
of distributions by the entities owning the Kremlin sites to BrookeMil. The loan
is due and payable upon the dissolution of BrookeMil and is collateralized by a
pledge of New Valley's shares of BrookeMil. Such distributions must be applied
first to pay the principal of the loan and then as contingent participating
interest on the loan. Any rights of payment on the loan are subordinate to the
rights of all other creditors of BrookeMil. BrookeMil used a portion of the
proceeds to repay New Valley for certain expenditures on the Kremlin sites
previously incurred.
The development of Ducat Place III and the Kremlin sites will require
significant amounts of debt and other financing. New Valley is considering
potential financing alternatives on behalf of Western Realty Development and
BrookeMil. However, in light of the recent economic turmoil in Russia, there is
a risk that such financing will not be available on acceptable terms. Failure to
obtain sufficient capital for the projects would force Western Realty
Development and BrookeMil to curtail or delay the planned development of Ducat
Place III and the Kremlin sites.
Cash flows provided from financing activities were $4,181 for the six months
ended June 30, 2000 as compared to cash used for financing activities of $4,425
for the six months ended June 30, 1999. The increase was primarily due to an
increase of $4,414 in the Company's margin loans versus a $8,235 net payment on
the Company's margin loans in the 1999 period. The increase was offset by the
issuance to BrookeMil of $4,473 of the participating loan in the 1999 period.
New Valley has lent Thinking Machines an additional $671, net of repayments,
bearing interest at 15% per annum, since Thinking Machines sold its Darwin(R)
software and services business to Oracle Corporation in June 1999.
On October 5, 1999, New Valley's Board of Directors authorized the repurchase of
up to 2,000,000 Common Shares from time to time on the open market or in
privately negotiated transactions depending on market conditions. As of August
11, 2000, New Valley had repurchased 261,400 shares for approximately $981.
The Company expects that its available working capital will be sufficient to
fund its currently anticipated cash requirements for 2000, including the
currently anticipated cash requirements of its operating businesses,
investments, commitments, and payments of principal and interest on its
outstanding indebtedness.
MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates, equity and commodity
prices, changes in the implied volatility of interest rates, foreign exchange
rates, 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
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<PAGE> 19
support units involved. Credit risk related to various financing activities is
reduced by the industry practice of obtaining and maintaining collateral. The
Company monitors its exposure to counterparty risk through the use of credit
exposure information, the monitoring of collateral values and the establishment
of credit limits.
EQUITY PRICE RISK
Ladenburg maintained inventories of trading securities at June 30, 2000 with
fair values of $13,589 in long positions and $976 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, 2000 will not have a material adverse effect on the
consolidated financial position or results of operations of the Company.
The Company held investment securities available for sale totaling $36,756 at
June 30, 2000. Approximately 32% of these securities represent an investment in
Nabisco Group Holdings Corp., which is a defendant in numerous tobacco
products-related litigation, claims and proceedings. An adverse outcome in any
of these proceedings could have a significant effect on the value of the
Company's investment.
The Company also holds long-term investments in limited partnerships and limited
liability companies. The Company's investments in limited partnerships are
illiquid, and the ultimate realization of these investments is subject to the
performance of the investee entities.
FOREIGN MARKET RISK
BrookeMil's and Western Realty Development's operations are conducted in Russia.
The Russian Federation continues to experience economic difficulties following
the financial crisis of August 1998. Consequently, the country's currency
continues to devalue, there is continued volatility in the debt and equity
markets, hyperinflation persists, confidence in the banking sector has yet to be
restored and there continues to be a general lack of liquidity in the economy.
In addition, laws and regulations affecting businesses operating within the
Russian Federation continue to evolve.
The Russian Federation's return to economic stability is dependent to a large
extent on the effectiveness of the measures taken by the government, decisions
of international lending organizations, and other actions, including regulatory
and political developments, which are beyond the control of companies operating
in the Russian Federation. The operations of BrookeMil and Western Realty
Development may be significantly affected by these factors for the foreseeable
future.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
New Valley and its representatives may from time to time make oral or written
"forward-looking statements" within the meaning of the Private Securities Reform
Act of 1995, including any statements that may be contained in the foregoing
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", in this report and in other filings with the Securities and
Exchange Commission and in its reports to stockholders, which represent New
Valley's expectations or beliefs with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties and, in connection with the "safe-harbor" provisions of the
Private Securities Reform Act, New Valley has identified under "Risk Factors" in
Item 1 of the Company's Form 10-K for the year ended December 31, 1999 filed
with the Securities and Exchange Commission and in this section important
factors that could cause actual results to differ materially from those
contained in any forward-looking statements made by or on behalf of New Valley.
Each of New Valley's operating businesses, Ladenburg, BrookeMil and New Valley
Realty, and its interests in Western Realty Development and Western Realty
Repin, are subject to intense competition, changes in consumer preferences, and
local economic conditions. BrookeMil, Western Realty Development, Western Realty
Repin and New Valley Realty are additionally subject to the uncertainties
relating to the real estate business, including, without limitation, required
capital improvements to facilities, local real estate market conditions and
federal, state, city and municipal laws and regulations concerning, among
others, zoning and environmental matters. Uncertainties affecting New Valley
generally include, without limitation, the effect of market conditions on the
salability of New Valley's investment securities, the uncertainty of other
potential acquisitions and investments by
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<PAGE> 20
New Valley, the effects of governmental regulation on New Valley's ability to
target and/or consummate any such acquisitions and the effects of limited
management experience in areas in which New Valley may become involved.
Results actually achieved may differ materially from expected results included
in these forward-looking statements as a result of these or other factors. Due
to such uncertainties and risks, readers are cautioned not to place undue
reliance on such forward-looking statements, which speak only as of the date on
which such statements are made. New Valley does not undertake to update any
forward-looking statement that may be made from time to time on behalf of New
Valley.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Market Risk" is incorporated
herein by reference.
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<PAGE> 21
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 8 to the "Notes to the Condensed Consolidated Financial
Statements" in Part I, Item 1 to this Report.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
No securities of the Company which were not registered under the
Securities Act of 1933, as amended, have been issued or sold by the
Company during the three months ended June 30, 2000.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
During the second quarter of 2000, the Company submitted certain
matters to a vote of security holders at its Annual Meeting of
Stockholders held on May 24, 2000. 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 Common Shares of the
Company at the close of business on April 17, 2000 was entitled to
vote, in person or by proxy, one vote for each Common Share, as the
case may be, held by such holder. As of the record date, the Company
had outstanding 23,159,862 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:
Present in Person or Represented by Proxy
-----------------------------------------
Shares No. of Percent
Outstanding Shares of Votes
----------- ------ --------
Common Shares 23,159,862 21,296,909 92.0
1. Eight nominees were elected as directors of the Company by a plurality
of the votes cast by the holders of Common Shares 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>
Henry C. Beinstein 20,955,701 98.4 341,208 1.6
Arnold I. Burns 20,955,345 98.4 341,564 1.6
Ronald J. Kramer 20,955,406 98.4 341,503 1.6
Richard J. Lampen 20,955,273 98.4 341,636 1.6
Bennett S. LeBow 20,953,085 98.4 343,824 1.6
Howard M. Lorber 20,955,676 98.4 341,233 1.6
Barry W. Ridings 20,955,412 98.4 341,497 1.6
Victor M. Rivas 20,955,708 98.4 341,201 1.6
</TABLE>
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<PAGE> 22
2. The New Valley Corporation 2000 Long-Term Inventive Plan was approved by
the affirmative vote of a majority of the votes cast by the holders of
the Common Shares, as indicated in the following table:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
------------------ ---------------- ---------------- -------------------
No. of % of No. of % of No. of % of No. of % of
Votes Votes Votes Votes Votes Votes Votes Votes
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common Shares 15,782,083 74.1 738,820 3.5 67,484 0.3 4,708,522 22.1
</TABLE>
3. The New Valley Non-Employee Directors Stock Option Program was approved
by the affirmative vote of a majority of the votes cast by the holders of
the Common Shares as indicated in the following table:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
------------------ ---------------- ---------------- -------------------
No. of % of No. of % of No. of % of No. of % of
Votes Votes Votes Votes Votes Votes Votes Votes
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common Shares 16,029,762 75.3 488,821 2.3 69,804 0.3 4,708,522 22.1
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Purchase and Sale Agreement, dated as of June 14,
2000, between Gallaher Overseas (Holdings) Ltd. and
Brooke (Overseas) Ltd. (incorporated by reference to
Exhibit 10.1 in Vector's Form 8-K dated June 14,
2000).
27 Financial Data Schedule (for SEC use only)
(b) REPORTS ON FORM 8-K
Date Items Financial Statements
---- ----- --------------------
June 19, 2000 5, 7 None
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<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW VALLEY CORPORATION
(Registrant)
Date: August 14, 2000 By: /s/ J. BRYANT KIRKLAND III
--------------------------------
J. Bryant Kirkland III
Vice President, Treasurer
and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
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