-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NQ4mhUaBsL0vLvy8PKo6R5PwQEe//WuXBM13DgraTcmQ7rysSZguQQhNy/5Ene2v 4CTMMbpWFotODTGVjGgx/g== 0000950144-99-010280.txt : 19990817 0000950144-99-010280.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950144-99-010280 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW VALLEY CORP CENTRAL INDEX KEY: 0000106374 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 135482050 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02493 FILM NUMBER: 99690702 BUSINESS ADDRESS: STREET 1: INTERNATIONAL PLACE STREET 2: 100 SOUTHEAST SECOND STREET CITY: MIAMI STATE: FL ZIP: 33131 BUSINESS PHONE: 3055798000 MAIL ADDRESS: STREET 1: INTERNATIONAL PLACE STREET 2: 100 SE SECOND STREET CITY: MIAMI STATE: FL ZIP: 33131 FORMER COMPANY: FORMER CONFORMED NAME: WESTERN UNION CORP/NY/ DATE OF NAME CHANGE: 19910516 FORMER COMPANY: FORMER CONFORMED NAME: WESTERN UNION TELEGRAPH CO /NY/ DATE OF NAME CHANGE: 19880121 10-Q 1 NEW VALLEY CORP. QUARTERLY REPORT D/D 06/30/99 1 =============================================================================== 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. =============================================================================== 2 NEW VALLEY CORPORATION AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page ---- 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
-2- 3 NEW VALLEY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
June 30, December 31, --------------- ----------------- 1999 1998 --------------- ----------------- 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 ========= =========
See accompanying notes to condensed consolidated financial statements -3- 4 NEW VALLEY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, --------------------------- ------------------------- 1999 1998 1999 1998 --------------------------- ------------------------- 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 ========== ========= ========== =========
See accompanying notes to condensed consolidated financial statements -4- 5 NEW VALLEY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Unearned Accumulated Class B Compensation Other Preferred Common Paid-In Accumulated on Stock Comprehensive Shares Shares Capital Deficit Options Income Total --------- ------ ------- ----------- ------------ ------------- ----- 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 ===== ==== ======== ========= ===== ====== ========
See accompanying notes to condensed consolidated financial statements -5- 6 NEW VALLEY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Six Months Ended June 30, ---------------------------- 1999 1998 ---------------------------- 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 ======== =========
See accompanying notes to condensed consolidated financial statements -6- 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%. -7- 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: -8- 9
June 30, 1999 December 31, 1998 ------------- ----------------- 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
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 ------------- ------------- ------------- ---------------- 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)
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. -9- 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:
Gross Gross Unrealized Unrealized Fair Cost Gain Loss Value ------- ---------- ---------- ------ 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 ====== ======= ======= ======
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 -10- 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. -11- 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:
Broker- Computer Corporate Dealer Real Estate Software and Other Total ------- ----------- -------- --------- ----- 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
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. -12- 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.
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- 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) ========= ========= ========= =========
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:
Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- 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) ======== ======== ======== ========
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. -13- 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: -14- 15
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- 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 ======= ======= ======= =======
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. -15- 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 -16- 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 -17- 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 -18- 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 -19- 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- 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- 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:
Present in Person or Represented by Proxy Shares Votes Votes No. of No. of Percent Outstanding Per Share Outstanding Shares Votes of Class ----------- --------- ----------- ------ ----- -------- 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
-22- 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:
VOTED FOR DIRECTORS VOTE WITHHELD -------------------------------- -------------------------------- No. of Votes Percent of Votes No. of Votes Percent of Votes ------------ ---------------- ------------ ---------------- 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
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:
VOTED FOR DIRECTORS VOTE WITHHELD -------------------------------- -------------------------------- No. of Votes Percent of Votes No. of Votes Percent of Votes ------------ ---------------- ------------ ---------------- Henry C. Beinstein 458,855 94.8 25,116 5.2 Barry W. Ridings 458,855 94.8 25,116 5.2
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:
VOTED FOR DIRECTORS VOTE WITHHELD -------------------------------- -------------------------------- No. of Votes Percent of Votes No. of Votes Percent of Votes ------------ ---------------- ------------ ---------------- Henry C. Beinstein 579,749 94.9 31,028 5.1 Barry W. Ridings 579,749 94.9 31,028 5.1
-23- 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:
FOR AGAINST ABSTAIN ------------------------ ------------------------- ------------------------ % of % of % of No. of Outstanding No. of Outstanding No. of Outstanding Votes Votes Votes Votes Votes Votes ----- ----------- ------ ----------- ------ ----------- 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
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- 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- EX-10.2 2 EMPLOYMENT AGREEMENT WITH BRYANT KIRKLAND 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. 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 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 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 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 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 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 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 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 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 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 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 4,033 59,809 13,427 0 0 83,477 110,277 8,628 265,565 72,391 54,801 0 0 233 108,367 265,565 0 49,700 0 0 54,124 0 4,711 (9,387) 60 (9,447) 4,100 0 0 (5,347) (3.22) (3.22)
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