<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NEW VALLEY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C> <C>
DELAWARE 6211 13-5482050
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
100 S.E. SECOND STREET
MIAMI, FLORIDA 33131
(305) 579-8000
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
RICHARD J. LAMPEN
EXECUTIVE VICE PRESIDENT
NEW VALLEY CORPORATION
100 S.E. SECOND STREET
MIAMI, FLORIDA 33131
(305) 579-8000
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code or Agent For Service)
COPY TO:
MARK L. WEISSLER, ESQ.
MILBANK, TWEED, HADLEY & MCCLOY LLP
ONE CHASE MANHATTAN PLAZA
NEW YORK, NEW YORK 10005
(212) 530-5000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement is declared effective.
If the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration of the earlier effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration of the earlier effective registration statement for the same
offering. [ ]
If this form is a post effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
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<CAPTION>
CALCULATION OF REGISTRATION FEE
============================================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED(1) REGISTERED PER UNIT OFFERING PRICE FEE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares, $.01 par value 18,482,629 (2) $12.50 $231,032,863(3) $64,228
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This Registration Statement relates to the maximum number of common
shares, par value $.01 per share, of the Company (the "Common Shares")
issuable to holders of outstanding warrants to purchase Common Shares
(the "Warrants").
(2) Based on 18,482,629, the maximum number of Common Shares to be received
upon the exercise of all outstanding Warrants.
(3) Pursuant to Rules 457(g) of the Securities Act of 1933, as amended, and
solely for the purpose of calculating the registration fee, the
proposed maximum aggregate offering price is based on the sum of (i)
the product of 18,482,629, the maximum number of Common Shares that
will be received upon the exercise of all outstanding Warrants, and
(ii) $12.50, the stated exercise price of the Warrants, subject to
adjustments.
<PAGE> 2
LEGEND FOR RED HERRING
[The information in this prospectus is not completed and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.]
PROSPECTUS
SUBJECT TO COMPLETION, DATED JUNE 2, 1999
NEW VALLEY CORPORATION
---------------
18,482,629 COMMON SHARES
---------------
This is a prospectus filed with the Securities and Exchange Commission
covering up to 18,482,629 Common Shares to be issued on the exercise of Warrants
issued by the Company to its stockholders under a plan of recapitalization. Each
Warrant entitles the holder to purchase one Common Share at an exercise price of
$12.50, subject to adjustments. The Warrants are exercisable for a period of
five years from the effective date of the registration statement of which this
prospectus is a part.
YOU SHOULD CONSIDER THE RISKS ASSOCIATED WITH INVESTING IN THE COMPANY.
SEE "RISK FACTORS" BEGINNING ON PAGE 2.
---------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------
JUNE _, 1999
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
NO ONE HAS BEEN AUTHORIZED TO PROVIDE YOU WITH DIFFERENT INFORMATION. YOU SHOULD
NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE
OTHER THAN THE DATE ON THE FRONT COVER OF THE DOCUMENT. WE ARE NOT MAKING AN
OFFER TO SELL THESE SECURITIES WHERE THE OFFER IS NOT PERMITTED.
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY.................................................................. 1
RISK FACTORS............................................................. 2
DISCLAIMER REGARDING FORWARD-LOOKING
STATEMENTS.............................................................. 3
USE OF PROCEEDS.......................................................... 4
DILUTION................................................................. 4
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION................................................... 5
SELECTED FINANCIAL DATA.................................................. 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................... 11
BUSINESS................................................................. 21
MANAGEMENT............................................................... 27
DESCRIPTION OF CAPITAL STOCK............................................. 34
PLAN OF DISTRIBUTION..................................................... 35
LEGAL MATTERS............................................................ 37
EXPERTS.................................................................. 37
INDEX TO FINANCIAL STATEMENTS............................................ F-1
</TABLE>
<PAGE> 4
SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. You should read the
entire document carefully.
THE COMPANY
The Company is engaged:
- through its subsidiary Ladenburg Thalmann & Co. Inc. in the
investment banking and brokerage business;
- through its subsidiary BrookeMil Ltd. in real estate
development in Russia;
- through its New Valley Realty division in the ownership and
management of commercial real estate in the United States; and
- in the acquisition of operating companies.
The mailing address of the principal executive offices of the Company
is 100 S.E. Second Street, Miami, Florida 33131, and its telephone number at
that address is (305) 579-8000.
PLAN OF RECAPITALIZATION
The Company consummated the plan of recapitalization on June _, 1999,
following approval by the Company's stockholders. Pursuant to the plan of
recapitalization:
- each $15.00 Class A Increasing Rate Cumulative Senior
Preferred Share ($100 liquidation), $.01 par value, was
reclassified into 20 Common Shares and one Warrant,
- each $3.00 Class B Cumulative Convertible Preferred Share,
$.10 par value, was reclassified into 1/3 of a Common Share
and five Warrants, and
- each outstanding Common Share was reclassified into 1/10 of a
Common Share and 3/10 of a Warrant.
THE COMMON SHARES
This prospectus covers up to 18,482,629 Common Shares, par value $.01
per share, of the Company to be issued on exercise of Warrants issued by the
Company to its stockholders under the plan of recapitalization. The Common
Shares are quoted on the OTC Electronic Bulletin Board, a National Association
of Securities Dealers sponsored inter-dealer automated quotation system, under
the symbols NVYL.
DESCRIPTION OF THE WARRANTS
The Warrants have an exercise price of $12.50 per share subject to
adjustments in certain circumstances. They may be exercised for a period of five
years from the effective date of the registration statement covering the
underlying Common Shares, of which this prospectus forms a part. The Company may
redeem the warrants at $0.01 per warrant at any time after June _, 2002, the
third anniversary of the recapitalization, if the Common Shares trade for a
specified period above $12.50 per share.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
Generally, holders of Warrants will not recognize gain or loss on the
exercise of Warrants for Common Shares.
<PAGE> 5
RISK FACTORS
THE COMPANY HAS EXPERIENCED CONTINUING LOSSES; IT HAS HIGH LEVERAGE AND A FIXED
CHARGE COVERAGE DEFICIT.
The Company has experienced losses from continuing operations for the
last four years. The Company had outstanding debt in the amount of $57.5 million
as of March 31, 1999 and a margin loan payable of $4.0 million, and its earnings
have been inadequate to cover fixed charges for the four most recent years. The
Company's ability to make required payments on its debt will depend on its
ability to generate cash sufficient for such purposes. Similarly, the Company's
future operating performance and ability to make planned expenditures will
depend on future economic conditions and financial, business and other factors
which may be beyond its control. There is a risk that the Company will not be
able to generate enough funds to repay its debt. If the Company cannot service
its fixed charges, it would significantly harm the Company.
THE COMPANY IS SUBJECT TO RISKS RELATING TO THE INDUSTRIES IN WHICH IT OPERATES.
Each of the Company's operating businesses, Ladenburg, BrookeMil and
New Valley Realty division, and its interests in Western Realty Ducat
Development LLC and Western Realty Repin LLC, are subject to substantial risks.
The Securities Industry. Ladenburg is subject to uncertainties endemic
to the securities industry. These include the volatility of domestic and
international financial, bond and stock markets, as demonstrated by recent
disruptions in the financial markets, extensive governmental regulation,
litigation, intense competition and substantial fluctuations in the volume and
price level of securities. Ladenburg also depends on the solvency of various
counterparties. As a result, revenues and earnings may vary significantly from
quarter to quarter and from year to year. In periods of low volume,
profitability is impaired because certain expenses remain relatively fixed.
Ladenburg is much smaller and has much less capital than many firms in the
industry.
Risks of Real Estate Joint Ventures and Construction Projects. The
Company has a significant joint venture. The ownership and voting interests in
this joint venture are held equally by the Company and another party, and the
Company must seek the approval of the other party for actions regarding the
joint venture. Since the other party's interests may differ from those of the
Company, a deadlock could arise that might impair the ability of the joint
venture to function. Such a deadlock could significantly harm the joint venture.
The joint venture also may make it more difficult for the Company to forge
alliances in Russia with other entities.
The Company plans to pursue a variety of real estate construction
projects. Construction projects are subject to special risks including potential
increase in costs, inability to meet deadlines which may delay the timely
completion of projects, reliance on contractors who may be unable to perform and
the need to obtain various governmental or third party consents.
Risks Relating to Operations in Russia. The Company has significant
real estate development operations in Russia. These operations are subject to a
high level of risk. In its on-going transition from a centrally-controlled
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. The Russian economy suffers from
significant inflation, declining industrial production, rising unemployment and
underemployment, and an unstable currency. In addition, BrookeMil and Western
Realty Ducat may be harmed by:
- political or diplomatic developments;
- regional tensions;
- currency repatriation restrictions;
- foreign exchange fluctuations;
- an undeveloped system of commercial laws, including laws on real
estate title and mortgages, and a relatively untested judicial
system;
- an evolving tax system subject to constant changes which may be
applied retroactively; and
- other legal developments and, in particular, the risks of
expropriation, nationalization and confiscation of assets and changes
in laws relating to foreign ownership.
2
<PAGE> 6
The uncertainties in Russia may impair BrookeMil's and Western Realty
Ducat's ability to complete planned financing and investing activities. The
development of certain Russian properties will require significant amounts of
debt and other financing. In acquiring its interest in the Kremlin sites,
BrookeMil agreed with the City of Moscow to invest an additional $6.0 million in
1999 (which has been funded) and $22 million in 2000 in the development of the
property. The Company is actively pursuing various financing alternatives on
behalf of Western Realty Ducat and BrookeMil. However, given the recent economic
turmoil in Russia, there is a risk that financing will not be available on
acceptable terms. Failure to obtain sufficient capital for the projects would
force Western Realty Ducat and BrookeMil to curtail or delay their projects.
THE COMPANY'S MANAGEMENT DOES NOT DEVOTE ITS FULL TIME TO THE COMPANY'S AFFAIRS.
The Company is dependent upon the services of Bennett S. LeBow, the
Chairman of the Board and Chief Executive Officer of the Company. The loss to
the Company of Mr. LeBow could harm the Company. In addition, management divides
its time between the Company and Brooke and, consequently, does not spend its
full time on the Company's business.
BROOKE CONTROLS A MAJORITY OF THE COMPANY'S SHARES.
As a result of the recapitalization and assuming that no warrant holder
exercises its warrants, Brooke's ownership of the outstanding Common Shares
increased from 42.3% to 55.1% and its total voting power from 42% to 55.1%. As
holder of the absolute majority of the Common Shares, Brooke is able to elect
all of the Company's directors and control the management of the Company. Also,
the increase in Brooke's ownership of Common Shares makes it impossible for a
third party to acquire control of the Company without the consent of Brooke and
therefore may discourage third parties from seeking to acquire the Company. A
third party would have to negotiate any such transaction with Brooke, and the
interests of Brooke may be different from the interests of other Company
stockholders. This may depress the price of the Common Shares.
THE COMPANY ENGAGES IN SUBSTANTIAL RELATED PARTY TRANSACTIONS.
The Company has had substantial dealings with its controlling
stockholder and its affiliates, certain members of management and certain
directors. The Company may continue to have such dealings in the future. While
the Company believes these arrangements and transactions are fair to and in the
best interest of the Company, they were not negotiated at arms length.
THE VALUE OF AND MARKET FOR COMMON SHARES IS UNCERTAIN.
The Company has recently completed a plan of recapitalization that made
far-reaching changes in the Company's capital structure. At this time, it is
unclear how the Common Shares will be valued after the recapitalization.
Moreover, while the Company will seek to have the Common Shares quoted on the
Nasdaq SmallCap Market, or if possible the Nasdaq National Market System, there
is a risk that the Company will not be able to satisfy applicable listing
requirements. Even if the Common Shares are quoted, the liquidity of their
trading market is uncertain. The potential future issuance of the Common Shares
on exercise of the Warrants, which would increase the number of Common Shares by
more than 76%, may depress the price of the Common Shares. The Company has not
declared a dividend on the Common Shares since 1984, and does not currently
intend to pay such dividends in the foreseeable future.
DISCLAIMER REGARDING
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. We may also make
written or oral forward-looking statements in our periodic reports to the SEC,
in our annual reports to stockholders, in our proxy statements, in our offering
circulars and prospectuses, in press releases and other written materials and in
oral statements made by our officers, directors or employees to third parties.
Statements that are not historical facts, including statements about our beliefs
and expectations, are forward-looking statements. These statements are based on
current plans, estimates and projections, and therefore you should not place
undue reliance on them. Forward-looking statements speak only as of the date
they are made, and we undertake no duty to update publicly any of them in light
of new information or future events.
Forward-looking statements involve inherent risks and uncertainties. We
caution you that a number of important factors could cause actual results to
differ materially from those contained in any forward-looking statement. Such
factors include but are not limited to those factors described in "RISK FACTORS"
of this prospectus.
3
<PAGE> 7
USE OF PROCEEDS
The aggregate net proceeds from the issuance and sale of the Common
Shares on exercise of all of the outstanding Warrants will be approximately
$231,032,863. These proceeds will be used for general corporate purposes.
DILUTION
Our pro forma net tangible book value as of March 31, 1999, giving
effect to the recapitalization as if it had occurred on such date, was
$104,062,000 or $4.46 per share. Net tangible book value is defined as the book
value of all the assets of the Company, less all liabilities and intangible
assets. Without taking into account any changes in net tangible book value after
March 31, 1999, other than to give effect to the exercise of all outstanding
Warrants and the application of the net proceeds therefrom, the pro forma net
tangible book value of the Company's Common Shares as of March 31, 1999 would
have been approximately $335,094,863 or $8.02 per share. The following table
gives effect to the exercise of all outstanding Warrants at an exercise price of
$12.50 per Warrant. The table illustrates the immediate increase in net tangible
book value of $3.56 per share to the Company's existing stockholders and an
immediate dilution of $4.48 per share to new investors.
<TABLE>
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Pro forma net tangible book value per share as of March 31, 1999
(giving effect to the recapitalization) $ 4.46
Increase in net tangible book value per share attributable to exercise of Warrants 3.56
-------
Pro forma net tangible book value per share as of March 31, 1999
giving effect to the recapitalization and the exercise of the Warrants $ 8.02
Immediate dilution per share to new investors 4.48
-------
Exercise price per Warrant $ 12.50
=======
</TABLE>
4
<PAGE> 8
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The Pro Forma Condensed Consolidated Statements of Operations for the
year ended December 31, 1998 and the three months ended March 31, 1999 have been
prepared giving effect to the recapitalization which occurred on June __, 1999
and the Company's sale of its four office buildings in Troy, Michigan and
Bernards Township, New Jersey which occurred on September 28, 1998, and the Pro
Forma Condensed Consolidated Balance Sheet as of March 31, 1999 has been
prepared giving effect to the recapitalization. The pro forma financial
information should be read in conjunction with the information set forth under
"RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Introduction - Plan of Recapitalization," "BUSINESS
- --New Valley Realty Division -- Sale of Properties" and the Consolidated
Financial Statements and the related notes included elsewhere in this
prospectus.
Since there has not be a change in the equity ownership of the Company
of greater than 50% as a result of the recapitalization, the recapitalization
will not be subject to purchase accounting. Consequently, the pro forma
information does not reflect any adjustment to the carrying value of assets and
liabilities of the Company based on the fair market value as of the date of the
recapitalization.
The Pro Forma Condensed Consolidated Statements of Operations were
prepared as if the recapitalization and the sale of the office buildings had
occurred at the beginning of the period presented. The Pro Forma Condensed
Consolidated Balance Sheet as of March 31, 1999 was prepared as if the
recapitalization had occurred on March 31, 1999.
The pro forma expenses do not reflect non-recurring costs directly
attributed to the plan of recapitalization which were expensed upon consummation
of the recapitalization. The pro forma financial information does not purport to
show the results, which would actually have occurred had such transactions been
completed as of the date and for the period presented or which may occur in the
future.
5
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NEW VALLEY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1999
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PRO FORMA
ADJUSTMENTS
---------------
HISTORICAL RECAPITALIZATION PRO FORMA
---------- ---------------- ----------
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Revenues:
Principal transactions, net.................................. $ 4,776 $ 4,776
Commissions.................................................. 11,126 11,126
Corporate finance fees....................................... 1,438 1,438
Gain on sale of investments, net............................. 499 499
Loss in joint venture........................................ (1,503) (1,503)
Real estate leasing.......................................... 2,230 2,230
Computer sales and service................................... 251 251
Interest and dividends....................................... 1,261 1,261
Other income................................................. 2,692 2,692
------------- -----------
Total revenues........................................... 22,770 22,770
------------- -----------
Costs and expenses:
Selling, general and administrative ......................... 26,592 26,592
Interest..................................................... 2,325 2,325
------------- -----------
Total costs and expenses................................. 28,917 28,917
------------- -----------
Loss from continuing operations before income taxes
and minority interests....................................... (6,147) (6,147)
Income tax provision.............................................. 15 15
Minority interests in loss from continuing operations
of consolidated subsidiaries................................. 480 480
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Loss from continuing operations (5,682) (5,682)
Discontinued operations:
Gain on disposal of discontinued operations.................. 4,100 4,100
------------- -----------
Income from discontinued operations.......................... 4,100 4,100
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Net loss ......................................................... (1,582) (1,582)
Dividend requirements on Preferred Shares......................... (22,219) $ 22,219 (a) --
------------- ----------- -----------
Net loss applicable to Common Shares.............................. $ (23,801) $ 22,219 (a) $ (1,582)
============= =========== ===========
Loss per Common Share (basic and diluted):
Continuing operations........................................ $ (2.92) $ (.25)
Discontinued operations...................................... .43 .18
------------- -----------
Net loss per Common Share.................................... $ (2.49) $ (0.07)
============= ===========
Number of shares used in computation.............................. 9,577,624 13,739,637 (a) 23,317,261
============= =========== ===========
</TABLE>
- ----------
(a) To adjust for the conversion of outstanding Preferred Shares and Common
Shares to new Common Shares and Warrants.
6
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NEW VALLEY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
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PRO FORMA ADJUSTMENTS
---------------------------------------
SALE OF OFFICE
HISTORICAL BUILDINGS RECAPITALIZATION PRO FORMA
---------- -------------- ---------------- ---------
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Revenues:
Principal transactions, net ............. $ 11,430 $ 11,430
Commissions ............................. 28,284 28,284
Corporate finance fees .................. 14,733 14,733
Gain on sale of investments, net ........ 11,768 11,768
Loss in joint venture ................... (4,976) -- (4,976)
Real estate leasing ..................... 20,577 $ (10,222)(a) 10,355
Gain on sale of real estate ............. 4,682 (4,682) --
Computer sales and service .............. 794 794
Interest and dividends .................. 8,808 (71)(a) 8,737
Other income ............................ 5,987 -- 5,987
----------- ------------ ------------
Total revenues ...................... 102,087 (14,975) 87,112
----------- ------------ ------------
Costs and expenses:
Selling, general and administrative ..... 110,375 (4,914)(a) 105,461
Interest ................................ 13,939 (5,494)(a) 8,445
Provision for loss on long-term
investments .......................... 3,185 -- 3,185
----------- ------------ ------------
Total costs and expenses ............ 127,499 (10,408) 117,091
----------- ------------ ------------
Loss from continuing operations before
income taxes and minority interests ..... (25,412) (4,567) (29,979)
Income tax provision ...................... 6 6
Minority interests in loss from
continuing operations of consolidated
subsidiaries ......................... 2,089 -- 2,089
----------- ------------ ------------
Loss from continuing operations ........... (23,329) (4,567) (27,896)
Discontinued operations:
Gain on disposal of discontinued
operations ........................... 7,740 -- 7,740
----------- ------------ ------------
Income from discontinued
operations ......................... 7,740 -- 7,740
---------- ------------ ------------
Net loss .................................. (15,589) (4,567) (20,156)
Dividend requirements on preferred
shares .................................. 80,964 -- $ 80,964(b) --
----------- ------------ ------------ ------------
Net loss applicable to Common Shares ...... $ (96,553) $ (4,567) $ 80,964(b) $ (20,156)
=========== ============ ============ ============
Loss per Common Share (basic and
diluted):
Continuing operations ................... $ (10.89) $ (1.19)
Discontinued operations ................. .81 .33
----------- ------------
Net loss per Common Share ............... $ (10.08) $ (0.86)
=========== ============
Number of shares used in computation ...... 9,577,624 13,739,637(b) 23,317,261
=========== ============ ============
</TABLE>
- ----------
(a) To eliminate the operations of the office buildings.
(b) To adjust for the conversion of outstanding Preferred Shares and Common
Shares to new Common Shares and Warrants.
7
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NEW VALLEY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------------------------------
PRO FORMA
ADJUSTMENTS
----------------
HISTORICAL RECAPITALIZATION PRO FORMA
---------- ---------------- ---------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 10,312 $ 10,312
Investment securities available for sale..................... 36,563 36,563
Trading securities owned..................................... 6,562 6,562
Restricted assets............................................ 1,192 1,192
Receivable from clearing brokers............................. 12,575 12,575
Other current assets......................................... 3,647 3,647
---------- ----------
Total current assets................................ 70,851 70,851
---------- ----------
Investment in real estate, net.................................... 83,049 83,049
Furniture and equipment, net...................................... 10,393 10,393
Restricted assets................................................. 8,909 8,909
Long-term investments, net........................................ 11,726 11,726
Investment in joint venture....................................... 63,690 63,690
Other assets ..................................................... 6,020 6,020
---------- ----------
Total assets........................................ $ 254,638 $ 254,638
---------- ----------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
Current liabilities:
Margin loan payable.......................................... $ 4,044 $ 4,044
Current portion of notes payable and other
long-term obligations.................................... 2,708 2,708
Accounts payable and accrued liabilities..................... 26,863 $ 600 (a) 27,463
Prepetition claims and restructuring accruals................ 12,340 12,340
Income taxes................................................. 18,361 18,361
Securities sold, not yet purchased........................... 2,659 2,659
---------- ----------- ----------
Total current liabilities........................... 66,975 600 67,575
---------- ----------- ----------
Notes payable 54,801 54,801
Other long-term obligations....................................... 28,200 28,200
Redeemable preferred shares....................................... 332,198 (332,198) (b) --
Commitment and contingencies......................................
Stockholders' equity (deficiency):
Cumulative preferred shares; liquidation preference of
$69,769 and $0; dividends in arrears $172,905 and $0 279 (279) (b) --
Common Shares, $.01 par value; 850,000 ,000 and
100,000,000 shares authorized; 9,577,624 and
23,317,261 shares outstanding............................ 96 137 (b) 233
Additional paid-in capital................................... 534,568 331,740 (a), (b) 866,308
Accumulated deficit.......................................... (759,598) (759,598)
Unearned compensation on stock options....................... (148) (148)
Accumulated other comprehensive income....................... (2,733) (2,733)
---------- ----------- ----------
Total stockholders' equity (deficiency)............. (227,536) (331,598) 104,062
---------- ----------- ----------
Total liabilities and stockholders'
equity (deficiency)................................. $ 254,638 $ 254,638
========== ==========
</TABLE>
- ----------
(a) To record costs associated with the plan of recapitalization.
(b) To record the plan of recapitalization.
8
<PAGE> 12
SELECTED FINANCIAL DATA
The selected financial data presented in the following table for and
as of the end of each of the three-month periods ended March 31, 1999 and 1998
and each year in the five-year period ended December 31, 1998, 1997, 1996, 1995
and 1994 have been derived from the financial statements of the Company.
Balance Sheets at December 31, 1998 and 1997, and the related Statements of
Operations, Statements of Changes in Stockholders' Deficiency and Statements of
Cash Flows for each of the three fiscal years ended December 31, 1998, 1997 and
1996 and related notes, appear elsewhere in this prospectus. The financial data
for each of the three-month periods ended March 31, 1999 and 1998 are derived
from unaudited financial statements of the Company and include all adjustments,
consisting of normal recurring adjustments, which the Company considers
necessary for a fair presentation of the financial position and results of
operations for those periods. Operating results for the three months ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the entire year ended December 31, 1999. The historical data
presented in the following table does not reflect the effects of the
recapitalization.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- -------- --------- --------- -------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Total revenues ....................................... $ 22,770 $ 33,840 $ 102,087 $ 114,568 $130,865 $ 67,730 $ 10,381
Total costs and expenses(a) .......................... 28,917 34,260 127,499 139,989 149,454 66,064 26,146
--------- -------- --------- --------- -------- ---------- ----------
(Loss) income from continuing operations before
income ............................................... (6,147) (420) (25,412) (25,421) (18,589) 1,666 (15,765)
taxes, minority interests, and extraordinary items
Income tax provision (benefit) ....................... 15 6 6 186 300 292 (500)
Minority interests in loss from continuing
operations of consolidated subsidiaries ............... 480 583 2,089 1,347 4,241 -- --
--------- -------- --------- --------- -------- ---------- ----------
(Loss) income from continuing operations before
extraordinary items ................................ (5,682) 157 (23,329) (24,260) (14,648) 1,374 (15,265)
Income from discontinued operations .................. 4,100 -- 7,740 3,687 7,158 16,873 1,135,706
--------- -------- --------- --------- -------- ---------- ----------
(Loss) income before extraordinary items ............. (1,582) 157 (15,589) (20,573) (7,490) 18,247 1,120,441
Extraordinary items(b) ............................... -- -- -- -- -- -- (110,500)
--------- -------- --------- --------- -------- ---------- ----------
Net (loss) income .................................... (1,582) 157 (15,589) (20,573) (7,490) 18,247 1,009,941
Dividend requirements on preferred shares(c) ......... (22,219) (18,832) (80,964) (68,475) (61,949) (72,303) (80,037)
Excess of carrying value of redeemable preferred
shares over cost of shares purchased ................ -- -- -- -- 4,279 40,342 --
--------- -------- --------- --------- -------- ---------- ----------
Net (loss) income applicable to Common Shares ........ $ (23,801) $(18,675) $ (96,553) $ (89,048) $(65,160) $ (13,714) $ 929,904
========= ======== ========= ========= ======== ========== ==========
Per common and equivalent share(f):
Basic:
Loss from continuing operations before extraordinary
items ............................................. $ (2.92) $ (1.95) $ (10.89) $ (9.68) $ (7.55) $ (3.20) $ (10.12)
Discontinued operations ............................ .43 -- .81 .38 .75 1.77 120.63
Extraordinary items ................................ -- -- -- -- -- -- (11.74)
Net (loss) income .................................. (2.49) (1.95) (10.08) (9.30) (6.80) (1.43) 98.77
Diluted:
Loss from continuing operations before extraordinary
items ............................................. $ (2.92) $ (1.95) $ (10.89) $ (9.68) $ (7.55) $ (3.20) $ (9.00)
Discontinued operations ............................ .43 -- .81 .38 .75 1.77 107.36
Extraordinary items ................................ -- -- -- -- -- -- (10.45)
Net (loss) income .................................. (2.49) (1.95) (10.08) (9.30) (6.80) (1.43) 87.91
Dividends declared(c) ................................ -- -- -- -- -- -- --
Book value ........................................... $ (23.75) $ (21.44) $ (13.61) $ (7.55) $ (3.18) $ (4.01)
BALANCE SHEET DATA:
Total assets ......................................... $ 254,638 $ 272,722 $ 441,391 $406,540 $385,822 $1,069,891
Long-term obligations ................................ 54,801 54,801 185,024 170,223 11,967 36,177
Prepetition claims(d) ................................ 12,340 12,364 12,611 15,526 33,392 619,833
Redeemable preferred shares(e) ....................... 322,198 316,202 258,638 210,571 226,396 317,798
Stockholders' deficiency ............................. (227,536) (205,312) (130,399) (72,364) (30,461) (38,444)
Working capital (deficiency) ......................... 3,876 7,870 (6,986) 85,610 155,565 284,849
</TABLE>
- -----------
(a) Includes reorganization (benefit) expense of $(9,706), $(2,044) and
$22,734 in 1996, 1995, 1994, respectively.
(b) Represents extraordinary loss on the extinguishment of debt in 1994.
(c) The dividend requirements on preferred share amounts for the three
months ended March 31, 1999 and 1998 and the years ended December 31,
1998, 1997, 1996, 1995 and 1994 include $260, $202, $891, $692, $417,
$521 and $4,847, respectively, accrued on the Class A Senior Preferred
Shares to reflect the effective dividend yield over the life of such
securities. All preferred dividends, whether or not declared, are
reflected as a deduction in arriving at income (loss) applicable to
Common Shares. No dividends on Preferred Shares were declared in 1999,
1998 and 1997. Dividends of $40 per share in 1996 and $50 per share in
both 1995 and 1994 were declared on the Class A Senior Preferred
Shares.
(d) Represents prepetition claims against the Company in its bankruptcy
case. See Note 17 to the Consolidated Financial Statements and
"BUSINESS -- Legal Proceedings."
9
<PAGE> 13
(e) Includes cumulative preferred dividends on the redeemable Class A
Senior Preferred Shares of $234,581, $176,161, $219,068, $163,302,
$117,117, $121,893 and $176,761 at March 31, 1999 and 1998 and
December 31, 1998, 1997, 1996, 1995 and 1994, respectively. See Note
13 to the Consolidated Financial Statements.
(f) All per share data have been restated to reflect the one-for-20 reverse
stock split completed on July 29, 1996.
10
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTRODUCTION
The following discussion assesses the results of operations, capital
resources and liquidity of the Company and its consolidated subsidiaries. It
should be read in conjunction with the Selected Financial Data and the
Consolidated Financial Statements, Unaudited Interim Condensed Consolidated
Financial Statements and the related notes included elsewhere in this document.
The operating results of the periods presented were not significantly affected
by inflation. The consolidated financial statements include the accounts of
Ladenburg, BrookeMil, Thinking Machines and other subsidiaries.
The Company's financial statements have been affected by its complete
redeployment of its assets since it emerged from bankruptcy in January 1995.
These redeployment transactions include:
- the sale of the money transfer business in January 1995 (booked in
1994) and the messaging service business in October 1995. These
operations, which generated virtually all of the Company's revenues
before 1995, are treated as discontinued in the Company's financial
statements,
- the acquisition of the broker-dealer business in May 1995,
- the purchase of the Company's U.S. office buildings and shopping
centers in January 1996 and the sale of the office buildings in
September 1998,
- the acquisition of BrookeMil in January 1997,
- the formation in February 1998 of the Western Realty Ducat joint
venture, to which the Company contributed a significant portion of
BrookeMil's operations and which is accounted for on the equity
method, and
- the formation in June 1998 of the Western Realty Repin joint
venture to provide financing to BrookeMil.
The Company's Investment in RJR Nabisco. The Company expensed $100 in
1997 and $11,724 in 1996 relating to its investment in the common stock of RJR
Nabisco Holdings Corp. Under a December 27, 1995 agreement between the Company
and Brooke, the Company agreed to reimburse Brooke for certain reasonable
out-of-pocket expenses in connection with RJR Nabisco. The Company paid Brooke
a total of $17 in 1997 and $2,370 in 1996.
On February 29, 1996, the Company entered into a total return equity
swap transaction with an unaffiliated financial institution relating to
1,000,000 shares of RJR Nabisco common stock. The size of the swap was reduced
to 750,000 shares of RJR Nabisco common stock as of August 13, 1996. During the
third quarter of 1996, the swap was terminated when the Company reduced its
holdings of RJR Nabisco common stock, and the Company recognized a loss on the
swap of $7,305 for the year ended December 31, 1996.
Class A Senior Preferred Shares. During 1996, the Company repurchased
72,104 Class A Senior Preferred Shares for an aggregate consideration of
$10,530. The Company declared and paid cash dividends on the Class A Senior
Preferred Shares of $40 per share in 1996.
Reincorporation. On July 29, 1996, the Company reincorporated from New
York to Delaware and effected a one-for 20 reverse stock split of the Common
Shares. All per share data has been restated to retroactively reflect the
reverse stock split, and a total of $1,820 was reclassified from the Company's
Common Shares account to the additional paid-in capital account.
Plan of Recapitalization. The Company consummated the plan of
recapitalization on June _, 1999, following approval by the Company's
stockholders. Pursuant to the plan of recapitalization:
- each $15.00 Class A Increasing Rate Cumulative Senior Preferred
Share ($100 liquidation), $.01 par value, was reclassified into 20
Common Shares and one Warrant,
11
<PAGE> 15
- each $3.00 Class B Cumulative Convertible Preferred Share, $.10 par
value, was reclassified into 1/3 of a Common Share and five
Warrants, and
- 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, on a pro forma basis at March 31, 1999, the carrying value
and dividend arrearages of $332,198 of redeemable preferred stock were
eliminated, changing a stockholders' deficiency of $227,536 into stockholders'
equity of $104,062. 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 Series A 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 increased its ownership of the outstanding Common
Shares from 42.3% to 55.1%, and its total voting power from 42% to 55.1%.
New Accounting Pronouncements. In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share." This new standard is designed to improve the
earnings per share information provided in financial statements by simplifying
the existing computational guidelines, revising disclosure requirements and
increasing the comparability of earnings per share data on an international
basis. Prior years' earnings per share have been restated to conform with this
standard.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." The statement, which the Company adopted in the first quarter of 1998,
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. Where
applicable, earlier periods have been restated to conform to the standards
established by SFAS No. 130. The adoption of SFAS 130 did not have a material
impact on the Company's financial statements.
For transactions entered into beginning in 1998, the Company has
adopted and is reporting under SOP 97-2, "Software Revenue Recognition." The
adoption of SOP 97-2 did not have a material impact on the Company's financial
statements.
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Under SOP 98-1, the carrying value of software
developed or obtained for internal use is assessed based on an analysis of
estimated future cash flows on an undiscounted basis and before interest
charges. SOP 98-1 is effective for transactions entered into in fiscal years
beginning after December 15, 1998. The Company believes that adoption of SOP
98-1 will not have a material impact on its financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for reporting by public business enterprises of information about operating
segments. The Company has adopted SFAS No. 131 and has restated its financial
statements to conform to the pronouncement in the fourth quarter of 1998.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. SFAS 133 requires
that all derivative instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if so, the type of hedge
transaction. The Company has not yet determined the impact of adoption of SFAS
133 on its earnings or statements of financial position.
Year 2000 Costs. The "Year 2000 issue" relates to 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 rather than the year 2000. This could result in
system failure or miscalculations causing disruption to operations, including
an inability to process transactions or engage in similar normal business
activities.
The Company and BrookeMil. Both the Company and BrookeMil 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 BrookeMil are Year 2000 compliant.
12
<PAGE> 16
It is unclear whether the Russian government and other organizations
that 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 BrookeMil 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 anticipates that all phases of its Year 2000 plan except
for the contingency planning phase will be complete by July 1999 and will cost
approximately $650. The cost is inclusive of hardware and software upgrades and
replacements as well as consulting. Ladenburg anticipates that the remaining
costs will be incurred by July 1999. Ladenburg completed its 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 material financial risk. The most significant outside service
provider is Ladenburg's clearing agent. Ladenburg has been informed by its
clearing agent that it has initiated an extensive effort to ensure that it is
Year 2000 compliant. Ladenburg has been informed by its clearing agent that it
completed the remediation process in July 1998 and anticipates completion of
internal testing of its Year 2000 compliant software in June 1999. The clearing
agent has informed Ladenburg that it will conduct system-wide testing of its
Year 2000 software throughout 1999.
Although the Company and its subsidiaries are in the process of
confirming that their service providers are adequately addressing Year 2000
issues, there remains a risk that interaction with service providers will
impair the Company's or its subsidiaries' services.
RESULTS OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996, and the three
months ended March 31, 1999 and 1998, results of continuing operations of the
Company's primary operating units were as follows. The operations of BrookeMil
are included in the real estate operations, while the Company's interest in the
Western Realty Ducat joint venture, which is accounted for on the equity
method, is included in corporate and other activity.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999 YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Broker-dealer:
Revenues ............................................................ $ 19,030 $ 19,425 $ 66,569 $ 56,197 $ 71,960
Expenses ............................................................ 19,005 20,649 72,744 66,155 72,305
-------- -------- -------- -------- --------
Operating income (loss) before taxes and minority interests ......... $ 25 $ (1,224) $ (6,175) $ (9,958) $ (345)
======== ======== ======== ======== ========
Real estate:
Revenues ............................................................ $ 2,323 $ 7,776 $ 25,259 $ 27,067 $ 23,559
Expenses ............................................................ 3,548 7,796 25,451 34,894 24,304
-------- -------- -------- -------- --------
Operating loss before taxes and minority interests .................. $ (1,225) $ (20) $ (192) $ (7,827) $ (745)
======== ======== ======== ======== ========
Computer software:
Revenues ............................................................ $ 251 $ 413 $ 794 $ 3,947 $ 15,017
Expenses ............................................................ 1,852 1,662 6,924 12,103 30,099
-------- -------- -------- -------- --------
Operating loss before taxes and minority interests .................. $ (1,601) $ (1,249) $ (6,130) $ (8,156) $(15,082)
======== ======== ======== ======== ========
Corporate and other:
Revenues ............................................................ $ 1,166 $ 6,226 $ 9,465 $ 27,357 $ 20,329
Expenses ............................................................ 4,512 4,153 22,380 26,837 22,746
-------- -------- -------- -------- --------
Operating (loss) income before taxes and minority interests ......... $ (3,346) $ 2,073 $(12,915) $ 520 $ (2,417)
======== ======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED 1998
Consolidated total revenues were $22,770 for the three months ended
March 31, 1999 versus $33,840 for the same period last year. The decrease in
revenues of $11,070 is attributable primarily to the $5,453 decrease in
revenues from the real estate operations as a
13
<PAGE> 17
result of the sale of the U.S. office buildings in September 1998 and the
contribution of Ducat Place II to Western Realty Ducat in February 1998.
Revenues were also lower as a result of decreased gains on investments of
$4,158 in 1999.
Ladenburg's revenues for the first quarter of 1999 decreased $395 as
compared to revenues for the first quarter of 1998. Ladenburg's expenses for
the first quarter of 1999 decreased $1,644 as compared to expenses for the
first quarter of 1998 due primarily to a decrease in administrative overhead.
Revenues from the real estate operations for the first quarter of 1999
decreased $5,453 primarily due to the sale of the office buildings in September
1998 and the contribution of Ducat Place II to Western Realty Ducat in February
1998. Expenses of the real estate operations decreased $4,248 in the 1999
period due primarily to the sale of the office buildings. In the first quarter
of 1999, BrookeMil incurred expenses of $1,391, which were related to the
acquisition of the Kremlin Sites. A foreign currency loss of $236, which
resulted from the devaluation of rubles held in an escrow account, was included
in BrookeMil's expenses for the first quarter of 1999. The Company anticipates
that the currency loss will be offset by lower future expenditures in the
development of the Kremlin sites. During 1999, BrookeMil also incurred interest
expense associated with the Repin loan of $978.
Thinking Machines had revenues of $251 for the three months ended
March 31, 1999. Direct costs of these revenues were $90 for the period.
Operating expenses of Thinking Machines consisted of primarily selling, general
and administrative of $684 and research and development of $1,000 for the three
months ended March 31, 1999. Thinking Machines had revenues of $413 for the
three months ended March 31, 1998. Direct costs of these revenues were $185 for
the period. Operating expenses of Thinking Machines consisted of selling,
general and administrative of $661 and research and development of $816 for the
three months ended March 31, 1998.
For the first quarter of 1999, the Company's revenues of $1,165
related to corporate and other activities primarily consisted of net gains on
investments of $499 and interest and dividend income of $492 as compared to net
gains on investments of $5,596 and interest and dividends income of $596 for
the same period in the prior year. Corporate revenues in 1999 were offset by
$1,503 of loss in joint venture.
Corporate and other expenses of $4,511 for the first quarter of 1999
consisted primarily of employee compensation and benefits of $2,280 and
expenses of a certain non-significant consolidated subsidiary of $493.
Corporate and other expenses for the first quarter of 1998 of $4,153 consisted
primarily of employee compensation and benefits of $1,849 and expenses
associated with a 50.1% consolidated subsidiary of $613.
Income tax for the first quarter of 1999 was $15 versus $6 for the
first quarter of 1998 due to state tax expense. The effective tax rate does not
bear a customary relationship with pre-tax accounting income principally as a
consequence of the change in the valuation allowance relating to deferred tax
assets.
FISCAL 1998 COMPARED TO FISCAL 1997
Consolidated total revenues for 1998 were $102,087 as compared with
$114,568 for 1997. The decrease in revenues of $12,481 is primarily
attributable to the decrease in corporate and other revenues and revenues at
Thinking Machines offset by an increase in revenues at Ladenburg. The decrease
in corporate and other revenues was a result of a decline in gains on
investments of $8,033 and a loss in Western Realty Ducat of $4,976. During
1998, Ladenburg experienced an increase in commissions offset by a decline in
principal transactions as compared to the prior year. The decrease in Thinking
Machines' revenues was due to the termination of its parallel processing
computer sales and service business commencing in the fourth quarter of 1996.
Ladenburg's revenues for 1998 consisted of commissions of $28,284,
principal transactions of $11,276, corporate finance fees of $14,673, syndicate
and underwriting income of $2,834 and other income of $9,502. Ladenburg's
revenues for 1997 consisted of principal transactions of $17,115, commissions
of $16,727, corporate finance fees of $11,971, syndicate and underwriting
income of $3,269, and other income of $7,115. Expenses of Ladenburg for 1998
consisted of employee compensation and benefits of $47,845 and other expenses
of $24,899. Expenses of Ladenburg for 1997 consisted of employee compensation
and benefits of $42,495 and other expenses of $23,660.
Revenues from the real estate operations in 1998 decreased $1,808
primarily due to lower fourth quarter revenues as a result of the sale of the
office buildings in September 1998 and the contribution of Ducat Place II to
Western Realty Ducat offset by the $4,682 gain on the sale of the office
buildings. Expenses of the real estate operations decreased $9,443 due
primarily to the absence of significant expenses associated with Ducat Place II
and Ducat Place III resulting from the contribution of the properties to
Western
14
<PAGE> 18
Realty Ducat and the sale of the office buildings. A foreign currency loss of
$1,860, which resulted from the devaluation of rubles held in an escrow
account, was included in BrookeMil's expenses for 1998. The currency loss will
be offset by lower future expenditures in the development of the Kremlin sites.
Thinking Machines' revenues in 1998 resulted from software and
maintenance revenue of $680 and service and other revenues of $114. To date,
Thinking Machines has had only minimal revenues from the sale or leasing of
such software and services. Thinking Machines is developing and marketing a
data mining software product. Thinking Machines' revenues in 1997 resulted from
parallel processing computer sales and service of $3,386, software and
maintenance revenue of $241, service revenues of $109, interest income of $94
and other income of $117. Operating expenses of Thinking Machines in 1998
consisted of cost of sales of $821, selling, general and administrative of
$2,571, research and development of $3,444 and interest expense of $88.
Operating expenses of Thinking Machines in 1997 consisted of cost of sales of
$3,463 ($2,309 of which related to the parallel processing computer division),
selling, general and administrative of $5,206 and research and development of
$3,434.
For 1998, the Company's revenues of $9,465 related to corporate and
other activities consisted primarily of net gains on investments of $11,767 and
interest and dividends income of $2,199, offset by the $4,976 loss in the
Western Realty Ducat joint venture. During 1998, the principal component of net
gains on investments were $4,770 from the liquidation of long-term investments
and $6,997 from the liquidation of portfolio holdings. For 1997, the Company's
revenues of $27,357 related to corporate and other activities consisted
primarily of net gains on investments of $19,800 and interest and dividends
income of $3,252. During 1997, the principal component of net gain on
investments consisted of $7,570 and $11,392 from sales of RJR Nabisco and
Milestone Scientific Inc. equity, respectively.
Corporate and other expenses of $22,380 for 1998 consisted primarily
of employee compensation and benefits of $8,937, a provision for loss on a
long-term investment of $3,185, expenses of certain non-significant
subsidiaries of $3,719 and interest expense of $366. Corporate and other
expenses of $26,837 for 1997 consisted primarily of a provision for loss on a
long-term investment of $3,796, employee compensation and benefits of $9,495
and interest expense of $1,640.
Income tax expense for 1998 was $6 compared to $186 in 1997. Income
tax expense for 1998 and 1997 related to state income taxes at Ladenburg and
$107 of Russian profits tax at BrookeMil in 1997.
The Company recorded a gain on disposal of discontinued operations of
$7,740 in 1998 related to the settlement of a lawsuit originally initiated by
the Company's former Western Union telegraph business. The Company received an
additional $4,100 in the first quarter of 1999 from the settlement of a similar
lawsuit and will recognize $4,100 of income from discontinued operations for
the three months ended March 31, 1999. During 1997, the Company recorded a gain
on disposal of discontinued operations of $3,687 related to reversals in
estimates of certain pre-petition claims under Chapter 11 and restructuring
accruals which resulted from the Company's former money transfer business. The
amounts reversed were accrued in prior years upon the commencement of purported
claims against the Company in bankruptcy court. The Company's accounting policy
is to evaluate the remaining restructuring accruals on a quarterly basis and
adjust liabilities as claims are settled or dismissed by the bankruptcy court.
THE YEAR 1997 COMPARED TO 1996
Consolidated total revenues for 1997 were $114,568 as compared with
$130,865 for 1996. The decrease in revenues of $16,297 is attributable
primarily to the decrease in revenues of Ladenburg and Thinking Machines. The
decrease in Ladenburg's revenues resulted from a decline in net principal
transactions of $11,231 and a decline of $4,532 in other Ladenburg revenues.
During 1997, Ladenburg experienced a decline in syndicate and underwriting
activity, commission income and net profits as compared to the prior year. The
decrease in Thinking Machines' revenues was due to the termination of its
parallel processing computer sales and service business commencing in the
fourth quarter of 1996.
Ladenburg's revenues for 1997 consisted of principal transactions of
$17,115, commissions of $16,727, corporate finance fees of $11,971, syndicate
and underwriting income of $3,269, and other income of $7,115. Expenses of
Ladenburg for 1997 consisted of employee compensation and benefits of $42,495
and other expenses of $23,660. For 1996, Ladenburg's revenues consisted of
principal transactions of $28,344, commissions of $17,755, corporate finance
fees of $10,230, syndicate and underwriting income of $7,104 and other income
of $8,527. Expenses of Ladenburg in 1996 consisted of employee compensation and
benefits of $48,613 and other expenses of $23,692.
15
<PAGE> 19
Revenues from the real estate operations in 1997 increased $3,508 due
primarily to $3,490 in revenues of BrookeMil from February 1, 1997, the date of
acquisition. Expenses of the real estate operations increased $10,590 due
primarily to $11,448 in expenses of BrookeMil from the date of acquisition.
Thinking Machines' revenues in 1997 resulted from parallel processing
computer sales and service of $3,386, software and maintenance revenue of $241,
service revenues of $109, interest income of $117 and other income of $94.
Thinking Machines' revenues in 1996 resulted from parallel processing computer
sales and service of $15,017. Operating expenses of Thinking Machines in 1997
consisted of cost of sales of $3,463, $2,309 of which related to the parallel
processing computer division, selling, general and administrative of $5,206 and
research and development of $3,434. Operating expenses of Thinking Machines in
1996 consisted of $21,239 of costs associated with the parallel processing
computer division, selling, general and administrative of $5,984 and research
and development of $2,876. In 1996, Thinking Machines wrote down certain
assets, principally inventory, associated with its parallel processing computer
sales and service division to their net realizable value and recorded a charge
of $6,200 for these reserves.
For 1997, the Company's revenues of $27,357 for corporate and other
activities consisted primarily of net gains on investments of $19,800 and
interest and dividends income of $3,252. The Company's revenues for corporate
and other activities of $20,329 for 1996 consisted primarily of $12,001 of
interest and dividends income, gain on termination of various service
agreements with First Financial of $1,285 and net gain on investments of
$2,528. During 1997, the principal component of net gain on investments
consisted of $7,570 from sales of RJR Nabisco equity and $11,392 from sales of
Milestone Scientific Inc. equity. During 1996, the net gain on investments
consisted of the gain on the sale of the investment in a Brazilian airplane
manufacturer of $4,285, the liquidation of two limited partnerships for a gain
of $4,201, and the net realized gain on sales of investment securities held for
sale of $1,347, net of the loss on the RJR Nabisco swap of $7,305.
Corporate and other expenses of $26,837 for 1997 consisted primarily
of a provision for loss on a long-term investment of $3,796, employee
compensation and benefits of $9,495 and interest expense of $1,640. Corporate
and other expenses for 1996 of $22,746 consisted primarily of expenses related
to the RJR Nabisco investment of $11,724, employee compensation and benefits of
$7,262, and interest expense of $4,116, net of $9,706 in reversals of
restructuring accruals. The reversal of restructuring accruals related
primarily to the settlement of certain lease obligations, which were
prepetition claims. The Company did not reverse any restructuring accruals from
continuing operations in 1997; however, reversals of $3,687 of accruals related
to prepetition claims filed relating to the Company's former money transfer
business were recorded as income from discontinued operations in 1997.
Income tax expense for 1997 was $186 compared to $300 in 1996. Income
tax expense for 1997 and 1996 related to state income taxes at Ladenburg in
1997 and 1996 and $107 of Russian profits tax at BrookeMil in 1997.
During the fourth quarter of 1996, the Company settled a receivable
claim originally begun by Western Union Telegraph Company for a gain of $6,374
and reduced certain liabilities related to Western Union retirees by $784. The
Company recorded the gain on settlement and liability reduction as a gain on
disposal of discontinued operations of $7,158. During 1997, the Company
recorded a gain on disposal of discontinued operations of $3,687 related to
reversals in estimates of certain prepetition claims under Chapter 11 and
restructuring accruals which resulted from the Company's former money transfer
business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net working capital decreased to $3,876 at March 31,
1999 from $7,870 at December 31, 1998 primarily as a result of a $5,418 decline
in the market value of the Company's investments held for sale.
The Company's working capital increased by $14,856 for the year ended
December 31, 1998 and decreased by $92,596 and $69,955 for the years ended
December 31, 1997 and 1996, respectively.
The Company's working capital increased to $7,870 at December 31, 1998
from a working capital deficit at $6,986 at December 31, 1997 as a result
primarily of the sale of the office buildings, liquidations of various
long-term investments and the contribution of Ducat Place II and Ducat Place
III and the liabilities associated therewith to Western Realty Ducat. The
amount was offset by changes in the Company's unrealized loss on marketable
securities.
The Company's working capital decreased by $92,596 from $85,610 at
December 31, 1996 to a deficit of $6,986 at December 31, 1997 as a result
primarily of the purchase of BrookeMil and net purchases of long-term
investments of $15,384 offset by the net sale of long-term investments of
$2,807.
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At December 31, 1996, the Company's net working capital was $85,610
and had decreased by $69,955 from $155,565 at December 31, 1995 as the result
primarily of the payment of preferred dividends of $41,419, the repurchase of
redeemable preferred stock of $10,530 and the purchase of and additions to the
office buildings and shopping centers of $24,496. These items were offset by
net liquidations of investments of $15,241.
During the first quarter 1999, the Company's cash and cash equivalents
decreased from $16,444 to $10,312 due primarily to net purchases of $6,411 of
marketable securities and long-term investments and a decrease in the Company's
margin loans payable of $9,044. The amounts were offset by the incurrence of
the Western Realty Repin loan of $4,473.
During 1998, the Company's cash and cash equivalents increased from
$11,606 to $16,444 due primarily to the sale of the office buildings and
liquidations of long-term investments offset by capital expenditures of $21,835
and purchases of long-term investments of $13,590.
During 1997, the Company's cash and cash equivalents decreased from
$57,282 to $11,606 due primarily to the purchase of BrookeMil and net purchases
of long-term investments offset by the net sale of long-term investments of
$2,807.
During 1996, the Company's cash flows came primarily from the sale of
its investments of $178,380 and the release of restricted assets of $29,159.
These funds were used principally to repay margin loan financing of $75,119, to
pay preferred dividends of $41,419, for purchase of and additions to the office
buildings and shopping centers of $24,496, and to fund operations ($22,699).
Cash provided from operating activities for the three months ended
March 31, 1999 was $8,744 as compared to cash used for operating activities of
$2,722 from the prior year. The difference is due primarily to a decrease of
$9,986 in receivables from clearing brokers in 1999 and the $446 decrease in
Ladenburg's net trading securities owned for the 1999 period versus an $1,967
increase for the 1998 period. The amount was offset by a decrease in net income
of $1,739.
Cash used for operating activities for the year ended December 31,
1998 increased to $13,957 compared to $249 for the prior year. The difference
is due primarily to a net decrease in Ladenburg's net trading securities of
$8,665, a decrease in accounts payable and accrued liabilities of $2,144 and
gains on the sale of the office buildings and other long-term investments of
$9,452 in 1998. These amounts were offset by cash provided from discontinued
operations of $7,740 and a decrease in the Company's loss from continuing
operations of $931.
Cash used for operating activities for the year ended December 31,
1997 decreased to $249 compared to $22,699 for the year ended December 31,
1996. The difference is due primarily to the $19,708 increase in non-cash
charges in 1997, consisting of increased depreciation and amortization of
$4,657, provision for losses on long-term investments of $2,795, reversals of
restructuring accruals of $9,706 and non-cash stock compensation expense of
$2,550, and increases in net working capital items of $12,354 in 1997, offset
by an increase in net loss of $13,083.
Cash flows used for investing activities for the three months ended
March 31, 1999 were $10,269 compared to cash flows provided from investing
activities of $4,148 for the three months ended March 31, 1998. The difference
is primarily attributable to the $6,411 used to acquire marketable securities
and long-term investments in 1999 compared to net sales of investments of
$7,166.
Cash flows provided from investing activities for the year ended
December 31, 1998 were $104,213 compared to cash flows used for investing
activities of $21,110 for the year ended December 31, 1997. The difference is
attributable primarily to the sale of the office buildings for $111,292 in
1998, the net liquidation of long-term investments in 1998 of $12,305 and
$20,014 used to acquire the BrookeMil stock in the 1997 period. The amount is
offset by capital expenditures in 1998 of $18,236 compared with $10,777 in 1997
and greater net sales of investments in the 1997 period.
Cash flows used for investing activities for the year ended December
31, 1997 were $21,110 compared with cash flows provided from investing
activities of $165,856 for the year ended December 31, 1996. The difference
resulted from changes in net purchases and sales of investment securities of
$132,547, purchases and liquidations of long-term investments of $30,818,
restricted assets of $26,029 and acquisitions of businesses in 1997 of $21,929.
The above-mentioned items were offset by net purchases of real estate of
$25,760.
The capital expenditures for the three months ended March 31, 1999
related principally to the development of the Kremlin Sites ($1,608). BrookeMil
also held $3,525, in restricted cash, at March 31, 1999, which is restricted
for future investment in the Kremlin
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Sites. In connection with the acquisition of its interest in one of the Kremlin
Sites, BrookeMil 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.
The capital expenditures for the year ended December 31, 1998 related
principally to the development of the Kremlin sites ($18,013). BrookeMil also
held $252 in cash at December 31, 1998, which was restricted for future
investment in the Kremlin sites. In acquiring its interest in one of the
Kremlin sites, BrookeMil agreed with the City of Moscow to invest an additional
$6,000 in 1999 and $22,000 in 2000 in the development of the property.
BrookeMil funded $4,800 of this amount in the first quarter of 1999.
In June 1998, the Company and Apollo organized Western Realty Repin to
make a $25,000 participating loan to BrookeMil. The proceeds from the loan will
be used by BrookeMil for the acquisition and preliminary development of the
Kremlin sites. Through March 31, 1999, Western Realty Repin had advanced
$25,000 (of which $18,773 has been funded by Apollo) to BrookeMil. The loan,
which bears no fixed interest, is payable only out of distributions, if made,
by the entities owning the Kremlin sites. Distributions will be applied first
to pay the principal of the loan and then as contingent participating interest
on the loan. Rights of payment on the loan are subordinate to the rights of all
other creditors. BrookeMil used a portion of the proceeds to reimburse the
Company for certain expenditures on the Kremlin sites.
In May 1999, Western Realty Ducat purchased the remaining 48% of the
one Kremlin site that BrookeMil does not currently own and the land lease
rights for the property. Western Realty Ducat will transfer the shares to
BrookeMil, which funded the purchase.
The development of Ducat Place III and the Kremlin sites will require
significant amounts of debt and other financing. The Company is actively
pursuing various financing alternatives on behalf of Western Realty Ducat and
BrookeMil. However, given the recent economic turmoil in Russia, there is a
risk that such financing will not be available on acceptable terms. Failure to
obtain sufficient capital for the projects would force Western Realty Ducat and
BrookeMil to curtail or limit the planned development of Ducat Place III and
the Kremlin sites.
On September 28, 1998, the Company completed a sale of the office
buildings to institutional investors for an aggregate purchase price of
$112,400 before closing adjustments and expenses. The Company received
approximately $13,000 in cash from the transaction before closing adjustments
and expenses. The office buildings were subject to approximately $99,000 of
mortgage financing, which was retired at closing. The Company recorded a gain
of $4,682 associated with the sale of the office buildings. The Company may
seek to dispose of other U.S. real estate holdings in the future.
In September 1998, the Company made a $2,000 loan due December 31,
1999 to its 73%-owned subsidiary Thinking Machines and acquired warrants to
purchase additional shares in a rights offering. In 1999, the Company lent
Thinking Machines an additional $1,848. The amount bears interest at 15% per
annum.
On June 1, 1999, Thinking Machines sold all assets of its Darwin(R)
software and services business, which comprise substantially all of its assets,
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. At the closing of the Oracle sale, $ 4,136 of
the loans, including interest, were repaid by Thinking Machines and the Company
offered to purchase all of Thinking Machines' outstanding preferred stock for
$1,950.
In September 1998, the Company made a one-year $950 loan to BGLS, an
affiliate of the Company, bearing interest at 14% per annum.At March 31, 1999,
the amount outstanding, including interest, on the BGLS loan was $1,019.
Cash flows used for financing activities increased to $4,607 for the
three months ended March 31, 1999 from $3,133 for the three months ended March
31, 1998 due primarily to the $9,044 net payment on the Company's margin loan
offset by the borrowing of a $4,473 participating loan from Western Realty
Repin.
Cash flows used for financing activities increased to $85,418 for the
year ended December 31, 1998 compared to $24,317 in the 1997 period. The
difference consisted of the retirement of notes payable associated with the
sale of the office buildings offset by the fundings of the Repin loan in the
1998 period and the payment of $42,746 of net notes payable in the 1997 period
offset by an increase in margin loan payable of $13,012.
Cash flows used in financing activities decreased to $24,317 for the
year ended December 31, 1997 from $137,617 for the prior year. The difference
was attributable primarily to the payment of preferred dividends in 1996 of
$41,419, repurchases of Class A
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Senior Preferred Shares in 1996 of $10,530 and changes in the margin loan
payable. The amount was offset by payment of long-term liabilities of $52,190.
Of the $55,000 purchase price for the BrookeMil shares acquired by the
Company on January 31, 1997, the Company paid $21,500 in cash at the closing
and executed a note in the principal amount of $33,500 to Brooke (Overseas) for
the balance. The note, which was collateralized by the BrookeMil shares, was
paid during 1997. The source of funds used by the Company for the acquisition,
including the payment of the note, was general working capital including cash
and cash equivalents and proceeds from the sale of investment securities
available for sale.
When the Company bought the BrookeMil shares, certain liabilities
aggregating approximately $40,000 remained liabilities of BrookeMil after the
closing. These liabilities included the $20,400 construction loan owed to
Vneshtorgbank. In addition, the liabilities of BrookeMil at the time of
purchase included approximately $13,800 of rents and related payments prepaid
by tenants in Ducat Place II for periods generally ranging from 15 to 18
months.
In August 1997, BrookeMil refinanced all amounts due under the
construction loan with borrowings under a new credit facility with the Russian
bank SBS-Agro. The new credit facility bears interest at 16% per year, matures
no later than August 2002 with principal payments commencing after the first
year, and is collateralized by a mortgage on Ducat Place II and guaranteed by
the Company. At March 31, 1999, borrowings under the new credit agreement
totaled $18,846.
Of the $72,500 aggregate purchase price for the shopping centers
acquired by the Company on January 11, 1996 from various limited partnerships,
the Company paid $12,500 in cash at the closing. Under loan and security
agreements, the Company executed eight promissory notes in the aggregate
principal amount of $60,000 to the applicable selling partnership for the
balance of the purchase price. Each note has a term of approximately five years
and bears interest at the rate of 8% per annum for the first two and one-half
years and 9% for the remainder of the term. There is no amortization of
principal except out of payments made to obtain the release of mortgages from
the property and to the extent net operating income from the shopping centers
is available as provided in the loan and security agreements. On December 6,
1996, the Company sold a portion of one of the shopping centers for $1,750, and
on November 10, 1997 the Company sold the Marathon shopping center for $5,400.
At March 31, 1999, the aggregate principal amount of the promissory notes was
$54,801.
Under agreements entered into after January 11, 1996, the closing date
of the shopping center purchase, income from the shopping centers is paid to a
trustee bank. Under these agreements, certain payments, including regular
payments of principal and interest on existing senior mortgages to lenders to
the partnerships on the Richland, Washington property and interest on the
shopping center notes, are to be made before the Company receives income for
such period from the shopping centers. In addition, under the shopping center
notes, if the net operating income from the shopping centers does not cover the
interest payments, the interest rate is reduced to a rate per annum not less
than 6%. The interest otherwise payable will be deferred until the earlier of
the date on which sufficient net operating income is available and the maturity
date. The Company has also agreed to use any net income from the shopping
centers it receives in excess of a specified return on its cash investment in
the shopping centers to pay down principal on the shopping center notes.
The shopping centers are subject to underlying mortgages in favor of
senior lenders and second mortgages in favor of the selling partnerships. The
shopping center notes are non-recourse against the Company, except for
misappropriations of insurance and certain other proceeds, failures to apply
rent and other income to required maintenance and taxes, environmental
liabilities and certain other matters.
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.
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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 maintained inventories of trading securities at March 31,
1999 with fair values of $6,562 in long positions and $2,659 in short
positions. Ladenburg performed an entity-wide analysis of its financial
instruments and assessed the related risk and materiality. Based on this
analysis, in the opinion of management, the market risk associated with the
Ladenburg's financial instruments at March 31, 1999 will not have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
The Company held investment securities available for sale totaling
$36,563 at March 31, 1999. Approximately 45% of these securities represent an
investment in RJR Nabisco, which is a defendant in numerous tobacco
products-related litigation, claims and proceedings. The effect of an adverse
lawsuit against RJR Nabisco could have a significant effect on the value of the
Company's investment.
The Company also holds long-term investments in limited partnerships
and limited liability companies. The Company's investments in limited
partnerships are illiquid, and the ultimate realization of these investments is
subject to the performance of the underlying partnership and its management by
general partners.
Foreign Market Risk
BrookeMil's and Western Realty Ducat's operations are conducted in
Russia. During 1998, the economy of the Russian Federation entered a period of
economic instability. The impact includes, but is not limited to, a steep
decline in prices of domestic debt and equity securities, a severe devaluation
of the currency, a moratorium on foreign debt repayments, an increasing rate of
inflation and increasing rates on government and corporate borrowings. The
return to economic stability is dependent to a large extent on the
effectiveness of the fiscal measures taken by government and other actions
beyond the control of companies operating in the Russian Federation. The
operations of BrookeMil and Western Realty Ducat may be significantly affected
by these factors for the foreseeable future.
Russian taxation is subject to varying interpretations and constant
changes. Furthermore, the interpretation of tax legislation by tax authorities
as applied to the transactions and activity of BrookeMil and Western Realty
Ducat may not coincide with that of management. As a result, transactions may
be challenged by tax authorities and BrookeMil and Western Realty Ducat may be
assessed additional taxes, penalties and interest, which can be significant.
Management regularly reviews the Company's taxation compliance with applicable
legislation, laws and decrees and current interpretations and from time to time
potential exposures are identified. At any point in time a number of open
matters may exist; however, management believes that adequate provision has
been made for all material liabilities. Tax years remain open to review by the
authorities for six years.
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BUSINESS
The Company was organized under the laws of New York in 1851. The
principal executive office of the Company is located at 100 S.E. Second Street,
Miami, Florida 33131, and the telephone number is (305) 579-8000.
On January 18, 1995, the Company emerged from bankruptcy
reorganization proceedings and completed substantially all distributions to
creditors under its bankruptcy plan. The plan was confirmed on November 1,
1994, and the Company disposed of certain assets. On July 29, 1996, the Company
reincorporated from New York to Delaware and effected a one-for-20 reverse
stock split of the Common Shares. On June , 1999, the Company implemented its
plan of recapitalization.
The Company is engaged through Ladenburg in the investment banking and
brokerage business, through BrookeMil in real estate development in Russia,
through its New Valley Realty division in the ownership and management of
commercial real estate in the United States, and in the acquisition of
operating companies.
LADENBURG THALMANN & CO. INC.
On May 31, 1995, the Company acquired all of the outstanding shares of
common stock and other equity interests of Ladenburg for $25.8 million, net of
cash acquired, subject to adjustment. Ladenburg is a full service
broker-dealer, which has been a member of the New York Stock Exchange since
1876. Its specialties include investment banking, trading, research, market
making, private client services, institutional sales and asset management.
Ladenburg's investment banking area maintains relationships with
businesses and provides them with research, advisory and investor relations
support. Services include merger and acquisition consulting, management of and
participation in underwriting of equity and debt financing, private debt and
equity financing, and rendering appraisals, financial evaluations and fairness
opinions. Ladenburg's listed securities, fixed income and over-the-counter
trading areas trade a variety of financial instruments. Ladenburg's client
services and institutional sales departments serve over 20,000 accounts
worldwide and its asset management area provides investment management and
financial planning services to numerous individuals and institutions.
Ladenburg is a subsidiary of Ladenburg Thalmann Group Inc., which has
other subsidiaries specializing in merchant banking, venture capital and
investment banking activities on an international level. In July 1997,
Ladenburg Thalmann International, a wholly-owned subsidiary of Ladenburg Group,
together with Societe Generale, formed a fund for investment in public and
private equity securities in Ukraine. The subsidiary's Kiev office serves as
investment advisor to the fund.
BROOKEMIL LTD.
On January 31, 1997, the Company entered into a purchase agreement
with Brooke (Overseas), under which the Company acquired the BrookeMil shares.
Brooke (Overseas) is a subsidiary of Brooke, the Company's controlling
stockholder. The shares comprise 99.1% of the outstanding shares of BrookeMil,
a real estate development company in Russia.
The Company paid Brooke (Overseas) a purchase price of $55 million for
the BrookeMil shares, consisting of $21.5 million in cash and a $33.5 million
9% note. The note, which was collateralized by the BrookeMil shares, was paid
during 1997. The source of funds used by the Company for the acquisition,
including the payment of the note, was general working capital including cash
and cash equivalents and proceeds from the sale of investment securities
available for sale. The amount of consideration paid by the Company was
determined based on a number of factors including current valuations of the
assets, future development plans, local real estate market conditions and
prevailing economic and political conditions in Russia.
The Company retained independent legal counsel and financial advisors
to assist the Company in evaluating and negotiating the transaction, which was
approved by a special committee of the independent directors of the Company. As
required by the bankruptcy plan, the transaction was approved by not less than
two-thirds of the entire Board of Directors, including the approval of at least
one of the directors elected by the holders of the Preferred Shares, and a
fairness opinion from an investment banking firm was obtained. The stockholders
of the Company did not vote on the BrookeMil transaction or the acquisition of
Ladenburg or the office buildings and shopping centers described below, as
their approval was not required by applicable corporate law or the Company's
constituent documents.
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BrookeMil is developing a three-phase complex on 2.2 acres of land in
downtown Moscow, for which it has a 49-year lease. In 1993, the first phase of
the project, Ducat Place I, a 46,500 sq. ft. Class-A office building, was
successfully built and leased. On April 18, 1997, BrookeMil sold Ducat Place I
to one of its tenants, Citibank, for approximately $7.5 million. This price had
been reduced to reflect approximately $6.2 million of rent prepayments by
Citibank. In 1997, BrookeMil completed construction of Ducat Place II, a
premier 150,000 sq. ft. office building. Ducat Place II has been leased to a
number of leading international companies including Motorola, Conoco,
Lukoil-Arco and Morgan Stanley. Ducat Place II is one of the leading modern
office buildings in Moscow due to its design and full range of amenities. The
third phase, Ducat Place III, has been planned as a 450,000 sq. ft. office
tower. The site of the proposed third phase of the project is currently used by
Liggett-Ducat Ltd., an affiliate of Brooke and BGLS, as the site for its
tobacco factory under a use agreement with BrookeMil, terminable by BrookeMil
on 270 days' notice. In addition, the Company has the right to require Brooke
(Overseas) and BGLS to repurchase this site for the then appraised fair market
value, but in no event less than $13.6 million, during the period Liggett-Ducat
Ltd. operates the factory on such site. Liggett-Ducat Ltd., which is
constructing a new factory on the outskirts of Moscow currently scheduled to be
operational by mid-1999, will vacate the site upon completion of the new
factory.
Under the BrookeMil purchase agreement, certain specified liabilities
of BrookeMil aggregating approximately $40 million remained as liabilities of
BrookeMil after the purchase of the BrookeMil shares. These liabilities
included the $20.4 million construction loan. In addition, the liabilities of
BrookeMil at the time of purchase included approximately $13.8 million of rents
and related payments prepaid by tenants in Ducat Place II for periods generally
ranging from 15 to 18 months.
In August 1997, BrookeMil refinanced all amounts due under the
construction loan with borrowings under a new credit facility with the Russian
bank SBS-Agro. The new credit facility bears interest at 16% per year, matures
no later than August 2002 with principal payments commencing after the first
year, and is collateralized by a mortgage on Ducat Place II and guaranteed by
the Company. At June 1, 1999, borrowings under the new credit agreement totaled
$17.5 million.
Western Realty Ducat. In February 1998, the Company and Apollo Real
Estate Investment Fund III, L.P. organized Western Realty Ducat to make real
estate and other investments in Russia. The Company agreed to contribute the
real estate assets of BrookeMil, including Ducat Place II and the site for
Ducat Place III, to Western Realty Ducat, and Apollo agreed to contribute up to
$58.75 million, including the investment in Western Realty Repin discussed
below. Through March 31, 1999, Apollo had funded $36.5 million of its
investment in Western Realty Ducat.
The ownership and voting interests in Western Realty Ducat are held
equally by Apollo and the Company. Apollo will be entitled to a preference on
distributions of cash from Western Realty Ducat to the extent of its investment
($40 million), together with a 15% annual rate of return. The Company will then
be entitled to a return of $20 million of BrookeMil-related expenses incurred
and cash invested by the Company since March 1, 1997, together with a 15%
annual rate of return. Subsequent distributions will be made 70% to the Company
and 30% to Apollo. Western Realty Ducat will be managed by a Board of Managers
consisting of an equal number of representatives chosen by Apollo and the
Company. Material corporate transactions by Western Realty Ducat will 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.
The Company, Brooke and their affiliates have other business
relationships with affiliates of Apollo. On January 11, 1996, the Company
acquired from an affiliate of Apollo eight shopping centers for $72.5 million.
The Company and pension plans sponsored by BGLS have invested in investment
partnerships managed by an affiliate of Apollo. Affiliates of Apollo have owned
a substantial amount of debt securities of BGLS and hold warrants to purchase
common stock of Brooke.
Western Realty Ducat will seek additional real estate and other
investments in Russia. Western Realty Ducat has made a $30 million
participating loan to, payable out of a 30% profits interest in, a company
organized by Brooke (Overseas) which holds Brooke (Overseas)'s interest in
Liggett-Ducat Ltd. and the new factory being constructed by Liggett-Ducat Ltd.
on the outskirts of Moscow.
Western Realty Repin. In June 1998, the Company and Apollo organized
Western Realty Repin to make a loan to BrookeMil. The proceeds of the loan will
be used by BrookeMil for the acquisition and preliminary development of the
Kremlin sites, two adjoining sites totaling 10.25 acres located on the
Sofiskaya Embankment of the Moscow River. The sites are directly across the
river from the Kremlin and have views of the Kremlin walls, towers and nearby
church domes. BrookeMil is planning the development of a 1.1 million sq. ft.
hotel, office, retail and residential complex on the Kremlin sites. BrookeMil
owned 95.2% of one site and 52% of the other site at March 31, 1999. Apollo
will be entitled to a preference on distributions of cash from Western Realty
Repin to the extent of its investment of $18.75 million, together with a 20%
annual rate of return, and the Company will then be entitled to a return of its
investment of $6.25 million, together with a 20% annual rate of return.
Subsequent distributions will be made 50% to the Company
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and 50% to Apollo. Western Realty Repin will be managed by a board of managers
consisting of an equal number of representatives chosen by Apollo and the
Company. Material corporate transactions by Western Realty Repin will generally
require the unanimous consent of the board of managers.
Through March 31, 1999, Western Realty Repin had advanced $25 million,
of which $18.8 million was funded by Apollo, under the Repin loan. This loan is
classified in other long-term obligations on the March 31, 1999 consolidated
balance sheet included in the Consolidated Financial Statements appearing
elsewhere in this prospectus. The loan bears no fixed interest and is payable
only out of distributions by the entities owning the Kremlin sites to BrookeMil.
Such distributions must be applied first to pay the principal of the loan and
then as contingent participating interest on the loan. Any rights of payment on
the loan are subordinate to the rights of all other creditors of BrookeMil.
BrookeMil used a portion of the proceeds of the loan to reimburse the Company
for certain expenditures on the Kremlin sites previously incurred. The loan is
due and payable upon the dissolution of BrookeMil and is collateralized by a
pledge of the Company's shares of BrookeMil.
In May 1999, Western Realty Ducat purchased the remaining 48% of the
one Kremlin site that BrookeMil does not currently own and the land lease
rights for the property. Western Realty Ducat will transfer the shares to
BrookeMil, which funded the purchase.
As of March 31, 1999, BrookeMil had invested $19.6 million in the
Kremlin sites and held approximately $3.5 million in cash, which was restricted
for future investment. In acquiring its interest in one of the Kremlin sites,
BrookeMil agreed with the City of Moscow to invest an additional $6.0 million
in 1999 (which has been funded) and $22 million in 2000 in the development of
the property.
NEW VALLEY REALTY DIVISION
Acquisition of Office Buildings and Shopping Centers. In January 1996,
the Company acquired the office buildings and shopping centers for an aggregate
purchase price of $183.9 million, consisting of $23.9 million in cash and $160
million in non-recourse mortgage financing provided by the sellers. The office
buildings and shopping centers have been operated through the Company's New
Valley Realty division. On September 28, 1998, the Company sold the office
buildings.
The office buildings consisted of two adjacent commercial office
buildings in Troy, Michigan and two adjacent commercial office buildings in
Bernards Township, New Jersey. The Company acquired the office buildings in
Michigan from Belle Mead of Michigan, Inc. and the office buildings in New
Jersey from Jared Associates, L.P., for an aggregate purchase price of $111.4
million. Each seller was an affiliate of Bellemead Development Corporation,
which was indirectly wholly-owned by The Chubb Corporation. The purchase price
for the office buildings was $23.5 million for the 700 Tower Drive property,
located in Troy, Michigan; $28.1 million for the 800 Tower Drive property,
located in Troy, Michigan; $48.3 million for the Westgate I property, located
in Bernards Township, New Jersey; and $11.4 million for the Westgate II
property, located in Bernards Township, New Jersey. The two Michigan buildings
were constructed in 1987 and the two New Jersey buildings were constructed in
1991. The gross square footage of the office buildings ranged from
approximately 50,300 square feet to approximately 244,000 square feet.
The Company acquired a fee simple interest in each office building
subject to certain rights of existing tenants, together with a fee simple
interest in the land underlying three of the office buildings and a 98-year
ground lease underlying one of the office buildings. Under the ground lease,
Bellemead Michigan, as lessor, was entitled to receive rental payments of a
fixed monthly amount and a specified portion of the income received from the
700 Tower Drive property. Space in the office buildings was leased to
commercial tenants and the office buildings were fully occupied at the time of
the sale.
On January 11, 1996, the Company acquired the shopping centers for an
aggregate purchase price of $72.5 million. Each seller was an affiliate of
Apollo. The shopping centers are located in Marathon and Royal Palm Beach,
Florida; Lincoln, Nebraska; Santa Fe, New Mexico; Milwaukee, Oregon; Richland
and Marysville, Washington; and Charleston, West Virginia. The Company acquired
a fee simple interest in each shopping center and the underlying land for each
property. Space in the shopping center is leased to a variety of commercial
tenants and, as of March 31, 1999, the aggregate occupancy of the shopping
centers was approximately 94%. The shopping centers were constructed at various
times during the period 1963-1988. The gross square footage of the shopping
centers ranges from approximately 108,500 square feet to approximately 222,500
square feet.
The purchase price paid for the shopping centers was as follows: $3.9
million for the Marathon Shopping Center property, located in Marathon,
Florida; $9.8 million for the Village Royale Plaza Shopping Center property,
located in Royal Palm Beach, Florida; $6 million for the University Place
property, located in Lincoln, Nebraska; $9.6 million for the Coronado Shopping
Center property, located in Santa Fe, New Mexico; $7.3 million for the Holly
Farm Shopping Center property, located in Milwaukee, Oregon; $10.6
23
<PAGE> 27
million for the Washington Plaza property, located in Richland, Washington;
$12.4 million for the Marysville Towne Center property, located in Marysville,
Washington; and $12.9 million for the Kanawha Mall property, located in
Charleston, West Virginia. The properties are subject to underlying mortgages
in favor of senior lenders and second mortgages in favor of the sellers.
When it acquired the shopping centers, the Company engaged a
property-management firm, whose principals were the former minority partners in
the sellers that had previously operated the shopping centers, to act as the
managing and leasing agent. Effective December 31, 1996, this firm's engagement
was terminated, and Kravco Company was engaged as managing and leasing agent
for the Kanawha Mall and Insignia Commercial Group, Inc. as managing and
leasing agent for the remaining shopping centers.
Sale of Properties. On November 10, 1997, the Company sold its
Marathon, Florida shopping center for $5.4 million and recognized a gain of
$1.2 million on the sale.
On September 28, 1998, the Company sold the office buildings to
institutional investors for an aggregate purchase price of $112.4 million and
recognized a gain of $4.7 million on the sale. The Company received
approximately $13.4 million in cash from the transaction before closing
adjustments and expenses. The office buildings were subject to approximately
$99 million of mortgage financing, which was retired at closing.
The Company sold the office buildings in Michigan to PW/MS OP Sub I,
LLC, a Delaware limited liability company, and the office buildings in New
Jersey to OTR, an Ohio general partnership acting as the duly authorized
nominee of The State Teachers Retirement System of Ohio. Before the closing of
the sale, the Michigan purchaser assigned and delegated to the New Jersey
purchaser its rights and obligations under the agreement pertaining to the
purchase of the office buildings in New Jersey. The sale was negotiated on an
arm's-length basis between the Company and the Michigan purchaser.
OTHER ACQUISITIONS AND INVESTMENTS
Thinking Machines Corporation. Thinking Machines, the Company's 73%
owned subsidiary, designed, developed, marketed and supported software offering
prediction-based management solutions under the name LoyaltyStream(TM) for
businesses such as financial services and telecommunications providers. This
software was designed to help reduce customer attrition, control costs, more
effectively cross-sell or bundle products or services and manage risks.
Incorporated in LoyaltyStream was Darwin(R), a data mining software tool set
with which a customer can analyze large amounts of its pre-existing data as
well as external demographics data to predict behavior or outcomes. The
customer can then send this information through systems integration to those
divisions of the customer, which can use it to more effectively anticipate and
solve business problems. To date, no material revenues have been recognized by
Thinking Machines from the sale or licensing of such software and services.
On June 1, 1999, Thinking Machines sold all assets of its Darwin(R)
software and services business, which comprise substantially all of its assets,
to Oracle Corporation. The purchase price was $4.7 million in cash at the
closing of the sale and up to an additional $20.3 million, 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.
In February 1996, a subsidiary of the Company made a $10.6 million
investment and acquired a controlling interest in Thinking Machines when
Thinking Machines emerged from bankruptcy. In December 1997, the Company
acquired additional shares for $3.15 million in a rights offering, thus
increasing its ownership to approximately 73% of the outstanding Thinking
Machines shares. In September 1998, the Company made a $2 million loan due
December 31, 1999 to Thinking Machines and acquired warrants to purchase
additional shares in a rights offering. In 1999, the Company lent Thinking
Machines an additional $1.8 million. The amount bore interest at 15% per annum.
At the closing of the Oracle sale, $ 4.1 million of the loans were repaid by
Thinking Machines and the Company offered to purchase all of Thinking Machines'
outstanding preferred stock for $1.95 million.
During the fourth quarter of 1996, Thinking Machines announced its
intention to dispose of its parallel processing computer sales and service
business. As a result, Thinking Machines wrote down certain assets, principally
inventory, related to these operations to their net realizable value by $6.1
million. Thinking Machines sold its parallel processing software business on
November 19, 1996 for $4.3 million and sold its remaining parallel processing
service business in April 1997 for $2.4 million in cash and a percentage of
certain future operating profits. During 1997 and 1998, Thinking Machines
received profit participation payments totaling $1.2 million and $37,000,
respectively.
CDSI Holdings, Inc. At March 31, 1999, the Company owned approximately
48% of the outstanding shares of CDSI Holdings, Inc. (formerly known as PC411,
Inc.), a development stage company, which completed an initial public offering
with net proceeds of
24
<PAGE> 28
$5.9 million in May 1997. CDSI is engaged in the marketing of an inventory
control system for tobacco products through its subsidiary, Controlled
Distribution Systems, Inc., and holds a minority interest in a business engaged
in the delivery of an on-line electronic directory information service.
Miscellaneous Investments. As of March 31, 1999, long-term investments
consisted primarily of investments in limited partnerships of $11.7 million.
The Company determined that an other than temporary impairment in the value of
its investment in a joint venture had occurred and wrote down this investment
to zero in 1997 with a charge to operations of $3.8 million.
The Company has invested $3.5 million in various Internet-related
businesses. These investments include a minority interest in JFAX.COM, Inc., an
Internet-based messaging and communications services provider to individuals
and businesses, which has filed a registration statement with the SEC in
connection with a proposed public offering. The Company also holds a minority
interest in Ant 21, LLC, which is engaged in the online music industry and
operates under the domain name www.atomicpop.com.
The Company may acquire additional operating businesses through
merger, purchase of assets, stock acquisition or other means, or seek to
acquire control of operating companies through one of such means.
BANKRUPTCY REORGANIZATION
On November 15, 1991, an involuntary petition under the Bankruptcy
Code was commenced against the Company. On March 31, 1993, the Company
consented to the entry of an order for relief under the Bankruptcy Code.
On November 1, 1994, the bankruptcy court entered an order confirming
the Company's bankruptcy plan. In addition to providing for the sale of assets
to First Financial, the plan provided for:
- the satisfaction of allowed claims in full, in cash, including
settlement of all issues relating to post-petition interest,
- the discharge unless otherwise specifically provided of all pending
lawsuits, prepetition indebtedness other than disputed claims,
accrued interest and post-petition interest, and
- the reinstatement of the Class A Senior Preferred Shares, the Class
B Preferred Shares, the Common Shares, and all other equity
security interests in the Company.
The plan required the Company to pay a $50 per share cash dividend to
the holders of the Class A Senior Preferred Shares and to make a tender offer
to purchase up to 150,000 Class A Senior Preferred Shares at a price of $80 per
share.
When the bankruptcy plan became effective, the Company paid
approximately $550 million on account of allowed prepetition claims and emerged
from bankruptcy. At March 31, 1999, the Company's remaining accruals totaled
approximately $12.3 million for unsettled prepetition claims and restructuring
accruals.
DISCONTINUED OPERATIONS
Under the bankruptcy plan, on November 15, 1994, the Company sold the
assets and operations of its core business, the money transfer business,
including the capital stock of its money transfer subsidiary and certain
related assets, to First Financial. On January 13, 1995, it sold to First
Financial all of the trademarks and tradenames used in the money transfer
business, constituting the Western Union name and trademark. The aggregate
purchase price was approximately $1,193 million, and included $893 million in
cash and $300 million representing the assumption by First Financial of
substantially all of the Company's obligations under the Western Union pension
plan. The Company recognized a gain on this sale of approximately $1,056
million in 1994.
The First Financial agreement required the Company to pay $7 million
to terminate various service agreements with First Financial. The Company
recognized a gain on the termination of these service agreements over
approximately $1.3 million representing the excess over the amounts previously
accrued under these agreements.
Through October 1, 1995, the Company was engaged in the messaging
services business through a wholly-owned subsidiary. On October 31, 1995, the
Company sold substantially all of the assets exclusive of certain contracts and
conveyed substantially all of the liabilities of the subsidiary to First
Financial for $20 million, subject to certain adjustments. This transaction was
effective as of October 1, 1995. The Company recognized a gain on this sale of
approximately $13 million during the fourth quarter of 1995.
25
<PAGE> 29
EMPLOYEES
At March 31, 1999, the Company had approximately 448 full-time
employees of which approximately 367 were employed by Ladenburg. The Company
believes that relations with its employees are satisfactory.
PROPERTIES
The Company's principal executive office is in Miami, Florida, where
it shares offices with Brooke and various of their subsidiaries. The Company
has entered into an expense sharing agreement for use of such office space.
Ladenburg's principal offices are located in New York. Ladenburg leases
approximately 74,000 square feet of office space under a lease that expires on
June 30, 2015. The Company's operating and investment properties are described
above.
LEGAL PROCEEDINGS
On January 18, 1995, approximately $550 million of the approximately
$620 million of prepetition claims were paid under the bankruptcy plan. Another
$57 million of prepetition claims and restructuring accruals have been settled
and paid or adjusted since January 18, 1995. The remaining prepetition claims
may be subject to future adjustments depending on pending discussions with the
various parties and the decisions of the bankruptcy court.
On or about March 13, 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 of the
BrookeMil shares constituted a self-dealing transaction, which involved the
payment of excessive consideration by the Company. The plaintiff seeks a
declaration that the Company's directors breached their fiduciary duties,
Brooke aided and abetted these breaches and these parties are therefore liable
to the Company, and 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, the Company believes, after consultation with counsel, that the
ultimate resolution of this matter will not have a material adverse effect on
the Company's consolidated financial position, results of operations or cash
flows.
The Company is a defendant in various lawsuits and may be subject to
unasserted claims primarily concerning its activities as a securities
broker-dealer and its participation in public underwritings. These lawsuits
involve claims for substantial or indeterminate amounts and are in varying
stages of legal proceedings. In the opinion of the Company, 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.
26
<PAGE> 30
MANAGEMENT
DIRECTORS
The table below, together with accompanying text, presents certain
information regarding all directors of the Company. Each director is a citizen
of the United States of America.
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
---------------- --- ----------------------------------- --------------
<S> <C> <C> <C>
Bennett S. LeBow 61 Chairman of the Board and Chief December 1987
New Valley Corporation Executive Officer of the Company
100 S.E. Second Street
Miami, FL 33131
Howard M. Lorber 50 President and Chief Operating January 1991
New Valley Corporation Officer of the Company
100 S.E. Second Street
Miami, FL 33131
Richard J. Lampen 45 Executive Vice President and July 1996
New Valley Corporation General Counsel of the Company
100 S.E. Second Street
Miami, FL 33131
Arnold I. Burns 69 Managing Director, Arnold and S. November 1994
Arnhold and S. Bleichroeder, Inc. Bleichroeder, Inc.
1345 Avenue of the Americas
New York, NY 10105
Ronald J. Kramer 40 Chairman and Chief Executive November 1994
Ladenburg Thalmann Group Inc. Officer of Ladenburg Thalmann Group
1209 Orange Street Inc.
Wilmington, DE 19801
Henry C. Beinstein 56 Executive Director, Schulte Roth & November 1994
Schulte Roth & Zabel LLP Zabel LLP
900 Third Avenue
New York, NY 10022
Barry W. Ridings 47 Managing Director, BT Alex. Brown November 1994
BT Alex. Brown Incorporated Incorporated
1290 Avenue of the Americas
New York, NY 10104
</TABLE>
Bennett S. LeBow has been Chairman of the Board of the Company since
January 1988 and Chief Executive Officer thereof since November 1994 and
currently holds various positions with the Company's subsidiaries. Since June
1990, Mr. LeBow has been the Chairman of the Board, President and Chief
Executive Officer of Brooke, a New York Stock Exchange-listed holding company,
and since October 1986 has been a director of Brooke. Since November 1990, he
has been Chairman of the Board, President and Chief Executive Officer of BGLS,
which directly or indirectly holds Brooke's equity interests in several private
and public companies. Mr. LeBow has been a director of Liggett Group Inc., a
manufacturer and seller of cigarettes, since June 1990. Liggett is a
wholly-owned subsidiary of BGLS.
Howard M. Lorber has been President and Chief Operating Officer of the
Company since November 1994. Mr. Lorber has been Chairman of the Board and
Chief Executive Officer of Hallman & Lorber Assoc., Inc., consultants and
actuaries to qualified pension and profit sharing plans, and various of its
affiliates since 1975. Mr. Lorber has been a stockholder and a registered
representative of Aegis Capital Corp., a broker-dealer and a member firm of the
National Association of Securities Dealers, since 1984; Chairman of the Board
of Directors since 1987 and Chief Executive Officer since November 1993 of
Nathan's Famous, Inc., a chain of fast food restaurants; a consultant to Brooke
and its subsidiaries since January 1994; a director and member of the Audit
Committee of United Capital Corp., a real estate investment and diversified
manufacturing company, since May 1991; a director and member of the Audit
Committee of Prime Hospitality Corp., a company doing business in the lodging
industry, since May 1994; and a director of PLM International Inc., a leasing
company, since January 1999.
Richard J. Lampen has been the Executive Vice President and General
Counsel of the Company since October 1995. Since July 1996, Mr. Lampen has
served as Executive Vice President of Brooke and BGLS and since November 1998
as President and Chief Executive Officer of CDSI Holdings Inc., a marketer of
an inventory control system in which the Company also has a controlling
interest. Mr. Lampen has been a director of Thinking Machines, a developer and
marketer of data mining and knowledge discovery software in which the Company
has a controlling interest, since February 1996; a director of CDSI since
January 1997; and a director of Panaco, Inc., an independent oil and gas
exploration and production company, since February 1999. From May 1992 to
September 1995, Mr. Lampen was a partner at Steel Hector & Davis, a law firm
located in Miami, Florida. From January 1991 to April 1992, Mr. Lampen was a
Managing Director at Salomon Brothers Inc, an investment bank, and was an
employee at Salomon Brothers Inc from 1986 to April 1992. Mr. Lampen has served
as a director of a number of other companies, including U.S. Can Corporation,
The International Bank of Miami, N.A. and Spec's Music, Inc., as well as a
court-appointed independent director of Trump Plaza Funding, Inc.
Arnold I. Burns has been a Managing Director at Arnhold and S.
Bleichroeder, Inc., an investment bank, since February 1999. Mr. Burns was a
partner of Proskauer Rose LLP, a New York-based law firm, from September 1988
to January 1999. Mr. Burns was Associate Attorney General of the United States
in 1986 and Deputy Attorney General from 1986 to 1988.
Ronald J. Kramer has been Chairman and Chief Executive Officer of
Ladenburg Thalmann Group Inc. since June 1995 and Chairman of the Board and
Chief Executive Officer of its subsidiary, a broker-dealer and investment bank,
since December 1995 and an employee for more than the past five years.
Ladenburg is a wholly-owned subsidiary of the Company. Mr. Kramer currently
serves on the Boards of Directors of Griffon Corporation and Lakes Gaming, Inc.
27
<PAGE> 31
Henry C. Beinstein became the Executive Director of Schulte Roth & Zabel
LLP, a New York-based law firm, in August 1997. Before that, Mr. Beinstein had
served as the Managing Director of Milbank, Tweed, Hadley & McCloy LLP, a New
York-based law firm, commencing November 1995. Mr. Beinstein was the Executive
Director of Proskauer Rose LLP from April 1985 through October 1995. Mr.
Beinstein is a certified public accountant in New York and New Jersey and
before joining Proskauer was a partner and National Director of Finance and
Administration at Coopers & Lybrand.
Barry W. Ridings has been a Managing Director of BT Alex. Brown
Incorporated, an investment banking firm, since March 1990. Mr. Ridings
currently serves as a director of Siem Industries Inc., Noodle Kidoodle, Inc.
and Furr's/Bishop's, Incorporated.
EXECUTIVE OFFICERS
The table below, together with accompanying text, presents certain
information regarding all executive officers of the Company. There are no
family relationships among the executive officers of the Company. Each of the
executive officers of the Company serves until the election and qualification
of his successor or until his death, resignation or removal by the Board.
<TABLE>
<CAPTION>
YEAR INDIVIDUAL
BECAME AN
EXECUTIVE
NAME AGE POSITION OFFICER
- ---- --- -------- ---------------
<S> <C> <C> <C>
Bennett S. LeBow............................... 61 Chairman of the Board and Chief 1988
Executive Officer
Howard M. Lorber............................... 50 President and Chief Operating 1994
Officer
Richard J. Lampen.............................. 45 Executive Vice President and 1995
General Counsel
J. Bryant Kirkland III......................... 33 Vice President, Treasurer and 1998
Chief Financial Officer
Marc N. Bell................................... 38 Vice President, Associate 1998
General Counsel and Secretary
</TABLE>
Bennett S. LeBow has been Chairman of the Board of the Company since
January 1988 and Chief Executive Officer thereof since November 1994 and
currently holds various positions with the Company's subsidiaries. See "-
Directors."
Howard M. Lorber has been President and Chief Operating Officer of the
Company since November 1994 and serves as a director of the Company. See "-
Directors."
Richard J. Lampen has been Executive Vice President and General
Counsel of the Company since October 1995 and serves as a director of the
Company. See "- Directors."
J. Bryant Kirkland III has been Vice President, Treasurer and Chief
Financial Officer of the Company since January 1998 and since November 1994 has
served in various financial capacities with the Company and with Brooke and
BGLS. Mr. Kirkland has served as Vice President and Chief Financial Officer of
CDSI Holdings, Inc. since January 1998 and as a director of CDSI since November
1998. Before November 1994, Mr. Kirkland served as Director of Financial
Planning and Control of Liggett.
Marc N. Bell has been the Vice President of the Company since February
1998 and has served as Associate General Counsel and Secretary of the Company
since November 1994. Since May 1994, Mr. Bell has served as General Counsel and
Secretary of Brooke and BGLS and since January 1998 as Vice President. Before
May 1994, Mr. Bell was with the law firm of Zuckerman, Spaeder, Taylor & Evans
in Miami, Florida and from June 1991 to May 1993, with the law firm of
Fischbein Badillo Wagner Harding in New York, New York.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding all
persons known by the Company to own beneficially more than 5% of the Company's
Common Shares (the only class of its voting securities) and Warrants as of June
1, 1999. The number of shares beneficially owned by each beneficial owner
listed below is based upon the numbers reported by such owner in documents
publicly filed with the SEC, publicly available information or information
available to the Company. The number of shares and percentage of
28
<PAGE> 32
class include shares of which such beneficial owner has the right to acquire
beneficial ownership as specified in Rule 13d-3(d)(1) under the Securities
Exchange Act of 1934. The information set forth in the following table gives
effect to the recapitalization.
<TABLE>
<CAPTION>
NUMBER NUMBER
OF PERCENTAGE OF PERCENTAGE
NAME AND ADDRESS SHARES OF CLASS WARRANTS OF CLASS
------------------------- ------ ---------- -------- -----------
<S> <C> <C> <C> <C>
Bennett S. LeBow 12,849,119(1) 55.1(2) 3,069,664 17.2%
Brooke Group Ltd.
BGLS Inc. -- -- -- --
100 S.E. Second Street
Miami, FL 33131
New Valley Holdings, Inc.
204 Plaza Centre
3505 Silverside Road
Wilmington, DE 19810
Canyon Capital
Advisors LLC -- -- -- --
Mitchell R. Julis
Joshua S. Friedman 1,142,360(3) 4.9%(4) 57,118 *
R. Christian B. Evensen
Suite 200
9665 Wilshire Boulevard
Beverly Hills, CA 90212
</TABLE>
- ----------------
* The percentage beneficially owned does not exceed 1% of the class.
(1) Based on Amendment No. 17 to Schedule 13D dated June __, 1999, filed jointly
by Brooke, BGLS, New Valley Holdings Inc., a direct wholly-owned subsidiary
of BGLS, and Bennett S. LeBow. According to the filing, BGLS exercises sole
voting power and sole dispositive power, subject to the pledge described
below, over 85,603 Common Shares and 1,260,349 Warrants and NV Holdings
exercises sole voting power and sole dispositive power, subject to the
pledge over 12,763,516 Common Shares and 1,809,315 Warrants. Each of BGLS
and NV Holdings disclaims beneficial ownership of the shares beneficially
owned by the other under Rule 13d-3 under the Exchange Act, or for any
other purpose. Each of Brooke and Mr. LeBow disclaims beneficial ownership
of these shares under Rule 13d-3, or for any other purpose. BGLS and NV
Holdings have pledged their Company shares to secure certain notes issued
by BGLS. The securities issued in the recapitalization are subject to the
pledge and have been delivered to the trustee to perfect the lien. The
indenture also provides for restrictions on certain affiliated transactions
between the Company and Brooke, BGLS and their affiliates, as well as for
certain restrictions on the use of future distributions received from the
Company.
(2) Assuming exercise of the warrants held by the named individual and
entities only, the percentage of class would be 60.3%. Assuming exercise
of all outstanding warrants, the percentage of class would be 38.3%.
(3) Canyon Capital Advisors LLC is an investment advisor to various managed
accounts. Capital Advisors LLC is owned in equal shares by entities
controlled by Messrs. Julis, Friedman and Evensen. The named entity and
individuals have reported that, as of March 5, 1999, the entity had sole
power, and the individuals shared power, to vote or to direct the voting
and to dispose or direct the disposition of 57, 118 Class A Senior
Preferred Shares.
(4) Assuming exercise of the warrants held by the named individuals and
entities only, the percentage of class would be 5.1%. Assuming exercise of
all outstanding warrants, the percentage of class would be .7%.
The following table sets forth, as of June 1, 1999, the beneficial
ownership of the Company's Common Shares and Warrants by each of the Company's
directors, each of the executive officers named in the Summary Compensation
Table below and all directors and executive officers as a group. The percentage
of each class includes shares of which such person has the right to acquire
beneficial ownership as specified in Rule 13d-3(d)(1) under the Exchange Act.
The information set forth in the following table gives effect to the
recapitalization.
29
<PAGE> 33
<TABLE>
<CAPTION>
NUMBER NUMBER
OF PERCENTAGE OF PERCENTAGE
NAME AND ADDRESS TITLE OF CLASS SHARES OF CLASS WARRANTS OF CLASS
---------------------- ------------------------ ------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Bennett S. LeBow(1)(4).... Class A Senior Preferred
Shares
Class B Preferred Shares
Common Shares 12,849,119 55.1%(7) 3,069,664 17.2%
Howard M. Lorber(2)(4).... Class A Senior Preferred
Shares
Class B Preferred Shares
Common Shares 752,703 3.2%(8) 328,112 1.8%
Richard J. Lampen(4)...... Class A Senior Preferred
Shares
Class B Preferred Shares
Common Shares
Ronald J. Kramer(5)....... Class A Senior Preferred
Shares
Class B Preferred Shares
Common Shares
Arnold I. Burns(5)........ Class A Senior Preferred
Shares
Class B Preferred Shares
Common Shares
Henry C. Beinstein(3)(5).. Class A Senior Preferred
Shares
Class B Preferred Shares
Common Shares 11,500 * (9) 172,500 1.0%
Barry W. Ridings(5)....... Class A Senior Preferred
Shares
Class B Preferred Shares
Common Shares
Marc N. Bell(6)........... Class A Senior Preferred
Shares
Class B Preferred Shares
Common Shares
J. Bryant Kirkland III(6). Class A Senior Preferred
Shares
Class B Preferred Shares
Common Shares
All directors and
executive officers as a
group (9 persons)(1)..... Class A Senior Preferred
Shares
Class B Preferred Shares
Common Shares 13,613,323 58.3%(10) 3,570,276 19.6%
</TABLE>
- --------------
* The percentage beneficially owned does not exceed 1% of the class.
(1) Includes the BGLS shares and the NV Holding shares, as to which
Mr. LeBow disclaims beneficial ownership. See footnote (1) to
the preceding table.
(2) Includes 32,666 Common Shares and 292,000 Warrants subject to
employee stock options exercisable within 60 days of June 1, 1999.
(3) Includes 833 Common Shares beneficially owned by his spouse, as to
which shares Mr. Beinstein disclaims beneficial ownership.
(4) The named individual is a director and an executive officer of the
Company.
(5) The named individual is a director of the Company.
(6) The named individual is an executive officer of the Company.
(7) Assuming exercise of the warrants held by the named individual
only, the percentage of class would be 60.3%. Assuming exercise of
all outstanding warrants, the percentage of class would be 38.3%.
(8) Assuming exercise of the warrants held by the named individual
only, the percentage of class would be 4.6%. Assuming exercise of
all outstanding warrants, the percentage of class would be 2.6%.
(9) Assuming exercise of the warrants held by the named individual
only, the percentage of class would be .8%. Assuming exercise of
all outstanding warrants, the percentage of class would be .4%.
(10) Assuming exercise of the warrants held by the group only, the
percentage of class would be 63.8%. Assuming exercise of all
outstanding warrants, the percentage of class would be 41.4%.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation
awarded to, earned by or paid during the past three years to those persons who
were, at December 31, 1998, the Company's Chief Executive Officer and the other
executive officers whose cash compensation exceeded $100,000.
30
<PAGE> 34
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE(1)
LONG-TERM COMPENSATION
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDERLYING
--------------------- STOCK OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARD($) (#)
- --------------------------------- ---- ---------- --------- ---------- ----------------------
<S> <C> <C> <C> <C> <C>
Bennett S. LeBow.................... 1998 $2,000,000 -- -- --
Chairman and Chief Executive 1997 2,000,000 -- -- --
Executive Officer 1996 2,000,000 -- -- --
Howard M. Lorber.................... 1998 1,400,000 $250,000 -- --
President and Chief Operating 1997 1,400,000 976,544(2) -- --
Officer 1996 1,250,000 300,000 $4,356,000(3) 427,000(4)
Richard J. Lampen(5)................ 1998 750,000 750,000 -- --
Executive Vice President and 1997 650,000 -- -- --
General Counsel 1996 600,000 100,000 -- --
Marc N. Bell(6)..................... 1998 300,000 300,000 -- --
Vice President, Associate
General Counsel and Secretary
J. Bryant Kirkland III(7)........... 1998 200,000 200,000 -- --
Vice President, Chief Financial
Officer and Treasurer
</TABLE>
- ----------
(1) The aggregate value of perquisites and other personal benefits received by
the named executive officers are not reflected because the amounts were
below the reporting requirements established by SEC rules.
(2) Includes $476,544 paid to Mr. Lorber under the Company's obligation to
reimburse him for taxes relating to the vesting of the 1996 restricted
stock award. See "-- Employment Agreements."
(3) Represents an award of 36,000 Class A Senior Preferred Shares valued based
on the closing price on the date of issuance. Subject to earlier vesting
upon a change of control, the shares vest in six equal annual installments
commencing on July 1, 1997. The shares are identical with all other Class A
Senior Preferred Shares issued and outstanding as of July 1, 1996,
including undeclared dividends of $3.776 million and declared dividends of
$1.08 million. Dividends are payable on the shares provided that such
payments will be deferred until the time of vesting. At December 31, 1998,
the shares had a market value of $3.6 million without giving effect to any
diminution in value attributable to the restrictions. As a result of the
recapitalization, these shares were converted into 720,000 Common Shares
and 36,000 Warrants.
(4) Represents options to purchase 330,000 Common Shares and 97,000 Class B
Preferred Shares granted in 1996. As a result of the recapitalization,
these options now relate to 65,333 Common Shares and 584,000 Warrants.
(5) The table reflects 100% of Mr. Lampen's salary and bonus, all of which are
paid by the Company, and includes his salary and bonus from the Company and
a bonus of $500,000 awarded by Brooke for 1998. Of Mr. Lampen's salary and
bonus from the Company, 25% (or $250,000, $162,500 and $175,000 in 1998,
1997 and 1996, respectively) and all of the 1998 bonus from Brooke have
been or will be reimbursed to the Company by Brooke.
(6) In February 1998, Mr. Bell was appointed a Vice President of the Company.
The table reflects 100% of Mr. Bell's salary and bonus, all of which are
paid by Brooke. Of Mr. Bell's salary and bonus from Brooke, $200,000 has
been or will be reimbursed to Brooke by New Valley.
(7) In January 1998, Mr. Kirkland was appointed a Vice President of the
Company. The table reflects 100% of Mr. Kirkland's salary and bonus, all of
which are paid by the Company, and includes his salary and bonus from the
Company and a bonus of $133,333 awarded by Brooke for 1998. Of Mr.
Kirkland's salary and bonus from the Company, 25% (or $66,666) and all of
the 1998 bonus from Brooke have been or will be reimbursed to the Company
by Brooke.
The following table sets forth certain information concerning
unexercised options held by the named executive officers as of December 31,
1998. The table includes options exercisable within 60 days of the date of this
prospectus.
31
<PAGE> 35
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998
---------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Howard M. Lorber
Class B Preferred Shares.............. 32,332(1) 64,668(3) $ 158,427* $ 316,873*
Common Shares......................... 110,000(2) 220,000(4) -- --
</TABLE>
* Calculated using the closing price of $6.75 per Class B Preferred Share on
December 31, 1998 less the option exercise price.
(1) As a result of the recapitalization these options now are exercisable
for 10,777 Common Shares and 161,660 Warrants with the aggregate
exercise price remaining the same.
(2) As a result of the recapitalization these options now are exercisable
for 11,000 Common Shares and 33,000 Warrants with the aggregate
exercise price remaining the same.
(3) As a result of the recapitalization these options now are exercisable
for 21,556 Common Shares and 323,340 Warrants with the aggregate
exercise price remaining the same.
(4) As a result of the recapitalization these options now are exercisable
for 22,000 Common Shares and 66,000 Warrants with the aggregate
exercise price remaining the same.
COMPENSATION OF DIRECTORS
In 1998, each non-employee director of the Company received an annual
fee of $35,000 for serving on the Board and a $1,000 fee for attending each
meeting of the Board or a committee of the Board.
EMPLOYMENT AGREEMENTS
Mr. LeBow is a party to an employment agreement with the Company dated
as of June 1, 1995, as amended effective as of January 1, 1996. The agreement
has an initial term of three years effective as of January 18, 1995, with an
automatic one-year extension on each anniversary of the effective date unless
notice of non-extension is given by either party within the 60-day period
before this date. As of January 1, 1999, Mr. LeBow's annual base salary was $2
million. After termination of his employment without cause, he would continue
to receive his base salary for a period of 36 months commencing with the next
anniversary of the effective date following the termination notice. After
termination of his employment within two years of a change of control, he would
receive a lump sum payment equal to 2.99 times his then current base salary.
The bankruptcy plan provides that the annual compensation paid to Mr. LeBow for
services rendered in his capacity as an officer or director of the Company may
not exceed $2 million.
Howard M. Lorber is a party to an employment agreement with the
Company dated June 1, 1995. The agreement has an initial term of three years
effective as of January 18, 1995, with an automatic one-year extension on each
anniversary of the effective date unless notice of non-extension is given by
either party within 60 days before this date. As of January 1, 1999, Mr.
Lorber's annual base salary was $1.65 million. The Board must periodically
review this base salary and may increase but not decrease it from time to time
in its sole discretion. In addition, the Board may award an annual bonus to Mr.
Lorber at its sole discretion. The Board awarded Mr. Lorber a bonus of $250,000
for 1998. In January 1998, Mr. Lorber and the Company entered into an amendment
to his employment agreement under which he is entitled to receive an additional
annual bonus in an amount necessary to reimburse him, on an after-tax basis,
for all applicable taxes incurred by him during the prior calendar year as a
result of the grant to him, or vesting, of the 1996 award of 36,000 restricted
Class A Senior Preferred Shares and options to acquire 330,000 Common Shares
and 97,000 Class B Preferred Shares. In January 1998 Mr. Lorber received an
additional bonus of $476,544, which Mr. Lorber and the Company have agreed will
constitute full satisfaction of the Company's obligations under the amendment
for 1997. After termination of his employment without cause, he would continue
to receive his base salary for a period of 36 months commencing with the next
anniversary of the effective date following the termination notice. After
termination of his employment within two years of a change of control, he is
entitled to receive a lump sum payment equal to 2.99 times the sum of his then
current base salary and the bonus amounts earned by him for the twelve-month
period ending with the last day of the month immediately before the month in
which the termination occurs.
Richard J. Lampen is a party to an employment agreement with the
Company dated September 22, 1995. The agreement has an initial term of two and
a quarter years from October 1, 1995 with automatic renewals after the initial
term for additional one-year terms unless notice of non-renewal is given by
either party within the 90-day period before the termination date. As of
January 1, 1999, his annual base salary was $750,000. In addition, the Board
may award an annual bonus to Mr. Lampen at its sole discretion. The Board
awarded Mr. Lampen a bonus of $250,000 for 1998 and Brooke awarded Mr. Lampen a
bonus of $500,000 for 1998. The Board must review such base salary annually and
may increase but not decrease it from time to time, in its sole discretion.
After termination of his employment without cause, he will receive severance
pay in a lump sum equal to the amount of his base salary he would have received
if he was employed for one year after termination of his employment term.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not currently have a compensation committee. The
Board acts on compensation matters as a committee of the whole. Mr. LeBow has
been Chairman of the Board of the Company since 1988 and Chief Executive
Officer since November 1994,
32
<PAGE> 36
Mr. Lorber was named President and Chief Operating Officer of the Company in
November 1994, Mr. Kramer was named Chairman of the Board and Chief Executive
Officer of Ladenburg Group, Inc. in June 1995 and Chairman of the Board and
Chief Executive Officer of Ladenburg in December 1995, and Mr. Lampen was named
Executive Vice President and General Counsel of the Company in October 1995.
During 1998, Mr. LeBow was Chairman of the Board, President and Chief
Executive Officer of Brooke and BGLS and a member of Brooke's compensation
committee. During 1998, Mr. Lampen was Executive Vice President of Brooke and
BGLS.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Mr. Lorber, a director and executive officer of the Company, is a
stockholder and registered representative of Aegis, a broker-dealer that has
performed services for the Company and its affiliates since before January 1,
1996. Aegis received commissions and other income from the Company and its
affiliates in the aggregate amount of approximately $317,000 during 1996,
$522,000 during 1997, $128,000 during 1998 and $26,000 for the four months
ended April 30, 1999. Aegis, in the ordinary course of its business, engages in
brokerage activities with Ladenburg on customary terms. Mr. Lorber is also
Chairman of the Board and Chief Executive Officer of Hallman & Lorber and its
affiliates, and serves as a consultant to Brooke and BGLS and is a stockholder
of Brooke.
Hallman & Lorber and its affiliates received ordinary and customary
insurance commissions aggregating approximately $136,000 during 1996, $133,000
during 1997, $128,000 during 1998 and $29,000 for the four months ended April
30, 1999, on various insurance policies issued for the Company and its
affiliates.
On December 18, 1996, the Company loaned BGLS $990,000 under a
promissory note due January 31, 1997 bearing interest at 14%. On January 2,
1997, the Company loaned BGLS an additional $975,000 under another promissory
note due January 31, 1997 bearing interest at 14%. Both loans including
interest were repaid on January 31, 1997. In September 1998, the Company made a
one-year $950,000 loan to BGLS which bears interest at 14%.
On January 31, 1997, the Company entered into the BrookeMil purchase
agreement with Brooke (Overseas), a wholly-owned subsidiary of Brooke, under
which the Company acquired the BrookeMil shares. The Company paid Brooke
(Overseas) a purchase price of $55 million, consisting of $21.5 million in cash
and a $33.5 million 9% promissory note of the Company. The note has been paid
in full. The amount of consideration paid by the Company was determined based
on a number of factors including current valuations of the assets, future
development plans, local real estate market conditions and prevailing economic
and political conditions in Russia. The Company retained independent legal
counsel and financial advisors to evaluate and negotiate the transaction, which
was approved by a special committee of the independent directors of the
Company. Under the terms of the bankruptcy plan, the transaction was approved
by not less than two-thirds of the entire Board, including the approval of at
least one of the directors elected by the holders of the Preferred Shares, and
a fairness opinion from an investment banking firm was obtained. See "BUSINESS
- -- BrookeMil Ltd." and "-- Legal Proceedings" as well as Notes 3 and 10 to the
Company's Consolidated Financial Statements for information concerning the
transaction and a pending lawsuit relating to the Company's purchase of the
BrookeMil shares.
In 1995, the Company and Brooke entered into an expense sharing
agreement under which certain lease, legal and administrative expenses are
allocated to the entities incurring the expense. Under this agreement the
Company expensed approximately $462,000 for 1996, $312,000 for 1997, $502,000
for 1998 and $148,000 for the three months ended March 31, 1999.
During 1996, the Company entered into a court-approved settlement with
Brooke and BGLS relating to their application under the Bankruptcy Code for
reimbursement of expenses incurred by them in the Company's bankruptcy
proceedings. Under the settlement, the Company reimbursed Brooke and BGLS
$655,217 for such expenses. The terms of the settlement were substantially
similar to the terms of previous settlements between the Company and other
applicants who had sought reimbursement of reorganization-related legal fees
and expenses.
Richard Ressler, a former director of the Company, is Chairman of the
Board and the beneficial owner of 17.8% of the shares of MAI Systems
Corporation, Brooke's former indirect majority-owned subsidiary. In 1996 MAI
entered into certain arrangements with Ladenburg under which MAI has sold
computer and software products and has been providing related professional and
support services to Ladenburg. Ladenburg paid MAI approximately $100,000 in
1996 and $610,000 in 1997 for such products and services. In addition,
Ladenburg paid another company controlled by Mr. Ressler approximately $10,000
in 1996 and $143,000 in 1997 for communications consulting services.
33
<PAGE> 37
In March 1997, the Company acquired a membership interest in
Orchard/JFAX Investors, LLC, of which Mr. Ressler serves as a managing member,
for $1 million. Orchard/JFAX Investors, LLC holds a controlling interest in
JFAX.COM, Inc., an Internet-based messaging and communications services
provider in which the Company has an indirect minority interest.
In February 1998, the Company and Apollo organized Western Realty
Ducat to make real estate and other investments in Russia. When Western Realty
Ducat was formed, the Company agreed to contribute to Western Realty Ducat the
real estate assets of BrookeMil, and Apollo agreed to contribute up to $58
million. Western Realty Ducat has made a $30 million participating loan to,
payable out of a 30% profits interest in, a company organized by Brooke
(Overseas) that holds Brooke (Overseas)'s interest in Liggett-Ducat Ltd. and
the new factory being constructed by Liggett-Ducat Ltd. on the outskirts of
Moscow.
Until January 1999, Mr. Burns, a director of the Company, was a
partner of Proskauer Rose LLP, a law firm which has been engaged to perform
legal services for the Company in the past and which may be so engaged in the
future. The fees received for such legal services in 1996, 1997 and 1998 did
not exceed five percent of the law firm's revenues.
From October 1995 through August 1997, Mr. Beinstein, a director of
the Company, served as the Managing Director of Milbank, Tweed, Hadley & McCloy
LLP, a law firm which has performed services for the Company in the past and
may do so in the future. The fees received for these services in 1996 and 1997
did not exceed five percent of the law firm's revenues.
For information concerning certain agreements and transactions between
the Company and Brooke relating to RJR Nabisco, see "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Introduction
- -- The Company's Investment in RJR Nabisco" and Note 5 to the Company's
Consolidated Financial Statements.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 100,000,000
Common Shares and 10,000,000 Class C Preferred Shares. American Stock Transfer
& Trust Company, New York, New York, serves as the transfer agent and registrar
for the Common Shares.
The following summaries of the terms of the Company's capital stock
are not complete and are qualified by reference to the Certificate of
Incorporation which has been incorporated by reference as an exhibit to the
registration statement of which this prospectus forms a part.
Each outstanding share of the Company's capital stock is fully paid
and nonassessable.
CLASS C PREFERRED SHARES
The Board has authority to issue the Class C Preferred Shares in one
or more series and to fix their terms. The Class C Preferred Shares rank senior
to the Common Shares in liquidation and in respect of dividends.
COMMON SHARES
Dividends
Holders of the Common Shares are entitled to dividends when declared
by the Board out of legally available funds. Payment of dividends is subject to
the rights of the holders of shares ranking above Common Shares as to
distributions and limitations on the payment of dividends contained in certain
of the Company's outstanding debt instruments.
Liquidation Rights
On liquidation of the Company, the net assets of the Company will be
distributed pro rata to the holders of Common Shares (after payment is made on
any outstanding Preferred Shares, if any) of the stated liquidation preference
together with all cumulative dividends for the current and all prior quarterly
periods.
34
<PAGE> 38
Voting Rights
Each Common Share is entitled to one vote for all purposes, except as
otherwise provided by law or as expressly provided in the Certificate of
Incorporation.
Market for Common Shares
The Common Shares are quoted on the OTC Electronic Bulletin Board, a
National Association of Securities Dealers sponsored inter-dealer automated
quotation system, under the symbols NVYL.
The following table sets forth, for the calendar quarters indicated,
the range of per share prices for the Common Shares. Prices reflect quotations
on the NASD OTC Electronic Bulletin Board. Quotations reflect inter-dealer
prices in the over-the-counter market, without retail markups, markdowns or
commissions, and do not necessarily represent actual transactions. No cash
dividends have been declared by the Company on the Common Shares, and the
Company does not currently intend to pay a dividend on the Common Shares in the
foreseeable future. On June _, 1999, the last trading price as quoted on the
NASD OTC Electronic Bulletin Board for the Common Shares was $____ per share.
<TABLE>
<CAPTION>
COMMON SHARES
HIGH LOW
---- ---
<S> <C> <C>
1999
Second Quarter (from June, 1999 through June , 1999 (post
recapitalization period)).........................................
Second Quarter (through June , 1999 effective date of
recapitalization)................................................. $ .75 $ .22
First Quarter..................................................... .84 .38
1998
Fourth Quarter.................................................... 2.00 .25
Third Quarter..................................................... .50 .32
Second Quarter.................................................... .94 .44
First Quarter..................................................... 1.18 .50
1997
Fourth Quarter.................................................... 1.00 .47
Third Quarter..................................................... 1.22 .75
Second Quarter.................................................... 1.56 .91
First Quarter..................................................... 1.94 1.38
</TABLE>
At June , 1999, there were approximately holders of record of the Common
Shares.
PLAN OF DISTRIBUTION
The Common Shares are to be issued upon the exercise of the
outstanding Warrants issued to the Company stockholder's pursuant to a plan of
recapitalization which was implemented on June _, 1999.
DESCRIPTION OF THE WARRANTS
The Warrants are governed by a warrant agreement between the Company
and American Stock Transfer and Trust Company, as warrant agent. Below is a
brief summary of the terms of the Warrants and the warrant agreement. This
summary is subject to the provisions of the warrant agreement and the warrant
certificates representing the Warrants. The warrant agreement, including the
form of warrant certificate, is an exhibit to the registration statement of
which this prospectus is a part.
35
<PAGE> 39
Exercise of Warrants. Each Warrant entitles the holder to purchase one
Common Share at an exercise price of $12.50 per share. The Warrants may be
exercised during the period commencing on the effective date of the Company's
registration statement covering the underlying Common Shares, of which this
prospectus is a part, and ending on the fifth anniversary thereafter. The
Company may redeem the warrants for $0.01 per warrant on 30 days' notice to the
holders if, at any time after June _, 2002, the third anniversary of the
effective time of the plan of recapitalization, the average reported closing
price or bid price of a Common Share exceeds $12.50 for any 20 consecutive
trading days ending within five days before the date of such notice. The
Warrants, however, may be exercised by the holders during the period following
such notice and before such redemption.
The Warrants may be exercised by surrendering properly endorsed
certificates to the warrant agent together with full payment of the exercise
price for each Common Share underlying the Warrant being exercised, and any
applicable transfer or other taxes.
Adjustment of Purchase Price. The exercise price will be reduced by
the amount of any cash dividends or cash distributions paid on the Common
Shares. If the Company distributes evidences of indebtedness or assets, other
than cash dividends or cash distributions, holders of Warrants will be entitled
to participate in the distribution at the time of exercise on a basis that the
Company determines in its good faith discretion to be fair and appropriate. In
addition, the exercise price and the number of shares issuable on exercise will
be adjusted for any issuance of a dividend of additional Common Shares to
holders of Common Shares or subdivisions, combinations or reclassifications or
other changes in the outstanding Common Shares. The Company also has the right,
at any time, to voluntarily reduce the Exercise Price to such amount and for
such periods as may be deemed appropriate by the Board of Directors of the
Company.
Amendment. The Warrants may be amended only if the Company has
obtained the consent of the holders of Warrants representing a majority of the
Common Shares issuable upon exercise of all outstanding Warrants. However, no
amendment may increase the exercise price of the Warrants or decrease the
number of Common Shares issuable upon exercise of a Warrant without the consent
of the holders of Warrants representing at least 66 2/3% of the Common Shares
issuable upon exercise of all outstanding Warrants.
Notices. Notices to each registered Warrant holder will be made by the
Company by first-class mail, postage prepaid, in the following circumstances:
- upon the fixing of a date for redemption, the establishing of the
exercise date, and the fixing of a reduced exercise price and
reduced exercise price period, for the Warrants,
- upon any adjustment to the exercise price of the Warrants or the
number of Common Shares purchasable upon exercise of a Warrant,
- upon the authorization by the Company of the issuance to all
holders of Common Shares of rights or warrants to subscribe for or
purchase Common Shares (or of any other subscription rights or
warrants), or the distribution to all holders of Common Shares of
evidences of indebtedness or assets (other than cash dividends or
distributions in cash),
- upon any consolidation or merger to which the Company is a party
and for which approval by holders of Common Shares is required,
or the conveyance or transfer of the properties or assets of the
Company substantially as an entirety, or any reclassification or
change of Common Shares (other than a change in par value, if any,
or as a result of a subdivision or combination), or
- the voluntary or involuntary dissolution, liquidation or winding
up of the Company.
In addition, upon the declaration of cash dividends or distributions
in cash on all Common Shares, the Company shall cause notice of such payment to
be given to the Warrant holders in such manner as the Company determines to be
fair and appropriate, including by public announcement.
Other Matters. The Company is not required to issue any fractional
Warrants or any fractional Common Shares on the exercise of warrants or the
occurrence of adjustments under antidilution provisions. Instead, the Company
will pay cash based on the market value of the Common Shares.
36
<PAGE> 40
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion describes certain material federal income tax
considerations relating to the exercise of the Warrants and represents the
opinion of Milbank, Tweed, Hadley & McCloy LLP. This discussion is based upon
the Internal Revenue Code of 1986, existing and proposed regulations,
legislative history, judicial decisions, and current administrative rulings and
practices, all as amended and in effect on the date hereof. Any of these
authorities could be repealed, overruled, or modified at any time. Any change
could be retroactive and, accordingly, could cause the tax consequences to vary
substantially from the consequences described here. No ruling from the IRS with
respect to the matters discussed has been requested, and there is no assurance
that the IRS would agree with the conclusions set forth in this discussion. All
stockholders should consult their own tax advisors.
This discussion may not address certain federal income tax
consequences that may be relevant to particular stockholders in light of their
personal circumstances (such as persons subject to the alternative minimum tax)
or to certain types of stockholders who may be subject to special treatment
under the federal income tax laws (such as dealers in securities, insurance
companies, foreign individuals and entities, financial institutions, and
tax-exempt entities). This discussion also does not address any tax
consequences under state, local, or foreign laws. The following discussion of
federal income tax considerations is for general information only and is not
tax advice.
STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE PLAN OF RECAPITALIZATION, INCLUDING
THE APPLICABILITY OF ANY STATE, LOCAL, OR FOREIGN TAX LAWS, CHANGES IN
APPLICABLE TAX LAWS, AND ANY PENDING OR PROPOSED LEGISLATION.
Exchange of Warrants for Common Shares
Generally, holders of Warrants will not recognize gain or loss upon
the exercise of Warrants for Common Shares. The holder's basis in the Common
Shares received in exchange for a Warrant will equal the holder's basis in the
Warrant plus any amount paid on the exercise of the Warrant. The holder's
holding period for the Common Shares will begin on the day the Warrant is
exercised. Under Section 305 of the Code, holders of Warrants may be deemed to
receive a deemed distribution of stock if the number of Common Shares which a
Warrant holder may acquire by exercising its Warrant is adjusted to reflect
certain distributions with respect to the Common Shares. An adjustment made
pursuant to a bona fide formula that has the effect of preventing the dilution
of the interest of the Warrant holders generally will not have that effect.
Under the Warrants' anti-dilution provisions, in certain circumstances it is
possible that some adjustments to the exercise price of the Warrants will be
treated as a distribution. The distribution would be treated as a dividend to
the extent of the Company's current and accumulated earnings and profits in the
year of distribution, then as a return of capital to the extent of the holder's
basis in the Warrant and then as capital gain.
LEGAL MATTERS
The legality of the Common Shares to be issued upon the exercise of
the Warrants, as well as certain tax matters concerning the Warrants, are being
passed on by Milbank, Tweed, Hadley & McCloy LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company and subsidiaries
at December 31, 1998 and December 31, 1997 and for each of the three years in
the period ended December 31, 1998 included in this prospectus have been
included herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
37
<PAGE> 41
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NEW VALLEY CORPORATION
PAGE
----
<S> <C>
Report of Independent Accountants...................................................................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997........................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996............................. F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficiency) for the years ended December 31,
1998, 1997 and 1996.................................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996............................. F-6
Notes to Consolidated Financial Statements............................................................................. F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998....................................... F-25
Condensed Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998..................... F-26
Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficiency) for the three months ended March 31,
1999 and 1998.......................................................................................................... F-27
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998..................... F-28
Notes to Condensed Consolidated Financial Statements................................................................... F-29
</TABLE>
F-1
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the
Stockholders of New Valley Corporation
In our opinion, based upon our audits and the report of other
auditors, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and cash flows
present fairly, in all material respects, the financial position of New Valley
Corporation and its subsidiaries (the "Company") at December 31, 1998 and
December 31, 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We did
not audit the 1997 and 1996 financial statements of Thinking Machines
Corporation, a consolidated subsidiary, which statements reflect total assets
of $5,604,159 at December 31, 1997, and total revenues of $350,234 for the year
ended December 31, 1997. Those statements were audited by other auditors whose
report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Thinking Machines
Corporation, is based solely on the report of the other auditors. We conducted
our audits of the consolidated financial statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for the opinion expressed above.
As discussed in the notes to the consolidated financial statements,
the investments and operations of the Company, and those of similar companies
in the Russian Federation, have been significantly affected, and could continue
to be affected for the foreseeable future, by the country's unstable economy
caused in part by the currency volatility in the Russian Federation.
PriceWaterhouseCoopers LLP
Miami, Florida
March 19, 1999
F-2
<PAGE> 43
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 16,444 $ 11,606
Investment securities available for sale .......................... 37,567 51,993
Trading securities owned .......................................... 8,984 49,988
Restricted assets ................................................. 1,220 232
Receivable from clearing brokers .................................. 22,561 1,205
Other current assets .............................................. 4,675 3,618
--------- ---------
Total current assets ......................................... 91,451 118,642
--------- ---------
Investment in real estate, net ...................................... 82,875 259,968
Furniture and equipment, net ........................................ 10,444 12,194
Restricted assets ................................................... 6,082 5,484
Long-term investments, net .......................................... 9,226 27,224
Investment in joint venture ......................................... 65,193 --
Other assets ........................................................ 7,451 17,879
--------- ---------
Total assets ................................................. $ 272,722 $ 441,391
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Margin loan payable ............................................... $ 13,088 $ 13,012
Current portion of notes payable and long-term
obligations ...................................................... 2,745 760
Accounts payable and accrued liabilities .......................... 32,047 55,222
Prepetition claims and restructuring accruals ..................... 12,364 12,611
Income taxes ...................................................... 18,702 18,413
Securities sold, not yet purchased ................................ 4,635 25,610
--------- ---------
Total current liabilities .................................... 83,581 125,628
--------- ---------
Notes payable ....................................................... 54,801 176,314
Other long-term liabilities ......................................... 23,450 11,210
Commitments and contingencies ....................................... -- --
Redeemable preferred shares ......................................... 316,202 258,638
Stockholders' deficiency:
Cumulative preferred shares; liquidation preference of
$69,769, dividends in arrears: 1998-- $165,856;
1997-- $139,412 .................................................. 279 279
Common Shares, $.01 par value; 850,000,000 shares
authorized; 9,577,624 shares outstanding ......................... 96 96
Additional paid-in capital ........................................ 550,119 604,215
Accumulated deficit ............................................... (758,016) (742,427)
Unearned compensation on stock options ............................ (475) (158)
Accumulated other comprehensive income ............................ 2,685 7,596
--------- ---------
Total stockholders' deficiency ............................... (205,312) (130,399)
--------- ---------
Total liabilities and stockholders' deficiency ............... $ 272,722 $ 441,391
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-3
<PAGE> 44
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Principal transactions, net ................................. $ 11,430 $ 16,754 $ 28,344
Commissions ................................................. 28,284 16,727 17,755
Corporate finance fees ...................................... 14,733 12,514 10,230
Gain on sale of investments, net ............................ 11,768 19,202 10,014
Loss in joint venture ....................................... (4,976) -- --
Real estate leasing ......................................... 20,577 27,067 23,559
Gain on sale of real estate ................................. 4,682 1,290 --
Computer sales and service .................................. 794 3,947 15,017
Interest and dividends ...................................... 8,808 9,417 16,951
Other income ................................................ 5,987 7,650 8,995
----------- ----------- -----------
Total revenues .......................................... 102,087 114,568 130,865
----------- ----------- -----------
Costs and expenses:
Selling, general and administrative expenses ................ 110,375 119,205 140,399
Interest .................................................... 13,939 16,988 17,760
Recovery of restructuring charges ........................... -- -- (9,706)
Provision for loss on long-term investments ................. 3,185 3,796 1,001
----------- ----------- -----------
Total costs and expenses ................................ 127,499 139,989 149,454
----------- ----------- -----------
Loss from continuing operations before income taxes
and minority interests......................................... (25,412) (25,421) (18,589)
Income tax provision .......................................... 6 186 300
Minority interests in loss from continuing operations
of consolidated subsidiaries................................... 2,089 1,347 4,241
----------- ----------- -----------
Loss from continuing operations ............................... (23,329) (24,260) (14,648)
Discontinued operations (Note 22):
Gain on disposal of discontinued operations ................. 7,740 3,687 7,158
----------- ----------- -----------
Income from discontinued operations ..................... 7,740 3,687 7,158
----------- ----------- -----------
Net loss ...................................................... (15,589) (20,573) (7,490)
Dividend requirements on preferred shares ..................... (80,964) (68,475) (61,949)
Excess of carrying value of redeemable preferred
shares over cost of shares purchased........................... -- -- 4,279
----------- ----------- -----------
Net loss applicable to Common Shares .......................... $ (96,553) (89,048) $ (65,160)
=========== =========== ===========
Income (loss) per common share (Basic and Diluted):
Continuing operations ....................................... $ (10.89) (9.68) $ (7.55)
Discontinued operations ..................................... .81 .38 .75
----------- ----------- -----------
Net loss ................................................ $ (10.08) (9.30) $ (6.80)
=========== =========== ===========
Number of shares used in computation .......................... 9,577,624 9,577,624 9,577,624
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-4
<PAGE> 45
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNEARNED ACCUMULATED
CLASS B ADDITIONAL COMPENSATION OTHER
PREFERRED COMMON PAID-IN ACCUMULATED ON STOCK COMPREHENSIVE
SHARES SHARES CAPITAL DEFICIT OPTIONS INCOME
--------- --------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ....................... $ 279 $ 1,916 $ 679,058 $(714,364) $ 2,650
Net loss ....................................... (7,490)
Undeclared dividends and accretion on
redeemable preferred shares .................. (41,123)
Purchase of redeemable preferred
shares ....................................... 4,279
Effect of 1-for-20 reverse stock split ......... (1,820) 1,820
Issuance of stock options ...................... 755 $ (755)
Compensation expense on stock option
grants ....................................... 24
Unrealized gain on investment
securities ................................... 2,407
------- --------- --------- --------- ------- --------
Balance, December 31, 1996 ....................... 279 96 644,789 (721,854) (731) 5,057
Net loss ....................................... (20,573)
Undeclared dividends and accretion on
redeemable preferred shares .................. (45,148)
Unrealized gain on investment
securities ................................... 2,539
Compensation expense on stock option
grants ....................................... 15
Adjustment to unearned compensation on
stock options ................................ (558) 558
Public sale of subsidiaries' common
stock, net ................................... 5,132
------- --------- --------- --------- ------- --------
Balance, December 31, 1997 ....................... 279 96 604,215 (742,427) (158) 7,596
Net loss ....................................... (15,589)
Undeclared dividends and accretion on
redeemable preferred shares .................. (54,520)
Adjustment to unearned compensation on
stock options ................................ 424 (424)
Compensation expense on stock option
grants ....................................... 107
Unrealized loss on investment
securities ................................... (4,911)
------- --------- --------- --------- ------- --------
Balance, December 31, 1998 ....................... $ 279 $ 96 $ 550,119 $(758,016) $ (475) $ 2,685
======= ========= ========= ========= ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-5
<PAGE> 46
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................................... $ (15,589) $ (20,573) $ (7,490)
Adjustments to reconcile net loss to net cash used for
operating activities:
Income from discontinued operations ........................ (7,740) (3,687) (7,158)
Depreciation and amortization .............................. 6,495 9,414 4,757
Loss in joint venture ...................................... 4,976 -- --
Provision for loss on long-term investments ................ 3,185 3,796 1,001
Gain on sales of real estate and liquidation of
long-term investments ...................................... (9,452) (1,290) --
Reversal of restructuring accruals ......................... -- -- (9,706)
Stock based compensation expense ........................... 3,151 2,934 384
Other ...................................................... 578 -- --
Changes in assets and liabilities, net of effects from
acquisitions and dispositions:
Decrease (increase) in receivables and other assets ........ 19,376 4,474 (13,813)
Increase (decrease) in income taxes payable ................ 396 170 (2,040)
(Decrease) increase in accounts payable and accrued
liabilities ................................................ (27,073) 4,513 11,336
--------- --------- ----------
Net cash used for continuing operations ....................... (21,697) (249) (22,699)
Net cash provided from discontinued operations ................ 7,740 -- --
--------- --------- ----------
Net cash used for operating activities ........................ (13,957) (249) (22,699)
--------- --------- ----------
Cash flows from investing activities:
Sale or maturity of investment securities ................... 22,888 45,472 160,088
Purchase of investment securities ........................... (19,429) (30,756) (12,825)
Sale or liquidation of long-term investments ................ 25,895 2,807 18,292
Purchase of long-term investments ........................... (13,590) (15,384) (3,051)
Sale of real estate, net of closing costs ................... 111,292 8,718 --
Purchase of and additions to real estate .................... (18,236) (10,777) (24,496)
Purchase of furniture and equipment ......................... (583) (3,478) (5,240)
Payment of prepetition claims and restructuring accruals .... (1,061) (828) (8,160)
Payment for acquisitions, net of cash acquired .............. -- (20,014) 1,915
(Increase) decrease in restricted assets .................... (1,586) 3,130 29,159
Cash contributed to joint venture ........................... (442) -- --
Net proceeds from disposal of business ...................... -- -- 10,174
Other, net .................................................. (935) -- --
--------- --------- ----------
Net cash provided from (used for) investing activities ........ 104,213 (21,110) 165,856
--------- --------- ----------
Cash flows from financing activities:
Payment of preferred dividends .............................. -- -- (41,419)
Proceeds from participating loan ............................ 14,300 -- --
Purchase of redeemable preferred shares ..................... -- -- (10,530)
Increase (decrease) in margin loan payable .................. 76 13,012 (75,119)
Payment of long-term notes and other liabilities ............ (99,303) (62,739) (10,549)
Increase in long-term borrowings ............................ -- 19,993 --
Issuance of subsidiary stock ................................ -- 5,417 --
Other, net .................................................. (491) -- --
--------- --------- ----------
Net cash used for financing activities ........................ (85,418) (24,317) (137,617)
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents .......... 4,838 (45,676) 5,540
Cash and cash equivalents, beginning of year .................. 11,606 57,282 51,742
--------- --------- ----------
Cash and cash equivalents, end of year ........................ $ 16,444 $ 11,606 $ 57,282
========= ========= ==========
Supplemental cash flow information:
Cash paid during the year for:
Interest .................................................. $ 11,958 $ 16,667 $ 17,482
Income taxes .............................................. 169 116 2,341
Detail of acquisitions:
Fair value of assets acquired ............................... $ -- $ 94,114 $ 27,301
Liabilities assumed ......................................... -- 74,100 16,701
--------- --------- ----------
Cash paid ................................................... -- 20,014 10,600
Less cash acquired .......................................... -- -- (12,515)
--------- --------- ----------
Net cash paid for acquisition ............................... $ -- $ (20,014) $ (1,915)
========= ========= ==========
Detail of contribution to joint venture:
Fair value of assets contributed ............................ $ 97,107 $ -- $ --
Liabilities contributed ..................................... (37,380) -- --
Capital contribution ........................................ (60,169) -- --
--------- --------- ----------
Net cash contributed to joint venture ....................... $ (442) $ -- --
========= ========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-6
<PAGE> 47
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
Principles of Consolidation
The consolidated financial statements include the accounts of New
Valley Corporation and its majority owned subsidiaries (the "Company"). The
Company's investment in Western Realty Development LLC has been accounted for
under the equity method. All significant intercompany transactions are
eliminated in consolidation.
Certain amounts in the 1996 and 1997 financial statements have been
reclassified to conform to the 1998 presentation.
Nature of Operations
The Company and its subsidiaries are engaged in the investment banking
and brokerage business, in the ownership and management of commercial real
estate, and in the acquisition of operating companies. As discussed in Note 21,
the investment banking and brokerage segment accounted for 65% and 49% of the
Company's revenues and 24% and 39% of the Company's operating loss from
continuing operations for the years ended December 31, 1998 and 1997,
respectively. The Company's investment banking and brokerage segment provides
its services principally for middle market and emerging growth companies
through a coordinated effort among corporate finance, research, capital
markets, investment management, brokerage and trading professionals.
Proposed Recapitalization Plan
The Company intends to submit for approval of its stockholders at its
1999 annual meeting a proposed recapitalization of its capital stock (the
"Recapitalization Plan"). Under the Recapitalization Plan, each of the
Company's outstanding Class A Senior Preferred Shares would be reclassified and
changed into 20 Common Shares and one Warrant to purchase Common Shares (the
"Warrants"). Each of the Class B Preferred Shares would be reclassified and
changed into one-third of a Common Share and five Warrants. The existing Common
Shares would be reclassified and changed into one-tenth of a Common Share and
three-tenths of a Warrant. The authorized number of Common Shares would be
reduced from 850,000,000 to 100,000,000. The Warrants to be issued as part of
the Recapitalization Plan would have an exercise price of $12.50 per share
subject to adjustment in certain circumstances and be exercisable for five
years following the effective date of the Company's Registration Statement
covering the underlying Common Shares. The Warrants would not be callable by
the Company for a three-year period. Upon completion of the Recapitalization
Plan, the Company will apply for listing of the Common Shares and Warrants on
NASDAQ.
Completion of the Recapitalization Plan would be subject to, among
other things, approval by the required holders of the various classes of the
Company's shares, effectiveness of the Company's proxy statement and prospectus
for the annual meeting, receipt of a fairness opinion and compliance with the
Hart-Scott-Rodino Act.
Brooke Group Ltd. ("Brooke"), the Company's principal stockholder, has
agreed to vote all of its shares in the Company in favor of the
Recapitalization Plan. As a result of the Recapitalization Plan and assuming no
warrant holder exercises its Warrants, Brooke will increase its ownership of
the outstanding Common Shares of the Company from 42.3% to 55.1% and its total
voting power from 42% to 55.1%.
The Company believes the proposed Recapitalization Plan will simplify
the current capital structure of the Company by replacing it with a single
class of equity securities. The exchange of the Preferred Shares for Common
Shares will eliminate dividend arrearages, thus increasing the net worth of the
Company by approximately $316,202 on a pro forma basis as of December 31, 1998.
It will also remove the need to redeem the Class A Senior Preferred Shares in
2003. The resulting improvement in the net worth of the Company, along with a
hoped for increase in the price of the Common Shares, should increase the
likelihood of having the Common Shares quoted on NASDAQ. This, along with a
more transparent capital structure, should increase the liquidity of the
Company's securities, improve the valuation of the Common Shares and provide a
currency for acquisitions and financings. Finally, the recapitalization will
allow the voting rights of stockholders to properly reflect the economic
interest of such stockholders.
F-7
<PAGE> 48
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Reorganization
On November 15, 1991, an involuntary petition under Chapter 11 of
Title 11 of the United States Code (the "Bankruptcy Code") was commenced
against the Company in the United States Bankruptcy Court for the District of
New Jersey (the "Bankruptcy Court"). On March 31, 1993, the Company consented
to the entry of an order for relief placing it under the protection of Chapter
11 of the Bankruptcy Code.
On November 1, 1994, the Bankruptcy Court entered an order confirming
the First Amended Joint Chapter 11 Plan of Reorganization, as amended (the
"Joint Plan"). The terms of the Joint Plan provided for, among other things,
the sale of Western Union Financial Services Company, Inc. ("FSI"), a
wholly-owned subsidiary of the Company, and certain other Company assets
related to FSI's money transfer business, payment in cash of all allowed
claims, payment of postpetition interest in the amount of $178,000 to certain
creditors, a $50 per share cash dividend to the holders of the Company's Class
A Senior Preferred Shares, a tender offer by the Company for up to 150,000
shares of the Class A Senior Preferred Shares, at a price of $80 per share, and
the reinstatement of all of the Company's equity interests.
On November 15, 1994, pursuant to the Asset Purchase Agreement, dated
as of October 20, 1994, as amended (the "Purchase Agreement"), by and between
the Company and First Financial Management Corporation ("FFMC"), FFMC purchased
all of the common stock of FSI and other assets relating to FSI's money
transfer business for $1,193,000 (the "Purchase Price"). The Purchase Price
consisted of $593,000 in cash, $300,000 representing the assumption of the
Western Union Pension Plan obligation, and $300,000 paid on January 13, 1995
for certain intangible assets of FSI. The Purchase Agreement contained various
terms and conditions, including the escrow of $45,000 of the Purchase Price, a
put option by the Company to sell to FFMC, and a call option by FFMC to
purchase, Western Union Data Services Company, Inc., a wholly-owned subsidiary
of the Company engaged in the messaging service business (the "Messaging
Services Business"), for $20,000, exercisable during the first quarter of 1996,
and various services agreements between the Company and FFMC.
On January 18, 1995, the effective date of the Joint Plan, the Company
paid approximately $550,000 on account of allowed prepetition claims and
emerged from bankruptcy. At December 31, 1998, the Company's remaining accruals
totaled $12,364 for unsettled prepetition claims and restructuring accruals
(see Note 17). The Company's accounting policy is to evaluate the remaining
restructuring accruals on a quarterly basis and adjust liabilities as claims
are settled or dismissed by the Bankruptcy Court.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Reincorporation and Reverse Stock Split. On July 29, 1996, the Company
completed its reincorporation from the State of New York to the State of
Delaware and effected a one-for-twenty reverse stock split of the Company's
Common Shares. In connection with the reverse stock split, all per share data
have been restated to reflect retroactively the reverse stock split.
Cash and Cash Equivalents. The Company considers all highly liquid
financial instruments with an original maturity of less than three months to be
cash equivalents.
Fair Value of Financial Instruments. Investments in securities and
securities sold, not yet purchased traded on a national securities exchange or
listed on NASDAQ are valued at the last reported sales prices of the reporting
period. Futures contracts are valued at their last reported sales price.
Investments in securities, principally warrants, which have exercise or holding
period restrictions, are valued at fair value as determined by the Company's
management based on the intrinsic value of the warrants discounted for such
restrictions. For cash and cash equivalents, restricted assets, receivable from
clearing brokers and short-term loan, the carrying value of these amounts is a
reasonable estimate of their fair value. The fair value of long-term debt,
including current portion, is estimated based on current rates offered to the
Company for debt of the same maturities. The fair value of the Company's
redeemable preferred shares is based on their last reported sales price.
F-8
<PAGE> 49
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Investment Securities. The Company classifies investments in debt and
marketable equity securities as either trading, available for sale, or held to
maturity. Trading securities are carried at fair value, with unrealized gains
and losses included in income. Investments classified as available for sale are
carried at fair value, with net unrealized gains and losses included as a
separate component of stockholders' equity (deficiency). Debt securities
classified as held to maturity are carried at amortized cost. Realized gains
and losses are included in other income, except for those relating to the
Company's broker-dealer subsidiary which are included in principal transactions
revenues. The cost of securities sold is determined based on average cost.
Restricted Assets. Restricted assets at December 31, 1998 consisted
primarily of $5,831 pledged as collateral for a $5,000 letter of credit which
is used as collateral for a long-term lease of commercial office space.
Restricted assets at December 31, 1997 consisted primarily of $5,484 pledged as
collateral for the $5,000 letter of credit.
Property and Equipment. Shopping centers are depreciated over periods
approximating 25 years, the estimated useful life, using the straight-line
method. Office buildings were depreciated over periods approximating 40 years,
the estimated useful life, using the straight-line method (see Note 7).
Furniture and equipment (including equipment subject to capital leases) is
depreciated over the estimated useful lives, using the straight-line method.
Leasehold improvements are amortized on a straight-line basis over their
estimated useful lives or the lease term, if shorter. The cost and the related
accumulated depreciation are eliminated upon retirement or other disposition
and any resulting gain or loss is reflected in operations.
Income Taxes. Under Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes", deferred taxes reflect the
impact of temporary differences between the amounts of assets and liabilities
recognized for financial reporting purposes and the amounts recognized for tax
purposes as well as tax credit carryforwards and loss carryforwards. These
deferred taxes are measured by applying currently enacted tax rates. A
valuation allowance reduces deferred tax assets when it is deemed more likely
than not that some portion or all of the deferred tax assets will not be
realized.
Securities Sold, not yet Purchased. Securities sold, not yet purchased
represent obligations of the Company to deliver a specified security at a
contracted price and thereby create a liability to repurchase the security in
the market at prevailing prices. Accordingly, these transactions involve, to
varying degrees, elements of market risk, as the Company's ultimate obligation
to satisfy the sale of securities sold, not yet purchased may exceed the amount
recognized in the consolidated balance sheet.
Real Estate Leasing Revenues. The real estate properties are being
leased to tenants under operating leases. Base rental revenue is generally
recognized on a straight-line basis over the term of the lease. The lease
agreements for certain properties contain provisions which provide for
reimbursement of real estate taxes and operating expenses over base year
amounts, and in certain cases as fixed increases in rent. In addition, the
lease agreements for certain tenants provide additional rentals based upon
revenues in excess of base amounts, and such amounts are accrued as earned. The
future minimum rents scheduled to be received on non-cancelable operating
leases at December 31, 1998 are $6,013, $5,519, $4,685, $4,239 and $3,662 for
the years 1999, 2000, 2001, 2002 and 2003, respectively, and $16,872 for
subsequent years.
Basic Income (loss) per Common Share. Basic net income (loss) per
common share is based on the weighted average number of Common Shares
outstanding. Net income (loss) per common share represents net income (loss)
after dividend requirements on redeemable and non-redeemable preferred shares
(undeclared) and any adjustment for the difference between excess of carrying
value of redeemable preferred shares over the cost of the shares purchased.
Diluted net income (loss) per common share assuming full dilution is based on
the weighted average number of Common Shares outstanding plus the additional
common shares resulting from the conversion of convertible preferred shares and
the exercise of stock options and warrants if such conversion was dilutive.
Options to purchase 330,000 common shares at $.58 per share and 40,417
common shares issuable upon the conversion of Class B Preferred Shares were not
included in the computation of diluted loss per share as the effect would have
been anti-dilutive.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share". SFAS No. 128 specifies new standards
designed to improve the earnings per share ("EPS") information provided in
financial statements by simplifying the existing computational guidelines,
revising the disclosure requirements, and increasing the comparability of EPS
data on an international basis. Prior years' EPS have been restated to conform
with standards established by SFAS No. 128.
F-9
<PAGE> 50
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Recoverability of Long-Lived Assets. An impairment loss is recognized
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Beginning in 1995 with the adoption of SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", assets are grouped and evaluated at the lowest level
for which there are identifiable cash flows that are largely independent of the
cash flows of other groups of assets. The Company considers historical
performance and future estimated results in its evaluation of potential
impairment and then compares the carrying amount of the asset to the estimated
future cash flows expected to result from the use of the asset. If the carrying
amount of the asset exceeds estimated expected undiscounted future cash flows,
the Company measures the amount of the impairment by comparing the carrying
amount of the asset to its fair value. The estimation of fair value is
generally measured by discounting expected future cash flows at the rate the
Company utilizes to evaluate potential investments. The Company estimates fair
value based on the best information available making whatever estimates,
judgments and projections are considered necessary.
NEW ACCOUNTING PRONOUNCEMENTS.
In June 1997, the FASB released SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS No. 130 did not have a material impact on the
Company's financial statements.
For transactions entered into in fiscal years beginning after December
15, 1997, the Company adopted and is reporting in accordance with SOP 97-2,
"Software Revenue Recognition". The adoption of SOP 97-2 did have a material
impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which establishes standards
for the way that public business enterprises report information about operating
segments. The Company has adopted SFAS No. 131 and has restated its financial
statements accordingly.
3. ACQUISITIONS AND DISPOSITIONS
On May 31, 1995, the Company consummated its acquisition of Ladenburg,
Thalmann & Co. Inc. ("Ladenburg"), a registered broker-dealer and investment
bank, for $25,750, net of cash acquired. The acquisition was treated as a
purchase for financial reporting purposes and, accordingly, these consolidated
financial statements include the operations of Ladenburg from the date of
acquisition. The excess of the consideration paid over the estimated fair value
of net assets acquired of $1,342 has been recorded as goodwill to be amortized
on a straight-line basis over 15 years.
On January 10 and January 11, 1996, the Company acquired four
commercial office buildings (the "Office Buildings") and eight shopping centers
(the "Shopping Centers") for an aggregate purchase price of $183,900,
consisting of $23,900 in cash and $160,000 in non-recourse mortgage financing
provided by the sellers. In addition, the Company has capitalized approximately
$800 in costs related to the acquisitions. The Company paid $11,400 in cash and
executed four promissory notes aggregating $100,000 for the Office Buildings.
On September 28, 1998, the Company completed the sale to institutional
investors of the Office Buildings for an aggregate purchase price of $112,400
and recognized a gain of $4,682 on the sale. The Company received approximately
$13,400 in cash from the transaction before closing adjustments and expenses.
The Office Buildings were subject to approximately $99,300 of mortgage
financing which was retired at closing.
F-10
<PAGE> 51
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table presents unaudited pro forma results from
continuing operations as if the sale of the Office Buildings had occurred on
January 1, 1998 and January 1, 1997, respectively. These pro forma results have
been prepared for comparative purposes only and do not purport to be indicative
of what would have occurred had this acquisition been consummated as of each
respective date.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Revenues ............................................................ $ 87,112 $ 99,996
========== =========
Loss from continuing operations ..................................... $ (27,896) $ (23,925)
========== =========
Loss from continuing operations applicable to common
shares ............................................................ $ (108,860) $ (92,400)
========== =========
Loss from continuing operations per common share .................... $ (11.37) $ (9.65)
========== =========
</TABLE>
The Shopping Centers were acquired for an aggregate purchase price of
$72,500, consisting of $12,500 in cash and $60,000 in eight promissory notes.
In November 1997, the Company sold one of the Shopping Centers for $5,400 and
realized a gain of $1,200.
On January 11, 1996, the Company provided a $10,600 convertible bridge
loan to finance Thinking Machines Corporation ("Thinking Machines"), a
developer and marketer of data mining and knowledge discovery software and
services. In February 1996, the bridge loan was converted into a controlling
interest in a partnership which held approximately 61.4% of Thinking Machines'
outstanding common shares. In December 1997, the Company acquired for $3,150
additional shares in Thinking Machines pursuant to a rights offering by
Thinking Machines to its existing stockholders which increased the Company's
ownership to approximately 72.7% of the outstanding Thinking Machines shares.
As a result of the rights offering, the Company recorded $2,417 as additional
paid-in-capital which represented its interest in the increase in Thinking
Machines' stockholders' equity. In September 1998, the Company made a $2,000
loan due December 31, 1999 to Thinking Machines and acquired warrants to
purchase additional shares pursuant to a rights offering by Thinking Machines
to its existing stockholders. In the first quarter of 1999, the Company lent
Thinking Machines an additional $1,250. The acquisition of Thinking Machines
through the conversion of the bridge loan was accounted for as a purchase for
financial reporting purposes, and accordingly, the operations of Thinking
Machines subsequent to January 31, 1996 are included in the operations of the
Company. The fair value of assets acquired, including goodwill of $1,726, was
$27,301 and liabilities assumed totaled $7,613. In addition, minority interests
in the amount of $9,088 were recognized at the time of acquisition. To date, no
material revenues have been recognized by Thinking Machines with respect to the
sale or licensing of such software and services. Thinking Machines is also
subject to uncertainties relating to, without limitation, the development and
marketing of computer products, including customer acceptance and required
funding, technological changes, capitalization, and the ability to utilize and
exploit its intellectual property and propriety software technology.
On January 31, 1997, the Company entered into a stock purchase
agreement (the "Purchase Agreement") with Brooke (Overseas) Ltd. ("Brooke
(Overseas)"), a wholly-owned subsidiary of Brooke Group Ltd. ("Brooke"), an
affiliate of the Company, pursuant to which the Company acquired 10,483 shares
(the "BrookeMil Shares") of the common stock of BrookeMil Ltd. ("BrookeMil")
from Brooke (Overseas) for a purchase price of $55,000, consisting of $21,500
in cash and a $33,500 9% promissory note of the Company (the "Note"). The
BrookeMil Shares comprise 99.1% of the outstanding shares of BrookeMil, a real
estate development company in Russia. The Note, which was collateralized by the
BrookeMil Shares, was paid during 1997.
BrookeMil is developing a three-phase complex on 2.2 acres of land in
downtown Moscow. In 1993, the first phase of the project, Ducat Place I, a
46,500 sq. ft. Class-A office building, was constructed and leased. On April
18, 1997, BrookeMil sold Ducat Place I to one of its tenants for approximately
$7,500, which purchase price had been reduced to reflect prepayments of rent.
In 1997, BrookeMil completed construction of Ducat Place II, a 150,000 sq. ft.
office building. Ducat Place II has been leased to a number of leading
international companies. The development of the third phase, Ducat Place III,
has been planned as a 450,000 sq. ft. mixed-use complex. The site of Ducat
Place III, which is currently used by a subsidiary of Brooke (Overseas) as the
site for a factory, is subject to a put option held by the Company. The option
allows the Company to put this site back to Brooke (Overseas) and BGLS Inc., a
subsidiary of Brooke, at the greater of the appraised fair value of the
property at the date of exercise or $13,600 during the period the subsidiary of
Brooke (Overseas) operates the factory on such site.
F-11
<PAGE> 52
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In connection with the Purchase Agreement, certain specified
liabilities of BrookeMil aggregating approximately $40,000 remained as
liabilities of BrookeMil after the purchase of the BrookeMil Shares by the
Company. These liabilities included a $20,400 loan to a Russian bank for the
construction of Ducat Place II (the "Construction Loan"). In addition, the
liabilities of BrookeMil at the time of purchase included approximately $13,800
of rents and related payments prepaid by tenants of Ducat Place II for periods
generally ranging from 15 to 18 months.
The fair value of the assets acquired, including goodwill of $12,400
was $95,500. The Company, through its interest in Western Realty, is amortizing
the goodwill over a five year period.
In August 1997, BrookeMil refinanced all amounts due under the
Construction Loan with borrowings under a new credit facility with another
Russian bank. The new credit facility bears interest at 16% per year, matures
no later than August 2002, with principal payments commencing after the first
year, and is collateralized by a mortgage on Ducat Place II and guaranteed by
the Company. At December 31, 1997, borrowings under the new credit facility
totaled $19,700.
4. RUSSIAN REAL ESTATE JOINT VENTURES
Western Realty Development LLC
In February 1998, the Company and Apollo Real Estate Investment Fund
III, L.P. ("Apollo") organized Western Realty Development LLC ("Western Realty
Ducat") to make real estate and other investments in Russia. In connection with
the formation of Western Realty Ducat, the Company agreed, among other things,
to contribute the real estate assets of BrookeMil, including Ducat Place II and
the site for Ducat Place III, to Western Realty Ducat and Apollo agreed to
contribute up to $58,750, including the investment in Western Realty Repin
discussed below. Through December 31, 1998, Apollo had funded $32,364 of its
investment in Western Realty Ducat.
The ownership and voting interests in Western Realty Ducat are held
equally by Apollo and the Company. Apollo will be entitled to a preference on
distributions of cash from Western Realty Ducat to the extent of its investment
($40,000), together with a 15% annual rate of return, and the Company will then
be entitled to a return of $20,000 of BrookeMil-related expenses incurred and
cash invested by the Company since March 1, 1997, together with a 15% annual
rate of return; subsequent distributions will be made 70% to the Company and
30% to Apollo. Western Realty Ducat will be managed by a Board of Managers
consisting of an equal number of representatives chosen by Apollo and the
Company. All material corporate transactions by Western Realty Ducat will
generally require the unanimous consent of the Board of Managers. Accordingly,
the Company has accounted for its non-controlling interest in Western Realty
Ducat using the equity method of accounting. Through December 31, 1998, Apollo
has funded $32,364 of its investment in Western Realty Ducat.
The Company recorded its basis in the investment in the joint venture
in the amount of $60,169 based on the carrying value of assets less liabilities
transferred. There was no difference between the carrying value of the
investment and the Company's proportionate interest in the underlying value of
net assets of the joint venture. The Company recognizes losses incurred by
Western Realty Ducat to the extent that cumulative earnings of Western Realty
Ducat are not sufficient to satisfy Apollo's preferred return.
Western Realty Ducat will seek to make additional real estate and
other investments in Russia. Western Realty Ducat has made a $30,000
participating loan to, and payable out of a 30% profits interest in Western
Tobacco Investments LLC ("WTI"), a company organized by Brooke (Overseas)
which, among other things, holds the interests of Brooke (Overseas) in
Liggett-Ducat Ltd. and the new factory being constructed by Liggett-Ducat Ltd.
on the outskirts of Moscow. Western Realty Ducat has recognized as other income
$1,991, which represents 30% of WTI's net income for the period from April 28,
1998 (date of inception) to December 31, 1998.
F-12
<PAGE> 53
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Summarized financial information as of December 31, 1998 and for the
period from February 20, 1998 (date of inception) to December 31, 1998 for
Western Realty Ducat follows:
<TABLE>
<S> <C>
Current assets........... $ 857
Participating loan
receivable............... 31,991
Real estate, net......... 85,761
Furniture and fixtures, net 179
Noncurrent assets........ 631
Goodwill, net............ 7,636
Notes payable-- current.. 5,299
Current liabilities...... 5,802
Notes payable............ 14,356
Long-term liabilities.... 756
Members' equity.......... 100,842
Revenues................. 10,176
Costs and expenses....... 13,099
Other income............. 1,991
Income tax benefit....... 760
Net loss................. (1,692)
</TABLE>
Western Realty Repin LLC
In June 1998, the Company and Apollo organized Western Realty Repin
LLC ("Western Realty Repin") to make a $25,000 participating loan (the "Repin
Loan") to BrookeMil. The proceeds of the loan will be used by BrookeMil for the
acquisition and preliminary development of two adjoining sites totaling 10.25
acres (the "Kremlin Sites") located in Moscow across the Moscow River from the
Kremlin. BrookeMil, which is planning the development of a 1.1 million sq. ft.
hotel, office, retail and residential complex on the Kremlin Sites, owned 94.6%
of one site and 52% of the other site at December 31, 1998. Apollo will be
entitled to a preference on distributions of cash from Western Realty Repin to
the extent of its investment ($18,750), together with a 20% annual rate of
return, and the Company will then be entitled to a return of its investment
($6,250), together with a 20% annual rate of return; subsequent distributions
will be made 50% to the Company and 50% to Apollo. Western Realty Repin will be
managed by a Board of Managers consisting of an equal number of representatives
chosen by Apollo and the Company. All material corporate transactions by
Western Realty Repin will generally require the unanimous consent of the Board
of Managers.
Through December 31, 1998, Western Realty Repin has advanced $19,067
under the Repin Loan to BrookeMil, of which $14,300 was funded by Apollo and is
classified in other long-term obligations on the consolidated balance sheet at
December 31, 1998. The Repin Loan, which bears no fixed interest, is payable
only out of 100% of the distributions, if made, by the entities owning the
Kremlin Sites to BrookeMil. Such distributions shall be applied first to pay
the principal of the Repin Loan and then as contingent participating interest
on the Repin Loan. Any rights of payment on the Repin Loan are subordinate to
the rights of all other creditors of BrookeMil. BrookeMil used a portion of the
proceeds of the Repin Loan to repay the Company for certain expenditures on the
Kremlin Sites previously incurred. The Repin Loan is due and payable upon the
dissolution of BrookeMil and is collateralized by a pledge of the Company's
shares of BrookeMil.
As of December 31, 1998, BrookeMil had invested $18,013 in the Kremlin
Sites and held $252, in cash, which was restricted for future investment. In
connection with the acquisition of its interest in one of the Kremlin Sites,
BrookeMil has agreed with the City of Moscow to invest an additional $6,000 in
1999 and $22,000 in 2000 in the development of the property. BrookeMil funded
$4,800 of this amount in the first quarter of 1999.
The Company has accounted for the formation of Western Realty Repin as
a financing by Apollo and a contribution of assets into a consolidated
subsidiary by New Valley which is eliminated in consolidation. Based on the
distribution terms contained in the Western Realty Repin LLC agreement, the 20%
annual rate of return preference to be received by Apollo on funds advanced to
Western Realty Repin is treated as interest cost in the consolidated statement
of operations.
F-13
<PAGE> 54
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The development of Ducat Place III and the Kremlin Sites will require
significant amounts of debt and other financing. The Company is actively
pursuing various financing alternatives on behalf of Western Realty Ducat and
BrookeMil. 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 BrookeMil to curtail or delay the planned development
of Ducat Place III and the Kremlin Sites.
5. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at
fair value, with net unrealized gains included as a separate component of
stockholders' equity (deficiency). The Company had net unrealized gains on
investment securities available for sale of $2,685 and $7,596 at December 31,
1998 and 1997, respectively.
The components of investment securities available for sale are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
1998
Marketable equity securities .... $34,882 $ 1,856 $2,877 $33,861
Marketable warrants ............. -- 3,706 -- 3,706
------- ------- ------ -------
Investment securities ........... $34,882 $ 5,562 $2,877 $37,567
======= ======= ====== =======
1997
Short-term investments .......... $ 6,218 -- -- $ 6,218
Marketable equity securities .... 34,494 $ 7,492 $2,101 39,885
Marketable warrants ............. -- 4,939 -- 4,939
Marketable debt securities ...... 3,685 -- 2,734 951
------- ------- ------ -------
Investment securities ........... $44,397 $12,431 $4,835 $51,993
======= ======= ====== =======
</TABLE>
During 1998, the Company determined that an other than temporary
impairment had occurred in marketable debt securities (face amount of $14,900,
cost of $3,185) of a company that was in default at the time of purchase and is
currently in default under its various debt obligations. The Company wrote down
this investment to zero resulting in a $3,185 charge to operations.
Investment in RJR Nabisco
The Company expensed $100 in 1997 and $11,724 in 1996 relating to its
investment in the common stock of RJR Nabisco Holdings Corp. ("RJR Nabisco").
Pursuant to a December 31, 1995 agreement between the Company and Brooke
whereby the Company agreed to reimburse Brooke and its subsidiaries for certain
reasonable out-of-pocket expenses relating to RJR Nabisco, the Company paid
Brooke and its subsidiaries a total of $17 and $2,370 in 1997 and 1996.
On February 29, 1996, the Company entered into a total return equity
swap transaction (the "Swap") with an unaffiliated company (the "Counterparty")
relating to 1,000,000 shares of RJR Nabisco common stock (reduced to 750,000
shares of RJR Nabisco common stock as of August 13, 1996). The Company entered
into the Swap in order to be able to participate in any increase or decrease in
the value of the RJR Nabisco common stock during the term of the Swap. The
transaction was for a period of up to six months, unless extended by the
parties, subject to earlier termination at the election of the Company, and
provided for the Company to make a payment to the Counterparty of $1,537 upon
commencement of the Swap. At the termination of the transaction, if the price
of the RJR Nabisco common stock during a specified period prior to such date
(the "Final Price") exceeded $34.42, the price of the RJR Nabisco common stock
during a specified period following the commencement of the Swap (the "Initial
Price"), the Counterparty was required to pay the Company an amount in cash
equal to the amount of such appreciation with respect to the shares of RJR
Nabisco common stock subject to the Swap plus the value of any dividends with a
record date occurring during the Swap period. If the Final Price was less than
the Initial Price, then the Company was required to pay the Counterparty at the
termination of the transaction an amount in cash equal to the amount of such
decline with respect to the shares of RJR Nabisco common stock subject to the
Swap, offset by the value of any dividends, provided that, with respect to
approximately 225,000 shares of RJR Nabisco common stock, the Company was not
required to pay any amount in excess of an approximate 25% decline in the value
of the shares. The potential obligations of the Counterparty under the Swap
were guaranteed by the Counterparty's parent, a large foreign bank, and the
Company pledged certain
F-14
<PAGE> 55
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
collateral in respect of its potential obligations under the Swap and agreed to
pledge additional collateral under certain conditions. The Company marked its
obligation with respect to the Swap to fair value with unrealized gains or
losses included in income. During the third quarter of 1996, the Swap was
terminated in connection with the Company's reduction of its holdings of RJR
Nabisco common stock, and the Company recognized a loss on the Swap of $7,305
for the year ended December 31, 1996.
6. TRADING SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
The components of trading securities owned and securities sold, not
yet purchased are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------- -----------------------------
TRADING SECURITIES SOLD, TRADING SECURITIES SOLD,
SECURITIES NOT YET SECURITIES NOT YET
OWNED PURCHASED OWNED PURCHASED
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Common stock .................... $ 4,243 $ 4,395 $16,208 $ 4,513
Equity and index options ........ 870 240 5,290 17,494
Other ........................... 3,871 -- 28,490 3,603
------- ------- ------- -------
$ 8,984 $ 4,635 $49,988 $25,610
======= ======= ======= =======
</TABLE>
7. INVESTMENT IN REAL ESTATE AND NOTES PAYABLE
The components of the Company's investment in real estate and the
related non-recourse notes payable collateralized by such real estate at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
RUSSIAN
REAL SHOPPING
ESTATE CENTERS TOTAL
-------- -------- --------
<S> <C> <C> <C>
Land .......................................................... $ 18,013 $ 16,087 $ 34,100
Buildings ..................................................... 912 52,959 53,871
-------- -------- --------
Total ........................................................ 18,925 69,046 87,971
Less accumulated depreciation ................................. -- (5,096) (5,096)
-------- -------- --------
Net investment in real estate ................................ $ 18,925 $ 63,950 $ 82,875
======== ======== ========
Notes payable ................................................. $ -- $ 54,801 $ 54,801
Current portion of notes payable .............................. -- -- --
-------- -------- --------
Notes payable--long-term portion .............................. $ -- $ 54,801 $ 54,801
======== ======== ========
</TABLE>
At December 31, 1998, the Company's investment in real estate
collateralized eight promissory notes aggregating $54,801 due 2001 related to
the Shopping Centers. Each Shopping Center note has a term of five years,
requires no principal amortization, and bears interest payable monthly at the
rate of 8% for the first two and one-half years and at the rate of 9% for the
remainder of the term.
The components of the Company's investment in real estate and the
related notes payable collateralized by such real estate at December 31, 1997
are as follows:
<TABLE>
<CAPTION>
U.S. RUSSIAN
OFFICE REAL SHOPPING
BUILDINGS ESTATE CENTERS TOTAL
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Land ............................ $ 19,450 $ 22,623 $ 16,087 $ 58,160
Buildings ....................... 92,332 66,688 51,430 210,450
--------- -------- -------- ---------
Total .......................... 111,782 89,311 67,517 268,610
Less accumulated depreciation ... (4,616) (879) (3,147) (8,642)
--------- -------- -------- ---------
Net investment in real estate .. $ 107,166 $ 88,432 $ 64,370 $ 259,968
========= ======== ======== =========
Notes payable ................... $ 99,302 $ 20,078 $ 54,801 $ 174,181
Current portion of notes payable 336 424 760
--------- -------- -------- ---------
Notes payable--long-term portion $ 98,966 $ 19,654 $ 54,801 $ 173,421
========= ======== ======== =========
</TABLE>
F-15
<PAGE> 56
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
At December 31, 1997, the Company's investment in real estate
collateralized four promissory notes aggregating $99,302 related to the Office
Buildings and eight promissory notes aggregating $54,801 related to the
Shopping Centers.
In 1997, the Company sold one of the Shopping Centers for $5,400 and
realized a gain of $1,200. In 1998, the Company sold its U.S. Office Buildings
for $112,400 and realized a gain of $4,682.
8. LONG-TERM INVESTMENTS
Long-term investments consisted of investments in the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Limited partnerships...................... $ 9,226 $ 12,282 $ 27,224 $ 33,329
</TABLE>
The principal business of the limited partnerships is investing in
investment securities. The estimated fair value of the limited partnerships was
provided by the partnerships based on the indicated market values of the
underlying investment portfolio. The Company is not required to make additional
investments in limited partnerships as of December 31, 1998. The Company's
investments in limited partnerships are illiquid, and the ultimate realization
of these investments is subject to the performance of the underlying
partnership and its management by the general partners. During 1997, the
Company sold for an amount which approximated its $2,000 cost an investment in
a foreign corporation which owned an interest in a Russian bank. During 1997,
the Company determined that an other than temporary impairment in the value of
its investment in a joint venture had occurred and wrote down this investment
to zero with a charge to operations of $3,796.
In January 1997, the Company converted an investment in preferred
stock made in 1995 into a majority equity interest in a small on-line directory
assistance development stage company and, accordingly, began consolidating the
results of this company. This long-term investment of $1,001 was written off in
1996 due to continuing losses of this company. In May 1997, this development
stage company completed an initial public offering and, as a result, the
Company recorded $2,715 as additional paid-in capital which represented its
50.1% ownership in this company's stockholders' equity after this offering.
The Company recognized gains of $4,652 on liquidations of investments
of certain limited partnerships for the year ended December 31, 1998.
The Company's estimate of the fair value of its long-term investments
are subject to judgment and are not necessarily indicative of the amounts that
could be realized in the current market.
9. PENSIONS AND RETIREE BENEFITS
Ladenburg has a Profit Sharing Plan (the "Plan") for substantially all
its employees. The Plan includes two features: profit sharing and a deferred
compensation vehicle. Contributions to the profit sharing portion of the Plan
are made by Ladenburg on a discretionary basis. The deferred compensation
feature of the Plan enables non-salaried employees to invest up to 15% of their
pre-tax annual compensation. For the year ended December 31, 1996, employer
contributions to the Plan were approximately $200, excluding those made under
the deferred compensation feature described above. The Plan was inactive in
1997 and 1998.
The Company maintains 401(k) plans for substantially all employees,
except those employees of Thinking Machines. These 401(k) plans allow eligible
employees to invest a percentage of their pre-tax compensation. Ladenburg
elected to contribute $500 of matching contributions in 1997. The Company did
not make discretionary contributions to these 401(k) plans in 1998 and 1996.
F-16
<PAGE> 57
10. COMMITMENT AND CONTINGENCIES
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Leases
The Company, Thinking Machines and Ladenburg are currently obligated
under three noncancelable lease agreements for office space, expiring in May
2003, April 1999 and December 2015, respectively. The following is a schedule
by fiscal year of future minimum rental payments required under the agreements
that have noncancelable terms of one year or more at December 31, 1998:
<TABLE>
<S> <C>
1999 .................... $ 5,431
2000 .................... 5,163
2001 .................... 4,309
2002 .................... 4,115
2003 and thereafter ..... 50,382
-------
Total ................. $69,400
=======
</TABLE>
Rental expense for operating leases during 1998, 1997 and 1996 was
$6,397, $4,404 and $3,914, respectively.
Lawsuits
On or about March 13, 1997, a shareholder derivative suit was filed
against the Company, as a nominal defendant, its directors and Brooke in the
Delaware Chancery Court, by a stockholder of the Company. The suit alleges that
the Company's purchase of the BrookeMil Shares constituted a self-dealing
transaction which involved the payment of excessive consideration by the
Company. The plaintiff seeks (i) a declaration that the Company's directors
breached their fiduciary duties, Brooke aided and abetted such breaches and
such parties are therefore liable to the Company, and (ii) unspecified damages
to be awarded to the Company. The Company's time to respond to the complaint
has not yet expired. The Company believes that the allegations were without
merit.
Although there can be no assurances, management is of the opinion,
after consultation with counsel, that the ultimate resolution of this matter
will not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
The Company is a defendant in various lawsuits and may be subject to
unasserted claims primarily in connection with its activities as a securities
broker-dealer and participation in public underwritings. These lawsuits involve
claims for substantial or indeterminate amounts and are in varying stages of
legal proceedings. In the opinion of management, after consultation with
counsel, the ultimate resolution of these matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
Russian Operations
During 1998, the economy of the Russian Federation entered a period of
economic instability. The impact includes, but is not limited to, a steep
decline in prices of domestic debt and equity securities, a severe devaluation
of the currency, a moratorium on foreign debt repayments, an increasing rate of
inflation and increasing rates on government and corporate borrowings. The
return to economic stability is dependent to a large extent on the
effectiveness of the fiscal measures taken by government and other actions
beyond the control of companies operating in the Russian Federation. The
operations of BrookeMil 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
BrookeMil and Western Realty Ducat may not coincide with that of management. As
a result, transactions may be challenged by tax authorities and BrookeMil 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.
F-17
<PAGE> 58
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 BrookeMil 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.
11. FEDERAL INCOME TAX
At December 31, 1998, the Company had $102,061 of unrecognized net
deferred tax assets, comprised primarily of net operating loss carryforwards,
available to offset future taxable income for federal tax purposes. A valuation
allowance has been provided against this deferred tax asset as it is presently
deemed more likely than not that the benefit of the tax asset will not be
utilized. The Company continues to evaluate the realizability of its deferred
tax assets and its estimate is subject to change. The provision for income
taxes, which represented the effect of the Alternative Minimum Tax and state
income taxes, for the three years ended December 31, 1998, 1997 and 1996, does
not bear a customary relationship with pre-tax accounting income from
continuing operations principally as a consequence of the change in the
valuation allowance relating to deferred tax assets. The provision for income
taxes on continuing operations differs from the amount of income tax determined
by applying the applicable U.S. statutory federal income tax rate (35%) to
pretax income from continuing operations as a result of the following
differences:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Loss from continuing operations ............................... $ (23,323) $ (24,074) $ (14,348)
--------- --------- ---------
(Credit) provision under statutory U.S. tax rates ............. (8,163) (8,426) (5,022)
Increase (decrease) in taxes resulting from:
Nontaxable items ............................................ 4,281 2,603 (224)
State taxes, net of Federal benefit ......................... 4 55 195
Foreign Taxes ............................................... -- 108 --
Increase (decrease) in valuation reserve ...................... 3,884 5,846 5,351
--------- --------- ---------
Income tax provision ........................................ $ 6 $ 186 $ 300
========= ========= =========
</TABLE>
Income taxes associated with discontinued operations and extraordinary
items have been shown net of the utilization of the net operating loss
carryforward and the change in other deferred tax assets.
Deferred tax amounts are comprised of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss
carryforward:
Restricted net operating loss ..................................... $ 12,450 $ 15,561
Unrestricted net operating loss ................................... 70,552 70,216
Other ............................................................. 21,718 17,209
---------- ---------
Total deferred tax assets ......................................... 104,720 102,986
---------- ---------
Deferred tax liabilities:
Other ............................................................. (2,659) (5,542)
---------- ---------
Total deferred tax liabilities ...................................... (2,659) (5,542)
---------- ---------
Net deferred tax assets ............................................. 102,061 97,444
Valuation allowance ................................................. (102,061) (97,444)
---------- ---------
Net deferred taxes .................................................. $ -- $ --
========== =========
</TABLE>
In December 1987, the Company consummated certain restructuring
transactions that included certain changes in the ownership of the Company's
stock. The Internal Revenue Code restricts the amount of future income that may
be offset by losses and credits incurred prior to an ownership change. The
Company's annual limitation on the use of its net operating losses is
approximately $7,700, computed by multiplying the "long-term tax exempt rate"
at the time of change of ownership by the fair market value of the company's
outstanding stock immediately before the ownership change. The limitation is
cumulative; any unused limitation from one year may be added to the limitation
of a following year. Operating losses incurred subsequent to an ownership
change are generally not subject to such restrictions.
F-18
<PAGE> 59
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company's tax years from 1993 to 1995 are presently under audit
with the Internal Revenue Service. The Company believes it has adequately
reserved for any potential adjustments which may occur.
As of December 31, 1998, the Company had consolidated net operating
loss carryforwards of approximately $206,000 for tax purposes, which expire at
various dates through 2008. Approximately $31,000 net operating loss
carryforwards constitute pre-change losses and $175,000 of net operating losses
were unrestricted.
12. OTHER LONG-TERM LIABILITIES
The components of other long-term liabilities, excluding notes
payable, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1998 1997
---------------------- -----------------------
LONG-TERM CURRENT LONG-TERM CURRENT
PORTION PORTION PORTION PORTION
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Retiree and disability obligations $ 4,715 $ 500 $ 3,638 $ 2,000
Minority interests .............. 2,699 -- 6,112 --
Participating loan payable ...... 15,795 -- -- --
Other long-term liabilities ..... 241 -- 1,460 --
-------- ----- -------- -------
Total other long-term liabilities $ 23,450 $ 500 $ 11,210 $ 2,000
======== ===== ======== =======
</TABLE>
13. REDEEMABLE PREFERRED SHARES
At December 31, 1998 and 1997, the Company had authorized and
outstanding 2,000,000 and 1,071,462, respectively, of its Class A Senior
Preferred Shares. At December 31, 1998 and 1997, respectively, the carrying
value of such shares amounted to $316,202 and $258,638, including undeclared
dividends of $219,068 and $163,302, or $204.46 and $152.41 per share.
The holders of Class A Senior Preferred Shares are currently entitled
to receive a quarterly dividend, as declared by the Board, payable at the rate
of $19.00 per annum. The Class A Senior Preferred Shares are mandatorily
redeemable on January 1, 2003 at $100 per share plus accrued dividends. The
Class A Senior Preferred Shares were recorded at their market value ($80 per
share) at December 30, 1987, the date of issuance. The discount from the
liquidation value is accreted, utilizing the interest method, as a charge to
additional paid-in capital and an increase to the recorded value of the Class A
Senior Preferred Shares, through the redemption date. As of December 31, 1998,
the unamortized discount on the Class A Senior Preferred Shares was $6,846.
In the event a required dividend or redemption is not made on the
Class A Senior Preferred Shares, no dividends shall be paid or declared and no
distribution made on any junior stock other than a dividend payable in junior
stock. If at any time six quarterly dividends payable on the Class A Senior
Preferred Shares shall be in arrears or such shares are not redeemed when
required, the number of directors will be increased by two and the holders of
the Class A Senior Preferred Shares, voting as a class, will have the right to
elect two directors until full cumulative dividends shall have been paid or
declared and set aside for payment. Such directors were designated pursuant to
the Joint Plan in November 1994.
The Company declared and paid cash dividends on the Class A Senior
Preferred Shares of $40 per share in 1996. Undeclared dividends are accrued
quarterly and such accrued and unpaid dividends shall accrue additional
dividends in respect thereof compounded monthly at the rate of 19% per annum,
both of which are included in the carrying amount of redeemable preferred
shares, offset by a charge to additional paid-in capital.
During the first quarter of 1996, the Company repurchased 72,104 of
its Class A Senior Preferred Shares for an aggregate consideration of $10,530.
The repurchase increased the Company's additional paid-in capital by $4,279
based on the difference between the purchase price and the carrying values of
the shares.
On November 18, 1996, the Company granted to an executive officer and
director of the Company 36,000 Class A Senior Preferred Shares (the "Award
Shares"). The Award Shares are identical with all other Class A Senior
Preferred Shares issued and outstanding as of July 1, 1996, including
undeclared dividends of $3,776 and declared dividends of $1,080. The Award
Shares vested
F-19
<PAGE> 60
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
one-sixth on July 1, 1997 and one-sixth on each of the five succeeding one-year
anniversaries thereof through and including July 1, 2002. The Company recorded
deferred compensation of $5,436 representing the fair market value of the Award
Shares on November 18, 1996 and $3,020 of original issue discount representing
the difference between the book value of the Award Shares on November 18, 1996
and their fair market value. The deferred compensation will be amortized over
the vesting period and the original issue discount will be accreted, utilizing
the interest method, through the redemption date, both through a charge to
compensation expense. During 1998, 1997 and 1996, the Company recorded $3,043,
$2,934 and $359, respectively, in compensation expense related to the Award
Shares and, at December 31, 1998 and 1997, the balance of the deferred
compensation and the unamortized discount related to the Award Shares was
$5,721 and $6,890, respectively.
For information on Class A Senior Preferred Shares owned by Brooke,
see Note 18.
14. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS
The holders of the Class B Preferred Shares, 12,000,000 shares
authorized and 2,790,776 shares outstanding as of December 31, 1998 and 1997,
are entitled to receive a quarterly dividend, as declared by the Board, at a
rate of $3.00 per annum. Undeclared dividends are accrued quarterly at a rate
of 12% per annum, and such accrued and unpaid dividends shall accrue additional
dividends in respect thereof, compounded monthly at the rate of 12% per annum.
Each Class B Preferred Share is convertible at the option of the
holder into .41667 Common Shares based on a $25 liquidation value and a
conversion price of $60 per Common Share.
At the option of the Company, the Class B Preferred Shares are
redeemable in the event that the closing price of the Common Shares equals or
exceeds 140% of the conversion price at a specified time prior to the
redemption. If redeemed by New Valley, the redemption price would equal $25 per
share plus accrued dividends.
In the event a required dividend is not paid on the Class B Preferred
Shares, no dividends shall be paid or declared and no distribution made on any
junior stock other than a dividend payable in junior stock. If at any time six
quarterly dividends on the Class B Preferred Shares are in arrears, the number
of directors will be increased by two, and the holders of Class B Preferred
Shares and any other classes of preferred shares similarly entitled to vote for
the election of two additional directors, voting together as a class, will have
the right to elect two directors to serve until full cumulative dividends shall
have been paid or declared and set aside for payment. Such directors were
designated pursuant to the Joint Plan in November 1994.
No dividends on the Class B Preferred Shares have been declared since
the fourth quarter of 1988. The undeclared dividends, as adjusted for
conversions of Class B Preferred Shares into Common Shares, cumulatively
amounted to $165,856 and $139,412 at December 31, 1998 and 1997, respectively.
These undeclared dividends represent $59.43 and $49.95 per share as of the end
of each period. No accrual was recorded for such undeclared dividends as the
Class B Preferred Shares are not mandatorily redeemable.
15. COMMON SHARES
On November 18, 1996, the Company granted an executive officer and
director of the Company nonqualified options to purchase 330,000 Common Shares
at a price of $.58 per share and 97,000 Class B Preferred Shares at a price of
$1.85 per share. These options may be exercised on or prior to July 1, 2006 and
vest one-sixth on July 1, 1997 and one-sixth on each of the five succeeding
anniversaries thereof through and including July 1, 2002. The Company
recognized compensation expense of $108 in 1998, $15 in 1997 and $24 in 1996
from these option grants and recorded deferred compensation of $475 and $158
representing the intrinsic value of these options at December 31, 1998 and
December 31, 1997, respectively.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock options. In 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation", which, if fully adopted, changes the
methods of recognition of cost on certain stock options. Had compensation cost
for the nonqualified stock options been determined based upon the fair value at
the grant date consistent with SFAS No. 123, the Company's net loss in 1998 and
1997 would have been increased by $316 and by $33 in 1996. The fair value of
the nonqualified stock options was estimated at $1,774 using the Black-Scholes
option-pricing model with the following assumptions: volatility of 171% for the
Class B Preferred Shares and 101% for the Common Shares, a risk free interest
rate of 6.2%, an expected life of 10 years, and no expected dividends or
forfeiture.
F-20
<PAGE> 61
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The composition of accounts payable and accrued liabilities is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
------- -------
<S> <C> <C>
Accounts payable and accrued liabilities:
Accrued compensation ........................... $ 9,753 $11,202
Deferred rent .................................. 4,739 4,560
Unearned revenues .............................. 79 10,163
Taxes (property and miscellaneous) ............. 7,037 9,429
Accrued expenses and other liabilities ......... 10,439 19,868
------- -------
Total ...................................... $32,047 $55,222
======= =======
</TABLE>
17. PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS
On January 18, 1995, approximately $550,000 of the approximately
$620,000 of prepetition claims were paid pursuant to the Joint Plan. Another
$57,000 of prepetition claims and restructuring accruals have been settled and
paid or adjusted since January 18, 1995. The remaining prepetition claims may
be subject to future adjustments depending on pending discussions with the
various parties and the decisions of the Bankruptcy Court.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
------- -------
<S> <C> <C>
Restructuring accruals(a) ....................... $ 8,085 $ 8,196
Money transfer payable(b) ....................... 4,279 4,415
------- -------
Total ......................................... $12,364 $12,611
======= =======
</TABLE>
- -------------
(a) Restructuring accruals at December 31, 1998 consisted of $6,771 of
disputed claims, primarily related to leases and former employee
benefits, and $1,178 of other restructuring accruals. In 1996, the
Company reversed $9,706 of prior year restructuring accruals as a
result of settlements on certain of its prepetition claims and vacated
real estate lease obligations.
(b) Represents unclaimed money transfers issued by the Company prior to
January 1, 1990. The Company is currently in litigation in Bankruptcy
Court seeking a determination that these monies are not an obligation
of the Company. There can be no assurance as to the outcome of the
litigation.
18. RELATED PARTY TRANSACTIONS
At December 31, 1998, Brooke, a company under the control of Bennett
S. LeBow, Chairman of the Company's Board of Directors, held 3,989,710 Common
Shares (approximately 41.7% of such class), 618,326 Class A Senior Preferred
Shares (approximately 57.7% of such class), and 250,885 Class B Preferred
Shares (approximately 8.9% of such class) which represented in the aggregate
42.1% of all voting power. Several of the other officers and directors of the
Company are also affiliated with Brooke. In 1995, the Company signed an expense
sharing agreement with Brooke pursuant to which certain lease, legal and
administrative expenses are allocated to the entity incurring the expense. The
Company expensed approximately $502, $312 and $462 under this agreement in
1998, 1997, and 1996, respectively.
The Joint Plan imposes a number of restrictions on transactions
between the Company and certain affiliates of the Company, including Brooke.
On December 18, 1996, the Company loaned BGLS Inc. ("BGLS"), a
wholly-owned subsidiary of Brooke, $990 under a short-term promissory note due
January 31, 1997 and bearing interest at 14%. On January 2, 1997, the Company
loaned BGLS an additional $975 under another short-term promissory note due
January 31, 1997 and bearing interest at 14%. Both loans including interest
were repaid on January 31, 1997. In September 1998, the Company made a one-year
$950,000 loan to BGLS, which bears interest at 14% per annum. At December 31,
1998, the loan and accrued interest thereon of $984 was included in other
current assets.
F-21
<PAGE> 62
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
During 1998, one director of the Company and during 1996 and 1997, two
directors of the Company, were affiliated with law firms that rendered legal
services to the Company. The Company paid these firms $516, $568 and $4,141
during 1998, 1997 and 1996, respectively, for legal services. An executive
officer and director of the Company is a shareholder and registered
representative in a broker-dealer to which the Company paid $128, $522 and $317
in 1998, 1997 and 1996, respectively, in brokerage commissions and other
income, and is also a shareholder in an insurance company that received
ordinary and customary insurance commissions from the Company and its
affiliates of $128, $133 and $136 in 1998, 1997 and 1996, respectively. The
broker-dealer, in the ordinary course of its business, engages in brokerage
activities with Ladenburg on customary terms.
During 1996, the Company entered into a court-approved Stipulation and
Agreement (the "Settlement") with Brooke and BGLS relating to Brooke's and
BGLS's application under the Federal Bankruptcy code for reimbursement of legal
fees and expenses incurred by them in connection with the Company's bankruptcy
reorganization proceedings. Pursuant to the Settlement, the Company reimbursed
Brooke and BGLS $655 for such legal fees and expenses. The terms of the
Settlement were substantially similar to the terms of previous settlements
between the Company and other applicants who had sought reimbursement of
reorganization-related legal fees and expenses.
In connection with the acquisition of the Office Buildings by the
Company in 1996, a director of Brooke received a commission of $220 from the
seller.
See Note 3 for information concerning the purchase by the Company on
January 31, 1997 of BrookeMil from a subsidiary of Brooke.
19. OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
Ladenburg -- As a nonclearing broker, Ladenburg's transactions are
cleared by other brokers and dealers in securities pursuant to clearance
agreements. Although Ladenburg clears its customers through other brokers and
dealers in securities, Ladenburg is exposed to off-balance-sheet risk in the
event that customers or other parties fail to satisfy their obligations. In
accordance with industry practice, agency securities transactions are recorded
on a settlement-date basis. Should a customer fail to deliver cash or
securities as agreed, Ladenburg may be required to purchase or sell securities
at unfavorable market prices.
The clearing operations for Ladenburg's securities transactions are
provided by several brokers. At December 31, 1998, substantially all of the
securities owned and the amounts due from brokers reflected in the consolidated
balance sheet are positions held at and amounts due from one clearing broker.
Ladenburg is subject to credit risk should this broker be unable to fulfill its
obligations.
In the normal course of its business, Ladenburg enters into
transactions in financial instruments with off-balance-sheet risk. These
financial instruments consist of financial futures contracts and written index
option contracts. Financial futures contracts provide for the delayed delivery
of a financial instrument with the seller agreeing to make delivery at a
specified future date, at a specified price. These futures contracts involve
elements of market risk in excess of the amounts recognized in the consolidated
statement of financial condition. Risk arises from changes in the values of the
underlying financial instruments or indices. At December 31, 1998, Ladenburg
had commitments to purchase and sell financial instruments under futures
contracts of $3,113 and $1,378, respectively.
Equity index options give the holder the right to buy or sell a
specified number of units of a stock market index, at a specified price, within
a specified time from the seller ("writer") of the option and are settled in
cash. Ladenburg generally enters into these option contracts in order to reduce
its exposure to market risk on securities owned. Risk arises from the potential
inability of the counterparties to perform under the terms of the contracts and
from changes in the value of a stock market index. As a writer of options,
Ladenburg receives a premium in exchange for bearing the risk of unfavorable
changes in the price of the securities underlying the option. Financial
instruments have the following notional amounts as December 31, 1998:
<TABLE>
<CAPTION>
LONG SHORT
------- ------
<S> <C> <C>
Equity and index options ....... $24,555 $3,755
Financial futures contracts .... 2,954 1,532
</TABLE>
F-22
<PAGE> 63
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The table below discloses the fair value at December 31, 1998 of these
commitments, as well as the average fair value during the year ended December
31, 1998, based on monthly observations.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 AVERAGE
----------------- --------------------
LONG SHORT LONG SHORT
------ ------ ------- -------
<S> <C> <C> <C> <C>
Equity and index options .......... $ 870 $ 241 $ 5,385 $12,469
Financial futures contracts ....... 3,113 1,378 23,261 2,098
</TABLE>
For the years ended December 31, 1998, 1997, and 1996, the net loss arising
from options and futures contracts included in net gain on principal
transactions was $3,661 $2,399, and $6,012, respectively. The Company's
accounting policy related to derivatives is to value these instruments,
including financial futures contracts and written index option contracts, at
the last reported sales price. The measurement of market risk is meaningful
only when related and offsetting transactions are taken into consideration.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments have
been determined by the Company using available market information and
appropriate valuation methodologies described below. However, considerable
judgment is required to develop the estimates of fair value and, accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that could be realized in a current market exchange.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents .......... $ 16,444 $ 16,444 $ 11,606 $ 11,606
Investments available for sale ..... 37,567 37,567 51,993 51,993
Trading securities owned ........... 8,984 8,984 49,988 49,988
Restricted assets .................. 7,302 7,302 5,716 5,716
Receivable from clearing brokers.... 22,561 22,561 1,205 1,205
Long-term investments (Note 8) ..... 9,226 12,282 27,224 33,329
Financial liabilities:
Margin loans payable ............... 13,088 13,088 13,012 13,012
Notes payable ...................... 57,546 57,546 177,074 177,074
Redeemable preferred shares ........ 316,202 107,146 258,638 102,860
</TABLE>
21. 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 years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
BROKER- COMPUTER CORPORATE
DEALER REAL ESTATE SOFTWARE AND OTHER TOTAL
--------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1998
Revenues .......................... $ 66,569 $ 25,259 $ 794 $ 9,465 $ 102,087
Operating loss .................... (6,175) (192) (6,130) (12,915) (25,412)
Identifiable assets ............... 53,160 87,670 1,241 130,651 272,722
Depreciation and amortization ..... 1,125 4,373 693 304 6,495
Capital expenditures .............. 428 18,270 83 38 18,819
1997
Revenues .......................... $ 56,197 $ 27,067 $ 3,947 $ 27,357 $ 114,568
Operating (loss) income ........... (9,958) (7,827) (8,156) 520 (25,421)
Identifiable assets ............... 77,511 276,770 5,604 81,506 441,391
Depreciation and amortization ..... 1,035 7,469 815 95 9,414
Capital expenditures .............. 1,627 10,777 466 1,385 14,255
1996
Revenues .......................... $ 71,960 $ 23,559 $ 15,017 $ 20,329 $ 130,865
Operating loss .................... (345) (745) (15,082) (2,417) (18,589)
Identifiable assets ............... 76,302 182,645 11,686 135,787 406,540
Depreciation and Amortization ..... 600 3,622 532 3 4,757
Capital expenditures .............. 3,644 183,193 1,596 18 188,451
</TABLE>
F-23
<PAGE> 64
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
22. DISCONTINUED OPERATIONS
During the fourth quarter of 1996, the Company received $5,774 in cash
and $600 in a promissory note (paid in 1997) in settlement of a receivable
claim originally filed by the Company's former Western Union telegraph
business. In addition, the Company reduced its liability related to certain
Western Union retirees by $784. The Company recorded the gain on settlement of
$6,374 and liability reduction of $784 as gain on disposal of discontinued
operations. During 1997, the Company recorded a gain on disposal of
discontinued operations of $3,687 related to reversals in estimates of certain
pre-petition claims under Chapter 11 and restructuring accruals which resulted
from the Company's former money transfer business. The Company recorded a gain
on disposal of discontinued operations of $7,740 in 1998 related to the
settlement of a lawsuit originally initiated by the Western Union telegraph
business.
F-24
<PAGE> 65
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------
1999 1998
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................................... $ 10,312 $ 16,444
Investment securities available for sale ...................... 36,563 37,567
Trading securities owned ...................................... 6,562 8,984
Restricted assets ............................................. 1,192 1,220
Receivable from clearing brokers .............................. 12,575 22,561
Other current assets .......................................... 3,647 4,675
--------- ---------
Total current assets ...................................... 70,851 91,451
--------- ---------
Investment in real estate, net ..................................... 83,049 82,875
Furniture and equipment, net ....................................... 10,393 10,444
Restricted assets .................................................. 8,909 6,082
Long-term investments, net ......................................... 11,726 9,226
Investment in joint venture ........................................ 63,690 65,193
Other assets ....................................................... 6,020 7,451
--------- ---------
Total assets .............................................. $ 254,638 $ 272,722
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Margin loan payable ........................................... $ 4,044 $ 13,088
Current portion of notes payable and long-term obligations .... 2,708 2,745
Accounts payable and accrued liabilities ...................... 26,863 32,047
Prepetition claims and restructuring accruals ................. 12,340 12,364
Income taxes .................................................. 18,361 18,702
Securities sold, not yet purchased ............................ 2,659 4,635
--------- ---------
Total current liabilities ................................. 66,975 83,581
--------- ---------
Notes payable ...................................................... 54,801 54,801
Other long-term liabilities ........................................ 28,200 23,450
Commitments and contingencies ...................................... -- --
Redeemable preferred shares ........................................ 332,198 316,202
Stockholders' deficiency:
Cumulative preferred shares; liquidation preference of $69,769,
dividends in arrears: $172,905 and $165,856 ................. 279 279
Common Shares, $.01 par value; 850,000,000 shares
authorized; 9,577,624 shares outstanding .................... 96 96
Additional paid-in capital .................................... 534,568 550,119
Accumulated deficit ........................................... (759,598) (758,016)
Unearned compensation on stock options ........................ (148) (475)
Accumulated other comprehensive income ........................ (2,733) 2,685
--------- ---------
Total stockholders' deficiency ............................ (227,536) (205,312)
--------- ---------
Total liabilities and stockholders' deficiency ............ $ 254,638 $ 272,722
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
F-25
<PAGE> 66
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Principal transactions, net ................................... $ 4,776 $ 5,893
Commissions ................................................... 11,126 6,676
Corporate finance fees ........................................ 1,438 3,238
Gain on sale of investments, net .............................. 499 5,596
Loss from joint venture ....................................... (1,503) (329)
Real estate leasing ........................................... 2,230 7,776
Computer sales and service .................................... 251 413
Interest and dividends ........................................ 1,261 2,849
Other income .................................................. 2,692 1,728
----------- -----------
Total revenues ............................................ 22,770 33,840
----------- -----------
Cost and expenses:
Selling, general and administrative ........................... 26,592 30,100
Interest ...................................................... 2,325 4,160
----------- -----------
Total costs and expenses .................................. 28,917 34,260
----------- -----------
Loss from continuing operations before income taxes
and minority interests ........................................ (6,147) (420)
Income tax provision ............................................... 15 6
Minority interest in loss of consolidated subsidiaries ............. 480 583
----------- -----------
(Loss) income from continuing operations ........................... (5,682) 157
Discontinued operations:
Gain on disposal of discontinued operations ................... 4,100 --
----------- -----------
Income from discontinued operations ........................... 4,100 --
----------- -----------
Net (loss) income ......................................... (1,582) 157
Dividend requirements on preferred shares .......................... (22,219) (18,832)
----------- -----------
Net loss applicable to Common Shares ............................... $ (23,801) $ (18,675)
=========== ===========
Loss per Common Share (basic and diluted):
Continuing operations ......................................... $ (2.92) $ (1.95)
Discontinued operations ....................................... .43 --
----------- -----------
Net loss per Common Share ..................................... $ (2.49) $ (1.95)
=========== ===========
Number of shares used in computation ............................... 9,577,624 9,577,624
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
F-26
<PAGE> 67
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' DEFICIENCY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Unearned Accumulated
Class B Compensation Other
Preferred Common Paid-In Accumulated on Stock Comprehensive
Shares Shares Capital Deficit Options Income
--------- ------ -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998............ $279 $96 $550,119 $(758,016) $ (475) $ 2,685
Net income......................... (1,582)
Undeclared dividends and accretion
on redeemable preferred shares... (15,171)
Unrealized loss on investment
securities....................... (5,418)
Adjustment to unearned compensation
on stock options................. (327) 327
Compensation expense on stock
option grants.................... (53)
---- --- -------- --------- ------ --------
Balance, March 31, 1999............... $279 $96 $534,568 $(759,598) $ (148) $ (2,733)
==== === ======== ========= ====== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-27
<PAGE> 68
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ................................................................... $ (1,582) $ 157
Adjustments to reconcile net (loss) income to net cash provided from
(used for) operating activities:
Income from discontinued operations ............................................... (4,100) --
Loss from joint venture ........................................................... 1,503 329
Depreciation and amortization ..................................................... 898 2,344
Stock based compensation expense .................................................. 774 828
Changes in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in receivables and other assets ............................ 14,375 (9,586)
(Decrease) increase in income taxes ............................................ (340) 440
(Decrease) increase in accounts payable and accrued liabilities ................ (6,884) 2,766
-------- --------
Net cash provided from (used for) continuing operations ........................... 4,644 (2,722)
Net cash provided from discontinued operations .................................... 4,100 --
-------- --------
Net cash provided from (used for) operating activities ................................. 8,744 (2,722)
-------- --------
Cash flows from investing activities:
Sale or maturity of investment securities ......................................... 2,947 8,129
Purchase of investment securities ................................................. (6,858) (913)
Sale or liquidation of long-term investments ...................................... -- 1,901
Purchase of long-term investments ................................................. (2,500) (1,951)
Sale of real estate ............................................................... 920 --
Purchase of real estate ........................................................... (1,615) (1,419)
Purchase of furniture and fixtures ................................................ (312) (197)
Payment of prepetition claims ..................................................... (24) (847)
Increase in restricted assets ..................................................... (2,827) (68)
Net cash transferred to joint venture ............................................. -- (487)
-------- --------
Net cash (used for) provided from investing activities ................................. (10,269) 4,148
-------- --------
Cash flows from financing activities:
Decrease in margin loan payable ................................................... (9,044) (2,842)
Proceeds from participating loan .................................................. 4,473 --
Prepayment of notes payable ....................................................... (36) (291)
-------- --------
Net cash used for financing activities ................................................. (4,607) (3,133)
-------- --------
Net decrease in cash and cash equivalents .............................................. (6,132) (1,707)
Cash and cash equivalents, beginning of period ......................................... 16,444 11,606
-------- --------
Cash and cash equivalents, end of period ............................................... $ 10,312 $ 9,899
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
F-28
<PAGE> 69
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
The consolidated financial statements include the accounts of New
Valley Corporation and its majority-owned subsidiaries (the
"Company"). The consolidated financial statements as of March 31, 1999
presented herein have been prepared by the Company and are unaudited.
In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the
financial position as of March 31, 1999 and the results of operations
and cash flows for all periods presented have been made. Results for
the interim periods are not necessarily indicative of the results for
an entire year.
These financial statements should be read in conjunction with the
consolidated financial statements in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 as filed with the
Securities and Exchange Commission (Commission File Number 1-2493).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior interim period
financial information to conform with current year presentation.
PROPOSED RECAPITALIZATION PLAN
The Company has submitted for approval of its stockholders at its 1999
annual meeting, which will be held on May 21, 1999, a proposed
recapitalization of its capital stock (the "Recapitalization Plan").
Under the Recapitalization Plan, each of the Company's outstanding
Class A Senior Preferred Shares would be reclassified and changed into
20 Common Shares and one Warrant to purchase Common Shares (the
"Warrants"). Each of the Class B Preferred Shares would be
reclassified and changed into one-third of a Common Share and five
Warrants. The existing Common Shares would be reclassified and changed
into one-tenth of a Common Share and three-tenths of a Warrant. The
authorized number of Common Shares would be reduced from 850,000,000
to 100,000,000. The Warrants to be issued as part of the
Recapitalization Plan would have an exercise price of $12.50 per share
subject to adjustment in certain circumstances and be exercisable for
five years following the effective date of the Company's Registration
Statement covering the underlying Common Shares. The Warrants would
not be callable by the Company for a three-year period. Upon
completion of the Recapitalization Plan, the Company will apply for
listing of the Common Shares and Warrants on NASDAQ.
Completion of the Recapitalization Plan would be subject to, among
other things, approval by the required holders of the various classes
of the Company's shares. Brooke Group Ltd. ("Brooke"), the Company's
principal stockholder, has agreed to vote all of its shares in the
Company in favor of the Recapitalization Plan. As a result of the
Recapitalization Plan and assuming no warrant holder exercises its
Warrants, Brooke will increase its ownership of the outstanding Common
Shares of the Company from 42.3% to 55.1% and its total voting power
from 42% to 55.1%.
F-29
<PAGE> 70
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The Company believes the proposed Recapitalization Plan will simplify
the current capital structure of the Company by replacing it with a
single class of equity securities. The exchange of the Preferred
Shares for Common Shares will eliminate dividend arrearages, thus
increasing the net worth of the Company by approximately $332,198 on a
pro forma basis as of March 31, 1999. It will also remove the need to
redeem the Class A Senior Preferred Shares in 2003. The resulting
improvement in the net worth of the Company, along with a hoped for
increase in the price of the Common Shares, should increase the
likelihood of having the Common Shares quoted on NASDAQ. This, along
with a more transparent capital structure, should increase the
liquidity of the Company's securities, improve the valuation of the
Common Shares and provide a currency for acquisitions and financings.
Finally, the recapitalization will allow the voting rights of
stockholders to properly reflect the economic interest of such
stockholders.
New Accounting Pronouncements.
In June, 1998, FASB issued Statement of Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. The Company has not yet determined the
impact that the adoption of SFAS 133 will have on its earnings or
statement of financial position.
2. INVESTMENT IN WESTERN REALTY
WESTERN REALTY DEVELOPMENT LLC
In February 1998, the Company and Apollo Real Estate Investment Fund
III, L.P. ("Apollo") organized Western Realty Development LLC
("Western Realty Ducat") to make real estate and other investments in
Russia. In connection with the formation of Western Realty Ducat, the
Company agreed, among other things, to contribute the real estate
assets of BML, including Ducat Place II and the site for Ducat Place
III, to Western Realty Ducat and Apollo agreed to contribute up to
$58,750, including the investment in Western Realty Repin discussed
below. Through March 31, 1999, Apollo had funded $36,529 of its
investment in Western Realty Ducat.
The ownership and voting interests in Western Realty Ducat are held
equally by Apollo and the Company. Apollo will be entitled to a
preference on distributions of cash from Western Realty Ducat to the
extent of its investment ($40,000), together with a 15% annual rate of
return, and the Company will then be entitled to a return of $20,000
of BML-related expenses incurred and cash invested by the Company
since March 1, 1997, together with a 15% annual rate of return;
subsequent distributions will be made 70% to the Company and 30% to
Apollo. Western Realty Ducat will be managed by a Board of Managers
consisting of an equal number of representatives chosen by Apollo and
the Company. All material corporate transactions by Western Realty
Ducat will generally require the unanimous consent of the Board of
Managers. Accordingly, the Company has accounted for its
non-controlling interest in Western Realty Ducat using the equity
method of accounting.
The Company recorded its basis in the investment in the joint venture
in the amount of $60,169 based on the carrying value of assets less
liabilities transferred. There was no difference between the carrying
value of the investment and the Company's proportionate interest in
the underlying value of net assets of the joint venture. The Company
recognizes losses incurred by Western Realty Ducat to the extent that
cumulative earnings of Western Realty Ducat are not sufficient to
satisfy Apollo's preferred return.
Western Realty Ducat will seek to make additional real estate and
other investments in Russia. Western Realty Ducat has made a $30,000
participating loan to, and payable out of a 30% profits interest in
Western Tobacco Investments LLC ("WTI"), a company organized by Brooke
(Overseas) Ltd., a subsidiary of Brooke, which, among other things,
holds the interests of Brooke (Overseas) Ltd. in Liggett-Ducat Ltd.
and the new factory being constructed by Liggett-Ducat Ltd. on the
outskirts of Moscow. Western Realty Ducat has recognized as other
income $1,002, which represents 30% of WTI's net income for the three
months ended March 31, 1999.
F-30
<PAGE> 71
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Summarized financial information as of March 31, 1999 and December 31,
1998 and for the three month period ended March 31, 1999 and for the
period from February 20, 1998 (date of inception) to March 31, 1998
for Western Realty Ducat follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Current assets................................ $ 2,939 $ 857
Participating loan receivable................. 32,993 31,991
Real estate, net.............................. 86,307 85,761
Furniture and fixtures, net................... 230 179
Noncurrent assets............................. 538 631
Goodwill, net................................. 7,016 7,636
Notes payable - current....................... 5,703 4,999
Current liabilities........................... 5,445 5,802
Notes payable................................. 13,143 14,656
Long-term liabilities......................... 756 756
Members' equity............................... 104,976 100,842
FEBRUARY 20, 1998
THREE MONTHS ENDED (DATE OF INCEPTION)
MARCH 31, 1999 TO MARCH 31, 1998
------------------ -----------------
Revenues...................................... $ 3,448 $ 927
Costs and expenses............................ 4,425 1,256
Other income.................................. 1,002 --
Income tax provision.......................... 16 --
Net loss...................................... 9 (329)
</TABLE>
Western Realty Repin LLC
In June 1998, the Company and Apollo organized Western Realty Repin
LLC ("Western Realty Repin") to make a $25,000 participating loan (the
"Repin Loan") to BML. The proceeds of the loan will be used by BML for
the acquisition and preliminary development of two adjoining sites
totaling 10.25 acres (the "Kremlin Sites") located in Moscow across
the Moscow River from the Kremlin. BML, which is planning the
development of a 1.1 million sq. ft. hotel, office, retail and
residential complex on the Kremlin Sites, owned 95.2% of one site and
52% of the other site at March 31, 1999. Apollo will be entitled to a
preference on distributions of cash from Western Realty Repin to the
extent of its investment ($18,750), together with a 20% annual rate of
return, and the Company will then be entitled to a return of its
investment ($6,250), together with a 20% annual rate of return;
subsequent distributions will be made 50% to the Company and 50% to
Apollo. Western Realty Repin will be managed by a Board of Managers
consisting of an equal number of representatives chosen by Apollo and
the Company. All material corporate transactions by Western Realty
Repin will generally require the unanimous consent of the Board of
Managers.
Through March 31, 1999, Western Realty Repin has advanced $25,000
under the Repin Loan to BML, of which $18,773 was funded by Apollo and
is classified in other long-term obligations on the consolidated
balance sheet at March 31, 1999. The Repin Loan, which bears no fixed
interest, is payable only out of 100% of the distributions, if made,
by the entities owning the Kremlin Sites to BML. Such distributions
shall be applied first to pay the principal of the Repin Loan and then
as contingent participating interest on the Repin Loan. Any rights of
payment on the Repin Loan are subordinate to the rights of all other
creditors of BML. BML used a portion of the proceeds of the Repin Loan
to repay the Company for certain expenditures on the Kremlin Sites
previously incurred. The Repin Loan is due and payable upon the
dissolution of BML and is collateralized by a pledge of the Company's
shares of BML.
F-31
<PAGE> 72
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
As of March 31, 1999, BML had invested $19,621 in the Kremlin Sites
and held $3,525, in cash, which was restricted for future investment.
In connection with the acquisition of its interest in one of the
Kremlin Sites, BML has agreed with the City of Moscow to invest an
additional $6,000 (which has been funded) in 1999 and $22,000 in 2000
in the development of the property.
The Company has accounted for the formation of Western Realty Repin as
a financing by Apollo and a contribution of assets into a consolidated
subsidiary by New Valley which is eliminated in consolidation. Based
on the distribution terms contained in the Western Realty Repin LLC
agreement, the 20% annual rate of return preference to be received by
Apollo on funds advanced to Western Realty Repin is treated as
interest cost in the consolidated statement of operations.
The development of Ducat Place III and the Kremlin Sites will require
significant amounts of debt and other financing. The Company is
actively pursuing various financing alternatives on behalf of Western
Realty Ducat and BML. However, in light of the recent economic turmoil
in Russia, no assurance can be given that such financing will be
available on acceptable terms. Failure to obtain sufficient capital
for the projects would force Western Realty Ducat and BML to curtail
or delay the planned development of Ducat Place III and the Kremlin
Sites.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at
fair value, with net unrealized gains included as a component of
accumulated other comprehensive income. The Company had realized gains
on sales of investment securities available for sale of $499 for the
three months ended March 31, 1999.
The components of investment securities available for sale at March
31, 1999 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Marketable equity securities.............. $39,297 $ 254 $ 6,444 $33,107
Marketable warrants....................... -- 3,456 -- 3,456
------- ------- ------- -------
Investment securities..................... $39,297 $ 3,710 $ 6,444 $36,563
======= ======= ======= =======
</TABLE>
4. LONG-TERM INVESTMENTS
At March 31, 1999, long-term investments consisted primarily of
investments in limited partnerships of $11,726. The Company believes
the fair value of the limited partnerships exceeds their carrying
amount by approximately $2,600 based on the indicated market values of
the underlying investment portfolio provided by the partnerships. The
Company's investments in limited partnerships are illiquid and the
ultimate realization of these investments are subject to the
performance of the underlying partnership and its management by the
general partners.
5. REDEEMABLE PREFERRED SHARES
At March 31, 1999, the Company had authorized and outstanding
2,000,000 and 1,071,462, respectively, of its Class A Senior Preferred
Shares. At March 31, 1999 and December 31, 1998, respectively, the
carrying value of such shares amounted to $332,198 and $316,202,
including undeclared dividends of $234,581 and $219,068 or $218.94 and
$204.46 per share. As of March 31, 1999, the unamortized discount on
the Class A Senior Preferred Shares was $6,586.
F-32
<PAGE> 73
For the three months ended March 31, 1999 and 1998, the Company
recorded $774 and $828 in compensation expense related to certain
Class A Senior Preferred Shares awarded to an officer of the Company
in 1996. At March 31, 1999 and December 31, 1998, the balance of the
deferred compensation and the unamortized discount related to these
award shares was $5,416 and $5,721, respectively.
6. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS
The undeclared dividends, as adjusted for conversions of Class B
Preferred Shares into Common Shares, cumulatively amounted to $172,905
and $165,856 at March 31, 1999 and December 31, 1998, respectively.
These undeclared dividends represent $61.96 and $59.43 per share as of
the end of each period. No accrual was recorded for such undeclared
dividends as the Class B Preferred Shares are not mandatorily
redeemable.
7. CONTINGENCIES
Lawsuits
On or about March 13, 1997, a shareholder derivative suit was filed
against the Company, as a nominal defendant, its directors and Brooke
in the Delaware Chancery Court, by a stockholder of the Company. The
suit alleges that the Company's purchase in January 1997 of the shares
of BML from Brooke (Overseas) Ltd. constituted a self-dealing
transaction which involved the payment of excessive consideration by
the Company. The plaintiff seeks (i) a declaration that the Company's
directors breached their fiduciary duties, Brooke aided and abetted
such breaches and such parties are therefore liable to the Company,
and (ii) unspecified damages to be awarded to the Company. The
Company's time to respond to the complaint has not yet expired. The
Company believes that the allegations were without merit. Although
there can be no assurances, management is of the opinion, after
consultation with counsel, that the ultimate resolution of this matter
will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
The Company is a defendant in various lawsuits and may be subject to
unasserted claims primarily in connection with its activities as a
securities broker-dealer and participation in public underwritings.
These lawsuits involve claims for substantial or indeterminate amounts
and are in varying stages of legal proceedings. In the opinion of
management, after consultation with counsel, the ultimate resolution
of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or
cash flows.
Russian Operations
During 1998, the economy of the Russian Federation entered a period of
economic instability. The impact includes, but is not limited to, a
steep decline in prices of domestic debt and equity securities, a
severe devaluation of the currency, a moratorium on foreign debt
repayments, an increasing rate of inflation and increasing rates on
government and corporate borrowings. The return to economic stability
is dependent to a large extent on the effectiveness of the fiscal
measures taken by government and other actions beyond the control of
companies operating in the Russian Federation. The operations of BML
and Western Realty Ducat may be significantly affected by these
factors for the foreseeable future.
Russian Taxation: Russian taxation is subject to varying
interpretations and constant changes. Furthermore, the interpretation
of tax legislation by tax authorities as applied to the transactions
and activity of BML and Western Realty Ducat may not coincide with
that of management. As a result, transactions may be challenged by tax
authorities and BML and Western Realty Ducat may be assessed
additional taxes, penalties and interest, which can be significant.
F-33
<PAGE> 74
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.
Year 2000: It is unclear whether the Russian government and other
organizations who provide significant infrastructure services have
addressed the Year 2000 Problem sufficiently to mitigate potential
substantial disruption to these infrastructure services. The
substantial disruption of these services would have an adverse affect
on the operations of BML and Western Realty Ducat. Furthermore, the
current financial crisis could affect the ability of the government
and other organizations to fund Year 2000 compliance programs.
8. BUSINESS SEGMENT INFORMATION
The following table presents certain financial information of the
Company's continuing operations before taxes and minority interests as
of and for the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
BROKER- COMPUTER CORPORATE
DEALER REAL ESTATE SOFTWARE AND OTHER TOTAL
------- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
1999
Revenues.................... $19,030 $ 2,323 $ 251 $ 1,166 $ 22,770
Operating (loss) income..... 25 (1,225) (1,601) (3,346) (6,147)
Identifiable assets......... 38,957 91,091 985 123,605 254,638
Depreciation and
amortization............. 198 532 120 48 898
Capital expenditures........ -- 1,615 26 286 1,927
1998
Revenues.................... $19,425 $ 7,776 $ 413 $ 6,226 $ 33,840
Operating (loss) income..... (1,224) (20) (1,249) 2,073 (420)
Depreciation and
amortization............. 304 1,746 236 58 2,344
Capital expenditures........ 112 1,419 27 58 1,616
</TABLE>
9. INCOME FROM DISCONTINUED OPERATIONS
The Company recorded a gain on disposal of discontinued operations of
$4,100 for the three months ended March 31, 1999 related to the
settlement of a lawsuit originally initiated by the Company's former
Western Union telegraph business.
10. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards
for the reporting and disclosure of comprehensive income and its
components. Comprehensive income is a measure that reflects all
changes in stockholders' equity, except those resulting from
transactions with stockholders. For the Company, comprehensive income
includes net income and changes in the value of equity securities that
have not been included in net income. For the three months ended March
31, 1999 and 1998, comprehensive loss applicable to Common Shares was
$29,219 and $21,493, respectively.
F-34
<PAGE> 75
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable by us in
connection with the sale and distribution of the securities offered hereby. All
of the amounts show are estimated except the Securities and Exchange Commission
registration fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee $ 64,228
Printing expenses 50,000
Legal fees and expenses 10,000
Accounting fees and expenses 5,000
Blue Sky filing fees and expenses 5,000
Miscellaneous expenses 15,772
Total $ 150,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law and Article
Seventh of the Company's Restated Certificate of Incorporation and Article V of
the Company's By-laws provide for indemnification of the Company's directors
and officers in a variety of circumstances, which may include liabilities under
the Securities Act of 1933.
Section 102 of the Delaware General Corporation Law allows a
corporation to eliminate the personal liability of a director of a corporation
to the corporation or to any of its stockholders for monetary damage for a
breach of his fiduciary duty as a director, except in the case where the
director (i) breaches his duty of loyalty, (ii) fails to act in good faith,
engages in intentional misconduct or knowingly violates a law, (iii) authorized
the payment of a dividend or approves a stock repurchase in violation of the
Delaware General Corporation Law or (iv) obtains an improper personal benefit.
Article Eighth of the Company's Restated Certificate of Incorporation includes
a provision which eliminates directors' personal liability to the full extent
permitted under the Delaware General Corporation Law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On November 18, 1996, the Company issued 36,000 Class A Senior
Preferred Shares and granted stock options to purchase 330,000 Common Shares
and 97,000 Class B Preferred Shares at exercise prices of $.58 and $1.85 per
share, respectively, to an executive officer of the Company. The transactions
described above did not involve a public offering of the Company's securities
and were exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following is a list of exhibits filed as a part of this
Registration Statement or incorporated by reference herein:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------
<S> <C>
*(2)(a) -- Joint Plan (incorporated by reference to Exhibit 2 in the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1994)
*(b) -- Plan Amendment (incorporated by reference to Exhibit 2 in
the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1994)
*(c) -- Notice of Modification to the First Amended Joint Chapter
11 Plan of Reorganization (incorporated by reference to
Exhibit 2 in the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1994)
*(d) -- Agreement and Plan of Merger dated as of May 22, 1996, by
</TABLE>
II-1
<PAGE> 76
<TABLE>
<S> <C>
and between the Company and NV Delaware Inc. (incorporated
by reference to Annex II in the Company's Definitive Proxy
Statement dated May 22, 1996)
*(e) -- Agreement and Plan of Merger dated as of May 22, 1996, by
and between NV Delaware Inc. and NV Merger Sub Inc.
(incorporated by reference to Annex V in the Company's
Definitive Proxy Statement dated May 22, 1996)
*(f) -- Stock Purchase Agreement dated as of January 31, 1997, among
BrookeMil, Brooke (Overseas) Ltd., BGLS and the Company
(incorporated by reference to Exhibit 2.1 in the Company's
Current Report on Form 8-K dated January 31, 1997)
*(g) -- Amended and Restated Limited Liability Company Agreement
(Second Restatement) dated as of February 20, 1998 by and
among Western Realty Development LLC, the Company,
BrookeMil Ltd. and Apollo Real Estate Investment Fund III, L.P.
(incorporated by reference to Exhibit 10.1 in the Company's
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998)
*(h) -- Limited Liability Company Agreement, dated as of June 18,
1998, by and among Western Realty Repin LLC, Apollo Real
Estate Fund III, L.P., and the Company (incorporated by
reference to Exhibit 10.3 in the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June
30, 1998)
*(3)(a) -- Restated Certificate of Incorporation dated July 29, 1996
of the Company (incorporated by reference to Exhibit 3(i) in the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1996)
*(b) -- By-Laws of the Company adopted July 29, 1996 (incorporated by
reference to Exhibit (3)(ii) in the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1996)
(c) -- Form of Amended and Restated Certificate of Incorporation of
the Company (previously filed).
*(4)(a) -- Loan and Security Agreement dated January 11, 1996 by and
between AP Century III, L.P., AP Century IV, L.P., AP
Century V, L.P., AP Century VI, L.P. and AP Century VIII,
L.P., as Lenders, and the Company, as Borrower (the
Properties) (incorporated by reference to Exhibit 4.3 in
Amendment No. 1 in the Company's Current Report on Form 8-K
dated January 25, 1996, as amended)
*(b) -- Amendment to Loan and Security Agreement, dated December
27, 1996, by and between AP Century III, L.P., AP Century IV,
L.P., AP Century V, L.P., AP Century VI, L.P. and AP Century
VIII, L.P. (incorporated by reference to Exhibit 4(d) in
the Company's Form 10-K for the fiscal year ended December 31,
1996)
(c) -- Form of Warrant Agreement, dated as of June ___, 1999, between
American Stock Transfer & Trust Company, as Warrant Agent,
and the Company including form of warrant (previously filed)
(5) Opinion of Milbank, Tweed, Hadley & McCloy LLP as to the legality of
the Common Shares being registered
(8) Opinion of Milbank, Tweed, Hadley & McCloy LLP as to
certain federal income tax considerations
*(10)(a)(i) -- Restricted Share Agreement, dated November 18, 1996, by and between
the Company and Howard M. Lorber (incorporated by reference to
Exhibit 10 (a)(ii) in the Company's Form 10-K for the fiscal
year ended December 31, 1996)
*(ii) -- Option Agreement, dated November 18, 1996, between the Company and
Howard M. Lorber (incorporated by reference to Exhibit 10 (a)(iii) in the
Company's Form 10-K for the fiscal year ended December 31, 1996)
*(b)(i) -- Employment Agreement dated as of June 1, 1995, as amended,
effective as of January 1, 1996, between the Company and Bennett S.
LeBow (incorporated by reference to Exhibit 10(b)(i) in the
Company's Form 10-K for the fiscal year ended December 31, 1995)
*(ii) -- Employment Agreement ("Lorber Employment Agreement") dated
as of June 1, 1995, as amended, effective as of January 1,
1996, between the Company and Howard M. Lorber (incorporated
by reference to Exhibit 10(b)(ii) in the Company's Form 10-K
for the fiscal year ended December 31, 1995)
*(iii) -- Amendment dated January 1, 1998 to Lorber Employment Agreement
(incorporated by reference to Exhibit 10(b)(iii) in the
Company's Form 10-K for the fiscal year ended December 31, 1997)
*(iv) -- Employment Agreement dated September 22, 1995, between the
Company and Richard J. Lampen (incorporated by reference to
Exhibit 10(c) in the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1995)
</TABLE>
II-2
<PAGE> 77
<TABLE>
<S> <C>
*(c)(i) -- Purchase Agreement, dated as of October 20, 1994, between
First Financial Management Corporation ("FFMC") and the
Company (incorporated by reference to Exhibit 10(a) in the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1994)
*(ii) -- Amendment No. 1 to the Purchase Agreement, dated November 14,
1994, between FFMC and the Company (incorporated by reference to
Exhibit 10(b) in the Company's Current Report on Form 8-K dated
November 1, 1994)
*(iii) -- Pension and Retiree Benefits Administration Services Agreement,
dated November 1, 1994, between the Company and Western Union
Financial Services, Inc. ("FSI") (incorporated by reference to
Exhibit 10(e) in the Company's Current Report on Form 8-K dated
November 1, 1994)
*(iv) -- Settlement Agreement dated October 19, 1994 among the
Company, the Statutory Committee of Unsecured Creditors, the
Official Committee of Secured Noteholders, FSI, FFMC and the
Pension Benefit Guaranty Corporation (incorporated by
reference to Exhibit 10(c) in the Company's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1994)
*(v) -- Stipulation dated October 20, 1994 among the Western Union
Employee Benefit Committee, the Company and the Pension
Benefit Guaranty Corporation (incorporated by reference to
Exhibit 10(d) in the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1994)
*(vi) -- Settlement Agreement, Stipulation and Order dated October
28, 1994 among the Company, BGLS, NV Holdings, the Statutory
Committee of Unsecured Creditors, the Official Committee of
Secured Noteholders and the Official Committee of Equity
Security Holders, the Preferred A Stockholders'
Sub-Committee of the Equity Committee and certain beneficial
holders of Series A Senior Preferred Shares of the Company
(incorporated by reference to Exhibit 10(b) in the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1994)
*(vii) -- Asset Purchase Agreement dated September 30, 1995 among the
Company, Western Union Data Services Company, Inc. ("DSI") and
FFMC (incorporated by reference to Exhibit 10(b) in the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1995)
*(viii) -- Release and Termination Agreement, dated September 30,
1995, among the Company, FSI, DSI and FFMC, which agreement
terminated certain agreements among such parties in connection
with the sale of DSI (incorporated by reference to Exhibit 10(y) in
the Company's Form 10-K for the fiscal year ended December 31, 1995)
*(d) -- Sale-Purchase Agreement, dated as of September 2, 1998, by and
between the Company and PW/MS OP Sub I, LLC (incorporated by
reference to Exhibit 2.1 in the Company's Current Report on Form
8-K dated September 28, 1998)
*(e)(i) -- Purchase Agreement dated January 11, 1996 between the
Company and AP Century I, L.P., AP Century II, L.P., AP
Century III, L.P., AP Century IV, L.P., A.P. Century V, L.P.,
A.P. Century VI, L.P., A.P. Century VIII, L.P. and AP Century IX,
L.P. (incorporated by reference to Exhibit 2.2 in the Company's
Current Report on Form 8-K dated January 25, 1996, as amended)
*(ii) -- Indemnity Agreement, dated January 11, 1996, from Apollo
Real Estate Investment to the Company regarding loan
document discrepancies (incorporated by reference to Exhibit
10(k)(i) in the Company's Form 10-K for the fiscal year ended
December 31, 1995)
*(iii) -- Indemnity Agreement, dated January 11, 1996, from Apollo Real
Estate Investment to the Company regarding existing lender consents
(incorporated by reference to Exhibit 10(k)(ii) in the Company's
Form 10-K for the fiscal year ended December 31, 1995)
*(iv) -- Environmental Indemnity Agreement, dated January 11, 1996,
from Apollo to the Company regarding University Place
Property (incorporated by reference to Exhibit 10(k)(iii) in
the Company's Form 10-K for the fiscal year ended December 31, 1995)
*(v) -- Environmental Indemnity Agreement, dated January 11, 1996, from the
Company to Apollo regarding post-closing
</TABLE>
II-3
<PAGE> 78
<TABLE>
<S> <C>
contamination (incorporated by reference to Exhibit 10(k)(iv) in the
Company's Form 10-K for the fiscal year ended December 31, 1995)
*(f) -- Expense Sharing Agreement made and entered into as of
January 18, 1995, by and between Brooke and the Company
(incorporated by reference to Exhibit 10(a) in the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1995)
*(g) -- Use Agreement dated as of January 31, 1997, entered into by
and between BrookeMil and Liggett-Ducat Joint Stock Company
(incorporated by reference to Exhibit 10.3 in the Company's
Current Report on Form 8-K dated January 31, 1997)
*(h) -- TMC Investment Partnership Agreement dated as of February 2,
1996, between Ladenburg Thalmann Capital Corp. and Levin-A Limited
Partnership (incorporated by reference to Exhibit 10(r) in the
Company's Form 10-K for the fiscal year ended December 31, 1995)
*(i) -- Form of Margin Agreement dated September 12, 1995, between
ALKI and Bear Stearns & Co. (incorporated by reference to
Exhibit 2 in the Schedule 13D)
*(j)(i) -- Non-Negotiable Promissory Note of Western Realty Development LLC
dated February 27, 1998 in favor of Apollo Real Estate Investment
Fund III, L.P. (incorporated by reference to Exhibit 10.1 in the
Company's Current Report on Form 8-K dated February 20, 1998)
*(ii) -- Pledge Agreement dated as of February 27, 1998 by and
between Apollo Real Estate Investment Fund III, L.P. and the
Company (incorporated by reference to Exhibit 10.2 in the
Company's Current Report on Form 8-K dated February 20, 1998)
*(iii) -- Participating Loan Agreement, dated as of April 28, 1998, by
and between Western Realty Development LLC, Western Tobacco
Investments LLC and Brooke (Overseas) Ltd. (incorporated by
reference to Exhibit 10.2 in the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1998)
*(iv) -- Participating Loan Agreement, dated as of June 18, 1998, by
and between Western Realty Repin LLC and BrookeMil Ltd.
(incorporated by reference to Exhibit 10.4 in the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998)
*(21) -- Subsidiaries of the Company (incorporated by reference to
Exhibit 21 in the Company's Form 10-K for the fiscal year ended
December 31, 1998
(23)(a) -- Consent of PricewaterhouseCoopers LLP
(b) -- Consent of Arthur Andersen LLP
(c) -- Consent of Milbank, Tweed, Hadley & McCloy LLP (included in
their opinionS filed as Exhibit 5 and Exhibit 8)
(24) -- Power of Attorney (included on signature page hereof)
*(99)(a) -- Order confirming First Amended Joint Chapter 11 Plan of
Reorganization for the Company entered by the United States
Bankruptcy Court for the District of New Jersey on November
1, 1994 (incorporated by reference to Exhibit 99(b) in the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1994)
*(b) -- Order Authorizing Sale of Shares and Related Assets entered
by the United States Bankruptcy Court for the District of
New Jersey on November 1, 1994 (incorporated by reference to
Exhibit 99(a) in the Company's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1994)
</TABLE>
- ----------------
* Incorporated by reference.
The foregoing list omits instruments defining the rights of holders of
long-term debt of the Company and its consolidated subsidiaries where the total
amount of securities authorized thereunder does not exceed 10% of the total
assets of the Company and its consolidated subsidiaries. The Company hereby
agrees to furnish a copy of each such instrument or agreement to the Commission
upon request.
(b) Financial Statements Schedules
Schedule III -- Real Estate and Accumulated Depreciation
II-4
<PAGE> 79
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of New Valley Corporation
In connection with our audits of the consolidated financial statements
of New Valley Corporation and Subsidiaries as of December 31, 1998 and 1997,
and for each of the three years in the period ended December 31, 1998, which
financial statements are included in the Prospectus, we have also audited the
financial statement schedule listed in Item 21 herein.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
As discussed in the notes to the consolidated financial statements,
the investments and operations of the Company, and those of similar companies
in the Russian Federation, have been significantly affected, and could continue
to be affected for the foreseeable future, by the country's unstable economy
caused in part by the currency volatility in the Russian Federation.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
March 19, 1999
II-5
<PAGE> 80
SCHEDULE III
NEW VALLEY CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT CARRIED
AT CLOSE OF PERIOD
COST ---------------------------------
INITIAL COST CAPITALIZED BUILDINGS
-------------------- NET OF AND ACCUMULATED
DESCRIPTION AND LOCATION ENCUMBRANCES LAND BUILDING DELETIONS LAND IMPROVEMENTS TOTAL DEPRECIATION
------------ ------- -------- ----------- ------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Office Buildings:
Bernards Township, NJ. $ 43,838 $10,059 $ 38,432 $ (48,491) $ -- $ -- $ -- $ --
Bernards Township, NJ. 10,283 2,342 9,172 (11,514) -- -- -- --
Troy, MI.............. 22,384 23,581 (23,581) -- -- -- --
Troy, MI.............. 22,798 7,049 21,147 (28,196) -- -- -- --
Ducat Place I......... -- 5,561 (5,561) -- -- -- --
Ducat Place II........ 20,078 -- 59,300 (59,300) -- -- -- --
Ducat Place III....... -- 13,600 -- (13,600) -- -- -- --
Kindergarten Building. -- -- 912 -- -- 912 912 --
Kremlin Site.......... -- -- -- 18,013 18,013 -- 18,013 --
-------- ------- -------- --------- ------- ------- ------- ------
119,381 33,050 158,105 (172,230) 18,013 912 18,925 --
-------- ------- -------- --------- ------- ------- ------- ------
Shopping Centers:
Tri Cities, WA........ 5,919 2,981 7,692 -- 2,981 7,692 10,673 807
Santa Fe, NM.......... 8,331 3,233 6,423 11 3,233 6,434 9,667 667
Portland, OR.......... 4,875 949 6,374 (1,098) 722 5,503 6,225 542
Marathon, FL.......... -- 624 3,299 (3,923) -- -- -- --
Seattle, WA........... 10,717 3,354 9,069 544 3,354 9,613 12,967 948
Charleston, WV........ 11,238 2,510 10,516 317 2,511 10,832 13,343 791
Royal Palm Beach, FL.. 8,539 2,032 7,867 8 2,032 7,875 9,907 826
Lincoln, NE........... 5,182 1,254 4,750 260 1,254 5,010 6,264 515
-------- ------- -------- --------- ------- ------- ------- ------
54,801 16,937 55,990 (3,881) 16,087 52,959 69,046 5,096
-------- ------- -------- --------- ------- ------- ------- ------
Total................. $174,182 $49,987 $214,095 $(176,111) $34,100 $53,871 $87,971 $5,096
======== ======= ======== ========= ======= ======= ======= ======
<CAPTION>
DATE DATE DEPRECIABLE
DESCRIPTION AND LOCATION CONSTRUCTED ACQUIRED LIFE
----------- ---------- -----------
<S> <C> <C> <C>
Office Buildings:
Bernards Township, NJ. 1991 Jan 1996 40
Bernards Township, NJ. 1994 Jan 1996 40
Troy, MI.............. 1987 Jan 1996 40
Troy, MI.............. 1990 Jan 1996 40
Ducat Place I......... 1993 Jan 1997 40
Ducat Place II........ 1997 Jan 1997 40
Ducat Place III....... 1997 Jan 1997 40
Kindergarten Building. April 1998 40
Kremlin Site.......... 1998 40
Shopping Centers:
Tri Cities, WA........ 1980 Jan 1996 25
Santa Fe, NM.......... 1964 Jan 1996 25
Portland, OR.......... 1978 Jan 1996 25
Marathon, FL.......... 1972 Jan 1996 25
Seattle, WA........... 1988 Jan 1996 25
Charleston, WV........ 1985 Jan 1996 25
Royal Palm Beach, FL.. 1985 Jan 1996 25
Lincoln, NE........... 1964 Jan 1996 25
Total.................
</TABLE>
NEW VALLEY CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
RECONCILIATION OF CARRYING COSTS AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
BUILDINGS
AND ACCUMULATED
LAND IMPROVEMENTS TOTAL DEPRECIATION
------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Balance at 1/1/96 ........ $ -- $ -- $ -- $ --
------- -------- -------- ------
Additions during period:
Acquisitions through
foreclosure........... -- -- -- --
Other acquisitions ..... 36,387 148,322 184,709 --
Improvements, etc ...... -- 209 209 --
Depreciation expense ... -- -- -- 3,622
------- -------- -------- ------
Total additions ......... 36,387 148,531 184,918 3,622
------- -------- -------- ------
Deductions during period:
Cost of real estate sold 227 1,498 1,725 --
------- -------- -------- ------
Balance at 12/31/96 ...... $36,160 $147,033 $183,193 $3,622
------- -------- -------- ------
Additions during period:
Acquisitions through
foreclosure........... -- -- --
Other acquisitions ..... 22,623 64,861 87,484
Improvements, etc ...... -- 7,454 7,454
Depreciation expense ..... -- -- -- 5,197
------- -------- -------- ------
Total Additions ......... 22,623 72,315 94,938 5,197
------- -------- -------- ------
Deductions during period:
Cost of real estate sold 624 8,897 9,521 177
------- -------- -------- ------
Balance at 12/31/97 ...... $58,159 $210,451 $268,610 $8,642
------- -------- -------- ------
</TABLE>
II-6
<PAGE> 81
SCHEDULE III
NEW VALLEY CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C> <C> <C> <C>
Additions during period:
Acquisition through foreclosure ........... -- -- --
Other acquisitions ........................ -- -- --
Improvements, etc ......................... 17,324 912 18,236
Depreciation expense ...................... -- -- -- 3,985
------- ------- -------- ------
Total additions ............................ 17,324 912 18,236 3,985
------- ------- -------- ------
Deductions during period:
Real estate contributed to joint venture... 21,933 65,650 87,583 1,050
Cost of real estate sold .................. 19,450 91,842 111,292 6,481
------- ------- -------- ------
Balance at 12/31/98 ......................... $34,100 $53,871 $ 87,971 $5,096
------- ------- -------- ------
</TABLE>
II-7
<PAGE> 82
Financial statement schedules not included in this Registration
Statement have been omitted because they are not applicable or the required
information is shown in the Company's Consolidated Financial Statements or the
Notes thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by
Section 19(a) (3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth in
the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent
no more than 20 percent change in the maximum
aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with
respect to the plan of distribution not previously
disclosed in the registration statement or any
material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-8
<PAGE> 83
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Miami, and
State of Florida, on the 2nd day of June, 1999.
NEW VALLEY CORPORATION
By: /s/ J. Bryant Kirkland III
-----------------------------------
J. Bryant Kirkland III
Vice President, Treasurer and
Chief Financial Officer
The registrant and each person whose signature appears below hereby
authorizes Richard J. Lampen, J. Bryant Kirkland III and Marc N. Bell (the
"Agents"), with full power of substitution and resubstitution, to file one or
more amendments (including post-effective amendments) to the Registration
Statement which amendments may make such changes in the Registration Statement
as such Agent deems appropriate, and the registrant and each such person hereby
appoints each such Agent as attorney-in-fact to execute in the name and on
behalf of the registrant and each such person, individually and in each
capacity stated below, any such amendments to the Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on June 2, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Bennett S. LeBow Chairman of the Board of Directors and Chief
----------------------------------- Executive Officer (Principal Executive
Bennett S. LeBow Officer)
/s/ J. Bryant Kirkland III Vice President, Treasurer and Chief Financial
----------------------------------- Officer (Principal Financial Officer and
J. Bryant Kirkland III Principal Accounting Officer)
/s/ Henry C. Beinstein Director
-----------------------------------
Henry C. Beinstein
Director
-----------------------------------
Arnold I. Burns
/s/ Ronald J. Kramer Director
-----------------------------------
Ronald J. Kramer
/s/ Richard J. Lampen Director
-----------------------------------
Richard J. Lampen
/s/ Howard M. Lorber Director
-----------------------------------
Howard M. Lorber
/s/Barry W. Ridings Director
-----------------------------------
Barry W. Ridings
</TABLE>
II-9
<PAGE> 1
EXHIBIT 5
June 2, 1999
New Valley Corporation
100 S.E. Second Street
Miami, Florida 33131
Re: Registration Statement on Form S-1
Issuance of Common Shares Underlying Warrants
Ladies and Gentlemen:
We refer to the Registration Statement on Form S-1 (the "Registration
Statement") of New Valley Corporation, a Delaware corporation (the "Company"),
filed with the Securities and Exchange Commission today for the purpose of
registering under the Securities Act of 1933, as amended, a maximum of
18,482,629 shares (the "Shares") of common stock, par value $.01 per share (the
"Common Shares"), to be received upon the exercise of all outstanding warrants
(the "Warrants") issued by the Company to its stockholders under a plan of
recapitalization.
We are acting as special counsel for the Company in connection with
the Plan of Recapitalization and the Registration Statement and certain matters
contemplated thereby.
We have examined originals, or copies certified to our satisfaction,
of such corporate records of the Company, certificates of public officials,
certificates of officers and representatives of the Company and other documents
as we have deemed it necessary or appropriate to review as a basis for the
opinions hereinafter expressed. In such examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to
us as originals, the conformity with authentic originals of all documents
submitted to us as copies and the authenticity of the originals of such latter
documents. As to questions of fact material to the opinions hereinafter
expressed, we have, when relevant facts were not independently established,
relied upon the representations set forth in certificates of public officials
and officers of the Company and other appropriate persons and statements of the
Company contained in the Registration Statement.
Based upon and subject to the foregoing, and having regard to legal
considerations we deem relevant, we are of the opinion that the Shares have
been duly authorized
<PAGE> 2
2
by all necessary corporate action on the part of the Company and upon issuance
pursuant to exercise of the Warrants in accordance with their terms, the Shares
will be validly issued, fully paid and non-assessable.
The foregoing opinions are limited to the federal laws of the United
States of America and the General Corporation Law of the State of Delaware, and
we do not express any opinion as to the laws of any other jurisdiction.
We hereby consent to the reference to us under the heading "Legal
Matters" in the prospectus forming a part of the Registration Statement and to
the filing of this opinion as an exhibit to the Registration Statement. In
giving this consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations of the Commission.
Very truly yours,
/s/ Milbank, Tweed, Hadley & McCloy LLP
MLW/RSR
<PAGE> 1
EXHIBIT 8
June 2, 1999
New Valley Corporation
100 S.E. Second Street
Miami, Florida 33131
Re: Registration Statement on Form S-1
Certain Material Tax Considerations
Dear New Valley Corporation:
We deliver this letter in our capacity as special counsel to New
Valley Corporation, a Delaware corporation (the "Company"), as to certain
material federal income tax considerations relating to the plan of
recapitalization as described in the Registration Statement on Form S-1 (the
"Registration Statement") of the Company, filed with the Securities and
Exchange Commission (the "Commission") today with respect to the issuance of
its securities pursuant to the plan of recapitalization.
We have examined originals, or copies certified to our satisfaction,
of such corporate records of the Company, certificates of public officials,
certificates of officers and representatives of the Company and other documents
as we have deemed it necessary or appropriate to review as a basis for the
opinions we express here. In that examination, we have assumed the genuineness
of all signatures, the authenticity of all documents submitted to us as
originals, the conformity with authentic originals of all documents submitted
to us as copies and the authenticity of the originals of the latter documents.
As to questions of fact material to our opinions, we have, when relevant facts
were not independently established, relied upon the representations set forth
in certificates of public officials and officers of the Company and other
appropriate persons and statements of the Company contained in the Registration
Statement.
Based upon the foregoing, and assuming the plan of recapitalization is
consummated in accordance with its terms as described in the Registration
Statement, and subject to the conditions and limitations contained herein, we
confirm our opinion as to the federal income tax considerations of the Company,
as set forth in the Registration Statement, is true and complete in all
material respects.
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The foregoing opinions reflect our best professional judgment as to
the correct federal income tax treatment, under current law, of those aspects
of the proposed transactions to which the opinions relate. We note that our
opinions are based upon our review of the documents described above, the
statements and representations referred to above, the provisions of the
Internal Revenue Code of 1986, as amended, the regulations, published rulings
and announcements thereunder, and the judicial interpretations thereof,
currently in effect. Any change in applicable law or any of the facts and
circumstances described in the Registration Statement, or any inaccuracy of any
statements or representations on which we have relied, may affect the
continuing validity of our opinions.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the use of our name under the caption "Material
Federal Income Tax Considerations" in the proxy statement/prospectus filed as a
part thereof. In giving this consent, we do not admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended or the rules and regulations of the Commission.
Very truly yours,
/s/ Milbank, Tweed, Hadley & McCloy LLP
RAJ/SF
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CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
reports dated March 19, 1999 relating to the financial statements and financial
statement schedule of New Valley Corporation which appear in such Registration
Statement. We also consent to the references to us under the heading "Experts"
in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Miami, Florida
June 2, 1999
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CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we consent to the use of our report dated
January 23, 1998 in this registration statement on Form S-1 of New Valley
Corporation, relating to the consolidated balance sheet of Thinking Machines
Corporation and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' investment and cash flows
for the year ended December 31, 1997 and the period from February 8, 1996
(inception) to December 31, 1996.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
June 1, 1999
