<PAGE> 1
Filed pursuant to Rule 424(b)(3)
Reg. No. 333-76133
NEW VALLEY CORPORATION
100 S.E. SECOND STREET
MIAMI, FLORIDA 33131
APRIL 14, 1999
To the stockholders of New Valley Corporation:
Enclosed are a notice of annual meeting of stockholders, a proxy
statement/prospectus which also constitutes New Valley's annual report for the
fiscal year ended December 31, 1998, and a proxy for an annual meeting of
stockholders of New Valley. The meeting will take place on May 21, 1999, at
11:00 a.m., local time, at The Hyatt Regency Miami, 400 S.E. Second Avenue,
Miami, Florida.
At the meeting, we will ask you to elect directors and vote on a plan of
recapitalization. The Board of Directors believes that the plan of
recapitalization will:
- simplify New Valley's capital structure,
- increase New Valley's net worth and the price of its securities, and
- improve New Valley's liquidity and make it possible to have New Valley's
securities quoted on Nasdaq.
The plan of recapitalization would change our capital structure as follows:
- each Class A Senior Preferred Share will be changed into 20 Common Shares
and one warrant to purchase a Common Share,
- each Class B Preferred Share will be changed into 1/3 of a Common Share
and five warrants to purchase a Common Share,
- each outstanding Common Share will be changed into 1/10 of a Common Share
and 3/10 of a warrant to purchase a Common Share, and
- the number of authorized Common Shares of New Valley will be reduced from
850,000,000 to 100,000,000.
Details of the plan of recapitalization are set forth in the accompanying
proxy statement/prospectus, which you should read carefully.
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE PLAN OF RECAPITALIZATION AND UNANIMOUSLY RECOMMENDS THAT ALL
STOCKHOLDERS VOTE FOR THE PLAN.
WE CORDIALLY INVITE YOU TO ATTEND THE ANNUAL MEETING IN PERSON. TO MAKE
SURE THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING, WE URGE YOU TO
PROMPTLY COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED
ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. If you attend
the annual meeting in person you may, if you wish, vote personally even if you
have previously returned your proxy. You can request assistance regarding
proxies and related materials from New Valley's proxy solicitor, Georgeson &
Company, Inc., at 1-800-233-2064.
Sincerely,
/s/ Bennett S. LeBow
-----------------------------------
Bennett S. LeBow
Chairman of the Board of Directors
YOUR VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR PROXY
<PAGE> 2
NEW VALLEY CORPORATION
100 S.E. SECOND STREET
MIAMI, FLORIDA 33131
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 21, 1999
TO THE STOCKHOLDERS OF NEW VALLEY CORPORATION:
The annual meeting of stockholders of New Valley Corporation, a
Delaware corporation, will take place at The Hyatt Regency Miami, 400 S.E.
Second Avenue, Miami, Florida 33131, on Friday, May 21, 1999, at 11:00
a.m., local time. The meeting will be for the following purposes:
1. To elect five directors by the holders of Common Shares, Class A
Senior Preferred Shares and Class B Preferred Shares, voting
together as a single class.
2. To elect two directors by the holders of Class A Senior Preferred
Shares, voting as a class.
3. To elect two directors by the holders of Class B Preferred Shares
and Class A Senior Preferred Shares, voting together as a single
class.
4. To approve a plan of recapitalization to
- change each Class A Senior Preferred Share into 20 Common Shares
and one warrant to purchase a Common Share,
- change each Class B Preferred Share into 1/3 of a Common Share
and five warrants to purchase a Common Share,
- change each outstanding Common Share into 1/10 of a Common Share
and 3/10 of a warrant to purchase a Common Share and
- reduce the number of authorized Common Shares from 850,000,000 to
100,000,000.
5. To transact such other business as may properly come before the
meeting or any postponement or adjournment thereof.
Every holder of record of shares of the Company at the close of business on
April 8, 1999 is entitled to vote, in person or by proxy. Each holder of a Class
A Senior Preferred Share is entitled to .4645 vote per share, each holder of a
Class B Preferred Share is entitled to .05 vote per share and each holder of a
Common Share is entitled to one vote per share. A list of stockholders entitled
to vote at the meeting will be available to any stockholder during ordinary
business hours, from May 11, 1999 to May 21, 1999, at the headquarters of the
Company at the address above, for any purpose germane to the annual meeting.
A proxy statement/prospectus, which also constitutes the Company's annual
report for the fiscal year ended December 31, 1998, and form of proxy are
enclosed with this notice.
By order of the Board of Directors,
/s/ Bennett S. LeBow
-----------------------------------
Bennett S. LeBow
Chairman of the Board of Directors
Miami, Florida
April 14, 1999
- --------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT
IT IS IMPORTANT TO RETURN PROXIES PROMPTLY. THEREFORE, WHETHER OR NOT YOU
EXPECT TO ATTEND THE MEETING IN PERSON, PLEASE SIGN AND RETURN THE ENCLOSED
PROXY AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE PRE-PAID ENVELOPE.
- --------------------------------------------------------------------------------
<PAGE> 3
PROXY STATEMENT/PROSPECTUS
OF
NEW VALLEY CORPORATION
FOR AN ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD
ON MAY 21, 1999
AND
1998 ANNUAL SHAREHOLDERS' REPORT
---------------------
This proxy statement/prospectus relates to the election of directors and
the approval of a plan of recapitalization of New Valley Corporation. We are
furnishing it to you as part of the solicitation of proxies by our Board of
Directors for use at the annual meeting of our stockholders. The meeting will
take place at The Hyatt Regency Miami, 400 S.E. Second Avenue, Miami, Florida
33131, on Friday, May 21, 1999, at 11:00 a.m., local time.
The plan of recapitalization will change:
- each Class A Senior Preferred Share into 20 Common Shares and one warrant
to purchase a Common Share;
- each Class B Preferred Share into 1/3 of a Common Share and five warrants
to purchase a Common Share;
- each outstanding Common Share into 1/10 of a Common Share and 3/10 of a
warrant to purchase a Common Share; and
- the number of authorized Common Shares from 850,000,000 to 100,000,000.
YOU SHOULD CONSIDER THE RISKS ASSOCIATED WITH THE PLAN OF RECAPITALIZATION.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
This document is also a prospectus filed with the Securities and Exchange
Commission covering up to 23,317,261 Common Shares and 17,898,629 warrants to be
issued under the plan of recapitalization.
We are first mailing this proxy statement/prospectus and the accompanying
form of proxy to stockholders on or about April 19, 1999.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED THE SECURITIES TO BE ISSUED UNDER THIS PROXY
STATEMENT/PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
APRIL 14, 1999
<PAGE> 4
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS. NO ONE HAS BEEN AUTHORIZED TO PROVIDE YOU WITH DIFFERENT
INFORMATION. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROXY
STATEMENT/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>
<CAPTION>
PAGE
----------
<S> <C>
SUMMARY..................................................... 1
The Company............................................... 1
The Meeting............................................... 1
Election of Directors..................................... 1
The Plan of Recapitalization.............................. 1
Opinion of Financial Advisor.............................. 2
Who Can Help Answer Your Questions........................ 3
Comparative Historical and Pro Forma Per Share Data....... 4
DISCLAIMER REGARDING FORWARD-LOOKING STATEMENTS............. 5
RISK FACTORS................................................ 6
Risks Relating to the Plan of Recapitalization............ 6
Risks Relating to the Company's Business.................. 7
ANNUAL MEETING, VOTING AND PROXIES.......................... 9
Voting Rights; Solicitation of Proxies; Attendance of
Accountants............................................ 9
NOMINATION AND ELECTION OF DIRECTORS........................ 10
THE PLAN OF RECAPITALIZATION................................ 14
Terms of the Plan of Recapitalization..................... 14
Background of the Plan of Recapitalization................ 14
Fairness of the Plan of Recapitalization; Recommendation
of the Board of Directors.............................. 17
Purpose and Reasons for the Plan of Recapitalization...... 18
Opinion of Financial Advisor.............................. 19
Benefits to Brooke from the Plan of Recapitalization...... 22
Description of the Warrants............................... 22
Exchange of Stock Certificates; Fractional Security
Procedures............................................. 23
Regulatory Approval Required.............................. 24
Material Federal Income Tax Considerations................ 24
Absence of Appraisal Rights............................... 26
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION............................................... 26
SELECTED FINANCIAL DATA..................................... 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 31
BUSINESS.................................................... 41
Ladenburg Thalmann & Co. Inc.............................. 41
BrookeMil Ltd............................................. 41
New Valley Realty Division................................ 43
Other Acquisitions and Investments........................ 45
Bankruptcy Reorganization................................. 45
Discontinued Operations................................... 46
Employees................................................. 46
</TABLE>
i
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Properties................................................ 46
Legal Proceedings......................................... 47
MANAGEMENT.................................................. 48
Directors and Executive Officers.......................... 48
Security Ownership of Certain Beneficial Owners and
Management............................................. 48
Board of Directors and Committees......................... 51
Executive Compensation.................................... 52
Compensation of Directors................................. 53
Employment Agreements..................................... 53
Compensation Committee Interlocks and Insider
Participation.......................................... 54
Certain Relationships and Related Party Transactions...... 54
Board Compensation Committee Report on Executive
Compensation........................................... 55
Section 16(a) Beneficial Ownership Reporting.............. 57
Performance Graph......................................... 57
DESCRIPTION OF CAPITAL STOCK................................ 58
COMPARISON OF STOCKHOLDER RIGHTS............................ 63
STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING........... 64
OTHER MATTERS............................................... 65
LEGAL MATTERS............................................... 65
EXPERTS..................................................... 65
INDEX TO FINANCIAL STATEMENTS............................... F-1
FAIRNESS OPINION............................................ Appendix A
</TABLE>
ii
<PAGE> 6
SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. For a more complete
understanding of the matters to be considered at the annual meeting, including
the plan of recapitalization, 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.
THE MEETING
The annual meeting will take place on May 21, 1999, at The Hyatt Regency
Miami, 400 S.E. Second Avenue, Miami, Florida 33131 at 11:00 a.m., local time.
You may vote at the annual meeting if you own shares as of the close of business
on April 8, 1999, the record date. On the record date, there were outstanding
9,577,624 shares of Common Shares, 1,071,462 shares of Class A Senior Preferred
Shares and 2,790,776 shares of Class B Preferred Shares. Stockholders will be
entitled to one vote at the annual meeting for each Common Share, .4645 vote for
each Class A Senior Preferred Share and .05 vote for each Class B Preferred
Share held.
At the annual meeting, we will ask our stockholders to elect directors and
approve the plan of recapitalization.
ELECTION OF DIRECTORS
At the meeting, the stockholders will elect seven directors. Five directors
will be elected by the holders of Common Shares, Class A Senior Preferred Shares
and Class B Preferred Shares voting together as a class. Two directors will be
elected by the Class A Senior Preferred Shares, and these directors will also be
elected by the Class A Senior Preferred Shares and the Class B Preferred Shares,
voting as a single class.
If the plan of recapitalization is approved at the annual meeting, the
terms of the directors elected by holders of the Preferred Shares will end when
the plan takes effect. However, the Board of Directors intends at that time to
increase the number of directors on the Board by two, and to appoint the two
directors elected by the holders of Preferred Shares to the new positions.
THE PLAN OF RECAPITALIZATION
TERMS OF THE PLAN OF RECAPITALIZATION
The plan of recapitalization will make the following changes to our capital
structure:
- each Class A Senior Preferred Share will be changed into 20 Common Shares
and one warrant to purchase a Common Share;
1
<PAGE> 7
- each Class B Preferred Share will be changed into 1/3 of a Common Share
and five warrants to purchase a Common Share;
- each outstanding Common Share will be changed into 1/10 of a Common Share
and 3/10 of a warrant to purchase a Common Share; and
- the number of authorized Common Shares will be reduced from 850,000,000
to 100,000,000.
PURPOSE OF THE PLAN OF RECAPITALIZATION
We are proposing the plan of recapitalization to accomplish the following
goals:
- to simplify the Company's capital structure;
- to increase the Company's net worth;
- to increase the price of the Company's securities;
- to improve the liquidity of the Company; and
- to enable the Company's securities to qualify as Nasdaq SmallCap Market
or Nasdaq National Market System securities.
RECOMMENDATION OF THE BOARD OF DIRECTORS
Based on the recommendation of a special committee of directors not
associated with the Company's controlling stockholder, the Board has determined
that the plan of recapitalization is fair to, and in the best interests of, the
Company and its stockholders. The Board has unanimously approved, and recommends
for stockholder approval, the plan of recapitalization. The Company's officers
and directors and the Company's controlling stockholder, who together may be
deemed to beneficially own 43.1% of the Common Shares, 61.1% of the Class A
Senior Preferred Shares and 11.3% of the Class B Preferred Shares, have
indicated that they intend to vote for the plan of recapitalization.
OPINION OF FINANCIAL ADVISOR
In deciding to approve and recommend the plan of recapitalization, the
Board considered the opinion of its financial advisor, Pennsylvania Merchant
Group, that the plan of recapitalization is fair from a financial point of view
to the current holders of the Company's shares.
BENEFITS TO BROOKE OF THE PLAN OF RECAPITALIZATION
In considering the recommendations of the Board, you should be aware that
Brooke Group Ltd., the controlling stockholder of the Company, has interests in
the plan of recapitalization that are different from your interests as a
stockholder. Under the plan of recapitalization, Brooke will become the holder
of an absolute majority of the Common Shares and, consequently, will be able to
elect all the Company's directors and control its management. This increase in
ownership of Common Shares will make it impossible for a third party to acquire
control of the Company without Brooke's consent, and therefore may discourage
acquisition proposals and depress the price of the Common Shares. Finally,
Brooke will be able to consolidate its financial statements with the financial
statements of the Company for accounting purposes.
DESCRIPTION OF THE WARRANTS
The warrants issued under the plan of recapitalization will have an
exercise price of $12.50 per share subject to adjustments in certain
circumstances. They may be exercised beginning on the effective date of the
Company's registration statement covering the underlying Common Shares for up to
five years from that date. The Company may redeem the warrants at $0.01 per
warrant at any time after the third anniversary of the recapitalization if the
Common Shares trade for a specified period above $12.50 per share.
2
<PAGE> 8
PROCEDURES FOR EXCHANGE OF CERTIFICATES
After the plan of recapitalization takes effect, the exchange agent will
send you written instructions for exchanging your stock certificates for
certificates representing the new securities and payment for any fractional
interests that were sold by the exchange agent on your behalf.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
We expect that the exchange of shares under the plan of recapitalization
will be tax-free to stockholders although you may have to pay taxes if you
receive cash for fractional shares or warrants. Generally, the exercise of
warrants for Common Shares will be tax-free to stockholders. The tax
consequences of the recapitalization to you will depend on your own situation.
You should consult your own tax advisor to fully understand the tax consequences
of the recapitalization to you.
ABSENCE OF APPRAISAL RIGHTS
We are organized under Delaware law. Under Delaware law, stockholders will
not have appraisal rights in connection with the recapitalization.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have questions about the annual meeting or the plan of
recapitalization or desire additional copies of this proxy statement/prospectus,
please contact:
Georgeson & Company Inc.
Wall Street Plaza, 30th Floor
New York, New York 10005
Banks and Brokers Call Collect: (212) 440-9800
All Others Call Toll-Free: (800) 223-2064
or
New Valley Corporation
100 S.E. Second Street
Miami, Florida 33131
Attention: Corporate Secretary's Office
Telephone Number: (305) 579-8000
3
<PAGE> 9
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
The following table shows per share data for the Company on a historical
basis and on a pro forma equivalent basis giving effect to the recapitalization
and the sale of the Company's U.S. office buildings in September 1998. The pro
forma equivalent data are intended to portray the amounts that would be
applicable to a share of each class of the Company's outstanding shares as those
shares would be changed in the recapitalization. The Company did not pay
dividends during the periods shown.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------- -----------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Book value per share
Series A Senior Preferred Shares.......................... $ 94.60
Series B Preferred Shares................................. $ 1.58
Common Shares............................................. $(21.44) $ .47
------- -------
Loss per share from continuing operations
Series A Senior Preferred Shares.......................... $(23.92)
Series B Preferred Shares................................. $ (.40)
Common Shares............................................. $(10.08) $ (.12)
------- -------
</TABLE>
4
<PAGE> 10
DISCLAIMER REGARDING
FORWARD-LOOKING STATEMENTS
This proxy statement/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 report 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 obligation 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 proxy statement/prospectus.
5
<PAGE> 11
RISK FACTORS
RISKS RELATING TO THE PLAN OF RECAPITALIZATION
Loss of Preference of Preferred Shares
In the recapitalization, the Preferred Shares will be reclassified into
Common Shares and warrants. As a result, current holders of the Preferred Shares
will no longer be entitled to a fixed dividend or liquidation amount or priority
over any other class of security holders. Holders of Class A Senior Preferred
Shares will no longer be entitled to have their shares redeemed in 2003.
Instead, current holders of Preferred Shares will hold the most junior
securities issued by the Company and warrants to acquire additional shares of
the same type, with no right to receive a fixed amount of dividends or in
liquidation at any specific times. Holders of Preferred Shares will lose their
right to accrued dividends which, as of March 31, 1999, totaled $234.6 million,
or $218.94 per share, for the Class A Senior Preferred Shares and $172.9
million, or $61.96 per share, for the Class B Preferred Shares. In addition,
holders of Preferred Shares will lose their fixed liquidation preference equal
to an aggregate of $107.1 million, or $100 per share, for the Class A Senior
Preferred Shares and an aggregate of $69.8 million, or $25.00 per share, for the
Class B Preferred Shares.
Dilution of Holders of Common Shares
The reclassification of the shares will greatly increase the total number
of Common Shares outstanding while decreasing the number of such shares held by
the current holders of Common Shares. This will dilute the economic and voting
rights of current holders. After the recapitalization, Common Shares held by
these holders, assuming no exercise of the warrants, will represent only 4.1% of
the Company's voting power, compared with 93.9% at present, and 4.1% of the
Company's residual equity, compared with 100% at present.
Benefits of Recapitalization to Brooke
Brooke has certain interests in the plan of recapitalization that are
different from those of other stockholders. As a result of the recapitalization
and assuming that no warrant holder exercises its warrants, Brooke will increase
its ownership of the outstanding Common Shares from 42.3% to 55.1% and its total
voting power from 42% to 55.1%. As holder of an absolute majority of the Common
Shares, Brooke will be 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 will make 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.
At present, if a class vote of the Class A Senior Preferred Shares is
required, the vote must include the affirmative vote of either 80% of the
outstanding Class A Senior Preferred Shares or a simple majority of all the
Class A Senior Preferred Shares voting, excluding shares beneficially owned by
Brooke and certain related persons. After the plan of recapitalization takes
effect, there will be no provisions requiring the vote of a majority of holders
other than Brooke.
Finally, as a result of the increase in beneficial ownership, Brooke will
be able to consolidate the financial statements of the Company into its
financial statements for accounting purposes (although not for tax purposes).
The Company has been informed by Brooke that Brooke presently carries its
investment in the Company at $0. Brooke has informed the Company that it
believes that the plan of recapitalization will increase Brooke's net equity by
approximately $60 million pro forma at December 31, 1998.
Interests of Financial Advisor
Pennsylvania Merchant Group, the financial advisor that advised the Company
and rendered its opinion as to the fairness of the plan of recapitalization, may
have a conflict of interest because certain associated
6
<PAGE> 12
persons and customers of Pennsylvania Merchant Group hold a substantial number
of Class A Senior Preferred Shares and Class B Preferred Shares.
Uncertain Value of and Market for Common Shares
Because the recapitalization will make far-reaching changes in the
Company's capital structure, 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.
Uncertain Value of and Market for the Warrants
The Company will seek to have the warrants 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 the applicable listing requirements.
Even if the warrants are quoted, the liquidity of their trading market is
uncertain. There also is a risk that the price of the Common Shares will not
reach the strike price of the warrants.
RISKS RELATING TO THE COMPANY'S BUSINESS
After the recapitalization, the current holders of Preferred Shares will no
longer be senior to the holders of Common Shares. Therefore, the holders of
Preferred Shares may be more exposed to the business risks of the Company than
they are currently. A discussion of certain of these risks follows.
Continuing Losses and Net Worth Deficit; High Leverage and Fixed Charge
Coverage Deficit
The Company has experienced losses from continuing operations for the last
four years. The Company had a stockholders' deficiency of $205.3 million as of
December 31, 1998. The Company had outstanding debt in the amount of $57.5
million as of December 31, 1998, a margin loan payable of $13.1 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.
Risks Relating to the Industries in which the Company Operates
Each of the Company's operating businesses, Ladenburg, BrookeMil, New
Valley Realty division and Thinking Machines Corporation, 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
7
<PAGE> 13
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.
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 $1.2 million in 1999 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.
Reliance of Thinking Machines on New Strategy and Single Product. Thinking
Machines is much smaller and has much less capital than many firms in the
industry and at this time does not generate any material revenue. Thinking
Machines adopted a new business strategy at the end of 1996 and disposed of its
parallel processing computer sales and service business, and currently develops
only one software product. There is a risk that the new strategy will not
succeed, and that Thinking Machines will not be able to commercialize its sole
product. As a software developer, Thinking Machines is heavily dependent on key
employees. Loss of these key employees could harm Thinking Machines.
Other Activities of Management
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.
8
<PAGE> 14
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.
ANNUAL MEETING, VOTING AND PROXIES
This proxy statement/prospectus is being furnished to the holders of shares
as part of the solicitation of proxies by the Board of Directors for use at the
Company's annual meeting of stockholders.
VOTING RIGHTS; SOLICITATION OF PROXIES; ATTENDANCE OF ACCOUNTANTS
Every holder of record of $15.00 Class A Increasing Rate Cumulative Senior
Preferred Shares ($100 liquidation), $.01 par value, $3.00 Class B Cumulative
Convertible Preferred Shares, $.10 par value, and Common Shares, $.01 par value,
at the close of business on April 8, 1999 is entitled to notice of the annual
meeting. Holders may vote, in person or by proxy, .4645 vote for each Class A
Senior Preferred Share, .05 vote for each Class B Preferred Share and one vote
for each Common Share held by such holder. At the record date, the Company had
outstanding 1,071,462 Class A Senior Preferred Shares, 2,790,776 Class B
Preferred Shares and 9,577,624 Common Shares, in each case excluding treasury
shares. The approximate date on which this proxy statement/prospectus and
accompanying notice and proxy are first being mailed to stockholders is April
19, 1999. This document also constitutes the Company's annual report for the
year ended December 31, 1998.
Any stockholder giving a proxy in the form accompanying this proxy
statement/prospectus has the power to revoke the proxy before its exercise. A
proxy can be revoked by delivering an instrument of revocation at or before the
annual meeting to the Secretary or Assistant Secretary of the Company, by
delivering a duly executed proxy bearing a date or time later than that of the
proxy being revoked, or by being present and voting in person at the annual
meeting. Mere attendance at the annual meeting will not revoke a proxy.
Abstentions and shares held of record by a broker or its nominee that are voted
on any matter are included in determining the number of votes present. Broker
shares that are not voted on any matter will be excluded in determining whether
a quorum is present.
All proxies received and not revoked will be voted as directed. If no
directions are specified, the proxies will be voted FOR the election of the
Board's nominees as specified in Board Proposals 1, 2 and 3 below and FOR the
plan of recapitalization as specified in Board Proposal 4 below. Under Board
Proposals 1, 2 and 3, the nominees receiving a plurality of the votes cast will
be elected as directors. However, under Board Proposal 2, the First Amended
Joint Chapter 11 Plan of Reorganization of the Company, as amended, mandates
that the nominees must also receive the affirmative vote of either 80% of the
outstanding Class A Senior Preferred Shares, or a simple majority of all Class A
Senior Preferred Shares voting, excluding Class A Senior Preferred Shares
beneficially owned directly or indirectly by Brooke and certain related persons.
These related persons are:
- Mr. LeBow, his parents, his parents' lineal descendants, any of their
spouses and any trust for the benefit of any of these persons;
- Brooke, BGLS Inc. or any entity that is, directly or indirectly,
controlled by one or more of the persons or trusts described in the first
bullet point, or of which any of the persons is a director, officer,
general partner, trustee or a person who acts in a similar capacity; and
- any entity in which one or more of the persons or entities described in
the two bullet points above own individually or in the aggregate 5% or
more of the voting power or economic interest, or for a trust or estate,
5% or more of the beneficial interest.
9
<PAGE> 15
The plan of recapitalization is subject to the approval by:
- the majority of the outstanding shares;
- at least two-thirds of the outstanding Class A Senior Preferred Shares,
voting as a class, and either a simple majority of all Class A Senior
Preferred Shares voting, excluding shares beneficially owned by Brooke
and the related persons listed above, or 80% of the outstanding Class A
Senior Preferred Shares; and
- at least two-thirds of the outstanding Class B Preferred Shares, voting
as a class.
THE COMPANY'S OFFICERS AND DIRECTORS AND BROOKE, WHO TOGETHER MAY BE DEEMED
TO BENEFICIALLY OWN 43.1% OF THE COMMON SHARES, 61.1% OF THE CLASS A SENIOR
PREFERRED SHARES AND 11.3% OF THE CLASS B PREFERRED SHARES, HAVE INDICATED THAT
THEY INTEND TO VOTE FOR THE PLAN OF RECAPITALIZATION.
To determine the existence of a simple majority of all Class A Senior
Preferred Shares voting thereon (excluding shares beneficially owned by Brooke),
shares as to which authority is withheld, abstentions and broker shares that are
not voted will not be counted in determining the number of votes cast. In
calculating all other votes relating to Board Proposals 2 and 4, shares as to
which authority is withheld, abstentions and broker shares that are not voted
will have the effect of a vote against Proposals 2 and 4. An affirmative vote of
the majority of the votes present at the annual meeting is necessary for
approval of any other matters to be considered at the annual meeting.
PricewaterhouseCoopers LLP has been the independent auditors for the
Company since 1993 and will serve in that capacity for the 1999 fiscal year
unless the Board of Directors deems it advisable to name another firm. It is
expected that one or more representatives of this firm will attend the annual
meeting and be available to respond to appropriate questions. These
representatives will be given an opportunity to make a statement at the annual
meeting if they desire.
NOMINATION AND ELECTION OF DIRECTORS
The Company's By-Laws provide that the number of directors will be not more
than nine and not less than three as will be determined from time to time by the
Board. The Board currently consists of seven directors. Two of the current
directors were directors at the date of confirmation of the Company's bankruptcy
plan in 1994 and four were appointed under the bankruptcy plan, and all such
directors were re-elected at each annual meeting of stockholders thereafter. Two
of these directors are deemed under the bankruptcy plan to have been elected by
the holders of the Class A Senior Preferred Shares, voting as a class, and by
the holders of the Class A Senior Preferred Shares and the Class B Preferred
Shares, voting together as a single class, as a result of the dividend
arrearages on these shares. The special provisions of the bankruptcy plan
applicable to the election of the preferred shareholder designees expired at the
1997 annual meeting. As a result of continuing dividend arrearages on the
Preferred Shares, the Board has continued to nominate these designees, and these
designees have continued to serve, as the nominees for election as directors by
the holders of the Preferred Shares under the Certificate of Incorporation. The
present term of office of all directors will expire at the annual meeting.
BOARD PROPOSAL 1 -- NOMINEES FOR ELECTION AS DIRECTORS BY HOLDERS OF COMMON
SHARES, CLASS A SENIOR PREFERRED SHARES AND CLASS B
PREFERRED SHARES
Provided a quorum is present, directors are elected by a plurality of the
votes cast, to serve until the next annual meeting of stockholders and until
their successors are duly elected and qualified. The nominees for election as
directors by holders of Common Shares, Class A Senior Preferred Shares and Class
B Preferred Shares, voting together as a class, under Board Proposal 1 are
listed below. Although each nominee presently intends to serve, if any nominee
is unable or unwilling to serve the Board may nominate a substitute. In that
case the persons named as proxies in the accompanying proxy card will vote for
the election of the substitute nominee.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR ELECTION OF THE NOMINEES
NAMED BELOW.
10
<PAGE> 16
The following table sets forth, as to each of the nominees under Board
Proposal 1, certain information as of the record date. Each nominee 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 68 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
</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
11
<PAGE> 17
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.
BOARD PROPOSAL 2 -- NOMINEES FOR ELECTION AS DIRECTORS BY HOLDERS OF CLASS A
SENIOR PREFERRED SHARES
The Certificate of Incorporation provides that when six quarterly
dividends, whether or not consecutive, payable on the Class A Senior Preferred
Shares are in arrears, the holders voting as a class are entitled to elect two
directors. More than six quarterly dividends payable on the Class A Senior
Preferred Shares are in arrears. At March 31, 1999, the cumulative compounded
amount of dividend arrearages on the Class A Senior Preferred Shares was $234.6
million or $218.94 per share.
Under the Certificate of Incorporation, directors are elected by a
plurality of the votes cast, to serve until the earlier of the date on which
dividend arrearages have been eliminated or the next annual meeting.
However, under the Company's bankruptcy plan, whenever the Certificate of
Incorporation provides for the vote of the holders of the Class A Senior
Preferred Shares acting as a single class, the vote must include the affirmative
vote of either 80% of the outstanding Class A Senior Preferred Shares, or a
simple majority of all Class A Senior Preferred Shares voting thereon, excluding
Class A Senior Preferred Shares beneficially owned by Brooke and related
persons. Accordingly, the nominees for election as directors by holders of Class
A Senior Preferred Shares must be elected by a vote which meets these
requirements.
Whenever all arrears in dividends on the Class A Senior Preferred Shares
have been paid and dividends for the current quarterly dividend period have been
declared and set apart for payment, the right of the holders of the Class A
Senior Preferred Shares to elect additional directors will cease. The terms of
office of directors elected by the holders of the Class A Senior Preferred
Shares will terminate and the size of the Board will be reduced accordingly. If
a vacancy occurs among the directors elected by the holders of the Class A
Senior Preferred Shares, the Board will elect a successor to serve until the
next meeting of stockholders on the nomination of the remaining director elected
by such holders or the successor of such remaining director.
As discussed above, the designees of the holders of Preferred Shares were
deemed under the bankruptcy plan to have been elected by the holders of the
Preferred Shares under the Certificate of Incorporation as a result of the
dividend arrearages. The special provisions of the plan applicable to the
election of these designees expired at the 1997 annual meeting. As a result of
the continuing dividend arrearages on the Preferred Shares, the Board has
continued to nominate the designees, and the designees have continued to serve,
as nominees for election as directors by the holders of the Class A Senior
Preferred Shares and as nominees for election as directors by the holders of all
Preferred Shares as described below. Although the terms of these directors will
end when the recapitalization takes effect, the Board intends immediately
thereafter to increase the number of directors by two, and to appoint these
directors to the new positions.
THE BOARD RECOMMENDS THAT HOLDERS OF THE CLASS A SENIOR PREFERRED SHARES
VOTE FOR THE NOMINEES NAMED BELOW.
12
<PAGE> 18
The following table sets forth, as to each of the nominees under Board
Proposal 2, certain information as of the record date. Each nominee is a citizen
of the United States of America.
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- ---------------- --- -------------------- --------------
<S> <C> <C> <C>
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>
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.
BOARD PROPOSAL 3 -- NOMINEES FOR ELECTION AS DIRECTORS BY HOLDERS OF CLASS A
SENIOR PREFERRED SHARES AND CLASS B PREFERRED SHARES
Under the Certificate of Incorporation, when six quarterly dividends,
whether or not consecutive, on the Class B Preferred Shares are in arrears, the
holders of Class B Preferred Shares and Class A Senior Preferred Shares, voting
together as a single class, are entitled to elect two directors. No dividends on
the Class B Preferred Shares have been paid since 1988.
As of December 31, 1998, more than six quarterly dividends payable on the
Class B Preferred Shares were in arrears. At March 31, 1999, the cumulative
compounded amount of dividend arrearages on the Class B Preferred Shares was
$172.9 million or $61.96 per share.
Under the Certificate of Incorporation, directors are elected by a
plurality of the votes cast, to serve until the earlier of the date on which
dividend arrearages have been eliminated or the next annual meeting. Whenever
all arrears in dividends on the Class B Preferred Shares have been paid and
dividends for the current quarterly dividend period have been declared and set
apart for payment, the right of the holders of the Class B Preferred Shares to
elect additional directors will cease. The terms of office of all persons
elected as directors by them will terminate and the size of the Board will be
reduced accordingly. If a vacancy occurs among the directors elected by the
holders of the Class B Preferred Shares, a successor will be elected by the
Board to serve until the next meeting of the stockholders on the nomination of
the remaining director elected by such holders or the successor of such
remaining director.
Messrs. Beinstein and Ridings, both of whom have served as the designees of
the holders of Preferred Shares, are the nominees for election as directors by
holders of Class B Preferred Shares voting together as a single class with the
Class A Senior Preferred Shares. They are also nominees for election as
directors by the holders of the Class A Senior Preferred Shares under "Board
Proposal 2" above. Although the terms of these directors will end when the
recapitalization takes effect, the Board intends immediately thereafter to
increase the number of directors of the Board by two, and to appoint these
directors to these new positions. For information on these nominees, see "Board
Proposal 2" above.
THE BOARD RECOMMENDS THAT HOLDERS OF THE PREFERRED SHARES VOTE FOR ELECTION
OF THE NOMINEES NAMED IN THIS BOARD PROPOSAL 3.
13
<PAGE> 19
THE PLAN OF RECAPITALIZATION
TERMS OF THE PLAN OF RECAPITALIZATION
The plan of recapitalization would:
- reclassify each Class A Senior Preferred Shares into a share of temporary
new preferred stock that immediately will be redeemed for 20 Common
Shares and one warrant to purchase a Common Share,
- reclassify each Class B Preferred Share into a share of temporary new
preferred stock that immediately will be redeemed for 1/3 of a Common
Share and five warrants to purchase a Common Share, and
- reclassify each outstanding Common Share into a share of temporary new
preferred stock that immediately will be redeemed for 1/10 of a Common
Share and 3/10 of a warrant to purchase a Common Share.
The use of the temporary preferred shares is necessary because, under
Delaware law, the Company may not reclassify the Preferred Shares directly into
Common Shares and warrants. The Company intends that certificates for the newly
issued temporary preferred shares will not actually be sent to the Company's
stockholders, but that instead the appropriate number of Common Shares and
warrants will be issued and delivered directly to stockholders.
Holders of Series B Preferred Share and Common Share options outstanding
before the recapitalization who exercise these options after the
recapitalization will receive the Common Shares and warrants they would have
received if they had exercised their options immediately before the
recapitalization and held Series B Preferred Shares or Common Shares at that
time. The aggregate exercise price for these options will remain unchanged.
The plan would also decrease the number of authorized Common Shares from
850,000,000 to 100,000,000, to reduce franchise taxes the Company pays on its
authorized Common Shares.
The Company intends to implement the plan of recapitalization if it is
approved by the Company's stockholders. However, the Company reserves the right
to abandon the plan of recapitalization if it determines that, based on changes
in the economy, the business of the Company or other factors, the
recapitalization would not be in the best interests of the Company and its
stockholders.
BACKGROUND OF THE PLAN OF RECAPITALIZATION
The Company, which was the first telegraph company in the United States,
was originally organized under the laws of New York in 1851 and operated for
many years under the name "Western Union Corporation." The telegraph industry
was regulated, and consequently the Company had a capital structure appropriate
to a regulated utility; the predictable cash flow of the telegraph business
allowed the Company to service substantial fixed income securities. The Company
was also able to develop a highly profitable business through its wholly-owned
subsidiary Western Union Financial Services Company, Inc., which provided
domestic and international money transfer services, bill payment services,
telephone cards, money orders and bank card services. With the decline of the
telegraph industry, this became the core business of the Company. Ultimately,
however, the decline of the telegraph industry resulted in the Company being
unable to service its debt, and on November 15, 1991 an involuntary petition
under Chapter 11 of the Bankruptcy Code was commenced against the Company. On
March 31, 1993, the Company consented to the entry of an order for relief
placing it under the protection of Chapter 11.
On November 1, 1994, the bankruptcy court entered an order confirming the
Company's bankruptcy plan. The bankruptcy plan provided for:
- the sale of Western Union Financial Services and other Company assets
related to its money transfer business,
- payment in cash of all allowed claims and payment of post-petition
interest in the amount of $178 million to creditors,
14
<PAGE> 20
- a $50 per share cash dividend to the holders of Class A Senior Preferred
Shares,
- a tender offer by the Company for up to 150,000 shares of 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, the Company sold all of the common stock of Western
Union Financial Services and other assets related to the money transfer business
to First Financial Management Corporation for $1,193 million. Of this price,
$893 million was cash and $300 million represented 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. As a result of the sale, the Company was able to pay
approximately $550 million on account of allowed prepetition claims and emerge
from bankruptcy.
While the Company had managed to eliminate all of its debt in the
bankruptcy proceedings, it recognized that its capital structure needed to be
further modified to be appropriate for the future business plans of the Company
and to improve the liquidity of the Company's securities. The Company also
recognized the need to reduce the significant accrued and unpaid dividends on
the Preferred Shares.
In an attempt to improve the trading market for its stock, the Company
sought several times to have its equity securities quoted on the National
Association of Securities Dealers Automated Quotation System. In addition, in
1996, the Company effected a one-for-20 reverse stock split of the Common Shares
with the hope that this would allow the Company to satisfy criteria for
quotation on Nasdaq. However, the applications were rejected because the Company
failed to satisfy several requirements, including the minimum bid price
requirements and the minimum net tangible asset requirements.
In late 1996, the Company was approached by certain holders of Preferred
Shares who asked the Company to consider a recapitalization. The holders
proposed the recapitalization to address concerns relating to:
- the inability of the Company to have the Common Shares and Preferred
Shares traded on Nasdaq;
- the mandatory redemption of the Class A Senior Preferred Shares in 2003
and their high liquidation value;
- the accrued and unpaid dividends on the Preferred Shares;
- the inability of the Company to pay dividends to the holders of the Class
B Preferred Shares due to the dividend arrearage on the Class A Senior
Preferred Shares; and
- the resulting negative net worth of the Company and the illiquidity of
its securities.
The Company considered a recapitalization under which the holders of the
Preferred Shares would be allowed to exchange their Preferred Shares for either
subordinated debt or Common Shares. Further discussions concerning this plan
were held between management and the holders of Preferred Shares from time to
time through the first half of 1997, and management reviewed several financial
and legal issues. Because of concerns over the Company's assuming additional
debt, the potential negative tax consequences to recipients of such debt and
various other corporate issues, the Company determined not to proceed on this
basis.
In the middle of 1997, management and the holders of Preferred Shares
discussed a separate proposal under which the holders of Preferred Shares would
receive only Common Shares in exchange for their Preferred Shares. Following
occasional discussions with these holders, management was concerned about the
tax consequences of such a proposal, and also expressed uncertainty as to
whether the holders of Preferred Shares would approve such a transaction.
On December 8, 1997, the Board of Directors was advised that management
continued to consider various recapitalization alternatives and that various
corporate and tax issues were being reviewed with the Company's financial and
legal advisers.
15
<PAGE> 21
In May 1998, management held further discussions with the holders of
Preferred Shares. A proposal was made by these holders under which the holders
of Class A Senior Preferred Shares would receive Common Shares and the holders
of the Class B Preferred Shares would receive warrants.
Management and the holders of Preferred Shares continued discussions from
May to September 1998. On August 9, 1998, the Board was advised of the
discussions. The Board was informed that the proposed transaction would create a
more simple capital structure with a single class of stock. The Board was
advised that the new capital structure could improve trading of the Common
Shares by enabling the Common Shares to be listed on a national securities
exchange or quoted on Nasdaq, would provide a currency for acquisitions and
financing and would potentially permit the Company's market valuation to better
reflect its underlying assets and business. In addition, the Board was informed
that the proposed transaction would permit the Company to report for financial
statement purposes a significant positive shareholders' equity. The Board
discussed various aspects of the proposed recapitalization and encouraged
management to continue pursuing the proposal.
On November 9, 1998, the Board of Directors met and discussed the terms of
the proposed plan of recapitalization. The Board reviewed information concerning
the pro forma effects of the recapitalization, an analysis of its effect on the
voting power and residual equity interests of the shares held by the three
classes of securities and Brooke and a draft financial analysis prepared by its
financial advisor, Pennsylvania Merchant Group. Pennsylvania Merchant Group
advised the Board that based on its preliminary financial analysis of the
recapitalization, it would opine that the plan of recapitalization was fair.
While the Board agreed that a recapitalization would be in the best interests of
the Company, it determined that additional considerations needed to be addressed
by the Board and its financial advisors including the relative allocation of
value between the different classes of stock and the terms of the proposed
warrants. The Board then determined to form a special committee of independent
directors not associated with Brooke to review the terms of the plan of
recapitalization and to consider possible alternatives with management, legal
counsel, and Pennsylvania Merchant Group and to make a recommendation concerning
the recapitalization to the Board. The committee consisted of Messrs. Beinstein,
Burns and Ridings.
On December 10, 1998, the special committee met with its own counsel,
Proskauer Rose LLP, management and Company counsel, Milbank, Tweed, Hadley &
McCloy LLP, and discussed the terms of the proposed plan of recapitalization and
the presentation made by Pennsylvania Merchant Group at the November 9, 1998
Board meeting. The special committee considered various possible modifications
to the terms of the plan of recapitalization to align the interests of the
holders of the Company's three classes of securities by giving both Common
Shares and warrants to holders of each class, and to increase the value of the
proposed warrants. The special committee also considered various legal issues
concerning the proposed plan of recapitalization.
On February 1, 1999, the special committee met to discuss further the plan
of recapitalization and the modifications considered at the December 10, 1998
special committee meeting. The special committee also considered possible
alternatives to the plan of recapitalization. The special committee discussed
proposed modifications to the plan of recapitalization that had been made at its
request, including extending the period of time before which the Company could
redeem the warrants from two years to three years, providing for each class of
stock to receive both warrants and Common Shares and revising the amount of
consideration to be received by each class of stock. Pennsylvania Merchant Group
reviewed its analysis of the recapitalization and possible alternative
transactions and informed the special committee of its preliminary oral opinion
(later confirmed in writing) that the amount of consideration to be received by
the stockholders in the plan of recapitalization was fair, from a financial
point of view, to the stockholders. In addition, representatives of Brooke gave
assurances to the special committee that Brooke was not at the time planning any
extraordinary transactions involving the Company after the recapitalization.
After further discussions, the special committee unanimously agreed to recommend
to the Board of Directors that the Board authorize and approve the plan of
recapitalization and submit it for approval of the Company's stockholders at the
1999 annual meeting.
Immediately following the special committee meeting the Board held a
special meeting at which it determined based upon the recommendation of the
special committee and other factors that the plan of
16
<PAGE> 22
recapitalization is in the best interests of the Company and its stockholders.
The Board unanimously approved the plan of recapitalization and recommended that
the stockholders approve and adopt the plan of recapitalization.
FAIRNESS OF THE PLAN OF RECAPITALIZATION; RECOMMENDATION OF THE BOARD OF
DIRECTORS
The Board unanimously determined that the terms of the plan of
recapitalization are fair to, and in the best interests of, the Company and its
stockholders and recommended that the Company's stockholders approve and adopt
the plan of recapitalization.
In making its determination, the Board considered various factors including
the following:
- information on the financial condition, results of operations, business
and prospects of the Company, as well as current conditions and risks
involved with its business;
- the unanimous recommendation of the special committee of the Board to
approve the plan of recapitalization;
- the presentation by management and the opinion of Pennsylvania Merchant
Group that the plan of recapitalization is fair to the Company's
stockholders from a financial point of view;
- the interests in the recapitalization of Brooke and its treatment in the
same manner as the other holders of Preferred Shares and Common Shares;
- the potential conflict of interest of Pennsylvania Merchant Group;
- the required mandatory redemption in 2003 of the Class A Senior Preferred
Shares and the aggregate liquidation value of the Preferred Shares;
- the effect of the plan of recapitalization on the various classes of
shares;
- the current negative net worth of the Company and the illiquidity of its
securities;
- historical market prices and recent trading activity of the equity
securities of the Company;
- a detailed review of the terms of the plan of recapitalization;
- various accounting and tax considerations including the pro forma
information prepared by the Company;
- the expenses associated with the plan of recapitalization;
- the possibility that the plan of recapitalization would increase the
price of the Common Shares and the net worth of the Company which may
then allow the Company to have the Common Shares and warrants quoted on
Nasdaq; and
- possible alternatives to the plan of recapitalization, including the
proposal for the holders of the Preferred Shares to receive only Common
Shares or to elect to receive Common Shares or debt. The Board weighed
the possible benefits of these proposals against their risks, including
the consequences to the Company's net worth and liquidity, the likelihood
of acceptance by the holders of Preferred Shares, various accounting
considerations, and the tax consequences of such proposals. Ultimately,
the alternatives were not considered preferable by the Board because of
the lack of positive impact on the Company's net worth or liquidity, the
unlikeliness of acceptance of the proposals by the holders of Preferred
Shares and the negative tax consequences.
In addition to the recapitalization, the Board considered alternative
transactions as a way of realizing value for the stockholders. One such
alternative was the sale of the Company. Given the disparate nature of the
Company's businesses, the Board considered it unlikely that a single buyer could
be found for the Company as a whole. Accordingly, the Board concluded that any
sale would likely have to be piecemeal. The Board believed that current
conditions in Russia would make it difficult in the near term to sell the
Company's Russian operations at what the Board considers their true value. Also,
under the Company's arrangements
17
<PAGE> 23
with Apollo such a sale would require Apollo's consent. The Board did not
believe sales of the Company's other operations were likely to result in
substantial benefit to the stockholders.
The Board also considered distributing certain of its businesses to holders
of the Series A Senior Preferred Shares. However, most of the Company's
operations have not been held long enough to permit their spinoff without tax.
The Board considered liquidating its businesses, but concluded that this would
likely result in lower values as well as acceleration of the Company's
liabilities. Accordingly, the Board concluded that none of these alternatives
was as favorable as the recapitalization.
After consideration of these factors, the Board concluded that no
alternative to the plan of recapitalization would be as financially attractive
to the Company or its stockholders. In view of the wide variety of factors
considered in its evaluation of the plan of recapitalization, the Board, except
as disclosed in this proxy statement/prospectus, did not find it practicable to
quantify or otherwise attempt to assign relative weights to specific factors.
The Board also considered potential negatives with respect to the
recapitalization. These negatives included the overhang of the warrants, which
if exercised would increase the number of Common Shares outstanding by over 76%.
The resulting potential dilution may adversely affect the value of the Common
Shares after the recapitalization and prevent the Company from realizing some of
its objectives in the recapitalization. In addition, the Board considered that
the disparate nature of the Company's businesses might prevent the market from
fully appreciating the Company's values even after the recapitalization has made
the Company's capital structure more appropriate and easier to analyze. However,
the Board concluded that these potential negatives were outweighed by the
advantages of the recapitalization and determined to proceed.
THE BOARD HAS UNANIMOUSLY APPROVED, AND RECOMMENDS FOR STOCKHOLDER
APPROVAL, THE PLAN OF RECAPITALIZATION. THE BOARD BELIEVES THAT THE PLAN OF
RECAPITALIZATION IS FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS
STOCKHOLDERS. THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE PLAN OF
RECAPITALIZATION.
THE COMPANY'S OFFICERS AND DIRECTORS AND BROOKE, WHO TOGETHER MAY BE DEEMED
TO BENEFICIALLY OWN 43.1% OF THE COMMON SHARES, 61.1% OF THE CLASS A SENIOR
PREFERRED SHARES AND 11.3% OF THE CLASS B PREFERRED SHARES, HAVE INDICATED THAT
THEY INTEND TO VOTE FOR THE PLAN OF RECAPITALIZATION. THE OFFICERS OF THE
COMPANY AND BROOKE HAVE MADE NO RECOMMENDATIONS AS TO THE PLAN OF
RECAPITALIZATION.
PURPOSE AND REASONS FOR THE PLAN OF RECAPITALIZATION
The Board has determined to propose the plan of recapitalization to
simplify the capital structure of the Company. The Company believes that its
current capital structure is not appropriate for the Company's current
businesses for the reasons stated below.
- The Class A Senior Preferred Shares were originally intended to be fixed
income securities. However, the Company has not paid regular dividends on
them for ten years and there were $234.6 million of dividend arrearages
as of March 31, 1999. Accordingly, the Company believes the Class A
Senior Preferred Shares trade more like a residual equity security.
- The Class A Senior Preferred Shares are mandatorily redeemable in 2003 at
$100 per share plus dividends accrued to the redemption date. It is not
clear how the Company would finance this redemption.
- The Class B Preferred Shares were also issued as fixed income securities.
However, the Company has not paid dividends on them for ten years and
there were $172.9 million of dividend arrearages as of March 31, 1999. In
addition, the conversion privilege of the Class B Preferred Shares at a
conversion price of $60.00 per share has essentially no value because of
the low current price of Common Shares.
18
<PAGE> 24
- The Common Shares were issued to be the Company's residual equity
security. However, because of the large dividend arrearages on the senior
securities, the Company does not believe the market so views them.
- The voting rights of the Company's equity securities do not reflect their
economic value. The Common Shares constitute a much smaller percentage of
the Company's equity than the Preferred Shares, but have a greater voting
power.
- The negative net worth associated with the accrued dividends, as well as
the low price of the Common Shares, prevents the Common Shares from being
quoted on Nasdaq.
All of these factors contribute to the inability of the financial community and
investing public to effectively value the Company's securities, and also impair
their liquidity.
The plan of recapitalization 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
million 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.
The Company believes the Common Shares will trade at a minimum bid price
sufficient to meet the requirements to be quoted on the Nasdaq Small Cap Market
or the Nasdaq National Market System.
OPINION OF FINANCIAL ADVISOR
On September 25, 1998, the Company retained Pennsylvania Merchant Group to
act as its financial advisor concerning the plan of recapitalization.
Pennsylvania Merchant Group has delivered its written opinion dated February 1,
1999 to the Board of Directors that, as of the date of such opinion, and subject
to assumptions, factors and limitations set forth in such opinion as discussed
below, the recapitalization was fair from a financial point of view to the
current holders of the Company's shares. Pennsylvania Merchant Group reaffirmed
its opinion as of the date of this proxy statement/prospectus.
THE FULL TEXT OF THE WRITTEN OPINION OF PENNSYLVANIA MERCHANT GROUP, DATED
AS OF THE DATE OF THIS PROXY STATEMENT/PROSPECTUS, WHICH SETS FORTH THE
ASSUMPTIONS MADE, FACTORS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY
PENNSYLVANIA MERCHANT GROUP IN RENDERING ITS OPINION, IS INCLUDED AS APPENDIX A
TO THIS PROXY STATEMENT/PROSPECTUS. THE SUMMARY OF THE OPINION SET FORTH HERE
SHOULD BE READ TOGETHER WITH THE FULL TEXT OF SUCH OPINION.
No limitations were imposed by the Company or the Board on Pennsylvania
Merchant Group as to its investigations or procedures in reaching its opinion.
Pennsylvania Merchant Group was not requested to and did not make any
recommendation to the Board as to the form or amount of consideration to be
offered to the stockholders in the recapitalization. Pennsylvania Merchant
Group's opinion is for the use and benefit of the Board and was rendered to the
Board in connection with its consideration of the recapitalization. The opinion
does not constitute a recommendation to any stockholder as to how such
stockholder should vote on the recapitalization. Pennsylvania Merchant Group was
not requested to opine as to, and its opinion does not address, the Company's
underlying business decision to effect the recapitalization.
In arriving at its opinion, Pennsylvania Merchant Group reviewed and
analyzed, among other things,
- the specific terms of the Company's shares;
- the proposed terms of the warrants;
19
<PAGE> 25
- certain publicly available business and financial information relating to
the Company, including the Annual Reports to Stockholders and Annual
Reports on Form 10-K for the three years ended December 31, 1998;
- certain financial and operating information with respect to the business,
operations and prospects of the Company furnished by the Company,
including without limitation certain projections prepared by the Company
and Brooke;
- a trading history of the Company's shares for the three-year period ended
April 9, 1999 and the relationship among the aggregate market value of
such securities; and
- a comparison of the historical financial results and present financial
condition of the Company with those of other companies that Pennsylvania
Merchant Group deemed relevant.
In addition, Pennsylvania Merchant Group held discussions with senior officers
of the Company concerning the business, operations, properties and prospects of
the Company and its subsidiaries, Ladenburg and BrookeMil, as well as its United
States real estate division, and undertook other analyses and examinations and
considered such other financial, economic and market criteria it deemed
appropriate and relevant.
In rendering its opinion, Pennsylvania Merchant Group assumed and relied
upon and did not independently verify the accuracy, completeness and fair
presentation of all financial and other information, including financial
projections and estimates, that was provided to it or which was publicly
available. Pennsylvania Merchant Group's opinion is conditioned upon such
information, whether written or oral, being complete, accurate and fair in all
material respects. With respect to the projections provided to and discussed
with Pennsylvania Merchant Group by the management of the Company, Pennsylvania
Merchant Group assumed that such projections were reasonably prepared on a basis
reflecting management's best currently available estimates and good faith
judgments as to the future performance of the Company and that the Company will
perform in accordance with all such projections. Pennsylvania Merchant Group did
not conduct a physical inspection of the properties and facilities of the
Company and did not make or obtain any independent evaluations or appraisals of
the assets or liabilities of the Company. The opinion of Pennsylvania Merchant
Group states that it was necessarily based upon market, economic and other
conditions as they existed on, and could be evaluated as of, the date of the
opinion.
In conducting its analysis and arriving at its opinion, Pennsylvania
Merchant Group evaluated the financial impact of the recapitalization on the
holders of the shares by considering certain financial and other factors it
deemed appropriate under the circumstances, including:
- the terms and business and financial aspects of the recapitalization;
- the Company's current capital structure and the advantages of a
simplified structure;
- the historical and current markets for the shares (including float and
liquidity) and for securities of other public companies believed by
Pennsylvania Merchant Group to be comparable to the Company;
- certain of the Company's operating and financial information, including
the financial forecasts provided by management relating to the Company's
business and prospects;
- publicly available financial data and stock market performance data of
other public companies believed by Pennsylvania Merchant Group to be
comparable to Ladenburg and New Valley Realty;
- the mandatory redemption requirements on January 1, 2003 with respect to
the Class A Senior Preferred Shares;
- the elimination of the overhang due to the accrual of the dividends on
the Class A Senior Preferred Shares and the Class B Preferred Shares
which amounted to $234.6 million and $172.9 million, respectively, as of
March 31, 1999;
- the potential effect of such overhang and complex capital structure on
the Company's stock trading liquidity and ability to attract research
analyst coverage; and
20
<PAGE> 26
- the Company's current intention not to pay any dividends either on the
Company's securities prior to the recapitalization or on the new Common
Shares for the foreseeable future following the recapitalization.
Based on its review of these factors, Pennsylvania Merchant Group estimated
the combined value of the Company's holdings to equal approximately $184.4
million net of liabilities. In arriving at fair value, Pennsylvania Merchant
Group relied on the most recent financial data available. In the case of the
Company's Ladenberg and BrookeMil subsidiaries and New Valley Realty division,
this data was as of December 31, 1998. For the other investments of the Company,
this data was as of March 31, 1999. Fair value is based solely on the
quantitative results of Pennsylvania Merchant Group's analysis and Pennsylvania
Merchant Group believed that it was inappropriate to, and therefore did not,
rely on this value completely. Pennsylvania Merchant Group also made qualitative
judgments concerning the Company, including among other factors the significant
overhang effect of the warrants and the lack of common factors among the
Company's various businesses. Pennsylvania Merchant Group determined that the
combined market value of the Company's securities before the recapitalization is
less than fair value and believed that the Common Shares outstanding after the
recapitalization will likely be valued at less of a discount to fair value due
to, among others, the factors discussed above.
Pennsylvania Merchant Group also made an evaluation of other alternatives
available to the Company, including (a) the sale of the Company, or certain of
its assets or divisions, including Ladenburg, BrookeMil and New Valley Realty;
(b) the distribution to stockholders of the Company's ownership in Ladenburg,
BrookeMil and New Valley Realty; and (c) a liquidation of the Company. In
completing its alternatives evaluation, Pennsylvania Merchant Group considered
certain financial and other factors it deemed appropriate under the
circumstances, including:
- Comparable merger and acquisition transactions for companies in the
investment banking and real estate industries;
- the terms of the Company's agreements with Apollo Real Estate Fund III,
L.P. and the restrictions they place upon the Company's transfer of its
ownership;
- the likelihood of the need for additional financing for BrookeMil and the
availability of such financing under current market conditions for
companies engaged in business in Russia;
- the inability of a spinoff of Ladenburg or BrookeMil to qualify as a
tax-free spinoff either to stockholders or the Company due to the length
of time these divisions have been held by the Company;
- the anticipated market value of the divisions post-spinoff and the
likelihood of a significant trading market developing for the shares of
these divisions; and
- the significant discounts to going concern value the Company would
receive in a liquidation of its assets.
Based on its review of these factors, as well as other factors, Pennsylvania
Merchant Group determined that the recapitalization represents the best
alternative for stockholders.
The factors set forth above do not purport to represent all of the factors
considered by Pennsylvania Merchant Group in rendering its opinion. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant methods of financial and comparative analysis and the
application of those methods to the particular circumstances, and therefore such
an opinion is not readily susceptible to summary description. Furthermore, in
arriving at its fairness opinion, Pennsylvania Merchant Group did not attribute
any particular weight to any analysis or factor it considered, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, Pennsylvania Merchant Group believes that its analyses must
be considered as a whole and that considering any portions of such analyses and
of the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying the opinion. In
its analyses, Pennsylvania Merchant Group made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of the Company. Any estimates in
the analyses do not
21
<PAGE> 27
necessarily indicate actual values or predict future results or values, which
may be significantly more or less favorable than as set forth in such analyses.
No public company utilized as a comparison is identical to the Company. An
analysis of the results of such a comparison is not mathematical, rather it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the comparable companies and other
factors, including capital structure, that could affect the public trading value
of the companies to which the Company is being compared. In addition, analyses
relating to the value of businesses do not purport to be appraisals or to
reflect the prices at which businesses actually may be sold.
Pursuant to the terms of an engagement letter agreement, dated September
25, 1998, between Pennsylvania Merchant Group and the Company, the Company has
paid Pennsylvania Merchant Group $200,000 for its opinion. In addition, the
Company has agreed to reimburse Pennsylvania Merchant Group for its reasonable
expenses, including professional and legal fees and disbursements, incurred in
connection with its engagement. The Company has also agreed to indemnify
Pennsylvania Merchant Group and certain related persons against certain
liabilities in connection with its engagement, including certain liabilities
that may arise under the federal securities laws.
In the ordinary course of business, Pennsylvania Merchant Group actively
trades in the equity securities of the Company for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or short
position in such securities. Pennsylvania Merchant Group may have a conflict of
interest because certain associated persons and customers of Pennsylvania
Merchant Group hold a substantial number of Class A Senior Preferred Shares and
Class B Preferred Shares.
BENEFITS TO BROOKE FROM THE PLAN OF RECAPITALIZATION
In considering the plan of recapitalization, stockholders should be aware
of the following conflicts of interests. The Board was aware of these conflicts
and considered them in determining to approve and recommend the plan of
recapitalization.
As a result of the plan of recapitalization and assuming that no warrant
holder exercises its warrants, Brooke will increase its ownership of the
outstanding Common Shares from 42.3% to 55.1%, and its total voting power from
42% to 55.1%. As holder of an absolute majority of the Common Shares, Brooke
will be able to elect all of the Company's directors and control the management
of the Company. In addition, the increase in Brooke's ownership of Common Shares
will make it impossible for a third party to acquire control of the Company
without the consent of Brooke. This may discourage third parties from seeking to
acquire the Company and may depress the price of the Common Shares.
Representatives of Brooke, however, have given assurances to a special committee
of the Board that Brooke was not at the time planning any extraordinary
transactions involving the Company after the recapitalization.
At present, when a class vote of the Class A Senior Preferred Shares is
required, the vote must include the affirmative vote of either 80% of the
outstanding Class A Senior Preferred Shares or a simple majority of all the
Class A Senior Preferred Shares voting, excluding shares beneficially owned by
Brooke and related persons. Following the recapitalization, there will be no
provisions requiring the vote of a majority of holders other than Brooke.
Finally, as a result of this increase in beneficial ownership, Brooke will
be able to consolidate the financial statements of the Company into its
financial statements for accounting purposes (although not for tax purposes).
Brooke has informed the Company that it presently carries its investment in New
Valley at $0. Brooke has informed the Company that it believes that the plan of
recapitalization will increase its net equity by approximately $60 million based
on pro forma results at December 31, 1998.
DESCRIPTION OF THE WARRANTS
Under the plan of recapitalization, the Company will issue warrants. The
warrants will be issued in registered form under and be governed by a warrant
agreement between the Company and American Stock Transfer and Trust Company, as
warrant agent. Set forth 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
22
<PAGE> 28
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 proxy statement/prospectus is a part.
Exercise of Warrants. Each warrant will entitle the holder to purchase one
Common Share at an exercise price of $12.50 per share. The warrants may be
exercised on the effective date of the Company's registration statement covering
the underlying Common Shares and terminating five years thereafter. The Company
may redeem the warrants for $0.01 per warrant on 30 days' notice to the holders
if, any time after 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 may instead be exercised following
such notice and before redemption.
The warrants can be exercised by surrendering properly endorsed
certificates to the warrant agent together with full payment of the exercise
price for each Common Share as to which the warrant is 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.
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.
Other Matters. The Company is not required to issue any fractional
warrants or any fractional Common Shares upon the exercise of warrants or the
occurrence of adjustments under antidilution provisions. Instead, the Company
will pay cash.
Warrant certificates may be exchanged for new certificates of different
denominations, and may be exercised by presenting them at the office of the
warrant agent, American Stock Transfer & Trust Company, at 40 Wall Street, New
York, New York 10005.
The warrants do not confer voting or preemptive rights or any other rights
of a stockholder. The Company intends to seek to have the warrants quoted on
Nasdaq.
EXCHANGE OF STOCK CERTIFICATES; FRACTIONAL SECURITY PROCEDURES
After the recapitalization, holders of Common Shares and Preferred Shares
will be required to surrender their share certificates together with completed
transmittal documents to the exchange agent. Stockholders will then receive
certificates representing Common Shares and warrants and payment in respect of
any fractional interests. The Company does not intend to actually deliver
certificates representing the newly issued temporary preferred shares. After the
recapitalization, certificates representing outstanding shares will be deemed to
represent the securities into which they are changed under the plan of
recapitalization. However, the holders of old certificates will not be able to
trade or vote these securities until they receive the certificates representing
the Common Shares and warrants into which the old shares were changed.
No fractional securities, or certificates representing fractional
securities, will be issued under the plan of recapitalization. Instead, the
Company will deposit with the exchange agent a number of Common Shares and
warrants equal to the aggregate number of fractional interests, rounded
downwards to the next whole number. The exchange agent will attempt to sell
these securities in brokers' transactions, and will remit to each holder of
fractional interests its pro rata share of the aggregate proceeds received by
the exchange agent, net of commissions. The Company will not make any payment to
holders in respect of fractional interests. The Company will not determine or
influence the bid or sale price for such securities. The Company will pay the
exchange agent a flat fee to cover the costs of the fractional interest
procedures.
23
<PAGE> 29
There is a risk that there will not be a market for the bundled securities;
that the exchange agent will not succeed in selling the bundled securities; and
that the consideration, if any, received by a holder in exchange for its
fractional interest will not equal the corresponding percentage of the security
at prevailing market prices.
Because no fractional securities will be issued, the equity and voting
interest of a stockholder holding fractional interests will be reduced.
Stockholders holding fewer than three Series B Preferred Shares or ten Common
Shares before the recapitalization will cease to be stockholders of the Company,
and thus will no longer participate in future potential earnings and growth and
will not have the right to vote on any corporate matter.
Holdings of less than 100 Common Shares or warrants following the
recapitalization will be treated as odd-lot holdings. Such holdings may be more
difficult to sell, and, in general, brokerage commissions and other costs of
transactions in odd-lot holdings may be higher than the cost of transactions in
excess or in multiples of 100 Common Shares or warrants. Stockholders may wish
to consult with their brokers concerning such potential increased commissions
and other costs in respect to "odd-lot" holdings.
REGULATORY APPROVAL REQUIRED
Because Brooke's percentage ownership of the Common Shares after the
recapitalization will increase, the recapitalization may not occur until
notifications have been filed and certain information has been furnished to the
Federal Trade Commission and the Antitrust Division of the Department of Justice
by the Company and Brooke under the Hart-Scott-Rodino Act and the applicable
waiting period has terminated. On March 3, 1999, notification and report forms
were filed by Brooke and the Company under the Act. Early termination of the
waiting period under the Act was granted on March 23, 1999.
At any time before or after the recapitalization, despite termination of
the waiting period under the Act, the antitrust agencies or any state could take
action under applicable antitrust laws as they deem necessary or desirable in
the public interest. Such action could include seeking to enjoin the
recapitalization or seeking divestiture of assets of the Company or all or a
portion of Brooke's shares. Private parties may also take legal action under
applicable antitrust laws under certain circumstances.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion describes certain material federal income tax
considerations relating to the plan of recapitalization 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.
24
<PAGE> 30
Exchange of Existing Stock for Common Shares and Warrants
The exchange of Class A Senior Preferred Shares, Class B Preferred Shares
and outstanding Common Shares for Common Shares and warrants will be a
"tax-free" recapitalization reorganization described in Section 368(a)(1)(E) of
the Code. Thus, except as required by Code Section 305 (discussed in the
following paragraphs), under applicable Treasury Regulations no gain or loss
should be recognized by a stockholder who exchanges existing stock for Common
Shares and warrants. The basis of the Common Shares and warrants received by a
holder of existing stock immediately after the exchange will equal in the
aggregate the basis of the existing stock surrendered in the exchange, reduced,
if a stockholder receives cash in lieu of fractional shares or warrants, by the
basis of any existing stock deemed sold for cash, as described in the following
paragraph. The remaining aggregate basis will be allocated between the Common
Shares and the warrants in proportion to their respective fair market values.
The holding period for the Common Shares and the warrants received in the
exchange will include the holding period of the shares so exchanged, provided
the shares were held as capital assets by the holder at the effective time of
the recapitalization.
A stockholder that receives cash in lieu of fractional Common Shares or
fractional warrants that would otherwise be held as a capital asset should
recognize capital gain or loss in an amount equal to the difference between the
cash received and the stockholder's basis in the fractional Common Shares or
warrants, determined as if the stockholder actually received the fractional
shares or warrants and then sold them. Stockholders who have used the specific
identification method to identify their basis in shares of existing stock
exchanged in the recapitalization should consult their own tax advisors to
determine their basis in the post-recapitalization Common Shares and warrants
received in exchange therefor.
Dividends have accrued but have not been paid on the Class A Senior
Preferred Shares and the Class B Senior Preferred Shares. Regulations under Code
Section 305 provide that a recapitalization will result in a deemed corporate
distribution under Code Section 305(c) if a stockholder owning preferred stock
with dividends in arrears exchanges its stock for other stock and as a result
increases its proportionate interest in the assets or earnings and profits of
the corporation. An increase in a preferred stockholder's proportionate interest
occurs where the fair market value or the liquidation preference, whichever is
greater, of the stock received in the exchange immediately after the
recapitalization exceeds the issue price of the preferred stock. In that event,
the amount of the deemed distribution is the lesser of (a) the amount by which
the fair market value of the stock or the liquidation preference of the
Preferred Shares, whichever is greater, exceeds the issue price of the Preferred
Shares surrendered or (b) the amount of the dividends in arrears. It is likely,
though not certain, that stock for this purpose includes warrants, so that
holders of Preferred Shares may be deemed to receive distributions if the fair
market value of the Common Shares and warrants exceeds the issue price of the
Preferred Shares surrendered. The Common Shares and warrants have no liquidation
preference. The issue price of preferred stock is generally the fair market of
that stock at the time of its issuance. The Company expects that the fair market
value of the Common Shares and warrants received in exchange for Preferred
Shares will be less than the issue price of the Preferred Shares being exchanged
for the Common Shares and warrants. In that event, holders of Preferred Shares
will not be deemed to receive any distributions under Code Section 305(c). If,
contrary to the Company's expectations, holders of Preferred Shares are deemed
to receive a distribution, it is likely that the distribution will be treated as
a dividend to the extent of the Company's current and accumulated earnings and
profits, then as a return of capital to the extent of the holder's basis in the
Preferred Shares exchanged and then as capital gains. At December 31, 1998, the
Company had no accumulated earnings and profits. The Company is unable to
predict as to whether there will be any current earnings and profits in the
future or the year of exchange. The holder's basis in the Common Shares received
in the exchange will be reduced to the extent the distribution is treated as a
return of capital.
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
25
<PAGE> 31
the dilution of the interest of the warrant holders will generally not have that
effect. The warrants have certain unusual anti-dilution provisions and 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 gains.
Effect on the Company
The Company believes the recapitalization will not cause the Company to
incur any taxable income or gain. The recapitalization is likely to cause the
Company and Brooke to be treated as members of a single controlled group within
the meaning of Code Section 1563. Members of a controlled group must share
certain tax benefits, such as the benefit of lower brackets in the graduated tax
applicable to corporation. The effects of being required to share these tax
benefits should not be material.
ABSENCE OF APPRAISAL RIGHTS
Under Delaware law, no appraisal rights are available to stockholders in
the recapitalization.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 1998 have been prepared giving effect to the recapitalization
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 December 31, 1998 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," "THE PLAN OF RECAPITALIZATION," "BUSINESS -- New Valley Realty
Division -- Sale of Properties" and the Consolidated Financial Statements and
the related notes included elsewhere in this proxy statement/prospectus.
Since there will 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 Statement of Operations was 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 December 31, 1998 was prepared as if the recapitalization
had occurred on December 31, 1998.
The pro forma expenses do not reflect non-recurring costs directly
attributed to the plan of recapitalization which will be 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.
26
<PAGE> 32
NEW VALLEY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-----------------------------------
SALE OF OFFICE
HISTORICAL BUILDINGS RECAPITALIZATION PRO FORMA
---------- -------------- ---------------- -----------
<S> <C> <C> <C> <C>
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 on 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
expenses........................... 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
========== =========== ===========
Ratio of earnings to fixed charges
(c)................................... (--) (--)
========== ===========
</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.
(c) Earnings were inadequate to cover fixed charges by $104,293 and $27,896 for
the year ended December 31, 1998 on a historical and pro forma basis,
respectively.
27
<PAGE> 33
NEW VALLEY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------
PRO FORMA
ADJUSTMENTS
-----------
HISTORICAL RECAPITALIZATION PRO FORMA
---------- ---------------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 16,444 $ 16,444
Investment securities available for sale.................. 37,567 37,567
Trading securities owned.................................. 8,984 8,984
Restricted assets......................................... 1,220 1,220
Receivable from clearing brokers.......................... 22,561 22,561
Other current assets...................................... 4,675 4,675
--------- ---------
Total current assets............................... 91,451 91,451
--------- ---------
Investment in real estate, net.............................. 82,875 82,875
Furniture and equipment, net................................ 10,444 10,444
Restricted assets........................................... 6,082 6,082
Long-term investments, net.................................. 9,226 9,226
Investment in joint venture................................. 65,193 65,193
Other assets................................................ 7,451 7,451
--------- ---------
Total assets....................................... $ 272,722 $ 272,722
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Margin loan payable....................................... $ 13,088 $ 13,018
Current portion of notes payable and other long-term
obligations............................................. 2,745 2,745
Accounts payable and accrued liabilities.................. 32,047 $ 600(a) 32,647
Prepetition claims and restructuring accruals............. 12,364 12,364
Income taxes.............................................. 18,702 18,702
Securities sold, not yet purchased........................ 4,635 4,635
--------- --------- ---------
Total current liabilities.......................... 83,581 600 84,181
--------- --------- ---------
Notes payable............................................... 54,801 54,801
Other long-term obligations................................. 23,450 23,450
Commitments and contingencies...............................
Redeemable preferred shares................................. 316,202 (316,202)(b) --
Stockholders' equity (deficiency):
Cumulative preferred shares; liquidation preference of
$69,769; dividends in arrears, $165,856 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................................ 550,119 316,344(b) 866,463
Accumulated deficit....................................... (758,016) (600)(a) (758,616)
Unearned compensation on stock options.................... (475) (475)
Accumulated other comprehensive income.................... 2,685 2,685
--------- --------- ---------
Total stockholders' equity (deficiency)............ (205,312) 315,602 110,290
--------- ========= ---------
Total liabilities and stockholders' equity
(deficiency)..................................... $ 272,722 $ 272,722
========= =========
Book value per Common Share................................. $ (21.44) $ 4.73
========= =========
</TABLE>
- ---------------
(a) To record costs associated with the plan of recapitalization.
(b) To record the plan of recapitalization.
28
<PAGE> 34
SELECTED FINANCIAL DATA
The selected financial data presented in the following table for and as of
the end of 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 proxy
statement/prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Total revenues.............................................. $102,087 $114,568 $130,865 $ 67,730 $ 10,381
Total costs and expenses(a)................................. 127,499 139,989 149,454 66,064 26,146
-------- -------- -------- -------- ----------
(Loss) income from continuing operations before income
taxes, minority interests, and extraordinary items........ (25,412) (25,421) (18,589) 1,666 (15,765)
Income tax provision (benefit).............................. 6 186 300 292 (500)
Minority interests in loss from continuing operations of
consolidated subsidiaries................................. 2,089 1,347 4,241 -- --
-------- -------- -------- -------- ----------
(Loss) income from continuing operations before
extraordinary items....................................... (23,329) (24,260) (14,648) 1,374 (15,265)
Income from discontinued operations......................... 7,740 3,687 7,158 16,873 1,135,706
-------- -------- -------- -------- ----------
(Loss) income before extraordinary items.................... (15,589) (20,573) (7,490) 18,247 1,120,441
Extraordinary items(b)...................................... -- -- -- -- (110,500)
-------- -------- -------- -------- ----------
Net (loss) income........................................... (15,589) (20,573) (7,490) 18,247 1,009,941
Dividend requirements on preferred shares(c)................ (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............... $(96,553) $(89,048) $(65,160) $(13,714) $ 929,904
======== ======== ======== ======== ==========
Ratio of earnings to fixed charges(d)....................... (--) (--) (--) (--) (--)
======== ======== ======== ======== ==========
Per common and equivalent share(g):
Basic:
Loss from continuing operations before extraordinary
items................................................... $ (10.89) $ (9.68) $ (7.55) $ (3.20) $ (10.12)
Discontinued operations................................... .81 .38 .75 1.77 120.63
Extraordinary items....................................... -- -- -- -- (11.74)
Net (loss) income......................................... (10.08) (9.30) (6.80) (1.43) 98.77
Diluted:
Loss from continuing operations before extraordinary
items................................................... $ (10.89) $ (9.68) $ (7.55) $ (3.20) $ (9.00)
Discontinued operations................................... .81 .38 .75 1.77 107.36
Extraordinary items....................................... -- -- -- -- (10.45)
Net (loss) income......................................... (10.08) (9.30) (6.80) (1.43) 87.91
Dividends declared(c)....................................... -- -- -- -- --
Book value.................................................. $ (21.44) $ (13.61) $ (7.55) $ (3.18) $ (4.01)
BALANCE SHEET DATA:
Total assets................................................ $272,722 $441,391 $406,540 $385,822 $1,069,891
Long-term obligations....................................... 54,801 185,024 170,223 11,967 36,177
Prepetition claims(e)....................................... 12,364 12,611 15,526 33,392 619,833
Redeemable preferred shares(f).............................. 316,202 258,638 210,571 226,396 317,798
Stockholders' deficiency.................................... (205,312) (130,399) (72,364) (30,461) (38,444)
Working capital (deficiency)................................ 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 1998, 1997, 1996, 1995 and 1994 dividend requirements on preferred
share amounts include $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,
29
<PAGE> 35
are reflected as a deduction in arriving at income (loss) applicable to
Common Shares. No dividends on Preferred Shares were declared in 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) Earnings were inadequate to cover fixed charges by approximately $104,293,
$92,549, $76,297, $70,637 and $95,802, for and the years ended December 31,
1998, 1997, 1996, 1995 and 1994, respectively.
(e) Represents prepetition claims against the Company in its bankruptcy case.
See Note 17 to the Consolidated Financial Statements and "BUSINESS -- Legal
Proceedings."
(f) Includes cumulative preferred dividends on the redeemable Class A Senior
Preferred Shares of $219,068, $163,302, $117,117, $121,893 and $176,761 at
December 31, 1998, 1997, 1996, 1995 and 1994, respectively. See Note 13 to
the Consolidated Financial Statements.
(g) All per share data have been restated to reflect the one-for-20 reverse
stock split completed on July 29, 1996.
30
<PAGE> 36
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 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 is considering adopting the plan of
recapitalization. The plan of recapitalization, if implemented, will have a
significant effect on the Company's financial position and results of
operations.
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
31
<PAGE> 37
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.
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.
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.
Thinking Machines' payroll processing system is not Year 2000 compliant.
Thinking Machines has identified replacements for its payroll system and
anticipates being Year 2000 compliant by mid-1999. Thinking Machines converted
its accounting system to a Year-2000 compliant system in 1998. Thinking Machines
anticipates the costs of these systems were approximately $50.
32
<PAGE> 38
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 its Year 2000 plan will be complete by July 1999 and will cost
approximately $350. The cost includes hardware and software upgrades and
replacements as well as consulting and internal soft-dollar personnel costs.
Ladenburg anticipates that the remaining costs will be incurred by July 1999 and
the contingency planning phase will be completed in November 1999.
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 May 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, the 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>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Broker-dealer:
Revenues.................................................. $ 66,569 $56,197 $ 71,960
Expenses.................................................. 72,744 66,155 72,305
-------- ------- --------
Operating loss before taxes and minority interests........ $ (6,175) $(9,958) $ (345)
======== ======= ========
Real estate:
Revenues.................................................. $ 25,259 $27,067 $ 23,559
Expenses.................................................. 25,451 34,894 24,304
-------- ------- --------
Operating loss before taxes and minority interests........ $ (192) $(7,827) $ (745)
======== ======= ========
Computer software:
Revenues.................................................. $ 794 $ 3,947 $ 15,017
Expenses.................................................. 6,924 12,103 30,099
-------- ------- --------
Operating loss before taxes and minority interests........ $ (6,130) $(8,156) $(15,082)
======== ======= ========
Corporate and other:
Revenues.................................................. $ 9,465 $27,357 $ 20,329
Expenses.................................................. 22,380 26,837 22,746
-------- ------- --------
Operating loss (income) before taxes and minority
interests.............................................. $(12,915) $ 520 $ (2,417)
======== ======= ========
</TABLE>
THE YEAR 1998 COMPARED TO 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
33
<PAGE> 39
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 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.
34
<PAGE> 40
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.
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
35
<PAGE> 41
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 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.
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 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).
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
the Repin loan to BrookeMil. The proceeds from the Repin loan will be used by
BrookeMil for the acquisition and preliminary
36
<PAGE> 42
development of the Kremlin sites. Through December 31, 1998, Western Realty
Repin had advanced $19,067, of which $14,300 was funded by Apollo, under the
loan. 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 of BrookeMil. BrookeMil used a
portion of the proceeds to reimburse the Company for certain expenditures on the
Kremlin sites.
The development of Ducat Place III and the Kremlin sites will require
significant amounts of debt and other financing. The Company is 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 limit or delay 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 the first quarter of 1999, the
Company lent Thinking Machines and additional $1,250. In September 1998, the
Company made a one-year $950 loan to BGLS, an affiliate of the Company, bearing
interest at 14% per annum.
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 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.
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
37
<PAGE> 43
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 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
December 31, 1998, borrowings under the new credit agreement totaled $19,655.
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 December 31, 1998, 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.
38
<PAGE> 44
The Company expects that its available capital resources will suffice to
fund its currently anticipated cash requirements for 1999, including the
currently anticipated cash requirements of its operating businesses,
investments, commitments, and payments of principal and interest on its
outstanding indebtedness.
MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates, equity and commodity
prices, changes in the implied volatility of interest rates, foreign exchange
rates, equity and commodity prices and also changes in the credit ratings of
either the issuer or its related country of origin. Market risk is inherent in
both derivative and non-derivative financial instruments, and accordingly, the
scope of the Company's market risk management procedures extends beyond
derivatives to include all market risk sensitive financial instruments.
Current and proposed underwriting, corporate finance, merchant banking and
other commitments are subject to due diligence reviews by Ladenburg's senior
management, as well as professionals in the appropriate business and support
units involved. Credit risk related to various financing activities is reduced
by the industry practice of obtaining and maintaining collateral. The Company
monitors its exposure to counterparty risk through the use of credit exposure
information, the monitoring of collateral values and the establishment of credit
limits.
Equity Price Risk
Ladenburg maintains inventories as detailed in Notes 6 and 19 to the
Consolidated Financial Statements. The fair value of trading securities at
December 31, 1998 was $8,984 in long positions and $4,635 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 Ladenburg's financial
instruments at December 31, 1998 will not have a material adverse effect on the
consolidated financial position or results of operations of the Company.
The Company holds investment securities available for sale detailed in Note
5 to the Consolidated Financial Statements totaling $37,567 at December 31,
1998. Approximately 52% 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
detailed in Note 8 to the Consolidated Financial Statements. 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. Approximately 50% of the Company's
investments in limited partnerships represents an interest in a leveraged
partnership investing in high yield securities with a 4:1 debt to equity ratio.
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
39
<PAGE> 45
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.
40
<PAGE> 46
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.
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 with an initial capitalization of $90.5 million
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
41
<PAGE> 47
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.
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
December 31, 1998, borrowings under the new credit agreement totaled $19.7
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
December 31, 1998, Apollo had funded $32.4 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
42
<PAGE> 48
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 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 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 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 December 31, 1998, Western Realty Repin had advanced $19.1 million,
of which $14.3 million was funded by Apollo, under the Repin loan. This loan is
classified in other long-term obligations on the December 31, 1998 consolidated
balance sheet included in the Consolidated Financial Statements appearing
elsewhere in this proxy statement/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.
As of December 31, 1998, BrookeMil had invested $18 million in the Kremlin
sites and held approximately $252,000 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 and
$22 million in 2000 in the development of the property. BrookeMil funded $4.8
million of this amount in the first quarter of 1999.
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
Bellemead 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
43
<PAGE> 49
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 December 31, 1998, 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 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.
44
<PAGE> 50
OTHER ACQUISITIONS AND INVESTMENTS
Thinking Machines Corporation. Thinking Machines, the Company's 73% owned
subsidiary, designs, develops, markets and supports software offering
prediction-based management solutions under the name LoyaltyStream(TM) for
businesses such as financial services and telecommunications providers. This
software is designed to help reduce customer attrition, control costs, more
effectively cross-sell or bundle products or services and manage risks.
Incorporated in LoyaltyStream is 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.
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 the first quarter of 1999, the
Company lent Thinking Machines an additional $1.25 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 December 31, 1998, 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 $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 December 31, 1998, long-term investments
consisted primarily of investments in limited partnerships of $9.2 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 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
45
<PAGE> 51
- 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.
The bankruptcy plan places restrictions on and requires approvals for
certain transactions with Brooke and its affiliates to which the Company or a
subsidiary of, or entity controlled by, the Company is a party. Subject to
certain exceptions for transactions involving less than $1 million in a year or
pro rata distributions on the Company's capital stock, these transactions must
be approved by not less than two-thirds of the entire Board, including at least
one of the directors elected by the holders of the Preferred Shares. In
addition, the Board must obtain a fairness opinion from an investment banking
firm. Under the plan, whenever the Certificate of Incorporation provides for the
vote of the holders of the Class A Senior Preferred Shares, the vote must
include the affirmative vote of either 80% of the outstanding shares of the
class or a simple majority of all shares of the class voting, excluding shares
beneficially owned by Brooke. These provisions of the plan will terminate upon
consummation of the recapitalization.
When the bankruptcy plan became effective, the Company paid approximately
$550 million on account of allowed prepetition claims and emerged from
bankruptcy. At December 31, 1998, the Company's remaining accruals totaled
approximately $12.4 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.
EMPLOYEES
At December 31, 1998, the Company had approximately 460 full-time employees
of which approximately 379 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.
46
<PAGE> 52
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.
47
<PAGE> 53
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's current directors are listed under "NOMINATION AND ELECTION
OF DIRECTORS." The table below, together with accompanying text, presents
certain information regarding all current executive officers of the Company as
of the record date. 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 General 1998
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
"NOMINATION AND ELECTION OF 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
"NOMINATION AND ELECTION OF 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
"NOMINATION AND ELECTION OF 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 any class of its voting
securities as of the record date and as adjusted for the recapitalization. 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 percentage of each class is calculated based on the total number
48
<PAGE> 54
of shares of each class outstanding on the record date. The number of shares and
percentage of 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.
<TABLE>
<CAPTION>
AS ADJUSTED FOR
RECAPITALIZATION
AS OF RECORD DATE ------------------------------------------------
---------------------- NUMBER NUMBER
NUMBER OF PERCENTAGE OF PERCENTAGE OF PERCENTAGE
NAME AND ADDRESS TITLE OF CLASS SHARES OF CLASS SHARES OF CLASS WARRANTS OF CLASS
- ---------------- ------------------- --------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Bennett S. LeBow Class A Senior 618,326(1) 57.7% -- -- -- --
Brooke Group Ltd. Preferred Shares
BGLS Inc. Class B 250,885(1) 8.9% -- -- -- --
100 S.E. Second Street Preferred Shares
Miami, FL 33131 Common Shares 4,094,253(2) 42.3% 12,849,119 55.1(5) 3,069,664 17.2%
New Valley Holdings, Inc.
204 Plaza Centre
3505 Silverside Road
Wilmington, DE 19810
Canyon Capital Class A Senior 57,118(3) 5.3% -- -- -- --
Advisors LLC Preferred Shares
Mitchell R. Julis Common Shares -- -- 1,142,360 4.9%(6) 57,118 *
Joshua S. Friedman
R. Christian B. Evensen
Suite 200
9665 Wilshire Boulevard
Beverly Hills, CA 90212
ITT Industries, Inc. Common Shares 719,571(4) 7.5% 71,957 *(7) 215,871 1.2%
4 West Red Oak Lane
White Plains, NY 10604
</TABLE>
- ---------------
* The percentage beneficially owned does not exceed 1% of the class.
(1) Based on Amendment No. 16 to Schedule 13D dated January 30, 1996, filed
jointly by Brooke, BGLS, New Valley Holdings Inc., a direct wholly-owned
subsidiary of BGLS, and Bennett S. LeBow, and Amendment No. 1 to Schedule
13D dated January 30, 1996, relating to the Class B Preferred Shares, filed
jointly by the foregoing persons except for NV Holdings. According to the
filings, BGLS exercises sole voting power and sole dispositive power,
subject to the pledge described below, over 19,748 Common Shares (less than
1% of such class) and 250,885 Class B Preferred Shares (approximately 8.9%
of such class), and NV Holdings exercises sole voting power and sole
dispositive power, subject to the pledge, over 3,969,962 Common Shares
(approximately 41.5% of such class) and 618,326 Class A Senior Preferred
Shares (approximately 57.7% of such class). 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 will be subject to the pledge and must be
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) Of such Common Shares, 104,543 represent shares which could be acquired by
conversion of the Class B Preferred Shares held by BGLS, as to which Mr.
LeBow disclaims beneficial ownership.
(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) ITT Industries, Inc. (as the successor in interest to ITT Corporation)
reported that, as of May 15, 1991, it had sole power to vote or to direct
the voting and sole power to dispose or direct the disposition of 719,571
Common Shares.
49
<PAGE> 55
(5) 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 38.6%.
(6) 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 2.9%.
(7) Assuming exercise of the warrants held by the entity only, the percentage of
class would be 1.2%. Assuming exercise of all outstanding warrants, the
percentage of class would be .7%.
The following table sets forth, as of the record date and as adjusted for
the recapitalization, the beneficial ownership of the Company's equity
securities by each of the Company's directors and nominees, 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 is
calculated based on the total number of shares of each class outstanding on the
record date. 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.
<TABLE>
<CAPTION>
AS OF RECORD DATE
----------------------
NUMBER
OF PERCENTAGE
NAME AND ADDRESS TITLE OF CLASS SHARES OF CLASS
- ---------------- -------------- --------- ----------
<S> <C> <C> <C>
Bennett S. LeBow(1)(4)...... Class A Senior Preferred Shares 618,326 57.7%
Class B Preferred Shares 250,885 8.9%
Common Shares 4,094,253 42.3%
Howard M. Lorber(2)(4)...... Class A Senior Preferred Shares 36,000 3.4%
Class B Preferred Shares 32,332 1.1%
Common Shares 123,846 1.3%
Richard J. Lampen(4)........ Class A Senior Preferred Shares 0 --
Class B Preferred Shares 0 --
Common Shares 0 --
Ronald J. Kramer(5)......... Class A Senior Preferred Shares 0 --
Class B Preferred Shares 0 --
Common Shares 0 --
Arnold I. Burns(5).......... Class A Senior Preferred Shares 0 --
Class B Preferred Shares 0 --
Common Shares 0 --
Henry C. Beinstein(3)(5).... Class A Senior Preferred Shares 0 --
Class B Preferred Shares 34,500 1.3%
Common Shares 14,376 .1%
Barry W. Ridings(5)......... Class A Senior Preferred Shares 0 --
Class B Preferred Shares 0 --
Common Shares 0 --
Marc N. Bell(6)............. Class A Senior Preferred Shares 0 --
Class B Preferred Shares 0 --
Common Shares 0 --
J. Bryant Kirkland III(6)... Class A Senior Preferred Shares 0 --
Class B Preferred Shares 0 --
Common Shares 0 --
All directors and
executive.................. Class A Senior Preferred Shares 654,326 61.1%
officers as a group (9 Class B Preferred Shares 317,717 11.3%
persons)(1) Common Shares 4,232,475 43.1%
<CAPTION>
AS ADJUSTED FOR RECAPITALIZATION
-------------------------------------------------
NUMBER NUMBER
OF PERCENTAGE OF PERCENTAGE
NAME AND ADDRESS SHARES OF CLASS WARRANTS OF CLASS
- ---------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Bennett S. LeBow(1)(4)...... -- -- -- --
-- -- -- --
12,849,119 55.1%(7) 3,069,664 17.2%
Howard M. Lorber(2)(4)...... -- -- -- --
-- -- -- --
741,815 3.2%(8) 230,773 1.3%
Richard J. Lampen(4)........ 0 -- -- --
0 -- -- --
0 -- -- --
Ronald J. Kramer(5)......... 0 -- -- --
0 -- -- --
0 -- -- --
Arnold I. Burns(5).......... 0 -- -- --
0 -- -- --
0 -- -- --
Henry C. Beinstein(3)(5).... 0 -- -- --
-- -- -- --
11,500 *(9) 172,500 1.0%
Barry W. Ridings(5)......... 0 -- -- --
0 -- -- --
0 -- -- --
Marc N. Bell(6)............. 0 -- -- --
0 -- -- --
0 -- -- --
J. Bryant Kirkland III(6)... 0 -- -- --
0 -- -- --
0 -- -- --
All directors and
executive.................. -- -- -- --
officers as a group (9 -- -- -- --
persons)(1) 13,602,434 58.3%(10) 3,472,937 19.4%
</TABLE>
- ---------------
* The percentage beneficially owned does not exceed 1% of the class.
(1) Includes the BGLS shares, the NV Holding shares and 104,543 Common Shares
which could be acquired by conversion of the Class B Preferred Shares held
by BGLS, as to which Mr. LeBow disclaims beneficial ownership. See
footnotes (2) and (3) to the preceding table.
(2) Mr. Lorber possesses voting power over his Class A Senior Preferred Shares.
All of the Class B Preferred Shares and 110,000 of the Common Shares
represent shares that are subject to employee stock options exercisable
within 60 days of the record date. Of the Common Shares, 375 are held in a
Keogh Plan for the benefit of Mr. Lorber and 13,471 Common Shares could be
acquired by conversion of the Class B Preferred Shares.
50
<PAGE> 56
(3) Includes 2,500 Class B Preferred Shares held in an individual retirement
account for his spouse, as to which shares Mr. Beinstein disclaims
beneficial ownership. Includes 14,376 Common Shares which could be acquired
by conversion of the Class B Preferred Shares. Mr. Beinstein disclaims
beneficial ownership over 1,041 of these Common Shares, as such shares
relate to the Class B Preferred Shares beneficially owned by his spouse.
(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 38.6%.
(8) Assuming exercise of the warrants held by the named individual only, the
percentage of class would be 4.1%. Assuming exercise of all outstanding
warrants, the percentage of class would be 2.4%.
(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 63.4%. Assuming exercise of all outstanding warrants, the
percentage of class would be 41.4%.
BOARD OF DIRECTORS AND COMMITTEES
During 1998, the Board held two meetings. Each director attended at least
75% of the aggregate number of meetings of the Board and of each committee of
which he was a member held during such period. During that period, the Executive
Committee, currently composed of Messrs. LeBow, as Chairman, Lorber and Burns,
and the Audit Committee, currently composed of Messrs. Beinstein and Ridings,
each met once.
The Executive Committee exercises, in the intervals between meetings of the
Board, all the powers of the Board in the management and affairs of the Company.
The Audit Committee reviews, with the Company's independent auditors, the
scope and plan of the audit, the adequacy of internal controls and the
preparation of financial statements, and reports and makes recommendations to
the Board with respect to these matters.
In November 1994, the Board determined not to have a separate compensation
committee and to act on compensation matters as a committee of the whole. The
Company does not have a nominating committee.
In November 1998, the Board appointed a special committee, composed of
Messrs. Beinstein, Burns and Ridings, to review the terms of the plan of
recapitalization. The special committee met twice prior to the Board's adoption
of the plan of recapitalization.
51
<PAGE> 57
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 $100,000.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDERLYING
--------------------- STOCK OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARD($) (#)
- --------------------------- ---- ---------- -------- ---------- ----------
<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.
(4) Represents options to purchase 330,000 Common Shares and 97,000 Class B
Preferred Shares granted in 1996.
(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 $200,000 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.
52
<PAGE> 58
The following table sets forth certain information concerning unexercised
options held by the named executive officers as of December 31, 1998.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT DECEMBER 31, OPTIONS AT DECEMBER 31,
1998 1998
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Howard M. Lorber
Class B Preferred Shares...................... 32,332 64,668 $158,427* $316,873*
Common Shares................................. 110,000 220,000 -- --
</TABLE>
* Calculated using the closing price of $6.75 per Class B Preferred Share on
December 31, 1998 less the option exercise price.
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
53
<PAGE> 59
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, 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 and $128,000 during 1998. 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 and $128,000 during 1998, 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
54
<PAGE> 60
Consolidated Financial Statements for information concerning the transaction and
a pending lawsuit relating to the Company's purchase of the BML 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 $415,000 for 1996, $312,000 for 1997 and $502,000 for 1998.
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.
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 a provider
of telecommunication services.
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.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The policy of the Company regarding the compensation of its executive
officers is to maintain a total compensation program competitive with comparable
companies so as to attract and retain highly qualified personnel. The Company
does not currently have a compensation committee. The Board acts on compensation
matters as a committee of the whole.
In June 1995, the Company entered into employment agreements with Messrs.
LeBow and Lorber after it had engaged an independent executive compensation
advisor to advise as to their compensation. In addition, the Company had
appointed Messrs. Burns, McDermott and Ridings as members of an ad hoc committee
to
55
<PAGE> 61
review the advisor's report and make a recommendation to the Board on such
compensation. The committee evaluated various factors, including the roles of
Messrs. LeBow and Lorber in effecting recent material transactions entered into
by the Company, their prior services to the Company, and the compensation levels
of other senior executive officers at comparable companies performing comparable
services. In determining the appropriate compensation level for Mr. LeBow's
employment agreement, the Board, after a review of such matters, including the
recommendation of the committee and the report of the advisor, accepted the
recommendation of the committee. First, the Board noted that the bankruptcy plan
provides that the compensation paid to Mr. LeBow for services rendered in his
capacity as an officer or director of the Company could not exceed $2 million
per year, and that such restrictions were extensively discussed during the
Company's reorganization proceedings. The Board then determined, based upon
additional recommendations of the committee and the advisor's report, that:
- the Company had been relying on a temporary exemption from registration
under Rule 3a-2 under the Investment Company Act of 1940;
- implementation of the Company's strategy of acquisitions and dispositions
in connection would involve complex matters requiring dedicated senior
management;
- Mr. LeBow possessed substantial experience in acquiring and managing
operating companies;
- the proposed annual compensation level of $2 million for Mr. LeBow was
reasonable compared to the compensation levels of other chief executive
officers at comparable companies performing comparable services; and
- Because Mr. LeBow's compensation is limited to $2 million per year under
the Joint Plan, as indicated above, Mr. LeBow does not receive any bonus
or other payment based upon the Company's performance.
In determining the compensation levels of the Company's other executive
officers, the Board reviews such officer's prior experience, including in
acquiring and managing operating companies, and such officer's contribution to
the Company's strategy in that area. The Board also compares the salary of such
officer with the compensation levels of other executive officers performing
comparable services, both in the Company and of comparable companies. The
employment agreements of certain executive officers provide for the payment of
bonuses at the sole discretion of the Board. Based on various factors, Messrs.
Lorber, Lampen and Kirkland were awarded bonuses of $250,000, $250,000 and
$66,667, respectively, by the Board for 1998.
In 1993, Section 162(m) was added to the Code. This Section generally
provides that no publicly held company may deduct compensation in excess of $1
million paid in any taxable year to its chief executive officer or any of its
four other highest paid officers unless:
- the compensation is payable solely on account of the attainment of
performance goals;
- the performance goals are determined by a compensation committee of two
or more outside directors;
- the material terms under which compensation is to be paid are disclosed
to and approved by the stockholders of the Company; and
- the compensation committee certifies that the performance goals were met.
This limitation is applicable to compensation paid by the Company to
certain of its executive officers. The effect of the Code Section 162(m)
limitation is substantially mitigated by the Company's net operating losses,
although the amount of any deduction disallowed under Code Section 162(m) could
increase the Company's alternative minimum tax by up to 2% of such disallowed
amount.
56
<PAGE> 62
The foregoing report is submitted by the Board of Directors.
Henry C. Beinstein
Arnold I. Burns
Ronald J. Kramer
Richard J. Lampen
Bennett S. LeBow
Howard M. Lorber
Barry W. Ridings
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, as well as persons who own more than 10% of a registered
class of the Company's equity securities, to file reports of initial beneficial
ownership and changes in beneficial ownership on Forms 3, 4 and 5 with the SEC.
These persons are also required by SEC regulations to furnish the Company with
copies of all such reports that they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and representations that no other reports were
required, during the fiscal year ended December 31, 1998, all reporting persons
have timely complied with all filing requirements applicable to them.
PERFORMANCE GRAPH
The following graph compares the total annual return of the Common Shares,
the S&P 500 Index, the S&P SmallCap 600 Index, and the NASDAQ Composite Index
for the five years ended December 31, 1998. The graph assumes the value of the
investment in the Common Shares and each index was $100 on December 31, 1993 and
that all dividends were reinvested. No dividends were paid on Common Shares in
the years indicated below. Because of the Company's emergence in 1995 from
bankruptcy and its subsequent acquisitions and dispositions, the Company does
not believe that it can reasonably identify a "peer group". In lieu thereof, it
has included statistical information on companies in the S&P 500 Index, the S&P
SmallCap 600 Index and the NASDAQ Composite Index.
(NEW VALLEY PERFORMANCE GRAPH)
<TABLE>
<CAPTION>
S&P
Measurement Period New Valley SmallCap NASDAQ
(Fiscal Year Covered) Corporation S&P 500 600 Composite
<S> <C> <C> <C> <C>
12/93 100 100 100 100
12/94 300 101 97 97
12/95 865 139 126 136
12/96 210 170 153 168
12/97 80 226 192 205
12/98 75 291 190 287
</TABLE>
57
<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
GENERAL
Prior to the completion of the plan of recapitalization, the authorized
capital stock of the Company consists of 850,000,000 Common Shares, 2,000,000
Class A Senior Preferred Shares, 12,000,000 Class B Preferred 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, Class A Senior Preferred Shares and Class B Preferred 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 document forms a part.
Each outstanding share of the Company's capital stock is fully paid and
nonassessable.
CLASS A SENIOR PREFERRED SHARES
Dividends
Holders of Class A Senior Preferred Shares are entitled to receive, when
declared by the Board, but only out of funds legally available therefor,
cumulative cash dividends presently payable at the rate of 19% per annum.
Dividends are payable quarterly in cash, on January 1, April 1, July 1 and
October 1, and are cumulative and compounding. The Company may not pay dividends
on any junior stock unless all prior dividends accumulated on the Class A Senior
Preferred Shares have been paid or declared and set aside for payment. As of
March 31, 1999, the accrued dividends per share were $218.94 and the total
dividend arrearage on the Class A Senior Preferred Shares was $234.6 million.
Redemption
The Class A Senior Preferred Shares must be redeemed on January 1, 2003 at
$100 per share plus dividends accrued to the redemption date. The Class A Senior
Preferred Shares are redeemable, at the option of the Board, in whole or in
part, on not more than 60 and not less than 30 days' notice, at $100 per share
plus dividends accrued to the redemption date.
Ranking
The Class A Senior Preferred Shares rank senior to the Class B Preferred
Shares, the Class C Preferred Shares and Common Shares on liquidation and in
respect of dividends.
Voting Rights
Each Class A Senior Preferred Share is entitled to .4645 of a vote per
share. The Class A Senior Preferred Shares vote on all matters on which the
Common Shares may vote, including elections of directors, voting together as a
single class with the holders of Common Shares and holders of any other class or
series which may similarly be entitled.
The vote of the holders of two-thirds of the outstanding Class A Senior
Preferred Shares, voting as a single class, is required:
- to authorize or create or increase the authorized number of shares of any
class or any security convertible into shares of any class ranking above
the Class A Senior Preferred Shares as to dividends or distribution of
assets,
- to change the rights of the Class A Senior Preferred Shares in a manner
harmful to the holders of those shares, or
- to authorize the merger of the Company if such merger would affect the
Class A Senior Preferred Shares in a way substantially similar to any of
the preceding actions.
58
<PAGE> 64
In addition, the vote of the holders of a majority of the outstanding Class
A Senior Preferred Shares is required to increase authorized Class A Senior
Preferred Shares or create or increase the authorized number of any class of
shares or any security convertible into shares of any class ranking equally with
the Class A Senior Preferred Shares as to distributions.
Unless dividends for all past dividend periods have been paid and the
current dividend has been declared and a sum sufficient for payment set apart,
consent of the holders of at least two-thirds of the outstanding Class A Senior
Preferred Shares is required for the Company to purchase or redeem less than all
of the outstanding Class A Senior Preferred Shares.
The bankruptcy plan requires that, whenever a vote of the holders of Class
A Senior Preferred Shares is required, then such vote must include the
affirmative vote of either 80% of the outstanding shares or a simple majority of
all shares of that class voting, excluding shares beneficially owned by Brooke
and certain related persons.
Failure to Pay Dividends
If dividends on the Class A Senior Preferred Shares are in default in an
amount equal to at least six quarterly dividends, or if the Class A Senior
Preferred Shares are not redeemed when required, the number of directors must be
increased by two and the holders of the Class A Senior Preferred Shares have a
right to elect the two additional directors. This right expires when these
defaults have been cured and dividends for the then current quarterly period
have been declared and set apart. The Company has omitted dividends on the Class
A Senior Preferred Shares since the beginning of the fourth quarter of 1988. As
a result, commencing at the Company's 1990 annual meeting, the holders of the
Class A Senior Preferred Shares, voting as a class, have elected two directors
to the Board.
CLASS B PREFERRED SHARES
Dividends
Holders of Class B Preferred Shares are entitled to receive, when declared
by the Board, but only out of legally available funds, cumulative cash dividends
payable at the rate of $3 per share per annum. Dividends are payable quarterly
in cash, on January 1, April 1, July 1 and October 1, and are cumulative and
compounding. The Company may not pay dividends on any junior stock unless all
prior dividends accumulated on the Class B Preferred Shares have been declared
and set aside for payment. As of March 31, 1999, the accrued dividends per share
are $61.96 and the total dividend arrearage on the Class B Preferred Shares is
$172.9 million.
Optional Redemption
The Company may redeem the Class B Preferred Shares at any time in whole or
in part on not more than 60 nor less than 30 days' notice, at $25 per share plus
dividends accrued to the redemption date. However, the Company may not redeem
the shares unless the closing price of Common Shares equals at least 140% of the
conversion price during any 20 trading days within a period of 30 consecutive
trading days ending on a date not more than ten days before the date of notice
of redemption.
Ranking
The Class B Preferred Shares rank junior to the Class A Senior Preferred
Shares, equally with the Class C Preferred Shares, and senior to the Common
Shares.
Liquidation
In the event of any liquidation, the holders of Class B Preferred Shares
are entitled, before any distribution to the holders of Common Shares, to an
amount equal to $25 per share, together with accrued dividends to the payment
date whether or not earned or declared.
59
<PAGE> 65
Conversion
The Class B Preferred Shares are convertible into Common Shares, at a
conversion price of $60 per share, based on the $25 per share liquidation
preference. The conversion price is subject to adjustment in certain events,
including:
- payment of dividends in Common Shares on any class of capital stock of
the Company,
- the issuance to all holders of Common Shares of rights or warrants
entitling them to subscribe for or purchase Common Shares at a price per
share less than the current market price,
- subdivisions, combinations and reclassifications of Common Shares, and
- distributions to all holders of Common Shares of evidences of
indebtedness of the Company or assets including securities, other than
Common Shares, rights or warrants referred to above and dividends and
distributions paid in cash out of surplus.
Adjustments need not be made unless they result in a cumulative change in
the conversion price of at least 1%. The Company is permitted to make other
reductions in the conversion price it considers advisable so that an event
treated for Federal income tax purposes as a dividend of stock or stock rights
will not be taxable to the recipients. In certain mergers or transfers of
substantially all of the assets of the Company, each Class B Preferred Share
would become convertible only into the kind and amount of securities and other
property receivable in the merger or transfer by a holder of the number of
Common Shares into which such Class B Preferred Share could have been converted
immediately before such merger or transfer. Fractional Common Shares will not be
issued upon conversion, but instead the Company will pay a cash adjustment based
on market price.
Voting Rights
Each Class B Preferred Share has .05 of a vote. The Class B Preferred
Shares vote on all matters on which Common Shares may vote, including elections
of directors, voting together as a single class with the holders of Common
Shares and holders of any other class which may similarly be entitled to vote.
The affirmative vote of the holders of two-thirds of the outstanding Class
B Preferred Shares, voting as a single class, is required:
- to authorize or create or increase the authorized number of shares of any
class or any security convertible into shares of any class ranking above
the Class B Preferred Shares as to distribution,
- to change the rights of the Class B Preferred Shares in a manner harmful
to the holders, or
- to authorize the merger of the Company if such merger would affect the
Class B Preferred Shares in a way substantially similar to the preceding
actions.
In addition, the vote of the holders of a majority of the outstanding Class
B Preferred Shares is required to approve any increase in the authorized number
of Class B Preferred Shares or the creation or increase in the authorized number
of shares of any class of shares or any security convertible into shares of any
class ranking equally with the Class B Preferred Shares as to dividends or
distribution of assets.
Unless dividends for all past dividend periods have been paid and the
current dividend has been paid or declared and a sum sufficient for payment set
apart, consent of the holders of at least two-thirds of the outstanding Class B
Preferred Shares is required for the Company to purchase or redeem less than all
of the Class B Preferred Shares.
Failure to Declare or Pay Dividends
If dividends on the Class B Preferred Shares are in default in an amount
equal to at least six quarterly dividends, the number of directors constituting
the Board is increased by two and the holders of the Class B Preferred Shares,
and other classes of preferred stock similarly entitled, voting together as a
single class, may elect two additional directors. This right expires when such
defaults have been cured and dividends for the
60
<PAGE> 66
then current quarterly period have been declared and set apart. The Company has
omitted dividends on the Class B Preferred Shares since the beginning of the
fourth quarter of 1988. As a result, commencing at the Company's 1990 Annual
Meeting, the holders of the Class B Preferred Shares, voting together with the
Class A Senior Preferred Shares as a single class, have elected two directors to
the Board.
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 junior to
the Class A Senior Preferred Shares, equally with the Class B Preferred Shares,
and 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,
including the Preferred Shares, and limitations on the payment of dividends
contained in certain of the Company's outstanding debt instruments. Holders of
Preferred Shares are entitled to dividends for the current and all prior
quarterly periods before any dividend may be declared upon Common Shares or any
other payment on account of, or the setting aside of money for, the purchase of
Common Shares.
Liquidation Rights
On liquidation of the Company, each Preferred Share is entitled, before any
distribution on Common Shares, to receive its liquidation preference together
with all cumulative dividends for the current and all prior quarterly periods.
After provision has been made for payment of the stated amounts payable upon
liquidation on the Preferred Shares, the remaining net assets of the Company
will be distributed pro rata to the holders of Common Shares.
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 Company's Shares
The 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 for the Common Shares, NVLYA for the Class A
Senior Preferred Shares and NVLYB for the Class B Preferred Shares.
The following table sets forth, for the calendar quarters indicated, the
range of per share prices for the Class A Senior Preferred Shares, Class B
Preferred Shares and 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, the Class A Senior Preferred
Shares or the Class B Preferred Shares for the calendar quarters indicated on
the following table, and the Company does not currently intend to pay a dividend
on the Common Shares in the foreseeable future. On April 9, 1999, the last
trading price as quoted on the NASD OTC Electronic Bulletin Board for the Class
A Senior Preferred Shares was $84 per share, for the Class B Preferred Shares
was $3 3/8 per share, and for the Common Shares was $13/32 per share.
61
<PAGE> 67
CLASS A SENIOR PREFERRED SHARES
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1999
Second Quarter (through April 9)............................ $ 86.00 $ 84.00
First Quarter............................................... 110.00 84.00
1998
Fourth Quarter.............................................. 100.00 51.00
Third Quarter............................................... 88.00 45.00
Second Quarter.............................................. 96.00 60.00
First Quarter............................................... 99.00 85.00
1997
Fourth Quarter.............................................. 98.25 87.75
Third Quarter............................................... 96.00 85.00
Second Quarter.............................................. 115.00 96.00
First Quarter............................................... 122.00 102.00
</TABLE>
CLASS B PREFERRED SHARES
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1999
Second Quarter (through April 9)............................ $3.63 $3.38
First Quarter............................................... 8.00 2.50
1998
Fourth Quarter.............................................. 7.00 1.75
Third Quarter............................................... 2.75 1.75
Second Quarter.............................................. 5.63 2.15
First Quarter............................................... 6.50 3.25
1997
Fourth Quarter.............................................. 4.89 3.00
Third Quarter............................................... 6.00 3.50
Second Quarter.............................................. 9.00 5.00
First Quarter............................................... 9.75 5.75
</TABLE>
COMMON SHARES
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1999
Second Quarter (through April 9)............................ $ .44 $ .41
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>
62
<PAGE> 68
COMPARISON OF STOCKHOLDER RIGHTS
CLASS A SENIOR PREFERRED SHARES COMPARED WITH COMMON SHARES AND WARRANTS
Dividends
Each Class A Senior Preferred Share entitles the holder to cumulative cash
dividends at a fixed rate of 19% per annum before distributions are made on the
Class B Preferred Shares or the Common Shares, and dividend arrearages of
$218.94 per share as of March 31, 1999. Each holder of Common Shares is entitled
to dividends only when and as declared by the Board, without limit on the amount
but subject to the rights of any shares ranking senior to the Common Shares. The
holder of a warrant is not entitled to receive any dividends.
Redemption
The Class A Senior Preferred Shares are redeemable at their liquidation
preference plus accrued dividends at any time at the option of the Board and
must be redeemed on January 1, 2003. The Common Shares are not redeemable under
any circumstances. The warrants are redeemable at the option of the Company at
any time following the third anniversary of the effective time of the plan of
recapitalization for $0.01 per warrant if the market price of the Common Shares
exceeds $12.50 per share for a specified period. The warrants will expire five
years from the effective date of the registration statement covering the
underlying Common Shares.
Liquidation Rights
In the event of liquidation, each holder of Class A Senior Preferred Shares
is entitled to receive a fixed liquidation preference equal to $100 per share,
together with accrued dividends, before distributions are made on the Class B
Preferred Shares or the Common Shares. Each holder of Common Shares will receive
a pro rata share of any remaining net assets of the Company only after all
required amounts are paid on all shares ranking senior to the Common Shares. A
holder of a warrant has no right to receive payment upon liquidation.
Voting Rights
Each holder of Class A Senior Preferred Shares is entitled to .4645 of a
vote per share and is entitled to vote together with the holders of Common
Shares as a single class upon all matters which holders of Common Shares are
entitled to vote. Each holder of Common Shares is entitled to one vote per share
for all purposes. A holder of a warrant is not entitled to vote on any matter.
Certain actions require either a majority vote or the vote of two-thirds of
the outstanding Class A Senior Preferred Shares voting as a class. Also, under
the bankruptcy plan, whenever a class vote of the holders of Class A Senior
Preferred Shares is required, the vote must include the affirmative vote of
either 80% of the outstanding shares of that class or a simple majority of all
shares of that class voting, excluding shares beneficially owned by Brooke and
certain related persons. The holders of Common Shares do not have such special
voting rights. Also, the holders of the Class A Senior Preferred Shares may
elect additional directors of the Company in certain circumstances where
dividends have not been paid, whereas the Common Shares holders have no such
special right.
CLASS B PREFERRED SHARES COMPARED WITH COMMON SHARES AND WARRANTS
Dividends
Each holder of Class B Preferred Shares is entitled to cumulative cash
dividends at $3 per annum, and accrued and unpaid dividend arrearage of $61.96
per share, as of March 31, 1999. Each holder of Common Shares is entitled to
cash dividends only when and as declared by the Board, without limitation on the
amount but subject to the rights of any shares ranking senior to the Common
Shares. The holder of a warrant is not entitled to receive any dividends.
63
<PAGE> 69
Redemption
The Class B Preferred Shares are redeemable at the option of the Company at
$25.00 per share plus accrued dividends if the market price of the Common Shares
exceeds a specified amount, but otherwise remain outstanding indefinitely. The
Common Shares are not redeemable under any circumstances. The warrants are
redeemable at the option of the Company at any time following the third
anniversary of the effective time of the plan of recapitalization for $0.01 per
warrant if the market price of the Common Shares exceeds $12.50 per share for a
specified period. The warrants will expire five years from the effective date of
the registration statement covering the underlying Common Shares.
Liquidation Rights
In liquidation, each holder of Class B Preferred Shares is entitled to
receive a liquidation preference of $25 per share, together with accrued
dividends, before distributions are made on the Common Shares. Each holder of
Common Shares will receive a pro rata share of any remaining net assets of the
Company only after all required amounts are paid on all shares ranking senior to
the Common Shares. A holder of a warrant has no right to receive payment upon
liquidation.
Voting Rights
Each holder of Class B Preferred Shares is entitled to .05 of a vote per
share and may vote on all matters on which the holders of Common Shares may
vote. Certain actions require either a majority vote or the vote of two-thirds
of the outstanding Class B Preferred Shares. Each holder of Common Shares is
entitled to one vote per share for all purposes and have no special voting
rights. A holder of a warrant is not entitled to vote on any matters.
Conversion
The Class B Preferred Shares are convertible into Common Shares at a
conversion price of $60 per share based on the $25 per share liquidation value
and otherwise remain outstanding indefinitely, unless redeemed when the Common
Shares have traded at certain levels. The Common Shares have no conversion
rights. The warrants are exercisable at $12.50 per share during a five-year
period commencing on the effective date of the Company's Registration Statement
covering the underlying Common Shares.
CURRENT COMMON SHARES COMPARED WITH NEW COMMON SHARES AND WARRANTS
The Common Shares that will be issued under the plan of recapitalization
will be identical to the Common Shares currently outstanding, except that a
stockholder's holding of Common Shares will be reduced to one-tenth of the
number of Common Shares currently held.
STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING
Proposals of security holders to be included in the Company's proxy
statement for the 2000 annual meeting of stockholders of the Company must be
received by the Company at its principal executive offices, 100 S.E. Second
Street, Miami, Florida 33131, Attention: Marc N. Bell, Secretary, on or before
December 20, 1999.
If the Company has received written notice on or before March 5, 2000 that
a stockholder intends to present a matter at the 2000 annual meeting, the
Company may not exercise discretionary voting authority on the matter unless it
discloses in its proxy statement the nature of the proposal and how it intends
to exercise its authority.
64
<PAGE> 70
OTHER MATTERS
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1998 WILL BE SENT WITHOUT CHARGE TO ANY SECURITY HOLDER OF THE
COMPANY ON WRITTEN REQUEST ADDRESSED TO THE COMPANY'S SECRETARY AT NEW VALLEY
CORPORATION, 100 S.E. SECOND STREET, MIAMI, FLORIDA 33131.
The cost of the solicitation of proxies will be borne by the Company. The
Company has engaged Georgeson & Company, Inc., Wall Street Plaza, New York, NY
10005, telephone: 212-440-9800, to assist with the solicitation of proxies for
an estimated fee of $8,000, plus reimbursement of out-of-pocket expenses.
Furthermore, Pennsylvania Merchant Group, financial advisor to the Company, may
solicit proxies from stockholders of the Company or may assist the Company in
its solicitation efforts. No additional compensation, above that paid to
Pennsylvania Merchant Group for rendering its fairness opinion and providing
other financial advisory services to the Company, will be paid to Pennsylvania
Merchant Group for its solicitation of proxies, other than reasonable
out-of-pocket expenses. In addition to the use of the mails, directors, officers
and regular employees of the Company may, without additional compensation,
solicit proxies personally or by telephone. The Company will reimburse brokerage
houses, banks and other custodians, nominees and fiduciaries for expenses
incurred in forwarding soliciting material to the beneficial owners of shares.
LEGAL MATTERS
The legality of the Common Shares and warrants to be issued under the plan
of recapitalization, as well as certain tax matters concerning the plan of
recapitalization, 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 proxy statement/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.
65
<PAGE> 71
NEW VALLEY CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
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-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997
and 1996............................................... F-7
Notes to Consolidated Financial Statements................ F-8
</TABLE>
F-1
<PAGE> 72
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 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> 73
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> 74
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)
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-4
<PAGE> 75
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>
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-5
<PAGE> 76
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-6
<PAGE> 77
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................................... (36,380) -- --
Capital contribution...................................... (60,169) -- --
-------- -------- ---------
Net cash contributed to joint venture..................... $ (442) $ -- --
======== ======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-7
<PAGE> 78
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
F-8
<PAGE> 79
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
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
F-9
<PAGE> 80
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
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.
F-10
<PAGE> 81
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
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.
F-11
<PAGE> 82
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
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
F-12
<PAGE> 83
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 "BML Shares")
of the common stock of BrookeMil Ltd. ("BML") 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 BML Shares comprise 99.1% of
the outstanding shares of BML, a real estate development company in Russia. The
Note, which was collateralized by the BML Shares, was paid during 1997.
BML 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, BML 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, BML 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.
In connection with the Purchase Agreement, certain specified liabilities of
BML aggregating approximately $40,000 remained as liabilities of BML after the
purchase of the BML 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 BML 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, BML 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.
F-13
<PAGE> 84
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 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 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 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. 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-14
<PAGE> 85
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 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 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 BML, 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 BML.
Such distributions shall be applied first to pay the principal of the Repin Loan
and then as contingent participating interest on the Repin Loan. Any rights of
payment on the Repin Loan are subordinate to the rights of all other creditors
of BML. BML used a portion of the proceeds of the Repin Loan to repay the
Company for certain expenditures on the Kremlin Sites previously incurred. The
Repin Loan is due and payable upon the dissolution of BML and is collateralized
by a pledge of the Company's shares of BML.
As of December 31, 1998, BML 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, BML 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. BML funded $4,800 of this amount in the
first quarter of 1999.
F-15
<PAGE> 86
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
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
F-16
<PAGE> 87
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
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>
F-17
<PAGE> 88
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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>
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.
F-18
<PAGE> 89
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
\ 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-19
<PAGE> 90
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. COMMITMENT AND CONTINGENCIES
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 BML 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 BML and
Western Realty Ducat may be significantly affected by these factors for the
foreseeable future.
F-20
<PAGE> 91
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Russian Taxation: Russian Taxation is Subject to Varying interpretations
and constant changes. Furthermore, the interpretation of tax legislation by tax
authorities as applied to the transactions and activity of BML and Western
Realty Ducat may not coincide with that of management. As a result, transactions
may be challenged by tax authorities and BML and Western Realty Ducat may be
assessed additional taxes, penalties and interest, which can be significant.
Management regularly reviews the Company's taxation compliance with
applicable legislation, laws and decrees and current interpretations and from
time to time potential exposures are identified. At any point in time a number
of open matters may exist, however, management believes that adequate provision
has been made for all material liabilities. Tax years remain open to review by
the authorities for six years.
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.
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.
F-21
<PAGE> 92
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
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>
F-22
<PAGE> 93
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 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.
F-23
<PAGE> 94
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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-24
<PAGE> 95
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.
F-25
<PAGE> 96
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
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 BML 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
F-26
<PAGE> 97
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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>
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.
F-27
<PAGE> 98
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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-28
<PAGE> 99
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-29
<PAGE> 100
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Thinking Machines Corporation:
We have audited the accompanying consolidated balance sheets 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 for the period from February 8, 1996
(inception) to December 31, 1996. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thinking
Machines Corporation and subsidiaries as of December 31, 1997, and the results
of their operations and their cash flows for the year ended December 31, 1997
and the period from February 8, 1996 (inception) to December 31, 1996, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has been unable to generate significant
revenue and has incurred recurring losses from its operations. These factors,
among others, as described in Note 1, create substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 23, 1998
F-30
<PAGE> 101
(PENNSYLVANIA MERCHANT GROUP LETTERHEAD) APPENDIX A
April 14, 1999
Board of Directors
New Valley Corporation
100 S.E. Second Street
Miami, FL 33131
Gentlemen:
Pennsylvania Merchant Group ("PMG") has been retained to provide certain
financial advisory services to the Board of Directors (the "Board") of New
Valley Corporation ("New Valley") in connection with the proposed
recapitalization of New Valley (the "Recapitalization") pursuant to which (i)
each share of Class A Senior Preferred Shares will be exchanged and redeemed for
20 Common Shares of New Valley and one warrant to purchase Common Shares, having
terms described in the Proxy Statement relating to the Recapitalization (the
"Proxy"), (ii) each share of Class B Preferred Shares will be exchanged and
redeemed for 1/3 Common Shares and five warrants to purchase Common Shares, and
(iii) New Valley intends to reclassify each of the then outstanding Common
Shares into .1 Common Shares and .3 warrants. You have requested our opinion as
to the fairness, from a financial point of view, to the shareholders of New
Valley of the consideration to be received by them in the Recapitalization.
In conducting our analysis and arriving at our opinion as expressed herein,
we have held discussions with certain senior officers of New Valley concerning
the business, operations and prospects of New Valley and its subsidiaries
Ladenburg Thalmann & Co. Inc. ("Ladenburg") and BrookeMil Ltd. ("BML"), as well
as its United States real estate division ("New Valley Realty" and collectively,
the "Businesses") and have also reviewed and analyzed, certain publicly
available business and financial information relating to New Valley as well as
certain financial forecasts and other data for the Businesses which were
provided to or otherwise discussed with us by the management of New Valley. We
also reviewed certain reports prepared by management of New Valley relating to
securities of certain publicly-traded and privately-held companies held by New
Valley, as well as New Valley's interests in certain limited partnerships. We
also reviewed, among other things, current and historical market prices and
trading volumes of the Class A Senior Preferred Shares, the Class B Preferred
Shares and the Common Shares. Based upon this information, we have made certain
estimates as to the trading prices of the Common Shares immediately following
the Recapitalization. We also analyzed certain financial, stock market and other
publicly available information relating to the businesses of other companies
whose operations we considered relevant in evaluating those of New Valley. In
addition to the foregoing, we conducted such other analyses and examinations and
considered such other financial, economic and market criteria as we deemed
appropriate in arriving at our valuation.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed by
or discussed with us. With respect to financial forecasts, appraisals and other
information and data provided to or otherwise reviewed by or discussed with us,
we have been advised by the management of New Valley that such information and
data were reasonably prepared on bases reflecting the best currently available
estimates and judgments of the management of New Valley. We have not made any
independent evaluations or appraisals of the assets, liabilities (contingent or
otherwise) or reserves of New Valley nor have we made any physical inspection of
the properties or assets of New Valley. Our opinion is
Four Falls Corporate Center - West Conshohocken, Pennsylvania 19428-2961 -
610-260-6200 - 800-338-2778
<PAGE> 102
necessarily based upon information available to us, and financial, stock market
and other conditions and circumstances existing and disclosed to us, as of the
date hereof.
Based on, and subject to, the foregoing, it is our opinion as investment
bankers, that the consideration to be received by the shareholders in the
Recapitalization is, from a financial point of view, fair. In arriving at our
opinion, we have not taken into account any tax considerations regarding the
Recapitalization and their potential effects on the financial interests of such
shareholders.
PMG has been engaged to render certain financial advisory services to New
Valley in connection with the proposed recapitalization and will receive a fee
for our services, a significant portion of which is contingent upon the delivery
of this opinion. In the ordinary course of our business, we and our affiliates
may actively trade or hold the securities of New Valley for our own account or
for the account of our customers and, accordingly, may at any time hold a long
or short position in such securities. Our opinion may not be published or
otherwise used or referred to, nor shall any public reference to PMG be made,
without our prior written consent, except that such opinion may be included in
the Proxy.
Very truly yours,
PENNSYLVANIA MERCHANT GROUP
