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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 1-2493
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NEW VALLEY CORPORATION
(Exact Name Of Registrant As Specified In Its Charter)
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DELAWARE 13-5482050
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
100 S.E. SECOND STREET, MIAMI, FLORIDA 33131
(Address of principal executive offices) (Zip Code)
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(305) 579-8000
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Shares, $.01 par value
Warrants to Purchase Common Shares, $.01 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 24, 2000 was approximately $35,920,780. Directors and
officers and ten percent or greater stockholders are considered affiliates for
purposes of this calculation but should not necessarily be deemed affiliates for
any other purpose.
At March 24, 2000, there were 23,159,862 Common Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III (Items 10, 11, 12 and 13) from the definitive Proxy Statement for
the 2000 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission no later than 120 days after the end of the registrant's
fiscal year covered by this report.
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TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 7
Item 3. Legal Proceedings........................................... 7
Item 4. Submission of Matters to a Vote of Security-Holders;
Executive
Officers of the Registrant................................ 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 10
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations..................................... 12
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 21
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 21
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 22
Item 11. Executive Compensation...................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 22
Item 13. Certain Relationships and Related Transactions.............. 22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 23
SIGNATURES............................................................ 57
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PART I
ITEM 1. BUSINESS
GENERAL
New Valley Corporation, a Delaware corporation, is engaged in the
investment banking and brokerage business through its ownership of Ladenburg,
Thalmann & Co. Inc., in real estate development in Russia through BrookeMil
Ltd., Western Realty Development LLC and Western Realty Repin LLC and in
investment in Internet-related businesses. The principal executive office of New
Valley is located at 100 S.E. Second Street, Miami, Florida 33131, and the
telephone number is (305) 579-8000.
New Valley was originally organized under the laws of New York in 1851 and
operated for many years under the name "Western Union Corporation". In 1991,
bankruptcy proceedings were commenced against New Valley. In January 1995, New
Valley emerged from bankruptcy. As part of the bankruptcy plan, New Valley sold
the Western Union money transfer and messaging services businesses and all
allowed claims in the bankruptcy were paid in full.
PLAN OF RECAPITALIZATION
New Valley consummated a plan of recapitalization on June 4, 1999,
following approval by New Valley's stockholders. Pursuant to the plan of
recapitalization:
- each $15.00 Class A Increasing Rate Cumulative Senior Preferred Share
($100 liquidation), $.01 par value, was reclassified into 20 Common
Shares and one Warrant exerciseable for five years,
- each $3.00 Class B Cumulative Convertible Preferred Share, $.10 par
value, was reclassified into 1/3 of a Common Share and five Warrants, and
- each outstanding Common Share was reclassified into 1/10 of a Common
Share and 3/10 of a Warrant.
The recapitalization had a significant effect on New Valley's financial
position and results of operations. As a result of the exchange of the
outstanding preferred shares for common shares and warrants in the
recapitalization, New Valley's stockholders' equity increased by $343.4 million
from the elimination of the carrying value and dividend arrearages on the
redeemable preferred stock. Furthermore, the recapitalization resulted in the
elimination of the on-going dividend accruals on the existing redeemable
preferred shares of New Valley, as well as the redemption obligation for the
Series A Preferred Shares in January 2003. Also as a result of the
recapitalization, the number of outstanding Common Shares more than doubled, and
additional Common Shares were reserved for issuance upon exercise of the
Warrants, which have an initial exercise price of $12.50 per Common Share. In
addition, Brooke Group Ltd., New Valley's principal stockholder, increased its
ownership of the Common Shares from 42.3% to 55.1%, and its total voting power
from 42% to 55.1%. At December 31, 1999, Brooke owned 55.4% of New Valley's
Common Shares.
LADENBURG, THALMANN & CO. INC.
On May 31, 1995, a subsidiary of New Valley 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 that has been a member of the New York Stock Exchange
since 1876. Ladenburg provides its services principally for middle market and
emerging growth companies and high net worth individuals through a coordinated
effort among corporate finance, research, capital markets, investment
management, brokerage and trading professionals.
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 more than 20,000 accounts
worldwide and its asset
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management area provides investment management and financial planning services
to numerous individuals and institutions.
On December 23, 1999, New Valley completed the sale of a 19.9% interest in
Ladenburg to Berliner Effektengesellschaft AG, a German public financial holding
company. New Valley received approximately $10.2 million in cash and Berliner
shares valued in accordance with the purchase agreement. Pursuant to the
agreement, Berliner also acquired a three-year option to purchase additional
interests in Ladenburg subject to certain conditions. New Valley recorded a $4.3
million gain in connection with the transaction for the year ended December 31,
1999.
BROOKEMIL LTD.
On January 31, 1997, New Valley entered into a purchase agreement with
Brooke (Overseas) Ltd., an indirect wholly-owned subsidiary of Brooke, under
which New Valley acquired 10,483 shares of the BrookeMil common stock. These
shares comprise 99.1% of the outstanding shares of BrookeMil, which is engaged
in the real estate development business in Moscow, Russia. New Valley 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.
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 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 was used by Liggett-Ducat Ltd., an indirect subsidiary of
Brooke, for its tobacco factory pursuant to a use agreement with BrookeMil.
Liggett-Ducat, which completed construction in 1999 of a new factory on the
outskirts of Moscow, is vacating the site.
Under the BrookeMil purchase agreement, certain liabilities of BrookeMil
aggregating approximately $40 million remained as liabilities of BrookeMil after
the purchase of the BrookeMil shares. These liabilities included a $20.4 million
construction loan from a Russian bank. 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 New Valley. At
December 31, 1999, borrowings under the new credit agreement totaled $14.7
million.
Western Realty Development. In February 1998, New Valley and Apollo Real
Estate Investment Fund III, L.P. organized Western Realty Development to make
real estate and other investments in Russia. New Valley agreed to contribute the
real estate assets of BrookeMil, including Ducat Place II and the site for Ducat
Place III, to Western Realty Development, and Apollo agreed to contribute up to
$65.9 million, including the $25.9 million investment in Western Realty Repin
discussed below.
The ownership and voting interests in Western Realty Development are held
equally by Apollo and New Valley. Apollo will be entitled to a preference on
distributions of cash from Western Realty Development to the extent of its
investment commitment of $40 million, of which $39.6 million had been funded
through December 31, 1999, together with a 15% annual rate of return. New Valley
will then be entitled to a return of $20 million of BrookeMil-related expenses
incurred and cash invested by New Valley since March 1, 1997, together with a
15% annual rate of return. Subsequent distributions will be made 70% to New
Valley and 30%
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to Apollo. Western Realty Development is managed by a Board of Managers
consisting of an equal number of representatives chosen by Apollo and New
Valley. Material corporate transactions by Western Realty Development will
generally require the unanimous consent of the Board of Managers. Accordingly,
New Valley accounts for its non-controlling interest in Western Realty
Development on the equity method.
In March 2000, Apollo and New Valley each agreed to increase its capital
commitment to Western Realty Development by $3.75 million.
New Valley, Brooke and their affiliates have other business relationships
with affiliates of Apollo. On January 11, 1996, New Valley acquired from an
affiliate of Apollo eight shopping centers for $72.5 million. New Valley's two
remaining shopping centers are subject to second mortgages in favor of the
sellers. New Valley and pension plans sponsored by BGLS Inc., a subsidiary of
Brooke, have invested in investment partnerships managed by an affiliate of
Apollo. Affiliates of Apollo have owned a substantial amount of debt securities
of BGLS and hold warrants to purchase common stock of Brooke.
Western Realty Development may seek additional real estate and other
investments in Russia. Western Realty Development has made a $30 million
participating loan to, and payable out of a 30% profits interest in, Western
Tobacco Investments LLC which holds Brooke (Overseas)'s interests in
Liggett-Ducat and its new factory. Western Realty Development is entitled to
receive a 15% annual rate of return on amounts advanced on the loan under
certain circumstances in the event of a sale or refinancing of Western Tobacco
Investments or the new factory.
New Valley has determined that a permanent impairment occurred in the value
of the site for the proposed Ducat Place III office building and related
goodwill due to the economic difficulties in the Russian economy following the
financial crisis of August 1998. New Valley recognized an impairment charge of
$11.6 million in 1999.
Western Realty Repin. In June 1998, New Valley 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 hotel, office, retail and residential
complex on the Kremlin sites. BrookeMil owned 95.9% of one site and 100% of the
other site at December 31, 1999. Apollo will be entitled to a preference on
distributions of cash from Western Realty Repin to the extent of its investment
of $25.9 million, together with a 20% annual rate of return, and New Valley will
then be entitled to a return of its investment of $10.5 million, together with a
20% annual rate of return. Subsequent distributions will be made 50% to New
Valley and 50% to Apollo. Western Realty Repin is managed by a board of managers
consisting of an equal number of representatives chosen by Apollo and New
Valley. Material corporate transactions by Western Realty Repin will generally
require the unanimous consent of the board of managers.
Through December 31, 1999, Western Realty Repin had advanced $36.4 million,
of which $25.9 million was funded by Apollo, to BrookeMil. 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 New Valley 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 New Valley's shares of BrookeMil.
As of December 31, 1999, BrookeMil had invested $32 million in the Kremlin
sites and held approximately $929,000 in cash and $1.4 million in receivables
from an affiliate, both of which were 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 $22 million in 2000 in
the development of the property. Management believes that short-term financing
alternatives are available to fund the investment. Failure to make the required
investment could result in the forfeiture of a 34.8% interest in the site. New
Valley's investment in the Kremlin sites, net of the participating loan of $32.1
million, was carried in the accompanying financial statements at approximately
$2.3 million at December 31, 1999.
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INTERNET INVESTMENTS
New Valley has invested $8.1 million in various Internet-related
businesses. These investments include an approximate 4% interest in JFAX.COM,
Inc. JFAX is an Internet-based messaging and communications services provider to
individuals and businesses, which completed an initial public offering in July
1999. New Valley has also invested $4.5 million for a 33.33% interest in Atomic
Pop, an online music enterprise founded by Al Teller, the former head of MCA
Music Entertainment and president of CBS Records, dedicated to leveraging the
digital medium to change the way music is acquired, promoted, sold and
distributed. New Valley also owns smaller interests in other Internet companies.
NEW VALLEY REALTY DIVISION
In January 1996, New Valley acquired four office buildings and eight
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 its New Valley Realty division.
In September 1998, New Valley completed the sale to institutional investors
of the office buildings for an aggregate purchase price of $112.4 million and
recognized a gain of $4.7 million on the sale. New Valley 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.
In January 1996, New Valley 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 Kanawha, West Virginia.
In November 1997, New Valley sold its Marathon, Florida shopping center for
$5.4 million and recognized a gain of $1.2 million on the sale. In August 1999,
New Valley sold to entities affiliated with P.O'B. Montgomery & Company five
shopping centers for an aggregate purchase price of $46.1 million before closing
adjustments and expenses. The shopping centers were subject to approximately $35
million of mortgage financing, which was assumed by the purchasers at closing.
New Valley recorded a gain of $3.8 million on the sale of the five centers.
Space in New Valley's two remaining shopping centers in Royal Palm Beach,
Florida and Kanawha, West Virginia is leased to a variety of commercial tenants
and, as of December 31, 1999, the aggregate occupancy of the centers was 85%.
The properties are subject to approximately $19.8 million of underlying
mortgages in favor of senior lenders and second mortgages in favor of the
original sellers.
OTHER ACQUISITIONS AND INVESTMENTS
Thinking Machines Corporation. Thinking Machines, New Valley's 73% owned
subsidiary, designed, developed, marketed and supported software offering
prediction-based management solutions under the name LoyaltyStream(TM)for
businesses such as financial services and telecommunications providers. This
software was designed to help reduce customer attrition, control costs, more
effectively cross-sell or bundle products or services and manage risks.
Incorporated in LoyaltyStream was Darwin(R), a data mining software tool set
with which a customer can analyze large amounts of its pre-existing data as well
as external demographics data to predict behavior or outcomes. The customer can
then send this information through systems integration to those divisions of the
customer, which can use it to more effectively anticipate and solve business
problems. To date, no material revenues have been recognized by Thinking
Machines from the sale or licensing of such software and services.
On June 2, 1999, Thinking Machines sold substantially all of its assets,
consisting of its Darwin(R) software and services business, to Oracle
Corporation. The purchase price was $4.7 million in cash at the closing of the
sale and up to an additional $20.3 million, payable in cash on January 31 in
each of the years 2001 through 2003, based on sales by Oracle of Darwin product
above specified sales targets.
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Miscellaneous Investments. At December 31, 1999, New Valley 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 in May 1997. CDSI holds a minority interest in an Internet
application service provider that develops and distributes direct marketing and
customer relationship products and services.
As of December 31, 1999, long-term investments consisted primarily of
investments in limited partnerships of $8.7 million. New Valley determined that
an other than temporary impairment in the value of an investment had occurred
and wrote down this investment to zero in 1997 with a charge to operations of
$3.8 million.
New Valley 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.
EMPLOYEES
At December 31, 1999, New Valley had approximately 365 full-time employees,
of whom approximately 343 were employed by Ladenburg. New Valley believes that
relations with its employees are satisfactory.
RISK FACTORS
NEW VALLEY HAS EXPERIENCED CONTINUING LOSSES; IT HAS HIGH LEVERAGE AND A FIXED
CHARGE COVERAGE DEFICIT.
New Valley has experienced losses from continuing operations for the last
five years. New Valley had outstanding debt in the amount of $19.8 million as of
December 31, 1999 and a margin loan payable of $1.0 million, and its earnings
have been inadequate to cover fixed charges for the five most recent years. New
Valley's ability to make required payments on its debt will depend on its
ability to generate cash sufficient for such purposes. Similarly, New Valley'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 New Valley will not be
able to generate enough funds to repay its debt. If New Valley cannot service
its fixed charges, it would significantly harm New Valley.
NEW VALLEY IS SUBJECT TO RISKS RELATING TO THE INDUSTRIES IN WHICH IT OPERATES
The Securities Industry. As a broker-dealer, Ladenburg is subject to
uncertainties endemic to the securities industry. These uncertainties 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
competitors in the securities industry.
Risks of real estate joint ventures and development projects. New Valley
has two significant joint ventures with Apollo to make real estate and other
investments in Russia. New Valley must seek Apollo's approval for important
actions regarding the joint ventures. Since Apollo's interests may differ from
those of New Valley, a deadlock could arise that might impair the ability of the
joint ventures to function. Such a deadlock could significantly harm the joint
ventures. The terms of the joint ventures, which require New Valley to offer
Apollo the first opportunity to participate in new investments in Russia, may
make it more difficult for New Valley to forge alliances in Russia with other
entities.
New Valley plans to pursue a variety of real estate development projects.
Development 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 and third party consents.
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Risks relating to Russian real estate operations. New Valley has
significant real estate development operations in Russia. These operations are
subject to a high level of risk. There is a risk that investments in Russia will
harm New Valley's profitability (if any) or liquidity and cash flow.
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. In August 1998, the economy of the Russian Federation
entered a period of even greater economic instability which has continued since
that time. The country's currency continues to devalue. There is continued
volatility in the debt and equity markets, and hyperinflation persists.
Confidence in the banking sector has yet to be restored, and there continues to
be a general lack of liquidity in the economy. In addition, New Valley may be
harmed by regulatory, political and legal developments beyond the control of
companies operating in the Russian Federation, including:
- diplomatic developments;
- decisions of international lending organizations;
- regional tensions;
- currency repatriation restrictions;
- foreign exchange fluctuations;
- an undeveloped system of commercial laws, including laws on real estate
titles and mortgages, and a relatively untested judicial system;
- an evolving taxation system subject to constant changes which may be
applied retroactively and subject to varying interpretations by tax
authorities which may not coincide with that of management and can result
in assessments of additional taxes, penalties and interest, which can be
significant; and
- other legal developments and, in particular, the risks of expropriation,
nationalization and confiscation of assets and changes in legislation
relating to foreign ownership.
As a result of the recent economic difficulties in the Russian economy, New
Valley took a charge of $11.6 million in 1999 for a permanent impairment in the
value of the site for the proposed Ducat Place III office building and related
goodwill. The uncertainties in Russia may also impair New Valley'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, New Valley agreed with the City
of Moscow to invest an additional $22 million by May 2000 in the development of
the property. Failure to make the required investment could result in the
forfeiture of a 34.8% interest in one of the sites. New Valley is considering
potential financing alternatives on behalf of the joint ventures. 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 the joint ventures to curtail or delay their projects.
NEW VALLEY'S POTENTIAL INVESTMENTS ARE UNIDENTIFIED AND MAY NOT SUCCEED
New Valley currently holds a significant amount of marketable securities
and cash not committed to any specific investments. This subjects stockholders
to increased risk and uncertainty because you will not be able to evaluate how
this cash will be invested and the economic merits of particular investments.
There may be substantial delay in locating suitable investment opportunities. In
addition, New Valley may lack relevant management experience in the areas in
which New Valley may invest. There is a risk that New Valley will fail in
targeting, consummating or effectively managing any of these investments.
NEW VALLEY'S MANAGEMENT DOES NOT DEVOTE ITS FULL TIME TO NEW VALLEY'S AFFAIRS
New Valley is dependent upon the services of Bennett S. LeBow, the Chairman
of the Board and Chief Executive Officer of New Valley. The loss to New Valley
of Mr. LeBow could harm New Valley. In addition,
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management divides its time between New Valley and Brooke and, consequently,
does not spend its full time on New Valley business.
BROOKE CONTROLS A MAJORITY OF NEW VALLEY'S SHARES
As a result of the recapitalization and assuming that no warrant holder
exercises its warrants, Brooke owns approximately 55% of the outstanding Common
Shares of New Valley. As holder of the absolute majority of the Common Shares,
Brooke is able to elect all of New Valley's directors and control the management
of New Valley. Also, Brooke's ownership of Common Shares makes it impossible for
a third party to acquire control of New Valley without the consent of Brooke and
therefore may discourage third parties from seeking to acquire New Valley. 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 New Valley
stockholders. This may depress the price of the Common Shares.
NEW VALLEY ENGAGES IN SUBSTANTIAL RELATED PARTY TRANSACTIONS
New Valley has had substantial dealings with its controlling stockholder
and its affiliates, certain members of management and certain directors. New
Valley may continue to have such dealings in the future. While New Valley
believes these arrangements and transactions are fair to and in the best
interest of New Valley, they were not negotiated at arms length.
THE VALUE OF THE MARKET FOR COMMON SHARES IS UNCERTAIN
New Valley has recently completed a plan of recapitalization that made
far-reaching changes in New Valley's capital structure. At this time, it is
unclear what the long-term impact of the recapitalization will be on the Common
Shares. Moreover, while New Valley has applied to have the Common Shares quoted
on the Nasdaq SmallCap Market, there is a risk that New Valley 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. New Valley has not declared a dividend on the Common Shares since
1984, and does not currently intend to pay such dividends in the foreseeable
future.
ITEM 2. PROPERTIES
New Valley's principal executive office is in Miami, Florida, where it
shares offices with Brooke and various of their subsidiaries. New Valley 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 pursuant to a lease that
expires on June 30, 2015. Effective September 1, 1999, Ladenburg subleased
approximately 13,125 square feet of office space under a 10-year sublease. New
Valley's operating properties are described above.
ITEM 3. LEGAL PROCEEDINGS
Reference is made to Notes 10 and 18 to the Consolidated Financial
Statements.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS; EXECUTIVE OFFICERS
OF THE REGISTRANT
During the last quarter of 1999, no matter was submitted to stockholders
for their vote or approval, through the solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
The table below, together with accompanying text, presents certain
information regarding all current executive officers of New Valley as of March
24, 2000. There are no family relationships among the executive officers of New
Valley. Each of the executive officers of New Valley serves until the election
and qualification of his successor or until his death, resignation or removal by
the Board of Directors of New Valley.
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YEAR INDIVIDUAL
BECAME AN
NAME AGE POSITION EXECUTIVE OFFICER
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Bennett S. LeBow....................... 62 Chairman of the Board and Chief 1988
Executive Officer
Howard M. Lorber....................... 51 President and Chief Operating Officer 1994
Richard J. Lampen...................... 46 Executive Vice President and General 1995
Counsel
J. Bryant Kirkland III................. 34 Vice President, Treasurer and Chief 1998
Financial Officer
Marc N. Bell........................... 39 Vice President, Associate General 1998
Counsel and Secretary
</TABLE>
BENNETT S. LEBOW has been Chairman of the Board of New Valley since January
1988 and Chief Executive Officer thereof since November 1994 and currently holds
various positions with New Valley'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 New
Valley since November 1994 and serves as a director of New Valley. 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 Liggett 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 Executive Vice President and General Counsel of
New Valley since October 1995 and serves as a director of New Valley. 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. Mr. Lampen
has been a director of Thinking Machines since February 1996; a director of CDSI
since January 1997; and a director of Panaco, Inc., an independent oil and gas
exploration and production company, since February 1999. From May 1992 to
September 1995, Mr. Lampen was a partner at Steel Hector & Davis, a law firm
located in Miami, Florida. From January 1991 to April 1992, Mr. Lampen was a
Managing Director at Salomon Brothers Inc, an investment bank, and was an
employee at Salomon Brothers Inc from 1986 to April 1992. Mr. Lampen has served
as a director of a number of other companies, including U.S. Can
8
<PAGE> 11
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.
J. BRYANT KIRKLAND III has been Vice President, Treasurer and Chief
Financial Officer of New Valley since January 1998, and since November 1994 has
served in various financial capacities with New Valley and with Brooke and BGLS.
Mr. Kirkland has served as Vice President and Chief Financial Officer of CDSI
since January 1998 and as a director of CDSI since November 1998.
MARC N. BELL has been a Vice President of New Valley since February 1998
and has served as Associate General Counsel and Secretary of New Valley 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.
9
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Shares are quoted on the NASD OTC Electronic Bulletin Board, a
NASD sponsored and operated inter-dealer automated quotation system under the
symbol NVAL. New Valley has applied to have its Common Shares and Warrants
quoted on the Nasdaq SmallCap Market. There is a risk that New Valley will not
be able to satisfy the applicable listing requirements.
The following table sets forth, for the calendar quarters indicated, the
range of per share prices for the Common Shares. Prices reflect quotations on
the NASD OTC Electronic Bulletin Board. Such quotations reflect inter-dealer
prices in the over-the-counter market, without retail markups, markdowns or
commissions, and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
POST-RECAPITALIZATION (AFTER JUNE 4, 1999 EFFECTIVE DATE OF
RECAPITALIZATION)
1999:
Fourth Quarter.............................................. $4.81 $3.13
Third Quarter............................................... 4.25 3.00
Second Quarter.............................................. 5.13 3.56
PRE-RECAPITALIZATION (BEFORE JUNE 4, 1999 EFFECTIVE DATE OF
RECAPITALIZATION)
1999:
Second Quarter.............................................. $ .75 $ .22
First Quarter............................................... .84 .38
1998:
Fourth Quarter.............................................. $2.00 $ .25
Third Quarter............................................... .50 .32
Second Quarter.............................................. .94 .44
First Quarter............................................... 1.18 .50
</TABLE>
HOLDERS
At March 24, 2000, there were approximately 13,600 holders of record of the
Common Shares.
DIVIDENDS
No dividends were paid on the Common Shares in 1999.
10
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- --------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Total revenues........................... $ 83,605 $ 102,087 $ 114,568 $130,865 $ 67,730
Total costs and expenses(a).............. 108,581 127,499 139,989 149,454 66,064
-------- --------- --------- -------- ---------
(Loss) income from continuing operations
before income taxes and minority
interests.............................. (24,976) (25,412) (25,421) (18,589) 1,666
Income tax provision..................... 80 6 186 300 292
Minority interests in (income) loss from
continuing operations of consolidated
subsidiaries........................... (667) 2,089 1,347 4,241 --
-------- --------- --------- -------- ---------
(Loss) income from continuing
operations............................. (25,723) (23,329) (24,260) (14,648) 1,374
Income from discontinued operations...... 4,100 7,740 3,687 7,158 16,873
-------- --------- --------- -------- ---------
Net (loss) income........................ (21,623) (15,589) (20,573) (7,490) 18,247
Dividend requirements on preferred
shares(b).............................. (37,759) (80,964) (68,475) (61,949) (72,303)
Excess of carrying value of redeemable
preferred shares over cost of shares
purchased.............................. -- -- -- 4,279 40,342
-------- --------- --------- -------- ---------
Net loss applicable to common shares..... $(59,382) $ (96,553) $ (89,048) $(65,160) $ (13,714)
======== ========= ========= ======== =========
Per Common and equivalent share(c):
Basic:
Loss from continuing operations........ $ (3.65) $ (10.89) $ (9.68) $ (7.55) $ (3.20)
Discontinued operations................ .24 .81 .38 .75 1.77
Net loss............................... (3.41) (10.08) (9.30) (6.80) (1.43)
Diluted:
Loss from continuing operations before
extraordinary items................. $ (3.65) $ (10.89) $ (9.68) $ (7.55) $ (3.20)
Discontinued operations................ .24 .81 .38 .75 1.77
Net loss............................... (3.41) (10.08) (9.30) (6.80) (1.43)
Dividends declared(b).................... -- -- -- -- --
Book value(c)............................ $ 3.94 $ (21.44) $ (13.61) $ (7.55) $ (3.18)
BALANCE SHEET DATA:
Total assets............................. $220,668 $ 272,722 $ 441,391 $406,540 $ 385,822
Long-term obligations.................... 19,519 54,801 185,024 170,223 11,967
Prepetition claims(d).................... 12,279 12,364 12,611 15,526 33,392
Redeemable preferred shares(e)........... -- 316,202 258,638 210,571 226,396
Stockholders' equity (deficiency)........ 91,379 (205,312) (130,399) (72,364) (30,461)
Working capital (deficiency)............. 23,014 7,870 (6,986) 85,610 155,565
</TABLE>
- ---------------
(a) Includes reorganization benefit of $9,706 in 1996 and $2,044 in 1995.
(b) Dividend requirements on preferred shares amounts include $444 in 1999, $891
in 1998, $692 in 1997, $417 in 1996 and $521 in 1995 accrued on the
redeemable Class A Senior Preferred Shares to reflect the effective dividend
yield over the life of such securities. All preferred dividends, whether or
not declared, are reflected as a deduction in arriving at net loss
applicable to Common Shares. No dividends on Preferred Shares were declared
in 1999, 1998 and 1997. Dividends of $40 per share in 1996 and $50 per share
in 1995 were declared on the redeemable Class A Senior Preferred Shares.
11
<PAGE> 14
(c) All per share data have been restated to reflect the one-for-twenty reverse
stock split completed on July 29, 1996 and the Company's recapitalization
which occurred on June 4, 1999.
(d) Represents prepetition claims against New Valley in its bankruptcy case. See
Note 18 to the Consolidated Financial Statements.
(e) Includes cumulative preferred dividends on the redeemable Class A Senior
Preferred Shares of $219,068, $163,302, $117,117 and $121,893 at December
31, 1998, 1997, 1996 and 1995, respectively. See Note 13 to the Consolidated
Financial Statements.
ITEM 7. 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 New Valley and its consolidated subsidiaries and
should be read in conjunction with the Consolidated Financial Statements and the
related notes included elsewhere in this report. 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.
New Valley'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 New Valley's revenues before 1995, are
treated as discontinued in New Valley's financial statements;
- the acquisition of the broker-dealer business in May 1995;
- the purchase of New Valley's U.S. office buildings and shopping centers
in January 1996 and the sale of the office buildings in September 1998
and five of the shopping centers in August 1999;
- the acquisition of BrookeMil in January 1997;
- the formation in February 1998 of the Western Realty Development joint
venture, to which New Valley 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.
RECENT DEVELOPMENTS
Plan of Recapitalization. New Valley consummated the plan of
recapitalization on June 4, 1999, following approval by New Valley's
stockholders. Pursuant to the plan of recapitalization:
- each Class A Senior Preferred Share was reclassified into 20 Common
Shares and one Warrant to purchase a Common Share at $12.50 per share
exercisable for five years,
- each Class B Preferred Share was reclassified into 1/3 of a Common Share
and five Warrants, and
- each outstanding Common Share was reclassified into 1/10 of a Common
Share and 3/10 of a Warrant.
The recapitalization had a significant effect on New Valley's financial
position and results of operations. As a result of the exchange of the
outstanding preferred shares for common shares and warrants in the
recapitalization, New Valley's stockholders' equity increased by $343,435 from
the elimination of the carrying value and dividend arrearages on the redeemable
preferred stock. Furthermore, the recapitalization resulted in the elimination
of the on-going dividend accruals on the existing redeemable preferred shares of
New Valley, as well as the redemption obligation for the Series A Preferred
Shares in January 2003. Also as a result of the recapitalization, the number of
outstanding Common Shares more than doubled, and additional Common
12
<PAGE> 15
Shares were reserved for issuance upon exercise of the Warrants. In addition,
Brooke increased its ownership of the Common Shares from 42.3% to 55.1%, and its
total voting power from 42% to 55.1%. At December 31, 1999, Brooke owned 55.4%
of New Valley's Common Shares.
RESULTS OF OPERATIONS
For the years ended December 31, 1999, 1998 and 1997, the results of
continuing operations of New Valley's primary operating units are as follows.
The operations of BrookeMil are included in real estate operations, while New
Valley's interest in Western Realty Development, which is accounted for on the
equity method, is included in corporate and other activities.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Broker-dealer:
Revenues.................................................. $ 77,171 $ 66,569 $56,197
Expenses.................................................. 74,107 72,744 66,155
-------- -------- -------
Operating income (loss) before taxes and minority
interests.............................................. $ 3,064 $ (6,175) $(9,958)
======== ======== =======
Real estate:
Revenues.................................................. $ 10,952 $ 25,259 $27,067
Expenses.................................................. 14,164 25,451 34,894
-------- -------- -------
Operating loss before taxes and minority interests........ $ (3,212) $ (192) $(7,827)
======== ======== =======
Computer software:
Revenues.................................................. $ 317 $ 794 $ 3,947
Expenses.................................................. 3,470 6,924 12,103
-------- -------- -------
Operating loss before taxes and minority interests........ $ (3,153) $ (6,130) $(8,156)
======== ======== =======
Corporate and other:
Revenues.................................................. $ (4,835) $ 9,465 $27,357
Expenses.................................................. 16,840 22,380 26,837
-------- -------- -------
Operating (loss) income before taxes and minority
interests.............................................. $(21,675) $(12,915) $ 520
======== ======== =======
</TABLE>
The year 1999 compared to 1998
Consolidated total revenues for 1999 were $83,605 as compared with $102,087
for 1998. The decrease in revenues of $18,482 is primarily attributable to the
decrease in real estate revenues of $14,307 from the sale of the office
buildings and shopping centers, the increase in loss in joint venture of $11,537
and lower gains on sale of investments of $9,395, offset by an increase in
revenues at Ladenburg of $10,602 and gains on sales of Ladenburg stock and
Thinking Machines' assets.
Ladenburg's revenues for 1999 consisted of commissions of $38,815,
principal transactions of $19,722, corporate finance fees of $8,340, syndicate
and underwriting income of $1,912 and other income of $8,382. 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. Expenses of Ladenburg for 1999 consisted of
employee compensation and benefits of $48,918 and other expenses of $25,189.
Expenses of Ladenburg for 1998 consisted of employee compensation and benefits
of $47,845 and other expenses of $24,899.
Revenues from the real estate operations in 1999 decreased $14,307
primarily due to the sale of the Company's four U.S. office buildings in
September 1998 and the sale of five of the Company's seven U.S. shopping centers
in August 1999. Expenses of the real estate operations decreased $11,287 due
primarily to the sale of the office buildings and shopping centers. BrookeMil
incurred expenses of $5,339 in 1999, which were related to the Kremlin sites.
The expenses consisted primarily of accrued interest expense of $4,698
13
<PAGE> 16
associated with the Western Realty Repin loan and a foreign currency loss of
$460 on cash restricted for future investments in the Kremlin sites.
On June 2, 1999, Thinking Machines sold substantially all its assets,
consisting of its Darwin(R) software and services business, to Oracle
Corporation. Prior to the sale Thinking Machines was developing and marketing a
data mining software product and had only minimal revenues from continuing
operations. Operating expenses of Thinking Machines in 1999 consisted of cost of
sales of $90, selling, general and administrative of $1,418, research and
development of $1,756 and interest expense of $206. 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.
For 1999, New Valley's revenues of $(4,835) related to corporate and other
activities included a $16,513 loss in the Western Realty Development joint
venture and equity losses in affiliates of $3,726. The losses were offset in
part by a gain on the sale of a 19.9% interest in Ladenburg of $4,256, a gain on
the sale of Thinking Machines' assets of $3,801, a net gain on investments of
$2,373 and interest and dividend income of $2,196. For 1998, New Valley's
revenues of $9,465 related to corporate and other activities consisted primarily
of net gains on investments of $11,768 and interest and dividends income of
$2,199, offset by the $4,976 loss in the 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.
The loss in joint venture of $16,513 in 1999 resulted principally from a
non-cash $11,561 impairment charge associated with Western Realty Development.
In 1999, Western Realty Development evaluated the recoverability of its
long-lived assets in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of." In 1999, Western Realty
Development determined a permanent impairment had occurred related to economic
difficulties in the Russian economy following the financial crisis of August
1998. Based on an appraisal conducted by an independent third party, Western
Realty Development recorded an impairment charge for the year ended December 31,
1999 of $11,561 associated with its investment in the site for the proposed
Ducat Place III office building and related goodwill. The fair market value was
determined based on current market conditions and anticipated future discounted
cash flows.
Corporate and other expenses of $16,840 for 1999 consisted primarily of
employee compensation and benefits of $7,942, expenses of certain
non-significant subsidiaries of $958 and interest expense of $293. 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.
Income tax expense for 1999 was $80 compared to $6 in 1998. Income tax
expense for 1999 and 1998 related to state income taxes at Ladenburg and $17 of
Russian profits tax at BrookeMil in 1999.
New Valley recorded a gain on disposal of discontinued operations of $4,100
in 1999 and $7,740 in 1998 related to the settlement of a lawsuit originally
initiated by New Valley's former Western Union telegraph business.
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 revenues was a result of a decline in gains on investments
of $7,434 and a loss in Western Realty Development 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,
14
<PAGE> 17
corporate finance fees of $10,573, syndicate and underwriting income of $3,269,
and other income of $8,513. 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 Development 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
Development 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.
Thinking Machines' revenues in 1998 resulted from software and maintenance
revenue of $680 and service and other revenues of $114. 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, New Valley's revenues of $9,465 related to corporate and other
activities consisted primarily of net gains on investments of $11,768 and
interest and dividends income of $2,199, offset by the $4,976 loss in the
Western Realty Development 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, New
Valley'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 Holdings
Corp. 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.
New Valley recorded a gain on disposal of discontinued operations of $7,740
in 1998 related to the settlement of a lawsuit originally initiated by New
Valley's former Western Union telegraph business. During 1997, New Valley
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 New Valley's former money transfer
business. The amounts reversed were accrued in prior years upon the commencement
of purported claims against New Valley in bankruptcy court. New Valley'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.
LIQUIDITY AND CAPITAL RESOURCES
New Valley's working capital increased by $15,144 and $14,856 for the years
ended December 31, 1999 and 1998 and decreased by $92,596 for the year ended
December 31, 1997.
New Valley's working capital increased to $23,014 at December 31, 1999 from
$7,870 at December 31, 1998 primarily as a result of the sale of the five U.S.
shopping centers and a 19.9% interest in Ladenburg and
15
<PAGE> 18
liquidations of various long-term investments. The amount was offset by changes
in New Valley's unrealized loss on marketable securities and investments of
$7,075 in internet-related businesses.
New Valley's working capital increased to $7,870 at December 31, 1998 from
a working capital deficit of $6,986 at December 31, 1997 primarily as a result
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
associated liabilities) to Western Realty Development. The amount was offset by
changes in New Valley's unrealized loss on marketable securities.
New Valley's working capital decreased by $92,596 from $85,610 at December
31, 1996 to a deficit of $6,986 at December 31, 1997 primarily as a result 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.
During 1999, New Valley's cash and cash equivalents decreased from $16,444
to $11,512 due primarily to a decrease in margin loans payable of $12,105 and
investments of $7,075 in internet-related businesses, offset by the sales of the
shopping centers, Thinking Machines' assets and the Ladenburg stock.
During 1998, New Valley'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, New Valley's cash and cash equivalents decreased from $57,282
to $11,606 primarily due to the purchase of BrookeMil and net purchases of
long-term investments offset by the net sale of long-term investments of $2,807.
Cash provided from operating activities for the year ended December 31,
1999 was $3,700 as compared to cash used for operating activities of $13,957 for
the prior year. The difference is primarily due to the reduction in receivable
from clearing brokers of $11,658 in 1999 compared to a $21,356 increase in 1998,
lower gains associated with sales of real estate and liquidation of long-term
investments of $3,512 and an increased non-cash loss from joint venture of
$11,537. The amounts were offset by a net increase in Ladenburg's net trading
securities of $23,762 and an increased net loss of $6,034.
Cash used for operating activities for the year ended December 31, 1998
increased to $13,957 as compared to $249 for the prior year. The difference is
primarily due 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 New Valley's loss from continuing operations of $931.
Cash flows provided from investing activities for the year ended December
31, 1999 were $29,777 compared to cash flows provided from investing activities
of $104,213 for the year ended December 31, 1998. The difference is primarily
attributable to the sale of real estate of $46,208 in 1999 versus the sale of
the office buildings of $111,292 in 1998, the net liquidation of long-term
investments in 1998 of $12,305 versus net investment in long-term investments of
$1,190 in 1999 and the net purchase of marketable securities of $8,335 in 1999
versus net sales of marketable securities of $3,459 in 1998.
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 primarily
attributable to the sale of the office buildings of $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 primarily
by capital expenditures in 1998 of $18,236 compared with $10,777 in 1997 and
greater net sales of investments in the 1997 period.
The capital expenditures for the year ended December 31, 1999 and 1998
related principally to the development of the Kremlin sites ($13,990 and
$18,013, respectively). BrookeMil also held $929, in cash and $1,418 in
receivables from an affiliate, at December 31, 1999, both of which were
restricted for future investment in the Kremlin sites. In connection with the
acquisition of its interest in one of the Kremlin sites, BrookeMil has agreed
with the City of Moscow to invest an additional $22,000 by May 2000 in the
16
<PAGE> 19
development of the property. Failure to make the required investment could
result in forfeiture of a 34.8% interest in the site.
In June 1998, New Valley and Apollo organized Western Realty Repin to make
a loan to BrookeMil. The proceeds from the loan will be used by BrookeMil for
the acquisition and preliminary development of the Kremlin sites. Through
December 31, 1999, Western Realty Repin has advanced $36,400 (of which $25,875
was funded by Apollo) to BrookeMil. 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 to repay New Valley 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 New Valley's shares of BrookeMil.
The development of Ducat Place III and the Kremlin sites will require
significant amounts of debt and other financing. New Valley is considering
potential financing alternatives on behalf of Western Realty Development and
BrookeMil. However, in light of the recent economic turmoil in Russia, there is
a risk that such financing will not be available on acceptable terms. Failure to
obtain sufficient capital for the projects would force Western Realty
Development and BrookeMil to curtail or delay the planned development of Ducat
Place III and the Kremlin sites.
On September 28, 1998, New Valley completed a sale to institutional
investors of its four U.S. office buildings for an aggregate purchase price of
$112,400 ($111,292 after closing adjustments and expenses). New Valley received
approximately $11,989 in cash from the transaction after closing adjustments and
expenses. The office buildings were subject to approximately $99,000 of mortgage
financing, which was retired at closing. New Valley recorded a gain of $4,682
associated with the sale of the office buildings.
On August 30, 1999, New Valley completed the sale of five of its shopping
centers for an aggregate purchase price of $46,125 ($45,288 after closing
adjustments and expenses) including the assumption of $35,023 of mortgage
financing. New Valley received approximately $10,265 in cash from the
transaction after closing adjustments and expenses and recorded a gain of $3,570
associated with the sale of the shopping centers. New Valley may seek to dispose
of its remaining two shopping centers in the future.
In connection with the sale of the shopping centers, New Valley refinanced
the notes payable on its two remaining shopping centers in Royal Palm Beach,
Florida and Kanawha, West Virginia and transferred the Kanawha shopping center
to a 99.0% owned limited liability company. The Royal Palm Beach, Florida
shopping center is now subject to a $6,899 senior mortgage note due September
2016 which is callable by the lender after March 2001 and bears interest at 7.5%
per annum and a $1,560 junior mortgage note due on the earlier of September 2002
or the due date of the senior loan which bears interest at 9.0% per annum. The
Kanawha, West Virginia shopping center is now subject to a $6,981 senior
mortgage note due September 2024 which bears interest at 9.03% per annum for the
first seven years and at floating rates thereafter (or 11.03% per annum if the
loan is still in a securitization) and a $4,388 subordinated note due September
2006 which bears interest at 9.0% per annum. The financing on the two remaining
shopping centers is non-recourse to New Valley, 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.
On June 2, 1999, Thinking Machines sold substantially all of its assets,
consisting of its Darwin(R) software and services business, to Oracle
Corporation. The purchase price was $4,700 in cash at the closing of the sale
and up to an additional $20,300, payable in cash on January 31 in each of the
years 2001 through 2003, based on sales by Oracle of Darwin product above
specified sales targets. At the closing of the Oracle sale, $4,136 of loans,
including interest, were repaid by Thinking Machines to New Valley and New
Valley offered to purchase all of Thinking Machines' outstanding preferred stock
for $1,950. Approximately 77% of Thinking Machines' preferred stockholders
tendered their stock to New Valley in the third quarter of 1999. In connection
with the repurchase, New Valley recorded an increase to equity of $1,542 in the
third quarter of 1999, which represented the difference between the purchase
price and carrying value of the stock.
17
<PAGE> 20
New Valley has lent Thinking Machines an additional $673, bearing interest
at 15% per annum, since the closing.
In September 1998, New Valley made a one-year $950 loan to BGLS, an
affiliate of New Valley, bearing interest at 14% per annum, which has been
repaid in full.
Cash flows used for financing activities increased to $38,409 for the year
ended December 31, 1999 compared to $85,418 in the 1998 period. The difference
consisted of the retirement of notes payable associated with the sale of the
office buildings and was offset by the fundings of the Western Realty Repin loan
in the 1999 period and an increase in margin loan payable of $12,105.
Cash flows used for financing activities increased to $85,418 for the year
ended December 31, 1998 compared to $24,317 in the 1997 period. The difference
consisted of the retirement of notes payable associated with the sale of the
office buildings and was offset by the fundings of the Western Realty 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.
Of the $55,000 purchase price for the BrookeMil shares acquired by New
Valley on January 31, 1997, New Valley paid $21,500 in cash at the closing and
executed a note in the principal amount of $33,500 in favor of Brooke (Overseas)
for the balance. The note, which was collateralized by the BrookeMil shares, was
paid during 1997. The source of funds used by New Valley 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 New Valley bought the BrookeMil shares, certain liabilities of
BrookeMil aggregating approximately $40,000 remained liabilities of BrookeMil
after the closing. These liabilities included the $20,400 construction loan from
a Russian bank. 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 New Valley. At
December 31, 1999, borrowings under the new credit agreement totaled $14,656.
On October 5, 1999, New Valley's Board of Directors authorized the
repurchase of up to 2,000,000 Common Shares from time to time on the open market
or in privately negotiated transactions depending on market conditions. As of
March 24, 2000, New Valley had repurchased 75,200 shares for approximately $346.
New Valley expects that its available capital resources will be sufficient
to fund its currently anticipated cash requirements for 2000, including the
currently anticipated cash requirements of its operating businesses,
investments, commitments, and payments of principal and interest on its
outstanding indebtedness.
MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates, equity and commodity
prices, changes in the implied volatility of interest rate, foreign exchange
rate, equity and commodity prices and also changes in the credit ratings of
either the issuer or its related country of origin. Market risk is inherent to
both derivative and non-derivative financial instruments, and accordingly, the
scope of New Valley'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. New Valley
monitors its exposure to counterparty
18
<PAGE> 21
risk through the use of credit exposure information, the monitoring of
collateral values and the establishment of credit limits.
Equity Price Risk
Ladenburg maintained inventories of trading securities at December 31, 1999
with fair market values of $15,707 in long positions and $7,625 in short
positions. Ladenburg performed an entity-wide analysis of the its financial
instruments and assessed the related risk and materiality. Based on this
analysis, in the opinion of management, the market risk associated with the
Ladenburg's financial instruments at December 31, 1999 will not have a material
adverse effect on the consolidated financial position or results of operations
of New Valley.
New Valley held investment securities available for sale totaling $48,722
at December 31, 1999. Approximately 22% of these securities represent an
investment in RJ Reynolds Tobacco Holdings, Inc. and Nabisco Group Holdings
Corp., which are defendants in numerous tobacco products-related litigation,
claims and proceedings. An adverse outcome in any of these proceedings against
these companies could have a significant effect on the value of New Valley's
investment.
New Valley also holds long-term investments in limited partnerships and
limited liability companies. These investments are illiquid, and their ultimate
realization is subject to the performance of the investee entities.
Foreign Market Risk
BrookeMil's and Western Realty Development's operations are conducted in
Russia. The Russian Federation continues to experience economic difficulties
following the financial crisis of August 1998. Consequently, the country's
currency continues to devalue, there is continued volatility in the debt and
equity markets, hyperinflation persists, confidence in the banking sector has
yet to be restored and there continues to be a general lack of liquidity in the
economy. In addition, laws and regulations affecting businesses operating within
the Russian Federation continue to evolve.
The Russian Federation's return to economic stability is dependent to a
large extent on the effectiveness of the measures taken by the government,
decisions of international lending organizations, and other actions, including
regulatory and political developments, which are beyond the control of companies
operating in the Russian Federation. The operations of BrookeMil and Western
Realty Development may be significantly affected by these factors for the
foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS 133 requires
that all derivative instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. New Valley has not yet determined the impact that the adoption of
SFAS No. 133 will have on its earnings or statement of financial position.
YEAR 2000 COSTS
The "Year 2000 issue" is the result of computer programs that were written
using two digits rather than four digits to define the applicable year. If New
Valley'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, among other things,
an inability to process transactions or engage in similar normal business
activities. Published reports have stated that Year 2000 miscalculations could
occur throughout the Year 2000.
19
<PAGE> 22
To date, neither the Company nor its subsidiaries have experienced any material
disruptions to their business operations.
New Valley and BrookeMil. Both New Valley 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,
New Valley and BrookeMil are Year 2000 compliant.
Ladenburg. Ladenburg is Year 2000 compliant. Ladenburg's plan addressed
external interfaces with third party computer systems necessary in the
broker-dealer industry. It also addressed internal operations software necessary
to continue operations on a daily basis. Ladenburg's Year 2000 plan cost
approximately $650. The cost was inclusive of hardware and software upgrades and
replacements as well as consulting.
External Service Providers. The modifications for Year 2000 compliance by
New Valley and its subsidiaries were completed in 1999. However, the failure of
New Valley's service providers, including Ladenburg's clearing agent, to resolve
their own processing issues in a timely manner could result in a material
financial risk. To date, New Valley is unaware of any incidents that have
occurred where its external service providers were not Year 2000 complaint.
It is unclear whether the Russian government and other organizations who
provide significant infrastructure services in Russia 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 Development.
Furthermore, the current financial crisis in Russia could affect the ability of
the government and other organizations to fund Year 2000 compliance programs. To
date, New Valley is not aware of any Year 2000 related issues reported in
Russia.
Although New Valley and its subsidiaries have confirmed that their service
providers adequately addressed Year 2000 issues, there can be no complete
assurance of success, or that interaction with other service providers will not
impair New Valley's or its subsidiaries' services.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
New Valley and its representatives may from time to time make oral or
written "forward-looking statements" within the meaning of the Private
Securities Reform Act of 1995, including any statements that may be contained in
the foregoing "Management's Discussion and Analysis of Financial Condition and
Results of Operations", in this report and in other filings with the Securities
and Exchange Commission and in its reports to stockholders, which represent New
Valley's expectations or beliefs with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties and, in connection with the "safe-harbor" provisions of the
Private Securities Reform Act, New Valley has identified under "Risk Factors" in
Item 1 above and in this section important factors that could cause actual
results to differ materially from those contained in any forward-looking
statements made by or on behalf of New Valley.
Each of New Valley's operating businesses, Ladenburg, BrookeMil and New
Valley Realty, and its interests in Western Realty Development and Western
Realty Repin, are subject to intense competition, changes in consumer
preferences, and local economic conditions. BrookeMil, Western Realty
Development, Western Realty Repin and New Valley Realty are additionally subject
to the uncertainties relating to the real estate business, including, without
limitation, required capital improvements to facilities, local real estate
market conditions and federal, state, city and municipal laws and regulations
concerning, among others, zoning and environmental matters. Uncertainties
affecting New Valley generally include, without limitation, the effect of market
conditions on the salability of New Valley's investment securities, the
uncertainty of other potential acquisitions and investments by New Valley, the
effects of governmental regulation on New Valley's ability to target and/or
consummate any such acquisitions and the effects of limited management
experience in areas in which New Valley may become involved.
Results actually achieved may differ materially from expected results
included in these forward-looking statements as a result of these or other
factors. Due to such uncertainties and risks, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date on which such
20
<PAGE> 23
statements are made. New Valley does not undertake to update any forward-looking
statement that may be made from time to time on behalf of New Valley.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Market Risk" is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements and Notes thereto, together with
the report thereon of PricewaterhouseCoopers LLP dated March 20, 2000, beginning
on page 26 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE> 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information is contained in New Valley's definitive Proxy Statement
for its 2000 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission not later than 120 days after the end of the registrant's
fiscal year covered by this report pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, and incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
This information is contained in the Proxy Statement and incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is contained in the Proxy Statement and incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is contained in the Proxy Statement and incorporated
herein by reference.
22
<PAGE> 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) INDEX TO 1999 CONSOLIDATED FINANCIAL STATEMENTS:
The Consolidated Financial Statements and the Notes thereto, together with
the report thereon of PricewaterhouseCoopers LLP dated March 20, 2000, appear on
pages 26 through 52 of this report. Financial statement schedules not included
in this report have been omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or the Notes
thereto.
(A)(2) FINANCIAL STATEMENT SCHEDULES:
<TABLE>
<S> <C>
Schedule III -- Real Estate and Accumulated Depreciation.... Page 54
</TABLE>
(A)(3) EXHIBITS
<TABLE>
<C> <C> <S>
* (2)(a) -- Stock Purchase Agreement, dated as of January 31, 1997,
among BrookeMil, Brooke (Overseas), BGLS and New Valley
(incorporated by reference to Exhibit 10.1 in New Valley's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998).
* (b) -- Amended and Restated Limited Liability Company Agreement
(Second Restatement), dated as of February 20, 1998, by and
among Western Realty Development, New Valley, BrookeMil and
Apollo Real Estate Investment Fund III, L.P. (incorporated
by reference to Exhibit 10.1 in New Valley's Current Report
on Form 8-K dated February 20, 1998).
* (c) -- Limited Liability Company Agreement, dated as of June 18,
1998, by and among Western Realty Repin, Apollo Real Estate
Investment Fund III, L.P., and New Valley (incorporated by
reference to Exhibit 10.3 in New Valley's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1998).
* (3)(a) -- Amended and Restated Certificate of Incorporation dated June
4, 1999 of New Valley (incorporated by reference to Exhibit
3(a) in New Valley's Form S-1, dated June 14, 1999,
Registration No. 333-79837).
* (b) -- By-Laws of New Valley adopted July 29, 1996 (incorporated by
reference to Exhibit (3)(ii) in New Valley's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1996).
* (4) -- Form of Warrant Agreement, dated as of June 4, 1999, between
American Stock Transfer & Trust Company, as Warrant Agent,
and New Valley including form of warrant (incorporated by
reference to Exhibit 4(c) in New Valley's Form S-1, dated
June 14, 1999, Registration No. 333-79837).
*(10)(a)(i) -- Restricted Share Agreement, dated November 18, 1996, by and
between New Valley and Howard M. Lorber (incorporated by
reference to Exhibit 10(a)(ii) in New Valley's Form 10-K for
the fiscal year ended December 31, 1996).
* (ii) -- Option Agreement, dated November 18, 1996, between New
Valley and Howard M. Lorber (incorporated by reference to
Exhibit 10(a)(iii) in New Valley's Form 10-K for the fiscal
year ended December 31, 1996).
* (b)(i) -- Employment Agreement, dated as of June 1, 1995, as amended,
effective as of January 1, 1996, between New Valley and
Bennett S. LeBow (incorporated by reference to Exhibit
10(b)(i) in New Valley's Form 10-K for the fiscal year ended
December 31, 1995).
* (ii) -- Employment Agreement ("Lorber Employment Agreement"), dated
as of June 1, 1995, as amended, effective as of January 1,
1996, between New Valley and Howard M. Lorber (incorporated
by reference to Exhibit 10(b)(ii) in New Valley's Form 10-K
for the fiscal year ended December 31, 1995).
</TABLE>
23
<PAGE> 26
<TABLE>
<C> <C> <S>
* (iii) -- Amendment dated January 1, 1998 to Lorber Employment
Agreement (incorporated by reference to Exhibit 10(b)(iii)
in New Valley's Form 10-K for the fiscal year ended December
31, 1997).
* (iv) -- Employment Agreement, dated September 22, 1995, between New
Valley and Richard J. Lampen (incorporated by reference to
Exhibit 10(c) in New Valley's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1995).
* (v) -- Employment Agreement, dated August 1, 1999, between New
Valley and J. Bryant Kirkland III (incorporated by reference
to Exhibit 10.2 in New Valley's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999).
* (c) -- Sale-Purchase Agreement, dated as of September 2, 1998, by
and between New Valley and PW/MS OP Sub I, LLC (incorporated
by reference to Exhibit 2.1 in New Valley's Current Report
on Form 8-K dated September 28, 1998).
* (d) -- Purchase and Sale Agreement dated as of June 23, 1999
between New Valley and P.O'B Montgomery & Company
(incorporated by reference to Exhibit 2.1 in New Valley's
Current Report on Form 8-K dated August 30, 1999).
* (e) -- Expense Sharing Agreement, dated as of January 18, 1995, by
and between Brooke and New Valley (incorporated by reference
to Exhibit 10(a) in New Valley's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1995).
* (f)(i) -- TMC Investment Partnership Agreement, dated as of February
2, 1996, between Ladenburg Thalmann Capital Corp. and
Levin-A Limited Partnership (incorporated by reference to
Exhibit 10(r) in New Valley's Form 10-K for the fiscal year
ended December 31, 1995).
* (ii) -- Asset Purchase Agreement, dated as of May 18, 1999, by and
between Oracle Corporation and Thinking Machines Corporation
(incorporated by reference to Exhibit 10(h)(ii) in New
Valley's Form S-1, dated June 14, 1999, Registration No.
333-79837).
* (g) -- Form of Margin Agreement, dated September 12, 1995, between
ALKI and Bear Stearns & Co. (incorporated by reference to
Exhibit 2 in the Schedule 13D filed by, among others, New
Valley with the SEC on March 11, 1996, as amended, with
respect to the common stock of RJR Nabisco Holdings Corp.).
* (h)(i) -- Participating Loan Agreement, dated as of April 28, 1998, by
and between Western Realty Development, Western Tobacco
Investments and Brooke (Overseas) (incorporated by reference
to Exhibit 10.2 in New Valley's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998).
* (ii) -- Participating Loan Agreement, dated as of June 18, 1998, by
and between Western Realty Repin and BrookeMil (incorporated
by reference to Exhibit 10.4 in New Valley's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1998).
(21) -- Subsidiaries of New Valley.
(27) -- Financial Data Schedule (for SEC use only).
(99) -- Western Realty Development LLC's Consolidated Financial
Statements for the year ended December 31, 1999 and for the
period February 20, 1998 (date of inception) to December 31,
1998.
</TABLE>
- ---------------
* Incorporated by reference.
The foregoing list omits instruments defining the rights of holders of
long-term debt of New Valley and its consolidated subsidiaries where the total
amount of securities authorized thereunder does not exceed 10% of the total
assets of New Valley and its consolidated subsidiaries. New Valley hereby agrees
to furnish a copy of each such instrument or agreement to the SEC upon request.
24
<PAGE> 27
Exhibits not filed herewith are incorporated by reference to the exhibits
in the prior filings indicated in parenthesis. Each management contract or
compensatory plan or arrangement required to be filed as an exhibit to this
report pursuant to Item 14(c) is listed in Exhibit Nos. 10(a) and 10(b).
(B) REPORTS ON FORM 8-K:
None
25
<PAGE> 28
NEW VALLEY CORPORATION
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
ITEMS 8, 14(A)(1) AND (2), AND 14(D)
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SCHEDULES OF THE REGISTRANT AND ITS SUBSIDIARIES,
REQUIRED TO BE INCLUDED IN ITEMS 8, 14(A)(1) AND (2), AND 14(D)
ARE LISTED BELOW:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants........ 27
Consolidated Balance Sheets as of December 31, 1999 and
1998................................................... 28
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997....................... 29
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) for the years ended December 31, 1999,
1998 and 1997.......................................... 30
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998
and 1997............................................... 31
Notes to Consolidated Financial Statements................ 33
FINANCIAL STATEMENT SCHEDULES:
Schedule III -- Real Estate and Accumulated
Depreciation........................................... 54
Financial Statement Schedules not listed above have been
omitted because they are not applicable or the required
information is contained in the Consolidated Financial
Statements or accompanying Notes.
Thinking Machines Corporation
Report of Independent Accountants......................... 56
Western Realty Development LLC
The consolidated financial statements of Western Realty
Development LLC are filed as Exhibit 99 to this report and
are incorporated herein by reference.
</TABLE>
26
<PAGE> 29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and the
Stockholders of New Valley Corporation
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements listed in the index appearing under Item
14(a)(1) of this Form 10-K present fairly, in all material respects, the
financial position of New Valley Corporation and its subsidiaries (the
"Company") at December 31, 1999 and December 31, 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedules listed in the index appearing under Item 14(a)(2) of this Form 10-K
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
did not audit the 1997 financial statements of Thinking Machines Corporation, a
consolidated subsidiary, which statements reflect total revenues of $4,168,262
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 these statements in accordance with auditing standards
generally accepted in the United States, 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 New Valley, and those of similar companies in the
Russian Federation, have been significantly affected, and could continue to be
affected for the foreseeable future, by the country's unstable economy caused in
part by the currency volatility in the Russian Federation.
/s/ PRICEWATERHOUSECOOPERS LLP
- ---------------------------------------------------------
Miami, Florida
March 20, 2000
27
<PAGE> 30
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 11,512 $ 16,444
Investment securities available for sale.................. 48,722 37,567
Trading securities owned.................................. 15,707 8,984
Restricted assets......................................... 3,239 1,220
Receivable from clearing brokers.......................... 10,903 22,561
Other current assets...................................... 1,360 4,675
-------- --------
Total current assets.............................. 91,443 91,451
-------- --------
Investment in real estate, net.............................. 53,353 82,875
Furniture and equipment, net................................ 8,409 10,444
Restricted assets........................................... 5,195 6,082
Long-term investments, net.................................. 8,730 9,226
Investment in joint venture................................. 48,680 65,193
Other assets................................................ 4,858 7,451
-------- --------
Total assets...................................... $220,668 $272,722
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Margin loans payable...................................... $ 983 $ 13,088
Current portion of notes payable and long-term
obligations............................................ 294 2,745
Accounts payable and accrued liabilities.................. 30,963 32,047
Prepetition claims and restructuring accruals............. 12,279 12,364
Income taxes.............................................. 16,285 18,702
Securities sold, not yet purchased........................ 7,625 4,635
-------- --------
Total current liabilities......................... 68,429 83,581
-------- --------
Notes payable............................................... 19,519 54,801
Other long-term liabilities................................. 41,341 23,450
Commitments and contingencies............................... -- --
Redeemable preferred shares................................. -- 316,202
Stockholders' equity (deficiency):
Cumulative preferred shares; liquidation preference of $0
and $69,769, dividends in arrears $0 and $165,856...... -- 279
Common Shares, $.01 par value; 100,000,000 and 850,000,000
shares authorized; 23,192,862 and 9,577,624 shares
outstanding............................................ 232 96
Additional paid-in capital................................ 868,673 550,119
Accumulated deficit....................................... (779,639) (758,016)
Unearned compensation on stock options.................... (333) (475)
Accumulated other comprehensive income.................... 2,446 2,685
-------- --------
Total stockholders' equity (deficiency)........... 91,379 (205,312)
-------- --------
Total liabilities and stockholders' equity
(deficiency).................................... $220,668 $272,722
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
28
<PAGE> 31
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Principal transactions, net............................... $ 19,722 $ 11,430 $ 16,754
Commissions............................................... 38,815 28,284 16,727
Corporate finance fees.................................... 8,340 14,733 11,116
Gain on sale of investments, net.......................... 2,373 11,768 19,202
Loss in joint venture..................................... (16,513) (4,976) --
Real estate leasing....................................... 7,056 20,577 27,067
Gain on sale of real estate............................... 3,828 4,682 1,290
Computer sales and service................................ 317 794 3,947
Interest and dividends.................................... 5,812 8,808 9,417
Gain on sale of assets.................................... 4,028 -- --
Gain on sale of subsidiary stock.......................... 4,256 -- --
Other income.............................................. 5,571 5,987 9,048
----------- ---------- ----------
Total revenues..................................... 83,605 102,087 114,568
----------- ---------- ----------
Costs and expenses:
Selling, general and administrative expenses.............. 99,627 110,375 119,205
Interest.................................................. 8,954 13,939 16,988
Provision for loss on long-term investments............... -- 3,185 3,796
----------- ---------- ----------
Total costs and expenses........................... 108,581 127,499 139,989
----------- ---------- ----------
Loss from continuing operations before income taxes and
minority interests........................................ (24,976) (25,412) (25,421)
Income tax provision........................................ 80 6 186
Minority interests in (income) loss from continuing
operations of consolidated subsidiaries................... (667) 2,089 1,347
----------- ---------- ----------
Loss from continuing operations............................. (25,723) (23,329) (24,260)
Discontinued operations:
Gain on disposal of discontinued operations............... 4,100 7,740 3,687
----------- ---------- ----------
Income from discontinued operations..................... 4,100 7,740 3,687
----------- ---------- ----------
Net loss.................................................... (21,623) (15,589) (20,573)
Dividend requirements on preferred shares................... (37,759) (80,964) (68,475)
----------- ---------- ----------
Net loss applicable to Common Shares........................ $ (59,382) $ (96,553) $ (89,048)
=========== ========== ==========
Income (loss) per common share (Basic and Diluted):
Continuing operations..................................... $ (3.65) $ (10.89) $ (9.68)
Discontinued operations................................... .24 .81 .38
----------- ---------- ----------
Net loss................................................ $ (3.41) $ (10.08) $ (9.30)
----------- ---------- ----------
Number of shares used in computation........................ 17,433,105.. 9,577,624 9,577,624
=========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
29
<PAGE> 32
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 TOTAL
--------- ------ ---------- ----------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996.............. $279 $ 96 $644,789 $(721,854) $(731) $5,057 $(72,364)
Net loss.............................. (20,573) (20,573)
Undeclared dividends and accretion on
redeemable preferred shares......... (45,148) (45,148)
Unrealized gain on investment
securities.......................... 2,539 2,539
Compensation expense on stock option
grants.............................. 15 15
Adjustment to unearned compensation on
stock options....................... (558) 558 --
Public sale of subsidiaries' common
stock, net.......................... 5,132 5,132
---- ---- -------- --------- ----- ------ --------
Balance, December 31, 1997.............. 279 96 604,215 (742,427) (158) 7,596 (130,399)
Net loss.............................. (15,589) (15,589)
Undeclared dividends and accretion on
redeemable preferred shares......... (54,520) (54,520)
Adjustment to unearned compensation on
stock options....................... 424 (424) --
Compensation expense on stock option
grants.............................. 107 107
Unrealized loss on investment
securities.......................... (4,911) (4,911)
---- ---- -------- --------- ----- ------ --------
Balance, December 31, 1998.............. 279 96 550,119 (758,016) (475) 2,685 (205,312)
Net loss.............................. (21,623) (21,623)
Undeclared dividends and accretion on
redeemable preferred shares......... (25,830) (25,830)
Unrealized loss on investment
securities.......................... (239) (239)
Effect of recapitalization and reverse
split............................... (279) 137 142 --
Expenses related to
recapitalization.................... (777) (777)
Conversion of redeemable preferred
shares to common shares............. 343,435 343,435
Effect of purchase of subsidiary's
preferred stock..................... 1,542 1,542
Adjustment to unearned compensation on
stock options....................... (59) 59 --
Compensation expense on stock option
grants.............................. 348 83 431
Repurchase of common shares........... (1) (191) (192)
Other, net............................ (56) (56)
---- ---- -------- --------- ----- ------ --------
Balance, December 31, 1999.............. $ -- $232 $868,673 $(779,639) $(333) $2,446 $ 91,379
==== ==== ======== ========= ===== ====== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
30
<PAGE> 33
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(21,623) $(15,589) $(20,573)
Adjustments to reconcile net loss to net cash provided
from (used for) operating activities:
Income from discontinued operations.................. (4,100) (7,740) (3,687)
Depreciation and amortization........................ 2,918 6,495 9,414
Loss in joint venture................................ 16,513 4,976 --
Provision for loss on long-term investments.......... -- 3,185 3,796
Gain on sale of other assets......................... (4,028) -- --
Gain on sale of subsidiary stock..................... (4,256) -- --
Gain on sales of real estate and liquidation of
long-term Investments............................. (5,940) (9,452) (1,290)
Stock based compensation expense..................... 2,015 3,151 2,934
Other................................................ 1,745 578 --
Changes in assets and liabilities, net of effects
from acquisitions and dispositions:
Decrease in receivables and other assets.......... 12,680 19,376 4,474
Increase (decrease) in accounts payable and
accrued
liabilities..................................... 3,676 (26,677) 4,683
-------- -------- --------
Net cash used for continuing operations..................... (400) (21,697) (249)
Net cash provided from discontinued operations.............. 4,100 7,740 --
-------- -------- --------
Net cash provided from (used for) operating activities...... 3,700 (13,957) (249)
-------- -------- --------
Cash flows from investing activities:
Sale or maturity of investment securities.............. 11,197 22,888 45,472
Purchase of investment securities...................... (19,532) (19,429) (30,756)
Sale or liquidation of long-term investments........... 5,810 25,895 2,807
Purchase of long-term investments...................... (7,000) (13,590) (15,384)
Sale of real estate, net of closing costs.............. 46,208 111,292 8,718
Purchase of and additions to real estate............... (14,344) (18,236) (10,777)
Purchase of furniture and equipment.................... (426) (583) (3,478)
Sale of other assets................................... 5,857 -- --
Sale of subsidiary's stock............................. 5,137 -- --
Payment of prepetition claims and restructuring
accruals............................................. (84) (1,061) (828)
Payment for acquisitions, net of cash acquired......... -- -- (20,014)
(Increase) decrease in restricted assets............... (1,412) (1,586) 3,130
Cash contributed to joint venture...................... -- (442) --
Purchase of subsidiary's preferred stock............... (1,509) -- --
Other, net............................................. (125) (935) --
-------- -------- --------
Net cash provided from (used for) investing activities...... 29,777 104,213 (21,110)
-------- -------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
31
<PAGE> 34
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from participating loan....................... 11,575 14,300 --
(Decrease) increase in margin loans payable............ (12,105) 76 13,012
Repayment (issuance) of note receivable to related
party................................................ 950 (950) --
Payment of long-term notes and other liabilities....... (57,636) (99,303) (62,739)
Increase in long-term borrowings....................... 19,898 -- 19,993
Issuance of subsidiary stock........................... -- -- 5,417
Expenses associated with recapitalization.............. (777) -- --
Repurchase of common stock............................. (194) -- --
Other, net............................................. (120) 459 --
-------- -------- --------
Net cash used for financing activities...................... (38,409) (85,418) (24,317)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents........ (4,932) 4,838 (45,676)
Cash and cash equivalents, beginning of year................ 16,444 11,606 57,282
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 11,512 $ 16,444 $ 11,606
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest............................................... $ 4,256 $ 11,958 $ 16,667
Income taxes........................................... 1,893 169 116
Detail of acquisitions:
Fair value of assets acquired............................. $ -- $ -- $ 94,114
Liabilities assumed....................................... -- -- 74,100
-------- -------- --------
Cash paid for acquisition................................. -- -- 20,014
-------- -------- --------
Detail of contribution to joint venture:
Fair value of assets contributed.......................... $ -- $ 97,107 $ --
Liabilities contributed................................... -- (37,380) --
Capital contribution...................................... -- (60,169) --
-------- -------- --------
Net cash contributed to joint venture..................... $ -- $ (442) $ --
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
32
<PAGE> 35
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"). Investments in
corporate joint ventures are accounted for under the equity method (Note 4). 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 1997 and 1998 financial statements have been
reclassified to conform to the 1999 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 investment in Internet-related businesses. As discussed in Note 22, the
investment banking and brokerage segment accounted for 92% and 65% of the
Company's revenues for the years ended December 31, 1999 and 1998, 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.
PLAN OF RECAPITALIZATION
On June 4, 1999, the Company consummated a plan of recapitalization
following approval by the Company's stockholders. Under the recapitalization
plan, each of the Company's Class A Senior Preferred Shares was reclassified and
changed into 20 Common Shares and one Warrant to purchase Common Shares. Each of
the Class B Preferred Shares was reclassified and changed into one-third of a
Common Share and five Warrants. Each outstanding Common Share was reclassified
and changed into one-tenth of a Common Share and three-tenths of a Warrant. The
authorized number of Common Shares were reduced from 850,000,000 to 100,000,000.
The Warrants issued as part of the recapitalization plan have an exercise price
of $12.50 per share subject to adjustment in certain circumstances and are
exercisable until June 14, 2004. The Warrants are not callable by the Company
for a three-year period.
The recapitalization had a significant effect on the Company's financial
position and results of operations. As a result of the exchange of the
outstanding preferred shares for common shares and warrants in the
recapitalization, the Company's stockholders' equity increased by $343,435 from
the elimination of the carrying value and dividend arrearages on the redeemable
preferred stock. Furthermore, the recapitalization resulted in the elimination
of the on-going dividend accruals on the existing redeemable preferred shares of
the Company, as well as the redemption obligation for the Series A Preferred
Shares in January 2003. Also, as a result of the recapitalization, the number of
outstanding Common Shares more than doubled, and additional Common Shares were
reserved for issuance upon exercise of the Warrants. In addition, Brooke Group
Ltd. ("Brooke"), the Company's principal stockholder, increased its ownership of
the Common Shares from 42.3% to 55.1%, and its total voting power from 42% to
55.1%. At December 31, 1999, Brooke owned 55.4% of the Company's Common Shares.
REORGANIZATION
The Company was originally organized in 1851 and operated for many years
under the name "Western Union Corporation". In 1991, bankruptcy proceedings were
commenced against the Company. In January 1995, the Company emerged from
bankruptcy. As part of the bankruptcy plan, the Company sold the Western
33
<PAGE> 36
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Union money transfer and messaging services businesses and all allowed claims in
the bankruptcy were paid in full.
At December 31, 1999, the Company's remaining accruals totaled $12,279 for
unsettled prepetition claims and restructuring accruals (see Note 18). 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.
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 at December 31, 1998 was 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, 1999 consisted
primarily of $5,147 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, 1998 consisted primarily of $5,831 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
34
<PAGE> 37
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and liabilities recognized for financial reporting purposes and the amounts
recognized for tax purposes as well as tax credit carryforwards and loss
carryforwards. These deferred taxes are measured by applying currently enacted
tax rates. A valuation allowance reduces deferred tax assets when it is deemed
more likely than not that some portion or all of the deferred tax assets will
not be realized.
Securities Sold, Not Yet Purchased. Securities sold, not yet purchased
represent obligations of the Company to deliver a specified security at a
contracted price and thereby create a liability to repurchase the security in
the market at prevailing prices. Accordingly, these transactions involve, to
varying degrees, elements of market risk, as the Company's ultimate obligation
to satisfy the sale of securities sold, not yet purchased may exceed the amount
recognized in the consolidated balance sheet.
Real Estate Leasing Revenues. The real estate properties are being leased
to tenants under operating leases. Base rental revenue is generally recognized
on a straight-line basis over the term of the lease. The lease agreements for
certain properties contain provisions which provide for reimbursement of real
estate taxes and operating expenses over base year amounts, and in certain cases
as fixed increases in rent. In addition, the lease agreements for certain
tenants provide additional rentals based upon revenues in excess of base
amounts, and such amounts are accrued as earned. The future minimum rents
scheduled to be received on non-cancelable operating leases at December 31, 1999
are $2,067 in 2000, $1,906 in 2001, $1,627 in 2002, $755 in 2003, $626 in 2004
and $590 thereafter.
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 and Warrants to
purchase Common Shares were not included in the computation of diluted loss per
share as the effect would have been anti-dilutive.
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. 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, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS 133 requires
that all derivative instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. The Company has not yet determined the impact that the adoption of
SFAS No. 133 will have on its earnings or statement of financial position.
3. ACQUISITIONS AND DISPOSITIONS
In May 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. The excess of the consideration paid
35
<PAGE> 38
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In January 1996, the Company acquired four office buildings and eight
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. In September 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 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. In August 1999, the Company sold to entities
affiliated with P.O'B. Montgomery & Company five shopping centers for an
aggregate purchase price of $46,125 before closing adjustments and expenses. The
shopping centers were subject to approximately $35,023 of mortgage financing,
which was assumed by the purchasers at closing. In connection with the
transaction, the Company recorded a gain of $3,849 associated with the
transaction.
In June 1999, Thinking Machines, the Company's 73% owned subsidiary, sold
substantially all of its assets, consisting of its Darwin(R)software and
services business, to Oracle Corporation. The purchase price was $4,700 in cash
at the closing of the sale and up to an additional $20,300, payable in cash on
January 31 in each of the years 2001 through 2003, based on sales by Oracle of
Darwin product above specified sales targets. The Company recorded a gain of
$3,801 in connection with the sale in 1999. The operations and related gain
associated with Thinking Machines have not been classified as discontinued
operations based on the fact that substantial revenues were not realized from
the Darwin(R) product.
At the closing of the Oracle sale, $4,136 of loans, including interest,
were repaid by Thinking Machines to the Company and the Company offered to
purchase all of Thinking Machines' outstanding preferred stock for $1,950.
Approximately 77% of Thinking Machines' preferred stockholders tendered their
stock to New Valley in the third quarter of 1999. In connection with the
repurchase, the Company recorded an increase to equity of $1,542 in the third
quarter of 1999, which represented the difference between the purchase price and
carrying value of the stock.
On January 31, 1997, the Company entered into a purchase agreement with
Brooke (Overseas) Ltd. ("Brooke (Overseas)"), a wholly-owned subsidiary of
Brooke, an affiliate of the Company, under which the Company acquired 10,483
shares of BrookeMil Ltd. ("BrookeMil") common stock. These BrookeMil shares
comprise 99.1% of the outstanding shares of BrookeMil, which is engaged in the
real estate development business in Moscow, Russia. The Company paid Brooke
(Overseas) a purchase price of $55,000 for the BrookeMil shares, consisting of
$21,500 in cash and a $33,500 9% note. The note, which was collateralized by the
BrookeMil shares, was paid during 1997.
BrookeMil is developing a three-phase complex on 2.2 acres of land in
downtown Moscow, 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
constructed and leased. On April 18, 1997, BrookeMil sold Ducat Place I to one
of its tenants for approximately $7,500. This price had been reduced to reflect
prepayments of rent. In 1997, BrookeMil completed construction of Ducat Place
II, a 150,000 sq. ft. office building. Ducat Place II has been leased to a
number of leading international companies. The third phase, Ducat Place III, has
been planned as a 450,000 sq. ft. mixed-use complex. The site of Ducat Place III
was used by a subsidiary of Brooke (Overseas) as the site for a factory.
36
<PAGE> 39
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the BrookeMil purchase agreement, certain liabilities of BrookeMil
aggregating approximately $40,000 remained as liabilities of BrookeMil after the
purchase of the BrookeMil shares. These liabilities included a $20,400
construction loan from a Russian bank. In addition, the liabilities of BrookeMil
at the time of purchase included approximately $13,800 of rents and related
payments prepaid by tenants of Ducat Place II for periods generally ranging from
15 to 18 months.
The fair value of the assets acquired, including goodwill of $12,400 was
$95,500. The Company, through its interest in Western Realty Development LLC, is
amortizing the goodwill over a five-year period.
In August 1997, BrookeMil refinanced all amounts due under the construction
loan with borrowings under a new credit facility with another Russian bank. The
new credit facility bears interest at 16% per year, matures no later than August
2002, with principal payments commencing after the first year, and is
collateralized by a mortgage on Ducat Place II and guaranteed by the Company. At
December 31, 1999, borrowings under the new credit facility totaled $14,656.
On December 23, 1999, the Company completed the sale of a 19.9% interest in
Ladenburg to Berliner Effektengesellschaft AG ("Berliner"), a German public
financial holding company. The Company received approximately $10,200 in cash
and Berliner shares valued in accordance with the purchase agreement. Pursuant
to the agreement, Berliner also acquired a three-year option to purchase
additional interests in Ladenburg subject to certain conditions. The Company
recorded a $4,256 gain in 1999 in connection with the transaction.
The following table presents unaudited pro forma results from continuing
operations as if the recapitalization, the Thinking Machines sale, the sale of
the five U.S. shopping centers and the sale of the office buildings had occurred
on January 1, 1999 and January 1, 1998, 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, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Revenues.................................................... $ 72,041 $ 80,989
======== ========
Loss from continuing operations............................. $(28,962) $(22,933)
======== ========
Loss from continuing operations applicable to common
shares.................................................... $(28,962) $(22,933)
======== ========
Loss from continuing operations per common share............ $ (1.25) $ (0.99)
======== ========
</TABLE>
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
Development") to make real estate and other investments in Russia. The Company
agreed to contribute the real estate assets of BrookeMil, including Ducat Place
II and the site for Ducat Place III, to Western Realty Development and Apollo
agreed to contribute up to $65,900, including the investment in Western Realty
Repin discussed below.
The ownership and voting interests in Western Realty Development are held
equally by Apollo and the Company. Apollo will be entitled to a preference on
distributions of cash from Western Realty Development to the extent of its
investment of $40,000, of which $39,606 had been funded through December 31,
1999, together with a 15% annual rate of return. The Company will then be
entitled to a return of $20,000 of BrookeMil-related expenses incurred and cash
invested by the Company since March 1, 1997, together with a 15% annual rate of
return; subsequent distributions will be made 70% to the Company and 30% to
Apollo.
37
<PAGE> 40
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Western Realty Development is managed by a Board of Managers consisting of an
equal number of representatives chosen by Apollo and the Company. Material
corporate transactions by Western Realty Development will generally require the
unanimous consent of the Board of Managers. Accordingly, the Company has
accounted for its non-controlling interest in Western Realty Development using
the equity method of accounting.
In March 2000, Apollo and New Valley each agreed to increase its capital
commitment to Western Realty Development by $3,750. Management believes that
this additional funding commitment will be sufficient to support Western Realty
Development's expected cash flow needs over the next 12 months.
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 Development to the extent that cumulative earnings of Western
Realty Development are not sufficient to satisfy Apollo's preferred return.
Western Realty Development may seek additional real estate and other
investments in Russia. Western Realty Development has made a $30,000
participating loan to, and payable out of a 30% profits interest in, Western
Tobacco Investments LLC ("WTI"), which holds the interests of Brooke (Overseas),
a subsidiary of Brooke, in Liggett-Ducat Ltd. and the new factory constructed by
Liggett-Ducat Ltd. on the outskirts of Moscow. Western Realty Development is
entitled to receive a 15% annual rate of return on amounts advanced on the loan
under certain circumstances in the event of a sale or refinancing of WTI or the
new factory. Western Realty Development has recognized as other income $5,858
and $1,991, which represent the 15% return on the loan plus 30% of any net
income applicable to common interests of WTI, for the year ended December 31,
1999 and the period from April 28, 1998 (date of inception) to December 31,
1998, respectively.
In 1999, Western Realty Development evaluated the recoverability of its
long-lived assets in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of." In 1999, Western Realty
Development determined a permanent impairment had occurred related to economic
difficulties in the Russian economy following the financial crisis of August
1998. Based on an appraisal conducted by an independent third party, Western
Realty Development recorded an impairment charge for the year ended December 31,
1999 of $11,561 associated with its investment in the site for the proposed
Ducat Place III office building and related goodwill. The fair market value was
determined based on current market conditions and anticipated future discounted
cash flows. Management has concluded that the site for the proposed Ducat Place
III office building had a fair value of $16,000 at December 31, 1999.
38
<PAGE> 41
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information as of December 31, 1999 and 1998 and for
year ended December 31, 1999 and the period from February 20, 1998 (date of
inception) to December 31, 1998 for Western Realty Development follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Current assets....................................... $ 3,557 $ 857
Participating loan receivable........................ 37,849 31,991
Real estate, net..................................... 77,988 85,761
Furniture and fixtures, net.......................... 249 179
Other noncurrent assets.............................. 320 631
Goodwill, net........................................ 722 7,636
Notes payable -- current............................. 6,445 5,299
Other current liabilities............................ 7,067 5,802
Notes payable -- long term........................... 8,211 14,356
Other long-term liabilities.......................... 752 756
Members' equity...................................... 98,210 100,842
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 20, 1998
YEAR ENDED (DATE OF INCEPTION) TO
DECEMBE 31, 1999 DECEMBER 31, 1998
----------------- ----------------------
<S> <C> <C>
Revenues........................................... $11,537 $ 10,176
Costs and expenses................................. 15,708 13,099
Real estate impairment charge...................... 11,561 --
Accretion of return on participating loan.......... 5,858 1,991
Income tax expense................................. -- 760
Net loss........................................... (9,874) (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 loan to BrookeMil. The proceeds of the loan
will be used by BrookeMil for the acquisition and preliminary development of two
adjoining sites totaling 10.25 acres located in Moscow across the Moscow River
from the Kremlin. BrookeMil is planning the development of a hotel, office,
retail and residential complex on the Kremlin sites. BrookeMil owned 95.9% of
one site and 100% of the other site at December 31, 1999. Apollo will be
entitled to a preference on distributions of cash from Western Realty Repin to
the extent of its investment of $25,875, together with a 20% annual rate of
return, and the Company will then be entitled to a return of its investment of
$10,525, together with a 20% annual rate of return. Subsequent distributions
will be made 50% to the Company and 50% to Apollo. Western Realty Repin is
managed by a Board of Managers consisting of an equal number of representatives
chosen by Apollo and the Company. Material corporate transactions by Western
Realty Repin will generally require the unanimous consent of the Board of
Managers.
Through December 31, 1999, Western Realty Repin had advanced $36,400 to
BrookeMil, of which $25,875 was funded by Apollo and is classified in other
long-term obligations on the consolidated balance sheet at December 31, 1999.
The loan bears no fixed interest and is payable only out of distributions by the
entities owning the Kremlin sites to BrookeMil. Such distributions must be
applied first to pay the principal of the loan and then as contingent
participating interest on the loan. Any rights of payment on the loan are
subordinate to the rights of all other creditors of BrookeMil. BrookeMil used a
portion of the proceeds of the loan to repay the Company for certain
expenditures on the Kremlin sites previously incurred. The loan is due and
payable upon the dissolution of BrookeMil and is collateralized by a pledge of
the Company's shares of BrookeMil.
39
<PAGE> 42
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1999, BrookeMil had invested $32,003 in the Kremlin
sites and held $929 in cash and $1,418 in receivables from an affiliate, both of
which were restricted for future investment in the Kremlin sites. As of December
31, 1998, BrookeMil had invested $18,013 in the Kremlin sites and held $252, in
restricted cash. In connection with the acquisition of its interest in one of
the Kremlin sites, BrookeMil has agreed with the City of Moscow to invest an
additional $22,000 by May 2000 in the development of the property. Failure to
make the required investment could result in forfeiture of a 34.8% interest in
the site.
The Company has accounted for the formation of Western Realty Repin as a
financing by Apollo and a contribution of assets into a consolidated subsidiary
by the Company which is eliminated in consolidation. Based on the distribution
terms contained in the Western Realty Repin LLC agreement, the 20% annual rate
of return preference to be received by Apollo on funds advanced to Western
Realty Repin is treated as interest cost in the consolidated statement of
operations.
The development of Ducat Place III and the Kremlin sites will require
significant amounts of debt and other financing. The Company is considering
potential financing alternatives on behalf of Western Realty Development and
BrookeMil. However, in light of the recent economic turmoil in Russia, there is
a risk that such financing will not be available on acceptable terms. Failure to
obtain sufficient capital for the projects would force Western Realty
Development and BrookeMil to curtail or delay the planned development of Ducat
Place III and the Kremlin sites.
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 $2,446 and $2,685 at December 31,
1999 and 1998, 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>
1999
Marketable equity securities.................... $45,213 $11,024 $12,737 $43,500
Notes receivable................................ 1,063 -- -- 1,063
Marketable warrants............................. -- 4,159 -- 4,159
------- ------- ------- -------
Investment securities........................... $46,276 $15,183 $12,737 $48,722
======= ======= ======= =======
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
======= ======= ======= =======
</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 under its various debt obligations. The
Company wrote down this investment to zero resulting in a $3,185 charge to
operations.
40
<PAGE> 43
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999 DECEMBER 31, 1998
--------------------------- ---------------------------
TRADING SECURITIES TRADING SECURITIES
SECURITIES SOLD, NOT YET SECURITIES SOLD, NOT YET
OWNED PURCHASED OWNED PURCHASED
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Common stock........................... $13,306 $6,522 $4,243 $4,395
Equity and index options............... 1,973 1,087 870 240
Other.................................. 428 16 3,871 --
------- ------ ------ ------
$15,707 $7,625 $8,984 $4,635
======= ====== ====== ======
</TABLE>
7. INVESTMENT IN REAL ESTATE AND NOTES PAYABLE
The components of the Company's investment in real estate and the related
non-recourse notes payable collateralized by such real estate at December 31,
1999 are as follows:
<TABLE>
<CAPTION>
RUSSIAN
REAL SHOPPING
ESTATE CENTERS TOTAL
------- -------- -------
<S> <C> <C> <C>
Land...................................................... $32,003 $ 4,542 $36,545
Buildings................................................. -- 19,053 19,053
------- ------- -------
Total........................................... 32,003 23,595 55,598
Less accumulated depreciated.............................. -- (2,245) (2,245)
------- ------- -------
Net investment in real estate............................. $32,003 $21,350 $53,353
======= ======= =======
Notes payable............................................. $ -- $19,813 $19,813
Current portion of notes payable.......................... -- 277 294
------- ------- -------
Notes payable -- long-term portion........................ $ -- $19,536 $19,519
======= ======= =======
</TABLE>
In connection with the sale of five shopping centers in August 1999, the
Company refinanced the notes payable on its two remaining shopping centers in
Royal Palm Beach, Florida and Kanawha, West Virginia and transferred the Kanawha
shopping center to a 99.0% owned limited liability company. The Royal Palm
Beach, Florida shopping center is now subject to a $6,899 senior mortgage note
due September 2016 which is callable by the lender after March 2001 and bears
interest at 7.5% per annum and a $1,560 junior mortgage note due on the earlier
of September 2002 or the due date of the senior loan which bears interest at
9.0% per annum. The Kanawha, West Virginia shopping center is now subject to a
$6,981 senior mortgage note due September 2024 which bears interest at 9.03% per
annum for the first seven years and at floating rates thereafter (or 11.03% per
annum if the loan is still in a securitization) and a $4,388 subordinated note
due September 2006 which bears interest at 9.0% per annum. The financing on the
two remaining shopping centers is non-recourse to 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.
Remaining required principal payments on the notes are $277 in 2000, $8,332
in 2001, $95 in 2002, $104 in 2003, $114 in 2004 and $10,891 thereafter.
41
<PAGE> 44
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 depreciated.............................. -- (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 seven promissory notes aggregating $54,801 due 2001 related to
the shopping centers. Each shopping center note had a term of five years,
required no principal amortization, and bore 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 notes were paid in full in connection with the sale
of the five shopping centers.
8. LONG-TERM INVESTMENTS
Long-term investments consisted of investments in the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Limited partnerships........................... $8,730 $13,788 $9,226 $12,282
</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, 1999. 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 an investment 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. 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. In May, 1998, the Company's
interest in the development stage company decreased to 47.8% and the Company
began accounting for its investment using the equity method of accounting.
Also included in long-term investments are various Internet-related
businesses which are carried at $5,598 at December 31, 1999. These investments
include an approximate 4% interest in JFAX.COM, Inc. JFAX is an Internet-based
messaging and communications services provider to individuals and businesses,
which completed an initial public offering in July 1999. The Company also has
invested $4,500 for a 33.33%
42
<PAGE> 45
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest in AtomicPop at December 31, 1999, which is engaged in the online music
industry. The Company also owns smaller interests in other Internet companies.
The Company recognized gains of $659 and $4,652 on liquidations of
investments of certain limited partnerships for the years ended December 31,
1999 and 1998, respectively.
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 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. The plan was inactive in 1997, 1998 and 1999.
The Company maintains 401(k) plans for substantially all employees. 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 1999 and 1998.
10. COMMITMENT AND CONTINGENCIES
LEASES
The Company and Ladenburg are currently obligated under two noncancelable
lease agreements for office space, expiring in May 2003 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, 1999:
<TABLE>
<S> <C>
2000........................................................ $ 5,074
2001........................................................ 4,259
2002........................................................ 4,073
2003........................................................ 3,707
2004 and thereafter......................................... 46,537
-------
Total............................................. $63,650
=======
</TABLE>
Rental expense for operating leases was $6,293 in 1999, $6,397 in 1998 and
$4,404 in 1997.
Effective September 1, 1999, Ladenburg is subleasing office space for
approximately $722 per year with annual increases. The sublease expires on
August 31, 2009.
LAWSUITS
In March 1997, a stockholder derivative suit was filed against the Company,
as a nominal defendant, its directors and Brooke in the Delaware Chancery Court
by a stockholder of the Company. The suit alleges that the Company's purchase of
the BrookeMil shares constituted a self-dealing transaction which involved the
payment of excessive consideration by the Company. The plaintiff seeks (i) a
declaration that the Company's directors breached their fiduciary duties, Brooke
aided and abetted such breaches and such parties are therefore liable to the
Company, and (ii) unspecified damages to be awarded to the Company. In December
1999, another stockholder of the Company commenced an action in Delaware
Chancery Court substantially similar to the March 1997 action. This stockholder
alleges, among other things, that the consideration paid by the Company for the
BrookeMil shares was excessive, unfair and wasteful, that the special committee
of the
43
<PAGE> 46
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
company's board lacked independence, and that the appraisal by the independent
appraisal firm and the fairness opinion by the independent investment bank were
flawed. Brooke and the Company believe that the allegations in both cases are
without merit. By order of the court, both actions were consolidated. Brooke and
the Company recently filed a motion to dismiss the consolidated action. Although
there can be no assurances, management is of the opinion, after consultation
with counsel, that the ultimate resolution of this matter will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
In July 1999, a purported class action was commenced on behalf of the
Company's former Class B preferred shareholders against the Company, Brooke and
certain directors and officers of the Company in Delaware Chancery Court. The
complaint alleges that the recapitalization, approved by a majority of each
class of the Company's stockholders in May 1999, was fundamentally unfair to the
Class B preferred shareholders, the proxy statement relating to the
recapitalization was materially deficient and the defendants breached their
fiduciary duties to the Class B preferred shareholders in approving the
transaction. The plaintiffs seek class certification of the action and an award
of unspecified compensatory damages as well as all costs and fees. Although
there can be no assurances, in the opinion of management, after consultation
with counsel, the ultimate resolution of this matter will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
The Company is a defendant in various lawsuits and may be subject to
unasserted claims primarily in connection with its activities as a securities
broker-dealer and participation in public underwritings. These lawsuits and
claims involve substantial or indeterminate amounts and are in varying stages of
legal proceedings. In the opinion of management, after consultation with
counsel, the ultimate resolution of these matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
RUSSIAN OPERATIONS
The Russian Federation continues to experience economic difficulties
following the financial crisis of August 1998. Consequently, the country's
currency continues to devalue, there is continued volatility in the debt and
equity markets, hyperinflation persists, confidence in the banking sector has
yet to be restored and there continues to be a general lack of liquidity in the
economy. In addition, laws and regulations affecting businesses operating within
the Russian Federation continue to evolve.
The Russian Federation's return to economic stability is dependent to a
large extent on the effectiveness of the measures taken by the government,
decisions of international lending organizations, and other actions, including
regulatory and political developments, which are beyond the Company's control.
Russian Taxation: Russian taxation is subject to varying interpretations
and constant changes. Furthermore, the interpretation of tax legislation by tax
authorities as applied to the transactions and activity of the Company may not
coincide with that of management. As a result, transactions may be challenged by
tax authorities and the Company may be assessed additional taxes, penalties and
interest, which can be significant.
Management regularly reviews the Company's taxation compliance with
applicable legislation, laws and decrees and current interpretations and from
time to time potential exposures are identified. At any point in time a number
of open matters may exist, however, management believes that adequate provision
has been made for all material liabilities. Tax years remain open to review by
the authorities for three years.
11. FEDERAL INCOME TAX
At December 31, 1999, the Company had $101,648 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
44
<PAGE> 47
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999, 1998 and 1997, 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>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Loss from continuing operations........................ $(25,643) $(23,323) $(24,074)
-------- -------- --------
Benefit under statutory U.S. tax rates................. (8,975) (8,163) (8,426)
Increase (decrease) in taxes resulting from:
Nontaxable items....................................... 2,608 4,281 2,603
State taxes, net of Federal benefit.................... 39 4 55
Foreign Taxes.......................................... 17 -- 108
Increase in valuation reserve, net of tax audit
adjustments.......................................... 6,391 3,884 5,846
-------- -------- --------
Income tax provision................................... $ 80 $ 6 $ 186
======== ======== ========
</TABLE>
Income taxes associated with discontinued operations and extraordinary
items have been shown net of the utilization of the net operating loss
carryforward and the change in other deferred tax assets.
Deferred tax amounts are comprised of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward:
Restricted net operating loss............................... $ 9,337 $ 12,450
Unrestricted net operating loss............................. 56,574 70,552
Other....................................................... 38,114 21,718
--------- ---------
Total deferred tax assets......................... 104,025 104,720
--------- ---------
Deferred tax liabilities:
Other....................................................... (2,377) (2,659)
--------- ---------
Total deferred tax liabilities.................... (2,377) (2,659)
--------- ---------
Net deferred tax assets..................................... 101,648 102,061
Valuation allowance......................................... (101,648) (102,061)
--------- ---------
Net deferred taxes.......................................... $ -- $ --
========= =========
</TABLE>
In December 1987, the Company consummated various restructuring
transactions that included 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.
45
<PAGE> 48
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1999, the Company reached a settlement with the Internal Revenue Service
with respect to the 1993 to 1995 tax years. The settlements resulted in a
reduction of approximately $35,000 in the Company's net operating loss
carryforwards and payments of $1,464 for alternative minimum taxes for such
years. The Company's 1996 and 1997 tax years are presently under audit with the
IRS. The Company believes it has adequately reserved for any potential
adjustments which may occur.
As of December 31, 1999, the Company had consolidated net operating loss
carryforwards of approximately $164,000 for tax purposes, which expire at
various dates from 2002 through 2008. Approximately $23,200 net operating loss
carryforwards constitute pre-change losses and $140,800 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, 1999 DECEMBER 31, 1998
-------------------- --------------------
LONG-TERM CURRENT LONG-TERM CURRENT
PORTION PORTION PORTION PORTION
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Retiree and disability obligations............. $ 4,568 $500 $ 4,715 $500
Minority interests............................. 4,612 -- 2,699 --
Participating loan payable..................... 32,091 -- 15,795 --
Other long-term liabilities.................... 70 -- 241 --
------- ---- ------- ----
Total other long-term liabilities.... $41,341 $500 $23,450 $500
======= ==== ======= ====
</TABLE>
13. REDEEMABLE PREFERRED SHARES
In connection with the Company's recapitalization in June 1999, each of the
Company's Class A Senior Preferred Shares was reclassified into 20 Common Shares
and one Warrant to purchase Common Shares.
At December 31, 1998, 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, the carrying value of such shares amounted to $316,202, including
undeclared dividends of $219,068, or $204.46 per share.
Prior to the recapitalization, the holders of Class A Senior Preferred
Shares were 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
were 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 was 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.
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 were changed into 720,000 common shares and 36,000
warrants in connection with the plan of recapitalization. The Award Shares were
identical with all other Class A Senior Preferred Shares issued and outstanding
as of July 1, 1996, including declared dividends of $1,080. The Award Shares
vest one-sixth on July 1, 1997 and one-sixth on each of the five succeeding
one-year anniversaries thereof through July 1, 2002. The Company recorded $1,932
in 1999, $3,043 in 1998 and $2,934 in 1997 in compensation expense related to
the Award Shares, and the balance of the deferred compensation and the
unamortized discount related to the Award Shares was $2,265 at December 31, 1999
and $5,721 at December 31, 1998.
46
<PAGE> 49
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS
In connection with the Company's recapitalization in June 1999, each of the
Company's Class B Preferred Shares was reclassified into one-third of a Common
Share and five Warrants to purchase Common Shares.
Prior to the plan of recapitalization, the holders of the Class B Preferred
Shares, 12,000,000 shares authorized and 2,790,776 shares outstanding as of
December 31, 1998, were entitled to receive a quarterly dividend, as declared by
the Board of Directors, at a rate of $3.00 per annum. Undeclared dividends were
accrued quarterly at a rate of 12% per annum, and such accrued and unpaid
dividends accrued additional dividends, compounded monthly at the rate of 12%
per annum.
No dividends on the Class B Preferred Shares were 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 at
December 31, 1998. These undeclared dividends represented $59.43 per share as of
that date. No accrual was recorded for such undeclared dividends as the Class B
Preferred Shares were not mandatorily redeemable.
15. WARRANTS
As of December 31, 1999, there were 17,867,567 warrants outstanding. Each
warrant entitles the holder to purchase one Common Share at an exercise price of
$12.50 per share. The warrants became exercisable on June 14, 1999 and terminate
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 June 4, 2002, 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 exercise price will be reduced by the amount of 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.
16. STOCK OPTION PLANS
THE COMPANY
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 old common share options were changed into options to purchase
33,000 Common Shares and 99,000 Warrants for an aggregate exercise price of $191
in connection with the plan of recapitalization. The options on the Class B
Preferred Shares were changed into options to purchase 32,333 Common Shares and
485,000 Warrants at an aggregate exercise price of $179 in connection with the
plan of recapitalization. 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 July 1, 2002. The Company recognized
compensation expense of $83 in 1999, $108 in 1998, and $15 in 1997 from these
option grants and recorded deferred compensation of $333 and $475 representing
the intrinsic value of these options at December 31, 1999 and December 31, 1998,
respectively.
47
<PAGE> 50
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1999,
1998 and 1997 would have been increased by $316. 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.
On January 19, 2000, the Company adopted its 2000 Long-Term Incentive Plan,
subject to approval by the stockholders of the Company at the 2000 annual
meeting. The stock plan authorizes the granting of up to 2,500,000 Common
Shares, subject to adjustment, of the Company through awards of stock options
(which may include incentive stock options and/or nonqualified stock options),
stock appreciation rights and restricted Common Shares. All officer, employees
and consultants of the Company and its subsidiaries are eligible to receive
awards under the stock plan.
On January 19, 2000, the Company also adopted the Non-Employee Directors
Stock Option Program, subject to approval by the stockholders of the Company at
the 2000 annual meeting. A total of 200,000 Common Shares are issuable under the
program, subject to adjustment. Under the program, each non-employee director
will receive an option to acquire 10,000 Common Shares upon the later of the
adoption of the program or the date such individual becomes a non-employee
director. In addition, commencing with the 2001 annual meeting of stockholders
and with respect to each subsequent annual meeting, an option to acquire an
additional 5,000 Common Shares will be granted automatically to each
non-employee director upon reelection as a director. The exercise price for each
option awarded under the program will be equal to the fair market value of a
Common Share on the date of grant. Each option will become exercisable on the
first anniversary of the date of grant. On the date of adoption of the program,
options to purchase a total of 40,000 Common Shares for an exercise price of
$4 11/16 per share were issued to the four non-employee directors of the
Company, subject to stockholder approval.
BROOKE
Executive officers of New Valley participate in the 1999 Long-Term
Incentive Plan sponsored by Brooke. The Brooke stock plan provides for grants to
key employees of Brooke and its subsidiaries of stock options and various other
stock-based awards. The options granted under the plan in 1999 entitle the
recipients to purchase shares of Brooke Common Stock at a price either equal to,
or in excess of, the fair market value on the date of grant. The participants
also receive dividend equivalent rights on both vested and unvested option
shares. The options granted under the plan have a ten year term and become
exercisable on the fourth anniversary of the date of grant, subject to earlier
exercise upon a change of control or death or disability.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock options. Accordingly, no compensation cost has been
recognized by the Company for stock options granted to the executive officers.
Had compensation cost for the Brooke stock plan been determined in accordance
with the provisions of SFAS No. 123, the Company's net loss would have increased
by $117 in 1999. The fair value of the option grant was estimated at $6,195 on
the grant date using the Black-Scholes option-pricing model with the following
assumptions: volatility of 69.67% for the Brooke Common Stock, a risk-free
interest rate of 5.958%, an expected option life of 10 years, and no expected
dividends or forfeiture.
48
<PAGE> 51
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The composition of accounts payable and accrued liabilities is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Accounts payable and accrued liabilities:
Accrued compensation...................................... $ 7,792 $ 9,753
Deferred rent............................................. 5,234 4,739
Unearned revenues......................................... -- 79
Taxes (property and miscellaneous)........................ 7,037 7,037
Accrued expenses and other liabilities.................... 10,900 10,439
------- -------
Total............................................. $30,963 $32,047
======= =======
</TABLE>
18. PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS
The following is a schedule of prepetition claims and restructuring
accruals at December 31, 1999 and 1998. 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,
------------------
1999 1998
------- -------
<S> <C> <C>
Restructuring accruals(a)................................... $ 8,000 $ 8,085
Money transfer payable(b)................................... 4,279 4,279
------- -------
Total............................................. $12,279 $12,364
======= =======
</TABLE>
- ---------------
(a) Restructuring accruals at December 31, 1999 consisted of $6,907 of disputed
claims, primarily related to leases and former employee benefits, and $1,093
of other restructuring accruals.
(b) Represents unclaimed money transfers issued by the Company prior to January
1, 1990. The Company is currently in litigation in the 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.
19. RELATED PARTY TRANSACTIONS
At December 31, 1999, Brooke, a company under the control of Bennett S.
LeBow, Chairman of the Company's Board of Directors, owned approximately 55.4%
of the Company's Common Shares. 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 $307 in 1999, $502 in 1998 and $312 in 1997 under
this agreement.
On January 2, 1997, the Company loaned BGLS Inc. ("BGLS"), a wholly-owned
subsidiary of Brooke, $975 under a short-term promissory note due January 31,
1997 and bearing interest at 14%. The loan including interest was repaid on
January 31, 1997. In September 1998, the Company made a one-year $950 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. The loan
was repaid in full in 1999.
During 1998, one director of the Company and, during 1997, two directors of
the Company, were affiliated with law firms that rendered legal services to the
Company. The Company paid these firms $516 in 1998 and $568 in 1997 for legal
services. During 1999, one director of the Company served as a managing director
of an investment banking company that provided investment banking services to
the Company in
49
<PAGE> 52
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
connection with the sale of an interest in Ladenburg to Berliner. The Company
paid this firm a fee of $254 in cash and 8,816 Berliner shares in connection
with such services. An executive officer and director of the Company is a
shareholder and registered representative in a broker-dealer to which the
Company paid $59 in 1999, $128 in 1998 and $522 in 1997 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 $158 in 1999, $128 in 1998 and $133 in 1997. The broker-dealer, in
the ordinary course of its business, engages in brokerage activities with
Ladenburg on customary terms.
See Note 3 for information concerning the purchase by the Company on
January 31, 1997 of BrookeMil from a subsidiary of Brooke.
20. 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, 1999, 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, written index option contracts and
securities sold, but not yet purchased.
Financial futures contracts provide for the delayed delivery of a financial
instrument with the seller agreeing to make delivery at a specified future date,
at a specified price. These futures contracts involve elements of market risk in
excess of the amounts recognized in the consolidated statement of financial
condition. Risk arises from changes in the values of the underlying financial
instruments or indices. At December 31, 1999, Ladenburg had commitments to
purchase and sell financial instruments under futures contracts of $54 and $183,
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 at December 31, 1999:
<TABLE>
<CAPTION>
LONG SHORT
------ ------
<S> <C> <C>
Equity and index options.................................... $1,777 $1,939
Financial futures contracts................................. 70 203
</TABLE>
50
<PAGE> 53
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table below discloses the fair value at December 31, 1999 of these
commitments, as well as the average fair value during the year ended December
31, 1999, based on monthly observations.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 AVERAGE
------------------ ----------------
LONG SHORT LONG SHORT
------- ------- ------ ------
<S> <C> <C> <C> <C>
Equity and index options.................................. $1,973 $1,087 $3,056 $1,628
Financial futures contracts............................... 54 183 434 442
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, the net gain arising
from options and futures contracts included in net gain on principal
transactions was $1,421, $3,661 and $2,399, 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.
Securities sold, but not yet purchased represent obligations of Ladenburg
to deliver specified securities at a contracted price and thereby create
liabilities to repurchase the securities 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, but not yet purchased may exceed the amount recognized in the consolidated
statement of financial condition.
21. 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, 1999 DECEMBER 31, 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents........................... $11,512 $11,512 $16,444 $16,444
Investments available for sale...................... 48,722 48,722 37,567 37,567
Trading securities owned............................ 15,707 15,707 8,984 8,984
Restricted assets................................... 8,434 8,434 7,302 7,302
Receivable from clearing brokers.................... 10,903 10,903 22,561 22,561
Long-term investments............................... 8,730 8,730 9,226 12,282
Financial liabilities:
Margin loans payable................................ 983 983 13,088 13,088
Notes payable....................................... 19,813 19,813 57,546 57,546
Redeemable preferred shares......................... -- -- 316,202 107,146
</TABLE>
51
<PAGE> 54
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. 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, 1999, 1998 and 1997. The operations of BrookeMil are
included in real estate operations, while the Company's interest in Western
Realty Development, which is accounted for on the equity method, is included in
corporate and other activities.
<TABLE>
<CAPTION>
CORPORATE
BROKER- COMPUTER AND
DEALER REAL ESTATE SOFTWARE OTHER TOTAL
------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
1999
Revenues...................................... $77,171 $10,952 $ 317 $(4,835) $ 83,605
Operating income (loss)....................... 3,064 (3,212) (3,153) (21,675) (24,976)
Identifiable assets........................... 47,480 57,920 403 114,865 220,668
Depreciation and amortization................. 846 1,766 199 107 2,918
Capital expenditures.......................... 395 14,345 30 -- 14,770
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
</TABLE>
23. DISCONTINUED OPERATIONS
The Company recorded a gain on disposal of discontinued operations of
$4,100 in 1999 and $7,740 in 1998 related to the settlement of a lawsuit
originally initiated by the Western Union telegraph business. 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.
52
<PAGE> 55
NEW VALLEY CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTERS
--------------------------------------------
1ST 2ND 3RD 4TH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1999:
Revenues...................................... $ 22,770 $ 26,930 $ 19,412 $ 14,493
Expenses(a)................................... 28,452 30,695 21,708 28,473
Loss from continuing operations............... (5,682) (3,765) (2,296) (13,980)
Discontinued operations(c).................... 4,100 -- -- --
Net loss...................................... $(23,801) $(19,305) $ (2,296) $(13,980)
Income (loss) per Common Share: (d)
Loss from continuing operations............ $ (2.92) $ (1.36) $ (0.10) $ (0.60)
Discontinued operations(c)................. .43 -- -- --
-------- -------- -------- --------
Net loss (b)............................... $ (2.49) $ (1.36) $ (0.10) $ (0.60)
======== ======== ======== ========
1998:
Revenues...................................... $ 33,840 $ 25,272 $ 19,440 $ 23,535
Expenses(a)................................... 33,683 32,148 28,179 31,406
Income (loss) from continuing operations...... 157 (6,876) (8,739) (7,871)
Discontinued operations(c).................... -- 880 6,860 --
Net loss...................................... $(18,675) $(25,754) $(22,622) $(29,502)
Income (loss) per Common Share:
Loss from continuing operations............ $ (1.95) $ (2.78) $ (3.08) $ (3.08)
Discontinued operations (c)................ -- .09 .72 --
-------- -------- -------- --------
Net loss (b)............................... $ (1.95) $ (2.69) $ (2.36) $ (3.08)
======== ======== ======== ========
</TABLE>
- ---------------
(a) Includes minority interests in results from continuing operations of
consolidated subsidiaries and provision for Federal, state and foreign
income taxes.
(b) Income (loss) per common share is determined after giving effect to
dividends on preferred shares. The sum of quarterly income (loss) per share
may not equal income (loss) per share for the year, because the per share
data for each quarter and for the year is independently computed. Fully
diluted earnings per share is anti-dilutive for all periods of 1999 and
1998. See Note 2.
(c) The amounts represent gains on the disposal of discontinued operations
related to the settlement of a lawsuit originally initiated by New Valley's
former Western Union telegraph business. See Note 23.
(d) For 1999 periods, loss per share reflects the Company's recapitalization,
which occurred on June 4, 1999. For the first and second quarters of 1999,
loss per share includes dividend requirements on preferred shares of $22,219
and $15,540, respectively.
53
<PAGE> 56
SCHEDULE III
NEW VALLEY CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT CARRIED
COST AT CLOSE OF PERIOD
INITIAL COST CAPITALIZED ---------------------------------
DESCRIPTION ------------------ NET OF BUILDINGS AND
AND LOCATION ENCUMBRANCES LAND BUILDING DELETIONS LAND IMPROVEMENTS TOTAL
------------ ------------ ------- -------- ----------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Office Buildings:
Bernards Township, NJ.......... $ -- $10,059 $ 38,432 $ (48,491) $ -- $ -- $ --
Bernards Township, NJ.......... -- 2,342 9,172 (11,514) -- -- --
Troy, MI....................... -- 23,581 (23,581) -- -- --
Troy, MI....................... -- 7,049 21,147 (28,196) -- -- --
Ducat Place I.................. -- -- 5,561 (5,561) -- -- --
Ducat Place II................. -- -- 59,300 (59,300) -- -- --
Ducat Place III................ -- 13,600 -- (13,600) -- -- --
Kindegarten Building........... -- -- 912 (912) -- -- --
Kremlin Site................... -- -- -- 32,002 32,002 -- 32,002
------------ ------- -------- --------- ------- ------- -------
-- 33,050 158,105 (159,153) 32,002 -- 32,002
------------ ------- -------- --------- ------- ------- -------
Shopping Centers:
Tri Cities, WA................. -- 2,981 7,692 (10,673) -- -- --
Santa Fe, NM................... -- 3,233 6,423 (9,656) -- -- --
Milwaukie, OR.................. -- 949 6,374 (7,323) -- -- --
Marathon, FL................... -- 624 3,299 (3,923) -- -- --
Seattle, WA.................... -- 3,354 9,069 (12,423) -- -- --
Charleston, WV................. 11,370 2,510 10,516 648 2,511 11,163 13,674
Royal Palm Beach, FL........... 8,442 2,032 7,867 23 2,032 7,890 9,922
Lincoln, NE.................... -- 1,254 4,750 (6,004) -- -- --
------------ ------- -------- --------- ------- ------- -------
19,812 16,937 55,990 (49,331) 4,543 19,053 23,596
------------ ------- -------- --------- ------- ------- -------
Total.................... $ 19,812 $49,987 $214,095 $(208,484) $36,545 $19,053 $55,598
============ ======= ======== ========= ======= ======= =======
<CAPTION>
DESCRIPTION ACCUMULATED DATE DATE DEPRECIABLE
AND LOCATION DEPRECIATION CONSTRUCTED ACQUIRED LIFE
------------ ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Office Buildings:
Bernards Township, NJ.......... $ -- 1991 Jan 1996 40
Bernards Township, NJ.......... -- 1994 Jan 1996 40
Troy, MI....................... -- 1987 Jan 1996 40
Troy, MI....................... -- 1990 Jan 1996 40
Ducat Place I.................. 1993 Jan 1997 40
Ducat Place II................. -- 1997 Jan 1997 40
Ducat Place III................ -- 1997 Jan 1997 40
Kindegarten Building........... -- April 1998 40
Kremlin Site................... -- 1998 40
------
--
------
Shopping Centers:
Tri Cities, WA................. -- 1980 Jan 1996 25
Santa Fe, NM................... -- 1964 Jan 1996 25
Milwaukie, OR.................. -- 1978 Jan 1996 25
Marathon, FL................... -- 1972 Jan 1996 25
Seattle, WA.................... -- 1988 Jan 1996 25
Charleston, WV................. 1,099 1985 Jan 1996 25
Royal Palm Beach, FL........... 1,146 1985 Jan 1996 25
Lincoln, NE.................... -- 1964 Jan 1996 25
------
2,245
------
Total.................... $2,245
======
</TABLE>
54
<PAGE> 57
SCHEDULE III
NEW VALLEY CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
RECONCILIATION OF CARRYING COSTS AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
BUILDINGS
AND ACCUMULATED
LAND IMPROVEMENTS TOTAL DEPRECIATION
------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Balance at 1/1/97................................... $36,160 $147,033 $183,193 $3,622
------- -------- -------- ------
Additions during period
Acquisitions through foreclosure.................. -- -- --
Other acquisitions................................ 22,623 64,861 87,484
Improvements, etc................................. -- 7,454 7,454
Depreciation expense.............................. -- -- -- 5,197
------- -------- -------- ------
Total Additions........................... 22,623 72,315 94,938 5,197
------- -------- -------- ------
Deductions during period:
Cost of real estate sold.......................... 624 8,897 9,521 177
------- -------- -------- ------
Balance at 12/31/97................................. $58,159 $210,451 $268,610 $8,642
------- -------- -------- ------
Additions during period
Acquisitions through foreclosure.................. -- -- --
Other acquisitions................................ -- -- --
Improvements, etc................................. 17,324 912 18,236
Depreciation expense.............................. -- -- -- 3,985
------- -------- -------- ------
Total Additions........................... 17,324 912 18,236 3,985
------- -------- -------- ------
Deductions during period:
Real estate contributed to joint venture............ 21,933 65,650 87,583 1,050
Cost of real estate sold.......................... 19,450 91,842 111,292 6,481
------- -------- -------- ------
Balance at 12/31/98................................. $34,100 $ 53,871 $ 87,971 $5,096
------- -------- -------- ------
Additions during period
Acquisitions through foreclosure.................. -- -- --
Other acquisitions................................ -- -- --
Improvements, etc................................. 14,344 -- 14,344
Depreciation expense.............................. -- -- -- 2,918
------- -------- -------- ------
Total Additions........................... 14,344 -- 14,344 2,918
------- -------- -------- ------
Deductions during period:
Cost of real estate sold.......................... 12,449 34,268 46,717 5,769
------- -------- -------- ------
Balance at 12/31/99................................. $35,995 $ 19,603 $ 55,598 $2,245
======= ======== ======== ======
</TABLE>
55
<PAGE> 58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Thinking Machines Corporation:
We have audited the consolidated statements of operations, stockholders'
investment and cash flows of Thinking Machines Corporation and subsidiaries for
the year ended December 31, 1997. These financial statements are the
responsibility of Thinking Machines Corporation'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 result of operations and cash
flows of Thinking Machines Corporation and subsidiaries for the year ended
December 31, 1997 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Thinking Machines Corporation will continue as a going concern. As discussed in
Note 1 to the financial statements, Thinking Machines Corporation 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 Thinking Machines Corporation'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.
/s/ ARTHUR ANDERSEN LLP
- --------------------------------------
Boston, Massachusetts
January 23, 1998
56
<PAGE> 59
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
NEW VALLEY CORPORATION
(REGISTRANT)
By: /s/ J. BRYANT KIRKLAND III
------------------------------------
J. Bryant Kirkland III
Vice President, Treasurer
and Chief Financial Officer
Date: March 30, 2000
57
<PAGE> 60
POWER OF ATTORNEY
The undersigned directors and officers of New Valley Corporation hereby
constitute and appoint Howard M. Lorber, Richard J. Lampen, J. Bryant Kirkland
III and Marc N. Bell, and each of them, with full power to act without the other
and with full power of substitution and resubstitution, our true and lawful
attorneys-in-fact with full power to execute in our name and behalf in the
capacities indicated below, this Annual Report on Form 10-K and any and all
amendments thereto and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
and hereby ratify and confirm all that such attorneys-in-fact, or any of them,
or their substitutes shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 30, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ BENNETT S. LEBOW Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer (Principal Executive Officer)
Bennett S. LeBow
/s/ J. BRYANT KIRKLAND III Vice President, Treasurer and Chief Financial
- ----------------------------------------------------- Officer (Principal Financial Officer and
J. Bryant Kirkland III Principal Accounting Officer)
/s/ HENRY C. BEINSTEIN Director
- -----------------------------------------------------
Henry C. Beinstein
/s/ ARNOLD I. BURNS Director
- -----------------------------------------------------
Arnold I. Burns
/s/ RONALD J. KRAMER Director
- -----------------------------------------------------
Ronald J. Kramer
/s/ RICHARD J. LAMPEN Director
- -----------------------------------------------------
Richard J. Lampen
/s/ HOWARD M. LORBER Director
- -----------------------------------------------------
Howard M. Lorber
/s/ BARRY W. RIDINGS Director
- -----------------------------------------------------
Barry W. Ridings
/s/ /S/ VICTOR M. RIVAS Director
- -----------------------------------------------------
Victor M. Rivas
</TABLE>
58
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF NEW VALLEY
The following is a list of the active subsidiaries of New Valley as of
March 24, 2000, indicating the jurisdiction of incorporation of each and the
names under which such subsidiaries conduct business.
<TABLE>
<CAPTION>
NAME OF BUSINESS (% OWNERSHIP) JURISDICTION OF INCORPORATION
------------------------------ -----------------------------
<S> <C>
Ladenburg, Thalmann Group Inc. (100%)....................... Delaware
Ladenburg, Thalmann & Co. Inc. (80.1%)...................... Delaware
Thinkcorp Holding Corporation (72.7%)....................... Delaware
BrookeMil Ltd. (99.1%)...................................... Cayman Islands
ALKI Corp. (100%)........................................... Delaware
</TABLE>
Not included above are other subsidiaries which, if considered in the
aggregate as a single subsidiary, would not constitute a significant subsidiary,
as such term is defined by Rule 1-02(w) of Regulation S-X.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 11,512
<SECURITIES> 64,429
<RECEIVABLES> 10,903
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 91,443
<PP&E> 66,920
<DEPRECIATION> 5,158
<TOTAL-ASSETS> 220,668
<CURRENT-LIABILITIES> 68,429
<BONDS> 19,519
0
0
<COMMON> 232
<OTHER-SE> 91,147
<TOTAL-LIABILITY-AND-EQUITY> 220,668
<SALES> 0
<TOTAL-REVENUES> 83,605
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 99,627
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,954
<INCOME-PRETAX> (24,976)
<INCOME-TAX> 80
<INCOME-CONTINUING> (25,056)
<DISCONTINUED> 4,100
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,623)
<EPS-BASIC> (3.41)
<EPS-DILUTED> (3.41)
</TABLE>
<PAGE> 1
EXHIBIT 99
WESTERN REALTY DEVELOPMENT LLC
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE YEAR ENDED DECEMBER 31, 1999
AND THE PERIOD FEBRUARY 20, 1998
(DATE OF INCEPTION) THROUGH
DECEMBER 31, 1998
<PAGE> 2
WESTERN REALTY DEVELOPMENT LLC
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Report of Independent Accountants........................... 2
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 3
Consolidated Statements of Operations for the year ended
December 31, 1999 and the period February 20, 1998 (date
of inception) through December 31, 1998................... 4
Consolidated Statements of Members' Equity for the year
ended December 31, 1999 and the period February 20, 1998
(date of inception) through December 31, 1998............. 5
Consolidated Statements of Cash Flows for the year ended
December 31, 1999 and the period February 20, 1998 (date
of inception) through December 31, 1998................... 6
Notes to Consolidated Financial Statements.................. 7-12
</TABLE>
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of Western Realty Development LLC:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, members' equity and cash flows
present fairly, in all material respects, the financial position of Western
Realty Development LLC and its subsidiaries at December 31, 1999 and 1998, and
the results of their operations and their cash flows for the year ended December
31, 1999 and the period of February 20, 1998 (date of inception) through
December 31, 1998, in conformity with accounting principles generally accepted
in the United States of America. 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 conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America 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 provide a reasonable basis for the opinion expressed
above.
As discussed in Note 7 to the consolidated financial statements, the
operations of the Company, and those of similar enterprises which have
operations in the Russian Federation, have been affected, and may continue to be
affected for the foreseeable future, by the continuing regulatory, political and
economic uncertainties existing for enterprises operating in the Russian
Federation.
/s/ PricewaterhouseCoopers
Moscow, Russia
March 3, 2000
2
<PAGE> 4
WESTERN REALTY DEVELOPMENT LLC
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 1,133 $ 415
Accounts receivable, net of allowances for doubtful
accounts of
$627 and $130.......................................... 1,748 163
Receivable from affiliate................................. 465 --
Prepaid expenses and other current assets................. 211 279
-------- --------
Total current assets.............................. 3,557 857
Investment in real estate, net of accumulated depreciation
of $4,067 and $2,439...................................... 77,988 85,761
Furniture and equipment, net of accumulated depreciation of
$113 and $54.............................................. 249 179
Deferred finance charges, net of accumulated amortization of
$391 and $266............................................. 234 359
Goodwill, net of accumulated amortization of $7,224 and
$4,747.................................................... 722 7,636
Participating loan receivable............................... 37,849 31,991
Prepaid lease commission, long-term......................... 86 272
-------- --------
Total assets...................................... $120,685 $127,055
======== ========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Current portion of note payable........................... $ 6,445 $ 5,299
Accounts payable.......................................... 593 798
Unearned revenue.......................................... 2,277 1,205
Accrued interest payable.................................. 234 314
Other accrued liabilities................................. 2,260 1,789
Due to affiliates......................................... 1,703 1,696
-------- --------
Total current liabilities......................... 13,512 11,101
Note payable................................................ 8,211 14,356
Security deposits........................................... 752 756
-------- --------
Total liabilities................................. 22,475 26,213
-------- --------
Commitments and contingencies............................... -- --
Members' equity:
Contributed capital....................................... 109,775 102,533
Retained earnings......................................... (11,565) (1,691)
-------- --------
Total members' equity............................. 98,210 100,842
-------- --------
Total liabilities and members' equity............. $120,685 $127,055
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
<PAGE> 5
WESTERN REALTY DEVELOPMENT LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FEBRUARY 20,
1998 (DATE OF
YEAR ENDED INCEPTION) THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -------------------
<S> <C> <C>
Rental income............................................... $11,537 $10,176
Cost and expenses:
Operating, general and administrative expenses.............. 8,217 6,644
Impairment of real estate assets and goodwill............... 11,561 --
Depreciation and amortization............................... 4,306 3,731
------- -------
Operating loss.............................................. (12,547) (199)
Other expenses (income):
Interest expense............................................ 2,805 2,736
Other income................................................ (5,478) (1,991)
Gain on asset disposal...................................... -- (13)
------- -------
Total other (income) expenses..................... (2,673) 732
Loss before income taxes.................................... (9,874) (931)
Income tax provision........................................ -- 760
------- -------
Net loss.................................................... $(9,874) $(1,691)
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
4
<PAGE> 6
WESTERN REALTY DEVELOPMENT LLC
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD
FEBRUARY 20, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
CONTRIBUTED RETAINED
CAPITAL EARNINGS TOTAL
----------- -------- -------
<S> <C> <C> <C>
Initial capitalization...................................... $ 60,169 $ -- $60,169
Net loss.................................................... -- (1,691) (1,691)
Capital contributions....................................... 42,364 -- 42,364
-------- -------- -------
Balance, December 31, 1998.................................. 102,533 (1,691) 100,842
Net loss.................................................... -- (9,874) (9,874)
Capital contributions....................................... 7,242 -- 7,242
-------- -------- -------
Balance, December 31, 1999.................................. $109,775 $(11,565) $98,210
======== ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
5
<PAGE> 7
WESTERN REALTY DEVELOPMENT LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FEBRUARY 20,
1998 (DATE OF
YEAR ENDED INCEPTION) THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -------------------
<S> <C> <C>
Net loss.................................................... $(9,874) $(1,691)
Cash flows from operating activities:
Depreciation and amortization............................... 4,306 3,545
Impairment of real estate assets and goodwill............... 11,561 --
Gain on asset disposal...................................... -- (13)
Changes in assets, net...................................... (7,189) (1,398)
Changes in liabilities, net................................. 1,256 (12,790)
------- -------
Net cash provided from (used in) operating
activities........................................... 60 (12,347)
------- -------
Cash flows from investing activities:
Capital expenditures........................................ (1,127) (1,317)
Participating loan issued................................... -- (30,000)
Cash contributed by BrookeMil............................... -- 442
------- -------
Net cash used in investing activities.................. (1,127) (30,875)
------- -------
Cash flows from financing activities:
Retirement of note payable.................................. (4,999) (423)
Advances (to) from affiliates, net.......................... (458) 1,696
Capital contributions....................................... 7,242 42,364
------- -------
Net cash provided from financing activities............ 1,785 43,637
------- -------
Net increase in cash........................................ 718 415
Cash at beginning of period................................. 415 --
------- -------
Cash at end of period....................................... $ 1,133 $ 415
======= =======
Supplemental cash flow information:
Cash paid during the year for:
Interest............................................... $ 2,885 $ 3,277
Income taxes........................................... 16 1,039
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
6
<PAGE> 8
WESTERN REALTY DEVELOPMENT LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Western
Realty Development LLC ("Western Realty" or the "Company") and its
majority-owned subsidiaries. The consolidated financial statements and
accompanying notes are prepared in accordance with generally accepted accounting
principles recognized in the U.S. and reflect the financial position, results of
operations and cash flows of the Company. All significant intercompany
transactions have been eliminated in consolidation.
NATURE OF OPERATIONS
Western Realty, a Delaware limited liability company, was organized in
February 1998 by New Valley Corporation ("New Valley"), its subsidiary,
BrookeMil Ltd. ("BrookeMil"), and Apollo Real Estate Investment Fund III, L.P.
("Apollo") to make real estate and other investments in Russia. In connection
with the formation of Western Realty, New Valley and BrookeMil agreed, among
other things, to contribute the real estate assets of BrookeMil, including the
Ducat Place II office building in Moscow and the site for the proposed Ducat
Place III office building and related goodwill, subject to a note payable to a
bank collateralized by Ducat Place II, and Apollo agreed to contribute up to
$40,000 to Western Realty. The transfer of net assets from BrookeMil was
accounted for on a historical cost basis.
Western Realty, through a wholly-owned subsidiary, owns 99% of Western
Realty LLC, a closed joint stock company in the Russian Federation.
Substantially all of the Company's operations are conducted by Western Realty
LLC.
ORGANIZATION
The ownership and voting interests in Western Realty are held equally by
Apollo and New Valley. Apollo will be entitled to a preference on distributions
of cash from Western Realty to the extent of its investment of $40,000, together
with a 15% annual rate of return. New Valley will then be entitled to a return
of $20,000 of BrookeMil-related expenses incurred and cash invested by New
Valley since March 1, 1997, together with a 15% annual rate of return;
subsequent distributions will be made 70% to New Valley and 30% to Apollo.
Western Realty is managed by a Board of Managers consisting of an equal number
of representatives chosen by Apollo and New Valley. All material corporate
transactions by Western Realty generally require the unanimous consent of the
Board of Managers.
As of December 31, 1999 and 1998, Apollo had contributed $39,606 and
$32,364, respectively, in cash to the Company and New Valley had contributed
$20,000 in addition to the real estate assets of BrookeMil.
The Company had a negative working capital deficit and accumulated deficit
as of December 31, 1999. In March 2000, Apollo and New Valley each agreed to
increase its capital commitment to Western Realty by $3,750. Management believes
that this additional funding commitment will be sufficient to support its
expected cash flow needs over the next 12 months.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash on hand and in banks plus all
short-term investments with a maturity, at the date of purchase, of three months
or less.
7
<PAGE> 9
WESTERN REALTY DEVELOPMENT LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REAL ESTATE
Real estate is stated at the lower of cost or fair value and is depreciated
using the straight-line method over estimated useful lives of 40 years. Real
estate assets under development are not depreciated until they are ready for
their intended use. Western Realty depreciates furniture, fixtures and equipment
using the straight-line method over estimated useful lives of 3 to 5 years.
Pre-acquisition, acquisition, development and holding costs are capitalized
as real estate assets until the assets are ready for their intended use.
Interest costs are capitalized during the active development phase of a project.
IMPAIRMENT 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. The estimation of fair value is generally measured by discounting
expected future cash flows. The Company estimates fair value based on the best
information available making estimates, judgments and projections as considered
necessary.
DEFERRED FINANCING COSTS
The costs incurred in connection with certain of the Company's debt
financing are included in deferred finance charges and are amortized using the
straight-line method over the term of the related debt.
GOODWILL
Goodwill is amortized on a straight-line basis using a 5 year life based on
management's assessment of the future value of the intangible asset. The Company
evaluates the carrying values of intangible assets in the same manner that it
evaluates the carrying values of real estate. Amortization expense for 1999 and
the period February 20, 1998 to December 31, 1998 was $2,476 and $2,115,
respectively.
TRANSLATION METHODOLOGY
The Company's Russian subsidiary reports to the Russian authorities in
rubles and its accounting records are maintained in that currency. The
accompanying consolidated financial statements have been prepared in U.S.
dollars. Transactions and balances of the Russian subsidiary not already
measured in dollars (primarily rubles) have been remeasured into dollars in
accordance with the relevant provisions of SFAS No. 52, "Foreign Currency
Translation," as applied to entities in highly inflationary economies.
Under SFAS No. 52, revenues, costs, capital and non-monetary assets and
liabilities are translated at historical exchange rates prevailing on the
transaction dates. Monetary assets and liabilities are translated at exchange
rates prevailing on the balance sheet date. Translation gains and losses from
remeasurement of monetary assets and liabilities that are not determined in U.S.
dollars are credited or charged to the consolidated statements of operations.
The Russian economy is considered hyperinflationary. The ruble to U.S.
dollar exchange rate will not necessarily reflect the relative inflation levels
of the Russian and U.S. economies. Future movements in the exchange rate between
the ruble and the U.S. dollar will affect the carrying value of the Company's
ruble denominated monetary assets and liabilities. Such movements may also
affect the Company's ability to realize non-monetary assets represented in U.S.
dollars in these financial statements. Accordingly, any translation of ruble
amounts to U.S. dollars should not be construed as a representation that such
ruble amounts have been, could be, or will in the future be converted into U.S.
dollars at the exchange rate shown or at any other exchange rate.
8
<PAGE> 10
WESTERN REALTY DEVELOPMENT LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The exchange rate for 1 U.S. dollar ranged from 6.06 rubles at the date of
inception, 20.65 rubles at December 31, 1998 and 27.00 rubles at December 31,
1999.
ESTIMATES AND ASSUMPTIONS
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 and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
INCOME TAXES
Western Realty has elected to be treated as a partnership for U.S. tax
purposes. Thus, its U.S. operations are not subject to income taxes, as any
income or loss is included in the tax returns of the individual members. The
Company's Russian subsidiary is subject to Russian Federation income taxes.
Deferred income taxes are provided, using the liability method, for all
temporary differences arising between the tax bases of assets and liabilities in
these financial statements and their carrying values for Russian statutory tax
purposes.
The Company is also subject to other taxes in the Russian Federation. These
taxes are included in operating, general and administrative expenses in the
statements of operations.
CONCENTRATION OF CREDIT AND OTHER RISKS
The Company maintains a portion its cash deposits with Russian banks which
are branch offices of large banks headquartered outside the Russian Federation.
The Company assesses the financial condition of the institutions on an on-going
basis.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of certain financial assets and liabilities carried at
cost, including accounts receivable and payable and other current financial
assets and liabilities, are considered to approximate their respective carrying
values due to their short term nature. The fair value of the note payable also
approximates its carrying value as management believes the interest rate
approximates the interest rates of new borrowings available to the Company.
REAL ESTATE LEASING REVENUES
Ducat Place II is 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 contain provisions which provide for
reimbursement of real estate taxes and operating expenses. The future minimum
rents scheduled to be received on non-cancelable operating leases at December
31, 1999 are $5,807, $2,819, $2,095, $63 for the years 2000, 2001, 2002 and 2003
and thereafter, respectively.
COMPARATIVE AMOUNTS
Certain amounts in the 1998 financial statements have been reclassified to
conform to the 1999 presentation.
3. PARTICIPATING LOAN
Western Realty has made a $30,000 participating loan to Western Tobacco
Investments LLC ("WTI"), which holds the interest of Brooke (Overseas) Ltd.
("BOL") in Liggett-Ducat Ltd., a Russian joint stock company, and a new factory
constructed by Liggett-Ducat Ltd. on the outskirts of Moscow. The participating
9
<PAGE> 11
WESTERN REALTY DEVELOPMENT LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loan, which bears no fixed interest, is payable only out of 30% of distributions
made by WTI to BOL. After prior payment of debt service on loans to finance the
construction of the new factory, 30% of the distributions from WTI to BOL will
be applied first to pay the principal on the loan and then as contingent
participating interest on the loan. In addition, Western Realty is entitled to
receive a 15% annual rate of return on amounts advanced on the loan under
certain circumstances in the event of a sale or refinancing of WTI or the new
factory. Any rights of payment on the loan are subordinate to the rights of all
creditors of WTI.
No distributions had been received by Western Realty from WTI at December
31, 1999. However, because the Company is entitled to 30% of WTI's distributions
and residual equity in the event of liquidation, $5,858 and $1,991, representing
the 15% return on the loan plus 30% of WTI's net income, has been recorded as
income for the year ended December 31, 1999 and the period from February 20,
1998 to December 31, 1998, respectively, in the accompanying statements of
operations. Summarized financial information as of December 31, 1999 and 1998
and for the year ended December 31, 1999 and the period April 28, 1998 (date of
inception) to December 31, 1998 for WTI follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Current assets.............................................. $35,456 $18,229
Property, plant and equipment............................... 115,645 76,557
Noncurrent assets........................................... 2,105 4,615
Credit facilities due within one year....................... 38,679 16,379
Current liabilities......................................... 55,923 15,547
Long-term liabilities....................................... 17,314 22,456
Participating loan payable.................................. 37,849 31,991
Members' equity............................................. 3,441 13,028
</TABLE>
<TABLE>
<CAPTION>
PERIOD APRIL 28,
1998 (DATE OF
YEAR ENDED INCEPTION) THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- ------------------
<S> <C> <C>
Revenues............................................. $100,181 $68,976
Costs and expenses................................... 103,036 62,767
Income tax expense (benefit)......................... 874 (429)
-------- -------
Net (loss) income.................................... (3,729) 6,638
Accretion of return on participating loan............ 5,858 1,991
-------- -------
Net (loss) income applicable to members' equity...... $ (9,587) $ 4,647
======== =======
</TABLE>
10
<PAGE> 12
WESTERN REALTY DEVELOPMENT LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENT IN REAL ESTATE AND NOTE PAYABLE
The components of the Company's investment in real estate and the related
note payable collateralized by such real estate at December 31, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Land........................................................ $16,920 $23,065
Buildings................................................... 65,135 65,135
------- -------
Total............................................. 82,055 88,200
Less accumulated depreciation............................... (4,067) (2,439)
------- -------
Net investment in real estate............................. $77,988 $85,761
======= =======
Note payable................................................ $14,656 $19,655
Less: current portion of note payable....................... 6,445 5,299
------- -------
Note payable -- long-term portion........................... $ 8,211 $14,356
======= =======
</TABLE>
In 1999, the Company evaluated the recoverability of its long-lived assets
in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of" and determined a permanent
impairment had occurred. The Company valued its investment in real estate based
on an appraisal conducted by an independent third party in December 1999. As a
result of this valuation, the Company recorded an impairment charge for the year
ended December 31, 1999 of $11,561 associated with its investment in the site
for the proposed Ducat Place III office building and related goodwill. The fair
value was determined based on current market conditions and anticipated future
discounted cash flows at a rate commensurate with the risk involved. Management
has concluded that the site for the Ducat Place III office building had a fair
value of $16,000 at December 31, 1999.
The cost and accumulated depreciation of property leased or held for lease
was $65,135 and $4,067, respectively, at December 31, 1999. Depreciation expense
for 1999 and the period February 20, 1998 (date of inception) to December 31,
1998 was $1,628 and $1,389, respectively.
Western Realty's 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 New
Valley. At December 31, 1999 and 1998, borrowings under the new credit agreement
totaled $14,656 and $19,655, respectively.
Remaining required principal payments on the note payable are $6,445 in
2000, $7,513 in 2001 and $698 in 2002.
5. INCOME TAXES
The full amount of tax provision in 1998 relates to current income tax
expense. There is no income tax provision in 1999 as the Company's Russian
subsidiary sustained statutory losses during the year.
Differences between U.S. GAAP and Russian statutory taxation regulations
give rise to certain temporary differences between the carrying value of certain
assets and liabilities for financial reporting purposes and for income tax
purposes. The most significant temporary differences at December 31, 1999 and
1998 relate to Russian tax loss carry forwards, which create a deferred tax
asset of $3,653 at December 31, 1999. Other temporary differences result in a
net deferred tax liability of $124 at December 31, 1999.
The Company can use the Russian tax loss carry forwards for five years
after the year when the loss was incurred. The relief available is limited to
20% of the tax loss carry forwards in each of the five years, not to exceed 50%
of taxable profit in any given year. The Company has recorded a valuation
allowance for the entire
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<PAGE> 13
WESTERN REALTY DEVELOPMENT LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amount of the net deferred tax asset at December 31, 1999 and 1998 due to the
uncertainty of ultimate realization of future benefits of such assets.
6. EMPLOYEE BENEFITS
The Company complies with Russian Federation regulations covering pensions,
education, day care, medical and other benefits to employees. These items are
funded as a percentage of gross wages and are paid on a current basis.
7. COMMITMENTS AND CONTINGENCIES
CONDUCTING BUSINESS IN RUSSIA
The Russian Federation continues to experience economic difficulties
following the financial crisis of August 1998. Consequently, the country's
currency continues to devalue, there is continued volatility in the debt and
equity markets, hyperinflation persists, confidence in the banking sector has
yet to be restored and there continues to be a general lack of liquidity in the
economy. In addition, laws and regulations affecting businesses operating within
the Russian Federation continue to evolve.
The Russian Federation's return to economic stability is dependent to a
large extent on the effectiveness of the measures taken by the government,
decisions of international lending organizations, and other actions, including
regulatory and political developments, which are beyond the Company's control.
The Company's assets and operations could be at risk if there are any
further significant adverse changes in the political and business environment.
Management is unable to predict what effect those uncertainties might have on
the future financial position of the Company. No adjustments related to these
uncertainties have been included in the accompanying financial statements.
TAXATION
Russian taxation is subject to varying interpretations and constant
changes. Furthermore, the interpretation of tax legislation by tax authorities
as applied to the transactions and activity of the Company may not coincide with
that of management. As a result, transactions may be challenged by tax
authorities and the Company may be assessed additional taxes, penalties and
interest, which can be significant.
Management regularly reviews the Company's taxation compliance with
applicable legislation, laws and decrees and current interpretations and from
time to time potential exposures are identified. At any point in time a number
of open matters may exist, however, management believes that adequate provision
has been made for all material liabilities. Tax years remain open to review by
the authorities for three years.
8. RELATED PARTY TRANSACTIONS
BOL is a wholly-owned subsidiary of Brooke Group Ltd., which owns
approximately 55% of the common shares of New Valley. During 1998, New Valley
and its subsidiaries made advances to Western Realty to fund its operations. The
net amount of outstanding advances at December 31, 1999 and 1998 was $1,141 and
$1,696, respectively.
In May 1999, Western Realty purchased the remaining 48% of a site of land
that BrookeMil did not own. Western Realty transferred the shares to BrookeMil
in exchange for a note receivable, which represented the amount of the purchase
price that Western Realty funded. The amount of the note ($316) is included in
net advances from New Valley and its subsidiaries above.
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