-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VHCwlV4Y2KC+cp0O67YDmJ2FlthYc8njFRoeTddXDuUycu6Np2T8JIYksorU7mKk Rzvnl3qdb1bG3qHjAApgQQ== 0000950144-01-004681.txt : 20010409 0000950144-01-004681.hdr.sgml : 20010409 ACCESSION NUMBER: 0000950144-01-004681 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW VALLEY CORP CENTRAL INDEX KEY: 0000106374 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 135482050 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-02493 FILM NUMBER: 1592058 BUSINESS ADDRESS: STREET 1: INTERNATIONAL PLACE STREET 2: 100 SOUTHEAST SECOND STREET CITY: MIAMI STATE: FL ZIP: 33131 BUSINESS PHONE: 3055798000 MAIL ADDRESS: STREET 1: INTERNATIONAL PLACE STREET 2: 100 SE SECOND STREET CITY: MIAMI STATE: FL ZIP: 33131 FORMER COMPANY: FORMER CONFORMED NAME: WESTERN UNION CORP/NY/ DATE OF NAME CHANGE: 19910516 FORMER COMPANY: FORMER CONFORMED NAME: WESTERN UNION TELEGRAPH CO /NY/ DATE OF NAME CHANGE: 19880121 10-K405 1 g68193e10-k405.txt NEW VALLEY CORP 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 COMMISSION FILE NUMBER 1-2493 ------------------------ NEW VALLEY CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-5482050 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 100 S.E. SECOND STREET, MIAMI, FLORIDA 33131 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(305) 579-8000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ------------------------ 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 23, 2001 was approximately $29,460,168. 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 23, 2001, there were 22,823,063 Common Shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Part III (Items 10, 11, 12 and 13) from the definitive Proxy Statement for the 2001 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 2 Item 2. Properties.................................................. 10 Item 3. Legal Proceedings........................................... 10 Item 4. Submission of Matters to a Vote of Security-Holders; Executive Officers of the Registrant...................... 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 12 Item 6. Selected Financial Data..................................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 23 Item 8. Financial Statements and Supplementary Data................. 23 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 23 PART III Item 10. Directors and Executive Officers of the Registrant.......... 23 Item 11. Executive Compensation...................................... 24 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 24 Item 13. Certain Relationships and Related Transactions.............. 24 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 24 SIGNATURES............................................................ 61
1 3 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. and in real estate business in Russia through BrookeMil Ltd., Western Realty Development LLC and Western Realty Repin LLC. 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, Vector Group Ltd. (formerly known as 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, 2000, Vector owned 56.1% of New Valley's Common Shares. LADENBURG, THALMANN & CO. INC. In May 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. 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, 2 4 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 management area provides investment management and financial planning services to numerous individuals and institutions. In December 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. On February 8, 2001, New Valley entered into a stock purchase agreement under which New Valley will acquire a controlling interest in GBI Capital Management Corp. and its operating subsidiary, GBI Capital Partners, Inc., a securities and trading firm. Upon completion of the transaction, New Valley will own approximately 50.1% of the outstanding shares of GBI, an American Stock Exchange-listed company, which will be renamed Ladenburg Thalmann Financial Services, Inc. Under the terms of the agreement, New Valley and Berliner will sell all of their outstanding shares of Ladenburg to GBI for 18,181,818 shares of GBI common stock, $10 million of cash and $10 million principal amount of convertible notes (convertible at $2.60 per share). Upon closing, New Valley will acquire for $1.00 per share an additional 3,945,060 shares of GBI from Joseph Berland, the Chairman and Chief Executive Officer of GBI. Howard M. Lorber, President and Chief Operating Officer of New Valley, will become Chairman of Ladenburg Thalmann Financial Services. Victor M. Rivas, Chairman and Chief Executive Officer of Ladenburg, will retain his role and become President and CEO of Ladenburg Thalmann Financial Services. Richard J. Rosenstock, President and Chief Operating Officer of GBI, will become Vice Chairman and COO of Ladenburg Thalmann Financial Services and continue to oversee GBI Capital Partners. The transaction, which is expected to close in the second quarter of 2001, is subject to customary closing conditions, including regulatory approval and approval by GBI shareholders. Holders of a majority of the outstanding shares of GBI have committed to vote in favor of the transaction. BROOKEMIL LTD. In January 1997, New Valley entered into a purchase agreement with Brooke (Overseas) Ltd., an indirect wholly-owned subsidiary of Vector, under which New Valley acquired 10,483 shares of the BrookeMil common stock. These shares comprised 99.1% of the outstanding shares of BrookeMil, which is engaged in the real estate development business in Moscow, Russia. In August 2000, the remaining 100 shares of BrookeMil were redeemed in connection with the sale of Western Tobacco Investments LLC (see discussion below). 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. In April 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 an office tower. The site of the proposed third phase of the project was formerly used by Liggett-Ducat Ltd., an indirect subsidiary of Vector, for its tobacco factory pursuant to a use agreement with BrookeMil. Liggett-Ducat completed construction of a new factory on the outskirts of Moscow in 1999. 3 5 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, 2000, borrowings under the new credit agreement totaled $8.2 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 $72.0 million, including the $28.3 million investment in Western Realty Repin discussed below. Western Realty Development has three classes of equity: Class A interests, representing 30% of the ownership of Western Realty Development, and Class B and Class C interests, which collectively represent 70% of the ownership of Western Realty Development. Prior to December 29, 2000, Apollo owned the Class A interests, New Valley owned the Class B interests and BrookeMil owned the Class C interests. On December 29, 2000, WRD Holding Corporation, a wholly-owned subsidiary of New Valley, purchased for $4 million 29/30ths of the Class A Interests of Western Realty Development previously held by Apollo. WRD Holding paid the purchase price of $4 million with a promissory note due November 30, 2005. The note, which is collateralized by a pledge of the purchased Class A interests, bears interest at a rate of 7% per annum, compounded annually; interest is payable to the extent of available cash flow from distributions from Western Realty Development. In addition, upon the maturity date of the note or, if earlier, upon the closing of various liquidity events, including sales of interests in or assets of, or a business combination or financing involving, Western Realty Development, additional interest will be payable under the note. The additional interest would be in an amount equal to 30% of the excess, if any, of the proceeds from a liquidity event occurring prior to the maturity of the note or the appraised fair market value of Western Realty Development, at maturity, over $13.75 million. Apollo and New Valley also agreed to loan Western Realty Development on an equal basis any additional funds required to pay off its existing indebtedness at an interest rate of 15% per annum. As a result of the purchase of the Class A interests, New Valley and its subsidiaries will be entitled to 99% of subsequent distributions from Western Realty Development and Apollo will be entitled to 1% of subsequent distributions. Accordingly, New Valley will no longer account for its interests in Western Realty Development using the equity method of accounting. Effective December 29, 2000, Western Realty Development became a consolidated subsidiary of New Valley. Prior to December 29, 2000, the ownership and voting interests in Western Realty Development were held equally by Apollo and New Valley. Apollo was entitled to a preference on distributions of cash from Western Realty Development to the extent of its investment commitment of $43.75 million, of which $42.6 million had been funded, $41.3 million was returned in connection with the sale of Western Tobacco Investments and $1.3 million was outstanding at December 29, 2000, together with a 15% annual rate of return. New Valley was then entitled to a return to the extent of its investment commitment of $23.75 million of BrookeMil-related expenses incurred and cash invested by New Valley since March 1, 1997, of which $22.6 million had been funded, $21.3 million was returned in connection with the sale of Western Tobacco Investments and $1.3 million was outstanding at December 29, 2000, together with a 15% annual rate of return. Subsequent distributions were made 70% to New Valley and 30% to Apollo. Prior to December 29, 2000, New Valley accounted for its interest in Western Realty Development on the equity method. 4 6 New Valley, Vector 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 remaining shopping center is subject to a second mortgage in favor of the seller. New Valley and pension plans sponsored by BGLS Inc., a subsidiary of Vector, 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 Vector common stock and warrants. Western Realty Development made a $30 million participating loan to, and payable out of a 30% profits interest in, Western Tobacco Investments which held the interests of Brooke (Overseas) in Liggett-Ducat and the new factory constructed by Liggett-Ducat on the outskirts of Moscow. As a result of the sale of Western Tobacco Investments, Western Realty Development was entitled to receive the return of all amounts advanced on the loan, together with a 15% annual rate of return, and 30% of subsequent distributions. The loan, together with the 15% annual rate of return thereon, was repaid and terminated in connection with the sale of Western Tobacco Investments in August 2000. On August 4, 2000, Vector completed the sale of Western Tobacco Investments to Gallaher Group Plc for $334.1 million in cash and $64.4 million of assumed debt and capital commitments. The cash proceeds from the transaction after estimated closing expenses were divided among Vector and Western Realty Development in accordance with the participating loan, which was terminated at the closing. Through their investments in Western Realty Development, New Valley received $57.2 million in cash proceeds from the sale and Apollo received $68.3 million. New Valley recorded a gain of $52.5 million in connection with the transaction in the third quarter of 2000. 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 100% of both sites at December 31, 2000. Western Realty Repin has three classes of equity: Class A Interests, of which $18.75 million were outstanding at December 31, 2000 and are owned by Apollo; Class B Interests, of which $6.25 million were outstanding at December 31, 2000 and are owned by New Valley; and Class C Interests, of which Apollo had subscribed for $9.5 million ($7.8 million funded) and New Valley had subscribed for $5.7 million ($4.7 million funded) at December 31, 2000. Apollo and New Valley are entitled to receive on a pro-rata basis an amount equal to each party's investment in Class C interests, together with a 20% annual return. After the distributions to the Class C interests have been made, Apollo will be entitled to a preference on distributions of cash from Western Realty Repin to the extent of its investment of $18.75 million in Class A interests, together with a 20% annual rate of return. New Valley will then be entitled to a return of its investment of $6.25 million in Class B interests, together with a 20% annual rate of return. Subsequent distributions will be made 50% to New Valley and 50% to Apollo. Through December 31, 2000, Western Realty Repin had advanced $37.5 million, of which $26.5 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 5 7 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, 2000, BrookeMil had invested $35.7 million in the Kremlin sites and held approximately $462,000 in cash and 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. In April 2000, Western Realty Repin arranged short-term financing to fund the investment. Under the terms of the investment, BrookeMil is required to utilize such financing amount to make construction expenditures on the site by June 2002. Failure to make the expenditures could result in forfeiture of the 34.8% interest in the site. In connection with the sale of Western Tobacco Investments, Gallaher also agreed for $1.5 million to purchase from a subsidiary of BrookeMil additional land adjacent to the Liggett-Ducat manufacturing facility outside Moscow, Russia. Closing of the sale is scheduled for the second quarter of 2001 following satisfaction of various regulatory requirements. 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. 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 $99.3 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; Milwaukie, 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. In February 2001, New Valley sold its Royal Palm Beach, Florida shopping center for $9.5 million before closing adjustments and expenses. Space in New Valley's remaining shopping center in Kanawha, West Virginia is leased to a variety of commercial tenants and, as of December 31, 2000, the aggregate occupancy of the center was 90%. The property is subject to approximately $11.3 million of an underlying mortgage in favor of its senior lender and a second mortgage in favor of the original sellers. 6 8 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. No material revenues were recognized by Thinking Machines from the sale or licensing of such software and services. In June 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 the Darwin product above specified sales targets. Oracle has informed Thinking Machines that it did not achieve the specified sales target for the 2000 period. In June 2000, Thinking Machines recognized a $150,000 gain related to Oracle's payment of the first installment of $150,000 from the $400,000 of the purchase price escrowed in connection with the sale. Miscellaneous Investments. At December 31, 2000, New Valley owned approximately 48% of the outstanding shares of CDSI Holdings, Inc., 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, 2000, long-term investments consisted primarily of investments in limited partnerships of $4.7 million, including investments in various Internet-related businesses that were carried at $321,000 at December 31, 2000. During the third quarter of 2000, an investee engaged in the online music industry ceased operations and the Company wrote down to zero the remaining $1.1 million carrying value of its investment. During the fourth quarter of 2000, the Company determined that a permanent impairment in the value of its investments in three Internet-related businesses with a historical cost of $2.0 million had occurred and wrote down these investments to $250,000. 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, 2000, New Valley had approximately 400 full-time employees, of whom approximately 361 were employed by Ladenburg. New Valley believes that relations with its employees are satisfactory. RISK FACTORS NEW VALLEY HAS EXPERIENCED CONTINUING LOSSES AND A FIXED CHARGE COVERAGE DEFICIT. New Valley has experienced losses from continuing operations for the four of the last five years. New Valley had outstanding debt in the amount of $32.4 million as of December 31, 2000, of which $15.8 million was due by December 31, 2001 and a margin loan payable of $4.7 million, and its earnings have been inadequate to cover fixed charges for four of 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. 7 9 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 development projects. New Valley is engaged in a variety of real estate development projects in Russia. 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. 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 a 34.8% interest in one of the Kremlin sites, New 8 10 Valley agreed with the City of Moscow to invest an additional $22 million by May 2000 in the development of the property. In April 2000, Western Realty Repin arranged short-term financing to fund the investment. Under the terms of the investment, BrookeMil is required to utilize such financing amount to make construction expenditures on the site by June 2002. Failure to make the expenditures could result in the forfeiture of a 34.8% interest in the site. 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, management divides its time between New Valley and Vector and, consequently, does not spend its full time on New Valley business. VECTOR CONTROLS A MAJORITY OF NEW VALLEY'S SHARES As a result of the recapitalization and assuming that no warrant holder exercises its warrants, Vector owns approximately 56% of the outstanding Common Shares of New Valley. As holder of the absolute majority of the Common Shares, Vector is able to elect all of New Valley's directors and control the management of New Valley. Also, Vector's ownership of Common Shares makes it impossible for a third party to acquire control of New Valley without the consent of Vector and therefore may discourage third parties from seeking to acquire New Valley. A third party would have to negotiate any such transaction with Vector, and the interests of Vector 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 completed a plan of recapitalization in June 1999 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. Although New Valley's Common Shares began trading on the Nasdaq SmallCap Market on September 27, 2000, 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 80%, 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. 9 11 ITEM 2. PROPERTIES New Valley's principal executive office is in Miami, Florida, where it shares offices with Vector 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS; EXECUTIVE OFFICERS OF THE REGISTRANT During the last quarter of 2000, 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 23, 2001. 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.
YEAR INDIVIDUAL BECAME AN NAME AGE POSITION EXECUTIVE OFFICER - ---- --- -------- ----------------- Bennett S. LeBow........ 63 Chairman of the Board and Chief Executive 1988 Officer Howard M. Lorber........ 52 President and Chief Operating Officer 1994 Richard J. Lampen....... 47 Executive Vice President and General Counsel 1995 J. Bryant Kirkland Vice President, Treasurer and Chief Financial III................... 35 Officer 1998 Marc N. Bell............ 40 Vice President, Associate General Counsel and 1998 Secretary
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 and Chief Executive Officer of Vector, a New York Stock Exchange-listed holding company, and since October 1986 has been a director of Vector. Since November 1990, he has been Chairman of the Board and Chief Executive officer of BGLS, which directly or indirectly holds Vector'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. Since January 2001, Mr. Lorber has served as President and Chief Operating Officer of Vector and BGLS. 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 Vector and Liggett from January 1994 to January 2001; 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 10 12 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 Vector 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 and a director of CDSI since January 1997. From May 1992 to September 1995, Mr. Lampen was a partner at Steel Hector & Davis, a law firm located in Miami, Florida. From January 1991 to April 1992, Mr. Lampen was a Managing Director at Salomon Brothers Inc, an investment bank, and was an employee at Salomon Brothers Inc from 1986 to April 1992. Mr. Lampen has served as a director of a number of other companies, including U.S. Can Corporation, The International Bank of Miami, N.A. Spec's Music, Inc. and Panaco, 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 Vector and BGLS. Since January 2001, Mr. Kirkland has served as Vice President of Vector 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 Vector and BGLS and since January 1998 as Vice President. 11 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Effective September 27, 2000, the Common Shares have traded on the NASDAQ SmallCap Market under the symbol NVAL. Prior to September 27, 2000, the Common Shares were quoted on the NASD OTC Electronic Bulletin Board, a NASD sponsored and operated inter-dealer automated quotation system under the symbol NVAL. The following table sets forth, for the calendar quarters indicated, the range of per share prices for the Common Shares. Prices commencing September 27, 2000 reflect quotations on the NASDAQ SmallCap Market and prices prior to September 27, 2000 reflect quotations on the NASD OTC Electronic Bulletin Board. Such quotations prior to September 27, 2000 reflect inter-dealer prices in the over-the-counter market, without retail markups, markdowns or commissions, and do not necessarily represent actual transactions.
HIGH LOW ----- ----- POST-NASDAQ SMALLCAP MARKET LISTING (COMMENCING SEPTEMBER 27, 2000) 2000: Fourth Quarter.............................................. $4.63 $2.75 Third Quarter............................................... 4.69 4.50 PRE-NASDAQ SMALLCAP MARKET LISTING (BEFORE SEPTEMBER 27, 2000) 2000: Third Quarter............................................... $5.00 $3.25 Second Quarter.............................................. 3.88 2.44 First Quarter............................................... 4.75 3.50 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
HOLDERS At March 23, 2001, there were approximately 13,089 holders of record of the Common Shares. DIVIDENDS No dividends were paid on the Common Shares in 2000. RECENT SALES OF UNREGISTERED SECURITIES No securities of New Valley which were not registered under the Securities Act of 1999, as amended, have been issued or sold by New Valley during the three months ended December 31, 2000. 12 14 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- --------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OPERATING RESULTS: Total revenues.................... $152,921 $ 83,605 $ 102,087 $ 114,568 $130,865 Total costs and expenses(a)....... 110,898 108,581 127,499 139,989 149,454 -------- -------- --------- --------- -------- Income (loss) from continuing operations before income taxes and minority interests.......... 42,023 (24,976) (25,412) (25,421) (18,589) Income tax provision.............. 84 80 6 186 300 Minority interests in (loss) income from continuing operations of consolidated subsidiaries.................... 889 (667) 2,089 1,347 4,241 -------- -------- --------- --------- -------- Income (loss) from continuing operations...................... 41,050 (25,723) (23,329) (24,260) (14,648) Gain from discontinued operations...................... 17,879 4,100 7,740 3,687 7,158 -------- -------- --------- --------- -------- Net income (loss)................. 58,929 (21,623) (15,589) (20,573) (7,490) Dividend requirements on preferred shares(b)....................... -- (37,759) (80,964) (68,475) (61,949) Excess of carrying value of redeemable preferred shares over cost of shares purchased........ -- -- -- -- 4,279 -------- -------- --------- --------- -------- Net income (loss) applicable to common shares................... $ 58,929 $(59,382) $ (96,553) $ (89,048) $(65,160) ======== ======== ========= ========= ======== Per Common and equivalent share(c): Basic: Income (loss) from continuing operations................... $ 1.78 $ (3.65) $ (10.89) $ (9.68) $ (7.55) Gain from discontinued operations................... 0.78 .24 .81 .38 .75 Net income (loss) per Common Share........................ $ 2.56 (3.41) (10.08) (9.30) (6.80) Diluted: Income (loss) from continuing operations................... $ 1.78 $ (3.65) $ (10.89) $ (9.68) $ (7.55) Gain from discontinued operations................... 0.77 .24 .81 .38 .75 Net income (loss) per Common Share........................ $ 2.55 (3.41) (10.08) (9.30) (6.80) Dividends declared(b)............. -- -- -- -- -- Book value(c)..................... $ 6.54 $ 3.94 $ (21.44) $ (13.61) $ (7.55) BALANCE SHEET DATA: Total assets...................... $299,257 $220,668 $ 272,722 $ 441,391 $406,540 Long-term obligations............. 11,900 19,519 54,801 185,024 170,223 Prepetition claims(d)............. 10,229 12,279 12,364 12,611 15,526 Redeemable preferred shares(e).... -- -- 316,202 258,638 210,571 Stockholders' equity (deficiency).................... 149,685 91,379 (205,312) (130,399) (72,364) Working capital (deficiency)...... 72,720 23,014 7,870 (6,986) 85,610
- --------------- (a) Includes reorganization benefit of $9,706 in 1996. 13 15 (b) Dividend requirements on preferred shares amounts include $444 in 1999, $891 in 1998, $692 in 1997 and $417 in 1996 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 were declared on the redeemable Class A Senior Preferred Shares. (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 and $117,117 at December 31, 1998, 1997 and 1996, 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 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; - the formation in June 1998 of the Western Realty Repin joint venture to provide financing to BrookeMil; and - the sale of Western Tobacco Investments in August 2000 and New Valley's receipt of $57,208 in sale proceeds. RECENT DEVELOPMENTS Sale of Western Tobacco Investments. On August 4, 2000, Vector completed the sale of Western Tobacco Investments to a subsidiary of Gallaher Group Plc for $334,100 in cash and $64,400 in assumed debt and capital commitments. The cash proceeds from the transaction after estimated closing expenses were divided among Vector and Western Realty Development in accordance with the terms of the participating loan, which was terminated at the closing. Through their investments in Western Realty Development, New 14 16 Valley received $57,208 in cash proceeds from the sale and Apollo received $68,338. New Valley recorded a gain of $52,512 in connection with the transaction in the third quarter of 2000. GBI Capital Management Acquisition. On February 8, 2001, New Valley entered into a stock purchase agreement under which New Valley will acquire a controlling interest in GBI Capital Management Corp. and its operating subsidiary, GBI Capital Partners, Inc., a securities and trading firm. Upon completion of the transaction, New Valley will own approximately 50.1% of the outstanding shares of GBI, an American Stock Exchange-listed company, which will be renamed Ladenburg Thalmann Financial Services, Inc. Under the terms of the agreement, New Valley and Berliner will sell all of their outstanding shares of Ladenburg to GBI for 18,181,818 shares of GBI common stock, $10,000 of cash and $10,000 principal amount of convertible notes (convertible at $2.60 per share). Upon closing, New Valley will acquire for $1.00 per share an additional 3,945,060 shares of GBI from Joseph Berland, the Chairman and Chief Executive Officer of GBI. The transaction, which is expected to close in the second quarter of 2001, is subject to customary closing conditions, including regulatory approval and approval by GBI shareholders. Holders of a majority of the outstanding shares of GBI have committed to vote in favor of the transaction. WRD Holding Corporation. On December 29, 2000, WRD Holding Corporation, a newly-organized subsidiary of New Valley, purchased 29/30ths of the Class A interests of Apollo in Western Realty Development. WRD Holding paid the purchase price of $4,000 with a promissory note due November 30, 2005. The note, which is collateralized by a pledge of the purchased Class A interests, bears interest at a rate of 7% per annum, compounded annually; interest is payable to the extent of available cash flow from distributions from Western Realty Development. In addition, upon the maturity date of the note or, if earlier, upon the closing of various liquidity events, including sales of interests in or assets of, or a business combination or financing involving, Western Realty Development, additional interest will be payable under the note. The additional interest would be in an amount equal to 30% of the excess, if any, of the proceeds from a liquidity event occurring prior to the maturity of the note or the appraised fair market value of Western Realty Development, at maturity, over $13,750. As a result of the purchase of the Class A interests, New Valley and its subsidiaries will be entitled to 99% of distributions from Western Realty Development and Apollo will be entitled to 1% of distributions. Accordingly, New Valley will no longer account for its interests in Western Realty Development using the equity method of accounting. Effective December 29, 2000, Western Realty Development became a consolidated subsidiary of New Valley. RESULTS OF OPERATIONS For the years ended December 31, 2000, 1999 and 1998, 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 was accounted for on the equity method prior to December 29, 2000, is included in corporate and other activities.
YEAR ENDED DECEMBER 31, ------------------------------- 2000 1999 1998 ------- -------- -------- Broker-dealer: Revenues.................................................. $89,584 $ 77,171 $ 66,569 Expenses.................................................. 83,372 74,107 72,744 ------- -------- -------- Operating income (loss) before taxes and minority interests.............................................. $ 6,212 $ 3,064 $ (6,175) ======= ======== ======== Real estate: Revenues.................................................. $ 3,199 $ 10,952 $ 25,259 Expenses.................................................. 8,534 14,164 25,451 ------- -------- -------- Operating loss before taxes and minority interests........ $(5,335) $ (3,212) $ (192) ======= ======== ========
15 17
YEAR ENDED DECEMBER 31, ------------------------------- 2000 1999 1998 ------- -------- -------- Computer software: Revenues.................................................. $ 150 $ 317 $ 794 Expenses.................................................. 143 3,470 6,924 ------- -------- -------- Operating income (loss) before taxes and minority interests.............................................. $ 7 $ (3,153) $ (6,130) ======= ======== ======== Corporate and other: Revenues.................................................. $59,988 $ (4,835) $ 9,465 Expenses.................................................. 18,849 16,840 22,380 ------- -------- -------- Operating income (loss) before taxes and minority interests.............................................. $41,139 $(21,675) $(12,915) ======= ======== ========
THE YEAR 2000 COMPARED TO 1999 Consolidated total revenues were $152,921 for the year ended December 31, 2000 versus $83,605 for the same period last year. The increase in revenues of $69,316 was attributable primarily to income from joint venture of $68,934 and Ladenburg's increased revenues of $12,413 offset by a decrease in real estate revenues of $7,753 from the sale of the shopping centers in August 1999. Ladenburg's revenues for the year ended December 31, 2000 increased $12,413 as compared to revenues for 1999 primarily due to increases in principal transactions of $8,553 and corporate finance fees of $7,597 offset by a decrease in commissions of $5,748. Ladenburg's revenues for 2000 consisted of commissions of $33,067, principal transactions of $28,275, corporate finance fees of $15,937, syndicate and underwriting income of $416 and other income of $11,889. 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. The $8,553 (43.4%) increase in principal transaction was primarily the result of expanding Ladenburg's trading and brokerage activities. The $7,597 (91.1%) increase in corporate finance fees was primarily the result of increased revenues from private placement and advisory activities. The $5,748 (14.8%) decrease in commissions was the result of a less active market for equity securities in the fourth quarter of 2000 versus 1999. Ladenburg's expenses for 2000 increased $9,265 as compared to expenses for 1999 due primarily to an increase in compensation expense of $7,304. Expenses of Ladenburg for 2000 consisted of employee compensation and benefits of $56,222 and other expenses of $27,150. Expenses of Ladenburg for 1999 consisted of employee compensation and benefits of $48,918 and other expenses of $25,189. Compensation expense increased due to an increase in performance-based compensation. Revenues from the real estate operations for 2000 decreased $7,753 from the prior year primarily due to the sale of the shopping centers in August 1999 and the gain of $3,570 associated with such sale. Expenses of the real estate operations decreased $5,630 due primarily to the sale of the shopping centers. BrookeMil incurred expenses of $3,920 and $5,339 for the years ended December 31, 2000 and 1999, respectively, which were related to the Kremlin sites. The expenses consisted primarily of accrued interest expense of $3,373 in the 2000 period and $4,698 in the 1999 period associated with the Western Realty Repin loan. BrookeMil also experienced a foreign currency loss of $460 on cash restricted for future investments in the Kremlin sites in the 1999 period. BrookeMil's historical cost in the Kremlin sites is $36,127 at December 31, 2000, which is the amount of the participating loan at December 31, 2000. Apollo is entitled to additional preferences of approximately $3,600 related to the Kremlin sites at December 31, 2000. In June, 1999, Thinking Machines sold substantially all of its assets consisting of the Darwin(R) software and services business to Oracle Corporation. In June 2000, Thinking Machines recognized a $150 gain related to Oracle's payment of the first installment of $150 from the $400 of the purchase price escrowed in connection with the sale. Prior to the sale, Thinking Machines had minimal revenues from continuing 16 18 operations. Operating expenses of Thinking Machines consisted of cost of sales of $90, selling, general and administrative expense of $1,418, research and development expense of $1,756 and interest expense of $206 for the year ended December 31, 1999. Since the sale, operating expenses have consisted of general and administrative expenses and interest expense. For 2000, New Valley's revenues of $59,988 related to corporate and other activities consisted primarily of income from joint venture of $52,421, net gains on investments of $7,271 and interest and dividend income of $3,021. Corporate revenues for 2000 were offset by a loss of $5,597 from the operations of certain Internet-related investees accounted for on the equity method which has been reported as a reduction of other income in New Valley's statement of operations. For 1999, New Valley's revenues of $(4,835) related to corporate and other activities included a $16,513 loss from 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. The loss from 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." 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 $18,849 for 2000 consisted primarily of employee compensation and benefits of $7,278 and an impairment charges of $2,808 related to certain investees engaged in the internet business. During the third quarter of 2000, an investee engaged in the online music industry ceased operations and New Valley wrote down to zero the remaining $1,054 carrying value of its investment. Also in the fourth quarter of 2000, New Valley determined that a permanent impairment in the value of its investments in three Internet-related businesses with a historical cost of $2,004 had occurred and wrote down these investments to $250. 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. Income tax expense for 2000 was $84 versus $80 for 1999. The income taxes related principally to state income taxes of Ladenburg. The effective tax rate does not bear a customary relationship with pre-tax accounting income principally as a consequence of the change in the valuation allowance relating to deferred tax assets. New Valley recorded a gain on disposal of discontinued operations of $17,879 related to the adjustment of accruals established during New Valley's bankruptcy proceedings in 1993 and 1994. The reversal of the accruals reduced restructuring, employee benefit and various tax accruals previously established. New Valley recorded a gain on disposal of discontinued operations of $4,100 in 1999 related to the settlement of a lawsuit originally initiated by New Valley's former Western Union telegraph business. 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 was 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 from 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. 17 19 Ladenburg's revenues for 1999 increased $10,602 from 1998 primarily as a result of increased commissions of $10,531, increased principal transactions of $8,292 offset by a decrease in corporate finance fees of $6,393. 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. The $10,531 (37.2%) increase in commissions was the result of an active market for equity securities. The $8,292 (72.5%) increase in principal transactions was the result of higher profitability by Ladenburg's proprietary traders. The $6,393 (43.2%) decrease in corporate finance fees was the result of the closing of a significant mergers and acquisitions advisory assignment during 1998. 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. The increase in compensation expense was the result of an increase in performance-based compensation. Revenues from the real estate operations in 1999 decreased $14,307 primarily due to the sale of New Valley's four U.S. office buildings in September 1998 and the sale of five of New Valley'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 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. 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 expense of $2,571, research and development expense 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 from the Western Realty Development joint venture and equity losses in affiliates of $3,726. The loss from joint venture of $16,513 in 1999 resulted principally from a non-cash $11,561 impairment charge associated with Western Realty Development. 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 from the joint venture. During 1998, the principal component of net gains on investments was $4,770 from the liquidation of long-term investments and $6,997 from the liquidation of portfolio holdings. 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. 18 20 LIQUIDITY AND CAPITAL RESOURCES New Valley's working capital increased by $49,706, $15,144 and $14,856 for the years ended December 31, 2000, 1999 and 1998. New Valley's working capital increased to $72,720 at December 31, 2000 from $23,014 at December 31, 1999 primarily as a result of a $57,208 distribution from joint venture related to the sale of Western Tobacco Investments. 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 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. During 2000, New Valley's cash and cash equivalents increased from $11,512 to $82,067 due primarily to a $57,208 distribution from joint venture related to the Western Tobacco Investments sale and net sales of $23,929 of marketable securities and long-term investments. 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. Cash used for operating activities for the year ended December 31, 2000 was $11,320 as compared to cash provided from operating activities of $3,700 from the prior year. The difference is primarily due to an increase in income from joint venture of $68,934, the reduction in receivable from clearing brokers of $777 in 2000 versus $11,658 in 1999 and a net increase in Ladenburg's net trading securities of $6,195 offset by increased net income of $80,552. 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 provided from investing activities for the year ended December 31, 2000 was $78,994 compared to $29,977 for the year ended December 31, 1999. The difference is primarily attributable to a distribution from joint venture of $57,208, net sales of $23,929 of marketable securities and long-term investments in the 2000 period versus net purchases of $9,525 in the 1999 period offset by $46,208 of cash received from the sale of New Valley's five U.S. shopping centers in the 1999 period. The difference is also attributable to a decrease in restricted assets of $4,434 for the year ended December 31, 2000 versus an increase in restricted assets of $1,412 in the 1999 period. The decrease in restricted assets during the year ended December 31, 2000 was primarily the result of a $2,516 reduction in a letter of credit which collateralizes a long-term lease of commercial office space. 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 19 21 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. The capital expenditures for the years ended December 31, 2000, 1999 and 1998 related principally to the development of the Kremlin sites ($3,663, $13,990 and $18,013, respectively). BrookeMil also held $462 in cash and receivables from an affiliate, at December 31, 2000, both of which were restricted for future investment in the Kremlin sites. In connection with the acquisition of a 34.8% interest in one of the Kremlin sites, BrookeMil agreed with the City of Moscow to invest an additional $22,000 by May 2000 in the development of the property. In April 2000, Western Realty Repin arranged short-term financing to fund the investment. Under the terms of the investment, BrookeMil is required to utilize such financing amount to make construction expenditures on the site by June 2002. Failure to make the expenditures could result in forfeiture of the 34.8% interest in the site. In June 1998, New Valley and Apollo organized Western Realty Repin to make a loan to BrookeMil. The proceeds from the loan will be used by BrookeMil for the acquisition and preliminary development of the Kremlin sites. Through December 31, 2000, Western Realty Repin has advanced $37,460 to BrookeMil, of which Apollo has funded $26,538. The loan bears no fixed interest and is payable only out of distributions by the entities owning the Kremlin sites to BrookeMil. The loan is due and payable upon the dissolution of BrookeMil and is collateralized by a pledge of New Valley's shares of BrookeMil. Such distributions must be applied first to pay the principal of the loan and then as contingent participating interest on the loan. Any rights of payment on the loan are subordinate to the rights of all other creditors of BrookeMil. BrookeMil used a portion of the proceeds to repay New Valley for certain expenditures on the Kremlin sites previously incurred. In connection with the sale of Western Tobacco Investments, Gallaher also agreed for $1,500 to purchase from a subsidiary of BrookeMil additional land adjacent to the Liggett-Ducat manufacturing facility outside Moscow, Russia. Closing of the sale is scheduled for the second quarter of 2001 following satisfaction of various regulatory requirements. 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. In August 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. In February 2001, New Valley sold its Royal Palm Beach, Florida shopping center for $9.5 million. New Valley may seek to dispose of its remaining shopping center in the future. In connection with the August 1999 sale of the shopping centers, New Valley refinanced the notes payable on its remaining shopping center in Kanawha, West Virginia and transferred the Kanawha shopping center to a 99.0% owned limited liability company. The Kanawha, West Virginia shopping center is now subject to a $6,915 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 20 22 the shopping center is non-recourse to New Valley, except for misappropriations of insurance and other proceeds, failures to apply rent and other income to required maintenance and taxes, environmental liabilities and certain other matters. In June 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 the Darwin(R) product above specified sales targets. Oracle has informed Thinking Machines that it did not achieve the specified sales target for the 2000 period. 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. New Valley has lent Thinking Machines an additional $790, net of repayments, bearing interest at 15% per annum, since the closing. In December 1999, New Valley completed the sale of a 19.9% interest in Ladenburg to Berliner for approximately $10.2 million in cash and Berliner shares valued in accordance with the purchase agreement. New Valley recorded a $4.3 million gain in connection with the transaction for the year ended December 31, 1999. On February 8, 2001, New Valley entered into a stock purchase agreement under which New Valley will acquire approximately 50.1% of the outstanding shares of GBI Capital Management Corp., an American Stock Exchange listed company and the parent of GBI Capital Partners, Inc., a securities and trading firm. Under the terms of the agreement, New Valley and Berliner will sell all of their outstanding shares of Ladenburg to GBI for 18,181,818 shares of GBI common stock, $10,000 of cash and $10,000 principal amount of convertible notes (convertible at $2.60 per share). Upon closing, New Valley will acquire for $1.00 per share an additional 3,945,060 shares of GBI from Joseph Berland, the Chairman and Chief Executive Officer of GBI. The transaction, which is expected to close in the second quarter of 2001, is subject to customary closing conditions, including regulatory approval and approval by GBI shareholders. Holders of a majority of the outstanding shares of GBI have committed to vote in favor of the transaction. 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 provided from financing activities were $2,881 for the year ended December 31, 2000 as compared to cash used for financing activities of $38,409 for the year ended December 31, 1999. The increase was primarily due to $35,023 of debt repayments associated with the sales of New Valley's five U.S. shopping centers in the 1999 period and an increase of $3,692 in 2000 in New Valley's margin loans versus a $12,105 net payment on New Valley's margin loans in 1999. The increase was offset by the issuance of $4,473 of the participating loan in 1999 versus an issuance of $663 of the participating loan in 2000. 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 1999 and an decrease in margin loan payable of $12,105. 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 23, 2001, New Valley had repurchased 412,000 shares for approximately $1,423. New Valley expects that its available capital resources will be sufficient to fund its currently anticipated cash requirements for 2001, including the currently anticipated cash requirements of its operating businesses, investments, commitments, and payments of principal and interest on its outstanding indebtedness. 21 23 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 adopted SFAS No. 133 on January 1, 2001, the effect of which did not have a material impact on its statement of financial position. 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 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, 2000 with fair market values of $18,348 in long positions and $3,570 in short positions. Ladenburg performed an entity-wide analysis of its financial instruments and assessed the related risk and materiality. Based on this analysis, in the opinion of management, the market risk associated with the Ladenburg's financial instruments at December 31, 2000 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 $29,331 at December 31, 2000. Adverse market conditions could have a significant effect on the value of New Valley's investments. 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. 22 24 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 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 27, 2001, beginning on page 27 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This information is contained in New Valley's definitive Proxy Statement for its 2001 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. 23 25 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. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A)(1) INDEX TO 2000 CONSOLIDATED FINANCIAL STATEMENTS: The Consolidated Financial Statements and the Notes thereto, together with the report thereon of PricewaterhouseCoopers LLP dated March 27, 2001, appear on pages 27 through 57 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: Schedule III -- Real Estate and Accumulated Depreciation ...........59 (A)(3) EXHIBITS *(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).
24 26 *(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). *(iii) New Valley Corporation 2000 Long-Term Incentive Plan (incorporated by reference to Appendix A of New Valley's Proxy Statement dated April 18, 2000). *(iv) New Valley Corporation Non-Employee Directors Stock Option Program (incorporated by reference to Appendix B of New Valley's Proxy Statement dated April 18, 2000). *(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). *(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) 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). *(d) Expense Sharing Agreement, dated as of January 18, 1995, by and between Vector 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). *(e) 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). *(f) 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.). *(g)(i) 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). *(ii) Interest Purchase Agreement, dated as of December 29, 2000, between WRD Holding and Apollo (incorporated by reference to Exhibit 10.1 in New Valley's Current Report on Form 8-K dated December 29, 2000). *(iii) Promissory Note of WRD Holding, dated December 29, 2000, in favor of Apollo (incorporated by reference to Exhibit 10.2 in New Valley's Current Report on Form 8-K dated December 29, 2000). *(iv) Pledge Agreement, dated as of December 29, 2000, between Apollo and WRD Holding (incorporated by reference to Exhibit 10.3 in New Valley's Current Report on Form 8-K dated December 29, 2000).
25 27 *(h)(i) Purchase and Sale Agreement, dated as of June 14, 2000, between Gallaher (Overseas) Holdings Ltd. and Brooke (Overseas) Ltd. (incorporated by reference to Exhibit 10.1 in Vector's Current Report on Form 8-K dated June 14, 2000). *(ii) Amendment to Purchase and Sale Agreement, dated as of August 4, 2000, between Gallaher Overseas (Holdings) Ltd. and Brooke (Overseas) Ltd. (incorporated by reference to Exhibit 10.3 in Vector's Current Report on Form 8-K dated August 4, 2000). (21) Subsidiaries of New Valley. (23) Consent of PricewaterhouseCoopers LLP relating to New Valley's Registration Statement on Form S-8 (No. 333-46370) and Registration Statement on Form S-3 (No. 333-79837). (99) Western Realty Development LLC's Consolidated Financial Statements for the years ended December 31, 2000 and 1999 and for the period February 20, 1998 (date of inception) to December 31, 1998.
- --------------- * 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. 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 26 28 NEW VALLEY CORPORATION FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 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:
PAGE ---- FINANCIAL STATEMENTS: Report of Independent Certified Public Accountants........ 28 Consolidated Balance Sheets as of December 31, 2000 and 1999................................................... 29 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998....................... 30 Consolidated Statements of Changes in Stockholders' Equity (Deficiency) for the years ended December 31, 2000, 1999 and 1998.......................................... 32 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998....................... 33 Notes to Consolidated Financial Statements................ 34 FINANCIAL STATEMENT SCHEDULES: Schedule III -- Real Estate and Accumulated Depreciation........................................... 59 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. 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.
27 29 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and the Stockholders of New Valley Corporation In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 27 present fairly, in all material respects, the financial position of New Valley Corporation and its subsidiaries (the "Company") at December 31, 2000 and December 31, 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 27 presents 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 schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule 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 our opinion. 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 27, 2001 28 30 NEW VALLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, -------------------- 2000 1999 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $ 82,067 $ 11,512 Investment securities available for sale.................. 29,331 48,722 Trading securities owned.................................. 18,348 15,707 Restricted assets......................................... 1,039 3,239 Receivable from clearing brokers.......................... 10,126 10,903 Other current assets...................................... 2,865 1,360 -------- -------- Total current assets.............................. 143,776 91,443 -------- -------- Investment in real estate, net.............................. 132,354 53,353 Furniture and equipment, net................................ 8,249 8,409 Restricted assets........................................... 3,060 5,195 Long-term investments, net.................................. 4,654 8,730 Investment in joint venture................................. -- 48,680 Deferred tax assets......................................... 466 -- Other assets................................................ 6,698 4,858 -------- -------- Total assets...................................... $299,257 $220,668 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Margin loans payable...................................... $ 4,675 $ 983 Current portion of notes payable and long-term obligations............................................ 15,816 294 Accounts payable and accrued liabilities.................. 27,001 30,963 Prepetition claims and restructuring accruals............. 10,229 12,279 Income taxes.............................................. 9,765 16,285 Securities sold, not yet purchased........................ 3,570 7,625 -------- -------- Total current liabilities......................... 71,056 68,429 -------- -------- Notes payable............................................... 11,900 19,519 Other long-term liabilities................................. 66,616 41,341 Commitments and contingencies............................... -- -- Stockholders' equity: Common Shares, $.01 par value; 100,000,000 and 100,000,000 shares authorized; 22,890,663 and 23,192,862 shares outstanding............................................ 229 232 Additional paid-in capital................................ 867,895 868,673 Accumulated deficit....................................... (720,710) (779,639) Unearned compensation on stock options.................... -- (333) Accumulated other comprehensive income.................... 2,271 2,446 -------- -------- Total stockholders' equity........................ 149,685 91,379 -------- -------- Total liabilities and stockholders' equity........ $299,257 $220,668 ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements 29 31 NEW VALLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ---------------------------------------- 2000 1999 1998 ----------- ----------- ---------- Revenues: Principal transactions, net........................ $ 28,276 $ 19,722 $ 11,430 Commissions........................................ 33,067 38,815 28,284 Corporate finance fees............................. 15,937 8,340 14,733 Gain on sale of investments, net................... 7,271 2,373 11,768 Income (loss) from joint venture................... 52,421 (16,513) (4,976) Real estate leasing................................ 3,199 7,056 20,577 Gain on sale of real estate........................ -- 3,828 4,682 Computer sales and service......................... -- 317 794 Interest and dividends............................. 8,262 5,812 8,808 Gain on sale of assets............................. 150 4,028 -- Gain on sale of subsidiary stock................... -- 4,256 -- Other income....................................... 4,338 5,571 5,987 ----------- ----------- ---------- Total revenues............................. 152,921 83,605 102,087 ----------- ----------- ---------- Costs and expenses: Selling, general and administrative expenses....... 102,202 99,627 110,375 Interest........................................... 5,888 8,954 13,939 Provision for loss on long-term investments........ 2,808 -- 3,185 ----------- ----------- ---------- Total costs and expenses................... 110,898 108,581 127,499 ----------- ----------- ---------- Income (loss) from continuing operations before income taxes and minority interests................ 42,023 (24,976) (25,412) Income tax provision................................. 84 80 6 Minority interests in income (loss) from continuing operations of consolidated subsidiaries............ 889 667 (2,089) ----------- ----------- ---------- Income (loss) from continuing operations............. 41,050 (25,723) (23,329) Discontinued operations: Gain on disposal of discontinued operations........ 17,879 4,100 7,740 ----------- ----------- ---------- Income from discontinued operations............. 17,879 4,100 7,740 ----------- ----------- ---------- Net income (loss).................................... 58,929 (21,623) (15,589) Dividend requirements on preferred shares............ -- (37,759) (80,964) ----------- ----------- ---------- Net income (loss) applicable to Common Shares........ $ 58,929 $ (59,382) $ (96,553) =========== =========== ========== Income (loss) per common share (Basic): Continuing operations.............................. $ 1.78 $ (3.65) $ (10.89) Discontinued operations............................ 0.78 .24 .81 ----------- ----------- ---------- Net income (loss) per Common Share......... $ 2.56 $ (3.41) $ (10.08) =========== =========== ========== Number of shares used in computation................. 23,040,332 17,433,105 9,577,624 =========== =========== ========== Income (loss) per common share (Diluted): Continuing operations.............................. $ 1.78 $ (3.65) $ (10.89) Discontinued operations............................ 0.77 .24 .81 ----------- ----------- ---------- Net income (loss) per Common Share......... $ 2.55 $ (3.41) $ (10.08) =========== =========== ========== Number of shares used in computation................. 23,072,975 17,433,105 9,577,624 =========== =========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements 30 32 NEW VALLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNEARNED ACCUMULATED CLASS B ADDITIONAL COMPENSATION OTHER PREFERRED COMMON PAID-IN ACCUMULATED ON STOCK COMPREHENSIVE SHARES SHARES CAPITAL DEFICIT OPTIONS INCOME TOTAL --------- ------ ---------- ----------- ------------ ------------- --------- Balance, December 31, 1997......... $279 $ 96 $604,215 $(742,427) $(158) $7,596 $(130,399) Comprehensive loss: Net loss......................... (15,589) (15,589) Other comprehensive income: Net change in unrealized gain on investment securities..... (4,911) (4,911) ------ --------- Total comprehensive loss......... (20,500) --------- 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 ---- ---- -------- --------- ----- ------ --------- Balance, December 31, 1998......... 279 96 550,119 (758,016) (475) 2,685 (205,312) Comprehensive loss: Net loss......................... (21,623) (21,623) Other comprehensive income: Net change in unrealized gain on investment securities..... (239) (239) ------ --------- Total comprehensive loss......... (21,862) --------- Undeclared dividends and accretion on redeemable preferred shares... (25,830) (25,830) 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 Comprehensive income: Net income....................... 58,929 58,929 Other comprehensive income: Net change in unrealized gain on investment securities..... (175) (175) --------- Total comprehensive income....... 58,754 --------- Compensation expense on stock option grants.................... 906 (185) 721 Adjustment to unearned compensation on stock options................. (518) 518 -- Repurchase of common shares........ (3) (1,166) (1,169) ---- ---- -------- --------- ----- ------ --------- Balance, December 31, 2000......... $ -- $229 $867,895 $(720,710) $ -- $2,271 $ 149,685 ==== ==== ======== ========= ===== ====== =========
The accompanying notes are an integral part of these Consolidated Financial Statements 31 33 NEW VALLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ------------------------------- 2000 1999 1998 ------- -------- -------- Cash flows from operating activities: Net income (loss)......................................... $58,929 $(21,623) $(15,589) Adjustments to reconcile net income (loss) to net cash (used for) provided from operating activities: Income from discontinued operations.................... (17,879) (4,100) (7,740) Depreciation and amortization.......................... 2,144 2,918 6,495 (Income) loss from joint venture....................... (52,421) 16,513 4,976 Provision for loss on long-term investments............ 2,808 -- 3,185 Gain on sale of assets................................. (150) (4,028) -- Gain on sale of subsidiary stock....................... -- (4,256) -- Gain on sale of real estate and sale or liquidation of investments.......................................... (7,271) (5,940) (9,452) Stock-based compensation expense....................... 541 2,015 3,151 Other.................................................. -- 1,745 578 Changes in assets and liabilities, net of effects from acquisitions and dispositions: Decrease in receivables and other assets............. 1,516 12,680 19,376 Decrease (increase) in accounts payable and accrued liabilities....................................... 463 3,676 (26,677) ------- -------- -------- Net cash used for continuing operations..................... (11,320) (400) (21,697) Net cash provided from discontinued operations.............. -- 4,100 7,740 ------- -------- -------- Net cash (used for) provided from operating activities...... (11,320) 3,700 (13,957) ------- -------- -------- Cash flows from investing activities: Sale or maturity of investment securities................. 58,811 11,197 22,888 Purchase of investment securities......................... (32,324) (19,532) (19,429) Sale or liquidation of long-term investments.............. 4 5,810 25,895 Purchase of long-term investments......................... (2,562) (7,000) (13,590) Sale of real estate, net of closing costs................. -- 46,208 111,292 Purchase of and additions to real estate.................. (3,663) (14,344) (18,236) Purchase of furniture and equipment....................... (763) (426) (583) Sale of other assets...................................... 150 5,857 -- Sale of subsidiary's stock................................ -- 5,137 -- Payment of prepetition claims and restructuring accruals............................................... (376) (84) (1,061) Decrease (increase) in restricted assets.................. 4,434 (1,412) (1,586) Cash acquired from (contributed to) joint venture......... 648 -- (442) Contributions to joint venture............................ (2,573) -- -- Distribution from joint venture........................... 57,208 -- -- Purchase of subsidiary's preferred stock.................. -- (1,509) -- Other, net................................................ -- (125) (935) ------- -------- -------- Net cash provided from investing activities................. 78,994 29,777 104,213 ------- -------- --------
32 34
YEAR ENDED DECEMBER 31, ------------------------------- 2000 1999 1998 ------- -------- -------- Cash flows from financing activities: Proceeds from participating loan.......................... $ 663 $ 11,575 $ 14,300 Increase (decrease) in margin loans payable............... 3,692 (12,105) 76 Repayment (issuance) of note receivable to related party.................................................. -- 950 (950) Payment of long-term notes and other liabilities.......... (284) (57,636) (99,303) Increase in long-term borrowings.......................... -- 19,898 -- Expenses associated with recapitalization................. -- (777) -- Repurchase of Common Shares............................... (1,190) (194) -- Other, net................................................ -- (120) 459 ------- -------- -------- Net cash provided from (used for) financing activities...... 2,881 (38,409) (85,418) ------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 70,555 (4,932) 4,838 Cash and cash equivalents, beginning of year................ 11,512 16,444 11,606 ------- -------- -------- Cash and cash equivalents, end of year...................... $82,067 $ 11,512 $ 16,444 ======= ======== ======== Supplemental cash flow information: Cash paid during the year for: Interest............................................... $ 1,813 $ 4,256 $ 11,958 Income taxes........................................... 1,136 1,893 169 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) ======= ======== ======== Detail of acquisition of interest in consolidated joint venture: Historical value of assets acquired....................... $79,644 $ -- $ -- Liabilities acquired...................................... 13,314 -- -- Capital acquired.......................................... 66,978 -- -- ------- -------- -------- Net cash held by joint venture............................ $ 648 $ -- $ -- ======= ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements 33 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 ("New Valley" or the "Company"). Prior to December 29, 2000, the Company's investment in Western Realty Development LLC was accounted for under the equity method. Effective December 29, 2000, Western Realty Development LLC became a consolidated subsidiary of New Valley. All significant intercompany transactions are eliminated in consolidation. Certain amounts in the 1998 and 1999 financial statements have been reclassified to conform to the 2000 presentation. Nature of Operations The Company and its subsidiaries are engaged in the investment banking and brokerage business and in the ownership and management of commercial real estate. As discussed in Note 22, the investment banking and brokerage segment accounted for 59%, 92% and 65% of the Company's revenues for the years ended December 31, 2000, 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, Vector Group Ltd. ("Vector"), 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, 2000, Vector owned 56.1% 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 34 36 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Western Union money transfer and messaging services businesses and all allowed claims in the bankruptcy were paid in full. At December 31, 2000, the Company's remaining accruals totaled $10,229 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 loans, 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. 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. 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, 2000 consisted primarily of $2,598 pledged as collateral for a $2,500 letter of credit which is used as collateral for a long-term lease of commercial office space. Restricted assets at December 31, 1999 consisted primarily of $5,147 pledged as collateral for a $5,000 letter of credit. The decrease in restricted assets during the year ended December 31, 2000 was primarily the result of a $2,516 reduction in the 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. 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. Repairs and maintenance costs are charged to expense as incurred. 35 37 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Income Taxes. Under Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", deferred taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes as well as tax credit carryforwards and loss carryforwards. These deferred taxes are measured by applying currently enacted tax rates. A valuation allowance reduces deferred tax assets when it is deemed more likely than not that some portion or all of the deferred tax assets will not be realized. Securities Sold, Not Yet Purchased. Securities sold, not yet purchased represent obligations of the Company to deliver a specified security at a contracted price and thereby create a liability to repurchase the security in the market at prevailing prices. Accordingly, these transactions involve, to varying degrees, elements of market risk, as the Company's ultimate obligation to satisfy the sale of securities sold, not yet purchased may exceed the amount recognized in the consolidated balance sheet. Real Estate Leasing Revenues. The real estate properties are being leased to tenants under operating leases. Base rental revenue is generally recognized on a straight-line basis over the term of the lease. The lease agreements for certain properties contain provisions which provide for reimbursement of real estate taxes and operating expenses over base year amounts, and in certain cases as fixed increases in rent. In addition, the lease agreements for certain tenants provide additional rentals based upon revenues in excess of base amounts, and such amounts are accrued as earned. The future minimum rents scheduled to be received on non-cancelable operating leases at December 31, 2000 are $7,797 in 2001, $6,932 in 2002, $4,402 in 2003, $2,768 in 2004, $1,018 in 2005 and $995 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. For 1999 and 1998, 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 Income (Loss) Per Common Share. 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 exercise of stock options and warrants if such exercise was dilutive. Options and warrants to purchase Common Shares were not included in the computation of diluted loss per share in 1999 and 1998 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 adopted SFAS No. 133 on January 1, 2001, the effect of which did not have a material impact on its balance sheet. 36 38 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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 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 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 February 2001, the Company sold its Royal Palm Beach, Florida shopping center for approximately $9,500 before closing adjustments and expenses. 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. Oracle has informed Thinking Machines that it did not achieve the specified sales target for the 2000 period. In June 2000, Thinking Machines recognized a $150 gain related to Oracle's payment of the first installment of $150 from the $400 of the purchase price escrowed in connection with the sale. 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 Vector, 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. In August 2000, the remaining 100 shares of BrookeMil were redeemed in connection with the sale of Western Tobacco Investments (see Note 4). The Company paid Brooke 37 39 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (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 an office tower. The site of Ducat Place III was used by a subsidiary of Brooke (Overseas) as the site for a factory. 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, 2000, borrowings under the new credit facility totaled $8,187. 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. On February 8, 2001, New Valley entered into a stock purchase agreement under which New Valley will acquire a controlling interest in GBI Capital Management Corp. and its operating subsidiary, GBI Capital Partners, Inc., a securities and trading firm. Upon completion of the transaction, New Valley will own approximately 50.1% of the outstanding shares of GBI, an American Stock Exchange-listed company, which will be renamed Ladenburg Thalmann Financial Services, Inc. Under the terms of the agreement, New Valley and Berliner will sell all of their outstanding shares of Ladenburg to GBI for 18,181,818 shares of GBI common stock, $10,000 of cash and $10,000 principal amount of convertible notes (convertible at $2.60 per share). Upon closing, New Valley will acquire for $1.00 per share an additional 3,945,060 shares of GBI from Joseph Berland, the Chairman and Chief Executive Officer of GBI. The transaction, which is expected to close in the second quarter of 2001, is subject to customary closing conditions, including regulatory approval and approval by GBI shareholders. Holders of a majority of the outstanding shares of GBI have committed to vote in favor of the transaction. The following table presents unaudited pro forma results from continuing operations as if the WRD Holding Corporation's acquisition of 29/30ths of the Class A Interests of Western Realty Development, 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. These pro forma results have been prepared for comparative purposes only and 38 40 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) do not purport to be indicative of what would have occurred had these transactions been consummated as of each respective date.
PRO FORMA PRO FORMA YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ Revenues.................................................... $198,159 $106,949 ======== ======== Income (loss) from continuing operations.................... $ 40,770 $(29,238) ======== ======== Income (loss) from continuing operations applicable to common shares............................................. $ 40,770 $(29,238) ======== ======== Income (loss) from continuing operations per common share (basic and diluted)....................................... $ 1.77 $ (1.26) ======== ========
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 $72,021, including the investment in Western Realty Repin discussed below. Western Realty Development has three classes of equity: Class A interests, representing 30% of the ownership of Western Realty Development, and Class B and Class C interests, which collectively represent 70% of the ownership of Western Realty Development. Prior to December 29, 2000, Apollo owned the Class A interests, New Valley owned the Class B interests and BrookeMil owned the Class C interests. On December 29, 2000, WRD Holding Corporation, a wholly-owned subsidiary of New Valley, purchased for $4 million 29/30ths of the Class A Interests of Western Realty Development previously held by Apollo. WRD Holding paid the purchase price of $4,000 with a promissory note due November 30, 2005. The note, which is secured by a pledge of the purchased Class A interests, bears interest at a rate of 7% per annum, compounded annually; interest is payable to the extent of available cash flow from distributions from Western Realty Development. In addition, upon the maturity date of the note or, if earlier, upon the closing of various liquidity events, including sales of interests in or assets of, or a business combination or financing involving, Western Realty Development, additional interest will be payable under the note. The additional interest would be in an amount equal to 30% of the excess, if any, of the proceeds from a liquidity event occurring prior to the maturity of the note or the appraised fair market value of Western Realty Development, at maturity, over $13,750. The note is classified in other long-term liabilities in the consolidated balance sheet at December 31, 2000. Apollo and New Valley also agreed to loan Western Realty Development on an equal basis any additional funds required to pay off its existing indebtedness at an interest rate of 15% per annum. As a result of the purchase of the Class A interests, New Valley and its subsidiaries will be entitled to 99% of subsequent distributions from Western Realty Development and Apollo will be entitled to 1% of subsequent distributions. Accordingly, New Valley will no longer account for its interests in Western Realty Development using the equity method of accounting. Effective December 29, 2000, Western Realty Development became a consolidated subsidiary of New Valley. Prior to December 29, 2000, the ownership and voting interests in Western Realty Development were held equally by Apollo and the Company. Apollo was entitled to a preference on distributions of cash from 39 41 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Western Realty Development to the extent of its investment commitment of $43,750, of which $42,574 had been funded, $41,266 was returned in connection with the sale of Western Tobacco Investments (discussed below) and $1,308 was outstanding as of December 31, 2000, together with a 15% annual rate of return. The Company was then entitled to a return of its investment commitment of $23,750, of which $22,574 was funded, $21,266 was returned in connection with the sale of Western Tobacco Investments and $1,308 was outstanding as of December 31, 2000, together with a 15% annual rate of return. Subsequent distributions were made 70% to the Company and 30% to Apollo. Prior to December 29, 2000, the Company accounted for its interest in Western Realty Development using the equity method of accounting and recognized losses incurred by Western Realty Development to the extent that cumulative earnings of Western Realty Development were not sufficient to satisfy Apollo's preferred return. The Company recorded its initial 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. Western Realty Development made a $30,000 participating loan to, and payable out of a 30% profits interest in, Western Tobacco Investments LLC ("Western Tobacco Investments"), which held the interests of Brooke (Overseas) in Liggett-Ducat Ltd. and the new factory constructed by Liggett-Ducat Ltd. on the outskirts of Moscow. As a result of the sale of Western Tobacco Investments, Western Realty Development was entitled to receive the return of all amounts advanced on the loan, together with a 15% annual rate of return, and 30% of subsequent distributions. Western Realty Development recognized income of $3,460, $5,858 and $1,991, which represented the 15% return on the loan plus 30% of any net income applicable to common interests of Western Tobacco Investments, for the years ended December 31, 2000 and 1999 and the period from February 20, 1998 (date of inception) to December 31, 1998. The loan, together with the 15% annual rate of return thereon, was repaid and terminated in connection with the sale of Western Tobacco Investments in August 2000. On August 4, 2000, Vector completed the sale of Western Tobacco Investments to Gallaher Group Plc for $334,100 in cash and $64,400 of assumed debt and capital commitments. The cash proceeds from the transaction after estimated closing expenses were divided among Vector and Western Realty Development in accordance with the participating loan, which was terminated at the closing. Through their investments in Western Realty Development, the Company received $57,208 in cash proceeds from the sale and Apollo received $68,338. The Company recorded a gain of $52,512 in connection with the transaction during the year ended December 31, 2000. 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. 40 42 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Summarized financial information as of December 31, 1999 and for the period from January 1, 2000 to December 29, 2000, the year ended December 31, 1999 and the period from February 20, 1998 (date of inception) to December 31, 1998 for Western Realty Development follows:
DECEMBER 31, 1999 ----------------- Current assets....................................... $ 3,557 Participating loan receivable........................ 37,849 Real estate, net..................................... 77,988 Furniture and fixtures, net.......................... 249 Other noncurrent assets.............................. 320 Goodwill, net........................................ 722 Note payable -- current.............................. 6,445 Other current liabilities............................ 7,067 Note payable -- long term............................ 8,211 Other long-term liabilities.......................... 752 Members' equity...................................... 98,210
FEBRUARY 20, 1998 JANUARY 1, 2000 TO YEAR ENDED (DATE OF INCEPTION) TO DECEMBER 29, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998 ------------------ ----------------- ---------------------- Revenues............................ $ 9,782 $11,537 $10,176 Costs and expenses.................. 8,678 15,708 13,099 Real estate impairment charge....... -- 11,561 -- Accretion of return on participating loan.............................. 3,460 5,858 1,991 Gain on sale of Western Tobacco Investments....................... 84,417 -- -- Income tax expense.................. 207 -- 760 ------- ------- ------- Net income (loss)................... $88,774 $(9,874) $(1,692) ======= ======= =======
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 have been used by BrookeMil for the acquisition and preliminary development of two adjoining sites totaling 10.25 acres located in Moscow across the Moscow River from the Kremlin. BrookeMil is planning the development of a hotel, office, retail and residential complex on the Kremlin sites. BrookeMil owned 100% of both sites at December 31, 2000. Western Realty Repin has three classes of equity: Class A Interests, of which $18,750 were outstanding at December 31, 2000 and are owned by Apollo; Class B Interests, of which $6,250 were outstanding at December 31, 2000 and are owned by New Valley; and Class C Interests, of which Apollo had subscribed for $9,521 ($7,788 funded) and New Valley had subscribed for $5,712 ($4,672 funded) at December 31, 2000. Apollo and New Valley are entitled to receive on a pro-rata basis an amount equal to each party's investment in Class C interests, together with a 20% annual return. After the distributions to the Class C interests have been made, Apollo will be entitled to a preference on distributions of cash from Western Realty Repin to the extent of its investment of $18,750 in Class A interests, together with a 20% annual rate of return. The Company will then be entitled to a return of its investment of $6,250 in Class B interests, together with a 20% annual rate of return. Subsequent distributions will be made 50% to the Company and 50% to Apollo. 41 43 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Through December 31, 2000, Western Realty Repin had advanced $37,460 to BrookeMil, of which $26,538 was funded by Apollo and was classified in other long-term obligations on the consolidated balance sheet at December 31, 2000. The loan bears no fixed interest and is payable only out of distributions by the entities owning the Kremlin sites to BrookeMil. Such distributions must be applied first to pay the principal of the loan and then as contingent participating interest on the loan. Any rights of payment on the loan are subordinate to the rights of all other creditors of BrookeMil. BrookeMil used a portion of the proceeds of the loan to repay the Company for certain expenditures on the Kremlin sites previously incurred. The loan is due and payable upon the dissolution of BrookeMil and is collateralized by a pledge of the Company's shares of BrookeMil. As of December 31, 2000, BrookeMil had invested $35,665 in the Kremlin sites and held $462 in cash and receivables from an affiliate, which were restricted for future investment in the Kremlin sites. In connection with the acquisition of a 34.8% interest in one of the Kremlin sites, BrookeMil agreed with the City of Moscow to invest an additional $22,000 by May 2000 in the development of the property. In April 2000, Western Realty Repin arranged short-term financing to fund the investment. Under the terms of the investment, BrookeMil is required to utilize such financing amount to make construction expenditures on the site by June 2002. Failure to make the expenditures could result in forfeiture of the 34.8% interest in the site. The Company has accounted for the formation of Western Realty Repin as a financing by Apollo through a participating interest to be received from the Kremlin sites. 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 is treated as interest cost in the consolidated statement of operations to the extent of the Company's net investment in the Kremlin sites. BrookeMil's historical cost in the Kremlin sites is $36,127 at December 31, 2000, which is the amount of the participating loan recorded in the Company's Consolidated Balance Sheet at December 31, 2000. Apollo is also entitled to additional preferences of approximately $3,600 related to the Kremlin sites at December 31, 2000. In connection with the sale of Western Tobacco Investments, Gallaher also agreed to purchase from a subsidiary of BrookeMil additional land adjacent to the Liggett-Ducat manufacturing facility outside Moscow, Russia for $1,500. Closing of the sale, scheduled for the second quarter of 2001, is subject to satisfaction of various regulatory requirements. 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. The Company had net unrealized gains on investment securities available for sale of $2,271 and $2,446 at December 31, 2000 and 1999, respectively. 42 44 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The components of investment securities available for sale are as follows:
GROSS GROSS UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE ------- ---------- ---------- ------- 2000 Marketable equity securities.................... $24,010 $ 411 $ 4,096 $20,325 Marketable debt securities...................... 3,050 -- -- 3,050 Marketable warrants............................. -- 5,956 -- 5,956 ------- ------- ------- ------- Investment securities........................... $27,060 $ 6,367 $ 4,096 $29,331 ======= ======= ======= ======= 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 ======= ======= ======= =======
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:
DECEMBER 31, 2000 DECEMBER 31, 1999 -------------------------- -------------------------- TRADING SECURITIES TRADING SECURITIES SECURITIES SOLD, NOT YET SECURITIES SOLD, NOT YET OWNED PURCHASED OWNED PURCHASED ---------- ------------- ---------- ------------- Common stock............................... $14,671 $3,170 $13,306 $6,522 Equity and index options................... 768 149 1,973 1,087 Other...................................... 2,909 251 428 16 ------- ------ ------- ------ $18,348 $3,570 $15,707 $7,625 ======= ====== ======= ======
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, 2000 are as follows:
RUSSIAN REAL SHOPPING ESTATE CENTERS TOTAL -------- -------- -------- Land................................................ $ 52,585 $ 4,543 $ 57,128 Buildings........................................... 65,135 19,052 84,187 -------- ------- -------- Total..................................... 117,720 23,595 141,315 Less accumulated depreciation....................... (5,696) (3,265) (8,961) -------- ------- -------- Net investment in real estate............. $112,024 $20,330 $132,354 ======== ======= ======== Notes payable....................................... $ 8,187 $19,529 $ 27,716 Current portion of notes payable.................... 7,513 8,303 15,816 -------- ------- -------- Notes payable -- long-term portion.................. $ 674 $11,226 $ 11,900 ======== ======= ========
43 45 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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:
RUSSIAN REAL SHOPPING ESTATE CENTERS TOTAL ------- -------- ------- Land.................................................. $32,003 $ 4,542 $36,545 Buildings............................................. -- 19,053 19,053 ------- ------- ------- Total....................................... 32,003 23,595 55,598 Less accumulated depreciation......................... -- (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 ======= ======= =======
In February 2001, New Valley sold its Royal Palm Beach, Florida shopping center for $9,500 before closing adjustments and expenses. The Royal Palm Beach, Florida shopping center's historical cost, net of depreciation, was approximately $8,364, and it was subject to notes payable of approximately $8,226 at December 31, 2000. In connection with the sale of five shopping centers in August 1999, the Company refinanced the notes payable on its remaining shopping center in Kanawha, West Virginia and transferred the Kanawha shopping center to a 99.0% owned limited liability company. The Kanawha, West Virginia shopping center is now subject to a $6,915 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 shopping center is non-recourse to the Company, except for misappropriations of insurance and 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 related to the Kanawha shopping center and Ducat Place II at December 31, 2000 are $7,590 in 2001, $758 in 2002, $92 in 2003, $99 in 2004 and $10,951 thereafter. 8. LONG-TERM INVESTMENTS Long-term investments consisted of investments in the following:
DECEMBER 31, 2000 DECEMBER 31, 1999 ------------------- ------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- ------- -------- ------- Limited partnerships......................... $4,654 $10,493 $8,730 $13,788
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, 2000. 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. 44 46 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Also included in long-term investments are various Internet-related businesses which were carried at $321 and $5,598 at December 31, 2000 and 1999, respectively. During the year ended December 31, 2000, an investee engaged in the online music industry ceased operations and the Company wrote down to zero the remaining $1,054 carrying value of its investment. During the year ended December 31, 2000, the Company also determined that a permanent impairment in the value of its investments in three Internet-related businesses with a historical cost of $2,004 had occurred and wrote down these investments to $250. The Company recognized gains of $659 and $4,652 on liquidations of investments of limited partnerships for the years ended December 31, 1999 and 1998, respectively. The Company's estimates of the fair value of its long-term investments are subject to judgment and are not necessarily indicative of the amounts that could be realized in the current market. 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. Ladenburg elected to make matching contributions for the year ended December 31, 2000 in the amount of $259. No matching contributions were made in 1999 and 1998. 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. The Company did not make discretionary contributions to these 401(k) plans in 2000, 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, 2000: 2001....................................................... $ 3,959 2002....................................................... 4,141 2003....................................................... 2,781 2004....................................................... 3,640 2005....................................................... 3,840 2006 and thereafter........................................ 39,152 ------- Total............................................ $57,513 =======
Rental expense for operating leases was $6,380 in 2000, $6,293 in 1999 and $6,397 in 1998. Effective September 1, 1999, Ladenburg is subleasing office space for approximately $797 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 Group Holding Inc. ("Brooke Group Holding"), an indirect wholly-owned subsidiary of 45 47 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Vector, in the Delaware Chancery Court by a stockholder of the Company. The suit alleges that the Company's purchase of the BrookeMil shares from Brooke (Overseas) in January 1997 constituted a self-dealing transaction which involved the payment of excessive consideration by the Company. The plaintiff seeks (i) a declaration that the Company's directors breached their fiduciary duties, Brooke Group Holding aided and abetted such breaches and such parties are therefore liable to the Company, and (ii) unspecified damages to be awarded to the Company. In December 1999, another stockholder of the Company commenced an action in Delaware Chancery Court substantially similar to the March 1997 action. This stockholder alleges, among other things, that the consideration paid by the Company for the BrookeMil shares was excessive, unfair and wasteful, that the special committee of the Company's board lacked independence, and that the appraisal by the independent appraisal firm and the fairness opinion by the independent investment bank were flawed. Brooke Group Holding and the Company believe that the allegations in both cases are without merit. By order of the court, both actions were consolidated. In January 2001, the court denied a motion to dismiss the consolidated action filed by Brooke Group Holding and the Company. Discovery in the case has commenced. 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 Group Holding and certain directors and officers of the Company in Delaware Chancery Court. The complaint alleges that the recapitalization, approved by a majority of each class of the Company's stockholders in May 1999, was fundamentally unfair to the Class B preferred shareholders, the proxy statement relating to the recapitalization was materially deficient and the defendants breached their fiduciary duties to the Class B preferred shareholders in approving the transaction. The plaintiffs seek class certification of the action and an award of unspecified compensatory damages as well as all costs and fees. Vector and the Company believe that the allegations are without merit. The Court, on the defendants' motion, recently dismissed six of plaintiff's nine claims alleging inadequate disclosure in the proxy statement. The surviving claims are plaintiff's allegations that (i) the fact that the fairness opinion did not cover the relative fairness to each class of shares should have been expressly disclosed; (ii) failure to disclose the identity of shareholders who suggested the recapitalization and their respective holdings, broken down by share class, was a material omission; and (iii) the disclosure in the proxy statement was inadequate because it did not reveal the value of the Company's lines of business or its assets. The Court speculated that facts might exist under which one or more of the foregoing alleged non-disclosures might be material and, therefore, the motion to dismiss as to these three allegations was denied. An answer has been filed as to the surviving claims. Discovery in the case has commenced. 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. As of December 31, 2000, New Valley had $10,229 of prepetition bankruptcy-related claims and restructuring accruals including claims for lease rejection damages and for unclaimed monies that certain states are seeking on behalf of money transfer customers. The remaining claims may be subject to future adjustments based on potential settlements or decisions of the court. 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. 46 48 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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, 2000, the Company had $81,677 of unrecognized net deferred tax assets, comprised primarily of net operating loss carryforwards, available to offset future taxable income for federal tax purposes. A valuation allowance has been provided against this deferred tax asset as it is presently deemed more likely than not that the benefit of the tax asset will not be utilized. The Company continues to evaluate the realizability of its deferred tax assets and its estimate is subject to change. The provision for income taxes, which represented the effect of the alternative minimum tax and state income taxes for the three years ended December 31, 2000, 1999 and 1998, 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:
2000 1999 1998 -------- -------- -------- Income (loss) from continuing operations........... $ 41,134 $(25,643) $(23,323) -------- -------- -------- Provision (benefit) under statutory U.S. tax rates............................................ 14,397 (8,975) (8,163) Increase in taxes resulting from: Nontaxable items................................. 3,520 2,608 4,281 State taxes, net of Federal benefit.............. 2,138 39 4 Foreign taxes.................................... -- 17 -- (Decrease) increase in valuation reserve, net of tax audit adjustments............................ (19,971) 6,391 3,884 -------- -------- -------- Income tax provision.......................... $ 84 $ 80 $ 6 ======== ======== ========
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. 47 49 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Deferred tax amounts are comprised of the following at December 31:
2000 1999 -------- --------- Deferred tax assets: Net operating loss carryforward: Restricted net operating loss.......................... $ 6,225 $ 9,337 Unrestricted net operating loss........................ 35,657 56,574 Other..................................................... 43,136 38,114 -------- --------- Total deferred tax assets................................. 85,018 104,025 -------- --------- Deferred tax liabilities: Other..................................................... (2,875) (2,377) -------- --------- Total deferred tax liabilities.............................. (2,875) (2,377) -------- --------- Net deferred tax assets..................................... 82,143 101,648 Valuation allowance......................................... (81,677) (101,648) -------- --------- Net deferred taxes.......................................... $ 466 $ -- ======== =========
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. 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, 2000, the Company had consolidated net operating loss carryforwards of approximately $104,185 for tax purposes, which expire at various dates from 2002 through 2008. Approximately $15,485 of net operating loss carryforwards constituted pre-change losses and $88,700 of net operating losses were unrestricted. 48 50 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 12. OTHER LONG-TERM LIABILITIES The components of other long-term liabilities, excluding notes payable, are as follows:
DECEMBER 31, 2000 DECEMBER 31, 1999 -------------------- -------------------- LONG-TERM CURRENT LONG-TERM CURRENT PORTION PORTION PORTION PORTION --------- ------- --------- ------- Retiree and disability obligations........... $ 3,533 $500 $ 4,568 $500 Minority interests........................... 6,322 -- 4,612 -- Participating loan payable................... 36,127 -- 32,091 -- Note payable for Western Realty Development Class A interests.......................... 19,968 -- -- -- Other long-term liabilities.................. 666 -- 70 -- ------- ---- ------- ---- Total other long-term liabilities............ $66,616 $500 $41,341 $500 ======= ==== ======= ====
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. 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. 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 $1,404 in 1999 and $3,043 in 1998 in compensation expense related to the Award Shares. The Company reflected dividend arrearages on such shares of $25,829 and $54,520 in the consolidated statement of operations for the years ended December 31, 1999 and 1998, respectively. 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. 49 51 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The Company reflected dividend arrearages on such shares of $11,930 and $26,444 in the consolidated statements of operations for the years ended December 31, 1999 and 1998, respectively. 15. WARRANTS As of December 31, 2000 and 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 January 19, 2000, the Company adopted its 2000 Long-Term Incentive Plan, which was approved by the stockholders of the Company on May 24, 2000. 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 officers, employees and consultants of the Company and its subsidiaries are eligible to receive awards under the stock plan. On March 22, 2000, the Company granted incentive and non-qualified stock options to purchase a total of 1,196,299 Common Shares. The recipients of the options were approximately 100 employees of Ladenburg. On October 27, 2000, the Company granted an additional 28,266 of stock options to two employees of Ladenburg. In the case of both grants, the exercise price of the options was $3.875 per share, the fair market value on the date of grant. The options have terms of between seven and ten years and vest over periods of three to five years after the date of grant. On January 19, 2000, the Company also adopted the Non-Employee Directors Stock Option Program, which was approved by the stockholders of the Company on May 24, 2000. 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 $4.6875 per share were issued to the four non-employee directors of the Company. 50 52 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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 (benefit) expense of $(185) in 2000, $83 in 1999 and $108 in 1998 from these option grants and recorded deferred compensation of $0 and $333 representing the intrinsic value of these options at December 31, 2000 and December 31, 1999, respectively. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its stock options. In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation", which, if fully adopted, changes the methods of recognition of cost on certain stock options. Vector Executive officers of New Valley participate in the 1999 Long-Term Incentive Plan sponsored by Vector. The Vector stock plan provides for grants to key employees of Vector 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 Vector 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. Summary A summary of stock options granted to employees follows. The summary of Vector options include only option grants to the Company's employees who were not also employees of Vector at the time of the grant. 51 53 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The Company
WEIGHTED AVERAGE NUMBER OF EXERCISE FAIR SHARES PRICE VALUE --------- ---------------- ---------------- Outstanding on December 31, 1997........ 330,000 $5.80 $27.15 Granted............................... 0 Exercised............................. 0 Cancelled............................. 0 --------- Outstanding on December 31, 1998........ 330,000 $5.80 $27.15 Granted............................... 0 Exercised............................. 0 Net impact of recapitalization........ (264,667) Cancelled............................. 0 --------- Outstanding on December 31, 1999........ 65,333 $5.55 - $5.80 $27.15 Granted............................... 1,264,565 $3.875 - $4.6875 $ 2.60 Exercised............................. 0 Cancelled............................. (58,810) --------- Outstanding on December 31, 2000........ 1,271,088 $3.875 - $5.80 $ 3.86 ========= Options exercisable at: December 31, 1998..................... 110,000 December 31, 1999..................... 32,667 December 31, 2000..................... 234,720
Vector
WEIGHTED AVERAGE NUMBER OF EXERCISE FAIR SHARES PRICE VALUE --------- -------- ---------------- Outstanding on December 31, 1998................ 0 $15.44 $12.39 Granted....................................... 545,000 Exercised..................................... 0 Cancelled..................................... 0 ------- Outstanding on December 31, 1999................ 545,000 $15.44 $12.39 Granted....................................... 0 Adjustment for stock dividend................. 27,250 Exercised..................................... 0 Cancelled..................................... 0 ------- Outstanding on December 31, 2000................ 572,250 $14.70 $11.80 ======= Options exercisable at: December 31, 1999............................. 0 December 31, 2000............................. 0
52 54 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The Company will continue to account for stock options granted employees at their intrinsic value. Had the fair value method of accounting been applied to the Company's and Vector's stock options granted to employees, the pro forma effect would have been as follows:
2000 1999 1998 ------- -------- -------- Net income (loss) applicable to Common Shares, as reported.......................................... $54,529 $(59,382) $(96,553) Estimated fair value of New Valley option grants.... (1,394) (316) (316) Estimated fair value of Vector option grants........ (1,351) (117) -- ------- -------- -------- Net income (loss) applicable to Common Shares, as adjusted.......................................... $56,184 $(59,815) $(96,869) ======= ======== ======== Adjusted net income (loss) per share -- basic and diluted........................................... $ 2.44 $ (3.43) $ (10.11) ======= ======== ========
The fair value of option grants to employees is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for options granted. The estimated dividend yield is 0% and no forfeitures are assumed.
WEIGHTED AVERAGE RISK-FREE EXPECTED EXPECTED FAIR DATE INTEREST RATE LIFE IN YEARS VOLATILITY VALUE - ---- ------------- ------------- ---------- ---------------- The Company October 27, 2000................. 5.79% 10 54.74% $ 2.78 March 22, 2000................... 6.40% 10 44.45% $ 2.57 January 19, 2000................. 6.69% 10 47.92% $ 3.24 Vector November 4, 1999................. 5.60% 10 69.67% $11.80
17. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES The composition of accounts payable and accrued liabilities is as follows:
DECEMBER 31, ------------------ 2000 1999 ------- ------- Accounts payable and accrued liabilities: Accrued compensation...................................... $ 7,841 $ 7,792 Deferred rent............................................. 5,724 5,234 Unearned revenues......................................... 1,989 -- Taxes..................................................... 829 7,037 Accrued expenses and other liabilities.................... 10,618 10,900 ------- ------- Total............................................. $27,001 $30,963 ======= =======
18. PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS The following is a schedule of prepetition claims and restructuring accruals at December 31, 2000 and 1999. 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. 53 55 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, ------------------ 2000 1999 ------- ------- Restructuring accruals(a)................................... $ 5,950 $ 8,000 Money transfer payable(b)................................... 4,279 4,279 ------- ------- Total............................................. $10,229 $12,279 ======= =======
- --------------- (a) Restructuring accruals at December 31, 2000 consisted of $5,700 of disputed claims, primarily related to leases and former employee benefits, and $250 of other restructuring accruals. 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, 2000, Vector, a company under the control of Bennett S. LeBow, Chairman of the Company's Board of Directors, owned approximately 56.1% of the Company's Common Shares. Several of the other officers and directors of the Company are also affiliated with Vector. In 1995, the Company signed an expense sharing agreement with Vector pursuant to which certain lease, legal and administrative expenses are allocated to the entity incurring the expense. The Company expensed approximately $344 in 2000, $307 in 1999 and $502 in 1998 under this agreement. In September 1998, the Company made a one-year $950 loan to BGLS, a wholly-owned subsidiary of Vector, which bore 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, a director of the Company was affiliated with a law firm that rendered legal services to the Company. The Company paid this firm $516 in 1998. A director of the Company serves as a managing director of an investment bank that provided advisory services to the Company in 1999 in 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. During 2000, the investment bank provided services to Brooke (Overseas) in connection with the sale of Western Tobacco Investments. Brooke (Overseas) paid this firm $750 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 $101 in 2000, $59 in 1999 and $128 in 1998 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 $27 in 2000, $158 in 1999 and $128 in 1998. The broker-dealer, in the ordinary course of its business, engages in brokerage activities with Ladenburg on customary terms. 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 54 56 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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, 2000, 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 balance sheet. Risk arises from changes in the values of the underlying financial instruments or indices. At December 31, 2000, Ladenburg had commitments to purchase and sell financial instruments under futures contracts of $0 and $134, 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, 2000:
LONG SHORT ------- ------- Equity and index options.................................... $15,300 $51,755 Financial futures contracts................................. -- 258
The table below discloses the fair value at December 31, 2000 of these commitments, as well as the average fair value during the year ended December 31, 2000, based on monthly observations.
DECEMBER 31, 2000 AVERAGE ------------- --------------- LONG SHORT LONG SHORT ---- ----- ------ ----- Equity and index options............................ $768 $149 $1,491 $563 Financial futures contracts......................... -- 134 790 554
For the years ended December 31, 2000, 1999 and 1998, the net gain arising from options and futures contracts included in net gain on principal transactions was $1,186, $1,421 and $3,661, 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 balance sheet. 55 57 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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.
DECEMBER 31, 2000 DECEMBER 31, 1999 ------------------- ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------- -------- ------- Financial assets: Cash and cash equivalents................. $82,067 $82,067 $11,512 $11,512 Investments available for sale............ 29,331 29,331 48,722 48,722 Trading securities owned.................. 18,348 18,348 15,707 15,707 Restricted assets......................... 1,039 1,039 8,434 8,434 Receivable from clearing brokers.......... 10,126 10,126 10,903 10,903 Long-term investments..................... 4,654 10,493 8,730 13,788 Financial liabilities: Margin loans payable...................... 4,675 4,675 983 983 Notes payable............................. 27,716 27,716 19,813 19,813
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, 2000, 1999 and 1998. The operations of BrookeMil are included in real estate operations, while the Company's interest in Western Realty Development, which was accounted for on the equity method prior to December 29, 2000, is included in corporate and other activities.
BROKER- COMPUTER CORPORATE DEALER REAL ESTATE SOFTWARE AND OTHER TOTAL ------- ----------- -------- --------- -------- 2000 Revenues............................. $89,584 $ 3,199 $ 150 $ 59,988 $152,921 Operating income (loss).............. 6,212 (5,335) 7 41,139 42,023 Identifiable assets.................. 48,770 173,312 250 77 299,257 Depreciation and amortization........ 1,102 1,020 -- 22 2,144 Capital expenditures................. 763 3,663 -- -- 4,426 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
56 58 NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BROKER- COMPUTER CORPORATE DEALER REAL ESTATE SOFTWARE AND OTHER TOTAL ------- ----------- -------- --------- -------- 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
23. DISCONTINUED OPERATIONS The Company recorded a gain on disposal of discontinued operations of $17,879 related to the adjustment of accruals established during the Company's bankruptcy proceedings in 1993 and 1994. The reversal of these accruals reduced restructuring, employee benefit and various tax accruals previously established. 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. 57 59 NEW VALLEY CORPORATION AND SUBSIDIARIES QUARTERLY FINANCIAL DATA (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
QUARTERS ------------------------------------------- 1ST 2ND 3RD 4TH -------- -------- ------- -------- 2000: Revenues......................................... $ 35,541 $ 22,400 $70,983 $ 23,997 Expenses(a)...................................... 33,745 26,598 23,759 27,769 Income (loss) from continuing operations......... 1,796 (4,198) 47,224 (3,772) Discontinued operations(c)....................... -- -- -- 17,879 -------- -------- ------- -------- Net income (loss)................................ $ 1,796 $ (4,198) $47,224 $ 14,107 ======== ======== ======= ======== Income (loss) per Common Share (Basic): Income (loss) from continuing operations....... $ 0.08 $ (0.18) $ 2.06 $ (0.16) Discontinued operations(c)..................... -- -- -- 0.78 -------- -------- ------- -------- Net income (loss)(b)........................... $ 0.08 $ (0.18) $ 2.06 $ 0.62 ======== ======== ======= ======== Income (loss) per Common Share (Diluted): Income (loss) from continuing operations....... $ 0.08 $ (0.18) $ 2.05 $ (0.16) Discontinued operations(c)..................... -- -- -- 0.78 -------- -------- ------- -------- Net income (loss)(b)........................... $ 0.08 $ (0.18) $ 2.05 $ 0.62 ======== ======== ======= ======== 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) ======== ======== ======= ======== Loss per Common Share (Basic and Diluted):(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) ======== ======== ======= ========
- --------------- (a) Includes minority interests in results from continuing operations of consolidated subsidiaries and provision (benefit) 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. (c) The 2000 amounts represent adjustments of accruals established during the Company's bankruptcy proceedings in 1993 and 1994. The 1999 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. 58 60 SCHEDULE III NEW VALLEY CORPORATION REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE THREE YEARS ENDED DECEMBER 31, 2000 (AMOUNTS IN THOUSANDS)
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 - ------------ ------------ ------- -------- ----------- ------- ------------- -------- 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 5,835 -- 65,135 65,135 Ducat Place III.............. 8,187 13,600 -- 2,400 16,000 -- 16,000 Kindergarten Building........ -- -- 912 8 920 -- 920 Kremlin Site................. -- -- -- 35,665 35,665 -- 35,665 ------- ------- -------- --------- ------- ------- -------- 8,187 33,050 158,105 (73,435) 52,585 65,135 117,720 ------- ------- -------- --------- ------- ------- -------- 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............... 11,303 2,510 10,516 646 2,511 11,161 13,672 Royal Palm Beach, FL......... 8,226 2,032 7,867 24 2,032 7,891 9,923 Lincoln, NE.................. -- 1,254 4,750 (6,004) -- -- -- ------- ------- -------- --------- ------- ------- -------- 19,529 16,937 55,990 (49,332) 4,543 19,052 23,595 ------- ------- -------- --------- ------- ------- -------- Total.......................... $27,716 $49,987 $214,095 $(122,767) $57,128 $84,187 $141,315 ======= ======= ======== ========= ======= ======= ======== DESCRIPTION ACCUMULATED DATE DATE DEPRECIABLE AND LOCATION DEPRECIATION CONSTRUCTED ACQUIRED LIFE - ------------ ------------ ----------- ---------- ----------- 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............... 5,696 1997 Jan 1997 40 Ducat Place III.............. -- 1997 Jan 1997 40 Kindergarten Building........ -- April 1998 40 Kremlin Site................. -- 1998 40 ------ 5,696 ------ 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............... 1,705 1985 Jan 1996 25 Royal Palm Beach, FL......... 1,560 1985 Jan 1996 25 Lincoln, NE.................. -- 1964 Jan 1996 25 ------ 3,265 ------ Total.......................... $8,961 ======
59 61 SCHEDULE III NEW VALLEY CORPORATION REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE THREE YEARS ENDED DECEMBER 31, 2000 (AMOUNTS IN THOUSANDS) RECONCILIATION OF CARRYING COSTS AND ACCUMULATED DEPRECATION
BUILDINGS AND ACCUMULATED LAND IMPROVEMENTS TOTAL DEPRECIATION ------- ------------- -------- ------------ Balance at 1/1/98............................ $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 ------- -------- -------- ------ Additions during period Acquisitions through foreclosure........... -- -- -- Other acquisitions......................... -- -- -- Improvements, etc.......................... 3,664 -- 3,664 Reclassifications.......................... 549 (549) -- Real estate in joint venture acquired...... 16,920 65,133 82,053 5,696 Depreciation expense....................... -- -- -- 1,020 ------- -------- -------- ------ Total Additions.............................. 21,133 64,584 85,717 6,716 ------- -------- -------- ------ Deductions during period: Cost of real estate sold................... -- -- -- -- ------- -------- -------- ------ Balance at 12/31/00.......................... $57,128 $ 84,187 $141,315 $8,961 ------- -------- -------- ------
60 62 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, 2001 61 63 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, 2001.
SIGNATURE TITLE --------- ----- /s/ BENNETT S. LEBOW Chairman of the Board and Chief Executive - --------------------------------------------- Officer Bennett S. LeBow (Principal Executive Officer) /s/ J. BRYANT KIRKLAND III Vice President, Treasurer and Chief Financial - --------------------------------------------- Officer (Principal Financial Officer and J. Bryant Kirkland 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/ VICTOR M. RIVAS Director - --------------------------------------------- Victor M. Rivas
62 EX-21 2 g68193ex21.txt SUBSIDIARIES OF NEW VALLEY 1 EXHIBIT 21 SUBSIDIARIES OF NEW VALLEY The following is a list of the active subsidiaries of New Valley as of March 23, 2001, indicating the jurisdiction of incorporation of each and the names under which such subsidiaries conduct business.
Name of Business (% ownership) Jurisdiction of Incorporation ------------------------------ ----------------------------- Ladenburg, Thalmann Group Inc. (100%) Delaware Ladenburg, Thalmann & Co. Inc. (80.1%) Delaware Thinkcorp Holding Corporation (72.7%) Delaware BrookeMil Ltd. (100%) Cayman Islands ALKI Corp. (100%) Delaware Western Realty Development LLC (99.0%) Delaware
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. EX-23 3 g68193ex23.txt CONSENT OF PRICEWATERHOUSECOOPERS 1 Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-46370) and on Form S-3 (No. 333-79837) of New Valley Corporation of (i) our report dated March 27, 2001 relating to the financial statements and financial statement schedule, which appears in this Form 10-K and (ii) our report dated March 27, 2001 relating to the financial statements of Western Realty Development LLC incorporated by reference as Exhibit 99 in this Form 10-K. PricewaterhouseCoopers LLP Miami, Florida March 27, 2001 EX-99 4 g68193ex99.txt WESTERN REALTY DEVELOPMENT FINANCIALS 1 Exhibit 99 WESTERN REALTY DEVELOPMENT LLC CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 AND THE PERIOD FEBRUARY 20, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998 2 WESTERN REALTY DEVELOPMENT LLC CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS
Page Report of Independent Accountants................................................ 2 Consolidated Balance Sheets as of December 31, 2000 and 1999..................... 3 Consolidated Statements of Operations for the years ended December 31, 2000 and 1999 and the period February 20, 1998 (date of inception) through December 31, 1998................................ 4 Consolidated Statements of Members' Equity for the years ended December 31, 2000 and 1999 and the period February 20, 1998 (date of inception) through December 31, 1998................................ 5 Consolidated Statements of Cash Flows for the years ended December 31, 2000 and 1999 and the period February 20, 1998 (date of inception) through December 31, 1998................................ 6 Notes to Consolidated Financial Statements....................................... 7-14
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, 2000 and 1999, and the results of their operations and their cash flows for the years ended December 31, 2000 and 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 27, 2001 2 4 WESTERN REALTY DEVELOPMENT LLC CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
December 31, 2000 1999 -------- -------- ASSETS Current assets: Cash $ 648 $ 1,133 Accounts receivable, net of allowances for doubtful accounts of $485 and $627 1,444 1,748 Receivable from affiliate 972 465 Prepaid expenses and other current assets 284 211 -------- -------- Total current assets 3,348 3,557 Investment in real estate, net of accumulated depreciation of $5,695 and $4,067 76,360 77,988 Furniture and equipment, net of accumulated depreciation of $212 and $113 157 249 Deferred finance charges, net of accumulated amortization of $250 and $391 109 234 Goodwill, net of accumulated amortization of $7,570 and $7,224 287 722 Participating loan receivable -- 37,849 Prepaid lease commission, long-term 31 86 -------- -------- Total assets $ 80,292 $120,685 ======== ======== LIABILITIES AND MEMBERS' EQUITY Current liabilities: Current portion of note payable $ 7,513 $ 6,445 Accounts payable 260 593 Unearned revenue 1,989 2,277 Accrued interest payable 138 234 Other accrued liabilities 1,285 2,260 Due to affiliates 861 1,703 -------- -------- Total current liabilities 12,046 13,512 Note payable 674 8,211 Security deposits 594 752 -------- -------- Total liabilities 13,314 22,475 -------- -------- Commitments and contingencies -- Members' equity: Contributed capital 52,784 109,775 Retained earnings 14,194 (11,565) -------- -------- Total members' equity 66,978 98,210 -------- -------- Total liabilities and members' equity $ 80,292 $120,685 ======== ========
The accompanying notes are an integral part of the consolidated financial statements 3 5 WESTERN REALTY DEVELOPMENT LLC CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
Period February 20, 1998 (date of Year Ended Year Ended inception) through December 31, 2000 December 31, 1999 December 31, 1998 ----------------- ----------------- ----------------- Rental income $ 9,782 $ 11,537 $ 10,176 Costs and expenses: Operating, general and administrative expenses 4,608 8,217 6,644 Impairment of real estate assets and goodwill -- 11,561 -- Depreciation and amortization 2,200 4,306 3,731 -------- -------- -------- Operating income (loss) 2,974 (12,547) (199) Other expense (income): Interest expense 1,870 2,805 2,736 Accretion of income on participating loan receivable (87,877) (5,478) (1,991) Gain on asset disposal -- -- (13) -------- -------- -------- Total other (income) expenses (86,007) (2,673) 732 -------- -------- -------- Income (loss) before income taxes 88,981 (9,874) (931) Income tax provision 207 -- 760 -------- -------- -------- Net income (loss) $ 88,774 $ (9,874) $ (1,691) ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements 4 6 WESTERN REALTY DEVELOPMENT LLC CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY (DOLLARS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 AND THE PERIOD FEBRUARY 20, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
Contributed Retained Capital Earnings Total ------- -------- ----- 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 Net income -- 88,774 88,774 Distributions (62,531) (63,015) (125,546) Capital contributions 5,540 -- 5,540 --------- --------- --------- Balance, December 31, 2000 $ 52,784 $ 14,194 $ 66,978 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements 5 7 WESTERN REALTY DEVELOPMENT LLC CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Period February 20, 1998 (date of Year Ended Year Ended inception) through December 31, 2000 December 31, 1999 December 31, 1998 ----------------- ----------------- ----------------- Net income (loss) $ 88,774 $ (9,874) $ (1,691) Cash flows from operating activities: Depreciation and amortization 2,199 4,306 3,545 Impairment of real estate assets and goodwill -- 11,561 -- Accretion of income on participating loan receivable (87,877) (5,858) (1,991) Gain on asset disposal -- -- (13) Changes in assets, net 286 (1,331) 593 Changes in liabilities, net (1,701) 1,256 (12,790) --------- --------- --------- Net cash provided from (used in) operating activities 1,681 60 (12,347) --------- --------- --------- Cash flows from investing activities: Capital expenditures (7) (1,127) (1,317) Repayment (issuance) of participating loan 125,546 -- (30,000) Cash contributed by BrookeMil -- -- 442 --------- --------- --------- Net cash purchased from (used in) investing activities 125,539 (1,127) (30,875) --------- --------- --------- Cash flows from financing activities: Retirement of note payable (6,462) (4,999) (423) Advances (to) from affiliates, net (1,237) (458) 1,696 Capital distributions (125,546) -- -- Capital contributions 5,540 7,242 42,364 --------- --------- --------- Net cash (used in) provided from financing activities (127,705) 1,785 43,637 --------- --------- --------- Net increase in cash (485) 718 415 Cash at beginning of period 1,133 415 -- --------- --------- --------- Cash at end of period $ 648 $ 1,133 $ 415 ========= ========= ========= Supplemental cash flow information: Cash paid during the year for: Interest $ 1,973 $ 2,885 $ 3,277 Income taxes -- 16 1,039
The accompanying notes are an integral part of the consolidated financial statements 6 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 Western Realty has three classes of equity: Class A interests, representing 30% of the ownership of the Company and Class B and Class C interests, which collectively represent 70% of the ownership of the Company. Prior to December 29, 2000, Apollo owned the Class A interests, New Valley owned the Class B interests and BrookeMil owned the Class C interests. On December 29, 2000, WRD Holding Corporation, a wholly-owned subsidiary of New Valley, purchased 29/30ths of the Class A Interests of Western Realty previously held by Apollo. In connection with the purchase, Apollo and New Valley agreed distributions will be made 30% to the holders of the Class A Interests and 70% to the holders of the Class B and Class C interests; therefore, New Valley and its subsidiaries are entitled to 99% of subsequent distributions from Western Realty and Apollo is entitled to 1% of subsequent distributions. Apollo and New Valley also agreed to loan Western Realty on an equal basis any additional funds required to pay off existing indebtedness at an interest rate of 15% per annum. 7 9 WESTERN REALTY DEVELOPMENT LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) Prior to December 29, 2000, the holder of the Class A interests (Apollo) was entitled to a preference on distributions of cash from Western Realty to the extent of its investment commitment of $43,750, of which $42,574 had been funded, $41,266 was returned in connection with the sale of Western Tobacco Investments (discussed in Note 3) and $1,308 was outstanding as of December 29, 2000, together with a 15% annual rate of return. Prior to December 29, 2000, the holder of the Class B interests (New Valley) was then entitled to a return of its investment commitment of $23,750, of which $22,574 had been funded, $21,266 was returned in connection with the sale of Western Tobacco Investments and $1,308 was outstanding as of December 29, 2000, together with a 15% annual rate of return; subsequent distributions are made 70% to the Class B and C interests and 30% to the holders of the Class A interests (Apollo). Western Realty 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 will generally require the unanimous consent of the Board of Managers. 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. 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. 8 10 WESTERN REALTY DEVELOPMENT LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 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 2000, 1999 and the period February 20, 1998 to December 31, 1998 was $346 and $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. 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, 27.00 rubles at December 31, 1999 and 28.16 rubles at December 31, 2000. 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 9 11 WESTERN REALTY DEVELOPMENT LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 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, 2000 are $5,487, $4,837, $2,551, and $1,490 for the years 2001, 2002, 2003 and 2004 and thereafter, respectively. COMPARATIVE AMOUNTS Certain amounts in the 1998 and 1999 financial statements have been reclassified to conform to the 2000 presentation. 3. PARTICIPATING LOAN Western Realty made a $30,000 participating loan to, and payable out of a 30% profits interest in, Western Tobacco Investments LLC ("Western Tobacco Investments"), which held the interests of Brooke (Overseas) Ltd., a subsidiary of Vector Group Ltd. ("Vector"), New Valley's principal stockholder, in Liggett-Ducat Ltd. and the new factory constructed by Liggett-Ducat Ltd. on the outskirts of Moscow. As a result of the sale of Western Tobacco Investments, Western Realty was entitled to receive the return of all amounts advanced on the loan, together with a 15% annual rate of return, and 30% of subsequent distributions. Western Realty recognized income of $3,460, $5,858 and $1,991, which represented the 15% return on the loan plus 30% of any net income applicable to common interests of Western Tobacco Investments, for the years ended December 31, 2000 and 1999 and the period April 28, 1998 (date of inception) to December 31, 1998, respectively. The loan, together with the 15% annual rate of return thereon, was repaid and terminated in connection with the sale of Western Tobacco Investments in August 2000. 10 12 WESTERN REALTY DEVELOPMENT LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) On August 4, 2000, Vector completed the sale of Western Tobacco Investments to Gallaher Group Plc for $334,100 in cash and $64,400 of assumed debt and capital commitments. The cash proceeds from the transaction after estimated closing expenses were divided among Vector and Western Realty in accordance with the participating loan, which was terminated at the closing. The Company received $125,546 in cash proceeds, of which $68,338 was distributed to Apollo and $57,208 was distributed to New Valley. The Company recorded a gain of $84,417 in connection with the transaction for the year ended December 31, 2000. Summarized financial information as of December 31, 1999 and for the period January 1, 2000 through August 4, 2000 (date of sale), the year ended December 31, 1999 and the period April 28, 1998 (date of inception) through December 31, 1998 for WTI follows:
1999 ---- Current assets................................................ $ 35,456 Property, plant and equipment................................. 115,645 Noncurrent assets............................................. 2,105 Credit facilities due within one year......................... 38,679 Current liabilities........................................... 55,923 Long-term liabilities......................................... 17,314 Participating loan payable.................................... 37,849 Members' equity............................................... 3,441
PERIOD JANUARY 1, PERIOD APRIL 28, 2000 THROUGH 1998 (DATE OF AUGUST 4, 2000 YEAR ENDED INCEPTION) THROUGH (DATE OF SALE) DECEMBER 31, 1999 DECEMBER 31, 1998 -------------- ----------------- ----------------- Revenues ............................ $ 107,263 $ 100,181 $ 68,976 Costs and expenses .................. 115,697 103,036 62,767 Income tax expense (benefit) ........ 20 874 (429) --------- --------- --------- Net (loss) income ................... (8,454) (3,729) 6,638 Accretion of return on participating loan .............. 3,460 5,858 1,991 --------- --------- --------- Net (loss) income applicable to members' equity ................. $ (11,914) $ (9,587) $ 4,647 ========= ========= =========
11 13 WESTERN REALTY DEVELOPMENT LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 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, 2000 and 1999 are as follows:
2000 1999 ---- ---- Land ............................................. $ 16,920 $ 16,920 Buildings ........................................ 65,135 65,135 -------- -------- Total ........................................ 82,055 82,055 Less accumulated depreciation .................... (5,695) (4,067) -------- -------- Net investment in real estate ................ $ 76,360 $ 77,988 ======== ======== Note payable ..................................... $ 8,187 $ 14,656 Less: current portion of note payable ............ 7,513 6,445 -------- -------- Note payable - long-term portion ................. $ 674 $ 8,211 ======== ========
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. Depreciation expense for 2000, 1999 and the period February 20, 1998 (date of inception) to December 31, 1998 was $1,727, $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, 2000 and 1999, borrowings under the new credit agreement totaled $8,211 and $14,656, respectively. Remaining required principal payments on the note payable are $7,513 in 2001 and $681 in 2002. 5. INCOME TAXES The full amount of tax provision in 2000 and 1998 relates to current income tax expense. There was 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 12 14 WESTERN REALTY DEVELOPMENT LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) differences at December 31, 2000 and 1999 relate to Russian tax loss carry forwards, which create a deferred tax asset of $3,296 at December 31, 2000. Other temporary differences result in a net deferred tax liability of $229 at December 31, 2000. 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 generally 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 amount of the net deferred tax asset at December 31, 2000 and 1999 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 13 15 WESTERN REALTY DEVELOPMENT LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 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 Brooke (Overseas) Ltd. is a wholly-owned subsidiary of Vector, which owns approximately 56.1% 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, 2000 and 1999 was $(335) and $1,141, 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) was included in net advances from New Valley and its subsidiaries above at December 31, 1999. The note was repaid in 2000. 14 -----END PRIVACY-ENHANCED MESSAGE-----