1
Exhibit 99.3
NEW VALLEY CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
2
NEW VALLEY CORPORATION AND SUBSIDIARIES
FOR THE THREE MONTHS ENDED MARCH 31, 1998
TABLE OF CONTENTS
PAGE
----
Item 1. Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of March 31,
1998 and December 31, 1997.................................... 3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 1998 and 1997................ 4
Condensed Consolidated Statement of Changes in
Shareholders' Deficiency for the three months
ended March 31, 1998.......................................... 5
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1998 and 1997................ 6
Notes to the Condensed Consolidated Financial
Statements .................................................. 7
-2-
3
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
March 31, December 31,
1998 1997
--------- -----------
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 9,899 $ 11,606
Investment securities available for sale...................... 41,960 51,993
Trading securities owned...................................... 56,028 49,988
Restricted assets............................................. 236 232
Receivable from clearing brokers.............................. 1,402 1,205
Other current assets.......................................... 5,466 3,618
--------- ----------
Total current assets..................................... 114,991 118,642
--------- ----------
Investment in real estate, net.................................... 170,811 256,645
Furniture and equipment, net...................................... 11,768 12,194
Restricted assets................................................. 5,548 5,484
Long-term investments, net........................................ 26,292 27,224
Investment in joint venture....................................... 59,340 --
Other assets...................................................... 14,489 21,202
--------- ----------
Total assets............................................. $ 403,239 $ 441,391
========= ==========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Margin loan payable........................................... $ 10,170 $ 13,012
Current portion of notes payable and long-term obligations ... 349 760
Accounts payable and accrued liabilities...................... 42,310 57,722
Prepetition claims and restructuring accruals................. 12,452 12,611
Income taxes.................................................. 18,746 18,413
Securities sold, not yet purchased............................ 29,683 25,610
--------- ----------
Total current liabilities................................ 113,710 128,128
--------- ----------
Notes payable..................................................... 154,027 173,814
Other long-term obligations....................................... 9,095 11,210
Redeemable preferred shares....................................... 271,924 258,638
Shareholders' deficiency:
Cumulative preferred shares; liquidation preference of $69,769;
dividends in arrears, $145,671 and $139,412................ 279 279
Common Shares, $.01 par value; 850,000,000 shares authorized;
9,577,624 shares outstanding............................... 96 96
Additional paid-in capital.................................... 592,004 604,215
Accumulated deficit........................................... (742,270) (742,427)
Unearned compensation on stock options........................ (405) (158)
Accumulated other comprehensive income........................ 4,779 7,596
--------- ----------
Total shareholders' deficiency........................... (145,517) (130,399)
--------- ----------
Total liabilities and shareholders' deficiency........... $ 403,239 $ 441,391
========= ==========
See accompanying Notes to Condensed Consolidated Financial Statements
-3-
4
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended March 31,
------------------------------
1998 1997
--------- ---------
Revenues:
Principal transactions, net................................ $ 5,893 $ 2,499
Commissions................................................ 6,676 3,393
Corporate finance fees..................................... 3,238 1,132
Gain on sale of investments................................ 5,596 3,694
Loss from joint venture.................................... (329) --
Real estate leasing........................................ 7,776 6,282
Interest and dividends..................................... 2,849 1,541
Computer sales and service................................. 413 3,283
Other income............................................... 1,728 1,029
--------- ---------
Total revenues......................................... 33,840 22,853
--------- ---------
Cost and expenses:
Operating, general and administrative...................... 30,100 25,946
Interest................................................... 4,160 3,862
Provision for loss on long-term investment................. -- 3,796
--------- ---------
Total costs and expenses............................... 34,260 33,604
--------- ---------
Loss before income taxes and minority interests................. (420) (10,751)
Income tax provision............................................ 6 50
Minority interest in loss of consolidated subsidiaries.......... 583 460
--------- ---------
Net income (loss)............................................... 157 (10,341)
Dividend requirements on preferred shares....................... (18,832) (15,980)
--------- ---------
Net loss applicable to Common Shares............................ $ (18,675) $ (26,321)
========= =========
Loss per Common Share (basic and diluted):
Net loss per Common Share.................................. $ (1.95) $ (2.75)
========= =========
Number of shares used in computation............................ 9,578,000 9,578,000
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements
-4-
5
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS'
DEFICIENCY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
UNEARNED ACCUMULATED
CLASS B COMPENSATION OTHER
PREFERRED COMMON PAID-IN ACCUMULATED ON STOCK COMPREHENSIVE
SHARES SHARES CAPITAL DEFICIT OPTIONS INCOME
--------- ------ ------- ----------- ------------ -------------
Balance, December 31, 1997............ $279 $96 $604,215 $(742,427) $(158) $ 7,597
Net income......................... 157
Undeclared dividends and accretion
on redeemable preferred shares... (12,574)
Unrealized loss on investment
securities....................... (2,818)
Adjustment to unearned compensation
on stock options................. 363 (363)
Compensation expense on stock
option grants.................... 116
---- --- --------- --------- ----- -------
Balance, March 31, 1998............... $279 $96 $ 592,004 $(742,270) $(405) $ 4,779
==== === ========= ========= ===== =======
See accompanying Notes to Condensed Consolidated Financial Statements
-5-
6
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
March 31,
-------------------------
1998 1997
------- --------
Cash flows from operating activities:
Net income (loss)....................................................... $ 157 $(10,341)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Loss from joint venture............................................... 329 --
Depreciation and amortization......................................... 2,344 2,009
Provision for loss on long-term investment............................ -- 3,796
Stock based compensation expense...................................... 828 847
Changes in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in receivables and other assets................ (9,586) 14,313
Increase in income taxes........................................... 440 759
Increase (decrease) in accounts payable and accrued liabilities.... 2,766 (12,905)
------- --------
Net cash used for operating activities..................................... (2,722) (1,522)
------- --------
Cash flows from investing activities:
Sale or maturity of investment securities............................. 8,129 23,193
Purchase of investment securities..................................... (913) (3,963)
Sale or liquidation of long-term investments.......................... 1,901 2,807
Purchase of long-term investments..................................... (1,951) (4,400)
Purchase of real estate............................................... (1,419) --
Purchase of furniture and fixtures.................................... (197) --
Payment of prepetition claims......................................... (847) (58)
Return of prepetition claims paid..................................... -- 1,396
(Increase) decrease in restricted assets.............................. (68) 82
Net cash transferred to joint venture................................. (487) --
Payment for acquisitions, net of cash acquired........................ -- (20,014)
------- --------
Net cash provided from (used for) investing activities..................... 4,148 (957)
------- --------
Cash flows from financing activities:
Decrease in margin loan payable....................................... (2,842) --
Prepayment of notes payable........................................... (291) (114)
Repayment of other obligations........................................ -- (207)
------- --------
Net cash used for financing activities..................................... (3,133) (321)
------- --------
Net decrease in cash and cash equivalents.................................. (1,707) (2,800)
Cash and cash equivalents, beginning of period............................. 11,606 57,282
------- --------
Cash and cash equivalents, end of period................................... $ 9,899 $ 54,482
======= ========
See accompanying Notes to Condensed Consolidated Financial Statements
-6-
7
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
The consolidated financial statements include the accounts of New Valley
Corporation and its majority-owned subsidiaries (the "Company"). The
consolidated financial statements as of March 31, 1998 presented herein
have been prepared by the Company without an audit. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position as of
March 31, 1998 and the results of operations and cash flows for all
periods presented have been made. Results for the interim periods are not
necessarily indicative of the results for an entire year.
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.
These financial statements should be read in conjunction with the
consolidated financial statements in the Company's Annual Report on Form
10-K, as amended, for the year ended December 31, 1997, as filed with the
Securities and Exchange Commission.
Certain reclassifications have been made to prior interim period
financial information to conform with current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." The Statement, which the Company adopted in the first quarter of
1998, establishes standards for reporting and displaying comprehensive
income and its components in a full set of general-purpose financial
statements. Where applicable, earlier periods have been restated to
conform to the standards established by SFAS No. 130. The adoption of
SFAS 130 did not have a material impact on the Company's financial
statements.
For transactions entered into in fiscal years beginning after December 15,
1997, the Company adopted and is reporting in accordance with SOP 97-2,
"Software Revenue Recognition". The adoption of SOP 97-2 did not have a
material impact on the Company's financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1
provides guidance that the carrying value of software developed or
obtained for internal use is assessed based upon an analysis of estimated
future cash flows on an undiscounted basis and before interest charges.
SOP 98-1 is effective for transactions entered into in fiscal years
beginning after December 15, 1998. The Company believes that adoption of
SOP 98-1 will not have a material impact on the Company's financial
statements.
-7-
8
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which establishes standards for
the way that public business enterprises report information about
operating segments. SFAS No. 131 is effective for financial statements for
fiscal years beginning after December 15, 1997. The Company is currently
reviewing its operating segment disclosures and will adopt SFAS No. 131 in
the fourth quarter of 1998.
2. INVESTMENT IN WESTERN REALTY
On January 31, 1997, the Company entered into a stock purchase agreement
(the "Purchase Agreement") with Brooke (Overseas) Ltd. ("Brooke
(Overseas)"), a wholly-owned subsidiary of Brooke Group Ltd. ("Brooke"),
an affiliate of the Company, pursuant to which the Company acquired 10,483
shares (the "BML Shares") of the common stock of BrookeMil Ltd. ("BML")
from Brooke (Overseas) for a purchase price of $55,000, consisting of
$21,500 in cash and a $33,500 9% promissory note of the Company (the
"Note"). The BML Shares comprise 99.1% of the outstanding shares of BML, a
real estate development company in Russia. The Note, which was
collateralized by the BML Shares, was paid during 1997.
In February 1998, the Company and Apollo Real Estate Investment Fund III,
L.P. ("Apollo") organized Western Realty Development LLC ("Western
Realty") to make real estate and other investments in Russia. In
connection with the formation of Western Realty, the Company agreed, among
other things, to contribute the real estate assets of BML, including Ducat
Place II and the site for Ducat Place III, to Western Realty and Apollo
agreed to contribute up to $58,000.
Under the terms of the agreement governing Western Realty ("the LLC
Agreement"), the ownership and voting interests in Western Realty will be
held equally by Apollo and the Company. Apollo will be entitled to a
preference on distributions of cash from Western Realty to the extent of
its investment, together with a 15% annual rate of return, and the Company
will then be entitled to a return of $10,000 of BML-related expenses
incurred by the Company since March 1, 1997, together with a 15% annual
rate of return; subsequent distributions will be made 70% to the Company
and 30% to Apollo. Western Realty will be managed by a Board of Managers
consisting of an equal number of representatives chosen by Apollo and the
Company. All material corporate transactions by Western Realty will
generally require the unanimous consent of the Board of Managers.
Accordingly, the Company has accounted for its non-controlling interest in
Western Realty using the equity method of accounting.
-8-
9
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
On February 27, 1998, at an initial closing under the LLC Agreement,
Apollo made a $11,000 loan (the "Loan") to Western Realty. The Loan, which
bore interest at the rate of 15% per annum and was due September 30, 1998,
was collateralized by a pledge of the Company's shares of BML. On April
28, 1998, the Loan and the accrued interest thereon were converted into a
capital contribution by Apollo to Western Realty and the BML pledge was
released.
The Company recorded its basis in the investment in the joint venture in
the amount of $59,669 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 will seek to make additional real estate and other
investments in Russia. The Company and Apollo have agreed to invest,
through Western Realty or another entity, up to $25,000 in the aggregate
for the potential development of a real estate project in Moscow. In
addition, Western Realty has made a $20,000 participating loan to, and
payable out of a 30% profits interest in, a company organized by Brooke
(Overseas) which will, among other things, acquire an interest in an
industrial site and manufacturing facility being constructed on the
outskirts of Moscow by a subsidiary of Brooke (Overseas).
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at fair
value, with net unrealized gains included as a separate component of
shareholders' equity (deficit). The Company had realized gains on sales of
investment securities available for sale of $ 4,588 for the three months
ended March 31, 1998.
The components of investment securities available for sale at March 31,
1998 are as follows:
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
Short-term investments...................... $ 3,798 $ -- $ -- $ 3,798
Marketable equity securities................ 29,698 1,147 611 30,234
Marketable warrants......................... -- 7,103 -- 7,103
Marketable debt securities ................. 3,685 -- 2,860 825
--------- -------- ------- --------
Investment securities....................... $ 37,181 $ 8,250 $ 3,471 $ 41,960
========= ======== ======= ========
4. LONG-TERM INVESTMENTS
At March 31, 1998, long-term investments consisted primarily of
investments in limited partnerships of $26,100. The Company is required
under certain limited partnership agreements to make additional
investments up to an aggregate of $6,700 at March 31, 1998. The Company
believes the fair value of the limited partnerships exceeds its carrying
amount by approximately $7,500 based on the indicated market values of the
underlying investment portfolio provided by the partnerships. The
Company's investments in limited partnerships are illiquid and the
ultimate realization of these investments are subject to the performance
of the underlying partnership and its management by the general partners.
-9-
10
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
In the first quarter of 1997, the Company determined that an other than
temporary impairment in the value of its investment in a joint venture had
occurred and wrote down this investment to zero with a charge to
operations of $3,796 for the three month period. 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.
5. REDEEMABLE PREFERRED SHARES
At March 31, 1998, the Company had authorized and outstanding 2,000,000
and 1,071,462, respectively, of its Class A Senior Preferred Shares. At
March 31, 1998 and December 31, 1997, respectively, the carrying value of
such shares amounted to $271,924 and $258,638, including undeclared
dividends of $176,161 and $163,302 or $164.41 and $152.41 per share. As of
March 31, 1998, the unamortized discount on the Class A Senior Preferred
Shares was $7,534.
For the three months ended March 31, 1998, the Company recorded $712 in
compensation expense related to certain Class A Senior Preferred Shares
awarded to an officer of the Company in 1996. At March 31, 1998, the
balance of the deferred compensation and the unamortized discount related
to these award shares was $3,849 and $2,760, respectively.
6. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS
The undeclared dividends, as adjusted for conversions of Class B Preferred
Shares into Common Shares, cumulatively amounted to $145,671 and $139,412
at March 31, 1998 and December 31, 1997, respectively. These undeclared
dividends represent $52.20 and $49.95 per share as of the end of each
period. No accrual was recorded for such undeclared dividends as the Class
B Preferred Shares are not mandatorily redeemable.
-10-
11
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
7. CONTINGENCIES
LITIGATION
On or about March 13, 1997, a shareholder derivative suit was filed
against the Company, as a nominal defendant, its directors and Brooke in
the Delaware Chancery Court, by a shareholder of the Company. The suit
alleges that the Company's purchase of the BML Shares constituted a
self-dealing transaction which involved the payment of excessive
consideration by the Company. The plaintiff seeks (i) a declaration that
the Company's directors breached their fiduciary duties, Brooke aided and
abetted such breaches and such parties are therefore liable to the
Company, and (ii) unspecified damages to be awarded to the Company. The
Company's time to respond to the complaint has not yet expired. The
Company believes that the allegations were without merit. Although there
can be no assurances, management is of the opinion, after consultation
with counsel, that the ultimate resolution of this matter will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
The Company is a defendant in various lawsuits and may be subject to
unasserted claims primarily in connection with its activities as a
securities broker-dealer and participation in public underwritings. These
lawsuits involve claims for substantial or indeterminate amounts and are
in varying stages of legal proceedings. In the opinion of management,
after consultation with counsel, the ultimate resolution of these matters
will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS
The prepetition claims remaining as of March 31, 1998 of $12,452 may be
subject to future adjustments depending on pending discussions with the
various parties and the decisions of the Bankruptcy Court.
-11-