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Exhibit 99.5
NEW VALLEY HOLDINGS, INC.
FINANCIAL STATEMENTS
MARCH 31, 1998
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NEW VALLEY HOLDINGS, INC.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
Balance Sheets as of March 31, 1998 and December 31, 1997.......................................... 2
Statements of Operations for the three months ended March 31, 1998 and
March 31, 1997................................................................................. 3
Statement of Stockholder's Equity (Deficit) for the three months ended March 31, 1998.............. 4
Statements of Cash Flows for the three months ended March 31, 1998 and
March 31, 1997................................................................................ 5
Notes to Financial Statements...................................................................... 6
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NEW VALLEY HOLDINGS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
===============================================================================
March 31, December 31,
1998 1997
-------------------- ------------------
ASSETS
Cash and cash equivalents.............................................. $ 1,031 $ 6
Investment in New Valley:
Redeemable preferred stock........................................... 58,277 59,359
Common stock......................................................... (58,277) (59,359)
--------- --------
Total investment in New Valley.......................................
--------- --------
Total assets........................................................... $ 1,031 $ 6
========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Payable to parent...................................................... $ 1,075 $ 56
Current income taxes payable to parent................................. 6,298 6,298
--------- --------
Total liabilities...................................................... 7,373 6,354
--------- --------
Commitments and contingencies..........................................
Common stock, $0.01 par value, 100 shares authorized, issued
and outstanding......................................................
Additional paid-in capital............................................. 7,633 7,633
Deficit................................................................ (29,901) (25,737)
Accumulated other comprehensive income................................. 15,926 11,756
--------- --------
Total stockholder's equity (deficit)................................... (6,342) (6,348)
--------- --------
Total liabilities and stockholder's equity (deficit)................... $ 1,031 $ 6
========= ========
The accompanying notes are an integral part
of the financial statements.
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NEW VALLEY HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
===============================================================================
Three Months Ended
-------------------------------------
March 31, March 31,
1998 1997
------------------ ------------------
Equity in loss of New Valley.................................................... $(4,166) $(8,153)
Interest income................................................................. 9 6
General and administrative expenses ............................................ (7) (23)
------- -------
Loss from continuing operations before income taxes............................. (4,164) (8,170)
------- -------
Income tax benefit.............................................................. (7)
------- -------
Net (loss)...................................................................... $(4,164) $(8,163)
======= =======
The accompanying notes are an integral part
of the financial statements.
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NEW VALLEY HOLDINGS, INC.
STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
==============================================================================
Accumulated
Common Stock Additional Retained Other
---------------- Paid-In Earnings Comprehensive
Shares Amount Capital (Deficit) Income Total
------ ------ ------- --------- ------------- -------
Balance, December 31, 1997................................. 100 $7,633 $(25,737) $11,756 $(6,348)
Unrealized holding gain on investment in New Valley........ 4,170 4,170
Net loss................................................... (4,164) (4,164)
--- ---- ------ -------- ------- -------
Balance, March 31, 1998.................................... 100 $7,633 $(29,901) $15,926 $ 6,342
=== ==== ====== ======== ======= =======
The accompanying notes are an integral part
of the financial statements.
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NEW VALLEY HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
===============================================================================
Three Months Ended
-------------------------------------
March 31, March 31,
1998 1997
------------------ ------------------
Net cash provided by operating activities................................ $1,025 $ 9
------ ---
Net cash provided by investing activities................................
Net cash used in financing activities....................................
Net increase in cash and cash equivalents................................ 1,025 9
Cash and cash equivalents at beginning of period......................... 6 1
------ ---
Cash and cash equivalents at end of period............................... $1,031 $10
====== ===
The accompanying notes are an integral part
of the financial statements.
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NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
ORGANIZATION. New Valley Holdings, Inc. (the "Company") was formed on
September 9, 1994, pursuant to the laws of Delaware, by BGLS Inc. ("BGLS")
to act as a holding company for certain stock investments in New Valley
Corporation ("New Valley"). BGLS, which owns 100% of the authorized,
issued and outstanding common stock of the Company, is a wholly-owned
subsidiary of Brooke Group Ltd. ("Brooke"), a Delaware corporation whose
stock is traded on the New York Stock Exchange.
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, disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS. For purposes of statements of cash flows, cash
includes cash on deposit in banks and cash equivalents, comprised of
short-term investments which have an original maturity of 90 days or less.
Interest on short-term investments is recognized when earned.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes standards for reporting and display of comprehensive income.
The purpose of reporting comprehensive income is to present a measure of
all changes in equity that result from recognized transactions and other
economic events of the period other than transactions with owners in their
capacity as owners. SFAS No. 130 requires that an enterprise classify
items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in
the equity section of the balance sheet. For the Company, other components
of stockholders' equity include such items as the Company's proportionate
interest in New Valley's capital transactions and unrealized gains and
losses on investment securities. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. The implementation of SFAS No.
130 for the quarter ended March 31, 1998 does not have any material effect
on the consolidated financial statements.
2. INVESTMENT IN NEW VALLEY CORPORATION
At March 31, 1998, the Company's investment in New Valley consisted of a
41.7% voting interest. At March 31, 1998, the Company owned 57.7% of the
outstanding $15.00 Class A Increasing Rate Cumulative Senior Preferred
Shares ($100 Liquidation Value), $.01 par value ("Class A Preferred
Shares") and 41.5% of New Valley's common shares, $.01 par value (the
"Common Shares").
The Class A Preferred Shares are accounted for as debt and equity
securities pursuant to the requirements of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", and are classified as
available-for-sale. The Common Shares are accounted for pursuant to
Accounting Principles Board Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock".
The Company determines the fair value of the Class A Preferred Shares
based on the quoted market price. Through September 1996, earnings on the
Class A Preferred Shares were comprised of dividends accrued during the
period and the accretion of the difference between the Company's basis
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NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(Continued)
and their mandatory redemption price. During the quarter ended September
30, 1996, the decline in the market value of the Class A Preferred Shares,
the dividend received on the Class A Preferred Shares and the Company's
equity in losses incurred by New Valley caused the carrying value of the
Company's investment in New Valley to be reduced to zero. Beginning in the
fourth quarter of 1996, the Company suspended the recording of its
earnings on the dividends accrued and the accretion of the difference
between the Company's basis in the Class A Preferred Shares and their
mandatory redemption price.
The Company's investment in New Valley at March 31, 1998 is summarized
below:
Unrealized
Number of Fair Carrying Holding
Shares Value Amount Gain (Loss)
--------- ------- --------- -------------
Class A Preferred Shares....... 618,326 $58,277 $ 58,277 $(1,082)
Common Shares.................. 3,969,962 3,722 (58,277)
----- --------
$61,999 $ $(1,082)
======= ========
In November 1994, New Valley's First Amended Joint Chapter 11 Plan of
Reorganization, as amended ("Joint Plan"), was confirmed by order of the
United States Bankruptcy Court for the District of New Jersey and on
January 18, 1995, New Valley emerged from bankruptcy reorganization
proceedings and completed substantially all distributions to creditors
under the Joint Plan. Pursuant to the Joint Plan, among other things, the
Class A Preferred Shares, the Class B Preferred Shares, the Common Shares
and other equity interests were reinstated and retained all of their
legal, equitable and contractual rights.
The Class A Preferred Shares of New Valley are required to be redeemed on
January 1, 2003 for $100.00 per share plus dividends accrued to the
redemption date. The shares are redeemable, at any time, at the option of
New Valley, at $100.00 per share plus accrued dividends. The holders of
Class A Preferred Shares are entitled to receive a quarterly dividend, as
declared by the Board of Directors, payable at the rate of $19.00 per
annum. At March 31, 1998, the accrued and unpaid dividends arrearage was
$176,161 ($164.41 per share).
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NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(Continued)
3. NEW VALLEY CORPORATION
Summarized financial information for New Valley as of March 31, 1998 and
December 31, 1997 and for the three months ended March 31, 1998 and 1997
follows:
March 31, December 31,
1998 1997
------------------- --------------------
Current assets, primarily cash and marketable
securities................................... $114,991 $ 118,642
Non-current assets.............................. 288,248 322,749
Current liabilities............................. 113,710 128,128
Non-current liabilities......................... 163,122 185,024
Redeemable preferred stock...................... 271,924 258,638
Shareholders' deficit........................... (145,517) (130,399)
March 31,
----------------------------------------
1998 1997
------------------- --------------------
Revenues........................................ 33,840 $22,853
Costs and expenses.............................. 34,260 33,604
Net income (loss)............................... 157 (10,341)
Net loss applicable to common shares(A)......... (18,675) (26,321)
- ------------------------
(A) Considers all preferred accrued dividends, whether or not declared.
On January 31, 1997, New Valley entered into a stock purchase agreement
with Brooke (Overseas) Ltd. ("BOL"), a wholly-owned subsidiary of BGLS,
and acquired all of BOL's shares (the "BML Shares") in BrookeMil Ltd.
("BML"), representing 99.1% of the common stock of BML, which is engaged
in real estate development in Russia. New Valley paid BOL a purchase price
of $55,000 for the BML Shares, consisting of $21,500 in cash and a New
Valley $33,500 9% promissory note. The note was paid in full in 1997.
On February 20, 1998, New Valley 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, New Valley agreed, among
other things, to contribute to Western Realty the real estate assets of
its subsidiary BML 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 are held
equally by Apollo and New Valley. Apollo is 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 New Valley is then entitled
to a return of $10,000 of BML-related expenses incurred by New Valley
since March 1, 1997, together with a 15% annual rate of return; subsequent
distributions will be made 70% to New Valley and 30% to Apollo. Western
Realty is managed by a Board of Managers consisting of an equal number of
representatives chosen by Apollo and New Valley. All material corporate
transactions by Western Realty generally require the
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NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(Continued)
unanimous consent of the Board of Managers. Accordingly, New Valley
accounts for its non-controlling interests in Western Realty on the equity
method.
The organization of Western Realty was effected pursuant to the LLC
Agreement. In 1996, New Valley acquired from an affiliate of Apollo eight
shopping centers for $72,500. New Valley and pension plans sponsored by
BGLS have invested in investment partnerships managed by an affiliate of
Apollo. Apollo's affiliate owns a substantial amount of debt securities of
Brooke and warrants to purchase common stock of the Company.
Western Realty will seek to make additional real estate and other
investments in Russia. New Valley 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 BOL
which, among other things, owns an interest in a new factory being
constructed on the outskirts of Moscow by a subsidiary of BOL.
4. FEDERAL INCOME TAX
At March 31, 1998, the Company had $8,400 of unrecognized net deferred tax
assets, comprised primarily of future deductible temporary differences. 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.
5. CONTINGENCIES
BGLS has pledged its ownership interest in the Company's common stock and
the Company's investments in the New Valley securities as collateral in
connection with the issuance of BGLS' 15.75% Senior Secured Notes ("BGLS
Notes") due 2001.
On March 2, 1998, BGLS entered into an agreement with AIF II, L.P. and an
affiliated investment manager on behalf of a managed account (together,
the "Apollo Holders") who hold approximately 41.9% of the BGLS Notes in
which the Apollo Holders agreed to defer the payment of interest on the
BGLS Notes held by them, commencing with the interest payment that was due
July 31, 1997, which they had previously agreed to defer, through the
interest payment due July 31, 2000. The deferred interest payments will be
payable at final maturity of the BGLS Notes on January 31, 2001 or upon an
event of default under the Indenture for the BGLS Notes.
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