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Exhibit 99.5
NEW VALLEY HOLDINGS, INC.
FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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NEW VALLEY HOLDINGS, INC.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
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Balance Sheets as of September 30, 1998 and December 31, 1997...................................... 2
Statements of Operations for the three and nine months ended September 30, 1998 and
September 30, 1997............................................................................. 3
Statement of Stockholder's Equity (Deficit) for the nine months ended
September 30, 1998............................................................................. 4
Statements of Cash Flows for the nine months ended September 30, 1998 and
September 30, 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)
===============================================================================
September 30, December 31,
1998 1997
------------- ------------
ASSETS
Cash and cash equivalents.............................................. $ 23 $ 6
Investment in New Valley:
Redeemable preferred stock........................................... 33,390 59,359
Common stock......................................................... (33,390) (59,359)
-------- --------
Total investment in New Valley.......................................
-------- --------
Total assets........................................................... $ 23 $ 6
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Payable to parent...................................................... $ 56
Current income taxes payable to parent................................. 6,333 6,298
-------- --------
Total liabilities...................................................... 6,333 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................................................................ (42,787) (25,737)
Accumulated other comprehensive income................................. 28,844 11,756
-------- --------
Total stockholder's equity (deficit)................................... (6,310) (6,348)
-------- --------
Total liabilities and stockholder's equity (deficit)................... $ 23 $ 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 Nine Months Ended
----------------------------- -------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
-------------- -------------- -------------- ----------
Equity in loss of New Valley..................................... $(8,906) $(6,973) $(20,295) $(21,268)
------- ------- -------- --------
Interest income.................................................. 48 125 6
General and administrative expenses ............................. (2) (4) (24) (34)
------- ------- -------- --------
Loss before income taxes......................................... (8,860) (6,977) (20,194) (21,296)
------- ------- -------- --------
Provision (benefit) for income taxes:
Current....................................................... 16 (2) 36 (10)
Deferred...................................................... (1,123) (24) (1,123) (40)
------- ------- -------- --------
Income tax benefit............................................... (1,107) (26) (1,087) (50)
------- ------- -------- --------
Loss from continuing operations.................................. (7,753) (6,951) (19,107) (21,246)
Income from discontinued operations of New Valley,
net of income taxes......................................... 2,085 2,085
------- ------- -------- --------
Net loss ........................................................ $(5,668) $(6,951) $(17,022) $(21,246)
======= ======= ======== ========
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
Additional Retained Other
Common Stock Paid-In Earnings Comprehensive
Shares Amount Capital Deficit Other Total
------ ------ ---------- -------- ------------- ---------
Balance, December 31, 1997........................ 100 $ $7,633 $(25,737) $11,756 $ (6,348)
Unrealized holding gain on investment
in New Valley................ 17,088 17,088
Dividend to parent................................ (28) (28)
Net loss.......................................... (17,022) (17,022)
--- ----- ------ -------- ------- --------
Balance, September 30, 1998....................... 100 $7,633 $(42,787) $28,844 $ (6,310)
=== ===== ====== ======== ======= ========
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)
===============================================================================
Nine Months Ended
----------------------------------
September 30, September 30,
1998 1997
------------------ ---------------
Net cash provided by operating activities................................ $ 45 $ 6
---- ---
Net cash provided by investing activities................................
Net cash used in financing activities.................................... (28)
Net increase in cash and cash equivalents................................ 17 6
Cash and cash equivalents at beginning of period......................... 6 1
---- ---
Cash and cash equivalents at end of period............................... $ 23 $ 7
==== ===
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, 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 statements. 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. The implementation of SFAS No. 130 in the
first quarter 1998 did not have any material effect on the consolidated
financial statements.
2. INVESTMENT IN NEW VALLEY CORPORATION
At September 30, 1998, the Company's investment in New Valley consisted of
a 41.7% voting interest. At September 30, 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 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 30, 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
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.
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NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (Continued)
The Company's investment in New Valley at September 30, 1998 is summarized
below:
Number of Fair Carrying
Shares Value Amount
--------- ----- --------
Class A Preferred Shares....... 618,326 $33,390 $ 33,390
Common Shares.................. 3,969,962 1,489 (33,390)
------- --------
$34,879 $
======= ========
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 September 30, 1998, the accrued and unpaid dividends arrearage
was $204,050 ($190.44 per share).
3. NEW VALLEY CORPORATION
Summarized financial information for New Valley as of September 30, 1998
and December 31, 1997 and for the three and nine months ended September
30, 1998 and 1997 follows:
September 30, December 31,
1998 1997
------------- ------------
Current assets, primarily cash and marketable
securities................................... $ 73,864 $ 118,642
Non-current assets.............................. 177,017 322,749
Current liabilities............................. 67,238 128,128
Non-current liabilities......................... 75,654 185,024
Redeemable preferred stock...................... 300,711 258,638
Shareholders' deficit........................... (192,722) (130,399)
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NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (Continued)
Three Months Ended Nine Months Ended
----------------- ---------------- ----------------- -----------------
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
----------------- ---------------- ----------------- -----------------
Revenues .................................... $ 19,440 $ 26,704 $78,552 $ 76,652
Costs and expenses.............................. 28,664 33,782 95,633 100,020
Loss from continuing operations................. (8,739) (6,754) (15,458) (21,944)
Income from discontinued operations............. 6,860 7,740
Net loss applicable to common shares(A)......... (22,622) (24,141) (67,051) (72,241)
- ---------------------
(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.
In February 1998, New Valley and Apollo Real Estate Investment Fund III,
L.P. ("Apollo") organized Western Realty Development LLC ("Western Realty
Ducat") to make real estate and other investments in Russia. In connection
with the formation of Western Realty, New Valley 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 $58,750, including the investment in Western Realty
Repin discussed below. Through September 30, 1998, Apollo had funded
$30,550 of its investment in Western Realty Ducat.
The ownership and voting interests in Western Realty Ducat will be held
equally by Apollo and New Valley. Apollo will be entitled to a preference
on distributions of cash from Western Realty Ducat to the extent of its
investment ($40,000), together with a 15% annual rate of return, and New
Valley will then be entitled to a return of $16,300 of BML-related
expenses incurred and cash invested by New Valley since March 1, 1997,
together with a 15% annual rate of return; subsequent distributions will
be made 70% to New Valley and 30% to Apollo. Western Realty Ducat will be
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 Ducat will generally require the unanimous
consent of the Board of Managers. Accordingly, New Valley has accounted
for its non-controlling interest in Western Realty Ducat using the equity
method of accounting.
New Valley recorded its basis in the investment in Western Realty Ducat 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 New Valley's proportionate interest in the
underlying value of net assets of Western Realty Ducat.
Western Realty Ducat will seek to make additional real estate and other
investments in Russia. Western Realty Ducat has made a $26,300
participating loan to, and payable out of a 30% profits interest in, a
company organized by BOL which, among other things, acquired an interest
in a new factory being constructed on the outskirts of Moscow by a
subsidiary of BOL.
In June 1998, New Valley and Apollo organized Western Realty Repin LLC
("Western Realty Repin") to make a $25,000 participating loan (the "Repin
Loan") to BML. The proceeds of the loan will be used by BML for the
acquisition and preliminary development of two adjoining sites totaling
10.25 acres (the "Kremlin Sites") located in Moscow across the Moscow
River from the Kremlin. BML, which is planning the development of a 1.1
million sq. ft. hotel, office, retail and residential complex on the
Kremlin Sites, owned 94.6% of one site and 52% of the other site at
September 30, 1998. Apollo will be entitled to a preference on
distributions of cash from Western Realty Repin to the extent of its
investment ($18,750) together with a 20% annual rate of return, and New
Valley will then be entitled to a return of its investment ($6,250),
together with a 20% annual rate of return; subsequent distributions will
be made 50% to New Valley and 50% to Apollo. Western Realty Repin will be
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NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (Continued)
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 Repin will generally require the unanimous
consent of the Board of Managers.
Through September 30, 1998, Western Realty Repin has advanced $19,067 (of
which $14,300 was funded by Apollo) under the Repin Loan to BML. The Repin
Loan, which bears no fixed interest, is payable only out of 100% of the
distributions, if made, by the entities owning the Kremlin Sites to BML.
Such distributions shall be applied first to pay the principal of the
Repin Loan and then as contingent participating interest on the Repin
Loan. Any rights of payment on the Repin Loan are subordinate to the
rights of all other creditors of BML. Apollo funded an additional advance
of $5,300 under the Repin Loan on July 2, 1998. BML used a portion of the
proceeds to repay New Valley for certain expenditures on the Kremlin Sites
previously incurred. The Repin Loan is due and payable upon the
dissolution of BML and is collateralized by a pledge of New Valley's
shares of BML.
As of September 30, 1998, BML had invested $15,171 in the Kremlin sites
and held $809, in cash, which was restricted for future investment. In
connection with the acquisition of its interest in one of the Kremlin
Sites, BML has agreed with the City of Moscow to invest an additional
$6,000 in 1998 and $22,000 in 1999 in the development of the property.
The development of Ducat Place III and the Kremlin Sites will require
significant amounts of debt and other financing. New Valley is actively
pursuing various financing alternatives on behalf of Western Realty Ducat
and BML. However, in light of the recent economic turmoil in Russia, no
assurance can be given that such financing will be available on acceptable
terms. Failure to obtain sufficient capital for the projects would force
Western Realty Ducat and BML to curtail or delay the planned development
of Ducat Place III and the Kremlin Sites.
4. FEDERAL INCOME TAX
At September 30, 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 due 2001
("BGLS Notes").
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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