1
Exhibit 99.3
NEW VALLEY CORPORATION
FINANCIAL STATEMENTS
MARCH 31, 1999
2
NEW VALLEY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1999
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31,
1999 and December 31, 1998.................................... 3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 1999 and 1998................ 4
Condensed Consolidated Statement of Changes in
Stockholders' Deficiency for the three months
ended March 31, 1999.......................................... 5
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1999 and 1998................ 6
Notes to the Condensed Consolidated Financial
Statements .................................................. 7
3
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
--------------- -----------------
March 31, December 31,
--------------- -----------------
1999 1998
--------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 10,312 $ 16,444
Investment securities available for sale.............................. 36,563 37,567
Trading securities owned.............................................. 6,562 8,984
Restricted assets..................................................... 1,192 1,220
Receivable from clearing brokers...................................... 12,575 22,561
Other current assets.................................................. 3,647 4,675
--------- ----------
Total current assets.............................................. 70,851 91,451
--------- ----------
Investment in real estate, net............................................. 83,049 82,875
Furniture and equipment, net............................................... 10,393 10,444
Restricted assets.......................................................... 8,909 6,082
Long-term investments, net................................................. 11,726 9,226
Investment in joint venture................................................ 63,690 65,193
Other assets............................................................... 6,020 7,451
--------- ----------
Total assets...................................................... $ 254,638 $ 272,722
========= ==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Margin loan payable................................................... $ 4,044 $ 13,088
Current portion of notes payable and long-term obligations............ 2,708 2,745
Accounts payable and accrued liabilities.............................. 26,863 32,047
Prepetition claims and restructuring accruals......................... 12,340 12,364
Income taxes.......................................................... 18,361 18,702
Securities sold, not yet purchased.................................... 2,659 4,635
--------- ----------
Total current liabilities......................................... 66,975 83,581
--------- ----------
Notes payable.............................................................. 54,801 54,801
Other long-term liabilities................................................ 28,200 23,450
Commitments and contingencies.............................................. -- --
Redeemable preferred shares................................................ 332,198 316,202
Stockholders' deficiency:
Cumulative preferred shares; liquidation preference of $69,769,
dividends in arrears: $172,905 and $165,856......................... 279 279
Common Shares, $.01 par value; 850,000,000 shares
authorized; 9,577,624 shares outstanding............................ 96 96
Additional paid-in capital............................................ 534,568 550,119
Accumulated deficit................................................... (759,598) (758,016)
Unearned compensation on stock options................................ (148) (475)
Accumulated other comprehensive income................................ (2,733) 2,685
--------- ----------
Total stockholders' deficiency.................................... (227,536) (205,312)
--------- ----------
Total liabilities and stockholders'deficiency..................... $ 254,638 $ 272,722
========= ==========
See accompanying Notes to Condensed Consolidated Financial Stctements.
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NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
-----------------------------------------
Three Months Ended March 31,
-----------------------------------------
1999 1998
-------------------- --------------------
Revenues:
Principal transactions, net................................ $ 4,776 $ 5,893
Commissions................................................ 11,126 6,676
Corporate finance fees..................................... 1,438 3,238
Gain on sale of investments, net........................... 499 5,596
Loss from joint venture.................................... (1,503) (329)
Real estate leasing........................................ 2,230 7,776
Computer sales and service................................. 251 413
Interest and dividends..................................... 1,261 2,849
Other income............................................... 2,692 1,728
---------- ----------
Total revenues......................................... 22,770 33,840
---------- ----------
Cost and expenses:
Selling, general and administrative........................ 26,592 30,100
Interest................................................... 2,325 4,160
---------- ----------
Total costs and expenses............................... 28,917 34,260
---------- ----------
Loss from continuing operations before income taxes
and minority interests..................................... (6,147) (420)
Income tax provision............................................ 15 6
Minority interest in loss of consolidated subsidiaries.......... 480 583
---------- ----------
(Loss) income from continuing operations........................ (5,682) 157
Discontinued operations:
Gain on disposal of discontinued operations................ 4,100 --
---------- ----------
Income from discontinued operations........................ 4,100 --
---------- ----------
Net (loss) income...................................... (1,582) 157
Dividend requirements on preferred shares....................... (22,219) (18,832)
---------- ----------
Net loss applicable to Common Shares............................ $ (23,801) $ (18,675)
========== ==========
Loss per Common Share (basic and diluted):
Continuing operations...................................... $ (2.92) $ (1.95)
Discontinued operations.................................... .43 --
---------- ----------
Net loss per Common Share.................................. $ (2.49) $ (1.95)
========== ==========
Number of shares used in computation............................ 9,577,624 9,577,624
========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
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NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' 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, 1998............ $279 $96 $550,119 $(758,016) $ (475) $ 2,685
Net income......................... (1,582)
Undeclared dividends and accretion
on redeemable preferred shares... (15,171)
Unrealized loss on investment
securities....................... (5,418)
Adjustment to unearned compensation
on stock options................. (327) 327
Compensation expense on stock
option grants....................
(53)
--- -- ------- -------- ------ -------
Balance, March 31, 1999............... $279 $96 $534,568 $(759,598) $ (148) $ (2,733)
=== == ======= ======== ====== =======
See accompanying Notes to Condensed Consolidated Financial Stctements.
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NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
----------------------------------
Three Months Ended
March 31,
----------------------------------
1999 1998
---------------- -----------------
Cash flows from operating activities:
Net (loss) income....................................................... $ (1,582) $ 157
Adjustments to reconcile net (loss) income to net cash provided from
(used for) operating activities:
Income from discontinued operations................................... (4,100) --
Loss from joint venture............................................... 1,503 329
Depreciation and amortization......................................... 898 2,344
Stock based compensation expense...................................... 774 828
Changes in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in receivables and other assets................ 14,375 (9,586)
(Decrease) increase in income taxes................................ (340) 440
(Decrease) increase in accounts payable and accrued liabilities.... (6,884) 2,766
--------- --------
Net cash provided from (used for) continuing operations............... 4,644 (2,722)
Net cash provided from discontinued operations........................ 4,100 --
--------- --------
Net cash provided from (used for) operating activities..................... 8,744 (2,722)
--------- --------
Cash flows from investing activities:
Sale or maturity of investment securities............................. 2,947 8,129
Purchase of investment securities..................................... (6,858) (913)
Sale or liquidation of long-term investments.......................... -- 1,901
Purchase of long-term investments..................................... (2,500) (1,951)
Sale of real estate................................................... 920 --
Purchase of real estate............................................... (1,615) (1,419)
Purchase of furniture and fixtures.................................... (312) (197)
Payment of prepetition claims......................................... (24) (847)
Increase in restricted assets......................................... (2,827) (68)
Net cash transferred to joint venture................................. -- (487)
--------- --------
Net cash (used for) provided from investing activities..................... (10,269) 4,148
--------- --------
Cash flows from financing activities:
Decrease in margin loan payable....................................... (9,044) (2,842)
Proceeds from participating loan...................................... 4,473 --
Prepayment of notes payable........................................... (36) (291)
--------- --------
Net cash used for financing activities..................................... (4,607) (3,133)
--------- --------
Net decrease in cash and cash equivalents.................................. (6,132) (1,707)
Cash and cash equivalents, beginning of period............................. 16,444 11,606
--------- --------
Cash and cash equivalents, end of period................................... $ 10,312 $ 9,899
========= ========
See accompanying Notes to Condensed Consolidated Financial Stctements.
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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, 1999 presented herein
have been prepared by the Company and are unaudited. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position as of
March 31, 1999 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.
These financial statements should be read in conjunction with the
consolidated financial statements in the Company's Annual Report on Form
10-K for the year ended December 31, 1998 as filed with the Securities and
Exchange Commission (Commission File Number 1-2493).
USE OF 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.
RECLASSIFICATIONS
Certain reclassifications have been made to prior interim period financial
information to conform with current year presentation.
PROPOSED RECAPITALIZATION PLAN
The Company has submitted for approval of its stockholders at its 1999
annual meeting, which will be held on May 21, 1999, a proposed
recapitalization of its capital stock (the "Recapitalization Plan"). Under
the Recapitalization Plan, each of the Company's outstanding Class A
Senior Preferred Shares would be reclassified and changed into 20 Common
Shares and one Warrant to purchase Common Shares (the "Warrants"). Each of
the Class B Preferred Shares would be reclassified and changed into
one-third of a Common Share and five Warrants. The existing Common Shares
would be reclassified and changed into one-tenth of a Common Share and
three-tenths of a Warrant. The authorized number of Common Shares would be
reduced from 850,000,000 to 100,000,000. The Warrants to be issued as part
of the Recapitalization Plan would have an exercise price of $12.50 per
share subject to adjustment in certain circumstances and be exercisable
for five years following the effective date of the Company's Registration
Statement covering the underlying Common Shares. The Warrants would not be
callable by the Company for a three-year period. Upon completion of the
Recapitalization Plan, the Company will apply for listing of the Common
Shares and Warrants on NASDAQ.
Completion of the Recapitalization Plan would be subject to, among other
things, approval by the required holders of the various classes of the
Company's shares. Brooke Group Ltd. ("Brooke"), the Company's principal
stockholder, has agreed to vote all of its shares in the Company in favor
of the Recapitalization Plan. As a result of the Recapitalization Plan and
assuming no warrant holder
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NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
exercises its Warrants, Brooke will increase its ownership of the
outstanding Common Shares of the Company from 42.3% to 55.1% and its total
voting power from 42% to 55.1%.
The Company believes the proposed Recapitalization Plan will simplify the
current capital structure of the Company by replacing it with a single
class of equity securities. The exchange of the Preferred Shares for
Common Shares will eliminate dividend arrearages, thus increasing the net
worth of the Company by approximately $332,198 on a pro forma basis as of
March 31, 1999. It will also remove the need to redeem the Class A Senior
Preferred Shares in 2003. The resulting improvement in the net worth of
the Company, along with a hoped for increase in the price of the Common
Shares, should increase the likelihood of having the Common Shares quoted
on NASDAQ. This, along with a more transparent capital structure, should
increase the liquidity of the Company's securities, improve the valuation
of the Common Shares and provide a currency for acquisitions and
financings. Finally, the recapitalization will allow the voting rights of
stockholders to properly reflect the economic interest of such
stockholders.
NEW ACCOUNTING PRONOUNCEMENTS.
In June, 1998, FASB issued Statement of Accounting Standards ("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, 1999. SFAS 133 requires that all derivative instruments be
recorded on the balance sheet at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
The Company has not yet determined the impact that the adoption of SFAS
133 will have on its earnings or statement of financial position.
2. INVESTMENT IN WESTERN REALTY
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
Ducat") to make real estate and other investments in Russia. In connection
with the formation of Western Realty Ducat, 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 Ducat and
Apollo agreed to contribute up to $58,750, including the investment in
Western Realty Repin discussed below. Through March 31, 1999, Apollo had
funded $36,529 of its investment in Western Realty Ducat.
The ownership and voting interests in Western Realty Ducat are held
equally by Apollo and the Company. 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 the
Company will then be entitled to a return of $20,000 of BML-related
expenses incurred and cash invested by the Company since March 1, 1997,
together with a 15% annual rate of return; subsequent distributions will
be made 70% to the Company and 30% to Apollo. Western Realty Ducat 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 Ducat will generally require the unanimous
consent of the Board of Managers. Accordingly, the Company has accounted
for its non-controlling interest in Western Realty Ducat using the equity
method of accounting.
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NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
The Company recorded its basis in the investment in the joint venture in
the amount of $60,169 based on the carrying value of assets less
liabilities transferred. There was no difference between the carrying
value of the investment and the Company's proportionate interest in the
underlying value of net assets of the joint venture. The Company
recognizes losses incurred by Western Realty Ducat to the extent that
cumulative earnings of Western Realty Ducat are not sufficient to satisfy
Apollo's preferred return.
Western Realty Ducat will seek to make additional real estate and other
investments in Russia. Western Realty Ducat has made a $30,000
participating loan to, and payable out of a 30% profits interest in
Western Tobacco Investments LLC ("WTI"), a company organized by Brooke
(Overseas) Ltd., a subsidiary of Brooke, which, among other things, holds
the interests of Brooke (Overseas) Ltd. in Liggett-Ducat Ltd. and the new
factory being constructed by Liggett-Ducat Ltd. on the outskirts of
Moscow. Western Realty Ducat has recognized as other income $1,002, which
represents 30% of WTI's net income for the three months ended March 31,
1999.
Summarized financial information as of March 31, 1999 and December 31,
1998 and for the three month period ended March 31, 1999 and for the
period from February 20, 1998 (date of inception) to March 31, 1998 for
Western Realty Ducat follows:
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
Current assets................................ $ 2,939 $ 857
Participating loan receivable................. 32,993 31,991
Real estate, net.............................. 86,307 85,761
Furniture and fixtures, net................... 230 179
Noncurrent assets............................. 538 631
Goodwill, net................................. 7,016 7,636
Notes payable - current....................... 5,703 4,999
Current liabilities........................... 5,445 5,802
Notes payable................................. 13,143 14,656
Long-term liabilities......................... 756 756
Members' equity............................... 104,976 100,842
February 20, 1998
Three months ended (date of inception)
March 31, 1999 to March 31, 1998
-------------- -----------------
Revenues...................................... $ 3,448 $ 927
Costs and expenses............................ 4,425 1,256
Other income.................................. 1,002 --
Income tax provision.......................... 16 --
Net loss...................................... 9 (329)
WESTERN REALTY REPIN LLC
In June 1998, the Company 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
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NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
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 95.2% of one site and 52% of the other site at March
31, 1999. 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 the Company 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 the
Company and 50% to Apollo. Western Realty Repin 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 Repin will generally require the unanimous consent of the Board of
Managers.
Through March 31, 1999, Western Realty Repin has advanced $25,000 under
the Repin Loan to BML, of which $18,773 was funded by Apollo and is
classified in other long-term obligations on the consolidated balance
sheet at March 31, 1999. 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.
BML used a portion of the proceeds of the Repin Loan to repay the Company
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 the Company's shares of BML.
As of March 31, 1999, BML had invested $19,621 in the Kremlin Sites and
held $3,525, 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 (which has been funded) in 1999 and $22,000 in 2000 in the
development of the property.
The Company has accounted for the formation of Western Realty Repin as a
financing by Apollo and a contribution of assets into a consolidated
subsidiary by New Valley which is eliminated in consolidation. Based on
the distribution terms contained in the Western Realty Repin LLC
agreement, the 20% annual rate of return preference to be received by
Apollo on funds advanced to Western Realty Repin is treated as interest
cost in the consolidated statement of operations.
The development of Ducat Place III and the Kremlin Sites will require
significant amounts of debt and other financing. The Company is 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.
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NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
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 component of accumulated
other comprehensive income. The Company had realized gains on sales of
investment securities available for sale of $499 for the three months
ended March 31, 1999.
The components of investment securities available for sale at March 31,
1999 are as follows:
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
Marketable equity securities................. $39,297 $ 254 $ 6,444 $33,107
Marketable warrants.......................... -- 3,456 -- 3,456
------- ------- -------- -------
Investment securities........................ $39,297 $ 3,710 $ 6,444 $36,563
======= ======= ======== =======
4. LONG-TERM INVESTMENTS
At March 31, 1999, long-term investments consisted primarily of
investments in limited partnerships of $11,726. The Company believes the
fair value of the limited partnerships exceeds their carrying amount by
approximately $2,600 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.
5. REDEEMABLE PREFERRED SHARES
At March 31, 1999, the Company had authorized and outstanding 2,000,000
and 1,071,462, respectively, of its Class A Senior Preferred Shares. At
March 31, 1999 and December 31, 1998, respectively, the carrying value of
such shares amounted to $332,198 and $316,202, including undeclared
dividends of $234,581 and $219,068 or $218.94 and $204.46 per share. As of
March 31, 1999, the unamortized discount on the Class A Senior Preferred
Shares was $6,586.
For the three months ended March 31, 1999 and 1998, the Company recorded
$774 and $828 in compensation expense related to certain Class A Senior
Preferred Shares awarded to an officer of the Company in 1996. At March
31, 1999 and December 31, 1998, the balance of the deferred compensation
and the unamortized discount related to these award shares was $5,416 and
$5,721, 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 $172,905 and $165,856
at March 31, 1999 and December 31, 1998, respectively. These undeclared
dividends represent $61.96 and $59.43 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.
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NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
7. CONTINGENCIES
LAWSUITS
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 stockholder of the Company. The suit
alleges that the Company's purchase in January 1997 of the shares of BML
from Brooke (Overseas) Ltd. 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.
RUSSIAN OPERATIONS
During 1998, the economy of the Russian Federation entered a period of
economic instability. The impact includes, but is not limited to, a steep
decline in prices of domestic debt and equity securities, a severe
devaluation of the currency, a moratorium on foreign debt repayments, an
increasing rate of inflation and increasing rates on government and
corporate borrowings. The return to economic stability is dependent to a
large extent on the effectiveness of the fiscal measures taken by
government and other actions beyond the control of companies operating in
the Russian Federation. The operations of BML and Western Realty Ducat may
be significantly affected by these factors for the foreseeable future.
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 BML and
Western Realty Ducat may not coincide with that of management. As a
result, transactions may be challenged by tax authorities and BML and
Western Realty Ducat 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 six years.
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NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
Year 2000: It is unclear whether the Russian government and other
organizations who provide significant infrastructure services have
addressed the Year 2000 Problem sufficiently to mitigate potential
substantial disruption to these infrastructure services. The substantial
disruption of these services would have an adverse affect on the
operations of BML and Western Realty Ducat. Furthermore, the current
financial crisis could affect the ability of the government and other
organizations to fund Year 2000 compliance programs.
8. 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 three months ended March 31, 1999 and 1998:
BROKER- COMPUTER CORPORATE
DEALER REAL ESTATE SOFTWARE AND OTHER TOTAL
------ ----------- -------- --------- -----
1999
----
Revenues.................... $19,030 $ 2,323 $ 251 $ 1,166 $ 22,770
Operating (loss) income..... 25 (1,225) (1,601) (3,346) (6,147)
Identifiable assets......... 38,957 91,091 985 123,605 254,638
Depreciation and
amortization............. 198 532 120 48 898
Capital expenditures........ -- 1,615 26 286 1,927
1998
----
Revenues.................... $19,425 $ 7,776 $ 413 $ 6,226 $ 33,840
Operating (loss) income..... (1,224) (20) (1,249) 2,073 (420)
Depreciation and
amortization............. 304 1,746 236 58 2,344
Capital expenditures........ 112 1,419 27 58 1,616
9. INCOME FROM DISCONTINUED OPERATIONS
The Company recorded a gain on disposal of discontinued operations of
$4,100 for the three months ended March 31, 1999 related to the settlement
of a lawsuit originally initiated by the Company's former Western Union
telegraph business.
10. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for the
reporting and disclosure of comprehensive income and its components.
Comprehensive income is a measure that reflects all changes in
stockholders' equity, except those resulting from transactions with
stockholders. For the Company, comprehensive income includes net income
and changes in the value of equity securities that have not been included
in net income. For the three months ended March 31, 1999 and 1998,
comprehensive loss applicable to Common Shares was $29,219 and $21,493,
respectively.
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