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Exhibit 99.5
NEW VALLEY HOLDINGS, INC.
FINANCIAL STATEMENTS
MARCH 31, 1999
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NEW VALLEY HOLDINGS, INC.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
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Balance Sheets as of March 31, 1999 and December 31, 1998......................................... 2
Statements of Operations for the three months ended March 31, 1999 and
March 31, 1998.............................................................................. 3
Statements of Stockholder's Equity (Deficit) for the three months ended
March 31, 1999.............................................................................. 4
Statements of Cash Flows for the three months ended March 31, 1999 and
March 31, 1998.............................................................................. 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,
1999 1998
-------- ------------
ASSETS
Cash and cash equivalents .................................. $ 20 $ 21
Investment in New Valley:
Redeemable preferred stock ............................... 51,939 61,833
Common stock ............................................. (51,939) (61,833)
-------- --------
Total investment in New Valley -- --
-------- --------
Total assets ............................................... $ 20 $ 21
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current income taxes payable to parent ..................... $ 6,324 $ 6,324
-------- --------
Total liabilities .......................................... 6,324 6,324
-------- --------
Commitments and contingencies
Common stock, $0.01 par value, 100 shares authorized, issued
and outstanding
Additional paid-in capital ................................. 7,633 7,633
Deficit .................................................... (57,048) (51,155)
Other comprehensive income ................................. 43,111 37,219
-------- --------
Total stockholder's equity (deficit) ....................... $ (6,304) $ (6,303)
-------- --------
Total liabilities and stockholder's equity (deficit) ....... $ 20 $ 21
======== ========
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,
1999 1998
-------- --------
Equity in loss of New Valley ..................... $(7,599) $(4,166)
Interest income .................................. 9
General and administrative expenses .............. (2) (7)
------- -------
Loss from continuing operations before
income taxes ................................ (7,601) (4,164)
------- -------
Benefit for income taxes:
Deferred ...................................... (598) --
------- -------
Income tax benefit ............................... (598) --
-------- -------
Loss from continuing operations .................. (7,003) (4,164)
------- -------
Income from discontinued operations of New Valley,
net of taxes of $598 in 1998 ................ 1,110 --
------- -------
Net loss ......................................... $(5,893) $(4,164)
======= =======
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)
================================================================================
Additional Other
Common Stock Paid-In Comprehensive
Shares Amount Capital Deficit Income Total
------ ------ ---------- ------- ------------- -----
Balance, December 31, 1998.............................. 100 $7,633 $(51,155) $37,219 $ (6,303)
Net loss................................................ (5,893) (5,893)
Unrealized holding gain on investment in New Valley... 5,892 5,892
--------
Total other comprehensive income.................... 5,892
--------
Total comprehensive loss.............................. (1)
----- ------ ------ -------- ------- --------
Balance, December 31, 1998.............................. 100 $7,633 $(57,048) $43,111 $ (6,304)
===== ====== ====== ======== ======= ========
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,
1999 1998
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Net cash (used in) provided by operating activities............. $ (1) $1,025
---- ------
Net (decrease) increase in cash and cash equivalents............ (1) 1,025
Cash and cash equivalents at beginning of period................ 21 6
---- ------
Cash and cash equivalents at end of period...................... $ 20 $1,031
==== ======
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.
Comprehensive Income. Comprehensive income is a component of stockholders'
equity and includes the Company's net income and other comprehensive
income such as the proportionate interest in New Valley's capital
transactions, unrealized gains and losses on investment securities and
minimum pension liability adjustments. For the three months ended March
31, 1999, total comprehensive loss was $1; for the three months ended
March 31, 1998, total comprehensive income was $6.
2. INVESTMENT IN NEW VALLEY CORPORATION
At March 31, 1999, the Company's investment in New Valley consisted of a
41.5% voting interest. At March 31, 1999 and 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 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 March 31, 1999 is summarized
below:
Number of Fair Carrying
1998 Shares Value Amount
- ---- --------- --------- --------
Class A Preferred Shares....... 618,326 $51,939 $ 51,939
Common Shares.................. 3,969,962 1,613 (51,939)
------- --------
$53,552 $ 0
======= ========
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, 1999, the accrued and unpaid dividends arrearage was
$234,581($218.94 per share).
3. NEW VALLEY CORPORATION
Summarized financial information for New Valley as of March 31, 1999 and
December 31, 1998 and for the three months ended March 31, 1999 and 1998
follows:
March 31, December 31,
1999 1998
----------- -----------
Current assets, primarily cash and marketable
securities................................... $ 70,851 $ 91,451
Non-current assets.............................. 183,787 181,271
Current liabilities............................. 66,975 83,581
Non-current liabilities......................... 83,001 78,251
Redeemable preferred stock...................... 332,198 316,202
Shareholders' deficit........................... (227,536) (205,312)
Three Months Ended
-----------------------------------
March 31, March 31,
1999 1998
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Revenues .................................... $ 22,770 $ 33,840
Costs and expenses.............................. 28,917 34,260
(Loss) income from continuing operations........ (5,682) 157
Gain from discontinued operations............... 4,100
Net loss applicable to common shares(A)......... (23,801) (18,675)
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(A) Considers all preferred accrued dividends, whether or not declared.
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NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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 Ducat, 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 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 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 $20,000 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 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. New Valley
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, a
company organized by BOL which, among other things, holds BOL's interest
in Liggett-Ducat Ltd. and the new factory being constructed by
Liggett-Ducat on the outskirts of Moscow.
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 95.29% 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 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 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 March 31, 1999, Western Realty Repin has advanced $25,000 (of
which $18,773 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
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NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
subordinate to the rights of all other creditors of BML. 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 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 agreed with the City of Moscow to invest an additional $6,000
in 1999 (which has been funded) and $22,000 in 2000 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.
Subsequent Event - Recapitalization Plan:
New Valley has submitted for approval of its shareholders 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 New Valley's outstanding Class A
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 number of authorized 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 New Valley's Registration Statement
covering the underlying Common Shares. The Warrants would not be callable
by New Valley for a three-year period. Upon completion of the
Recapitalization Plan, New Valley 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 New Valley's shares.
Brooke has agreed to vote all of its shares in New Valley in favor of the
Recapitalization Plan. As a result of the Recapitalization Plan and
assuming no warrant holder exercises its warrants, Brooke will increase
its ownership of the outstanding Common Shares of New Valley from 42.3% to
55.1% and its total voting power from 42.3% to 55.1%.
4. FEDERAL INCOME TAX
At March 31, 1999, 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.
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NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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.
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