1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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JOINT QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
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BROOKE GROUP LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 1-5759 51-0255124
(State or other jurisdiction of Commission File Number (I.R.S. Employer Identification No.)
incorporation or organization)
BGLS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-93576 13-3593483
(State or other jurisdiction of Commission File Number (I.R.S. Employer Identification No.)
incorporation or organization)
100 S.E. SECOND STREET
MIAMI, FLORIDA 33131
305/579-8000
(Address, including zip code and telephone number, including area code,
of the principal executive offices)
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Indicate by check mark whether the Registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), during the preceding 12 months (or
for such shorter period that the Registrants were required to file such
reports), and (2) have been subject to such filing requirements for the past 90
days. [X] Yes [ ] No
Explanatory Note: BGLS Inc. is required to file all reports required by
Section 13 or 15(d) of the Exchange Act in connection with its 15.75% Series B
Senior Secured Notes due 2001.
At May 12, 1997, Brooke Group Ltd. had 18,097,096 shares of common
stock outstanding, and BGLS Inc. had 100 shares of common stock outstanding, all
of which are held by Brooke Group Ltd.
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BROOKE GROUP LTD.
BGLS INC.
FORM 10-Q
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. BROOKE GROUP LTD./BGLS INC. CONSOLIDATED FINANCIAL STATEMENTS:
Brooke Group Ltd. Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996............................................................................. 2
BGLS Inc. Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996.................... 3
Brooke Group Ltd. Consolidated Statements of Operations for the three months ended
March 31, 1997 and March 31, 1996............................................................. 4
BGLS Inc. Consolidated Statements of Operations for the three months ended
March 31, 1997 and March 31, 1996............................................................. 5
Brooke Group Ltd. Consolidated Statement of Stockholders' Equity (Deficit) for the three
months ended March 31, 1997................................................................... 6
BGLS Inc. Consolidated Statement of Stockholder's Equity (Deficit) for the three months
ended March 31, 1997.......................................................................... 7
Brooke Group Ltd. Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and March 31, 1996............................................................. 8
BGLS Inc. Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and March 31, 1996............................................................. 9
Notes to Consolidated Financial Statements.......................................................... 10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.............................................. 27
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.............................................................................. 36
Item 2. CHANGES IN SECURITIES.......................................................................... 36
Item 3. DEFAULTS UPON SENIOR SECURITIES................................................................ 36
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................... 36
SIGNATURES............................................................................................. 38
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Item 1. CONSOLIDATED FINANCIAL STATEMENTS
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
March 31, December 31,
1997 1996
--------- ------------
ASSETS:
Current assets:
Cash and cash equivalents ................................................... $ 2,187 $ 1,941
Accounts receivable - trade ................................................. 9,802 19,475
Other receivables ........................................................... 737 1,217
Receivables from affiliates ................................................. 33,587 47
Inventories ................................................................. 52,643 53,691
Other current assets ........................................................ 2,751 4,181
--------- ---------
Total current assets ...................................................... 101,707 80,552
Property, plant and equipment, at cost, less accumulated
depreciation of $31,377 and $31,047 ......................................... 30,216 80,282
Intangible assets, at cost, less accumulated amortization
of $17,916 and $17,457 ...................................................... 3,979 4,421
Investment in affiliate ....................................................... 3,051
Other assets .................................................................. 5,352 9,371
--------- ---------
Total assets .............................................................. $ 141,254 $ 177,677
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Notes payable and current portion of long-term debt ......................... $ 77,446 $ 55,242
Accounts payable ............................................................ 18,768 32,461
Due to affiliates ........................................................... 990
Dividends payable ........................................................... 1,387
Cash overdraft .............................................................. 6
Accrued promotional expenses ................................................ 31,850 30,257
Accrued taxes payable ....................................................... 19,986 26,379
Accrued interest ............................................................ 9,401 24,354
Other accrued liabilities ................................................... 25,113 33,387
--------- ---------
Total current liabilities ................................................. 182,564 204,463
Notes payable, long-term debt and other obligations,
less current portion ........................................................ 341,506 378,243
Noncurrent employee benefits .................................................. 30,355 31,256
Other liabilities ............................................................. 31,404 18,704
Commitments and contingencies..................................................
Stockholders' equity (deficit):
Preferred Stock, par value $1.00 per share, authorized
10,000,000 shares .........................................................
Series G Preferred Stock, 2,184,834 shares, convertible,
participating, cumulative, each share convertible to 1,000 shares
of common stock and cash or stock distribution, liquidation
preference of $1.00 per share .............................................
Common stock, par value $0.10 per share, authorized 40,000,000
shares, issued 24,998,043 shares, outstanding 18,097,096 shares ........... 1,850 1,850
Additional paid-in capital .................................................. 92,811 94,169
Deficit ..................................................................... (482,686) (490,706)
Other ....................................................................... (22,411) (27,963)
Less: 6,900,947 and 6,500,947 shares of common stock in treasury,
at cost ................................................................... (34,139) (32,339)
--------- ---------
Total stockholders' equity (deficit) .................................... (444,575) (454,989)
--------- ---------
Total liabilities and stockholders' equity (deficit) .................... $ 141,254 $ 177,677
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
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Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
March 31, December 31,
1997 1996
--------- ------------
ASSETS:
Current assets:
Cash and cash equivalents ................................................... $ 2,118 $ 1,940
Accounts receivable - trade ................................................. 9,802 19,475
Other receivables ........................................................... 699 1,166
Receivables from affiliates ................................................. 33,575 47
Inventories ................................................................. 52,643 53,691
Other current assets ........................................................ 2,632 3,878
--------- ---------
Total current assets .................................................... 101,469 80,197
Property, plant and equipment, at cost, less accumulated depreciation of
$31,056 and $30,762 ......................................................... 29,942 79,972
Intangible assets, at cost, less accumulated amortization of $17,916
and $17,457 ................................................................. 3,979 4,421
Investment in affiliate ....................................................... 3,051
Other assets .................................................................. 8,319 10,467
--------- ---------
Total assets ............................................................ $ 143,709 $ 178,108
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT):
Current liabilities:
Notes payable and current portion of long-term debt ......................... $ 77,326 $ 53,945
Accounts payable ............................................................ 18,618 32,336
Cash overdraft .............................................................. 6
Due to parent ............................................................... 22,248 29,598
Accrued promotional expenses ................................................ 31,850 30,257
Accrued taxes payable ....................................................... 19,986 26,379
Accrued interest ............................................................ 9,401 24,354
Other accrued liabilities ................................................... 24,958 32,861
--------- ---------
Total current liabilities ............................................... 204,387 229,736
Notes payable, long-term debt and other obligations, less current portion ..... 341,506 378,243
Noncurrent employee benefits .................................................. 30,355 31,256
Other liabilities ............................................................. 37,818 21,958
Commitments and contingencies .................................................
Stockholder's equity (deficit):
Common stock, par value $0.01 per share; authorized 100 shares,
issued 100 shares, outstanding 100 shares .................................
Additional paid-in capital .................................................. 39,081 39,081
Deficit ..................................................................... (491,679) (499,264)
Other ....................................................................... (17,759) (22,902)
--------- ---------
Total stockholder's deficit ............................................. (470,357) (483,085)
--------- ---------
Total liabilities and stockholder's equity (deficit) .................... $ 143,709 $ 179,108
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
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Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
---------------------------
March 31, March 31,
1997 1996
--------- ---------
Revenues* ................................................................. $ 80,005 $ 90,516
Cost of goods sold* ....................................................... 41,845 47,048
------------ ------------
Gross profit .............................................................. 38,160 43,468
Operating, selling, administrative and general expenses ................... 37,322 44,892
------------ ------------
Operating income (loss) ................................................... 838 (1,424)
Other income (expenses):
Interest income ....................................................... 559 18
Interest expense ...................................................... (15,467) (14,777)
Equity in loss of affiliate ........................................... (8,557) (1,577)
Sale of assets ........................................................ 22,021
Retirement of debt .................................................... 2,963
Proceeds from legal settlement ........................................ 4,125
Other, net ............................................................ 119 115
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Income (loss) from continuing operations before income taxes .............. 6,601 (17,645)
Provision for income taxes ................................................ 744 435
------------ ------------
Income (loss) from continuing operations .................................. 5,857 (18,080)
Income from discontinued operations ....................................... 363 303
------------ ------------
Net income (loss) ......................................................... 6,220 (17,777)
Proportionate share of New Valley capital transaction, retirement of
Class A Preferred Shares .............................................. 1,782
------------ ------------
Net income (loss) applicable to common shares ............................. $ 6,220 $ (15,995)
============ ============
Per common share:
Income (loss) from continuing operations .............................. $ 0.32 $ (0.88)
============ ============
Income from discontinued operations ................................... $ 0.02 $ 0.02
============ ============
Net income (loss) applicable to common shares ......................... $ 0.34 $ (0.86)
============ ============
Weighted average common shares outstanding ................................ 18,385,985 18,497,096
============ ============
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* Revenues and Cost of goods sold include federal excise taxes of $16,860
and $21,197 for the periods ended March 31, 1997 and 1996,
respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
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Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
------------------------
March 31, March 31,
1997 1996
--------- ---------
Revenues* ....................................................... $ 80,005 $ 90,516
Cost of goods sold* ............................................. 41,845 47,048
-------- --------
Gross profit .................................................... 38,160 43,468
Operating, selling, administrative and general expenses ......... 37,076 44,587
-------- --------
Operating income (loss) ......................................... 1,084 (1,119)
Other income (expenses):
Interest income .............................................. 559 18
Interest expense ............................................. (16,381) (15,668)
Equity in loss of affiliate .................................. (8,557) (1,577)
Sale of assets ............................................... 26,384
Retirement of debt ........................................... 2,963
Other, net ................................................... 112 (35)
-------- --------
Income (loss) from continuing operations before income taxes .... 6,164 (18,381)
Provision for income taxes ...................................... 742 451
-------- --------
Net income (loss) from continuing operations .................... 5,422 (18,832)
Income from discontinued operations ............................. 363 303
-------- --------
Net income (loss) ............................................... $ 5,785 $(18,529)
======== ========
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* Revenues and Cost of goods sold include federal excise taxes of $16,860 and
$21,197 for the periods ended March 31, 1997 and 1996, respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
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Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Common Stock Additional
------------------- Paid-In Treasury
Shares Amount Capital Deficit Stock Other Total
------ ------ ---------- ------- --------- ----- -----
Balance, December 31, 1996 .............. 18,497,096 $ 1,850 $ 94,169 $(490,706) $(32,339) $(27,963) $(454,989)
Net income .............................. 6,220 6,220
Distributions on common stock
($0.075 per share) .................... (1,358) (1,358)
Amortization of deferred compensation ... 409 409
Unrealized holding gain on investment
in New Valley ......................... 5,804 5,804
Effect of New Valley capital transactions (661) (661)
Settlement of loan ...................... (400,000) 1,800 (1,800)
---------- ------- -------- --------- -------- -------- ---------
Balance, March 31, 1997 ................. 18,097,096 $ 1,850 $ 92,811 $(482,686) $(34,139) $(22,411) $(444,575)
========== ======= ======== ========= ======== ======== =========
The accompanying notes are an integral part
of the consolidated financial statements.
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Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Common Stock Additional
------------------- Paid-In
Shares Amount Capital Deficit Other Total
------ ------ ------- ------- ----- -----
Balance, December 31, 1996 ............. 100 $ 39,081 $(499,264) $ (22,902) $(483,085)
Net income ............................. 5,785 5,785
Unrealized holding gain on
investment in New Valley ............. 5,804 5,804
Effect of New Valley capital
transactions ......................... (661) (661)
Settlement of loan...................... 1,800 1,800
------ -------- --------- --------- --------- ---------
Balance, March 31, 1997 ................ 100 $ $ 39,081 $(491,679) $ (17,759) $(470,357)
====== ======== ========= ========= ========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
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Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
------------------
March 31, March 31,
1997 1996
--------- ---------
Net cash used in operating activities ................................ $ (26,619) $(11,568)
--------- --------
Cash flows from investing activities:
Proceeds from sale of businesses and assets, net ................... 21,906
Capital expenditures ............................................... (1,307) (6,939)
Dividends from New Valley .......................................... 6,183
Other, net ......................................................... 174
--------- --------
Net cash provided by (used in) investing activities .................. 20,599 (582)
--------- --------
Cash flows from financing activities:
Proceeds from debt ................................................. 3,000 11,347
Repayments of debt ................................................. (6,050) (6,537)
Borrowings under revolver .......................................... 81,291 87,794
Repayments on revolver ............................................. (69,224) (76,629)
Decrease in cash overdraft ......................................... (6) (449)
Distributions on common stock ...................................... (2,745) (1,369)
--------- --------
Net cash provided by financing activities ............................ 6,266 14,157
--------- --------
Net increase in cash and cash equivalents ............................ 246 2,007
Cash and cash equivalents, beginning of period ....................... 1,941 3,370
--------- --------
Cash and cash equivalents, end of period ............................. $ 2,187 $ 5,377
========= ========
Supplemental non-cash financing activities:
Exchange of Series 2 Senior Secured Notes for Series A Notes ....... $ 99,154
Exchange of 14.50% Subordinated Debentures for Series B Notes ...... 125,495
Issuance of Series A Notes for options ............................. 822
Exchange of Series A Notes for Series B Notes ...................... 99,976
The accompanying notes are an integral part
of the consolidated financial statements.
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Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
-------------------------
March 31, March 31,
1997 1996
--------- ---------
Net cash used in operating activities ......................... $ (30,609) $(11,685)
--------- --------
Cash flows from investing activities:
Proceeds from sale of businesses and assets, net ............ 21,906
Capital expenditures ........................................ (1,307) (6,939)
Dividends from New Valley ................................... 6,183
Other, net .................................................. 174
--------- --------
Net cash provided by (used in) investing activities ........... 20,599 (582)
--------- --------
Cash flows from financing activities:
Proceeds from debt .......................................... 3,000 11,347
Repayments of debt .......................................... (4,873) (6,410)
Borrowings under revolver ................................... 81,291 87,794
Repayments on revolver ...................................... (69,224) (76,629)
(Decrease) increase in cash overdraft ....................... (6) 56
Distributions paid to parent ................................ (1,922)
--------- --------
Net cash provided by financing activities ..................... 10,188 14,236
--------- --------
Net increase in cash and cash equivalents ..................... 178 1,969
Cash and cash equivalents, beginning of period ................ 1,940 3,370
--------- --------
Cash and cash equivalents, end of period ...................... $ 2,118 $ 5,339
========= ========
Supplemental non-cash financing activities:
Exchange of Series 2 Senior Secured Notes for Series A Notes $ 99,154
Exchange of 14.50% Subordinated Debentures for Series B Notes 125,495
Issuance of Series A Notes for options ...................... 822
Exchange of Series A Notes for Series B Notes ............... 99,976
Forgiveness of debt by parent ............................... 13,705
The accompanying notes are an integral part
of the consolidated financial statements.
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Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
The consolidated financial statements of Brooke Group Ltd. (the "Company")
include the consolidated statements of its wholly owned subsidiary, BGLS
Inc. ("BGLS"). The consolidated statements of BGLS include the accounts of
Liggett Group Inc. ("Liggett"), Brooke (Overseas) Ltd. ("BOL"), New Valley
Holdings, Inc. ("NV Holdings"), Liggett-Ducat Ltd. ("Liggett-Ducat") and
other less significant subsidiaries. Liggett is engaged primarily in the
manufacture and sale of cigarettes, principally in the United States.
Liggett-Ducat is engaged in the manufacture and sale of cigarettes in
Russia. All significant intercompany balances and transactions have been
eliminated.
The interim consolidated financial statements of the Company and BGLS are
unaudited and, in the opinion of management, reflect all adjustments
necessary (which are normal and recurring) to present fairly the Company's
and BGLS' consolidated financial position, results of operations and cash
flows. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's and BGLS' Annual Report on Form 10-K, as
amended, for the year ended December 31, 1996, as filed with the
Securities and Exchange Commission. The consolidated results of
operations for interim periods should not be regarded as necessarily
indicative of the results that may be expected for the entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts
of revenues and expenses. Actual results could differ from those
estimates.
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform to the 1997 presentation.
LIQUIDITY:
The Company believes it will have sufficient liquidity for 1997. This is
based on, among other things, the sale of BrookeMil Ltd. ("BML"), a
subsidiary of BOL, to an affiliate, New Valley Corporation ("New Valley"),
on January 31, 1997, and certain funds available from New Valley subject
to limitations imposed by BGLS' indenture agreements.
Liggett had net capital and working capital deficiencies of $179,782 and
$81,170, respectively, at March 31, 1997, is highly leveraged and has
substantial near-term debt service requirements. Further, Liggett's Senior
Secured Notes require a mandatory principal redemption of $37,500 on
February 1, 1998 and a payment at maturity on February 1, 1999 of
$107,400, and Liggett's revolving credit facility expires on March 8, 1998
unless extended by its lenders. While Liggett's management currently
intends to seek to refinance and/or restructure the redemption and
maturity requirements on the Senior Secured Notes with Liggett's note
holders and to extend the revolving credit facility, there are no
refinancing or restructuring arrangements for the notes or commitments to
extend the facility at this time, and no assurances can be given in this
regard. Based on Liggett's net loss for 1996 and anticipated 1997
operating results, Liggett does not anticipate it will be able to generate
sufficient cash from operations to make such payments. If Liggett is
unable to refinance or restructure such obligations, renegotiate the
payment terms of the Senior Secured Notes, extend the revolving credit
facility, or otherwise make such payments,
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Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
substantially all of its long-term debt and revolving credit facility
would be in default and holders of such debt could accelerate the maturity
of such debt. In such event, Liggett may be forced to seek protection from
creditors under applicable laws. These matters raise substantial doubt
about Liggett meeting its liquidity needs and its ability to continue as a
going concern.
2. INVESTMENT IN NEW VALLEY CORPORATION
The Company's and BGLS' investment in New Valley at March 31, 1997 is
summarized below:
Unrealized
Number of Fair Carrying Holding
Shares Value Amount Gain (Loss)
--------- ----- -------- -----------
Class A Preferred Shares ..... 618,326 $ 70,489 $ 70,489 $(19,924)
Class B Preferred Shares ..... 250,885 2,573 2,572 718
Common Shares ................ 3,989,710(A) 5,985 (73,061)
-------- -------- --------
$ 79,047 $ $(19,206)
======== ======== ========
(A) Gives effect to July 1996 one-for-twenty stock split.
The $15.00 Class A Increasing Rate Cumulative Senior Preferred Shares
($100 Liquidation Value), $.01 par value (the "Class A Preferred Shares"),
and the $3.00 Class B Cumulative Convertible Preferred Shares ($25
Liquidation Value), $.10 par value (the "Class B Preferred Shares"), are
accounted for as debt and equity securities, respectively, pursuant to the
requirements of Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities",
and are classified as available-for-sale. 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. New Valley's Common Shares, $.01 par
value (the "Common Shares"), were accounted for pursuant to APB No. 18,
"The Equity Method of Accounting for Investments in Common Stock".
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.
At March 31, 1997, the Company's investment in New Valley consisted of an
approximate 42% voting interest. The Company's investment is represented
by 618,326 Class A Preferred Shares (57.7%), 3,989,710 Common Shares
(41.7%) (giving effect to a one-for-twenty reverse stock split by New
Valley in July 1996) and 250,885 Class B Preferred Shares (9.0%).
During the first quarter of 1996, New Valley repurchased 72,104 Class A
Preferred Shares for a total amount of $10,530. The Company has recorded
its proportionate interest in the excess of
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Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
the carrying value of the shares over the cost of the shares repurchased
as a credit to additional paid-in capital in the amount of $1,782, along
with other New Valley capital transactions of $1,852, for the three months
ended March 31, 1996. No such repurchases have been made during the
quarter ended March 31, 1997. Other New Valley capital transactions
charged to equity were $661 for the three months ended March 31, 1997.
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. On March 13, 1996, New Valley declared a cash dividend of $10.00
per share on its Class A Preferred Shares payable on March 27, 1996. NV
Holdings received $6,183 in the distribution. At March 31, 1997, the
accrued and unpaid dividends arrearage on the Class A Preferred Shares was
$127,779 or $119.26 per share.
Holders of the Class B Preferred Shares are entitled to receive a
quarterly dividend, as declared by the Board, at a rate of $3.00 per
annum. At March 31, 1997, the accrued and unpaid dividends arrearage on
Class B Preferred Shares was $121,502 or $43.54 per share. No dividends on
the Class B Preferred Shares have been declared since the fourth quarter
of 1988.
Summarized financial information for New Valley as of March 31, 1997 and
December 31, 1996 and for the three months ended March 31, 1997 and 1996
follows:
March 31, December 31,
1997 1996
--------- ------------
Current assets, primarily cash and marketable
securities .................................... $ 149,244 $ 183,720
Non-current assets ............................... 309,098 222,820
Current liabilities .............................. 155,091 98,110
Non-current liabilities .......................... 176,213 170,223
Redeemable preferred stock ....................... 221,753 210,571
Shareholders' equity (deficit) ................... (94,715) (72,364)
-12-
14
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
March 31,
-----------------------
1997 1996
---- ----
Revenues .................................... $ 19,753 $ 31,985
Costs and expenses .......................... 31,925 38,178
Loss from continuing operations ............. (11,213) (5,612)
Income from discontinued operations ......... 872 728
Net loss applicable to common shares(A) ..... (26,321) (16,067)
(A) Considers all preferred accrued dividends, whether or not
declared, and the excess of carrying value of redeemable preferred
shares over cost of shares purchased.
ACQUISITION OF COMMON SHARES OF BML:
On January 31, 1997, New Valley acquired substantially all the common
shares of BML from BOL for $55,000. (Refer to Note 3.)
RJR NABISCO HOLDINGS CORP.:
At March 31, 1997, New Valley held 1,062,650 shares of RJR Nabisco
Holdings Corp. ("RJR Nabisco") common stock with a market value of $34,270
(cost of $32,574). The unrealized gain on New Valley's investment in RJR
Nabisco common stock was $1,696 at March 31, 1997. Based on the market
price of RJR Nabisco common stock at March 31, 1997, no amounts are
payable by the Company or New Valley under any of its net profit-sharing
arrangements with respect to the RJR Nabisco common stock.
3. INVESTMENT IN BROOKE (OVERSEAS) LTD.
On January 31, 1997, BOL sold all its shares of BML to New Valley for
$21,500 in cash and a promissory note of $33,500 payable $21,500 on June
30, 1997 and $12,000 on December 31, 1997 with interest at 9%. The
consideration received exceeded the carrying value of the Company's
investment in BML by $43,700. The Company recognized a gain on the sale in
the amount of $21,300. The remaining $22,400 will be deferred in
recognition of the fact that the Company retains an interest in BML
through its 42% equity ownership in New Valley and that a portion of the
property sold is subject to a put option held by New Valley. The option
allows New Valley, under certain circumstances, to put a portion of the
property sold back to the Company at the greater of the appraised fair
value of the property at the date of exercise or $13,600.
In connection with the sale of its BML shares to New Valley, certain
specified liabilities aggregating $40,800, including the Vneshtorgbank
loan with a balance of $20,419, remained with BML, and New Valley
indemnified the Company and its subsidiaries with respect to any
obligation arising from such liabilities.
-13-
15
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
SUBSEQUENT EVENTS:
On April 18, 1997, BML sold one of its office buildings, Ducat Place I, to
a third party. Accordingly, the Company will recognize approximately
$1,240 of its deferred gain on the BML sale in the second quarter, 1997.
On April 28, 1997, New Valley paid BOL $3,500, representing a portion of
the promissory note payment due to BOL on June 30, 1997, together with
accrued interest thereon.
4. INVENTORIES
Inventories consist of:
March 31, December 31,
1997 1996
--------- ------------
Finished goods ..................................................... $ 15,639 $ 15,304
Work-in-process .................................................... 5,126 4,435
Raw materials ...................................................... 32,274 34,002
Replacement parts and supplies ..................................... 4,465 4,406
-------- --------
Inventories at current cost ........................................ 57,504 58,147
LIFO adjustments ................................................... (4,861) (4,456)
-------- --------
$ 52,643 $ 53,691
======== ========
At March 31, 1997, Liggett and Liggett-Ducat had leaf tobacco purchase
commitments of approximately $21,217 and $4,934, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
March 31, December 31,
1997 1996
--------- ------------
Land and improvements ............. $ 455 $ 455
Buildings ......................... 6,443 14,205
Machinery and equipment ........... 49,647 49,401
Leasehold improvements ............ 302 302
Construction-in-progress .......... 4,746 46,966
--------- ---------
61,593 111,329
Less accumulated depreciation ..... 31,377 31,047
--------- ---------
$ 30,216 $ 80,282
========= =========
-14-
16
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
6. LONG TERM DEBT
Notes payable, long-term debt and other obligations consist of:
March 31, December 31,
1996 1996
--------- ------------
15.75% Series B Senior Secured Notes due 2001,
net of unamortized discount of $1,418 and $1,511 ....... $231,446 $231,353
14.500% Subordinated Debentures due 1998 ................... 800 800
Notes payable - Foreign .................................... 4,758 22,668
Other ...................................................... 1,067 2,425
Liggett:
11.500% Senior Secured Series B Notes due 1999, net of
unamortized discount of $349 and $424 .................. 112,263 119,688
Variable Rate Series C Senior Secured Notes due 1999 ....... 32,279 32,279
Revolving credit facility .................................. 36,339 24,272
-------- --------
Total notes payable and long-term debt ..................... 418,952 433,485
Less current maturities .................................... 77,446 55,242
-------- --------
Amount due after one year .................................. $341,506 $378,243
======== ========
REVOLVING CREDIT FACILITY - LIGGETT:
On March 8, 1994, Liggett entered into a revolving credit facility (the
"Facility") for $40,000 with a syndicate of commercial lenders. The
Facility is collateralized by all inventories and receivables of Liggett.
At March 31, 1997, $461 was available under the Facility based on eligible
collateral. Borrowings under the Facility bore interest at the rate of
9.75%, a rate which is equal to 1.5% above the Philadelphia National
Bank's prime rate (8.25%) at March 31, 1997. On April 1, 1997,
Philadelphia National Bank raised its prime rate to 8.5%, thereby
increasing Liggett's interest rate to 10.0%. The Facility requires
Liggett's compliance with certain financial and other covenants. The
Facility also limits the amount of cash dividends and distributions by
Liggett and imposes requirements with respect to Liggett's adjusted net
and working capital. In January 1997, the Facility was extended for one
year. The Facility is classified as short-term at March 31, 1997, since it
is due on March 8, 1998, unless extended by the lender. No assurances can
be given that the Facility will be further extended.
During the first quarter of 1997, Liggett violated the working capital
covenant contained in the Facility. This violation occurred during
February 1997 when $37,500 of the Liggett Senior Secured Notes were
reclassified from long-term to current as a result of the February 1, 1998
mandatory redemption requirement of such Notes. On March 19, 1997, the
lead lender agreed to waive this covenant default, and the Facility was
amended as follows: (i) the working capital definition was changed to
exclude the current portion of the Liggett Notes; (ii) the maximum
permitted working capital deficit was reduced to $12,000 (as computed in
accordance with the agreement); (iii) the maximum permitted adjusted net
worth deficit was increased to $180,000 (as computed in accordance with
the agreement); and (iv) the permitted advance rates under the Facility
for eligible inventory were reduced by five percent.
-15-
17
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
LIGGETT 11.500% SENIOR SECURED SERIES B NOTES DUE 1999:
On February 14, 1992, Liggett issued $150,000 in Senior Secured Notes (the
"Liggett Series B Notes"). Interest on the Liggett Series B Notes is
payable semiannually on February 1 and August 1 at an annual rate of
11.5%. The Liggett Series B Notes and Series C Notes referred to below
(collectively, the "Liggett Notes") require mandatory principal
redemptions of $7,500 on February 1 in each of the years 1993 through 1997
and $37,500 on February 1, 1998 with the balance of the Liggett Notes due
on February 1, 1999. In February 1997, $7,500 of Liggett Series B Notes
were purchased using the Facility and credited against the mandatory
redemption requirements. The transaction resulted in a net gain of $2,963.
The Liggett Notes are collateralized by substantially all of the assets of
Liggett, excluding inventories and receivables. Eve Holdings Inc. is a
guarantor for the Liggett Notes. The Liggett Notes may be redeemed, in
whole or in part, at a price equal to 102% and 100% of the principal
amount in the years 1997 and 1998, respectively, at the option of Liggett.
The Liggett Notes contain restrictions on Liggett's ability to declare or
pay cash dividends, incur additional debt, grant liens and enter into any
new agreements with affiliates, among others. While Liggett management
currently intends to seek to refinance and/or restructure with Liggett's
note holders the February 1, 1998 mandatory redemption payment of $37,500
and the $107,400 payment due on February 1, 1999 on maturity of the
Liggett Notes and to extend its revolving credit facility, there are no
refinancing or restructuring arrangements for the notes or commitments to
extend the facility at this time, and no assurances can be given in this
regard.
ISSUANCE OF LIGGETT SERIES C VARIABLE RATE NOTES:
On January 31, 1994, Liggett issued $22,500 of Variable Rate Series C
Senior Secured Notes Due 1999 (the "Liggett Series C Notes"). The Liggett
Series C Notes bore a 16.5% interest rate, which was reset on February 1,
1995 to 19.75%, the maximum reset rate. The Series C Notes have the same
terms (other than interest rate) and stated maturity as the Liggett Series
B Notes.
For information concerning Liggett's substantial near-term debt service
requirements and other related matters, refer to Note 1.
FOREIGN LOANS:
On January 31, 1997, in connection with the sale of BML shares to New
Valley, the Russian bank loan in the amount of $20,419 remained with BML
(Refer to Note 3). The Company is presently a guarantor on lines of credit
opened by BOL in 1997 with two Russian banks. The aggregate amount
available under these lines of credit is $3,000. Interest on such lines of
credit is currently 23%.
7. STOCK COMPENSATION
As of January 1, 1997, the Company granted to employees of the Company
non-qualified stock options to purchase 422,000 shares of the Company's
common stock at an exercise price of $5.00 per share. The options, which
will become exercisable over the ten-year term, vest in six equal annual
installments. No compensation expense was recorded in this transaction,
since the options had no intrinsic value.
-16-
18
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
8. RELATED PARTY TRANSACTIONS
Effective July 1, 1990, a former executive transferred all of his equity
in the Company to the Chairman and resigned from substantially all of his
positions with the Company and its affiliates. In consideration for this
transfer, a partnership (the "Partnership") controlled by the Chairman
agreed, among other things, to make certain payments to the Company on
account of the former executive's outstanding indebtedness of $8,677
(deducted from equity). In connection with this transaction, the
Partnership pledged 1,681,715 of the shares it held of the Company's
common stock to secure this non-recourse obligation, except as to the
pledged shares. In May 1994, the Partnership paid $3,200 in partial
satisfaction of the obligation. In consideration thereof, the Company
released 1,281,715 of the pledged shares. On March 7, 1997, the
Partnership transferred to the Company the remaining 400,000 pledged
shares in final satisfaction of the obligation. As a result, the Company
credited retained earnings $1,800, the fair market value of the pledged
shares which were returned to treasury.
9. RESTRUCTURING CHARGES
During the first quarter of 1997, Liggett reduced its headcount by 87
positions and recorded a $1,761 restructuring charge to operations for
severance programs, primarily salary continuation and related benefits for
terminated employees. Approximately $197 in restructuring charges will be
funded in subsequent years. Liggett expects to continue its cost reduction
programs.
10. CONTINGENCIES
TOBACCO-RELATED LITIGATION:
Since 1954, Liggett and other United States cigarette manufacturers have
been named as defendants in a number of direct and third-party actions
predicated on the theory that they should be liable for damages from
cancer and other adverse health effects alleged to have been caused by
cigarette smoking or by exposure to secondary smoke (environmental tobacco
smoke, "ETS") from cigarettes. These cases are reported hereinafter as
though having been commenced against Liggett (without regard to whether
such cases were actually commenced against the Company or Liggett). New
cases continue to be commenced against Liggett and other cigarette
manufacturers. As new cases are commenced, the costs associated with
defending such cases and the risks attendant to the inherent
unpredictability of litigation continue to increase. Liggett had been
receiving certain financial and other assistance from others in the
industry in defraying the costs and other burdens incurred in the defense
of smoking and health litigation and related proceedings, but these
benefits have recently ended. Certain joint defense arrangements, and the
financial benefits incident thereto, have also ended. The future financial
impact on the Company of the termination of this assistance and the
effects of the tobacco litigation settlements discussed below is not
quantifiable at this time.
As of March 31, 1997, there were 107 cases pending against Liggett where
individual plaintiffs allege injury resulting from cigarette smoking,
addiction to cigarette smoking or exposure to ETS and seek compensatory
and, in some cases, punitive damages. Of these, 53 are pending in the
State of
-17-
19
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Florida and 20 are pending in the State of New York. The balance of
individual cases are pending in 14 different states. The next individual
case scheduled for trial where Liggett is a defendant is CHUTZ-REYMERS ET
AL. V. LIGGETT GROUP INC., ET AL., United States District Court, Middle
District of Florida, Tampa Division, which is scheduled for trial in June
1997. In light of the settlements discussed below, this case will not
proceed against Liggett on that date. In addition to the foregoing, there
are four individual cases scheduled for trial in 1997 where Liggett is a
defendant, although trial dates are subject to change.
The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by
cigarette smoking are based on various theories of recovery, including
negligence, gross negligence, strict liability, fraud, misrepresentation,
design defect, failure to warn, breach of express and implied warranties,
conspiracy, concert of action, unjust enrichment, common law public
nuisance, indemnity, market share liability, and violations of deceptive
trade practices laws and antitrust statutes. Plaintiffs also seek punitive
damages in many of these cases. Defenses raised by defendants in these
cases include lack of proximate cause, assumption of the risk, comparative
fault and/or contributory negligence, lack of design defect, statute of
limitations, equitable defenses such as "unclean hands" and lack of
benefit, failure to state a claim and federal preemption. Several
representative cases are described below.
On June 24, 1992, in the action entitled CIPOLLONE V. LIGGETT GROUP INC.,
ET AL., the United States Supreme Court issued an opinion concluding that
the Act did not preempt state common law damage claims but that The Public
Health Cigarette Smoking Act of 1969 (the "1969 Act") did preempt certain,
but not all, state common law damage claims. The decision bars plaintiffs
from asserting claims that, after the effective date of the 1969 Act, the
tobacco companies either failed to warn adequately of the claimed health
risks of cigarette smoking or sought to neutralize those claimed risks in
their advertising or promotion of cigarettes. Bills have been introduced
in Congress on occasion to eliminate the federal preemption defense.
Enactment of any federal legislation with such an effect could result in a
significant increase in claims, liabilities and litigation costs.
On March 27, 1987, an action entitled YVONNE ROGERS V. LIGGETT GROUP INC.
ET AL., Superior Court, Marion County, Indiana, was filed against Liggett
and others. The plaintiff sought compensatory and punitive damages for
cancer alleged to have been caused by cigarette smoking. Trial commenced
on January 31, 1995. The trial ended on February 22, 1995 when the trial
court declared a mistrial due to the jury's inability to reach a verdict.
The Court directed a verdict in favor of the defendants as to the issue of
punitive damages during the trial of this action. A second trial commenced
on August 5, 1996 and, on August 23, 1996, the jury returned a verdict in
favor of the defendants. A Notice of Appeal has been filed by the
plaintiff.
On October 31, 1991, an action entitled BROIN, ET AL. V. PHILIP MORRIS
INCORPORATED, ET AL., Circuit Court of the Eleventh Judicial District in
and for Dade County, Florida, was filed against Liggett and others. This
case was the first class action commenced against the industry, and has
been brought by plaintiffs on behalf of all flight attendants that have
worked or are presently working for airlines based in the United States
and who have never regularly smoked cigarettes but allege that they have
been damaged by involuntary exposure to ETS. Plaintiffs' motion to certify
the action as a class action was granted. The suit is scheduled to go to
trial on June 2, 1997. In addition to Broin, as of March 31, 1997 there
were 16 actions which have either been certified as a class or are seeking
class certification. One of these actions, ENGLE, ET AL. V. R. J. REYNOLDS
TOBACCO COMPANY, ET AL., Circuit
-18-
20
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Court of the Eleventh Judicial Circuit in and for Dade County, Florida,
involving a certified class of smokers in the State of Florida, is
scheduled to commence trial on September 8, 1997.
On May 12, 1992, an action entitled CORDOVA V. LIGGETT GROUP INC., ET AL.,
Superior Court of the State of California, City of San Diego, was filed
against Liggett and others. In her complaint, plaintiff, purportedly on
behalf of the general public, alleges that defendants have been engaged in
unlawful, unfair and fraudulent business practices by allegedly
misrepresenting and concealing from the public scientific studies
pertaining to smoking and health funded by, and misrepresenting the
independence of, the Council on Tobacco Research ("CTR") and its
predecessor. The complaint seeks equitable relief against the defendants,
including the imposition of a corrective advertising campaign, restitution
of funds, disgorgement of revenues and profits and the imposition of a
constructive trust. The case is presently in the discovery phase. This
action is scheduled for trial on December 12, 1997. A similar action has
been filed in the Superior Court for the State of California, City of San
Francisco.
On September 10, 1993, an action entitled SACKMAN V. LIGGETT GROUP INC.,
United States District Court, Eastern District of New York, was filed
against Liggett alleging as injury lung cancer. On May 25, 1996, the
District Court granted Liggett summary judgment on plaintiff's fraud and
breach of warranty claims. In addition, the District Court vacated the
Magistrate's March 19, 1996 order compelling Liggett to produce certain
CTR documents with respect to which Liggett had asserted various privilege
claims, and allowed the other cigarette manufacturers and the CTR to
intervene in order to assert their interests and privileges with respect
to those same documents. The Magistrate Judge is presently reconsidering
plaintiffs' motion to compel production of documents. No trial date has
been set.
On March 25, 1994, an action entitled CASTANO, ET AL. V. THE AMERICAN
TOBACCO COMPANY INC., ET AL., United States District Court, Eastern
District of Louisiana, was filed against Liggett and others. The class
action complaint sought relief for a nationwide class of smokers based on
their alleged addiction to nicotine. The District Court granted
plaintiffs' motion for class certification. On May 23, 1996, the Fifth
Circuit Court of Appeals decertified the class and instructed the District
Court to dismiss the class complaint. On March 12, 1996, the Company and
Liggett entered into an agreement, subject to court approval, to settle
the CASTANO class action tobacco litigation.
Under the CASTANO settlement agreement, upon final court approval of the
settlement, the CASTANO class would be entitled to receive up to 5% of
Liggett's pretax income (income before income taxes) each year (up to a
maximum of $50,000 per year) for the next twenty-five years, subject to
certain reductions provided for in the agreement, and a $5,000 payment
from Liggett if the Company or Liggett fail to consummate a merger or
similar transaction with another non-settling tobacco company defendant
within three years of the date of the settlement. The Company and Liggett
have the right to terminate the CASTANO settlement under certain
circumstances. On May 11, 1996, the CASTANO Plaintiffs Legal Committee
filed a motion with the United States District Court for the Eastern
District of Louisiana seeking preliminary approval of the CASTANO
settlement. On May 23, 1996, the Court of Appeals for the Fifth Circuit
reversed the February 17, 1995 order of the District Court certifying the
CASTANO suit as a nationwide class action and instructed the District
Court to dismiss the class complaint. On September 6, 1996, the CASTANO
plaintiffs withdrew the motion for approval of the CASTANO settlement.
On March 14, 1996, the Company, the CASTANO Plaintiffs Legal Committee and
the CASTANO plaintiffs entered into a letter agreement. According to the
terms of the letter agreement, for the period ending
-19-
21
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
nine months from the date of Final Approval (as defined in the letter), if
granted, of the CASTANO settlement or, if earlier, the completion by the
Company or Liggett of a combination with any defendant in CASTANO, except
Philip Morris, the CASTANO plaintiffs and their counsel agree not to enter
into any more favorable settlement agreement with any CASTANO defendant
which would reduce the terms of the CASTANO settlement agreement. If the
CASTANO plaintiffs or their counsel enter into any such settlement during
this period, they shall pay the Company $250,000 within thirty days of the
more favorable agreement and offer the Company and Liggett the option to
enter into a settlement on terms at least as favorable as those included
in such other settlement. The letter agreement further provides that
during the same time period, and if the CASTANO settlement agreement has
not been earlier terminated by the Company in accordance with its terms,
the Company and its affiliates will not enter into any business
transaction with any third party which would cause the termination of the
CASTANO settlement agreement. If the Company or its affiliates enter into
any such transaction, then the CASTANO plaintiffs will be entitled to
receive $250,000 within thirty days from the transacting party.
In February 1995, an action entitled GRADY CARTER, ET AL. V. THE AMERICAN
TOBACCO COMPANY, ET AL., Superior Court for the State of Florida, Duval
County, was filed against Liggett and others. Plaintiff sought
compensatory damages, including, but not limited to, reimbursement for
medical costs. Both American Tobacco and Liggett were subsequently
dismissed from this action. On August 9, 1996, a jury returned a verdict
against the remaining defendant, Brown & Williamson Tobacco Corp., in the
amount of $750. Brown & Williamson has filed a Notice of Appeal.
On May 23, 1994, an action entitled MOORE, ATTORNEY GENERAL, EX REL STATE
OF MISSISSIPPI V. THE AMERICAN TOBACCO COMPANY, ET AL., Chancery Court of
Jackson County, Mississippi, was commenced against Liggett and others
seeking restitution and indemnity for medical payments and expenses
allegedly made or incurred for tobacco related illnesses. In May 1994, the
State of Florida enacted legislation, effective July 1, 1994, allowing
certain state authorities or entities to commence litigation seeking
recovery of certain Medicaid payments made on behalf of Medicaid
recipients as a result of diseases (including, but not limited to,
diseases allegedly caused by cigarette smoking) allegedly caused by liable
third parties (including, but not limited to, the tobacco industry). On
February 21, 1995, the State of Florida commenced an action pursuant to
this statutory scheme. In addition to Florida and Mississippi, similar
actions have been filed by many other states and municipalities. The
Mississippi, Florida and Texas Medicaid recovery actions are scheduled for
trial in 1997 (see settlement discussions below). Legislation similar to
that enacted in Florida has been introduced in the Massachusetts and New
Jersey legislatures.
In certain of the pending proceedings, state and local government entities
and others seek reimbursement for Medicaid and other health care
expenditures allegedly caused by tobacco products. The claims asserted in
these Medicaid recovery actions vary. All plaintiffs assert the equitable
claim that the tobacco industry was "unjustly enriched" by plaintiffs'
payment of health care costs allegedly attributable to smoking and seek
reimbursement of those costs. Other claims made by some but not all
plaintiffs include the equitable claim of indemnity, common law claims of
negligence, strict liability, breach of express and implied warranty,
violation of a voluntary undertaking or special duty, fraud, negligent
misrepresentation, conspiracy, public nuisance, claims under state and
federal statutes governing consumer fraud, antitrust, deceptive trade
practices and false advertising, and claims under the Federal Racketeer
Influenced and Corrupt Organization Act.
On March 15, 1996, the Company and Liggett entered into a settlement of
tobacco-related litigation with the Attorneys General of Florida,
Louisiana, Mississippi, West Virginia and Massachusetts. The
-20-
22
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
settlement with the Attorneys General releases the Company and Liggett
from all tobacco-related claims by these states including claims for
Medicaid reimbursement and concerning sales of cigarettes to minors. The
settlement provides that additional states which commence similar Attorney
General actions may agree to be bound by the settlement prior to six
months from the date thereof (subject to extension of such period by the
settling defendants). Certain of the terms of the settlement are
summarized below.
Under the settlement, the states would share an initial payment by Liggett
of $5,000 ($1,000 of which was paid on March 22, 1996, with the balance
payable over nine years and indexed and adjusted for inflation), provided
that any unpaid amount will be due sixty days after either a default by
Liggett in its payment obligations under the settlement or a merger or
other similar transaction by the Company or Liggett with another defendant
in the lawsuits. In addition, Liggett will be required to pay the states a
percentage of Liggett's pretax income (income before income taxes) each
year from the second through the twenty-fifth year. This annual percentage
is 2-1/2% of Liggett's pretax income, subject to increase to 7-1/2%
depending on the number of additional states joining the settlement. No
additional states have joined this settlement to date. All of Liggett's
payments are subject to certain reductions provided for in the agreement.
Liggett has also agreed to pay to the states $5,000 if the Company or
Liggett fails to consummate a merger or other similar transaction with
another defendant in the lawsuits within three years of the date of the
settlement.
Settlement funds received by the Attorneys General will be used to
reimburse the states' smoking-related healthcare costs. While neither
consenting to FDA jurisdiction nor waiving their objections thereto, the
Company and Liggett also have agreed to phase in compliance with certain
of the proposed interim FDA regulations on the same basis as provided in
the CASTANO settlement.
The Company and Liggett have the right to terminate the settlement with
respect to any state participating in the settlement if any of the
remaining defendants in the litigation succeed on the merits in that
state's Attorney General action. The Company and Liggett may also
terminate the settlement if they conclude that too many states have filed
Attorney General actions and have not resolved such cases as to the
settling defendants by joining in the settlement.
At December 31, 1995, the Company had accrued approximately $4,000 for the
present value of the fixed payments under the March 1996 Attorneys General
settlement, and no additional amounts have been accrued with respect to
the recent settlements discussed below. The Company cannot quantify the
future costs of the settlements at this time as the amount Liggett must
pay is based, in part, on future operating results. Possible future
payments based on a percentage of pretax income, and other contingent
payments based on the occurrence of a business combination, will be
expensed when considered probable.
On March 20, 1997, Liggett, together with the Company, entered into a
comprehensive settlement of tobacco litigation through parallel agreements
with the Attorneys General of 17 additional states and with a nationwide
class of individuals and entities that allege smoking-related claims.
Thereafter, on April 14, 1997, the State of California entered into a
settlement agreement with Liggett and BGL of the action which it
contemplates commencing against the industry and on May 6, 1997 the State
of Alaska entered into a settlement agreement with Liggett and the Company
of the action which it recently commenced against the industry. The
settlements cover all smoking-related claims, including both
addiction-based and tobacco injury claims against the Company and Liggett,
brought by the Attorneys General and, upon court approval, the nationwide
class.
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23
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
The recent Attorneys General settlements, which do not require court
approval, include the states of Alaska, Arizona, California, Connecticut,
Hawaii, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Minnesota,
New Jersey, New York, Oklahoma, Texas, Utah, Washington and Wisconsin. The
Company's and Liggett's previous settlements on March 15, 1996 with the
Attorneys General of Florida, Louisiana, Massachusetts, Mississippi and
West Virginia remain in full force and effect. (Several other states have
either recently filed Medicaid recovery actions or indicated intentions to
do so. Both Liggett and BGL will endeavor to resolve those matters on
substantially the same terms and conditions as the prior settlements,
however, there can be no assurance that any such settlements will be
completed).
The settlement with the nationwide class covers all smoking-related
claims. On March 20, 1997, Liggett, the Company and plaintiffs filed the
mandatory class settlement agreement in an action entitled FLETCHER, ET
AL. V. BROOKE GROUP LTD., ET AL., Circuit Court of Mobile County, Alabama,
where the court granted preliminary approval and preliminary certification
of the class. Class members will be notified of the settlement and will
have an opportunity to appear at a later court hearing. Effectiveness of
the mandatory settlement is conditioned on final court approval of the
settlement after a fairness hearing. There can be no assurance as to
whether or when such court approval will be obtained. There are no opt out
provisions in this settlement, except for Medicaid claims by states that
are not party to the Attorneys General settlements.
Pursuant to the settlements, the Company and Liggett have agreed to
cooperate fully with the Attorneys General and the nationwide class in
their lawsuits against the tobacco industry. The Company and Liggett have
agreed to provide to these parties all relevant tobacco documents in their
possession, other than those subject to claims of joint defense privilege,
and to waive, subject to court order, certain attorney-client privileges
and work product protections regarding Liggett's smoking-related documents
to the extent Liggett and the Company can so waive these privileges and
protections. The Attorneys General and the nationwide class have agreed to
keep Liggett's documents under protective order and, subject to final
court approval, to limit their use to those actions brought by parties to
the settlement agreements. Those documents that may be subject to a joint
defense privilege with other tobacco companies will not be produced to the
Attorneys General or the nationwide class, but will be, pursuant to court
order, submitted to the appropriate court and placed under seal for
possible IN CAMERA review. Additionally, under similar protective
conditions, the Company and Liggett have agreed to offer their employees
for witness interviews and testimony at deposition and trial. Pursuant to
both settlement agreements, Liggett has also agreed to place an additional
warning on its cigarette packaging stating that "smoking is addictive" and
to issue a public statement, as requested by the Attorneys General.
Under the terms of the new settlement agreements, Liggett will pay on an
annual basis 25% of its pretax income for the next 25 years into a
settlement fund, commencing with the first full fiscal year starting after
the date of the agreements. Monies collected in the settlement fund will
be overseen by a court-appointed committee and utilized to compensate
state health care programs and settlement class members and to provide
counter-market advertising. Liggett has also agreed to phase-in compliance
with certain proposed FDA regulations regarding smoking by children and
adolescents, including a prohibition on the use of cartoon characters in
tobacco advertising and limitations on the use of promotional materials
and distribution of sample packages where minors are present.
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Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Under both settlement agreements, any other tobacco company defendant,
except Philip Morris, merging or combining with Liggett or the Company,
prior to the fourth anniversary of the settlement agreements, would
receive certain settlement benefits, including limitations on potential
liability and not having to post a bond to appeal any future adverse
judgment. In addition, within 120 days following such a combination,
Liggett would be required to pay the settlement fund $25 million. Both the
Attorneys General and the nationwide class have also agreed not to seek an
injunction preventing a defendant tobacco company combining with Liggett
or the Company from spinning off any of its affiliates which are not
engaged in the domestic tobacco business.
The Company and Liggett are also entitled to certain "most favored nation"
benefits not available to the other defendant tobacco companies. In
addition, in the event of a "global" tobacco settlement enacted through
Federal legislation or otherwise, the Attorneys General and tobacco
plaintiffs have agreed to use their "best efforts" to ensure that the
Company and Liggett's liability under such a plan should be no more
onerous than under these new settlements.
On March 20, 1997, R.J. Reynolds Tobacco Company, Philip Morris, Inc.,
Brown & Williamson Tobacco Corporation and Lorillard Tobacco Company, Inc.
obtained a temporary restraining order from a North Carolina state court
preventing the Company and Liggett and their agents, employees, directors,
officers and lawyers from turning over documents allegedly subject to the
joint defense privilege in connection with the settlements, which
restraining order was converted to a preliminary injunction by the court
on April 9, 1997. This ruling is currently on appeal by the Company and
Liggett. On March 24, 1997, the United States District Court for the
Eastern District of Texas and state courts in Mississippi and Illinois
each issued orders enjoining the other tobacco companies from interfering
with Liggett's filing with the courts, under seal, those documents.
The Company understands that a grand jury investigation is being conducted
by the office of the United States Attorney for the Eastern District of
New York regarding possible violations of criminal law relating to the
activities of The Council for Tobacco Research - USA, Inc. Liggett was a
sponsor of The Council for Tobacco Research - USA, Inc. at one time. The
Company is unable, at this time, to predict the outcome of this
investigation.
In March 1996, Liggett received a subpoena from a Federal grand jury
sitting in the Southern District of New York. Documents have been produced
in response to the subpoena. The Company understands that this
investigation has been transferred to the main office of the United States
Department of Justice. In addition, in May 1996, Liggett was served with a
subpoena by a grand jury sitting in the District of Columbia. Liggett is
in the process of responding to that subpoena. The Company and Liggett are
unable, at this time, to predict the outcome of these investigations.
The Antitrust Division of the United States Department of Justice
investigation into the United States tobacco industry activities in
connection with product development efforts regarding "fire-safe" or
self-extinguishing cigarettes has been concluded. No action by the
Department of Justice was taken.
Litigation is subject to many uncertainties, and it is possible that some
of the aforementioned actions could be decided unfavorably against the
Company. An unfavorable outcome of a pending smoking and health case could
encourage the commencement of additional similar litigation. The Company
is not able to evaluate the effect of these developing matters on pending
litigation or the possible commencement of additional litigation.
-23-
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Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
There are several other proceedings, lawsuits and claims pending against
the Company unrelated to product liability. Management is of the opinion
that the liabilities, if any, ultimately resulting from such other
proceedings, lawsuits and claims should not materially affect the
Company's financial position, results of operations or cash flows.
The Company is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of the cases pending
against the Company and Liggett. It is possible that the Company's
consolidated financial position, results of operations and cash flows
could be materially adversely affected by an ultimate unfavorable outcome
in any of such pending litigation.
LEGISLATION AND REGULATION:
On August 28, 1996, the FDA filed in the Federal Register a Final Rule
classifying tobacco as a drug, asserting jurisdiction by the FDA over the
manufacture and marketing of tobacco products and imposing restrictions on
the sale, advertising and promotion of tobacco products. The FDA's stated
objective and focus for its initiative is to limit access to cigarettes by
minors by measures beyond the restrictions either mandated by existing
federal, state and local laws or voluntarily implemented by major
manufacturers in the industry. Litigation was commenced in the United
States District Court for the Middle District of North Carolina
challenging the legal authority of the FDA to assert such jurisdiction, as
well as challenging the constitutionality of the rules. A hearing on the
tobacco industry's motion for summary judgment in that case was held on
February 10, 1997 and a decision by the Court was issued on April 25,
1997. The court granted plaintiffs' motion for summary judgment
prohibiting the FDA from regulating or restricting the promotion and
advertising of tobacco products. The court denied plaintiffs' motion for
summary judgment on the issue of whether the FDA has the authority to
regulate access to, and labeling of, tobacco products. The four major
cigarette manufacturers and the FDA have filed notices of appeal.
The Company and Liggett, while neither consenting to FDA jurisdiction nor
waiving their objections thereto, agreed to withdraw their objections and
opposition to the proposed rule making and to phase in compliance with
certain of the proposed interim FDA regulations. See discussions of the
CASTANO and Attorneys General settlements above.
In August 1996, the Commonwealth of Massachusetts enacted legislation
requiring tobacco companies to publish information regarding the
ingredients in cigarettes and other tobacco products sold in that state.
Regulations adopted pursuant to this legislation are scheduled to become
effective on July 1, 1997. On February 7, 1997, the United States District
Court for the District of Massachusetts denied an attempt to block the new
legislation on the ground that it is preempted by federal law.
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Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
On September 13, 1995, the President of the United States issued
Presidential Proclamation 6821, which established a tariff rate quota
("TRQ") on certain imported tobacco, imposing extremely high tariffs on
imports of flue-cured and burley tobacco in excess of certain levels which
vary from country to country. Oriental tobacco is exempt from the quota as
well as all tobacco originating from Canada, Mexico or Israel. Management
believes that the TRQ levels are sufficiently high to allow Liggett to
operate without material disruption to its business.
On February 20, 1996, the United States Trade representative issued an
"advance notice of rule making" concerning how tobaccos imported under the
TRQ should be allocated. Currently, tobacco imported under the TRQ is
allocated on a "first-come, first-served" basis, meaning that entry is
allowed on an open basis to those first requesting entry in the quota
year. Others in the cigarette industry have suggested an "end-user
licensing" system under which the right to import tobacco under the quota
would be initially assigned on the basis of domestic market share. Such an
approach, if adopted, could have a material adverse effect on the Company.
In April 1994, the United States Occupational Safety and Health
Administration ("OSHA") issued a proposed rule that could ultimately ban
smoking in the workplace. Hearings were completed during 1995. OSHA has
not yet issued a final rule or a proposed revised rule. While the Company
cannot predict the outcome, some form of federal regulation of smoking in
workplaces may result.
In January 1993, the EPA released a report on the respiratory effect of
ETS which concludes that ETS is a known human lung carcinogen in adults,
and in children causes increased respiratory tract disease and middle ear
disorders and increases the severity and frequency of asthma. In June
1993, the two largest of the major domestic cigarette manufacturers,
together with other segments of the tobacco and distribution industries,
commenced a lawsuit against the EPA seeking a determination that the EPA
did not have the statutory authority to regulate ETS, and that given the
current body of scientific evidence and the EPA's failure to follow its
own guidelines in making the determination, the EPA's classification of
ETS was arbitrary and capricious. Whatever the outcome of this litigation,
issuance of the report may encourage efforts to limit smoking in public
areas.
Liggett has been involved in certain environmental proceedings, none of
which, either individually or in the aggregate, rise to the level of
materiality. Liggett's current operations are conducted in accordance with
all environmental laws and regulations. Management is unaware of any
material environmental conditions affecting its existing facilities.
Compliance with federal, state and local provisions regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, have not had a material effect on the
capital expenditures, earnings or competitive position of Liggett.
-25-
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Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
In addition to the foregoing, there have been a number of other
restrictive regulatory actions, adverse political decisions and other
unfavorable developments concerning cigarette smoking and the tobacco
industry, the effects of which, at this time, the Company is not able to
evaluate.
OTHER MATTERS:
In June 1993, the Company obtained expropriation and forced abandonment
insurance coverage for its investment in its Ducat Place I real estate
project in Moscow, Russia. Shortly thereafter, the Company submitted a
Notice of Loss to the insurer, under and pursuant to the policy. The
insurer denied the claim and, in July 1994, arbitration proceedings were
commenced in the United Kingdom. In January 1997, the Company recognized a
gain of $4,125 in settlement of the dispute.
On or about March 13, 1997, a shareholder derivative suit was filed
against New Valley, as a nominal defendant, its directors and the Company
in the Delaware Chancery Court, by a shareholder of New Valley. The suit
alleges that New Valley's purchase of the BML shares constituted a
self-dealing transaction which involved the payment of excessive
consideration by New Valley. The plaintiff seeks (i) a declaration that
New Valley's directors breached their fiduciary duties, the Company aided
and abetted such breaches and such parties are therefore liable to New
Valley, and (ii) unspecified damages to be awarded to New Valley. The
Company's time to respond to the complaint has not yet expired. The
Company believes that the allegations are without merit, and it intends to
defend the suit vigorously.
At March 31, 1997, there were several other proceedings, lawsuits and
claims pending against the Company and its subsidiaries. The Company is of
the opinion that the liabilities, if any, ultimately resulting from such
other proceedings, lawsuits and claims should not materially affect its
consolidated financial position, results of operations or cash flows.
11. SALES OF ASSETS
On January 31, 1997, BOL sold BML to New Valley for $21,500 in cash and a
promissory note of $33,500 payable $21,500 on June 30, 1997 and $12,000 on
December 31, 1997. (Refer to Note 3.)
On March 11, 1997, Liggett sold to Blue Devil Ventures, a North Carolina
limited liability partnership, certain surplus realty for $2,200 and
recognized a gain of $1,531.
-26-
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTRODUCTION
The following discussion provides an assessment of the consolidated
results of operations, capital resources and liquidity of Brooke Group Ltd. (the
"Company") and its subsidiaries and should be read in conjunction with the
Consolidated Financial Statements and notes thereto of the Company and BGLS Inc.
("BGLS") included elsewhere in this document. BGLS is a wholly owned subsidiary
of the Company. The consolidated financial statements include the accounts of
BGLS, Liggett Group Inc. ("Liggett"), Brooke (Overseas) Ltd. ("BOL"), New Valley
Holdings, Inc. ("NV Holdings"), Liggett-Ducat Ltd. ("Liggett-Ducat") and other
less significant subsidiaries. The Company holds an equity interest in New
Valley Corporation ("New Valley") through NV Holdings.
On January 31, 1997, BOL sold its interest in BrookeMil Ltd. ("BML"), a
real estate investment company doing business in Russia, to New Valley. See Note
3 to the Company's Consolidated Financial Statements.
For purposes of this discussion and other consolidated financial
reporting, the Company's significant business segments are tobacco for the three
months ended March 31, 1997 and tobacco and real estate for the three months
ended March 31, 1996.
RECENT DEVELOPMENTS
NEW VALLEY. As of March 31, 1997, New Valley held 1,062,650 shares of
RJR Nabisco Holdings Corp. ("RJR Nabisco") common stock with a market value of
$35,997 (cost of $32,574). New Valley's unrealized gain on its investment in RJR
Nabisco common stock was $1,697 at March 31, 1997. For information concerning
the acquisition of BML by New Valley, see "BOL" below.
BOL. On January 31, 1997, New Valley acquired from BOL 10,483 shares
(99.1%) of common stock of BML for a purchase price of $55,000, consisting of
$21,500 in cash and a $33,500 9% promissory note of New Valley (the "Note"). The
Note is collateralized by the BML Shares and is payable $21,500 on June 30, 1997
and $12,000 on December 31, 1997. The Company recognized a gain of $21,300 on
the sale in the first quarter, 1997. A prepayment of $3,500 on the Note together
with accrued interest was made on April 28, 1997 which reduces the June payment
discussed above to $18,000. See Note 3 to the Company's Consolidated Financial
Statements.
LIGGETT. In January 1997, Liggett underwent a major restructuring from
a centralized organization to a decentralized enterprise with four Strategic
Business Units, each a profit center, and a corporate headquarters. This
restructuring is intended to more closely align sales and marketing strategies
with the unique requirements of regional markets as well as reduce working
capital by improved production planning and inventory control. As a result of
this reorganization, Liggett will further reduce its salaried, hourly and
part-time headcount by a total of 273 positions (35%) over an eight-month
transition period.
On March 11, 1997, Liggett sold to Blue Devil Ventures, a North Carolina
limited liability partnership, certain surplus realty for $2,200. The Company
recognized a gain of $1,521.
-27-
29
RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY
PRICING ACTIVITY. On March 7, 1997, R.J. Reynolds Tobacco Company
("RJR") initiated another list price increase on all brands of $.40 per carton
(approximately 4%). Brown & Williamson Tobacco Corporation ("B&W"), Lorillard
Tobacco Company, Inc. ("Lorillard") and Liggett have matched this increase, and,
on March 21, 1997, Philip Morris, Inc. ("Philip Morris") announced a price
increase of $.50 per carton. Subsequently, Liggett and the other manufacturers
matched Philip Morris' price increase.
LEGISLATION, REGULATION AND LITIGATION. The cigarette industry
continues to be challenged on numerous fronts. New cases continue to be
commenced against Liggett and the Company and other cigarette manufacturers. As
of March 31, 1997, there were 107 individual suits, 14 purported class actions
and 22 state (and several municipality) Medicaid reimbursement actions pending
in the United States in which Liggett is a named defendant. As new cases are
commenced, the costs associated with defending such cases and the risks
attendant to the inherent unpredictability of litigation continue to increase.
Recently, there have been a number of restrictive regulatory actions from
various Federal administrative bodies, including the United States Environmental
protection Agency ("EPA") and the Food and Drug Administration ("FDA"), adverse
political and legal decisions and other unfavorable developments concerning
cigarette smoking and the tobacco industry, including the commencement and
certification of class actions and the commencement of Medicaid reimbursement
suits by various states' Attorneys General. These developments generally receive
widespread media attention. The Company is not able to evaluate the effect of
these developing matters on pending litigation or the possible commencement of
additional litigation, but it is possible that Company's financial position,
results of operations and cash flows could be materially adversely affected by
an ultimate unfavorable outcome in any of such pending litigation. See Note 10
to the Company's Consolidated Financial Statements for a description of
legislation, regulation and litigation.
The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence, gross
negligence, strict liability, fraud, misrepresentation, design defect, failure
to warn, breach of express and implied warranties, conspiracy, concert of
action, unjust enrichment, common law public nuisance, indemnity, market share
liability, and violations of deceptive trade practices laws and antitrust
statutes. Plaintiffs also seek punitive damages in many of these cases. Defenses
raised by defendants in these cases include lack of design defect, statutes of
limitations or response, equitable defenses such as "unclean hands" and lack of
benefit, failure to state a claim and preemption by the Federal Cigarette
Labeling and Advertising Act, as amended.
The claims asserted in the Medicaid recovery actions vary. All
plaintiffs assert the equitable claim that the tobacco industry was "unjustly
enriched" by plaintiffs' payment of health care costs allegedly attributable to
smoking and seek reimbursement of those costs. Other claims made by some but not
all plaintiffs include the equitable claim of indemnity, common law claims of
negligence, strict liability, breach of express and implied warranty, violation
of a voluntary undertaking or special duty, fraud, negligent misrepresentation,
conspiracy, public nuisance, claims under state and federal statutes governing
consumer fraud, antitrust, deceptive trade practices and false advertising, and
claims under the Federal Racketeer Influenced and Corrupt Organization Act.
On March 12, 1996, Liggett, together with the Company, entered into an
agreement to settle the CASTANO class action tobacco litigation, and on March
15, 1996, Liggett, together with the Company, entered into an agreement with the
Attorneys General of West Virginia, Florida, Mississippi, Massachusetts and
Louisiana to settle certain actions brought against Liggett and the Company by
such states. Liggett and the Company, while neither consenting to FDA
jurisdiction nor waiving their objections thereto, agreed to withdraw their
objections and opposition to the proposed FDA regulations and to phase in
compliance with certain of the proposed interim FDA regulations.
Under the CASTANO settlement agreement, upon final court approval of
the settlement, the CASTANO class would be entitled to receive up to 5% of
Liggett's pretax income (income before income taxes) each year (up to a maximum
of $50,000 per year) for the next twenty-five years, subject to certain
reductions provided for in the agreement, and a $5,000 payment from Liggett if
the Company or Liggett fail to consummate a merger or similar transaction with
another non-settling tobacco company defendant within three years of the date of
the settlement. The Company and Liggett have the right to terminate the CASTANO
settlement under certain circumstances. On May 11, 1996, the CASTANO Plaintiffs
Legal
-28-
30
Committee filed a motion with the United States District Court for the Eastern
District of Louisiana seeking preliminary approval of the CASTANO settlement. On
May 23, 1996, the Court of Appeals for the Fifth Circuit reversed the February
17, 1995 order of the District Court certifying the CASTANO suit as a nationwide
class action and instructed the District Court to dismiss the class complaint.
On September 6, 1996, the CASTANO plaintiffs withdrew the motion for approval of
the CASTANO settlement.
On March 14, 1996, the Company, the CASTANO Plaintiffs Legal Committee
and the CASTANO plaintiffs entered into a letter agreement. According to the
terms of the letter agreement, for the period ending nine months from the date
of Final Approval (if granted) of the CASTANO settlement or, if earlier, the
completion by the Company or Liggett of a combination with any defendant in
CASTANO, except Philip Morris, the CASTANO plaintiffs and their counsel agree
not to enter into any more favorable settlement agreement with any CASTANO
defendant which would reduce the terms of the CASTANO settlement agreement. If
the CASTANO plaintiffs or their counsel enter into any such settlement during
this period, they shall pay the Company $250,000 within thirty days of the more
favorable agreement and offer the Company and Liggett the option to enter into a
settlement on terms at least as favorable as those included in such other
settlement. The letter agreement further provides that during the same time
period, and if the CASTANO settlement agreement has not been earlier terminated
by the Company in accordance with its terms, the Company and its affiliates will
not enter into any business transaction with any third party which would cause
the termination of the CASTANO settlement agreement. If the Company or its
affiliates enter into any such transaction, then the CASTANO plaintiffs will be
entitled to receive $250,000 within thirty days from the transacting party.
Under the Attorneys General settlement, the five states would share an
initial payment by Liggett of $5,000 ($1,000 of which was paid on March 22,
1996, with the balance payable over nine years and indexed and adjusted for
inflation). In addition, Liggett will be required to pay the states a percentage
of Liggett's pretax income (income before income taxes) each year from the
second through the twenty-fifth year. This annual percentage is 2-1/2% of
Liggett's pretax income, subject to increase to 7-1/2% depending on the number
of additional states joining the settlement. No additional states have joined
this settlement to date. All of Liggett's payments are subject to certain
reductions provided for in the agreement. Liggett has also agreed to pay to the
states $5,000 if the Company or Liggett fails to consummate a merger or other
similar transaction with another defendant in the lawsuits within three years of
the date of the settlement.
RECENT SETTLEMENTS. On March 20, 1997, Liggett, together with the
Company, entered into a comprehensive settlement of tobacco litigation through
parallel agreements with the Attorneys General of 17 states and with a
nationwide class of individuals and entities that allege smoking-related claims.
Thereafter, on April 14, 1997, the State of California settled, on the same
terms, the action which it contemplates commencing against the industry and on
May 6, 1997, the State of Alaska settled, with the Company, the action which it
recently commenced against the industry. The 24 Attorneys General settlements
cover all smoking-related claims, including both addiction-based and tobacco
injury claims against Liggett and the Company, and upon court approval, the
nationwide class.
The settlements with the Attorneys General, which do not require court
approval, include the states of Alaska, Arizona, California, Connecticut,
Hawaii, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Minnesota, New
Jersey, New York, Oklahoma, Texas, Utah, Washington and Wisconsin. The Company's
and Liggett's previous settlements on March 15, 1996 with the Attorneys General
of Florida, Louisiana, Massachusetts, Mississippi and West Virginia remain in
full force and effect. Both the Company and Liggett will endeavor to resolve
those matters on substantially the same terms and conditions as the prior
settlements; however, there can be no assurance that any such settlements will
be completed.
The settlement with the nationwide class covers all smoking-related
claims. On March 20, 1997, Liggett, the Company and plaintiffs filed the
mandatory class settlement agreement in an action entitled FLETCHER, ET AL. V
BROOKE GROUP LTD., ET AL., Circuit Court of Mobile County, Alabama, where the
court granted preliminary approval and preliminary certification of the class.
Class members will be notified of the settlement and will have an opportunity to
appear at a later court hearing. Effectiveness of the mandatory settlement is
conditioned on final court approval of the settlement after a fairness hearing.
There can be no assurance as to whether or when court approval will be obtained.
There are no opt out
-29-
31
provisions in this settlement, except for Medicaid claims by states that are not
party to the Attorneys General settlements.
Pursuant to the settlements, the Company and Liggett have agreed to
cooperate fully with the Attorneys General and the nationwide class in their
lawsuits against the tobacco industry. The Company and Liggett have agreed to
provide to these parties all relevant tobacco documents in their possession,
other than those subject to claims of joint defense privilege, and to waive,
subject to court order, certain attorney-client privileges and work product
protections regarding Liggett's smoking-related documents to the extent Liggett
and the Company can so waive these privileges and protections. The Attorneys
General and the nationwide class have agreed to keep Liggett's documents under
protective order and, subject to final court approval, to limit their use to
those actions brought by parties to the settlement agreements. Those documents
that may be subject to a joint defense privilege with other tobacco companies
will not be produced to the Attorneys General or the nationwide class, but will
be, pursuant to court order, submitted to the appropriate court and placed under
seal for possible in camera review. Additionally, under similar protective
conditions, the Company and Liggett have agreed to offer their employees for
witness interviews and testimony at deposition and trial. Pursuant to both
settlement agreements, Liggett has also agreed to place an additional warning on
its cigarette packaging stating that "smoking is addictive" and to issue a
public statement, as requested by the Attorneys General.
Under the terms of the new settlement agreements, Liggett will pay on
an annual basis 25% of its pretax income for the next 25 years into a settlement
fund, commencing with the first full fiscal year starting after the date of the
agreements. Monies collected in the settlement fund will be overseen by a
court-appointed committee and utilized to compensate state health care programs
and settlement class members and to provide counter-market advertising. Liggett
has also agreed to phase in compliance with certain proposed FDA regulations
regarding smoking by children and adolescents, including a prohibition on the
use of cartoon characters in tobacco advertising and limitations on the use of
promotional materials and distribution of sample packages where minors are
present.
Under both settlement agreements, any other tobacco company defendant,
except Philip Morris, merging or combining with Liggett or the Company, prior to
the fourth anniversary of the settlement agreements, would receive certain
settlement benefits, including limitations on potential liability and not having
to post a bond to appeal any future adverse judgment. In addition, within 120
days following such a combination, Liggett would be required to pay the
settlement fund $25 million. Both the Attorneys General and the nationwide class
have also agreed not to seek an injunction preventing a defendant tobacco
company combining with Liggett or the Company from spinning off any of its
affiliates which are not engaged in the domestic tobacco business.
The Company and Liggett are also entitled to certain "most favored
nation" benefits not available to the other defendant tobacco companies. In
addition, in the event of a "global" tobacco settlement enacted through Federal
legislation or otherwise, the Attorneys General and tobacco plaintiffs have
agreed to use their "best efforts" to ensure that the Company and Liggett's
liability under such a plan should be no more onerous than under these new
settlements.
On March 20, 1997, RJR, Philip Morris, B & W and Lorillard obtained a
temporary restraining order from a North Carolina state court preventing, the
Company and Liggett and their agents, employees, directors, officers and lawyers
from turning over documents allegedly subject to the joint defense privilege in
connection with the settlements. On March 24, 1997, the United States District
Court for the Eastern District of Texas and state courts in Mississippi and
Illinois each issued orders enjoining these four companies from interfering with
Liggett's filing with the courts, under seal, those documents.
At December 31, 1995, the Company had accrued approximately $4,000 for
the present value of the fixed payments under the initial Attorneys General
settlement and no additional amounts have been accrued with respect to the
recent settlements discussed above. The Company cannot quantify the future costs
of the settlements at this time as the amount Liggett must pay is based, in
part, on future operating results. Possible future payments based on a
percentage of pretax income, and other contingent payments based on the
occurrence of a business combination, will be expensed when considered probable.
See the discussions
-30-
32
of the tobacco litigation settlements appearing in Note 10 to the Company's
Consolidated Financial Statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996.
REVENUES. Total revenues were $80,005 for the three months ended March
31, 1997 compared to $90,516 for the three months ended March 31, 1996. This
11.6% decrease in revenues was primarily due to a $12,187 or 15.5% decrease in
revenues at Liggett reflecting a 21.6% decrease in Liggett's unit sales volume,
partially offset by an increase of $3,311 over the same period in 1996 in
tobacco revenues at Liggett-Ducat. The decline in overall units sales volume of
21.6% at Liggett was comprised of declines within the premium segment of 13.5%
and discount segment (which includes generic, control label and branded discount
products) of 22.7%. The decline in premium and discount unit sales volume was
due to certain competitors continuing leveraging rebate programs tied to their
products and increased promotional activity by certain other manufacturers. The
decline in the discount segment is consistent with industry trends.
GROSS PROFIT. Gross profit was $38,160 for the three months ended March
31, 1997 compared to $43,468 for the three months ended March 31, 1996, a
decrease of $5,308 when compared to the same period last year, due primarily to
the decline in unit sales volume at Liggett discussed above. Overall, the
Company's gross profit as a percentage of revenues decreased 0.3% when compared
to the same period in the prior year. Liggett's gross profit as a percentage of
revenues (excluding federal excise taxes) for the period decreased to 72.9%
compared to 73.7% in the same period in the prior year. This decrease is the
result of increased tobacco costs due to reduced worldwide supply of tobacco and
a reduction in the average discount available to Liggett from leaf tobacco
dealers on tobacco purchased under prior years' purchase commitments, partially
offset by the March 1997 list price increase discussed above. See "Recent
Developments in the Cigarette Industry".
EXPENSES. Selling, general and administrative expenses were $37,322 for
the three months ended March 31, 1997 compared to $44,892 for the same period
last year. The decrease of $7,570 is due primarily to lower advertising,
marketing and administrative expenses at Liggett partially offset by
restructuring charges of $1,761 and higher legal expenses at Liggett.
OTHER INCOME (EXPENSE). Interest expense was $15,467 for the three
months ended March 31, 1997 compared to $14,777 for the same period last year,
an increase of $690 primarily due to the issuance of additional debt of $7,397
at BGLS in March 1996 and higher average outstanding balances on Liggett's
revolving credit facility in 1997.
Equity in earnings of affiliate was a loss of $8,557 for the three
months ended March 31, 1997 compared to a loss of $1,577 for the three months
ended March 31, 1996 and relates primarily to New Valley's net loss of $10,341
in 1997 compared to its net loss of $4,884 in 1996.
Interest expense and loss in equity of affiliate were offset by the gain
on sale of assets, which includes the sale of the BML shares and surplus realty
at Liggett, and proceeds from a legal settlement. See Notes 3, 10 and 11 to the
Company's Consolidated Financial Statements.
CAPITAL RESOURCES AND LIQUIDITY
Net cash and cash equivalents increased $246 and $2,007 for the three
months ended March 31, 1997 and 1996, respectively. Net cash used in operations
for the three months ended March 31, 1997 was $26,619 compared to net cash used
in operations of $11,568 for the comparable period of 1996, due to an increase
in receivables of $33,500 resulting from the sale of the BML shares to New
Valley, a decrease in accounts payable of $8,300 and a decrease in accrued
liabilities of approximately $24,000. These items were offset by a decrease in
trade receivables at Liggett due to declining sales volume, equity in loss of
affiliate of approximately $8,500 and the impact of the deferred gain on the
sale of the BML shares of approximately $23,000.
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33
Cash provided by investing activities of $20,599 for the period ended
March 31, 1997 includes principally cash of $21,500 received in the sale of the
BML shares to New Valley and cash of $2,049 received in the sale of certain of
Liggett's surplus realty to Blue Devil Ventures. Cash received was offset by
capital expenditures of $1,307 at Liggett and BOL and the impact of the sale of
BML to New Valley in the consolidated financial statements. Cash used in
investing activities of $582 for the period ended March 31, 1996 includes
capital expenditures of $5,500 and $1,350 for real estate development at BOL and
for equipment modernization at Liggett, respectively. Capital expenditures for
the period ended March 31, 1996 were offset by dividends from New Valley to NV
Holdings of $6,183 ($10.00 per share) on the Class A Preferred Shares.
Cash provided by financing activities was $6,266 for the three months
ended March 31, 1997 compared to cash provided of $14,157 for the same period in
1996. Proceeds from financing activities include proceeds at BOL from credit
lines and net borrowings under Liggett's revolving credit facility of $12,067.
These proceeds were offset by repayments on debt including principally the
required repurchase of $7,500 face amount of Liggett bonds on February 1, 1997
at a net gain of $2,963. Distributions on common stock include distributions
declared in the fourth quarter 1996 which were paid in January 1997 and
distributions declared and paid in March for the first quarter 1997. Proceeds
from debt in the same period in 1996 includes the private placement of BGLS'
Series A Notes (later exchanged for Series B Notes) for net cash proceeds of
$6,065, borrowings by BOL for real estate development of $5,282 and borrowings
of $11,015 by Liggett under its revolving credit facility. These transactions
were primarily offset by the redemption for approximately $6,300 of BGLS'
16.125% Senior Subordinated Reset Notes (the "Reset Notes"), including premium
and accrued interest thereon, and distributions to the Company's shareholders
of $1,369.
LIGGETT. Liggett had a net capital deficiency of $179,782 as of March
31, 1997, is highly leveraged and has substantial near-term service
requirements. Due to the many risks and uncertainties associated with the
cigarette industry and the impact of recent tobacco litigation settlements,
there can be no assurance that Liggett will be able to meet its future earnings
goals. Consequently, Liggett could be in violation of certain debt covenants,
and if its lenders were to exercise acceleration rights under the Revolving
Credit Facility (the "Facility") or the Senior Secured Notes (the "Liggett
Notes") indentures or refuse to lend under the Facility, Liggett would not be
able to satisfy such demands or its working capital requirements.
On March 8, 1994, Liggett entered into the Facility under which it can
borrow up to $40,000 (depending on the amount of eligible inventory and
receivables as determined by the lenders) from a syndicate of commercial
lenders. At March 31, 1997, $36,339 was outstanding and $461 was available under
the Facility based on eligible collateral at December 31, 1996. The Facility is
collateralized by all inventories and receivables of Liggett. Borrowings under
the Facility, whose interest is calculated at a rate equal to 1.5% above
Philadelphia National Bank's (the indirect parent of Congress Financial
Corporation, the lead lender) prime rate, bear a rate of 9.75% at March 31,
1997. On April 1, 1997, Philadelphia National Bank raised its prime rate to
8.5%, thereby increasing Liggett's interest rate to 10.0%. The Facility contains
certain financial covenants similar to those contained in the Liggett Notes'
Indenture, including restrictions on Liggett's ability to declare or pay cash
dividends, incur additional debt, grant liens and enter into any new agreements
with affiliates, among others. In addition, the Facility currently imposes
requirements with respect to Liggett's adjusted net worth (not to fall below a
deficit of $180,000 as computed in accordance with the agreement) and working
capital (not to fall below a deficit of $12,000 as computed in accordance with
the agreement). The Facility is classified as short-term at March 31, 1997,
since it is due on March 8, 1998, unless extended by the lender.
During the first quarter of 1997, Liggett violated the working capital
covenant contained in the Facility as a result of the 1998 mandatory redemption
payment on the Senior Secured Notes becoming due within one year. On March 19,
1997, the lead lender agreed to waive this covenant default, and the Facility
was amended as follows: (i) the working capital definition was changed to
exclude the Senior Secured Notes; (ii) the maximum permitted working capital
deficit, as defined, was reduced to $12,000; (iii) the maximum permitted
adjusted net worth deficit, as defined, was increased to $180,000; and (iv) the
permitted advance rates under the Facility for eligible inventory were reduced
by five percent.
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Further, the Liggett Notes require a mandatory principal redemption of
$37,500 on February 1, 1998 and a payment at maturity on February 1, 1999 of
$107,400. The Notes due on February 1998 ($37,500) are classified as a
short-term debt at March 31, 1997. In February 1997, Liggett purchased $7,500 of
Series B Notes using revolver availability and credited such Notes against the
1997 mandatory redemption requirement. Liggett recorded a net gain of $2,963 for
this transaction in the first quarter, 1997. Current maturities of both the
Liggett Notes and the Facility of approximately $74,000 contribute substantially
to the working capital deficit of $81,170 at March 31, 1997.
While Liggett management currently intends to seek to refinance and/or
restructure with Liggett's note holders the redemption and maturity requirements
on the Liggett Notes and to extend the Facility, there are no refinancing or
restructuring arrangements for the notes or commitments to extend the Facility
at this time, and no assurances can be given in this regard. Based on Liggett's
net loss for 1996 and projected 1997 operating results, Liggett does not
anticipate it will be able to generate sufficient cash from operations to make
such payments. If Liggett is unable to refinance or restructure such
obligations, renegotiate the payment terms of the Liggett Notes, extend the
Facility, or otherwise make such payments, substantially all of its long-term
debt and the Facility would be in default and debt holders could accelerate the
maturity of such debt. In such event, Liggett may be forced to seek protection
from creditors under applicable laws. These matters raise substantial doubt
about Liggett meeting its liquidity needs and Liggett's ability to continue as a
going concern.
Liggett (and, in certain cases, the Company) and other United States
cigarette manufacturers have been named as defendants in a number of direct and
third-party actions (and purported class actions) predicated on the theory that
they should be liable for damages from cancer and other adverse health effects
alleged to have been caused by cigarette smoking or by exposure to so-called
secondary smoke (environmental tobacco smoke) from cigarettes. As new cases are
commenced, the costs associated with defending such cases and the risk attendant
to the inherent unpredictability of litigation continue. Liggett had been
receiving certain financial and other assistance from others in the industry in
defraying the costs and other burdens incurred in the defense of smoking and
health litigation and related proceedings, but these benefits have recently
ended. Certain joint defense arrangements, and the financial benefits incident
thereto, have also ended. The future financial impact on the Company of the
termination of this assistance and the effects of the tobacco litigation
settlements discussed above is not quantifiable at this time.
The Company believes, and has been so advised by counsel handling the
respective cases, that the Company and Liggett have a number of valid defenses
to the claim or claims asserted against them. Litigation is subject to many
uncertainties, and it is possible that some of these actions could be decided
unfavorably. An unfavorable outcome of a pending smoking and health case could
encourage the commencement of additional similar litigation. Recently, there
have been a number of adverse regulatory, political and other developments
concerning cigarette smoking and the tobacco industry, including the
commencement of the purported class actions referred to above. These
developments generally receive widespread media attention. Neither the Company
nor Liggett is able to evaluate the effect of these developing matters on
pending litigation or the possible commencement of additional litigation.
The Company is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of the cases pending
against the Company and Liggett. It is possible that the Company's consolidated
financial position, results of operations or cash flows could be materially
affected by an ultimate unfavorable outcome in any such pending litigation.
BGLS. At March 31, 1997, BGLS' long-term debt was approximately
$233,000.
BOL. On January 31, 1997, BOL sold its 99.1% interest in BML to New
Valley for $55,000. The purchase price paid was $21,500 in cash and a 9%
promissory note of $33,500, payable $21,500 on June 30, 1997 and $12,000 on
December 31, 1997. On April 28, 1997, New Valley paid $3,500 of the promissory
note due to BOL on June 30, 1997.
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35
In October 1995, Liggett-Ducat entered into a loan agreement with
Vneshtorgbank, Moscow, Russia, to borrow up to $20,400 to fund real estate
development. Interest on the note is based on the London Interbank Offered Rate
plus 10%. The Company has guaranteed the payment of the note. In December 1996,
the loan was assigned by Liggett-Ducat to BML. On January 31, 1997, New Valley
purchased BOL's 99.1% interest in BML and indemnified the Company and its
subsidiaries with respect to the loan.
Liggett-Ducat plans to build a new cigarette factory on the outskirts
of Moscow. The new factory, which will utilize Western cigarette making
technology and have a capacity of 24 billion units per year, will produce
American and international blend cigarettes, as well as traditional Russian
cigarettes. Preliminary construction has begun, and management is actively
pursuing various potential financing alternatives that would permit the new
factory to be operational by the end of 1998, although no assurance can be given
that such financing can be obtained on satisfactory terms.
THE COMPANY. As a result of the 1995 debt exchange offer, the
redemption of the Reset Notes in 1996, the sale of the BML shares to New Valley
in January 1997 and the redemption of $7,500 of the Liggett Notes on February 1,
1997, the Company decreased its scheduled near-term debt maturities to
approximately $74,000 due in the year 1998; at March 31, 1997, substantially all
of this debt relates to Liggett. In addition, Liggett has a payment due at
maturity of the Liggett Notes on February 1, 1999 of $107,400. The Company
believes that it will continue to meet its liquidity requirements through 1997,
although the BGLS Series B Notes Indenture limits the amount of restricted
payments BGLS is permitted to make to the Company during the calendar year. At
March 31, 1997, the remaining amount available through December 31, 1997 in the
Restricted Payment Basket related to BGLS' payment of dividends to the Company
(as defined by BGLS' Series B Notes Indenture) is $7,801. In March 1997, the
Company provided for its quarterly dividend of $1,395 with proceeds from the
legal settlement received in January 1997. Company expenditures (exclusive of
Liggett and Liggett-Ducat) in 1997 for current operations include debt service
estimated at $36,800, dividends on the Company's shares (currently at an annual
rate of approximately $5,500) and corporate expense. The Company anticipates
funding 1997 current operations with the proceeds from the sale of BML,
management fees and other payments from subsidiaries of approximately $5,000 and
the proceeds from the legal settlement of $4,100. The Company expects to finance
its long-term growth, working capital requirements, capital expenditures and
debt service requirements through a combination of cash provided from
operations, proceeds from the sale of certain assets, additional public or
private debt and/or equity financing and distributions from New Valley. New
Valley may acquire or seek to acquire additional operating businesses through
merger, purchase of assets, stock acquisition or other means, or to make other
investments, which may limit its ability to make such distributions.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company and its representatives may from time to time make oral or
written "forward-looking statements" within the meaning of the Private
Securities Reform Act of 1995 (the "Reform Act"), including any statements that
may be contained in the foregoing discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations", in this report and
in other filings with the Securities and Exchange Commission and in its reports
to shareholders, which reflect management's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties and, in connection with the "safe-harbor"
provisions of the Reform Act, the Company is hereby identifying important
factors that could cause actual results to differ materially from those
contained in any forward-looking statement made by or on behalf of the Company.
Liggett continues to be subject to risk factors endemic to the domestic tobacco
industry including, without limitation, health concerns relating to the use of
tobacco products and exposure to ETS, legislation, including tax increases,
governmental regulation, privately imposed smoking restrictions, governmental
and grand jury investigations and litigation. Each of the Company's operating
subsidiaries, namely Liggett and Liggett-Ducat, are subject to intense
competition, changes in consumer preferences, the effects of changing prices for
its raw materials and local economic conditions. Furthermore, the performance of
Liggett-Ducat's cigarette operations in Russia are affected by uncertainties in
Russia which include, among others, political or diplomatic developments,
regional tensions, currency repatriation restrictions, foreign exchange
fluctuations, inflation, and an undeveloped system of commercial laws and
legislative reform relating to foreign ownership in Russia. In addition, the
Company has a high degree of leverage and substantial near-term debt service
requirements, as well as a net worth deficiency and recent losses from
continuing operations. The Indenture
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36
for BGLS' Series B Notes provides for, among other things, the restriction of
certain affiliated transactions between the Company and its affiliates, as well
as for certain restrictions on the use of future distributions received from New
Valley. Due to such uncertainties and risks, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date on which such statements are made. The Company does not undertake to update
any forward-looking statement that may be made from time to time by or on behalf
of the Company.
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37
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to information entitled "Contingencies" in Note 6
to the Consolidated Financial Statements of Brooke Group Ltd. and
BGLS Inc. (collectively, the "Companies") included elsewhere in this
report on Form 10-Q.
Item 2. CHANGES IN SECURITIES
During the first quarter of 1997, Brooke Group Ltd. granted stock
options to purchase 422,000 shares of its common stock at $5.00 per
share to certain employees. These transactions did not involve public
offerings of the company's securities and were exempt from the
registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereunder. See Note 7 to the Consolidated
Financial Statements of the Companies included elsewhere in this
report on Form 10-Q.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Reference is made to information entitled "Revolving Credit Facility"
in Note 7 to the Consolidated Financial Statements of the Companies
included elsewhere in this report on Form 10-Q.
As of March 31, 1997, New Valley Corporation, the Companies'
affiliate, had the following respective accrued and unpaid dividend
arrearages on its 1,072,462 outstanding shares of $15.00 Class A
Increasing Rate Cumulative Senior Preferred Shares ($100 Liquidation
Value), $.01 par value per share (the "Class A Shares") and 2,790,776
outstanding shares of $3.00 Class B Cumulative Convertible Preferred
Shares ($25 Liquidation Value), $.10 par value per share (the "Class
B Shares"): (1) $127.8 million or $119.26 per Class A Share; and
(2) $121.5 million or $43.54 per Class B Share.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.43 Addendum to Initial States Settlement Agreement.
10.44 Settlement Agreement, dated April 14, 1997, by and
among the State of California, Brooke Group Ltd. and
Liggett Group Inc.
10.45 Settlement Agreement, dated May 6, 1997, by and
among the State of Alaska, Brooke Group Ltd. and
Liggett Group Inc.
27.1 Brooke Group Ltd.'s Financial Data Schedule
(for SEC use only)
27.2 BGLS Inc.'s Financial Data Schedule
(for SEC use only)
99.1 Liggett Group Inc.'s Interim Consolidated Financial
Statements for the quarterly period ended
March 31, 1997.
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38
99.2 New Valley Corporation's Interim Consolidated
Financial Statements for the quarterly period
ended March 31, 1997.
` 99.3 Brooke (Overseas) Ltd.'s Interim Consolidated
Financial Statements for the quarterly period ended
March 31, 1997.
99.4 New Valley Holdings, Inc.'s Interim Consolidated
Financial Statements for the quarterly period
ended March 31, 1997.
(b) REPORTS ON FORM 8-K
During the first quarter of 1997, the following current
reports on Form 8-K were filed:
Registrant(s) Date of Report Items Financial Statements
------------- -------------- ----- --------------------
1. Brooke Group Ltd. January 31, 1997 2, 7 Unaudited pro-forma
BGLS Inc. financial statements for
the nine months ended
September 30, 1996
2. Brooke Group Ltd. February 14, 1997 7 None
3. Brooke Group Ltd. February 25, 1997 7 None
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39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
BROOKE GROUP LTD.
(REGISTRANT)
By: /s/ Joselynn D. Van Siclen
--------------------------
Joselynn D. Van Siclen
Vice President and Chief
Financial Officer
Date: May 15, 1997
BGLS INC.
(REGISTRANT)
By: /s/ Joselynn D. Van Siclen
---------------------------
Joselynn D. Van Siclen
Vice President and Chief
Financial Officer
Date: May 15, 1997
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Exhibit 10.43
ADDENDUM TO INITIAL STATES SETTLEMENT AGREEMENT
-----------------------------------------------
This ADDENDUM TO INITIAL STATES SETTLEMENT AGREEMENT is entered into
this _________ day of March, 1997 by and among the State of West Virginia, State
of Florida, State of Mississippi, Commonwealth of Massachusetts, and State of
Louisiana (collectively, "Initial States") and Brooke Group Ltd., a Delaware
corporation ("Brooke Group"), Liggett & Myers, Inc., a Delaware corporation
("Myers"), and Liggett Group, Inc., a Delaware corporation (which with Myers, is
hereinafter referred to as "Liggett").
WHEREAS,
A. On March 15, 1996, the State of West Virginia, the State of Florida,
the State of Mississippi, the Commonwealth of Massachusetts, and the State of
Louisiana, and Liggett and Brooke Group entered into a settlement (the "Initial
Settlement") of the Actions brought by the foregoing States, pursuant to which
Liggett agreed to make certain payments, comply with certain proposed
regulations restricting the marketing and sale of cigarettes to minors and to
offer certain cooperation in connection with the prosecution of such Actions
against other Defendants, all in accordance with the terms of the Initial
Settlement, a copy of which is annexed hereto as Appendix A.
B. On March 20, 1997, eighteen States and Liggett and Brooke Group
entered into a settlement (the "New Settlement") of the Actions brought by such
eighteen states, pursuant to which Liggett agreed, among other things, to extend
additional cooperation in connection with the prosecution of Attorneys General
Actions against other Defendants than Liggett agreed to in the Initial
Settlement and such other States agreed to exercise best efforts to ensure that
the financial terms of any Global Settlement, legislative or otherwise, are no
more onerous on, or less favorable to Brooke Group and Liggett than those set
forth in the New Settlement, a copy of which is annexed hereto as Appendix B.
C. The Initial Settling States and Liggett and Brooke Group wish to
expand upon the Initial Settlement, through this Addendum to Settlement
Agreement to provide for additional cooperation by the Settling Defendants with
the Initial Settling States, and to provide Settling Defendants with assurances
that the Initial Settling States will seek to ensure that any Global Settlement
provide for financial terms for Liggett that reflect appropriate recognition of
Liggett's cooperative efforts.
NOW THEREFORE, in consideration of the foregoing and of the promises
set forth in this Addendum to Settlement Agreement, the undersigned Attorneys
General, on their own behalf and on behalf of their respective States, and
Liggett and Brooke Group hereby stipulate and agree that the Initial Settlement
shall be changed and amended as follows:
1
2
1. With respect to each of the Initial Settling States defined in the
Agreement of March 15, 1996 and March 1997 Brooke Group and Liggett, upon
execution of this Amendment to the March 15, 1996 Agreement, shall cooperate in
and facilitate reasonable third party discovery from Brooke Group and Liggett in
connection with any Attorney Generals Action, provided that such information
disclosed or provided by Brooke Group and/or Liggett is not disclosed to any
third parties except as required by law, including non-settling Attorneys
General.
2. The March 15, 1996 Agreement shall be deemed amended to expressly
include the following provisions from the March 1997 Attorneys General
Agreement.
ss.4.1
ss.4.2
ss.4.3.1, ss.4.3.2, ss.4.3.3, ss.4.3.4
ss.4.5 to the extent this provision increases the required
compliance with FDA Rules.
ss.4.8
ss.5
3. The following sections shall be deleted from the March 15, 1996
Agreement or Amended as set forth below:
ss.4.1 is deleted
ss.4.4 is replaced by ss.4.7 of the March 1997 agreement.
ss.4.5 is amended by supplementing it with ss.4.8 of the
March 1997 Agreement to the extent the provision of
ss.4.8 of the March 1997 Agreement require greater
compliance with FDA Rules.
4. Section 4 of the March 15, 1996 Agreement shall in all other
respects remain in full force and effect.
5. Section 5.7 is to be deleted from the March 15, 1996 Agreement.
6. Section 8.2 of the March 15, 1996 Agreement shall be amended to
substitute the words "Non-Settling Tobacco Companies" for the current word
"Defendants".
7. Section 16.12 of the March 15, 1996 Agreement will be retained for
the continuing jurisdiction of the court over documents produced under this
Agreement as amended.
2
3
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
day and date first written above.
STATE OF MISSISSIPPI STATE OF LOUISIANA
By: /s/ Mike Moore By: /s/ Richard P. Leyoub
-------------- ---------------------
Attorney General Attorney General
STATE OF WEST VIRGINIA BROOKE GROUP LTD.
By: /s/ Darrell V. McGraw By: /s/ Bennett S. LeBow
--------------------- --------------------
Attorney General
STATE OF FLORIDA LIGGETT GROUP INC.
By: /s/ Robert Butterworth By: /s/ Bennett S. LeBow
---------------------- --------------------
Attorney General
3
1
Exhibit 10.44
STATE OF CALIFORNIA SETTLEMENT AGREEMENT
----------------------------------------
This SETTLEMENT AGREEMENT is entered into this 14th day of April, 1997
by and among the State of California and Brooke Group Ltd., a Delaware
corporation ("Brooke Group"), Liggett & Myers Inc., a Delaware corporation
("Myers"), and Liggett Group, Inc., a Delaware corporation (which, with Myers,
is hereinafter referred to as "Liggett").
RECITALS
--------
WHEREAS,
A. The State of California, by and through its Attorney General (the
"Attorney General"), contemplates bringing a civil action (a "Contemplated
Action", as defined in Section 1 hereof) against, among others, the American
Tobacco Company, Inc., BAT Industries, Plc, British American Tobacco Company,
R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation, Philip
Morris, Inc., Liggett & Myers, Inc., Lorillard Tobacco Company, Inc., and United
States Tobacco Company and their various parent and related companies
("Defendants"), asserting claims for, among other things, expenses allegedly
arising from
2
tobacco-related matters and injunctive relief concerning sales of cigarettes to
minors.
B. Because of the importance of the agreements and undertakings by
Liggett and Brooke Group herein to the goals of the State of California,
including the prosecution of the Contemplated Action against other Defendants,
the State of California has agreed to extend financial settlement terms to
Liggett and Brooke Group which will not be offered to any other Defendant, all
as set forth in this Settlement Agreement.
C. On March 20, 1997, seventeen States, by and through their Attorneys
General, and Liggett and Brooke Group entered into a settlement (the "Attorneys
General Settlement") of the actions brought by such States, pursuant to which
Liggett agreed to make certain payments, comply with certain proposed
regulations restricting the marketing and sale of cigarettes to minors and to
offer certain significant cooperation in connection with the prosecution of
their respective actions against the other Defendants; all in accordance with
the terms of the Attorneys General Settlement, a copy of which is annexed hereto
as Appendix A.
D. The State of California and Liggett and Brooke Group wish to provide
in this Settlement Agreement for the State of California to become a Subsequent
Settling State under the
-2-
3
Attorneys General Settlement, all in accordance with the terms of this
Settlement Agreement.
E. The State of California acknowledges and agrees that this Settlement
Agreement, including the cooperation provisions thereof, are important to the
prosecution of its Contemplated Action against non-settling Defendants.
F. The State of California and Liggett and Brooke Group recognize and
support the public interest in preventing smoking by, and preventing the
promotion of smoking to, children and adolescents.
G. Liggett and Brooke Group have denied, and continue to deny any
wrongdoing or any legal liability of any kind in all of the above-mentioned
actions.
H. The State of California recognizes and acknowledges that the
cooperation being provided for in this Settlement Agreement would be valuable to
the prosecution of claims against the tobacco industry. Further, the State of
California acknowledges that the change in warning labels provided for in this
Settlement Agreement is a step towards properly informing consumers more fully
of the truth about
-3-
4
cigarettes and the consequences of smoking, as is the statement by Liggett also
provided for herein.
NOW, THEREFORE, in consideration of the foregoing and of the promises
and covenants set forth in this Agreement, the undersigned Attorney General, on
behalf of the State of California, and Liggett and Brooke Group hereby stipulate
and agree that any and all smoking-related claims, including any Contemplated
Action, of the State of California shall be settled as against Liggett and
Brooke Group all on the terms contained herein, as follows:
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I. DEFINITIONS.
Capitalized terms used herein shall have the meanings assigned to them
in Section 1 of the Attorneys General Settlement, except as set forth below or
defined elsewhere in this Agreement:
"Agreement" means this Settlement Agreement.
"Attorneys General" means those State Attorneys General or other
parties who have brought or may bring Attorney General Actions.
"Attorney General Actions" means those actions settled pursuant to the
Attorneys General Settlement or any similar action commenced by or on behalf of
a State against the Defendants, including Contemplated Actions.
"Attorneys General Settlement" means the settlement agreement entered
into on March 20, 1997 by seventeen Settling States and Settling Defendants, a
copy of which is annexed hereto as Exhibit A.
"Contemplated Action" means an action which may be commenced by or on
behalf of the State of California against Non-settling Tobacco Companies and/or
other defendants seeking relief similar to that sought in those actions listed
in Appendix A to
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the Attorneys General Settlement, and shall be deemed to be an
Attorney General Action under the Attorneys General Settlement.
"Potential Defendants" means Defendants, as defined in the Attorneys
General Settlement.
"Parties" means the State of California and Brooke Group and Liggett.
"Protective Order" or "Stipulation Regarding Liggett Documents" means,
with respect to privileged documents produced by a Settling Defendant in or to
the State of California, an order by a California court of competent
jurisdiction: (a) protecting the confidentiality of such documents; (b)
providing that such documents may be used only in an action by the State of
California and, to the extent permitted by law, only under seal; (c) providing
that, to the extent such documents are or may be subject to the attorney/client
privilege or the attorney work product doctrine, such production or use of the
documents does not constitute a waiver of such privilege, doctrine or protection
with respect to any party other than the State of California. The provisions of
the order shall not apply to documents claimed to be privileged but which are
determined by a court not to be
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privileged for reasons other than waiver due to production pursuant to this
Agreement.
"Settling Defendants" means Brooke Group and/or Liggett.
"Settling States" means the States listed in Appendix A to the
Attorneys General Settlement and Subsequent Settling States.
II. SETTLEMENT PURPOSES ONLY.
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This Agreement is for settlement purposes only, and neither the fact
of, or any provision contained in, this Agreement nor any action taken hereunder
shall constitute, be construed as, or be admissible in evidence against the
Settling Defendants as, any admission of the validity of any claim, any argument
or any fact alleged or which could be alleged by the State of California as to
their standing or as to any jurisdictional, constitutional or any other legal or
factual issue in any Contemplated Action by the State of California or alleged
or which could have been alleged in any other action or proceeding of any kind
or of any wrongdoing, fault, violation of law, or liability of any kind on the
part of the Settling Defendants or any admission by them of any claim or
allegation made or which could have been made in any action by the State of
California or in any other action or proceeding of any kind, or as an admission
by the State of California of the validity of any fact or defense asserted
against them in any Contemplated Action or in any other action or proceeding of
any kind.
III. PARTIES.
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Section 3 of the Attorneys General Settlement is incorporated herein by
reference, with the addition of Section 3.3. below.
3.1. Section 3.1 of the Attorneys General Settlement is incorporated
herein by reference.
3.2. Section 3.2 of the Attorneys General Settlement is incorporated
herein by reference.
3.3. The Parties agree that, even though the State of California has
not as of the date of this Settlement Agreement filed a Contemplated Action, the
State of California is a Subsequent Settling State under the Attorneys General
Settlement, the terms and conditions of which are incorporated herein, except as
specifically modified by this Settlement Agreement because of unique
circumstances relating to the State of California.
IV. PUBLIC STATEMENT; COOPERATION; ADVERTISING LIMITATIONS.
Section 4 of the Attorneys General Settlement is incorporated herein by
reference, except as modified below.
A. Promptly after execution of this Settlement Agreement, Liggett
shall, by and through its Director, Bennett S.
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LeBow, issue in the State of California a public statement substantially in the
following form and substance:
I am, and have been for a number of years, a Director of Liggett Group
Inc., a manufacturer of cigarettes. Cigarettes were identified as a cause of
lung cancer and other diseases as early as 1950. I, personally, am not a
scientist. But, like all of you, I am aware of the many reports concerning the
ill-effects of cigarette smoking. We at Liggett know and acknowledge that, as
the Surgeon General and respected medical researchers have found, cigarette
smoking causes health problems, including lung cancer, heart and vascular
disease and emphysema. We at Liggett also know and acknowledge that, as the
Surgeon General, the Food and Drug Administration and respected medical
researchers have found, nicotine is addictive.
Liggett will continue to engage in the legal activity of selling
cigarettes to adults, but will endeavor to ensure that these adult smokers are
aware of the health risks and addictive nature of smoking. As part of our
efforts, we will do the following:
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1. In accordance with a court-approved settlement, Liggett
will set up a fund to compensate equitably those who claim to have been
injured by our products.
2. Liggett will add a prominent warning to each of our
packages of cigarettes and all of our cigarette advertising stating
that "Smoking is Addictive".
3. Liggett supports and will not challenge Food and Drug
Administration regulations concerning the sale and distribution of
nicotine-containing cigarettes and smokeless tobacco products to
children and adolescents. Accordingly, Liggett has agreed to comply
with many of these regulations even before they apply to the tobacco
industry generally.
4. Liggett has instructed its advertising and marketing people
to scrupulously avoid any and all advertising or marketing which would
appeal to children or adolescents. Liggett acknowledges that the
tobacco industry markets to "youth," which means those under 18 years
of age, and not just those 18-24 years of age. Liggett condemns this
practice and will not market to children. Liggett agrees that if it
sees industry advertisements which in its view are aimed at children,
it will bring this to the
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attention of the Attorney General of the State of California.
5. In accordance with our settlement agreements, Liggett
agrees to fully cooperate with the State of California in connection
with contemplated lawsuits against the other tobacco companies. To that
end, Liggett will make available to the State of California all
relevant documents and information, including documents subject to
Liggett's own attorney-client privileges and work product protections,
and will assist the State of California in obtaining prompt court
adjudication of the rest of the industry's joint privilege claims.
B. Section 4.2 of the Attorneys General Settlement is incorporated
herein by reference.
C.1. Upon execution of this Agreement, each Settling Defendant
shall:
(1) cooperate with the Attorney General of the State
of California in that such Settling Defendant will take no
steps to impede or frustrate civil investigations into, or
civil prosecutions of, any of the Potential Defendants, so as
to secure the just,
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speedy and inexpensive determination of all such
smoking-related claims against said non-settling persons and
entities;
(2) cooperate in and facilitate reasonable non-party
discovery from Settling Defendants in connection with a
Contemplated Action;
(3) actively assist the Attorney General of the State
of California in identifying and locating any and all persons
known to such Settling Defendant to have documents or
information that is discoverable in such proceedings, to
actively assist said counsel in interviewing and obtaining
documents and information from all such persons, and to
encourage such person to cooperate with the Attorney General;
and shall actively assist the Attorney General in interpreting
documents relating to Attorney General Actions against
Potential Defendants; and
(4) insofar as such Settling Defendant has or obtains
any material information concerning any fraudulent or illegal
conduct on the part of any parties, including Non-settling
Tobacco Companies,
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their agents, or their co-defendants designed to frustrate or
defeat the claims of the State of California against such
parties, companies, agents or co-defendants, or which have the
effect of unlawfully suppressing evidence relevant to smoking
claims, disclose such information to the appropriate judicial
and regulatory agencies.
4.3.2. Subject to, and promptly after, the entry of a Protective
Order or a Stipulation Regarding Liggett Documents by a California court of
competent jurisdiction, each Settling Defendant shall:
(1) promptly provide all documents and information
that are relevant to the subject matter of a Contemplated
Action or which are likely to lead to admissible evidence in
connection with claims asserted in a Contemplated Action,
subject to the provisions of Section 4.3.2(2) hereof;
(2) waive any and all applicable attorney-client
privileges and work product protections with respect to such
documents and information. Such waiver shall not extend to (a)
documents and information not relevant to
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the subject matter of a Contemplated Action or not likely to
lead to admissible evidence in connection with such an action
or (b) documents subject to a joint defense or other privilege
or protection which Settling Defendants cannot legally waive
unilaterally, except that the waiver by the Settling Defendant
shall apply, to the extent permitted by law, to its own joint
defenses or other privileges. To the extent that a Settling
Defendant has a good faith belief, or one or more Non-settling
Tobacco Companies claims, that documents to be provided
pursuant to Section 4.3.2(1) hereof may be subject to a joint
defense or other privilege (or a claim of such privilege) of
one or more of the Non-settling Tobacco Companies, such
documents shall be deposited under seal for IN CAMERA
inspection by a California court of competent jurisdiction,
together with a statement to such court that such Settling
Defendant has concerns as to whether some or all of such
documents should be protected from discovery, and the Parties
agree to request that such court shall retain jurisdiction to
resolve that issue.
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Liggett will participate in proceedings, including by way of
court appearances or declarations, concerning issues of
whether such documents are discoverable;
(3) offer their employees, and any and all other
individuals over whom they have control, and help locate
former employees, to provide witness interviews of such
employees and to testify, in depositions and at trial; it
being understood and agreed that Liggett will waive and hereby
does waive any and all applicable confidentiality agreements
to the extent such confidentiality agreements would restrict
testimony under this Agreement, if any, to which such
witnesses may be subject; and
(4) demand from its past or current national legal
counsel all documents and information obtained by them in the
course of representation of any Settling Defendant which in
any way relates to the cooperation required in paragraphs
4.3.1(1) - 4.3.2(3) above, which should be provided to the
Settling States as provided under this paragraph.
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4.3.3. Section 4.3.3 of the Attorneys General Settlement is
incorporated herein by reference.
4.3.4. Section 4.3.4 of the Attorneys General Settlement is
incorporated herein by reference.
4.4. Section 4.4 of the Attorneys General Settlement is incorporated
herein by reference.
4.5. Section 4.5 of the Attorneys General Settlement and subparts
4.5.1, 4.5.2, 4.5.3, and 4.5.4 thereof are incorporated herein by reference.
4.6. Section 4.6 of the Attorneys General Settlement is incorporated
herein by reference.
4.7. Section 4.7 of the Attorneys General Settlement is incorporated
herein by reference.
4.8. Section 4.8 of the Attorneys General Settlement is incorporated
herein by reference.
4.9. Section 4.9 of the Attorneys General Settlement is incorporated
herein by reference.
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V. GLOBAL SETTLEMENT.
5.1. Section 5.1 of the Attorneys General Settlement is incorporated
herein by reference.
5.2. Section 5.2 of the Attorneys General Settlement is incorporated
herein by reference.
VI. SETTLEMENT FUND.
6.1. Section 6.1 of the Attorneys General Settlement is incorporated
herein by reference.
6.2. Section 6.2 of the Attorneys General Settlement is incorporated
herein by reference.
6.3. Section 6.3 of the Attorneys General Settlement and subparts 6.3.1
and 6.3.2 thereof are incorporated herein by reference.
6.4. Section 6.4 of the Attorneys General Settlement is incorporated
herein by reference.
6.5. Section 6.5 of the Attorneys General Settlement is incorporated
herein by reference.
6.6. Section 6.6 of the Attorneys General Settlement is incorporated
herein by reference.
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6.7. Section 6.7 of the Attorneys General Settlement is incorporated
herein by reference.
6.8. Section 6.8 of the Attorneys General Settlement is incorporated
herein by reference.
6.9. Section 6.9 of the Attorneys General Settlement is incorporated
herein by reference.
6.10. Section 6.10 of the Attorneys General Settlement is incorporated
herein by reference.
6.11. Section 6.11 of the Attorneys General Settlement is incorporated
herein by reference.
6.12. Section 6.12 of the Attorneys General Settlement is incorporated
herein by reference.
6.13. Section 6.13 of the Attorneys General Settlement is incorporated
herein by reference.
VII. RELEASE.
1
B. Upon the date of the execution of this Agreement, for good and
sufficient consideration as described herein, the State of California shall for
the duration or term of this Agreement (whichever is shorter) be deemed to and
hereby does
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release, dismiss and discharge each and every civil claim, right, and cause of
action (including, without limitation, all claims for damages, restitution,
medical monitoring, claims arising under California Business and Professions
Code ss.ss. 17200 et seq., or any other claim for legal or equitable relief),
known or unknown, asserted or unasserted, direct or indirect, which it had, now
has or may hereafter have against each Settling Defendant (including its past
and present parents, subsidiaries, present affiliates, employees, directors and
shareholders, but only in such capacities, vis-a-vis, each such Settling
Defendant, and downstream distribution entities of Settling Defendant, but only
to the extent that such downstream distribution entities would have cross-claims
against Settling Defendant), which is smoking-related or otherwise arises out
of, or concerns, the acts, facts, transactions, occurrences, representations, or
omissions that would be set forth, alleged, referred to or otherwise embraced in
the complaint of the Contemplated Action, but does not in any fashion release
any Non-settling Tobacco Companies or other Potential Defendants except as
provided for in Seet seq., or any other claim for legal or equitable relief),
known or unknown, asserted or unasserted, direct or indirect, which it had, now
has or may hereafter have against each Settling Defendant (including its past
and present parents, subsidiaries, present affiliates, employees, directors and
shareholders, but only in such capacities, vis-a-vis, each such Settling
Defendant, and downstream distribution entities of Settling Defendant, but only
to the extent that such downstream distribution entities would have cross-claims
against Settling Defendant), which is smoking-related or otherwise arises out
of, or concerns, the acts, facts, transactions, occurrences, representations, or
omissions that would be set forth, alleged, referred to or otherwise embraced in
the complaint of the Contemplated Action, but does not in any fashion release
any Non-settling Tobacco Companies or other Potential Defendants except as
provided for in Section 17 of the Attorneys General Settlement.
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Upon the execution of this Agreement, for good and sufficient
consideration as described herein, each such Settling Defendant shall for the
duration or term of this Agreement (whichever is shorter) be deemed to and
hereby does release, dismiss and discharge each and every claim, right, and
cause of action (including, without limitation, all claims for damages,
restitution, fees, expenses, or any other legal or equitable relief), whether
known or unknown, asserted or unasserted, which they had, now have or may
hereafter have against the State of California, its public officials and
employees in connection with, arising out of or related to the acts, facts,
transactions, occurrences, representations, or omissions set forth, alleged or
referred to or otherwise embraced in the complaints of the Settling States'
Attorney General Actions.
Provided, however, as follows:
1) If this Agreement expires upon completion of its full term, these
releases set forth in this Section 7.1 shall continue and apply in full force
and effect with respect to all released claims which accrued or shall accrue
prior to, through and including the date of such expiration, such that such
claims shall be forever released, but only as to such claims through and
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including such date; if this Agreement terminates for any reason prior to its
full term, these releases shall be of no further force and effect and Settling
Defendants shall be entitled to a credit to the extent otherwise provided in
this Agreement against all claims covered by the release for the full amount
paid by such Settling Defendants hereunder.
2) Except as specifically provided herein, these releases set forth in
this Section 7.1 do not pertain or apply to any other existing or potential
party in any Contemplated Action.
3) These releases set forth in this Section 7.1 do not in any way
release any releasee from claims which may be asserted by a releasor involving
conduct unrelated to the manufacture and/or sale of tobacco products.
4) With respect to the claims of any county, municipality or
subdivision within the State of California that, as of the date of this
agreement, has brought an action against Settling Defendants separate and apart
from the action brought against Settling Defendants by the Settling State
encompassing such county, municipality or subdivision, these releases set forth
in this Section 7.1 do not release the claims of such
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county, municipality or subdivision except for the exclusively State share of
the Medicaid funds claimed in any such action.
7.2. Section 7.2 of the Attorneys General Settlement is incorporated
herein by reference.
7.3. Section 7.3 of the Attorneys General Settlement is incorporated
herein by reference.
7.4. Section 7.4 of the Attorneys General Settlement is incorporated
herein by reference.
7.5. Notwithstanding section 1542 of the California Civil Code, which
provides that:
[a] general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor,
these releases set forth in this Section 7 release all claims to releasee
whether known or unknown, foreseen or unforeseen, that releasor may have against
releasee, and releasor understands and acknowledges the significance and
consequences of waiver of California Civil Code ss. 1542 and hereby assumes full
responsibility for any injuries, damages or losses releasor may incur.
VIII. EXCLUSIVE REMEDY; DISMISSAL OF ACTION;
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JURISDICTION OF COURT.
Section 8 of the Attorneys General Settlement is incorporated herein by
reference, except as modified below. 8.1. Section 8.1 of the Attorneys General
Settlement is incorporated herein by reference.
8.2. If the State of California brings a Contemplated Action, the State
of California shall not name the Settling Defendants as defendants therein,
except only as may be necessary to effectuate Section 11.2 hereof.
8.3. Section 8.3 of the Attorneys General Settlement is incorporated
herein by reference.
IX. TERM.
Section 9 of the Attorneys General Settlement is incorporated herein by
reference, except as modified below.
9.1. Section 9.1 of the Attorneys General Settlement is incorporated
herein by reference.
9.2. Section 9.2 of the Attorneys General Settlement is incorporated
herein by reference.
9.3. Section 9.3 of the Attorneys General Settlement is incorporated
herein by reference.
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9.4. Section 9.4 of the Attorneys General Settlement is incorporated
herein by reference.
9.5. Section 9.5 of the Attorneys General Settlement is incorporated
herein by reference.
9.6. Section 9.6 of the Attorneys General Settlement is incorporated
herein by reference.
9.7. The duration of this Agreement shall be co-extensive with the
duration of the Attorneys General Settlement. The exercise of any right under
the Attorneys General Settlement to terminate the Attorneys General Settlement
with respect to the State of California shall also be a termination of this
Agreement.
X. CONTINUING ENFORCEABILITY.
Section 10 of the Attorneys General Settlement is incorporated herein
by reference.
XI. ENTRY OF GOOD FAITH BAR ORDER ON CONTRIBUTION AND INDEMNITY
CLAIMS.
Section 11 of the Attorneys General Settlement is replaced with the
following provisions.
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A. It is the intent of the parties that the payments to be made by
Liggett with respect to the claims and causes of action settled hereby, be
limited to those payments set forth in this Settlement Agreement, and that
Settling Defendants not be responsible for any payments relating to any
contribution or indemnity claim asserted, or to be asserted, by any non-settling
defendant that may arise from any Contemplated Action by the State of
California. In order to effectuate this intent of the parties, and only in order
to effectuate such intent, the parties agree as follows in this Section 11.
B. As promptly as reasonably practicable after a Contemplated Action
is brought by the State of California, the Parties shall request that the court
in which a Contemplated Action is brought by the State of California enter an
order proclaiming this Settlement Agreement as a good faith settlement under
California Civil Code ss. 877.6, and the State of California shall cooperate
with the Settling Defendants in seeking such an order.
XII. TAX STATUS OF SETTLEMENT FUND.
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12.1. Section 12.1 of the Attorneys General Settlement is incorporated
herein by reference.
12.2. Section 12.2 of the Attorneys General Settlement is incorporated
herein by reference.
12.3. Section 12.3 of the Attorneys General Settlement is incorporated
herein by reference.
XIII. EFFECT OF DEFAULT OF SETTLING DEFENDANT.
Section 13 of the Attorneys General Settlement is replaced with the
following.
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In the event a Settling Defendant fails to make a payment due and owing
under the terms of this Agreement, or is in default of this Agreement in any
other respect, the Attorney General of the State of California shall so notify
the defaulting Settling Defendant, which shall then be given 60 calendar days to
"cure" the default. If the defaulting Settling Defendant does not "cure" the
default in the time provided in this Section 13, the State of California may
apply to a court of competent jurisdiction for relief, in addition to any other
remedies the State may have hereunder.
XIV. REPRESENTATIONS AND WARRANTIES.
14.1. Section 14.1 of the Attorneys General Settlement is incorporated
herein by reference.
14.2. Section 14.2 of the Attorneys General Settlement is incorporated
herein by reference.
XV. ARBITRATION.
Section 15 of the Attorneys General Settlement is incorporated herein
by reference.
XVI. MOST FAVORED NATION.
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16.1. Section 16.1 of the Attorneys General Settlement is incorporated
herein by reference.
16.1.1. Section 16.1.1 of the Attorneys General Settlement is
incorporated herein by reference.
16.1.2. Section 16.1.2 of the Attorneys General Settlement is
incorporated herein by reference.
16.1.3. Section 16.1.3 of the Attorneys General Settlement is
incorporated herein by reference.
16.1.4. Section 16.1.4 of the Attorneys General Settlement is
incorporated herein by reference.
16.1.5. Section 16.1.5 of the Attorneys General Settlement is
incorporated herein by reference.
16.1.6. Section 16.1.6 of the Attorneys General Settlement is
incorporated herein by reference.
16.2. Section 16.2 of the Attorneys General Settlement is incorporated
herein by reference.
16.3. Section 16.3 of the Attorneys General Settlement is incorporated
herein by reference.
XVII. FUTURE AFFILIATE.
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17.1. Section 17.1 of the Attorneys General Settlement is incorporated
herein by reference.
17.2. Section 17.2 of the Attorneys General Settlement and subparts (a)
and (b) thereof are incorporated herein by reference.
17.3. Section 17.3 of the Attorneys General Settlement is incorporated
herein by reference.
17.4. Section 17.4 of the Attorneys General Settlement is incorporated
herein by reference.
17.5. Section 17.5 of the Attorneys General Settlement is incorporated
herein by reference.
17.6. Section 17.6 of the Attorneys General Settlement is incorporated
herein by reference.
17.7. Section 17.7 of the Attorneys General Settlement is incorporated
herein by reference.
17.8. Section 17.8 of the Attorneys General Settlement is incorporated
herein by reference.
17.9. Section 17.9 of the Attorneys General Settlement is incorporated
herein by reference.
XVIII. MISCELLANEOUS
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18.1. Section 18.1 of the Attorneys General Settlement is incorporated
herein by reference.
18.2. Section 18.2 of the Attorneys General Settlement is incorporated
herein by reference.
18.3. Section 18.3 of the Attorneys General Settlement is incorporated
herein by reference.
18.4. Section 18.4 of the Attorneys General Settlement is incorporated
herein by reference.
18.5. Section 18.5 of the Attorneys General Settlement is incorporated
herein by reference.
18.6. Section 18.6 of the Attorneys General Settlement is incorporated
herein by reference.
18.7. Section 18.7 of the Attorneys General Settlement is incorporated
herein by reference.
18.8. Section 18.8 of the Attorneys General Settlement is incorporated
herein by reference.
18.9. Section 18.9 of the Attorneys General Settlement is incorporated
herein by reference.
18.10. Section 18.10 of the Attorneys General Settlement is
incorporated herein by reference.
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18.11. Section 18.11 of the Attorneys General Settlement is
incorporated herein by reference.
18.12. Section 18.12 of the Attorneys General Settlement is
incorporated herein by reference.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
day and date first written above.
BROOKE GROUP LTD. STATE OF CALIFORNIA
By /s/ Bennett S. LeBow By /s/ Daniel E. Lungren
-------------------- ---------------------
Bennett S. LeBow Daniel E. Lungren
Attorney General
Date: April 14, 1997 Date: April 14, 1997
-------------- --------------
LIGGETT GROUP, INC.
By /s/ Bennett S. LeBow
--------------------
Bennett S. LeBow
Date: April 14, 1997
--------------
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Exhibit 10.45
STATE OF ALASKA SETTLEMENT AGREEMENT
------------------------------------
This SETTLEMENT AGREEMENT is entered into this 6th day of May, 1997 by
and among the State of Alaska and Brooke Group Ltd., a Delaware corporation
("Brooke Group"), Liggett & Myers Inc., a Delaware corporation ("Myers"), and
Liggett Group, Inc., a Delaware corporation (which, with Myers, is hereinafter
referred to as "Liggett").
RECITALS
--------
WHEREAS,
A. The State of Alaska, by and through its Attorney General (the
"Attorney General"), has brought a civil action (the "Action") against, among
others, the American Tobacco Company, Inc., BAT Industries, Plc, British
American Tobacco Company, R.J. Reynolds Tobacco Company, Brown & Williamson
Tobacco Corporation, Philip Morris, Inc., Liggett & Myers, Inc., Lorillard
Tobacco Company, Inc., and United States Tobacco Company and their various
parent and related companies ("Defendants"), asserting claims for, among other
things, expenses allegedly arising from tobacco-related matters and injunctive
relief concerning sales of cigarettes to minors.
2
B. Because of the importance of the agreements and undertakings by
Liggett and Brooke Group herein to the goals of the State of Alaska, including
the prosecution of the Action against non-settling defendants, the State of
Alaska has agreed to extend financial settlement terms to Liggett and Brooke
Group which will not be offered to any other Defendant, all as set forth in this
Settlement Agreement.
C. On March 20, 1997, seventeen States, by and through their Attorneys
General, and Liggett and Brooke Group entered into a settlement (the "Attorneys
General Settlement") of the actions brought by such States, pursuant to which
Liggett agreed to make certain payments, comply with certain proposed
regulations restricting the marketing and sale of cigarettes to minors and to
offer certain significant cooperation in connection with the prosecution of
their respective actions against the other Defendants; all in accordance with
the terms of the Attorneys General Settlement, a copy of which is annexed hereto
as Appendix A.
D. The State of Alaska and Liggett and Brooke Group wish to provide in
this Settlement Agreement for the State of Alaska to become a Subsequent
Settling State under the Attorneys
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General Settlement, all in accordance with the terms of this Settlement
Agreement.
E. The State of Alaska acknowledges and agrees that this Settlement
Agreement, including the cooperation provisions thereof, are important to the
prosecution of its Action against non-settling Defendants.
F. The State of Alaska and Liggett and Brooke Group recognize and
support the public interest in preventing smoking by, and preventing the
promotion of smoking to, children and adolescents.
G. Liggett and Brooke Group have denied, and continue to deny any
wrongdoing or any legal liability of any kind in all of the above-mentioned
actions.
H. The State of Alaska recognizes and acknowledges that the cooperation
being provided for in this Settlement Agreement would be valuable to the
prosecution of claims against the tobacco industry. Further, the State of Alaska
acknowledges that the change in warning labels provided for in this Settlement
Agreement is a step towards properly informing consumers more fully of the truth
about cigarettes and the consequences of smoking, as is the statement by Liggett
also provided for herein.
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NOW, THEREFORE, in consideration of the foregoing and of the promises
and covenants set forth in this Agreement, the undersigned Attorney General, on
behalf of the State of Alaska, and Liggett and Brooke Group hereby stipulate and
agree that any and all smoking-related claims, including the Action, of the
State of Alaska shall be settled as against Liggett and Brooke Group all on the
terms contained herein, as follows:
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I. DEFINITIONS.
Capitalized terms used herein shall have the meanings assigned to them
in Section 1 of the Attorneys General Settlement, except as set forth below or
defined elsewhere in this Agreement:
"Action" means the case filed by the State of Alaska in Juneau Superior
Court, Case No. 1JU-97-915 CI.
"Agreement" means this Settlement Agreement.
"Attorney General Actions" means those actions settled pursuant to the
Attorneys General Settlement or any similar action commenced by or on behalf of
a State against the Defendants.
"Attorneys General Settlement" means the settlement agreement entered
into on March 20, 1997 by seventeen Settling States and Settling Defendants, a
copy of which is annexed hereto as Exhibit A.
"Parties" means the State of Alaska and Brooke Group and Liggett.
"Settling States" means the States listed in Appendix A to the
Attorneys General Settlement and Subsequent Settling States.
-5-
6
II. SETTLEMENT PURPOSES ONLY.
Section 2 of the Attorneys General Settlement is incorporated herein by
reference.
III. PARTIES.
3.1. Section 3.1 of the Attorneys General Settlement is incorporated
herein by reference.
3.2. Section 3.2 of the Attorneys General Settlement is incorporated
herein by reference.
IV. PUBLIC STATEMENT; COOPERATION; ADVERTISING LIMITATIONS.
Section 4 of the Attorneys General Settlement is incorporated herein by
reference, except as modified below.
A. Promptly after execution of this Settlement Agreement, Liggett
shall, by and through its Director, Bennett S. LeBow, issue in the State of
Alaska a public statement substantially in the following form and substance:
I am, and have been for a number of years, a Director of Liggett Group
Inc., a manufacturer of cigarettes. Cigarettes were identified as a cause of
lung cancer and other diseases as early as 1950. I, personally, am not a
scientist. But, like all of you, I am aware of the many reports concerning the
ill-effects
-6-
7
of cigarette smoking. We at Liggett know and acknowledge that, as the Surgeon
General and respected medical researchers have found, cigarette smoking causes
health problems, including lung cancer, heart and vascular disease and
emphysema. We at Liggett also know and acknowledge that, as the Surgeon General,
the Food and Drug Administration and respected medical researchers have found,
nicotine is addictive.
Liggett will continue to engage in the legal activity of selling
cigarettes to adults, but will endeavor to ensure that these adult smokers are
aware of the health risks and addictive nature of smoking. As part of our
efforts, we will do the following:
1. In accordance with a court-approved settlement, Liggett
will set up a fund to compensate equitably those who claim to have been
injured by our products.
2. Liggett will add a prominent warning to each of our
packages of cigarettes and all of our cigarette advertising stating
that "Smoking is Addictive".
3. Liggett supports and will not challenge Food and Drug
Administration regulations concerning the sale and distribution of
nicotine-containing cigarettes and smokeless
-7-
8
tobacco products to children and adolescents. Accordingly, Liggett has
agreed to comply with many of these regulations even before they apply
to the tobacco industry generally.
4. Liggett has instructed its advertising and marketing people
to scrupulously avoid any and all advertising or marketing which would
appeal to children or adolescents. Liggett acknowledges that the
tobacco industry markets to "youth," which means those under 18 years
of age, and not just those 18-24 years of age. Liggett condemns this
practice and will not market to children. Liggett agrees that if it
sees industry advertisements which in its view are aimed at children,
it will bring this to the attention of the Attorney General of the
State of Alaska.
5. In accordance with our settlement agreements, Liggett
agrees to fully cooperate with the State of Alaska in connection with
contemplated lawsuits against the other tobacco companies. To that end,
Liggett will make available to the State of Alaska all relevant
documents and information, including documents subject to Liggett's own
attorney-client privileges and work product protections, and will
assist the State of Alaska in obtaining prompt court
-8-
9
adjudication of the rest of the industry's joint privilege claims.
B. Section 4.2 of the Attorneys General Settlement is incorporated
herein by reference.
C.1. Upon execution of this Agreement, each Settling Defendant
shall:
(1) cooperate with the Attorney General of the State
of Alaska in that such Settling Defendant will take no steps
to impede or frustrate civil investigations into, or civil
prosecutions of, any of the Non-settling Tobacco Companies, so
as to secure the just, speedy and inexpensive determination of
all such smoking-related claims against said non-settling
persons and entities;
(2) cooperate in and facilitate reasonable non-party
discovery from Settling Defendants in connection with the
Action;
(3) actively assist the Attorney General of the State
of Alaska in identifying and locating any and all persons
known to such Settling Defendant to have documents or
information that is discoverable in such
-9-
10
proceedings, to actively assist said counsel in interviewing
and obtaining documents and information from all such persons,
and to encourage such person to cooperate with the Attorney
General; and shall actively assist the Attorney General in
interpreting documents relating to Attorney General Actions
against Non-settling Tobacco Companies; and
(4) insofar as such Settling Defendant has or obtains
any material information concerning any fraudulent or illegal
conduct on the part of any parties, including Non-settling
Tobacco Companies, their agents, or their co-defendants
designed to frustrate or defeat the claims of the State of
Alaska against such parties, companies, agents or
co-defendants, or which have the effect of unlawfully
suppressing evidence relevant to smoking claims, disclose such
information to the appropriate judicial and regulatory
agencies.
4.3.2. Subject to, and promptly after, the entry of a Protective Order
or a Stipulation Regarding Liggett Documents
-10-
11
by the court in which the Action is pending, each Settling Defendant shall:
(1) promptly provide all documents and information
that are relevant to the subject matter of the Action or which
are likely to lead to admissible evidence in connection with
claims asserted in the Action, subject to the provisions of
Section 4.3.2(2) hereof;
(2) waive any and all applicable attorney-client
privileges and work product protections with respect to such
documents and information. Such waiver shall not extend to (a)
documents and information not relevant to the subject matter
of the Action or not likely to lead to admissible evidence in
connection with such an action or (b) documents subject to a
joint defense or other privilege or protection which Settling
Defendants cannot legally waive unilaterally, except that the
waiver by the Settling Defendant shall apply, to the extent
permitted by law, to its own joint defenses or other
privileges. To the extent that a Settling Defendant has a good
faith belief, or one or more Non-
-11-
12
settling Tobacco Companies claims, that documents to be
provided pursuant to Section 4.3.2(1) hereof may be subject to
a joint defense or other privilege (or a claim of such
privilege) of one or more of the Non-settling Tobacco
Companies, such documents shall be deposited under seal for IN
CAMERA inspection by the court in which the Action is pending,
together with a statement to such court that such Settling
Defendant has concerns as to whether some or all of such
documents should be protected from discovery, and the Parties
agree to request that such court shall retain jurisdiction to
resolve that issue. Liggett will participate in proceedings,
including by way of court appearances or declarations,
concerning issues of whether such documents are discoverable;
(3) offer their employees, and any and all other
individuals over whom they have control, and help locate
former employees, to provide witness interviews of such
employees and to testify, in depositions and at trial; it
being understood and agreed that Liggett will waive and hereby
does waive any and all applicable
-12-
13
confidentiality agreements to the extent such confidentiality
agreements would restrict testimony under this Agreement, if
any, to which such witnesses may be subject; and
(4) demand from its past or current national legal
counsel all documents and information obtained by them in the
course of representation of any Settling Defendant which in
any way relates to the cooperation required in paragraphs
4.3.1(1) - 4.3.2(3) above, which should be provided to the
Settling States as provided under this paragraph.
4.3.3. Section 4.3.3 of the Attorneys General Settlement is
incorporated herein by reference.
4.3.4. Section 4.3.4 of the Attorneys General Settlement is
incorporated herein by reference.
4.4. Section 4.4 of the Attorneys General Settlement is incorporated
herein by reference.
4.5. Section 4.5 of the Attorneys General Settlement and subparts
4.5.1, 4.5.2, 4.5.3, and 4.5.4 thereof are incorporated herein by reference.
-13-
14
4.6. Section 4.6 of the Attorneys General Settlement is incorporated
herein by reference.
4.7. Section 4.7 of the Attorneys General Settlement is incorporated
herein by reference.
4.8. Section 4.8 of the Attorneys General Settlement is incorporated
herein by reference.
4.9. Section 4.9 of the Attorneys General Settlement is incorporated
herein by reference.
V. GLOBAL SETTLEMENT.
5.1. Section 5.1 of the Attorneys General Settlement is incorporated
herein by reference.
5.2. Section 5.2 of the Attorneys General Settlement is incorporated
herein by reference.
VI. SETTLEMENT FUND.
6.1. Section 6.1 of the Attorneys General Settlement is incorporated
herein by reference.
6.2. Section 6.2 of the Attorneys General Settlement is incorporated
herein by reference.
-14-
15
6.3. Section 6.3 of the Attorneys General Settlement and subparts 6.3.1
and 6.3.2 thereof are incorporated herein by reference.
6.4. Section 6.4 of the Attorneys General Settlement is incorporated
herein by reference.
6.5. Section 6.5 of the Attorneys General Settlement is incorporated
herein by reference.
6.6. Section 6.6 of the Attorneys General Settlement is incorporated
herein by reference.
6.7. Section 6.7 of the Attorneys General Settlement is incorporated
herein by reference.
6.8. Section 6.8 of the Attorneys General Settlement is incorporated
herein by reference.
6.9. Section 6.9 of the Attorneys General Settlement is incorporated
herein by reference.
6.10. Section 6.10 of the Attorneys General Settlement is incorporated
herein by reference.
6.11. Section 6.11 of the Attorneys General Settlement is incorporated
herein by reference.
6.12. Section 6.12 of the Attorneys General Settlement is incorporated
herein by reference.
-15-
16
6.13. Section 6.13 of the Attorneys General Settlement is incorporated
herein by reference.
-16-
17
VII. RELEASE.
7.1. Section 7.1 of the Attorneys General Settlement is incorporated
herein by reference.
7.2. Section 7.2 of the Attorneys General Settlement is incorporated
herein by reference.
7.3. Section 7.3 of the Attorneys General Settlement is incorporated
herein by reference.
7.4. Section 7.4 of the Attorneys General Settlement is incorporated
herein by reference.
VIII. EXCLUSIVE REMEDY; DISMISSAL OF ACTION;
JURISDICTION OF COURT.
8.1. Section 8.1 of the Attorneys General Settlement is incorporated
herein by reference.
8.2. Section 8.2 of the Attorneys General Settlement is incorporated
herein by reference.
8.3. Section 8.3 of the Attorneys General Settlement is incorporated
herein by reference.
IX. TERM.
Section 9 of the Attorneys General Settlement is incorporated herein by
reference, except as modified below.
-17-
18
9.1. Section 9.1 of the Attorneys General Settlement is incorporated
herein by reference.
9.2. Section 9.2 of the Attorneys General Settlement is incorporated
herein by reference.
9.3. Section 9.3 of the Attorneys General Settlement is incorporated
herein by reference.
9.4. Section 9.4 of the Attorneys General Settlement is incorporated
herein by reference.
9.5. Section 9.5 of the Attorneys General Settlement is incorporated
herein by reference.
9.6. Section 9.6 of the Attorneys General Settlement is incorporated
herein by reference.
9.7. The duration of this Agreement shall be co-extensive with the
duration of the Attorneys General Settlement. The exercise of any right under
the Attorneys General Settlement to terminate the Attorneys General Settlement
with respect to the State of Alaska shall also be a termination of this
Agreement.
X. CONTINUING ENFORCEABILITY.
Section 10 of the Attorneys General Settlement is
incorporated herein by reference.
-18-
19
XI. ENTRY OF GOOD FAITH BAR ORDER ON CONTRIBUTION AND INDEMNITY
CLAIMS.
1. Section 11.1 of the Attorneys General Settlement is incorporated
herein by reference.
2. Section 11.2 of the Attorneys General Settlement is incorporated
herein by reference.
3. Section 11.3 of the Attorneys General Settlement is incorporated
herein by reference.
4. Section 11.4 of the Attorneys General Settlement is incorporated
herein by reference.
2. TAX STATUS OF SETTLEMENT FUND.
12.1. Section 12.1 of the Attorneys General Settlement is incorporated
herein by reference.
12.2. Section 12.2 of the Attorneys General Settlement is incorporated
herein by reference.
12.3. Section 12.3 of the Attorneys General Settlement is incorporated
herein by reference.
XII. EFFECT OF DEFAULT OF SETTLING DEFENDANT.
Section 13 of the Attorneys General Settlement is incorporated herein
by reference.
-19-
20
XIII. REPRESENTATIONS AND WARRANTIES.
14.1. Section 14.1 of the Attorneys General Settlement is incorporated
herein by reference.
14.2. Section 14.2 of the Attorneys General Settlement is incorporated
herein by reference.
XIV. ARBITRATION.
Section 15 of the Attorneys General Settlement is incorporated herein
by reference.
XV. MOST FAVORED NATION.
16.1. Section 16.1 of the Attorneys General Settlement is incorporated
herein by reference.
16.1.1. Section 16.1.1 of the Attorneys General Settlement is
incorporated herein by reference.
16.1.2. Section 16.1.2 of the Attorneys General Settlement is
incorporated herein by reference.
16.1.3. Section 16.1.3 of the Attorneys General Settlement is
incorporated herein by reference.
16.1.4. Section 16.1.4 of the Attorneys General Settlement is
incorporated herein by reference.
-20-
21
16.1.5. Section 16.1.5 of the Attorneys General Settlement is
incorporated herein by reference.
16.1.6. Section 16.1.6 of the Attorneys General Settlement is
incorporated herein by reference.
16.2. Section 16.2 of the Attorneys General Settlement is incorporated
herein by reference.
16.3. Section 16.3 of the Attorneys General Settlement is incorporated
herein by reference.
XVI. FUTURE AFFILIATE.
17.1. Section 17.1 of the Attorneys General Settlement is incorporated
herein by reference.
17.2. Section 17.2 of the Attorneys General Settlement and subparts (a)
and (b) thereof are incorporated herein by reference.
17.3. Section 17.3 of the Attorneys General Settlement is incorporated
herein by reference.
17.4. Section 17.4 of the Attorneys General Settlement is incorporated
herein by reference.
17.5. Section 17.5 of the Attorneys General Settlement is incorporated
herein by reference.
-21-
22
17.6. Section 17.6 of the Attorneys General Settlement is incorporated
herein by reference.
17.7. Section 17.7 of the Attorneys General Settlement is incorporated
herein by reference.
17.8. Section 17.8 of the Attorneys General Settlement is incorporated
herein by reference.
17.9. Section 17.9 of the Attorneys General Settlement is incorporated
herein by reference.
XVII. MISCELLANEOUS.
18.1. Section 18.1 of the Attorneys General Settlement is incorporated
herein by reference.
18.2. Section 18.2 of the Attorneys General Settlement is incorporated
herein by reference.
18.3. Section 18.3 of the Attorneys General Settlement is incorporated
herein by reference.
18.4. Section 18.4 of the Attorneys General Settlement is incorporated
herein by reference.
18.5. Section 18.5 of the Attorneys General Settlement is incorporated
herein by reference.
-22-
23
18.6. Section 18.6 of the Attorneys General Settlement is incorporated
herein by reference.
18.7. Section 18.7 of the Attorneys General Settlement is incorporated
herein by reference.
18.8. Section 18.8 of the Attorneys General Settlement is incorporated
herein by reference.
18.9. Section 18.9 of the Attorneys General Settlement is incorporated
herein by reference.
18.10. Section 18.10 of the Attorneys General Settlement is
incorporated herein by reference.
18.11. Section 18.11 of the Attorneys General Settlement is
incorporated herein by reference.
18.12. Section 18.12 of the Attorneys General Settlement is
incorporated herein by reference.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
day and date first written above.
BROOKE GROUP LTD. STATE OF ALASKA
By /s/ Bennett S. LeBow By /s/ Bruce Botelho
-------------------- -----------------
Bennett S. LeBow Bruce Botelho
Attorney General
Date: May 6, 1997 Date: May 6, 1997
----------- -----------
-23-
24
LIGGETT GROUP, INC.
By /s/ Bennett S. LeBow
--------------------
Bennett S. LeBow
Date: May 6, 1997
-----------
-24-
5
0000059440
BROOKE GROUP LTD.
1,000
3-MOS
DEC-31-1997
JAN-01-1997
MAR-31-1997
2,187
0
10,732
930
52,643
101,707
61,593
31,377
141,254
182,564
341,506
0
0
1,850
(446,425)
141,254
80,005
80,005
41,845
41,845
8,557
0
15,467
6,601
744
5,857
363
0
0
6,220
0.34
0.34
5
0000927388
BGLS INC.
1,000
3-MOS
DEC-31-1997
JAN-01-1997
MAR-31-1997
2,118
0
10,732
930
52,643
101,469
60,998
31,056
143,709
204,387
341,506
0
0
0
(470,357)
143,709
80,005
80,005
41,845
41,845
8,557
0
16,381
6,164
742
5,422
363
0
0
5,785
0
0
1
Exhibit 99.1
LIGGETT GROUP INC.
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
2
LIGGETT GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
-----------------
Page
----
Liggett Group Inc.:
-------------------
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . 4
Consolidated Statement of Stockholders' Equity (Deficit) for
the three months ended March 31, 1997 . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996. . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . 7
Eve Holdings Inc.:
------------------
Balance Sheets as of March 31, 1997 and December 31, 1996 . . . 20
Statements of Operations for the three months ended March 31,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . 21
Statements of Cash Flows for the three months ended March 31,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . 22
Notes to Financial Statements . . . . . . . . . . . . . . . . . 23
1
3
LIGGETT GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
March 31, December 31,
1997 1996
--------- ------------
ASSETS
Current assets:
Cash .............................................................. $ 477 $ --
Accounts receivable:
Trade, less allowances of $930 and $1,280, respectively ....... 9,117 19,316
Other ......................................................... 864 744
Inventories ....................................................... 49,261 50,122
Other current assets .............................................. 610 1,205
------- -------
Total current assets ...................................... 60,329 71,387
Property, plant and equipment, at cost, less accumulated
depreciation of $29,981 and $29,511, respectively ................. 18,662 18,705
Intangible assets, at cost, less accumulated amortization
of $17,817 and $17,388, respectively .............................. 2,898 3,327
Other assets and deferred charges, at cost, less accumulated
amortization of $7,860 and $7,410, respectively ................... 3,618 4,258
------- -------
Total assets .............................................. $85,507 $97,677
======= =======
(continued)
2
4
LIGGETT GROUP INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(Dollars in thousands, except per share amounts)
March 31, December 31,
1997 1996
--------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ...................................... $ 73,838 $ 31,807
Cash overdraft ............................................................ -- 6
Accounts payable, principally trade ....................................... 14,618 18,949
Accrued expenses:
Promotional ........................................................... 31,850 30,257
Compensation and related items ........................................ 502 682
Taxes, principally excise taxes ....................................... 2,698 7,565
Estimated allowance for sales returns ................................. 5,000 5,000
Interest .............................................................. 3,243 8,435
Other ................................................................. 9,750 9,380
--------- ---------
Total current liabilities ......................................... 141,499 112,081
Long-term debt, less current maturities ........................................ 107,245 144,698
Non-current employee benefits and other liabilities ............................ 16,545 17,376
Commitments and contingencies (Notes 5 and 8)
Stockholder's equity (deficit):
Redeemable preferred stock (par value $1.00 per share; authorized 1,000
shares; no shares issued and outstanding)
Common stock (par value $0.10 per share; authorized
2,000 shares; issued and outstanding 1,000 shares)
and contributed capital ................................................. 47,640 49,840
Accumulated deficit ....................................................... (227,422) (226,318)
--------- ---------
Total stockholder's deficit ....................................... (179,782) (176,478)
--------- ---------
Total liabilities and stockholder's equity (deficit) ............. $ 85,507 $ 97,677
========= =========
The accompanying notes are an integral part
of these financial statements.
3
5
LIGGETT GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
------------------------
1997 1996
---- ----
Net sales*......................................... $66,301 $78,488
Cost of sales*..................................... 30,259 36,292
------- -------
Gross profit ............................ 36,042 42,196
Selling, general and administrative expenses....... 33,910 42,118
Restructuring...................................... 1,761 --
------- -------
Operating income ........................ 371 78
Other income (expense):
Interest income ............................... 57 --
Interest expense .............................. (6,040) (5,856)
Equity in loss of affiliate ................... (33) --
Sale of assets ................................ 1,592 --
Retirement of debt ............................ 2,963 --
Miscellaneous, net ............................ (14) (12)
------- -------
Net loss................................. $(1,104) $(5,790)
======= =======
*Net sales and cost of sales include federal excise taxes of $16,860
and $21,197, respectively.
The accompanying notes are an integral part
of these financial statements.
4
6
LIGGETT GROUP INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(Unaudited)
(Dollars in thousands)
Common
Stock and Total
Contributed Accumulated Stockholder's
Capital Deficit Deficit
----------- ------------ -------------
Balance at December 31, 1996. . . . . . . . . . . . . . . $49,840 $(226,318) $(176,478)
Net loss . . . . . . . . . . . . . . . . . . . . . . . -- (1,104) (1,104)
Consideration for option to acquire affiliate
stock in excess of its net assets (Note 9) . . . . (2,200) -- (2,200)
------- --------- ---------
Balance at March 31, 1997. . . . . . . . . . . . .. . . . $47,640 $(227,422) $(179,782)
======= ========= =========
The accompanying notes are an integral part
of these financial statements.
5
7
LIGGETT GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
----------------------
1997 1996
---- ----
Cash flows from operating activities:
Net loss .................................................................... $ (1,104) $ (5,790)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............................................ 1,764 1,990
Deferred income taxes .................................................... -- (57)
(Gain) loss on sale of property, plant and equipment ..................... (1,592) 16
Gain on retirement of notes .............................................. (2,963) --
Deferred finance charges and debt discount written off ................... 130 --
Equity in loss of affiliate .............................................. 33 --
Changes in assets and liabilities:
Accounts receivable ..................................................... 10,079 10,151
Inventories ............................................................. 861 (2,115)
Accounts payable ........................................................ (922) (2,335)
Accrued expenses ........................................................ (11,685) (10,982)
Non-current employee benefits ........................................... (206) (348)
Other, net .............................................................. (433) (187)
-------- --------
Net cash used in operating activities .............................. (6,038) (9,657)
-------- --------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment ......................... 1,904 --
Capital expenditures ........................................................ (649) (1,350)
Purchase of an option in affiliate .......................................... (2,200) --
-------- --------
Net cash used in investing activities ............................... (945) (1,350)
-------- --------
Cash flows from financing activities:
Repayments of long-term debt ................................................ (4,601) (64)
Borrowings under revolving credit facility .................................. 81,291 87,644
Repayments under revolving credit facility .................................. (69,224) (76,629)
Increase (decrease) in cash overdraft ....................................... (6) 56
-------- --------
Net cash provided by financing activities ........................... 7,460 11,007
-------- --------
Net change in cash and cash equivalents ......................................... 477 --
Cash and cash equivalents:
Beginning of period ......................................................... -- --
-------- --------
End of period ............................................................... $ 477 $ --
======== ========
Supplemental cash flow information:
Cash payments (refunds) during the period for:
Interest ................................................................ $ 11,022 $ 10,793
Income taxes ............................................................ $ 93 $ 15
The accompanying notes are an integral part
of these financial statements.
6
8
LIGGETT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. THE COMPANY
Liggett Group Inc. ("Liggett" or the "Company") is a wholly-owned
subsidiary of BGLS Inc. ("BGLS"), a wholly-owned subsidiary of Brooke Group
Ltd. ("BGL"). Liggett is engaged primarily in the manufacture and sale of
cigarettes, principally in the United States. Certain management and
administrative functions are performed by affiliates (see Note 9).
The consolidated financial statements included herein are unaudited
and, in the opinion of management, reflect all adjustments necessary (which are
normal and recurring) to present fairly the Company's consolidated financial
position, results of operations and cash flows. The December 31, 1996 balance
sheet has been derived from audited financial statements. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements included in the Company's Annual Report on Form 10-K, as
amended, for the year ended December 31, 1996, as filed with the Securities and
Exchange Commission. The results of operations for interim periods should not be
regarded as necessarily indicative of the results that may be expected for the
entire year.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Liggett had a net
capital deficiency of $179,782 as of March 31, 1997, is highly leveraged and
has substantial near-term debt service requirements. Due to the many risks and
uncertainties associated with the cigarette industry and the impact of tobacco
litigation (see Note 8), there can be no assurance that the Company will be
able to meet its future earnings and/or cash flow goals. Consequently, the
Company could be in violation of certain debt covenants, and if its lenders
were to exercise acceleration rights under the revolving credit facility or
Senior Secured Notes indentures or refuse to lend under the revolving credit
facility, the Company would not be able to satisfy such demands or its working
capital requirements.
Further, the Company's Senior Secured Notes require a mandatory
principal redemption of $37,500 on February 1, 1998 and a payment at maturity
on February 1, 1999 of $107,400 and its revolving credit facility expires on
March 8, 1998 unless extended by its lenders. Current maturities of both the
Senior Secured Notes and revolving credit facility of approximately $74,000
contribute substantially to the working capital deficit of approximately
$81,170 as of March 31, 1997.
While management currently intends to seek to refinance and/or
restructure with the Company's note holders the redemption and maturity
requirements on the Senior Secured Notes and to extend the revolving credit
facility, there are no refinancing or restructuring arrangements for the notes
or commitments to extend the facility at this time, and no assurances can be
given in this regard. Based on the Company's net loss for 1996 and anticipated
1997 operating results, the Company does not anticipate it will be able to
generate sufficient cash from operations to make such payments. If the Company
is unable to refinance or restructure such obligations, renegotiate the payment
terms of the Senior Secured Notes, extend the revolving credit facility, or
otherwise make such payments, substantially all of its long-term debt and
revolving credit facility would be in default and holders of such debt could
accelerate the maturity of such debt. In such event, the Company may be forced
to seek protection from creditors under applicable laws. These matters raise
substantial doubt about the Company meeting its liquidity needs and its ability
to continue as a going concern.
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The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
2. 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, the
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Significant estimates subject to material changes in the
near term include deferred tax assets, allowance for doubtful accounts, sales
returns and allowances, actuarial assumptions of pension plans and litigation
and defense costs. Actual results could differ from those estimates.
3. PER SHARE DATA
All of the Company's common shares (1,000 shares, issued and
outstanding for all periods presented herein) are owned by BGLS. Accordingly,
earnings and dividends per share data are not presented in these consolidated
financial statements.
4. ASSETS UNDER AGREEMENTS FOR SALE
On April 29, 1996, Liggett executed a definitive agreement (as
amended) with Blue Devil Ventures, a North Carolina limited liability
partnership, for the sale by Liggett to Blue Devil Ventures of certain surplus
realty in Durham, North Carolina, for a sale price of $2,200. The transaction
closed on March 11, 1997. A gain of $1,531 was recognized, net of costs
required to prepare the properties for sale and selling costs.
5. INVENTORIES
Inventories consist of the following:
March 31, December 31,
1997 1996
--------- ------------
Finished goods .......................................................... $ 15,320 $ 15,304
Work-in-process ......................................................... 4,812 4,382
Raw materials ........................................................... 30,349 31,338
Replacement parts and supplies .......................................... 3,641 3,554
-------- --------
Inventories at current cost ............................................. 54,122 54,578
LIFO adjustment ......................................................... (4,861) (4,456)
-------- --------
Inventories at LIFO cost ................................................ $ 49,261 $ 50,122
======== ========
The Company has a leaf inventory management program whereby, among
other things, it is committed to purchase certain quantities of leaf tobacco.
The purchase commitments are for quantities not in excess of anticipated
requirements and are at prices, including carrying costs, established at the
date of the commitment. Liggett had leaf tobacco purchase commitments of
approximately $21,217 at March 31, 1997.
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6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
March 31, December 31,
1997 1996
--------- ------------
Land and improvements ............................................ $ 455 $ 455
Buildings ........................................................ 6,150 5,848
Machinery and equipment .......................................... 42,038 41,913
--------- --------
Property, plant and equipment .................................... 48,643 48,216
Less accumulated depreciation .................................... (29,981) (29,511)
--------- --------
Property, plant and equipment, net ............................... $ 18,662 $ 18,705
======== ========
7 LONG-TERM DEBT
Long-term debt consists of the following:
March 31, December 31,
1997 1996
--------- -----------
11.5% Senior Secured Notes due February 1, 1999,
net of unamortized discount of $349 and $424,
respectively .................................................. $112,263 $119,688
Variable Rate Series C Senior Secured Notes due
February 1, 1999 .............................................. 32,279 32,279
Borrowings outstanding under revolving credit
facility ...................................................... 36,339 24,272
Other ............................................................ 202 266
-------- --------
181,083 176,505
Current portion .................................................. (73,838) (31,807)
-------- --------
Amount due after one year ........................................ $107,245 $144,698
======== ========
Senior Secured Notes
--------------------
On February 14, 1992, Liggett issued $150,000 in Senior Secured Notes
(the "Series B Notes"). Interest on the Series B Notes is payable semiannually
on February 1 and August 1 at an annual rate of 11.5%. The Series B Notes and
Series C Notes referred to below (collectively, the "Notes") require mandatory
principal redemptions of $7,500 on February 1 in each of the years 1993 through
1997 and $37,500 on February 1, 1998 with the balance of the Notes due on
February 1, 1999. In February 1997, $7,500 of the Series B Notes were purchased
using revolver availability and credited against the mandatory redemption
requirements. The transaction resulted in a net gain of $2,963. The Notes are
collateralized by substantially all of the assets of the Company, excluding
inventories and receivables. Eve is a guarantor for the Notes. The Notes may be
redeemed, in whole or in part, at a price equal to 102% and 100% of the
principal amount in the years 1997 and 1998, respectively, at the option of the
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Company. The Notes contain restrictions on Liggett's ability to declare or pay
cash dividends, incur additional debt, grant liens and enter into any new
agreements with affiliates, among others.
On January 31, 1994, the Company issued $22,500 of Variable Rate
Series C Senior Secured Notes (the "Series C Notes"). The Series C Notes have
the same terms (other than interest rate) and stated maturity as the Series B
Notes. The Series C Notes bore a 16.5% interest rate, which was reset on
February 1, 1995 to 19.75%. The Company had received the necessary consents
from the required percentage of holders of its Series B Notes allowing for an
aggregate principal amount up to but not exceeding $32,850 of Series C Notes to
be issued under the Series C Notes indenture. In connection with the consents,
holders of Series B Notes received Series C Notes totaling two percent of their
current Series B Notes holdings. The total principal amount of such Series C
Notes issued was $2,842. On November 20, 1994, the Company issued the remaining
$7,508 of Series C Notes in exchange for an equal amount of Series B Notes and
cash of $375. The Series B Notes so exchanged were credited against the
mandatory redemption requirements for February 1, 1995.
Revolving Credit Facility
-------------------------
On March 8, 1994, Liggett entered into a revolving credit facility
(the "Facility") under which it can borrow up to $40,000 (depending on the
amount of eligible inventory and receivables as determined by the lenders) from
a syndicate of commercial lenders. Availability under the Facility was
approximately $461 based upon eligible collateral at March 31, 1997. The
Facility is collateralized by all inventories and receivables of the Company.
Borrowings under the Facility, whose interest is calculated at a rate equal to
1.5% above Philadelphia National Bank's (the indirect parent of Congress
Financial Corporation, the lead lender) prime rate of 8.25%, bore a rate of
9.75% on March 31, 1997. On April 1, 1997, Philadelphia National Bank raised
its prime rate to 8.5%, thereby increasing Liggett's interest rate to 10.0%.
The Facility contains certain financial covenants similar to those contained in
the Note indenture, including restrictions on Liggett's ability to declare or
pay cash dividends, incur additional debt, grant liens and enter into any new
agreements with affiliates, among others. In addition, the Facility currently
imposes requirements with respect to the Company's adjusted net worth (not to
fall below a deficit of $180,000 as computed in accordance with the agreement)
and working capital (not to fall below a deficit of $12,000 as computed in
accordance with the agreement). The Facility is classified as short-term debt
as of March 31, 1997, as it becomes due on March 8, 1998, unless extended by
the lenders.
During the first quarter of 1997, the Company violated the working
capital covenant contained in the Facility as a result of the 1998 mandatory
redemption payment on the Senior Secured Notes becoming due within one year. On
March 19, 1997, the lead lender agreed to waive this covenant default, and the
Facility was amended as follows: (i) the working capital definition was changed
to exclude the current portion of the Senior Secured Notes; (ii) the maximum
permitted working capital deficit, as defined, was reduced to $12,000; (iii)
the maximum permitted adjusted net worth deficit was increased to $180,000; and
(iv) the permitted advance rates under the Facility for eligible inventory were
reduced by five percent.
For information concerning Liggett's substantial near-term debt
service requirements and other related matters, see Note 1.
8. COMMITMENTS AND CONTINGENCIES
Litigation
----------
Since 1954, Liggett and other United States cigarette manufacturers
have been named as defendants in a number of direct and third-party actions
predicated on the theory that they should be liable for damages from cancer and
other adverse health effects alleged to have been caused by cigarette smoking
or by exposure to secondary smoke (environmental tobacco smoke, "ETS") from
cigarettes. These cases are reported hereinafter as though having been
commenced against Liggett (without regard to whether such cases were actually
commenced against BGL or Liggett). New cases continue to be commenced against
Liggett and other
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cigarette manufacturers. As new cases are commenced, the costs associated
with defending such cases and the risks attendant to the inherent
unpredictability of litigation continue to increase. Liggett had been receiving
certain financial and other assistance from others in the industry in defraying
the costs and other burdens incurred in the defense of smoking and health
litigation and related proceedings, but these benefits have recently ended.
Certain joint defense arrangements, and the financial benefits incident
thereto, have also ended. The future financial impact on the Company of the
termination of this assistance and the effects of the tobacco litigation
settlements discussed below is not quantifiable at this time.
As of March 31, 1997, there were 107 cases pending against Liggett
where individual plaintiffs allege injury resulting from cigarette smoking,
addiction to cigarette smoking or exposure to ETS and seek compensatory and, in
some cases, punitive damages. Of these, 53 are pending in the State of Florida
and 20 are pending in the State of New York. The balance of individual cases
are pending in 14 different states. The next individual case scheduled for
trial where Liggett is a defendant is CHUTZ-REYMERS V. LIGGETT GROUP INC., ET
AL. United States District Court, Middle District of Florida, Tampa Division,
which is scheduled for trial in June 1997. In light of the settlements
discussed below, this case will not proceed against Liggett on that date. In
addition to the foregoing, there are four individual cases scheduled for trial
in 1997 where Liggett is a defendant, although trial dates are subject to
change.
The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence, gross
negligence, strict liability, fraud, misrepresentation, design defect, failure
to warn, breach of express and implied warranties, conspiracy, concert of
action, unjust enrichment, common law public nuisance, indemnity, market share
liability, and violations of deceptive trade practices laws and antitrust
statutes. Plaintiffs also seek punitive damages in many of these cases.
Defenses raised by defendants in these cases include lack of proximate cause,
assumption of the risk, comparative fault and/or contributory negligence, lack
of design defect, statutes of limitations, equitable defenses such as "unclean
hands" and lack of benefit, failure to state a claim and federal preemption.
Several representative cases are described below.
On June 24, 1992, in the action entitled CIPOLLONE V. LIGGETT GROUP
INC., ET AL., the United States Supreme Court issued an opinion concluding that
The Federal Cigarette Labeling and Advertising Act did not preempt state common
law damage claims but that The Public Health Cigarette Smoking Act of 1969 (the
"1969 Act"), did preempt certain, but not all, state common law damage claims.
The decision bars plaintiffs from asserting claims that, after the effective
date of the 1969 Act, the tobacco companies either failed to warn adequately of
the claimed health risks of cigarette smoking or sought to neutralize those
claimed risks in their advertising or promotion of cigarettes. Bills have been
introduced in Congress on occasion to eliminate the federal preemption defense.
Enactment of any federal legislation with such an effect could result in a
significant increase in claims, liabilities and litigation costs.
On March 27, 1987, an action entitled YVONNE ROGERS V. LIGGETT GROUP
INC. ET AL., Superior Court, Marion County, Indiana, was filed against Liggett
and others. The plaintiff sought compensatory and punitive damages for cancer
alleged to have been caused by cigarette smoking. Trial commenced on January
31, 1995. The trial ended on February 22, 1995 when the trial court declared a
mistrial due to the jury's inability to reach a verdict. The Court directed a
verdict in favor of the defendants as to the issue of punitive damages during
the trial of this action. A second trial commenced on August 5, 1996 and, on
August 23, 1996, the jury returned a verdict in favor of the defendants. A
Notice of Appeal has been filed by the plaintiff.
On October 31, 1991, an action entitled BROIN ET AL. V. PHILIP MORRIS
INCORPORATED, ET AL., Circuit Court of the Eleventh Judicial District in and
for Dade County, Florida, was filed against Liggett and others. This case was
the first class action commenced against the industry, and has been brought by
plaintiffs on behalf of all flight attendants that have worked or are presently
working for airlines based in
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the United States and who have never regularly smoked cigarettes but allege
that they have been damaged by involuntary exposure to ETS. Plaintiffs' motion
to certify the action as a class action was granted. The suit is scheduled to
go to trial on June 2, 1997. In addition to Broin, as of March 31, 1997 there
were 16 other actions which have either been certified as a class or are
seeking class certification. One of these actions, ENGLE, ET AL. V. R. J.
REYNOLDS TOBACCO COMPANY, ET AL., Circuit Court of the Eleventh Judicial
Circuit in and for Dade County, Florida, involving a certified class of smokers
in the State of Florida, is scheduled to commence trial on September 8, 1997.
On May 12, 1992, an action entitled CORDOVA V. LIGGETT GROUP INC., ET
AL., Superior Court of the State of California, City of San Diego, was filed
against Liggett and others. In her complaint, plaintiff, purportedly on behalf
of the general public, alleges that defendants have been engaged in unlawful,
unfair and fraudulent business practices by allegedly misrepresenting and
concealing from the public scientific studies pertaining to smoking and health
funded by, and misrepresenting the independence of, the Council on Tobacco
Research ("CTR") and its predecessor. The complaint seeks equitable relief
against the defendants, including the imposition of a corrective advertising
campaign, restitution of funds, disgorgement of revenues and profits and the
imposition of a constructive trust. The case is presently in the discovery
phase. This action is scheduled for trial on December 12, 1997. A similar
action has been filed in the Superior Court for the State of California, City
of San Francisco.
On September 10, 1993, an action entitled SACKMAN V. LIGGETT GROUP
INC., United States District Court, Eastern District of New York, was filed
against Liggett alleging as injury lung cancer. On May 25, 1996, the District
Court granted Liggett summary judgment on plaintiff's fraud and breach of
warranty claims. In addition, the District Court vacated the Magistrate's March
19, 1996 order compelling Liggett to produce certain CTR documents with respect
to which Liggett had asserted various privilege claims, and allowed the other
cigarette manufacturers and the CTR to intervene in order to assert their
interests and privileges with respect to those same documents. The Magistrate
Judge is presently reconsidering plaintiffs' motion to compel production of
documents. No trial date has been set.
On March 25, 1994, an action entitled CASTANO, ET AL. V. THE AMERICAN
TOBACCO COMPANY INC., ET AL., United States District Court, Eastern District of
Louisiana, was filed against Liggett and others. The class action complaint
sought relief for a nationwide class of smokers based on their alleged
addiction to nicotine. The District Court granted plaintiffs' motion for class
certification. On May 23, 1996, the Fifth Circuit Court of Appeals decertified
the class and instructed the District Court to dismiss the class complaint. On
March 12, 1996, Liggett and BGL entered into an agreement, subject to court
approval, to settle the CASTANO class action tobacco litigation.
Under the CASTANO settlement agreement, upon final court approval of
the settlement, the CASTANO class would be entitled to receive up to 5% of
Liggett's pretax income (income before income taxes) each year (up to a maximum
of $50,000 per year) for the next twenty-five years, subject to certain
reductions provided for in the agreement, and a $5,000 payment from Liggett if
BGL or Liggett fails to consummate a merger or similar transaction with another
non-settling tobacco company defendant within three years of the date of the
settlement. BGL and Liggett have the right to terminate the CASTANO settlement
under certain circumstances. On May 11, 1996, the CASTANO Plaintiffs Legal
Committee filed a motion with the District Court seeking preliminary approval
of the CASTANO settlement. On September 6, 1996, the CASTANO plaintiffs
withdrew the motion for approval of the CASTANO settlement.
On March 14, 1996, BGL, the CASTANO Plaintiffs Legal Committee and the
CASTANO plaintiffs entered into a letter agreement. According to the terms of
the letter agreement, for the period ending nine months from the date of Final
Approval (as defined in the letter), if granted, of the CASTANO settlement or,
if earlier, the completion by BGL or Liggett of a combination with any
defendant in CASTANO, except Philip Morris, the CASTANO plaintiffs and their
counsel agree not to enter into any more favorable settlement agreement with
any CASTANO defendant which would reduce the terms of the CASTANO settlement
agreement. If the CASTANO plaintiffs or their counsel enter into any such
settlement during this period, they shall pay BGL $250,000 within thirty days
of the more favorable agreement and offer BGL and
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Liggett the option to enter into a settlement on terms at least as favorable as
those included in such other settlement. The letter agreement further provides
that during the same time period, and if the CASTANO settlement agreement has
not been earlier terminated by BGL in accordance with its terms, BGL and its
affiliates will not enter into any business transaction with any third party
which would cause the termination of the CASTANO settlement agreement. If BGL
or its affiliates enter into any such transaction, then the CASTANO plaintiffs
will be entitled to receive $250,000 within thirty days from the transacting
party.
In February 1995, an action entitled GRADY CARTER, ET AL. V. THE
AMERICAN TOBACCO COMPANY, ET AL., Superior Court for the State of Florida,
Duval County, was filed against Liggett and others. Plaintiff sought
compensatory damages, including, but not limited to, reimbursement for medical
costs. Both American Tobacco and Liggett were subsequently dismissed from this
action. On August 9, 1996, a jury returned a verdict against the remaining
defendant, Brown & Williamson Tobacco Corp., in the amount of $750. Brown &
Williamson has filed a Notice of Appeal.
On May 23, 1994, an action entitled MOORE, ATTORNEY GENERAL, EX REL
STATE OF MISSISSIPPI V. THE AMERICAN TOBACCO COMPANY, ET AL., Chancery Court of
Jackson County, Mississippi, was commenced against Liggett and others seeking
restitution and indemnity for medical payments and expenses allegedly made or
incurred for tobacco related illnesses. In May 1994, the State of Florida
enacted legislation, effective July 1, 1994, allowing certain state authorities
or entities to commence litigation seeking recovery of certain Medicaid
payments made on behalf of Medicaid recipients as a result of diseases
(including, but not limited to, diseases allegedly caused by cigarette smoking)
allegedly caused by liable third parties (including, but not limited to, the
tobacco industry). On February 21, 1995, the State of Florida commenced an
action pursuant to this statutory scheme. In addition to Florida and
Mississippi, similar actions have been filed by many other states and
municipalities. The Mississippi, Florida and Texas Medicaid recovery actions
are scheduled for trial in 1997 (see settlement discussions below). Legislation
similar to that enacted in Florida has been introduced in the Massachusetts and
New Jersey legislatures.
In certain of the pending proceedings, state and local government
entities and others seek reimbursement for Medicaid and other health care
expenditures allegedly caused by tobacco products. The claims asserted in these
Medicaid recovery actions vary. All plaintiffs assert the equitable claim that
the tobacco industry was "unjustly enriched" by plaintiffs' payment of health
care costs allegedly attributable to smoking and seek reimbursement of those
costs. Other claims made by some but not all plaintiffs include the equitable
claim of indemnity, common law claims of negligence, strict liability, breach
of express and implied warranty, violation of a voluntary undertaking or
special duty, fraud, negligent misrepresentation, conspiracy, public nuisance,
claims under state and federal statutes governing consumer fraud, antitrust,
deceptive trade practices and false advertising, and claims under the Federal
Racketeer Influenced and Corrupt Organization Act.
On March 15, 1996, Liggett and BGL entered into a settlement of
tobacco-related litigation with the Attorneys General of Florida, Louisiana,
Mississippi, West Virginia and Massachusetts. The settlement with the Attorneys
General releases Liggett and BGL from all tobacco-related claims by these
states including claims for Medicaid reimbursement and concerning sales of
cigarettes to minors. The settlement provides that additional states which
commence similar Attorney General actions may agree to be bound by the
settlement prior to six months from the date thereof (subject to extension of
such period by the settling defendants). Certain of the terms of the settlement
are summarized below.
Under the settlement, the states would share an initial payment by
Liggett of $5,000 ($1,000 of which was paid on March 22, 1996, with the balance
payable over nine years and indexed and adjusted for inflation), provided that
any unpaid amount will be due sixty days after either a default by Liggett in
its payment obligations under the settlement or a merger or other similar
transaction by Liggett or BGL with another defendant in the lawsuits. In
addition, Liggett will be required to pay the states a percentage of Liggett's
pretax income (income before income taxes) each year from the second through
the twenty-fifth year. This annual percentage is 2-1/2% of Liggett's pretax
income, subject to increase to 7-1/2%
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depending on the number of additional states joining the settlement. No
additional states have joined this settlement to date. All of Liggett's
payments are subject to certain reductions provided for in the agreement.
Liggett has also agreed to pay to the states $5,000 if Liggett or BGL fails to
consummate a merger or other similar transaction with another defendant in the
lawsuits within three years of the date of the settlement.
Settlement funds received by the Attorneys General will be used to
reimburse the states' smoking-related healthcare costs. While neither
consenting to FDA jurisdiction nor waiving their objections thereto, Liggett
and BGL also have agreed to phase in compliance with certain of the proposed
interim FDA regulations on the same basis as provided in the CASTANO
settlement.
Liggett and BGL have the right to terminate the settlement with
respect to any state participating in the settlement if any of the remaining
defendants in the litigation succeed on the merits in that state's Attorney
General action. Liggett and BGL may also terminate the settlement if they
conclude that too many states have filed Attorney General actions and have not
resolved such cases as to the settling defendants by joining in the settlement.
At December 31, 1995, the Company had accrued approximately $4,000 for
the present value of the fixed payments under the March 1996 Attorneys General
settlement, of which $2,278 was outstanding on March 31, 1997. No additional
amounts have been accrued with respect to the recent settlements discussed
below. The Company cannot quantify the future costs of the settlements at this
time as the amount Liggett must pay is based, in part, on future operating
results. Possible future payments based on a percentage of pretax income, and
other contingent payments based on occurrence of a business combination, will
be expensed when considered probable.
On March 20, 1997, Liggett, together with BGL, entered into a
comprehensive settlement of tobacco litigation through parallel agreements with
the Attorneys General of 17 additional states and with a nationwide class of
individuals and entities that allege smoking-related claims. Thereafter, on
April 14, 1997, the State of California entered into a settlement agreement
with Liggett and BGL, of the action which it comtemplates commencing against
the industry and on May 6, 1997, the State of Alaska entered into a settlement
agreement with Liggett and BGL, of the action which it recently commenced
against the industry. The settlements cover all smoking-related claims,
including both addiction-based and tobacco injury claims against Liggett and
BGL, brought by the Attorneys General and, upon court approval, the nationwide
class.
The recent Attorneys General settlements, which do not require court
approval, include the states of Alaska, Arizona, California, Connecticut,
Hawaii, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Minnesota, New
Jersey, New York, Oklahoma, Texas, Utah, Washington and Wisconsin. Liggett and
BGL's previous settlements on March 15, 1996, with the Attorneys General of
Florida, Louisiana, Massachusetts, Mississippi and West Virginia remain in
full force and effect. Several other states have either recently filed
Medicaid recovery actions or indicated intentions to do so. Both Liggett and
BGL will endeavor to resolve those matters on substantially the same terms and
conditions as the prior settlements; however, there can be no assurance that
any such settlements will be completed.
The settlement with the nationwide class covers all smoking-related
claims. On March 20, 1997, Liggett, BGL and plaintiffs filed the mandatory
class settlement agreement in an action entitled FLETCHER, ET AL. V. BROOKE
GROUP LTD., ET AL., Circuit Court of Mobile County, Alabama, where the court
granted preliminary approval and preliminary certification of the class. Class
members will be notified of the settlement and will have an opportunity to
appear at a later court hearing. Effectiveness of the mandatory settlement is
conditioned on final court approval of the settlement after a fairness hearing.
There can be no assurance as to whether or when court approval will be
obtained. There are no opt out provisions in this settlement, except for
Medicaid claims by states that are not party to the Attorneys General
settlements.
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Pursuant to the settlements, Liggett and BGL have agreed to cooperate
fully with the Attorneys General and the nationwide class in their lawsuits
against the tobacco industry. Liggett and BGL have agreed to provide to these
parties all relevant tobacco documents in their possession, other than those
subject to claims of joint defense privilege, and to waive, subject to court
order, certain attorney-client privileges and work product protections
regarding Liggett's smoking-related documents to the extent Liggett and BGL can
so waive these privileges and protections.. The Attorneys General and the
nationwide class have agreed to keep Liggett's documents under protective order
and, subject to final court approval, to limit their use to those actions
brought by parties to the settlement agreements. Those documents that may be
subject to a joint defense privilege with other tobacco companies will not be
produced to the Attorneys General or the nationwide class, but will be,
pursuant to court order, submitted to the appropriate court and placed under
seal for possible in camera review. Additionally, under similar protective
conditions, Liggett and BGL have agreed to offer their employees for witness
interviews and testimony at deposition and trial. Pursuant to both settlement
agreements, Liggett has also agreed to place an additional warning on its
cigarette packaging stating that "smoking is addictive" and to issue a public
statement, as requested by the Attorneys General.
Under the terms of the new settlement agreements, Liggett will pay on
an annual basis 25% of its pretax income for the next 25 years into a
settlement fund, commencing with the first full fiscal year starting after the
date of the agreements. Monies collected in the settlement fund will be
overseen by a court-appointed committee and utilized to compensate state health
care programs and settlement class members and to provide counter-market
advertising. Liggett has also agreed to phase-in compliance with certain
proposed FDA regulations regarding smoking by children and adolescents,
including a prohibition on the use of cartoon characters in tobacco advertising
and limitations on the use of promotional materials and distribution of sample
packages where minors are present.
Under both settlement agreements, any other tobacco company defendant,
except Philip Morris, merging or combining with Liggett or BGL, prior to the
fourth anniversary of the settlement agreements, would receive certain
settlement benefits, including limitations on potential liability and not
having to post a bond to appeal any further adverse judgment. In addition,
within 120 days following such a combination, Liggett would be required to pay
$25 million to a settlement fund. Both the Attorneys General and the nationwide
class have also agreed not to seek an injunction preventing a defendant tobacco
company combining with Liggett or BGL from spinning off any of its affiliates
which are not engaged in the domestic tobacco business.
Liggett and BGL are also entitled to certain "most favored nation"
benefits not available to the other defendant tobacco companies. In addition,
in the event of a "global" tobacco settlement enacted through Federal
legislation or otherwise, the Attorneys General and tobacco plaintiffs have
agreed to use their "best efforts" to ensure that Liggett's and BGL's liability
under such a plan should be no more onerous than under these new settlements.
On March 20, 1997, R.J. Reynolds Tobacco Company, Philip Morris, Inc.,
Brown & Williamson Tobacco Corporation and Lorillard Tobacco Company, Inc.
obtained a temporary restraining order from a North Carolina state court
preventing Liggett and BGL and their agents, employees, directors, officers and
lawyers from turning over documents allegedly subject to the joint defense
privilege in connection with the settlements, which restraining order was
converted to a preliminary injunction by the court on April 9, 1997. This
ruling is currently on appeal by Liggett and BGL. On March 24, 1997, the United
States District Court for the Eastern District of Texas and state courts in
Mississippi and Illinois each issued orders enjoining the other tobacco
companies from interfering with Liggett's filing with the courts, under seal,
those documents.
The Company understands that a grand jury investigation is being
conducted by the office of the United States Attorney for the Eastern District
of New York regarding possible violations of criminal law relating to the
activities of The Council for Tobacco Research - USA, Inc. The Company was a
sponsor of The Council for Tobacco Research - USA, Inc. at one time. The
Company is unable at this time to predict the outcome of this investigation.
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In March 1996, Liggett received a subpoena from a Federal grand jury
sitting in the Southern District of New York. Documents have been produced in
response to the subpoena. The Company understands that this investigation has
been transferred to the main office of the United States Department of Justice.
In addition, in May 1996, Liggett was served with a subpoena by a grand jury
sitting in the District of Columbia. Liggett is in the process of responding to
that subpoena. Liggett and BGL are unable, at this time, to predict the outcome
of these investigations.
The Antitrust Division of the United States Department of Justice
investigation into the United States tobacco industry activities in connection
with product development efforts regarding "fire-safe" or self-extinguishing
cigarettes has been concluded. No action by the Department of Justice was
taken.
On March 15, 1996, an action entitled SPENCER J. VOLK V. LIGGETT GROUP
INC. was filed in the United States District Court for the Southern District of
New York, Case No. 96-CIV-1921, wherein the plaintiff, who was formerly
employed as Liggett's President and Chief Executive Officer, seeks recovery of
certain monies allegedly owing by Liggett to him for long-term incentive
compensation. At a September 19, 1996 hearing, the court dismissed the
plaintiff's alternate claim for recovery under a fraud theory and by order
dated March 10, 1997, the court dismissed the balance of plaintiff's claims. A
notice of appeal has been filed by the plaintiff.
Litigation is subject to many uncertainties, and it is possible that
some of the aforementioned actions could be decided unfavorably against the
Company. An unfavorable outcome of a pending smoking and health case could
encourage the commencement of additional similar litigation. The Company is not
able to evaluate the effect of these developing matters on pending litigation
or the possible commencement of additional litigation.
There are several other proceedings, lawsuits and claims pending
against Liggett unrelated to product liability. Management is of the opinion
that the liabilities, if any, ultimately resulting from such other proceedings,
lawsuits and claims should not materially affect Liggett's financial position,
results of operations or cash flows.
The Company is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of the cases
pending against Liggett and BGL. It is possible that the Company's consolidated
financial position, results of operations and cash flows could be materially
adversely affected by an ultimate unfavorable outcome in any of such pending
litigation.
Legislation and Regulation
--------------------------
On August 28, 1996, the Food and Drug Administration ("FDA") filed in
the Federal Register a Final Rule classifying tobacco as a drug, asserting
jurisdiction by the FDA over the manufacture and marketing of tobacco products
and imposing restrictions on the sale, advertising and promotion of tobacco
products. The FDA's stated objective and focus for its initiative is to limit
access to cigarettes by minors by measures beyond the restrictions either
mandated by existing federal, state and local laws or voluntarily implemented
by major manufacturers in the industry. Litigation was commenced in the United
States District Court for the Middle District of North Carolina challenging the
legal authority of the FDA to assert such jurisdiction, as well as challenging
the constitutionality of the rules. A hearing on the tobacco industry's motion
for summary judgment in that case was held on February 10, 1997 and a decision
by the Court was issued on April 25, 1997. The court granted plaintiffs' motion
for summary judgment prohibiting the FDA from regulating or restricting the
promotion and advertising of tobacco products. The court denied plaintiffs'
motion for summary judgment on the issue of whether the FDA has the authority
to regulate access to, and labeling of, tobacco products. The four major
cigarette manufacturers and the FDA have filed notices of appeal.
16
18
Liggett and BGL, while neither consenting to FDA jurisdiction nor
waiving their objections thereto, agreed to withdraw their objections and
opposition to the proposed rule making and to phase in compliance with certain
of the proposed interim FDA regulations. See discussions of the CASTANO and
Attorneys General settlements above.
In August 1996, the Commonwealth of Massachusetts enacted legislation
requiring tobacco companies to publish information regarding the ingredients in
cigarettes and other tobacco products sold in that state. Regulations adopted
pursuant to this legislation are scheduled to become effective on July 1, 1997.
On February 7, 1997, the United States District Court for the District of
Massachusetts denied an attempt to block the new legislation on the ground that
it is preempted by federal law.
On September 13, 1995, the President of the United States issued
Presidential Proclamation 6821, which established a tariff rate quota ("TRQ")
on certain imported tobacco, imposing extremely high tariffs on imports of
flue-cured and burley tobacco in excess of certain levels which vary from
country to country. Oriental tobacco is exempt from the quota as well as all
tobacco originating from Canada, Mexico or Israel. Management believes that the
TRQ levels are sufficiently high to allow Liggett to operate without material
disruption to its business.
On February 20, 1996, the United States Trade representative issued an
"advance notice of rule making" concerning how tobaccos imported under the TRQ
should be allocated. Currently, tobacco imported under the TRQ is allocated on
a "first-come, first-served" basis, meaning that entry is allowed on an open
basis to those first requesting entry in the quota year. Others in the
cigarette industry have suggested an "end-user licensing" system under which
the right to import tobacco under the quota would be initially assigned on the
basis of domestic market share. Such an approach, if adopted, could have a
material adverse effect on the Company.
In April 1994, the United States Occupational Safety and Health
Administration ("OSHA") issued a proposed rule that could ultimately ban
smoking in the workplace. Hearings were completed during 1995. OSHA has not yet
issued a final rule or a proposed revised rule. While the Company cannot
predict the outcome, some form of federal regulation of smoking in workplaces
may result.
In January 1993, the United States Environmental Protection Agency
("EPA") released a report on the respiratory effect of ETS which concludes that
ETS is a known human lung carcinogen in adults, and in children causes
increased respiratory tract disease and middle ear disorders and increases the
severity and frequency of asthma. In June 1993, the two largest of the major
domestic cigarette manufacturers, together with other segments of the tobacco
and distribution industries, commenced a lawsuit against the EPA seeking a
determination that the EPA did not have the statutory authority to
17
19
regulate ETS, and that given the current body of scientific evidence and the
EPA's failure to follow its own guidelines in making the determination, the
EPA's classification of ETS was arbitrary and capricious. Whatever the outcome
of this litigation, issuance of the report may encourage efforts to limit
smoking in public areas.
The Company has been involved in certain environmental proceedings,
none of which, either individually or in the aggregate, rise to the level of
materiality. The Company's current operations are conducted in accordance with
all environmental laws and regulations. Management is unaware of any material
environmental conditions affecting its existing facilities. Compliance with
federal, state and local provisions regulating the discharge of materials into
the environment, or otherwise relating to the protection of the environment,
have not had a material effect on the capital expenditures, earnings or
competitive position of Liggett.
In addition to the foregoing, there have been a number of other
restrictive regulatory actions, adverse political decisions and other
unfavorable developments concerning cigarette smoking and the tobacco industry,
the effects of which, at this time, the Company is not able to evaluate.
9. RELATED PARTY TRANSACTIONS
On July 5, 1996, Liggett purchased 140,000 shares (19.97%) of
Liggett-Ducat Ltd.'s ("Liggett-Ducat") tobacco operations from Brooke
(Overseas) Ltd. ("BOL"), an indirect subsidiary of BGL, for $2,100.
Liggett-Ducat, which produces cigarettes in Russia, manufactured and marketed
11.4 billion cigarettes in 1996. Liggett also acquired on that date for $3,400
a ten-year option, exercisable by Liggett in whole or in part, to purchase from
BOL at the same per share price up to 292,407 additional shares of
Liggett-Ducat, thereby entitling Liggett to increase its interest in
Liggett-Ducat to approximately 62%. The option fee is to be credited against
the purchase price. In addition, as part of the same transaction, Liggett had
the right on or before June 30, 1997 to acquire from BOL for $2,200 another
ten-year option on the same terms to purchase the remaining shares of
Liggett-Ducat (an additional 33%). On March 13, 1997, Liggett acquired this
option and paid BOL $2,000, and recorded a payable to BOL for the remaining
$0.2 million. Liggett accounts for its investment in Liggett-Ducat under the
equity method of accounting. Liggett's equity in the net loss of Liggett-Ducat
amounted to $33 for the three months ended March 31, 1997. The excess of the
cost of the option over carrying amount of net assets to be acquired under the
option has been charged to stockholder's deficit.
Liggett is party to a Tax-Sharing Agreement dated June 29, 1990 with
BGL and certain other entities pursuant to which Liggett has paid taxes to BGL
as if it were filing a separate company tax return, except that the agreement
effectively limits the ability of Liggett to carry back losses for refunds.
Liggett is entitled to recoup overpayments in a given year out of future
payments due under the agreement.
Liggett is a party to an agreement dated February 26, 1991, as amended
October 1, 1995, with BGL to provide various management and administrative
services to the Company in consideration for an annual management fee of $900
paid in monthly installments and annual overhead reimbursements of $864 paid in
quarterly installments.
Liggett has entered into an annually renewable Corporate Services
Agreement with BGLS wherein BGLS agreed to provide corporate services to the
Company at an annual fee paid in monthly installments. Corporate services
provided by BGLS under this agreement include the provision of administrative
services related to Liggett's participation in its parent company's
multi-employer benefit plan, external publication of financial results,
preparation of consolidated financial statements and tax returns and such other
administrative and managerial services as may be reasonably requested by
Liggett. The charges for services rendered under the agreement amounted to $830
in 1997 and $790 in 1996. This fee is in addition to the management fee and
overhead reimbursements described above.
18
20
Since April 1994, the Company has leased equipment from BGLS for $50
per month. On April 28, 1997, BOL purchased excess production equipment from
Liggett for $3,000, for a gain of $2,578.
10. RESTRUCTURING CHARGES
In the first three months of 1997, the Company reduced its headcount
by 87 positions and recorded a $1,761 restructuring charge to operations for
severance programs, primarily salary continuation and related benefits for
terminated employees. Approximately $285 in restructuring charges will be
funded in subsequent years. The Company expects to continue its cost reduction
programs.
19
21
EVE HOLDINGS INC.
BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
March 31, December 31,
1997 1996
--------- ------------
ASSETS
Cash ........................................................................... $ 4 $ --
Office equipment ............................................................... 1 2
Trademarks, at cost, less accumulated amortization of
$17,719 and $17,294, respectively .......................................... 2,694 3,119
-------- --------
Total assets .................................................... $ 2,699 $ 3,121
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Federal income taxes currently payable to parent ............................... $ 528 $ --
Dividends payable .............................................................. 980 4,623
Cash overdraft ................................................................. -- 92
Other current liabilities ...................................................... -- 19
Deferred income taxes .......................................................... 943 1,092
-------- --------
Total liabilities ................................................ 2,451 5,826
-------- --------
Stockholder's equity (deficit):
Common stock (par value $1.00 per share; authorized,
issued and outstanding 100 shares) and contributed
capital ................................................................ 47,848 46,548
Receivables from parent:
Note receivable - interest at 14%, due no sooner
than February 1, 1999 ............................................... (44,520) (44,520)
Other ................................................................... (3,080) (4,733)
-------- --------
Total stockholder's equity (deficit) ............................. 248 (2,705)
-------- --------
Total liabilities and stockholder's equity (deficit) ............. $ 2,699 $ 3,121
======== ========
The accompanying notes are an integral part
of these financial statements.
20
22
EVE HOLDINGS INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
-------------------
1997 1996
---- ----
Revenues:
Royalties - parent .............................................................. $1,546 $1,713
Interest - parent ............................................................... 1,576 1,576
------ -----
3,122 3,289
Expenses:
Amortization of trademarks ...................................................... 425 425
Miscellaneous ................................................................... 37 24
------ -----
Income before income taxes ...................................................... 2,660 2,840
Income tax provision ................................................................ 379 994
------ ------
Net income ...................................................................... $2,281 $1,846
====== ======
The accompanying notes are an integral part
of these financial statements.
21
23
EVE HOLDINGS INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
-------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income ................................................................. $ 2,281 $ 1,846
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .......................................... 425 425
Deferred income taxes .................................................. (149) (149)
Changes in assets and liabilities:
Federal income taxes currently payable to parent ....................... 528 978
Other current liabilities .............................................. (19) --
------- -------
Net cash provided by operating activities .......................... 3,066 3,100
------- -------
Cash flows from financing activities:
Dividends/capital distributions ............................................ (4,623) (2,536)
Increase in due from parent ................................................ 1,653 (569)
Decrease in cash overdraft ................................................. (92) --
------- -------
Net cash used in financing activities ............................... (3,062) (3,105)
------- -------
Net increase (decrease) in cash ................................................ 4 (5)
Cash:
Beginning of period ........................................................ -- 8
------- -------
End of period .............................................................. $ 4 $ 3
======= =======
Supplemental cash flow information:
Payments of income taxes through receivable from parent .................... $ -- $ 164
Income taxes................................................................ 32 --
Dividends/capital distributions declared but not paid ...................... 980 2,122
The accompanying notes are an integral part
of these financial statements.
22
24
EVE HOLDINGS INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. THE COMPANY
Eve Holdings Inc. ("Eve") is a wholly-owned subsidiary of Liggett
Group Inc. ("Liggett"). Eve, formed in June 1990, is the proprietor of, and has
all right, title and interest in, certain federal trademark registrations (the
"Trademarks"). Eve has entered into an exclusive licensing agreement with
Liggett (effective until 2010) whereby Eve grants the use of the Trademarks to
Liggett in exchange for royalties, computed based upon Liggett's annual net
sales, excluding excise taxes. The Trademarks are pledged as collateral for
Liggett's borrowings under the notes indentures (see Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Going Concern
The accompanying financial statements have been prepared assuming that
Eve will continue as a going concern. Eve's revenues are comprised solely of
royalties and interest income from Liggett. In addition, Eve holds a note
receivable from Liggett for $44,520 due no sooner than February 1, 1999.
Liggett had a working capital deficiency of $81,170 and a capital deficiency of
$179,782 as of March 31, 1997, is highly leveraged and has substantial
near-term debt service requirements. These matters raise substantial doubt
about Eve and Liggett meeting their liquidity needs and their ability to
continue as going concerns.
The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
b. Per Share Data
All of Eve's common shares (100 shares authorized, issued and
outstanding for all periods presented herein) are owned by Liggett.
Accordingly, earnings and dividends per share data are not presented in these
financial statements.
3. GUARANTEE OF LIGGETT NOTES
On February 14, 1992, Liggett issued $150,000 of Senior Secured Notes
(the "Series B Notes"). In connection with the issuance of the Series B Notes,
the Trademarks were pledged as collateral. In addition, Eve is a guarantor for
the Series B Notes.
During 1994, Liggett issued $32,850 of Series C Senior Secured Notes
(the "Series C Notes"). Eve is a guarantor for the Series C Notes.
23
25
4. INCOME TAXES
Eve qualifies as a company conducting operations exempt from income
taxation under Delaware General Statute Section 1903(b). In recent years, some
states have been aggressively pursuing companies exempt under this statute.
Eve's management believes that certain state income tax rulings supporting
these states' arguments will be ultimately reversed and that Eve's status as a
company not conducting business in these states will be respected.
Consequently, management has not provided a reserve for additional state income
taxes. No assurance can be given with regard to future state income tax rulings
and audit activity with respect to Eve.
24
1
Exhibit 99.2
NEW VALLEY CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
2
NEW VALLEY CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
-----------------
Page
----
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996............................................. 2
Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996................................. 3
Consolidated Statement of Changes in Shareholders' Equity
(Deficit) for the three months ended March 31, 1997........... 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996................................. 5
Notes to the Quarterly Consolidated Financial Statements.......... 6
1
3
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
March 31, December 31,
----------------- -----------------
1997 1996
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 54,482 $ 57,282
Investment securities available for sale....................... 40,291 61,454
Trading securities owned....................................... 21,836 29,761
Restricted assets.............................................. 2,109 2,080
Receivable from clearing brokers............................... 19,507 23,870
Other current assets........................................... 11,019 9,273
--------- ---------
Total current assets...................................... 149,244 183,720
--------- ---------
Investment in real estate.......................................... 257,649 179,571
Investment securities available for sale........................... 2,974 2,716
Restricted assets.................................................. 6,655 6,766
Long-term investments, net......................................... 12,917 13,270
Other assets....................................................... 28,903 20,497
--------- ---------
Total assets.............................................. $ 458,342 $ 406,540
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities....................... $ 41,991 $ 44,888
Prepetition claims and restructuring accruals.................. 16,864 15,526
Income taxes................................................... 19,002 18,243
Securities sold, not yet purchased............................. 21,006 17,143
Note payable to related party.................................. 33,500 --
Current portion of notes payable and long-term obligations .... 22,728 2,310
--------- ---------
Total current liabilities................................. 155,091 98,110
--------- ---------
Notes payable...................................................... 157,827 157,941
Other long-term obligations........................................ 18,386 12,282
Redeemable preferred shares........................................ 221,753 210,571
Shareholders' equity (deficit):
Cumulative preferred shares; liquidation preference of $69,769;
dividends in arrears, $121,502 and $115,944................. 279 279
Common Shares, $.01 par value; 850,000,000 shares authorized;
9,577,624 shares outstanding................................ 96 96
Additional paid-in capital..................................... 634,731 644,789
Accumulated deficit............................................ (732,195) (721,854)
Unearned compensation on stock options......................... (1,008) (731)
Unrealized gain on investment securities ...................... 3,382 5,057
--------- ---------
Total shareholders' equity (deficit)...................... (94,715) (72,364)
--------- ---------
Total liabilities and shareholders' equity (deficit)...... $ 458,342 $ 406,540
========= =========
See accompanying Notes to Quarterly Consolidated Financial Statements
2
4
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31,
------------------------------------------
1997 1996
--------------------- --------------------
Revenues:
Principal transactions, net................................ $ 2,499 $ 8,738
Commissions................................................ 3,393 3,863
Real estate leasing........................................ 6,282 5,706
Interest and dividends..................................... 1,541 5,184
Other income............................................... 6,038 8,494
-------- --------
Total revenues......................................... 19,753 31,985
------- -------
Cost and expenses:
Operating, general and administrative...................... 24,267 33,654
Interest................................................... 3,862 4,524
Provision for loss on long-term investment................. 3,796 --
-------- ---------
Total costs and expenses............................... 31,925 38,178
------- -------
Loss from continuing operations before income taxes
and minority interest...................................... (12,172) (6,193)
Income tax provision (benefit).................................. 50 (100)
Minority interests in loss from continuing operations
of consolidated subsidiary................................. 1,009 481
-------- ---------
Loss from continuing operations................................. (11,213) (5,612)
Discontinued operations:
Income from discontinued operations........................ 872 728
-------- ---------
Net loss........................................................ (10,341) (4,884)
Dividend requirements on preferred shares....................... (15,980) (15,462)
Excess of carrying value of redeemable preferred
shares over cost of shares purchased....................... -- 4,279
--------- --------
Net loss applicable to Common Shares............................ $(26,321) $(16,067)
========= ========
Loss per common share:
Continuing operations...................................... $ (2.84) $ (1.76)
Discontinued operations.................................... .09 .08
--------- ---------
Net loss per Common Share.................................. $ (2.75) $ (1.68)
========= =========
Number of shares used in computation............................ 9,578,000 9,578,000
========= =========
See accompanying Notes to Quarterly Consolidated Financial Statements
3
5
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands, except per share amounts)
(Unaudited)
Unearned
Class B Compensation
Preferred Common Paid-In Accumulated on Stock Unrealized
Shares Shares Capital Deficit Options Gain
--------- ------ ------- ----------- ------------ -----------
Balance, December 31, 1996............ $279 $96 $644,789 $(721,854) $ (731) $ 5,057
Net loss........................... (10,341)
Undeclared dividends and accretion
on redeemable preferred shares... (10,422)
Unrealized loss on investment
securities....................... (1,675)
Adjustment to unearned
compensation on stock options.... 364 (364)
Compensation expense on stock
option grants.................... 87
---- --- -------- --------- -------- --------
Balance, March 31, 1997............... $279 $96 $634,731 $(732,195) $ (1,008) $ 3,382
==== === ======== ========= ======== ========
See accompanying notes to Quarterly Consolidated Financial Statements
4
6
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
----------------------------
1997 1996
----------------------------
Cash flows from operating activities:
Net loss................................................................ $(10,341) $ (4,884)
Adjustments to reconcile net loss to net
cash provided from (used for) operating activities:
Income from discontinued operations................................... (872) (728)
Depreciation and amortization......................................... 2,009 1,090
Provision for loss on long-term investment............................ 3,796 --
Stock based compensation expense...................................... 847 --
Changes in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in receivables and other assets................ 14,541 (7,420)
Decrease (increase) in income taxes................................ 759 (3,473)
Increase (decrease) in accounts payable and accrued liabilities.... (12,634) 9,583
------- ----------
Net cash used for continuing operations.................................... (1,895) (5,832)
Net cash provided from discontinued operations............................. 373 797
--------- ----------
Net cash provided from (used for) operating activities..................... (1,522) (5,035)
--------- ---------
Cash flows from investing activities:
Sale or maturity of investment securities............................. 23,193 8,627
Purchase of investment securities..................................... (3,963) (15,844)
Sale or liquidation of long-term investments.......................... 2,807 13,887
Purchase of long-term investments..................................... (4,400) --
Purchase of real estate............................................... -- (24,732)
Payment of prepetition claims......................................... (58) (508)
Return of prepetition claims paid..................................... 1,396 --
Decrease (increase) in restricted assets.............................. 82 (12,526)
Payment for acquisitions, net of cash acquired........................ (20,014) 1,915
-------- ---------
Net cash used for investing activities..................................... (957) (29,181)
-------- --------
Cash flows from financing activities:
Payment of preferred dividends........................................ -- (10,354)
Purchase of Class A preferred stock................................... -- (10,530)
Increase in margin loans payable...................................... -- 17,255
Prepayment of notes payable........................................... (114) --
Repayment of other obligations........................................ (207) (439)
---------- ----------
Net cash used for financing activities..................................... (321) (4,068)
--------- --------
Net decrease in cash and cash equivalents.................................. (2,800) (38,284)
Cash and cash equivalents, beginning of period............................. 57,282 51,742
------- -------
Cash and cash equivalents, end of period................................... $ 54,482 $ 13,458
======== ========
See accompanying Notes to Quarterly Consolidated Financial Statements
5
7
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY 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 Subsidiaries (the "Company"). The consolidated financial
statements as of March 31, 1997 presented herein have been prepared by
the Company without an audit. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary
to present fairly the financial position as of March 31, 1997 and the
results of operations and cash flows for all periods presented have been
made. Results for the interim periods are not necessarily indicative of
the results for an entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
These financial statements should be read in conjunction with the
consolidated financial statements in the Company's Annual Report on Form
10-K for the year ended December 31, 1996, as filed with the Securities
and Exchange Commission.
2. ACQUISITION
On January 31, 1997, the Company entered into a stock purchase agreement
(the "Purchase Agreement") with Brooke (Overseas) Ltd. ("Brooke
(Overseas)"), a wholly-subsidiary of Brooke Group Ltd. ("Brooke"), a
related party through the ownership of an approximate 42% voting interest
in the Company. Pursuant to the Purchase Agreement, the Company acquired
10,483 shares (the "BML Shares") of the common stock of BrookeMil Ltd.
("BML") from Brooke (Overseas) for a purchase price of $55,000, consisting
of $21,500 in cash and a $33,500 9% promissory note of the Company (the
"Note"). The BML Shares comprise 99.1% of the outstanding shares of BML, a
real estate development company in Russia. The Note is collateralized by
the BML Shares and is payable $21,500 on June 30, 1997 and $12,000 on
December 31, 1997. On April 28, 1997, the Company paid Brooke (Overseas)
$3,500, representing a portion of the Note payment due on June 30, 1997,
together with accrued interest thereon.
BML is developing a three-phase complex on 2.2 acres of land in downtown
Moscow, for which it has a 98-year lease. In 1993, the first phase of the
project, Ducat Place I, a 46,500 sq. ft. Class-A office building, was
constructed and leased. On February 5, 1997, BML entered into an
agreement to sell Ducat Place I to one of its tenants for approximately
$7,500, which purchase price has been reduced to reflect prepayments of
rent, and consummated the sale on April 18, 1997. In 1995, BML began
construction of Ducat Place II, a 150,000 sq. ft. office building. Ducat
Place II has been substantially pre-leased to a number of leading
international companies with occupancy expected by July 1997. The third
phase, Ducat Place III, is planned as a 400,000 sq. ft. mixed-use
complex, with construction anticipated to commence in 1998.
6
8
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
The acquisition was treated as a purchase for financial reporting
purposes and, accordingly, these consolidated financial statements
include the operations of BML from the date of acquisition.
The purchase price was allocated as follows: current assets of
approximately $9,000, investment in real estate of $79,200, other assets
of $8,800, assumption of current liabilities of $35,146 and long-term
liabilities of $6,854. Current assets consisted primarily of an asset held
for sale of $6,400 related to the estimated proceeds from the sale of
Ducat Place I, net of $1,100 in accrued closing costs. Liabilities
included a $20,400 loan to a Russian bank for the construction of Ducat
Place II. The loan, which matures $6,100 in April 1997 (paid with the
proceeds from the sale of Ducat Place I), $4,100 in July 1997 and $10,200
in October 1997, is collateralized by a mortgage on Ducat Place II. In
addition, the liabilities of BML included approximately $13,800 of rents
and related payments prepaid by tenants of Ducat Place II for periods
generally ranging from 15 to 18 months. Proforma operating results for the
three months ended March 31, 1997 and 1996 are not presented herein as the
historical operating results of BML are not material to the historical
operating results of the Company.
The Company is currently seeking long-term financing to replace the
$20,400 construction loan related to Ducat Place II due in 1997 and for
the development of Ducat Place III. There is no assurance that the
Company can obtain such financing particularly in light of the political
and economic risks associated with investments in real estate in Russia.
The components of the Company's investment in real estate at March 31,
1997 are as follows:
U.S. BML Total
---- --- -----
Land .................................. $ 36,162 $ 14,200 $ 50,362
Buildings............................... 146,799 65,000 211,799
Construction-in-progress................ 234 234
--------- -------- ---------
Total............................. 183,195 79,200 262,395
Less: accumulated depreciation......... (4,746) (4,746)
--------- -------- ---------
Net investment in real estate..... $ 178,449 $ 79,200 $ 257,649
========= = ====== =========
3. DISCONTINUED OPERATIONS
During the fourth quarter of 1996, Thinking Machines Corporation
("Thinking Machines") adopted a plan to terminate its parallel processing
computer sales and service business. Consequently, the operating results
of this segment have been classified as discontinued operations, and the
quarterly results for 1996 have been restated. Accordingly, the financial
statements reflect the financial position and the results of operations
of the discontinued operations of Thinking Machines separately from
continuing operations.
Summarized operating results of the discontinued operations of Thinking
Machines for the three months ended March 31, 1997 and the two months
ended March 31, 1996 from the date of acquisition.
7
9
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31,
1997 1996
-------- ------
Revenues..................................... $ 3,100 $ 4,699
======= =======
Operating income............................. $ 1,421 $ 1,186
======= =======
Income before income taxes and minority
interests................................. $ 1,421 $ 1,186
Minority interests........................... (549) (458)
-------- --------
Net income................................... $ 872 $ 728
======== ========
In April 1997, Thinking Machines sold the remaining part of its
discontinued operations for $2,405 in cash which resulted in the Company
recording a gain on disposal of discontinued operations of approximately
$200.
4. INCOME TAXES
At March 31, 1997, the Company had approximately $95,000 of unrecognized
net deferred tax assets, comprised primarily of net operating loss
carryforwards, available to offset future taxable income for federal tax
purposes. A valuation allowance has been provided against the amount as
it is deemed more likely than not that the benefit of the deferred tax
assets will not be utilized. The Company continues to evaluate the
realizability of the deferred tax assets and its estimate is subject to
change. The income tax provision (benefit), which principally represented
the effects of state income taxes, for the three months ended March 31,
1997 and 1996, does not bear a customary relationship with pre-tax
accounting income principally as a consequence of the change in the
valuation allowance relating to deferred tax assets.
5. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at
fair value, with net unrealized gains included as a separate component of
shareholders' equity (deficit). The Company had realized gains on sales
of investment securities available for sale of $3,694 for the three
months ended March 31, 1997.
The components of investment securities available for sale at March 31,
1997 are as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Gain Loss Value
---- ---------- ---------- -----
Marketable equity securities:
RJR Nabisco common stock................ $ 32,574 $ 1,696 $ 34,270
Other marketable securities............. 3,624 2,830 $ 433 6,021
--------- ------- -------- ---------
Total marketable equity securities... 36,198 4,526 433 40,291
Marketable debt securities (long-term)........ 3,685 711 2,974
-------- ---------- -------- ---------
Total securities available for sale........... 39,883 4,526 1,144 43,265
Less long-term portion of investment
securities.............................. (3,685) (711) (2,974)
--------- ---------- ------- ---------
Investment securities - current portion....... $ 36,198 $ 4,526 $ 433 $ 40,291
======== ======= ======= ========
8
10
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
As of March 31, 1997, the long-term portion of investment securities
available for sale consisted of marketable debt securities which mature
in two years.
As of March 31, 1997, the Company, through a wholly-owned subsidiary, held
approximately 1.06 million shares of RJR Nabisco Holdings Corp. ("RJR
Nabisco") common stock with a market value of $34,270 (cost of $32,574).
Based on the market price of the RJR Nabisco common stock at May 9, 1997
($30.625 per share), no amounts are payable by the Company under any of
its profit sharing arrangements with respect to the RJR Nabisco common
stock.
6. LONG-TERM INVESTMENTS
At March 31, 1997, long-term investments consisted primarily of
investments in limited partnerships of $11,782 and an equity investment in
a corporation of $1,000. The Company has determined that an other than
temporary impairment in the value of its investment in a joint venture has
occurred and has written-down this investment to zero with a charge to
operations of $3,796 for the three months ended March 31, 1997. The fair
value of the Company's long-term investments approximates its carrying
amount. The Company's estimates of the fair value of its long-term
investments are subject to judgment and are not necessarily indicative of
the amounts that could be realized in the current market.
The Company is required under certain limited partnership agreements to
make additional investments up to an aggregate of $24,000. 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.
7. REDEEMABLE PREFERRED SHARES
At March 31, 1997, the Company had authorized and outstanding 2,000,000
and 1,071,462, respectively, of its Class A Senior Preferred Shares. At
March 31, 1997 and December 31, 1996, respectively, the carrying value of
such shares amounted to $221,753 and $210,571, including undeclared
dividends of $127,779 and $117,117, or $119.26 and $109.31 per share. As
of March 31, 1997, the unamortized discount on the Class A Senior
Preferred Shares was $5,312.
For the three months ended March 31, 1997, the Company recorded $759 in
compensation expense related to certain Class A Senior Preferred Shares
awarded to an officer of the Company in 1996. At March 31, 1997, the
balance of the deferred compensation and the unamortized discount related
to these award shares was $4,900 and $2,960, respectively.
8. 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 $121,502
and $115,944 at March 31, 1997 and December 31, 1996, respectively. These
undeclared dividends represent $43.54 and $41.55 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.
9
11
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
9. PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS
Those liabilities that are expected to be resolved as part of the
Company's First Amended Joint Chapter 11 Plan of Reorganization, as
amended (the "Joint Plan") are classified in the Consolidated Balance
Sheets as prepetition claims and restructuring accruals. On January 18,
1995, approximately $550 million of prepetition claims were paid pursuant
to the Joint Plan. The prepetition claims remaining as of March 31, 1997
of $16,864 may be subject to future adjustments depending on pending
discussions with the various parties and the decisions of the Bankruptcy
Court.
10. CONTINGENCIES
Litigation
----------
On or about March 13, 1997, a shareholder derivative suit was filed
against the Company, as a nominal defendant, its directors and Brooke in
the Delaware Chancery Court, by a shareholder of the Company. The suit
alleges that the Company's purchase of the BML Shares constituted a
self-dealing transaction which involved the payment of excessive
consideration by the Company. The plaintiff seeks (i) a declaration that
the Company's directors breached their fiduciary duties, Brooke aided and
abetted such breaches and such parties are therefore liable to the
Company, and (ii) unspecified damages to be awarded to the Company. The
Company's time to respond to the complaint has not yet expired. The
Company believes that the allegations are without merit, and it intends
to defend the suit vigorously.
The Company is also a defendant in various other 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.
10
1
Exhibit 99.3
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
2
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
-----------------
Page
----
Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996.............................. 2
Consolidated Statements of Operations for the three months ended March 31, 1997
and March 31, 1996............................................................................ 3
Consolidated Statement of Stockholder's Equity (Deficit) for the three months
ended March 31, 1997.......................................................................... 4
Consolidated Statements of Cash Flows for the three months ended March 31, 1997
and March 31, 1996............................................................................ 5
Notes to Consolidated Financial Statements.......................................................... 6
1
3
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
================================================================================
March 31, December 31,
1997 1996
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 1,018 $ 1,875
Accounts receivable - trade ............................................. 685 166
Receivables from affiliates ............................................. 33,651
Inventories ............................................................. 3,382 3,569
Other current assets .................................................... 1,930 2,640
--------- ---------
Total current assets ................................................. 40,666 8,250
Property, plant and equipment, at cost, less
accumulated depreciation of $454 and $676 ........................... 9,666 59,607
Goodwill, net ............................................................. 1,081 1,094
Deferred finance costs .................................................... 2,805
Other ..................................................................... 5 540
--------- ---------
Total assets ......................................................... $ 51,418 $ 72,296
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Notes payable ........................................................... $ 3,000 $ 21,658
Accounts payable - trade ................................................ 4,255 13,074
Due to affiliates ....................................................... 45,638 48,875
Unearned revenue ........................................................ 3 7,406
Accrued taxes ........................................................... 18,989 8,474
Accrued interest ........................................................ 45 597
Other accrued liabilities ............................................... 2,019 2,692
--------- ---------
Total current liabilities ............................................ 73,949 102,776
Notes payable ............................................................. 1,758
Unearned revenue .......................................................... 9,458
Other liabilities ......................................................... 26,990 1,494
Commitments and contingencies..............................................
Stockholder's equity (deficit):
Common stock, par value $1 per share, 701,000 shares authorized,
authorized, issued and outstanding ................................... 701 701
Additional paid-in-capital .............................................. 5,600 3,400
Deficit ................................................................. (57,580) (45,533)
--------- ---------
Total stockholder's equity (deficit) ................................. (51,279) (41,432)
--------- ---------
Total liabilities and stockholder's equity (deficit) ................. $ 51,418 $ 72,296
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
2
4
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
================================================================================
Three Months Ended
------------------------
March 31, March 31,
1997 1996
--------- ---------
Net sales ................................... $ 13,704 $ 10,839
Cost of sales ............................... 11,329 9,995
-------- --------
Gross profit ................................ 2,375 844
Operating, selling, administrative and
general expenses ..................... 1,978 2,061
-------- --------
Operating income (loss) ..................... 397 (1,217)
Other income (expense):
Interest income .......................... 480
Interest expense ......................... (2,148) (1,824)
Gain on sale of stock .................... 25,563
Gain on foreign currency exchange ........ 200 153
Other, net ............................... (29) (156)
-------- --------
Income (loss) before income taxes ........... 24,463 (3,044)
Provision for income taxes .................. 12,482 451
-------- --------
Net income (loss) ........................... $ 11,981 $ (3,495)
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
3
5
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
================================================================================
Common Stock Additional
--------------------- Paid-in
Shares Amount Capital Deficit Total
------ ------ ----------- ------- -----
Balance, December 31, 1996 ........ 701,000 $ 701 $ 3,400 $(45,533) $(41,432)
Net income ........................ 11,981 11,981
Distributions to parent ........... (24,028) (24,028)
Capital contribution .............. 2,200 2,200
-------- -------- -------- -------- --------
Balance, March 31, 1997 ........... 701,000 $ 701 $ 5,600 $(57,580) $(51,279)
======== ======== ======== ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
4
6
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
================================================================================
Three Months Ended
------------------------
March 31, March 31,
1997 1996
--------- ---------
Net cash used in operating activities ...................................... $ (1,218) $ (1,962)
-------- --------
Cash flows from investing activities:
Capital expenditures ................................................. (658) (4,584)
Proceeds from sale of BML, net ....................................... 20,002
Proceeds from sale of option to purchase
stock in Liggett-Ducat ............................................. 2,200
-------- --------
Net cash provided by (used in) investing activities ........................ 21,544 (4,584)
-------- --------
Cash flows from financing activities:
Proceeds from debt ................................................... 3,000 1,648
Repayments of debt ................................................... (155) (155)
Borrowings under revolver ............................................ 4,254
Repayments on revolver ............................................... (195)
Distributions paid to parent ......................................... (24,028)
-------- --------
Net cash (used in) provided by financing activities ........................ (21,183) 5,552
-------- --------
Net decrease in cash and cash equivalents .................................. (857) (994)
Cash and cash equivalents, beginning of period ............................. 1,875 1,660
-------- --------
Cash and cash equivalents, end of period ................................... $ 1,018 $ 666
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
5
7
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. ORGANIZATION
Brooke (Overseas) Ltd. ("the Company"), a Delaware corporation, is a
wholly-owned subsidiary of BGLS Inc. ("BGLS") and an indirect
subsidiary of Brooke Group Ltd. ("Brooke"). The consolidated financial
statements of the Company include Liggett-Ducat Ltd. ("Liggett-Ducat"),
a Russian closed joint stock company engaged in the manufacture and
sale of cigarettes in Russia, Liggett-Ducat Tobacco ("LDT"), a
wholly-owned subsidiary engaged in the construction of a new cigarette
factory, and, prior to January 31, 1997, BrookeMil Ltd. ("BML"), a
wholly-owned subsidiary engaged in construction of office buildings and
property management in Moscow, Russia.
On July 5, 1996, Liggett Group Inc. ("Liggett"), a wholly-owned
subsidiary of BGLS, purchased from the Company 140,000 shares (19.97%)
of the tobacco operations of Liggett-Ducat for $2,100. Ten-year option
agreements currently in place enable Liggett to increase its ownership
in Liggett-Ducat to 95%. (Refer to Note 7.)
In December 1996, the Company cancelled BML intercompany debt in
exchange for 10,483 shares of newly issued BML common stock. These
shares represent 99.1% of the outstanding shares of BML. On January 31,
1997, such shares were sold to New Valley Corporation ("NVC"). (Refer
to Note 3.)
The interim consolidated financial statements of the Company are
unaudited and, in the opinion of management, reflect all adjustments
necessary (which are normal and recurring) to present fairly the
Company's consolidated financial position, results of operations and
cash flows. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto included as Exhibit 99.4 in Brooke's and BGLS' Annual Report on
Form 10-K, as amended, for the year ended December 31, 1996, as filed
with the Securities and Exchange Commission. The consolidated
results of operations for interim periods should not be regarded as
necessarily indicative of the results that may be expected for the
entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities and
the reported amounts of revenues and expenses. Actual results could
differ from those estimates.
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform to the 1997 presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LIQUIDITY:
The Company has historically relied on Brooke and BGLS for sources of
financing. At March 31, 1997, the Company had net capital and working
capital deficiencies of $51,279
6
8
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
and $33,283, respectively. The Company has upgraded the cigarette
operations' tobacco processing complex and is continuing to implement
cost-saving measures. Liggett-Ducat plans to begin the manufacture and
marketing of western style cigarettes. Management believes that such
activities will result in improved operations and cash flow, but there
can be no assurances in this regard.
3. SALE OF BROOKEMIL
On January 31, 1997, the Company sold its 99.1% of the outstanding
shares of BML to New Valley Corporation ("New Valley") for $21,500 in
cash and a promissory note of $33,500, collateralized by the BML
shares, payable during 1997 with an annual interest rate of 9%. The
consideration received exceeded the carrying value of the Company's
investment in BML by $52,500. The Company recognized a gain on the sale
in 1997 in the amount of $25,500. The remaining $27,000 has been
deferred, reflecting recognition that the Company's parent, BGLS,
retains an interest in BML through its 42% equity ownership in New
Valley, and, further, a portion of the property sold is subject to a
put option held by New Valley. This option allows New Valley, under
certain circumstances, to put a portion of the property sold back to
the Company at the greater of the appraised fair value of the property
at the date of exercise or $13,600. The Company distributed the $21,500
cash proceeds received from the sale of BML to BGLS and anticipates
distributing to BGLS proceeds from the $33,500 promissory note.
In connection with the sale of the BML shares, certain specified
liabilities aggregating $40,800 including the Vneshtorgbank loan with a
balance of $20,418, remained with BML. Further, the Company, Brooke and
BGLS each contributed to the capital of BML, through cancellation of
all indebtedness of BML to each such entity, the aggregate amount of
which was $19,275 including accrued interest thereon. Further, Liggett-
Ducat entered into a Use Agreement with BML whereby Liggett-Ducat is
permitted to continue to utilize the site on the same basis as in the
past. The Use Agreement is terminable by BML on 270 days' prior notice.
SUBSEQUENT EVENTS:
On April 18, 1997, BML sold one of its office buildings, Ducat Place I,
to a third party. Accordingly, the Company will recognize approximately
$1,490 of the deferred gain on the BML sale in the second quarter,
1997.
On April 28, 1997, New Valley paid BOL $3,500, representing a portion
of the promissory note payment due to BOL on June 30, 1997, together
with accrued interest thereon.
7
9
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
4. INVENTORIES
Inventories consist of:
March 31, December 31,
1997 1996
--------- ------------
Finished goods .................... $ 319 $
Work-in-process ................... 314 53
Raw materials ..................... 1,925 2,664
Replacement parts and supplies .... 824 852
------ ------
$3,382 $3,569
====== ======
The Company has a leaf inventory management program whereby, among
other things, it is committed to purchase certain quantities of leaf
tobacco. The purchase commitments are for quantities not in excess
of anticipated requirements and are at prices established at the date
of the commitment. At March 31, 1997, the Company had leaf tobacco
purchase commitments of $4,934.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
March 31, December 31,
1997 1996
--------- ------------
Buildings ......................... $ $ 8,064
Factory machinery and equipment ... 4,526 4,419
Computers and software ............ 295 289
Office furniture and equipment .... 137 129
Vehicles .......................... 416 416
Construction-in-progress .......... 4,746 46,966
------- -------
10,120 60,283
Less accumulated depreciation ..... 454 676
------- -------
$ 9,666 $59,607
======= =======
Purchase commitments of approximately $2,000 have been made for factory
machinery. Of this amount, $1,000 is payable in July 1997; the other
$1,000 is payable over a period of 5 years with interest at 8% per
annum.
SUBSEQUENT EVENT:
On April 28, 1997, BOL purchased excess production equipment from
Liggett for $3,000.
8
10
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
6. LONG-TERM DEBT
Current and long-term debt consist of the following:
March 31, December 31,
1997 1996
--------- ------------
Bank loan ......................... $ $20,418
Deferred financing fees ........... 1,240
Notes payable ..................... 4,758
------- -------
4,758 21,658
Less current maturities ........... 3,000 21,658
------- -------
Amount due after one year ......... $ 1,758 $
======= =======
In October 1995, Liggett-Ducat entered into a loan agreement with
Vneshtorgbank to borrow up to $20,418 to fund real estate development.
At December 31, 1996, BML had drawn down $20,418 of the loan. In
connection with the sale of BML to New Valley, the Russian bank loan
remained at BML and the Company and Brooke, as guarantor, were
indemnified by New Valley with respect to this liability. (Refer to
Note 3.)
REVOLVING CREDIT FACILITY:
In February and March 1997, the Company obtained lines of credit in the
amounts of $1,000 at 28% per annum and $2,000 at 26%, respectively, in
order to secure tobacco commitment purchases. The lines of credit will
expire in May 1997 and June 1997. In April and May 1997, the rates of
interest were renegotiated at 23%. Also in April 1997, an additional
$1,000 line of credit was obtained. Brooke is a guarantor on the lines
of credit.
7. RELATED PARTY TRANSACTIONS
The Company has obtained funding through a revolving credit facility
with Brooke and BGLS at an annual interest rate of 20% to cover certain
expenses including the cost of certain administrative services and
personnel, tobacco and material purchases and upgrades of factory
equipment. In addition, Brooke and BGLS have advanced funds to BML for
its real estate developments projects. The amount due to Brooke and
BGLS under this facility at March 31, 1997 was $33,410 including
interest of $12,128, of which $19,933 including interest of $5,897 is
due from Liggett-Ducat and LDT.
On March 13, 1997, Liggett acquired a second option to purchase all
remaining shares of Liggett-Ducat (an additional 33%) from the Company
for $2,200. Of that amount, $2,050 was paid in cash and the Company
recorded a receivable of $150.
8. INCOME TAXES
The entire 1996 and a portion ($741) of the 1997 provision for income
taxes is payable pursuant to Russian statutory requirements. Further,
the Company has recorded a
9
11
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
provision for income taxes of $11,741 related to its sale of BML in
1997 in accordance with its tax sharing agreement with Brooke.
9. CONTINGENCIES
BGLS has pledged its ownership interest in the Company's Common Stock
as collateral in connection with the issuance of BGLS' 15.75% Senior
Secured Notes due 2001.
10
1
Exhibit 99.4
NEW VALLEY HOLDINGS, INC.
FINANCIAL STATEMENTS
MARCH 31, 1997
2
NEW VALLEY HOLDINGS, INC.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
-----------------
Page
----
Balance Sheets as of March 31, 1997 and December 31, 1996.......................................... 2
Statements of Operations for the three months ended March 31, 1997 and
March 31, 1996................................................................................. 3
Statement of Stockholder's Equity (Deficit) for the three months ended March 31, 1997.............. 4
Statements of Cash Flows for the three months ended March 31, 1997 and
March 31, 1996................................................................................ 5
Notes to Financial Statements...................................................................... 6
1
3
NEW VALLEY HOLDINGS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
March 31, December 31,
1997 1996
--------- ------------
ASSETS
Cash and cash equivalents ..................................... $ 10 $ 1
Investment in New Valley:
Redeemable preferred stock .................................. 70,489 72,962
Common stock ................................................ (70,489) (72,962)
-------- --------
Total investment in New Valley ..............................
-------- --------
Total assets .................................................. $ 10 $ 1
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Payable to parent ............................................. $ 28 $ 4
Accrued expenses .............................................. 8 7
Current income taxes payable to parent ........................ 6,305 6,312
-------- --------
Total liabilities ............................................. 6,341 6,323
-------- --------
Commitments and contingencies .................................
Common stock, $0.01 par value, 100 shares authorized, issued
and outstanding .............................................
Additional paid-in capital .................................... 7,633 7,633
Retained earnings (deficit) ................................... (8,890) (727)
Other ......................................................... (5,074) (13,228)
-------- --------
Total stockholder's equity (deficit) .......................... (6,331) (6,322)
-------- --------
Total liabilities and stockholder's equity (deficit) .......... $ 10 $ 1
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
2
4
NEW VALLEY HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Three Months Ended
----------------------
March 31, March 31,
1997 1996
--------- ---------
Equity in loss of New Valley .................................... $(8,514) $(1,495)
Interest income ................................................. 6 7
General and administrative expenses ............................. (23) (2)
------- -------
Loss from continuing operations before income taxes ............. (8,531) (1,490)
------- -------
(Benefit) provision for income taxes:
Current ...................................................... (7) 435
Deferred ..................................................... (2,688)
------- -------
Income tax benefit .............................................. (7) (2,253)
------- -------
(Loss) income from continuing operations ........................ (8,524) 763
Income from discontinued operations of New Valley
net of taxes of $0 and $0 in 1997 and 1996, respectively ... 361
------- -------
Net (loss) income ............................................... $(8,163) $ 763
======= =======
The accompanying notes are an integral part
of the consolidated financial statements.
3
5
NEW VALLEY HOLDINGS, INC.
STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Common Stock Additional Retained
-------------------- Paid-In Earnings
Shares Amount Capital (Deficit) Other Total
------ ------ ---------- --------- ----- -----
Balance, December 31, 1996 ....................... 100 $ $ 7,633 $ (727) $(13,228) $(6,322)
Proportionate share of New Valley's
capital transactions ......................... (658) (658)
Unrealized holding gain on
investment in New Valley ..................... 8,812 8,812
Net loss ......................................... (8,163) (8,163)
------ ------- ------- ------- -------- -------
Balance, March 31, 1997 .......................... 100 $ $ 7,633 $(8,890) $ (5,074) $(6,331)
====== ======= ======= ======= ======== =======
The accompanying notes are an integral part
of the consolidated financial statements.
4
6
NEW VALLEY HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
================================================================================
Three Months Ended
------------------
March 31, March 31,
1997 1996
--------- ---------
Net cash provided by operating activities ............. $ 9 $ 4
------- ------
Cash flows from investing activities:
Dividends received from New Valley .................. 6,183
------- ------
Net cash provided by investing activities ............. 6,183
------- ------
Cash flows from financing activities:
Distributions paid to parent ........................ (2,851)
------- ------
Net cash used in financing activities ................. (2,851)
------- ------
Net increase in cash and cash equivalents ............. 9 3,336
Cash and cash equivalents at beginning of period ...... 1 738
------- ------
Cash and cash equivalents at end of period ............ $ 10 $4,074
======= ======
The accompanying notes are an integral part
of the consolidated financial statements.
5
7
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
ORGANIZATION. New Valley Holdings, Inc. (the "Company") was formed on
September 9, 1994 by BGLS Inc. ("BGLS") to act as a holding company for
certain stock investments in New Valley Corporation ("New Valley"). BGLS
owns 100% of the authorized, issued and outstanding common stock of the
Company. BGLS is a wholly-owned subsidiary of Brooke Group Ltd.
("Brooke").
The interim financial statements of the Company are unaudited and, in the
opinion of management, reflect all adjustments necessary (which are normal
and recurring) to present fairly the Company's financial position, results
of operations and cash flows. These financial statements should be read in
conjunction with the financial statements and the notes thereto included
in BGLS' Annual Report on Form 10-K, as amended, for the year ended
December 31, 1996, as filed with the Securities and Exchange Commission.
The results of operations for interim periods should not be regarded as
necessarily indicative of the results that may be expected for the entire
year.
Certain amounts in the 1996 financial statements have been reclassified to
conform to the 1997 presentation.
USE OF 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 and
disclosure of contingent assets and liabilities and the reported amounts
of revenues and expenses. Actual results could differ from those
estimates.
2. INVESTMENT IN NEW VALLEY CORPORATION
The Company's investment in New Valley at March 31, 1997 is summarized
below:
Unrealized
Number of Fair Carrying Holding
Shares Value Amount Gain (Loss)
------ ----- ------ -----------
Class A Preferred Shares ..... 618,326 $ 70,489 $ 70,489 $(19,924)
Common Shares ................ 3,969,962(A) 5,955 (70,489)
-------- -------- --------
$ 76,444 $ $(19,924)
======== ======== ========
(A) Gives effect to July 1996 one-for-twenty reverse stock split.
The $15.00 Class A Increasing Rate Cumulative Senior Preferred Shares
($100 Liquidation Value), $.01 par value (the "Class A Preferred Shares"),
are accounted for as debt securities pursuant to the requirements of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", and are classified
as available-for-sale. 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. New Valley's Common Shares, $.01 par value
(the "Common Shares") were accounted for pursuant to APB No. 18, "The
Equity Method of Accounting for Investments in Common Stock".
6
8
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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.
At March 31, 1997, the Company's investment in New Valley consisted of an
approximate 42% voting interest. The Company's investment is represented
by 618,326 Class A Preferred Shares (57.7%) and 3,969,962 Common Shares
(41.5%) after giving effect to a one-for-twenty reverse stock split by New
Valley in July 1996.
During the first quarter of 1996, New Valley repurchased 72,104 Class A
Preferred Shares for a total amount of $10,530. The Company has recorded
its proportionate interest in the excess of the carrying value of the
shares over the cost of the shares repurchased as a credit to additional
paid-in capital in the amount of $1,782 for the three months ended March
31, 1996. No such repurchases have been made during the quarter ended
March 31, 1997.
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. On March 27, 1996, New Valley paid a cash dividend on the Class A
Preferred Shares of $10.00 per share. The Company received $6,183 in the
distribution. At March 31, 1997, the accrued and unpaid dividends
arrearage was $127,779 ($119.26 per share).
3. NEW VALLEY CORPORATION
Summarized financial information for New Valley as of March 31, 1997 and
December 31, 1996 and for the three months ended March 31, 1997 and 1996
follows:
March 31, December 31,
1997 1996
--------- ------------
Current assets, primarily cash and marketable
securities ..................................... $ 149,244 $ 183,720
Non-current assets ............................... 309,098 222,820
Current liabilities .............................. 155,091 98,110
Non-current liabilities .......................... 176,213 170,223
Redeemable preferred stock ....................... 221,753 210,571
Shareholders' equity (deficit).................... (94,715) (72,364)
7
9
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
March 31,
-------------------
1997 1996
---- ----
Revenues .................................... $19,753 $31,985
Costs and expenses .......................... 31,925 38,178
Loss from continuing operations ............. (11,213) (5,612)
Income from discontinued operations ......... 872 728
Net loss applicable to common shares(A) ..... (26,321) (16,067)
(A) Considers all preferred accrued dividends, whether or not declared,
and the excess of carrying value of redeemable preferred shares over cost
of shares purchased.
ACQUISITION OF COMMON SHARES OF BML:
On January 31, 1997, New Valley acquired substantially all the common
shares of BrookeMil Ltd., a real estate investment company doing business
in Russia, from Brooke Overseas Ltd. ("BOL"), for $55,000, $21,500 payable
in cash and a promissory note of $33,500 payable $21,500 on June 30, 1997
and $12,000 on December 31, 1997 with interest at 9%.
RJR NABISCO HOLDINGS CORP.:
At March 31, 1997, New Valley held 1,062,650 shares of RJR Nabisco
Holdings Corp. ("RJR Nabisco") common stock with a market value of $34,270
(cost of $32,574). The unrealized gain on New Valley's investment in RJR
Nabisco common stock was $1,696 at March 31, 1997. Based on the market
price of RJR Nabisco common stock at March 31, 1997, no amounts are
payable by Brooke or New Valley under any of their net profit-sharing
arrangements with respect to the RJR Nabisco common stock.
SUBSEQUENT EVENT:
On April 28, 1997, New Valley paid $3,500 representing a portion of the
promissory note payment due to BOL on June 30, 1997, together with
accrued interest thereon.
4. FEDERAL INCOME TAX
At March 31, 1997, 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.
The provision for taxes for the three month period ended March 31, 1996
does not bear a customary relationship to the pretax income for the
Company due principally to the effects of the 80% dividends received
deduction for Federal taxes. The benefit for income taxes at March 31,
1997 is based on the current taxable loss.
8
10
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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.
9
