<PAGE> 1
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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
------------ ------------
Commission file number 1-5759
-----------------------------
BROOKE GROUP LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0255124
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 S.E. 2ND STREET, MIAMI, FLORIDA 33131
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(305) 579-8000
----------------------------------------------
(Registrant's telephone number, including area
code)
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---- ----
As of May 12, 1995, there were outstanding 18,247,096 shares of common
stock, par value $0.10 per share.
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BROOKE GROUP LTD.
FORM 10-Q
T A B L E O F C O N T E N T S
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1995 and December 31, 1994........................ 3
Consolidated Statements of Operations for the three months ended March 31, 1995 and
1994.......................................................................................... 5
Consolidated Statement of Stockholders' Equity (Deficit) for the three months ended March 31,
1995.......................................................................................... 6
Consolidated Statements of Cash Flows for the three months ended March 31, 1995 and
1994.......................................................................................... 7
Notes to Consolidated Financial Statements.................................................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................................................... 21
Item 6. Exhibits and Reports on Form 8-K ...................................................... 21
SIGNATURES...................................................................................... 22
</TABLE>
- 2 -
<PAGE> 3
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 35,877 $ 4,276
Accounts receivable - trade 17,304 31,325
Other receivables 10,867 1,558
Inventories 51,779 47,098
Other current assets 2,787 3,247
---------- ---------
Total current assets 118,614 87,504
Property, plant and equipment, at cost, less accumulated
depreciation of $25,368 and $24,460 25,128 25,806
Intangible assets, at cost, less accumulated amortization
of $14,367 and $13,936 6,306 6,728
Investment in affiliate 73,292 97,520
Other assets 11,158 11,867
---------- ---------
Total assets $ 234,498 $ 229,425
========== =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
- 3 -
<PAGE> 4
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
--------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Notes payable and current portion of long-term debt $ 39,299 $ 31,351
Accounts payable 14,299 12,415
Accrued promotional expenses 24,911 29,853
Unearned revenue 2,056
Net current liabilities of business held for disposition 4,974
Other accrued liabilities 64,545 63,702
-------- --------
Total current liabilities 143,054 144,351
Notes payable, long-term debt and other obligations, less current
portion 402,607 405,798
Noncurrent employee benefits 31,429 31,119
Net long-term liabilities of business held for disposition 23,009
Commitments and contingencies
Stockholders' equity (deficit):
Preferred Stock, par value $1.00 per share, authorized
10,000,000 shares
Common stock, par value $0.10 per share, authorized 40,000,000
shares, issued 24,998,043 shares, outstanding 18,247,096 and
18,260,844 shares, respectively 1,825 1,826
Additional paid-in capital 70,874 66,245
Deficit (392,766) (420,746)
Other 11,058 11,365
Less: 6,750,947 and 6,737,199 shares of common stock in
treasury, at cost (33,583) (33,542)
-------- --------
Total stockholders' equity (deficit) (342,592) (374,852)
-------- --------
Total liabilities and stockholders' equity (deficit) $ 234,498 $ 229,425
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
- 4 -
<PAGE> 5
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1995 1994
------------- -------------
<S> <C> <C>
Revenues* $ 95,290 $ 114,105
Cost of goods sold* 46,378 57,296
---------- ----------
Gross profit 48,912 56,809
Selling, general and administrative expenses 49,308 50,529
---------- ----------
Operating income (loss) (396) 6,280
Other income (expenses):
Interest income 389 49
Interest expense (14,715) (13,339)
Equity in earnings of affiliate 1,683
Other, net 115 237
---------- ----------
(Loss) from continuing operations before
income taxes (12,924) (6,773)
Provision (benefit) for income taxes (14) (53)
---------- ----------
(Loss) from continuing operations (12,910) (6,720)
Discontinued operations:
Income from discontinued operations, net of income taxes
of $63 and $3,068 in 1995 and 1994, respectively 1,648 5,314
Gain on diposal 13,138
---------- ----------
Income from discontinued operations 14,786 5,314
---------- ----------
Income (loss) before extraordinary item 1,876 (1,406)
Extraordinary (loss) from the early extinguishment of debt (1,118)
---------- ----------
Net income (loss) $ 1,876 $ (2,524)
========== ==========
Per common share:
(Loss) from continuing operations $ (0.70) $ (0.38)
========== ==========
Income from discontinued operations $ 0.80 $ 0.30
========== ==========
Extraordinary item $ -- $ (0.06)
========== ==========
Net income (loss) $ 0.10 $ (0.14)
========== ==========
Weighted average common shares and common stock
equivalents outstanding 18,501,830 17,426,809
========== ==========
</TABLE>
___________________________________
* Revenues and Cost of goods sold include federal excise taxes of $26,392
and $31,815 for the periods ended March 31, 1995 and 1994, respectively.
The accompanying notes are an integral part
of the consolidated financial statements
- 5 -
<PAGE> 6
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)
<TABLE>
<CAPTION>
Common Stock Additional
------------ Paid-In Treasury
Shares Amount Capital Deficit Stock Other Total
------ ------ ---------- ------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 18,260,844 $1,826 $66,245 $(420,746) $(33,542) $11,365 $(374,852)
Net income 1,876 1,876
Dividends on common stock of BGL ($0.075
per share) (1,368) (1,368)
Stock grant to directors 20,000 2 (2) 94 94
Stock grant to consultant 939 (703) 236
MAI spin-off 27,286 27,286
Net unrealized holding gain 396 396
Effect of New Valley capital transactions 3,689 3,689
Other, net 186 186
Treasury stock, at cost (33,748) (3) 3 (135) (135)
---------- ----- ------ ------- ------ ------ -------
Balance, March 31, 1995 18,247,096 $1,825 $70,874 $(392,766) $(33,583) $11,058 $(342,592)
========== ===== ====== ======= ====== ====== =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
- 6 -
<PAGE> 7
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1995 1994
--------- ---------
<S> <C> <C>
Net cash (used in) provided by operating activities $ (5,263) $ (4,785)
Cash flows from investing activities:
Dividends from affiliate 30,916
Redemption of SkyBox preferred stock 4,000
Investment in New Valley (365)
Capital expenditures (511) (38)
Proceeds from sale of assets/equipment 34
Impact of discontinued operations (438)
-------- --------
Net cash provided by (used in) investing activities 34,074 (476)
-------- --------
Cash flows from financing activities:
Proceeds from debt 2,343 18,840
Borrowings (repayments) under revolver 1,478 (143)
Repayments of debt (389) (7,534)
Increase (decrease) in overdraft 900 (11,972)
Dividends paid on Series G preferred stock (3,018)
Dividends paid on BGL common stock (1,368)
Treasury stock purchases (135) (82)
Stockholder loan and interest repayments 16,780
Deferred financing charges (5,043)
Impact of discontinued operations (81)
Other, net (39)
-------- --------
Net cash provided by financing activities 2,790 7,747
-------- --------
Net increase in cash and cash equivalents 31,601 2,486
Cash and cash equivalents, beginning of period 4,276 11,497
-------- --------
Cash and cash equivalents, end of period $ 35,877 $ 13,983
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
- 7 -
<PAGE> 8
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. GENERAL
The consolidated financial statements included herein prepared by Brooke
Group Ltd. (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 for the years ended December
31, 1994, 1993 and 1992, included in the Company's Form 10-K as filed
with the Securities and Exchange Commission on April 17, 1995. 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.
Certain amounts in the 1994 consolidated financial statements have been
reclassified to conform to the 1995 presentation.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Liggett
Group Inc. ("Liggett"), New Valley Holdings, Inc. and other less
significant subsidiaries.
As the result of the spin off of the Company's equity interest in MAI
Systems Corporation ("MAI") in February 1995 and the sale/redemption of
the Company's common and preferred stock of SkyBox International, Inc.,
both entities are reported as discontinued operations. Revenues for MAI
were $6,652 for the period January 1, 1995 to February 6, 1995 and
$17,188 for the three months ended March 31, 1994.
3. INVESTMENT IN NEW VALLEY CORPORATION
The Company's investment in New Valley at March 31, 1995 is summarized
as follows:
<TABLE>
<CAPTION>
Number of Shares Carrying Value
---------------- --------------
<S> <C> <C>
Common shares 79,794,229 $ (49,065)
Class A Preferred Shares 618,326 122,103
Class B Preferred Shares 50,885 254
-------
$ 73,292
=======
</TABLE>
Summarized income statement information for New Valley Corporation for the
three month period ended March 31, 1995 is as follows:
<TABLE>
<S> <C>
Revenues $7,669
=====
Income before discontinued operations $6,631
=====
Net income $8,029
=====
</TABLE>
- 8 -
<PAGE> 9
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
In February 1995, New Valley Corporation repurchased 54,445 Class A
Preferred shares pursuant to a tender offer made as part of the New
Valley Corporation First Amended Joint Chapter 11 Plan of Reorganization.
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 capital transaction in the amount of $3,069.
4. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
--------- -----------
<S> <C> <C>
Finished goods $21,611 $18,374
Work in process 2,872 2,952
Raw materials 21,782 20,609
Replacement parts and supplies 3,724 3,754
------- -------
49,989 45,689
LIFO adjustments 1,790 1,409
------- -------
$51,779 $47,098
======= =======
</TABLE>
At March 31, 1995, the Company had leaf tobacco purchase commitments of
approximately $31,000 compared to $41,000 at December 31, 1994.
5. CONTINGENCIES
Since 1954, the Company 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 exposures 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 actually were commenced against Brooke Group Ltd.
in its former name or in its present name or against Liggett), since all
involve the tobacco manufacturing and marketing activities currently
performed by Liggett. The number of such cases pending against the
Company and the other cigarette manufacturers has decreased generally
since early 1987, after several years of increases, but new cases continue
to be commenced against Liggett and other cigarette manufacturers with the
number of cases now pending against Liggett being somewhat greater than in
1993. As new cases are commenced, the costs associated with defending
such cases and the risks attendant on the inherent unpredictability of
litigation continue. To date a number of such actions, including several
against Liggett, have been disposed of favorably to the defendants; no
plaintiff has ultimately prevailed on the merits of any such action; and
no payment in settlement of any such claim has been made by the Company
nor, to the Company's knowledge, any other cigarette manufacturer.
An action entitled Yvonne Rogers v. Liggett Group Inc., et al., Superior
Court, Marion County, Indiana, was initiated by the plaintiff on March 27,
1987 against Liggett and three other cigarette manufacturers. The
plaintiff seeks compensatory and punitive damages for cancer alleged to
have
- 9 -
<PAGE> 10
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
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 has been
scheduled for August 1996.
In the action entitled Cipollone v. Liggett Group Inc., et al., the United
States Supreme Court, on June 24, 1992, issued an opinion respecting
federal preemption of state law damage actions. The Supreme Court in
Cipollone concluded that The Federal Cigarette Labeling and Advertising
Act (the "1965 Act") did not preempt any state common law damage claims.
The decision permits plaintiffs to assert common law claims for damages
for failure to warn adequately, fraudulent misrepresentation, concealment,
conspiracy and breach of express warranty in the period from 1966 to 1969.
Relying on an amendment to Section 5(b) of the 1965 Act by The Public
Health Cigarette Smoking Act of 1969 (the "1969 Act"), however, the
Supreme Court concluded that the 1969 Act preempted certain, but not all,
common law damage claims. Accordingly, 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. It does permit, however,
claims for fraudulent misrepresentation (other than a claim of
fraudulently neutralizing the warning), concealment (other than in
advertising and promotion of cigarettes), conspiracy and breach of express
warranty after 1969.
The Court expressed no opinion on whether any of these claims are viable
under state law, but assumed arguendo that they are viable. The
application of the principles enunciated in the decision to the particular
theories of recovery asserted in each case will await further proceedings.
In addition, 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 May 11, 1993, in the case entitled Wilks v. The American Tobacco
Company, No. 91-12,355, Circuit Court of Washington County, State of
Mississippi (a case in which Liggett was not a defendant), the trial court
granted plaintiffs' motion to impose absolute liability on defendants for
the manufacture and sale of cigarettes and struck defendants' affirmative
defenses of assumption of risk and comparative fault/contributory
negligence. The trial court ruled that the only issue to be tried in the
case were causation and damages. No other court has ever imposed absolute
liability on a manufacturer of cigarettes. After trial, the jury returned
a verdict for defendants, finding no liability. The Company is or has
been a defendant in other cases in Mississippi and it cannot be stated
that other courts will not apply the Wilks ruling as to absolute
liability.
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, five other cigarette manufacturing companies, the Tobacco
Institute, Inc., the Council for Tobacco Research and Hill & Knowlton. 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 for Tobacco
Research and its predecessor. The Complaint seeks equitable relief
against the defendants, including the imposition of a corrective
advertising campaign, restitution of funds fraudulently obtained by
defendants, disgorgement of revenues and profits acquired as a result of
the alleged fraud, the imposition of a constructive trust
- 10 -
<PAGE> 11
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
and an asset freeze on alleged ill-gotten gains, an injunction precluding
defendants from pursuing the alleged wrongful acts, and reasonable
attorneys' fees and costs. The case is presently in discovery.
On March 15, 1994, in an action entitled Broin et al v. Philip Morris
Companies, Inc., et al., Dade County Circuit Court, State of Florida, the
District court of Appeals for the Third District reversed the Dade County
Circuit Court's dismissal of plaintiffs' class action allegations and a
motion to invoke the discretionary jurisdiction of the Florida Supreme
Court is pending. 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 have been damaged by an involuntary exposure to ETS. On
December 12, 1994, plaintiffs' motion to certify the action as a class
action was granted. Defendants have appealed this ruling.
On March 25, 1994, an action entitled Castano, et al v. The American
Tobacco Company, et al., United States District Court, Eastern District of
Louisiana, was filed against Liggett and four other cigarette companies
(and since has been amended to add an additional cigarette company as a
defendant). The class action complaint was brought on behalf of
plaintiffs and residents of the United States who claim to be addicted to
tobacco products of defendants, including Liggett, and survivors who claim
their decedents were addicted to such tobacco products. The complaint is
based upon the claim that defendants manipulated the nicotine levels in
their tobacco products with the intent to addict plaintiffs and the class
members and, inter alia, fraud, deceit, negligent misrepresentation,
breach of express and implied warranty, strict liability and violation of
consumer protection statutes. Plaintiffs seek compensatory and punitive
damages, equitable relief including disgorgement of profits from the sale
of cigarettes and creation of a fund to monitor the health of class
members and to pay for medical expenses allegedly caused by defendants,
attorneys' fees and costs. On December 14, 1994, plaintiffs' motion to
certify the action as a class action was orally argued before the Court.
On February 17, 1995, the Court issued an Order that granted in part
Plaintiffs' motion for class certification for the specific claims of
fraud, breach of express warranty, breach of implied warranty, intentional
tort, negligence, strict liability and consumer protection, together with
punitive damages to the end of establishing a multiplier to compute
punitive damage awards. The court denied class certification as to issues
of injury and fact, proximate cause, reliance and affirmative defenses.
The Court defined Plaintiffs' class as being comprised of all
nicotine-dependent persons (and their representatives) in the U.S. and its
territories and possessions and Puerto Rico who have purchased and smoked
cigarettes manufactured by the Defendants. The trial court Order defines
"nicotine-dependent" as (a) all cigarette smokers who have been diagnosed
by a medical practitioner as nicotine-dependent; and/or (b) all regular
cigarette smokers who were or have been advised by a medical practitioner
that smoking has had or will have adverse health consequences who
thereafter do not or have not quit smoking. Defendants have made
application to the trial court that it certify the class certification
Order for interlocutory appeal, but if such is not granted, Defendants
will seek appellate review by mandamus. Hearing has been scheduled by the
trial court for May 10, 1995, on Defendants' interlocutory appeal
application.
On May 5, 1994, an action entitled Engle, et al v. R. J. Reynolds Tobacco
Company, et al., Circuit Court of the 11th Judicial District in and for
Dade County, Florida, was filed against Liggett, five other cigarette
companies, The Council for Tobacco Research - USA, Inc., the Tobacco
Institute, Inc. and others. The class action complaint was brought on
behalf of plaintiffs and all persons in the United States who allegedly
have become addicted to cigarette products of defendants, including those
of Liggett, and allegedly have suffered personal injury as a result
thereof, with such claims predicated on theories of strict liability in
tort, fraud and misrepresentation, conspiracy to misrepresent and
- 11 -
<PAGE> 12
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
commit fraud, breach of implied warranty of merchantability and fitness,
breach of express warranty, intentional infliction of emotional distress
and negligence. Plaintiffs seek compensatory and punitive damages,
equitable relief including but not limited to a medical fund for future
health care costs, attorneys' fees and costs. On October 31, 1994,
plaintiffs' motion to certify the action as a class action was granted.
Defendants have appealed this ruling.
On May 23, 1994, an action entitled Mike Moore, Attorney General, ex rel
State of Mississippi vs. The American Tobacco Company, et al., Chancery
Court for the County of Jackson, State of Mississippi, was filed against
Liggett and five other cigarette companies, the Tobacco Institute, Inc.,
the Council for Tobacco Research - USA, Hill & Knowlton and others. In
this action, the State of Mississippi seeks restitution and indemnity for
medical payments and expenses made or incurred by the State of Mississippi
on behalf of welfare patients for tobacco related illnesses. Similar
actions (although not identical) have been filed recently by the State of
Minnesota (together with Minnesota Blue Cross-Blue Shield) and by the
State of West Virginia.
The State of Florida enacted legislation effective July 1, 1994 allowing
certain state authorities or entities to commence a lawsuit to seek
recovery of Medicaid payments made on behalf of Medicaid recipients as a
result of diseases allegedly caused by liable third parties. Though not
limited to the tobacco industry, the statutory scheme includes the
industry with ultimate liability based upon market share and would include
disease allegedly caused by the smoking of cigarettes. The statute
abrogates comparative negligence, assumption of risk and other defenses
normally available to liable third parties and, by its stated language,
permits the use of statistical evidence to prove causation. A suit has
been commenced to challenge the constitutionality of the legislation. On
February 22, 1995, suit was commenced by the State of Florida, together
with others, against the five domestic cigarette manufacturers and their
respective parent companies, as well as others, seeking restitution of
monies expended in the past and which may be expended in the future by the
State of Florida to provide health care to Medicaid recipients for
injuries and ailments allegedly caused by the use of cigarettes and other
tobacco products. Plaintiffs also seek a variety of other forms of relief
including a disgorgement of all profits from the sales of cigarettes in
Florida. On May 6, 1995, the Florida legislature voted in favor of a bill
to repeal this legislation. The repeal of this legislation, if the
repealer bill becomes law, would be effective as of the date and time the
original legislation became law. The repealer bill will become law if the
Governor, after receipt of the repealer bill, signs such into law within
fifteen days after receipt or fails to act within such fifteen day period.
The Governor of Florida has announced that he will veto this repealer
bill. It is uncertain at this time whether or not and at what time the
Florida legislature could or would take action to override such a veto if
the Governor vetoes the repealer bill.
The Commonwealth of Massachusetts has enacted legislation authorizing
lawsuits similar to the suits filed by the State of Mississippi, the State
of Minnesota and the State of West Virginia. Aside from the Florida and
Massachusetts statutes, legislation authorizing the state to sue a company
or individual to recover costs incurred by the state to provide health
care to persons injured by the company or individual also has been
introduced in several other states (California, Connecticut, Kansas,
Maine, Massachusetts, New Jersey, New York, Oregon and Vermont). These
bills contain some or all of the following provisions: eliminating all
affirmative defenses, permitting the use of statistical evidence to prove
causation and damages, adopting market share liability and allowing class
action suits without notification to class members.
- 12 -
<PAGE> 13
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Currently in addition to Cordova, approximately 32 product liability
lawsuits are pending and active in which Liggett is a defendant. In most
of these lawsuits, plaintiffs seek punitive as well as compensatory
damages. The states in which suits are presently pending and active
against Liggett are California, Florida, Indiana, Louisiana, Minnesota,
Mississippi, Nevada, New Hampshire, New Jersey, New York, Ohio, Oklahoma,
Pennsylvania, Texas and West Virginia.
A Grand Jury investigation presently 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 the investigation.
Liggett has been responding to a Civil Investigative Demand from the
Antitrust Division of the United States Department of Justice, which
requests information from Liggett. The request appears to focus on United
States tobacco industry activities in connection with product development
efforts respecting, in particular, "fire-safe" or self-extinguishing
cigarettes. It also requests certain general information addressing
Liggett's involvement with and relationship to its competitors. Liggett
is unable to predict the outcome of this investigation.
In March and April 1994, the Health and the Environmental Subcommittee of
the Energy and Commerce Committee of the House of Representatives held
hearings regarding nicotine in cigarettes. On March 25, 1994,
Commissioner David A. Kessler of the Food and Drug Administration (the
"FDA") gave testimony as to the potential regulation of nicotine under the
Food, Drug and Cosmetic Act, and the potential for jurisdiction over the
regulation of cigarettes to be accorded to the FDA. In response to
Commissioner Kessler's allegations about manipulation of nicotine by
cigarette manufacturers, including Liggett, the chief executive of each of
the major cigarette manufacturers, including Liggett, testified before the
subcommittee on April 14, 1994, denying Commissioner Kessler's claims.
The Omnibus Budget Reconciliation Act of 1993 (the "Act") requires United
States cigarette manufacturers to use at least 75% domestic tobacco in the
aggregate of the cigarettes manufactured in the United States, effective
January 1, 1994, on an annualized basis or pay a "marketing assessment"
based upon price differentials between foreign and domestic tobacco and
under certain circumstances make purchases of domestic tobacco from a
corporation organized by the United States government. Liggett uses both
domestic and foreign tobacco in its cigarettes. As part of an inventory
management program, Liggett has entered into tobacco purchase agreements
under which Liggett's commitments amounted to approximately $31 million at
March 31, 1995, of which approximately 90% is foreign tobacco. The
foreign tobacco used in manufacturing Liggett's cigarettes costs
approximately 10- 15% less than its comparable domestic tobacco. In
response to this situation, Liggett implemented certain changes in its
product composition and modified its existing agreements with tobacco
vendors to minimize the effect of the Act on Liggett's financial position.
However, no assurance can be given that Liggett's efforts have been
successful.
A General Agreement on Tariffs and Trade ("GATT") tribunal ruled that the
Act violates GATT. Legislation has been enacted which will repeal
retroactively the Act as of the end of 1994 upon the declaration of
tariffs on imported tobacco in excess of certain quotas to be set forth in
a Presidential proclamation. The Act will be in effect until such time as
a proclamation is issued. Liggett believes that such a proclamation will
be issued during 1995. Liggett is exploring avenues which might be
- 13 -
<PAGE> 14
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
available to it to realize relief from any marketing assessment or
purchase requirement sanctions that may be imposed under the Act. While
Liggett is of the opinion that there would be a realistic potential to
achieve such relief if sanctions were imposed, no assurance can be given
that Liggett would be successful in doing so, either in whole or in part.
No amounts have been accrued.
Further, the tariff structure, when established, may have the effect of
limiting Liggett's access to imported tobacco, possible driving Liggett's
costs of goods higher. Due to existing inventories of foreign tobacco,
management believes the tariff structure would have no short-term effects
on Liggett, but is unable to state at this time what long-term effects, if
any, the tariff structure would have on Liggett.
As to each of the cases referred to above which is pending against
Liggett, Liggett believes, and has been so advised by counsel handling the
respective cases, that Liggett has a number of valid defenses to the claim
or claims asserted against Liggett. All cases are, and will continue to
be, vigorously defended. 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 restrictive regulatory, adverse 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.
Liggett is not able to evaluate the effect of these developing matters on
pending litigation or the possible commencement of additional litigation.
Liggett 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. It is possible that Liggett's financial position,
results of operations or cash flows could be materially affected by an
ultimate unfavorable outcome of certain pending 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 proceedings,
lawsuits and claims should not materially affect Liggett's financial
position, results of operations and cash flows.
On September 20, 1993, a group of Contingent Value Rights ("CVR") holders
and the CVR trustee filed an action in the Delaware Chancery court, New
Castle County, against the Company and certain of its present and former
directors, challenging and seeking to enjoin or rescind the Distribution.
Pursuant to notice given on October 15, 1993, the Company redeemed its
CVRs on December 9, 1993 for a payment of $.36 per CVR. On June 2, 1994,
the Company entered into a Stipulation and Agreement of Compromise and
Settlement (the "Stipulation") pursuant to which a class of CVR holders,
which includes all persons who held CVRs at any time between September 20,
1993 and June 2, 1994, were to receive a total of $4,000 plus an award of
attorneys' and experts' fees and expenses not to exceed $900. The $4,000
settlement fund has been deposited into an escrow account for eventual
disbursement to all eligible CVR holders.
By order dated June 10, 1994, the Court of Chancery scheduled a settlement
hearing to be held on August 16, 1994 to determine, inter alia, whether
the Stipulation is fair, reasonable and adequate. That settlement hearing
was adjourned at the named plaintiff CVR holders' request because of
issues arising from filing of a motion for leave to amend the Company's
complaint in a separate lawsuit pending against the CVR trustee. The
named plaintiff CVR holders subsequently asked the
- 14 -
<PAGE> 15
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
court to rescind the Stipulation, stating, in substance, that they had
mistakenly entered into it in the erroneous belief that the Company would
be unable to assert claims against the trustee which those CVR holders
might have to indemnify. On December 28, 1994, the court rescinded the
Stipulation, finding that such a mistake had been made; however, the named
plaintiff CVR holders and the defendants continued settlement discussions,
seeking to address the named plaintiff CVR holders' concerns over their
obligation to indemnify the trustee. On March 3, 1995, these parties
advised the court that they had reached an agreement in principle to
settle the case on a class basis, subject to the final resolution of
certain remaining issues.
At March 31, 1995, 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 the
CVR action and other proceedings, lawsuits and claims should not
materially affect its consolidated financial position, results of
operations or cash flows.
6. SERIES 1 NOTES
On April 3, 1995 a Notice of Redemption was sent to holders of the Series
1 Notes (the "Holders") in which the Company announced its intention to
redeem the Series 1 Notes on May 3, 1995. Accordingly, on April 3, 1995
the Company deposited with the trustee an amount sufficient to redeem all
of the Series 1 Notes including interest thereon accruing from April 1,
1995 to May 3, 1995. On May 2, 1995, the Company and the Holders agreed
to extend the redemption date to no earlier than May 9, 1995. After that
date, the redemption may be effected by either the Company or the Holders
with a two-day notice to the trustee.
7. REORGANIZATION
Liggett reduced its field sales force on January 10, 1994 by 150 permanent
positions and added approximately 300 part-time positions. This
reorganization has significantly reduced operating costs and enabled
Liggett to expand its retail base coverage.
In March 1995, Liggett continued its efforts towards reducing costs by,
among other things, offering voluntary retirement programs to eligible
employees. Thus far, Liggett's 1995 cost reduction programs have reduced
Liggett's headcount by approximately 63 positions. In connection
therewith, Liggett recorded a $487 non-recurring charge to operating
income. Liggett anticipates further cost reduction programs during 1995.
- 15 -
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTRODUCTION
The Company's Consolidated Financial Statements include the accounts of Liggett
Group Inc. ("Liggett"), New Valley Holdings, Inc. and other less significant
subsidiaries.
The Company believes it will have sufficient liquidity for 1995. This is based
on, among other things, the redemption/sale of the SkyBox International Inc.
("SkyBox") preferred and common stock and certain funds available from New
Valley Corporation ("New Valley") as described in the Company's indenture
agreements and New Valley's First Amended Joint Chapter 11 Plan of
Reorganization (the "Joint Plan"). Forecasts of cash flow for the principal
operating companies indicate that they will be self-sufficient; however, due to
Liggett's high degree of leverage, if Liggett were to experience significant
losses due to further change in conditions in the tobacco industry or
otherwise, it is possible that Liggett could be in violation of certain debt
covenants. If its lenders were to exercise acceleration rights or refuse to
advance under the revolving credit facility, Liggett would not be able to
satisfy such demands.
For purposes of this discussion and other consolidated financial reporting, the
Company's significant business segment is Tobacco.
RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY
Price Increase. On May 5, 1995, R.J. Reynolds Tobacco Company ("RJR")
initiated a list price increase on all brands of $.30/carton. Philip Morris
and Brown & Williamson Tobacco Company, which together with RJR comprise 90% of
the market, matched the price increase on the same day. Liggett followed on
May 9, 1995.
Competitive Activity. In April 1995, BAT Industries acquired American Brands'
American Tobacco Company subsidiary for $1 billion cash. Management is unable
to state what effect this acquisition might have, if any, on the Company or the
industry.
Recent Legislation. The Omnibus Budget Reconciliation Act of 1993 (the "Act")
requires United States cigarette manufacturers to use at least 75% domestic
tobacco in the aggregate of the cigarettes manufactured in the United States,
effective January 1, 1994, on an annualized basis or pay a "marketing
assessment" based upon price differentials between foreign and domestic tobacco
and under certain circumstances make purchases of domestic tobacco from a
corporation organized by the United States government. Liggett uses both
domestic and foreign tobacco in its cigarettes. A General Agreement on Tariffs
and Trade ("GATT") tribunal ruled that the Act violates GATT. Legislation has
been enacted which will repeal retroactively the Act as of the end of 1994 upon
the declaration of tariffs on imported tobacco in excess of certain quotas to
be set forth in a Presidential proclamation. The Act will be in effect until
such time as a proclamation is issued. Liggett believes that such a
proclamation will be issued during 1995. No amounts have been accrued.
The State of Florida enacted legislation effective July 1, 1994 allowing
certain state authorities or entities to commence a lawsuit to seek recovery of
certain Medicaid payments made 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).
This statute
- 16 -
<PAGE> 17
RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY (continued)
abrogates certain defenses traditionally available to defendants. This
legislation would impose on the tobacco industry, if ultimate liability of the
industry is established in litigation, a liability based upon market share for
such payments made as a result of such smoking-related diseases. The Florida
legislation, if upheld by the courts, could potentially increase Liggett's
litigation exposure. Although a suit has been commenced to challenge the
constitutionality of the Florida legislation, no assurance can be given that it
will be successful. On May 6, 1995, the Florida legislature voted favorably on
a bill to repeal the legislation referred to herein. The Governor of Florida
has announced that he will veto the repealing legislation and it is uncertain
at this time whether or not and at what time the Florida legislature could or
would take action to override such veto. Massachusetts has also recently
enacted legislation authorizing lawsuits by the attorney general of
Massachusetts to recover certain medical assistance payments.
In 1994, four class action lawsuits were brought against Liggett and other
cigarette manufacturers, representing the first time class actions were brought
against the cigarette industry. In the three of these cases which remain
pending, plaintiffs' motions for class certification were granted in whole or
in part, and the defendants have appealed or will appeal each of these rulings.
In addition, the states of Mississippi, Minnesota and West Virginia brought
actions against Liggett and other cigarette manufacturers seeking restitution
and indemnity for certain Medicaid costs allegedly incurred as a result of
tobacco-related illnesses, and in 1995 Florida commenced a similar action.
While Liggett is vigorously contesting this litigation, litigation is subject
to a number of uncertainties, and accordingly there can be no assurance that
Liggett will be able to prevent an unfavorable outcome.
Possible FDA Action. The Food and Drug Administration ("FDA") has announced
that it is considering classifying tobacco as a drug, and an FDA advisory panel
has stated that it believes nicotine is addictive. Management is unable to
predict whether such a classification will be made. Management is also unable
to predict the effects of such a classification, were it to occur, on its
business and profitability, but such a classification could have an unfavorable
impact on Liggett's operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 VS. THREE MONTHS ENDED MARCH 31, 1994
Consolidated total revenues were $95,290 for the three months ended March 31,
1995 versus $114,105 for the same period last year. This 16.5% decrease in
revenues was primarily due to a 20.3% decrease in Liggett's unit sales,
partially offset by the effects of the change in sales mix. The decrease in
unit sales volume was comprised of a 21.0% decline in the price/value cigarette
segment and a 8.7% decline in the full-price branded segment. The decrease in
net sales volume was comprised of declines in full-price branded volume of 8.7%
and price/value cigarette volume, which includes generic, control label and
branded discount of 17.7%. The decrease in full-price branded unit sales
volume was due primarily to trade programs offered by Liggett during the first
quarter of 1994 with no comparable programs offered during 1995. The reduction
in price/value unit sales volume was due to a decrease in the discount segment
of the industry of 13% for the quarter ended March 31, 1995, according to The
Maxwell Consumer Report (caused by certain competitors' continuing leveraging
rebate programs tied to their full-price products, and trade programs offered
by Liggett on branded discount products during the first quarter of 1994 with
no comparable programs offered during 1995). There were no list price changes
between the two periods.
- 17 -
<PAGE> 18
RESULTS OF OPERATIONS (continued)
Gross profit was $48,912 for the three months ended March 31, 1995, a decrease
of $7,897 from $56,809 for the same period last year. Gross profit as a
percent of revenues (excluding federal excise taxes) for the period increased
to 71.0% compared to 69.0% last year, due primarily to Liggett's sales mix and
lower per unit cost of sales. The reduction in cost of sales is a result of
the effect of cost reduction steps begun in 1993. Liggett expects to continue
its cost reduction steps through 1995.
Consolidated selling, general and administrative expenses were $49,308 for the
three months ended March 31, 1995 compared to $50,529 for the same period last
year. The decrease of $1,221 includes a $4,696 decrease for Liggett (which is
the result of cost reduction programs and lower revenue discussed above) offset
primarily by increased expenses relating to the Company's Russian ventures.
Consolidated interest expense was $14,715 for the three months ended March 31,
1995 compared to $13,339 for the same period last year. Approximately $800 of
the increase relates to Liggett. This increase is due to a change in the
interest rate on the Series C Notes which was reset from 16.5% to 19.75% on
February 1, 1995 and included the Series C Notes for the full period. The
remaining increase of approximately $500 related to additional borrowings by
the Company under the Series 1 Notes and an increase in the interest rate on
the Series 1 and Series 2 Notes from 13.75% to 14.25% on February 1, 1995.
The equity in earnings of affiliates of $1,683 for the three months ended March
31, 1995 relates to the Company's investment in New Valley Class A Preferred.
CAPITAL RESOURCES AND LIQUIDITY
Net cash used in operating activities was $5,263 for the three months ended
March 31, 1995 compared to net cash used in operating activities of $4,785 for
the comparable period of 1994. The net cash used in operations in 1995 was
primarily attributable to $14,786 of income from discontinued operations which
was non cash (except $4,000 for the redemption of SkyBox preferred shown in
investing activities), an increase in other receivables of $9,309 (relating to
the sale of SkyBox common stock for which payment was received in April 1995),
an increase in inventories of $4,679, the equity in earnings of an affiliate of
$1,683 which was non cash and a decrease in accrued expenses of $4,799 all
partially offset by the net income, non cash charges for depreciation and
amortization of $2,295, a reduction in trade receivables of $14,023 and an
increase in accounts payable of $1,885.
The net cash used in operations in 1994 primarily consisted of the net loss of
$2,524, a decrease in accounts payable and accrued expenses of $9,114 and an
increase in inventories of $6,755 partially offset by a decrease in trade
receivables of $5,239, non cash charges for depreciation and amortization of
$2,290 and non cash discontinued operations of $5,314.
Net cash and cash equivalents increased $31,601 for the three months ended
March 31, 1995 compared to $2,486 for the comparable period of 1994.
The increase in cash and cash equivalents for 1995 was primarily attributable
to a dividend on New Valley's Class A Preferred of $30,916, redemption of
SkyBox preferred of $4,000, net proceeds from debt of $4,332, partially offset
by the cash used in operating activities discussed above of $5,263 and cash
dividends on common stock of $1,368.
- 18 -
<PAGE> 19
CAPITAL RESOURCES AND LIQUIDITY (continued)
The net increase in cash and cash equivalents for 1994 of $2,486 consisted
primarily of proceeds from Liggett debt of $18,840 and repayment of shareholder
loans (including interest of $16,780) partially offset by the net cash used in
operating activities discussed above of $4,785, a decrease in overdraft of
$11,972, repayment of debt of $7,543, deferred financing charges of $5,043 and
payments of Series G preferred stock dividends of $3,018.
On April 3, 1995 a Notice of Redemption was sent to holders of the Series 1
Notes (the "Holders") in which the Company announced its intention to redeem
the Series 1 Notes on May 3, 1995. Accordingly, on April 3, 1995 the Company
deposited with the trustee an amount sufficient to redeem all of the Series 1
Notes including interest thereon accruing from April 1, 1995 to May 3, 1995.
On May 2, 1995, the Company and the Holders agreed to extend the redemption
date to no earlier than May 9, 1995. After that date, the redemption may be
effected by either the Company or the Holders with a two-day notice to the
Trustee.
On March 8, 1994, Liggett entered into a new revolving credit facility for
$40,000 with a syndicate of commercial banks (the "new facility"). The new
facility is collateralized by all inventories and receivables of Liggett.
Borrowings under the new facility bear interest at a rate equal to 1.5% above
Philadelphia National Bank's prime rate which was 8.5% at December 31, 1994.
The new facility requires Liggett's compliance with certain financial and other
covenants. The new facility also limits the amount of dividends and
distributions by Liggett. The new facility expires on March 8, 1997. The
refinancing of the revolver resulted in an extraordinary charge of $1,118 for
loss on early extinguishment of debt. Liggett believes that the new facility
will adequately address its liquidity requirements during 1995.
In January 1994 and January 1995, the Company issued a total of $22,500 of
Variable Rate Series C Senior Secured Notes (the "Series C Notes") due February
1, 1999. Liggett received $15,000 from the issuance in cash and received
$7,500 in Series B Notes which were credited against the mandatory redemption
requirements of Series B Notes required under the indenture for February 1,
1994. Liggett used the cash proceeds to satisfy working capital needs, which
included payment of interest related to Series B Notes of $8,172. 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%. Liggett 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 notes to be
issued under the Series C Indenture. In connection with the consents, holders
of Series B Notes received Series C Notes totaling two percent of their current
Series B Note holdings. The total principal amount of such Series C Notes
issued was $2,842. On November 20, 1994, Liggett 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 were credited against the mandatory redemption
requirements for February 1, 1995.
The Company and its subsidiaries expect to finance their long-term growth,
working capital requirements, capital expenditures and debt service
requirements through a combination of cash provided from operations,
negotiation of secured bank credit lines, additional public or private debt
financing and distributions from New Valley. In January 1995, a special $50
per share dividend was granted to holders of New Valley $15.00 Class A
Increasing Rate Cumulative Senior Preferred Shares. The Company's subsidiary,
New Valley Holdings, Inc. realized $30,916 in the transaction. New Valley
plans to use the cash from the sale of its money transfer business to First
Financial Management Corporation to acquire operating businesses through
merger, purchase of assets, stock acquisition or other means, or to acquire
control of operating companies through one of such means, with the purpose of
being primarily engaged in a business or businesses other than that of
investing, reinvesting, owning, holding or trading in securities. Indenture
agreements for certain of the Company's debt establish limits on the use of
amounts distributed to the Company with respect to its investments in New
Valley Corporation.
- 19 -
<PAGE> 20
CAPITAL RESOURCES AND LIQUIDITY (continued)
The Investment Company Act of 1940, as amended (the "Investment Company Act"),
and the rules and regulations thereunder, require the registration of, and
impose various substantive restrictions on, companies that (I) engage primarily
in the business of investing, reinvesting, or trading in securities or (ii)
engage in the business of investing, reinvesting, owning, holding or trading in
securities and own or propose to acquire "investment securities" having a value
exceeding 40% of a company's "total assets" (excluding United States government
securities and cash items). For purposes of the Investment Company Act,
"investment securities" include stocks, bonds and other securities, but exclude
United States government securities and securities issued by majority-owned
subsidiaries that are not investment companies. New Valley is relying on the
temporary exemption from registration provided by Rule 3a-2 under the
Investment Company Act. Pursuant to that Rule, the Executive Committee of the
Board of Directors of New Valley has adopted a resolution that New Valley shall
use reasonable efforts to become engaged, as soon as reasonably possible, and,
in any event, within the one-year period prescribed by Rule 3a-2, primarily in
a business or businesses other than that of investing, reinvesting, owning,
holding or trading in securities, and that, if said reasonable efforts do not
result in New Valley's becoming engaged in such business or businesses on or
prior to the end of such one-year period, New Valley will seek to obtain an
extension of such date or an exemption from the Securities and Exchange
Commission (the "SEC") or no-action position from the SEC staff with respect to
registration under the Investment Company Act.
New Valley plans to become engaged in such business or businesses (by
acquisitions or otherwise) within a time frame and in a manner such that it
will not be required to register under the Investment Company Act.
On January 25, 1995, the Company announced that it would resume payment of
regular quarterly cash dividends on its common stock. A quarterly cash
dividend of $0.075 per share was distributed on February 13, 1995 to Company
stockholders of record as of February 6, 1995.
- 20 -
<PAGE> 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to information entitled "Contingencies" in Note 4 to
the Company's Consolidated Financial Statements included elsewhere in
this report on Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4(a) Fifth Supplemental Indenture, dated as of January 18,
1995, to the Indenture, dated as of April 1, 1988, among
Brooke Partners, L.P., Brooke Capital Corp., L Holdings
Inc. and Shawmut Bank, N.A.*
4(b) Fifth Supplemental Indenture, dated as of January 18,
1995, to the Indenture, dated as of April 1, 1988, among
Brooke Partners, L.P., Brooke Capital Corp., L Holdings
Inc. and First Trust National Association.*
4(c) Letter agreements between BGLS Inc. and United States
Trust Company of New York, Tortoise Corp., The Bank of
New York and Daffodil & Co., each dated May 2, 1995.
10(a) Stock Option Agreement, dated January 25, 1995, by and
between Brooke Group Ltd. and Howard M. Lorber.*
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
The Company filed the following current reports on Form 8-K during
the first quarter of 1995:
<TABLE>
<CAPTION>
DATE ITEM(S) FINANCIAL STATEMENTS
---- ------- --------------------
<S> <C> <C> <C>
1. January 13, 1995 2, 5 Inapplicable
2. January 25, 1995 5 Unaudited ProForma financial statements
for the nine months ended September 30,
1994 and for the year ended December
31, 1993.
</TABLE>
*Incorporated by reference to the Issuer's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
- 21 -
<PAGE> 22
SIGNATURE
Pursuant to the requirements 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)
Date: May 15, 1995 By: /S/ Gerald E. Sauter
------------------------ ------------------------------------
Gerald E. Sauter
Vice President and Chief Financial
Officer
- 22 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BROOKE GROUP LTD. FOR THE THREE MONTHS ENDED MARCH
31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 35,877
<SECURITIES> 0
<RECEIVABLES> 17,304
<ALLOWANCES> 0
<INVENTORY> 51,779
<CURRENT-ASSETS> 118,614
<PP&E> 25,128
<DEPRECIATION> 0
<TOTAL-ASSETS> 234,498
<CURRENT-LIABILITIES> 143,054
<BONDS> 402,607
<COMMON> 1,825
0
0
<OTHER-SE> (344,417)
<TOTAL-LIABILITY-AND-EQUITY> 234,498
<SALES> 95,290
<TOTAL-REVENUES> 95,290
<CGS> 46,378
<TOTAL-COSTS> 95,686
<OTHER-EXPENSES> (2,187)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,715
<INCOME-PRETAX> (12,924)
<INCOME-TAX> (14)
<INCOME-CONTINUING> (12,910)
<DISCONTINUED> 14,786
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,876
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0
</TABLE>
