<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
JOINT QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
<TABLE>
<S> <C>
COMMISSION FILE NUMBER 1-5759 COMMISSION FILE NUMBER 33-93576
BROOKE GROUP LTD. BGLS INC.
(Exact name of registrant as specified in its (Exact name of registrant as specified in its
charter) charter)
51-0255124 13-3593483
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
DELAWARE DELAWARE
(State or other jurisdiction of incorporation (State or other jurisdiction of incorporation
or organization) or organization)
100 S.E. SECOND STREET 100 S.E. SECOND STREET
MIAMI, FLORIDA 33131 MIAMI, FLORIDA 33131
(Address of principal executive offices (Address of principal executive offices
including Zip Code) including Zip Code)
305/579-8000 305/579-8000
(Registrant's telephone number, including area (Registrant's telephone number, including area
code) code)
</TABLE>
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 registrant was 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.
As of August 12, 1996, there were 18,497,096 shares of Brooke Group
Ltd.'s common stock outstanding.
As of August 12, 1996, there were 100 shares of BGLS Inc.'s common
stock outstanding, all of which were owned by Brooke Group Ltd.
<PAGE> 2
BROOKE GROUP LTD.
BGLS INC.
FORM 10-Q
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Brooke Group Ltd./BGLS Inc. Consolidated Financial Statements:
--------------------------------------------------------------
Brooke Group Ltd. Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
BGLS Inc. Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995 . . . . . . . 4
Brooke Group Ltd. Consolidated Statements of Operations for the three and six months
ended June 30, 1996 and June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 5
BGLS Inc. Consolidated Statements of Operations for the three and six months ended
June 30, 1996 and June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Brooke Group Ltd. Consolidated Statement of Stockholders' Equity (Deficit) for the six
months ended June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
BGLS Inc. Consolidated Statement of Stockholder's Equity (Deficit) for the six months
ended June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Brooke Group Ltd. Consolidated Statements of Cash Flows for the six months ended
June 30, 1996 and June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
BGLS Inc. Consolidated Statements of Cash Flows for the six months ended
June 30, 1996 and June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 11
New Valley Holdings, Inc. Financial Statements:
----------------------------------------------
Balance Sheets as of June 30, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . . . 28
Statements of Operations for the three and six months ended June 30, 1996 and
June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Statement of Stockholder's Equity for the six months ended June 30, 1996 . . . . . . . . . . . 30
Statements of Cash Flows for the six months ended June 30, 1996 and June 30, 1995 . . . . . . 31
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
-----------------
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
-------------------------------
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
--------------------------------
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>
<PAGE> 3
Item 1. Financial Statements
--------------------
BROOKE GROUP LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . $ 4,406 $ 3,370
Accounts receivable - trade . . . . . . . . . . . . . . . . . . . . . . . 21,580 23,844
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . 901 1,448
Receivables from affiliates . . . . . . . . . . . . . . . . . . . . . . . 1,342 1,502
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,636 60,522
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 964 1,061
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 4,857 4,868
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 88,686 96,615
Property, plant and equipment, at cost, less accumulated
depreciation of $29,134 and $27,323 . . . . . . . . . . . . . . . . . . . 60,332 48,352
Intangible assets, at cost, less accumulated amortization
of $16,524 and $15,679 . . . . . . . . . . . . . . . . . . . . . . . . . 6,719 5,453
Investment in affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . 41,804 63,901
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,146 11,299
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 206,687 $ 225,620
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Notes payable and current portion of long-term debt . . . . . . . . . . . $ 37,941 $ 2,387
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,972 22,762
Cash overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,266
Accrued promotional expenses . . . . . . . . . . . . . . . . . . . . . . 25,167 25,519
Accrued taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 24,273 25,928
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,051 16,863
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . 25,976 21,452
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 169,380 119,177
Notes payable, long-term debt and other obligations, less current
portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394,314 406,744
Noncurrent employee benefits . . . . . . . . . . . . . . . . . . . . . . . 30,539 31,672
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,909 24,131
Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . .
Stockholders' equity (deficit):
Common stock, par value $0.10 per share, authorized 40,000,000
shares, issued 24,998,043 shares, outstanding 18,497,096 shares . . . . . 1,850 1,850
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 92,193 93,186
Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (456,622) (428,173)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,537) 9,372
Less: 6,500,947 shares of common stock in treasury, at cost . . . . . . (32,339) (32,339)
--------- ---------
Total stockholders' equity (deficit) . . . . . . . . . . . . . . . . . (400,455) (356,104)
--------- ---------
Total liabilities and stockholders' equity (deficit) . . . . . . . . . $ 206,687 $ 225,620
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-3-
<PAGE> 4
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 4,340 $ 3,370
Accounts receivable - trade . . . . . . . . . . . . . . . . . . . . . . . 21,580 23,844
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . 868 1,481
Receivables from affiliates . . . . . . . . . . . . . . . . . . . . . . . 1,222 1,130
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,636 60,522
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,764 4,861
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 4,186 4,435
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 91,596 99,643
Property, plant and equipment, at cost, less accumulated depreciation of
$28,920 and $27,181 . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,951 47,900
Intangible assets, at cost, less accumulated amortization of $16,524
and $15,679 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,719 5,453
Investment in affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . 41,804 63,901
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,241 12,345
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 210,311 $ 229,242
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT):
Current liabilities:
Notes payable and current portion of long-term debt . . . . . . . . . . . $ 37,299 $ 2,132
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,847 22,637
Cash overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,761
Due to parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,521 26,054
Accrued promotional expenses . . . . . . . . . . . . . . . . . . . . . . 25,167 25,519
Accrued taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 24,273 25,928
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,051 16,863
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . 24,720 19,991
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 192,878 142,885
Notes payable, long-term debt and other obligations, less current portion. . 394,314 420,449
Noncurrent employee benefits . . . . . . . . . . . . . . . . . . . . . . . 30,539 31,672
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,163 24,131
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 23,594
Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (457,595) (423,424)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,069) 9,935
--------- ---------
Total stockholder's deficit . . . . . . . . . . . . . . . . . . . . . . (423,583) (389,895)
--------- ---------
Total liabilities and stockholder's equity (deficit) . . . . . . . . . $ 210,311 $ 229,242
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-4-
<PAGE> 5
BROOKE GROUP LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $125,213 $122,328 $215,729 $217,618
Cost of goods sold* . . . . . . . . . . . . . . . . . . . . . . . . 63,522 57,762 110,570 104,140
-------- -------- -------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . 61,691 64,566 105,159 113,478
Operating, selling, general and administrative expenses . . . . . . . 58,264 65,196 103,156 114,504
-------- -------- -------- --------
Operating income (loss) . . . . . . . . . . . . . . . . . . . . 3,427 (630) 2,003 (1,026)
Other income (expenses):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . 110 461 128 850
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . (15,457) (14,702) (30,234) (29,417)
Equity in (loss) earnings of affiliate . . . . . . . . . . . . . (1,260) 354 (2,534) 2,037
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,219 962 2,334 1,077
-------- -------- -------- --------
(Loss) from continuing operations before income taxes . . . . . . . . (10,961) (13,555) (28,303) (26,479)
(Benefit) provision for income taxes . . . . . . . . . . . . . . . . (289) 84 146 70
-------- -------- -------- --------
(Loss) from continuing operations . . . . . . . . . . . . . . . . . . (10,672) (13,639) (28,449) (26,549)
Discontinued operations:
Income from discontinued operations . . . . . . . . . . . . . . . . 1,114 2,762
Gain on disposal . . . . . . . . . . . . . . . . . . . . . . . . . 13,183
-------- -------- -------- --------
Income from discontinued operations . . . . . . . . . . . . . . . . . 1,114 15,900
-------- -------- -------- --------
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,672) (12,525) (28,449) (10,649)
Proportionate share of New Valley capital transactions,
retirement of Class A Preferred Shares . . . . . . . . . . . . . . 10,954 1,782 14,023
-------- -------- -------- --------
Net (loss) income applicable to common shares . . . . . . . . . . $(10,672) $ (1,571) $(26,667) $ 3,374
======== ======== ======== ========
Per common share:
(Loss) from continuing operations . . . . . . . . . . . . . . . . $ (0.58) $ (0.15) $ (1.44) $ (0.68)
======== ======== ======== ========
Income from discontinued operations . . . . . . . . . . . . . . . $ $ 0.06 $ $ 0.86
======== ======== ======== ========
Net (loss) income applicable to common shares . . . . . . . . . . . $ (0.58) $ (0.09) $ (1.44) $ 0.18
======== ======== ======== ========
Weighted average common shares and common
shares equivalents outstanding . . . . . . . . . . . . . . . . . . 18,497,096 18,247,094 18,497,096 18,249,489
========== ========== ========== ==========
</TABLE>
___________________________________
* Revenues and Cost of goods sold include federal excise taxes of $29,487 and
$33,203 for the three months ended June 30, 1996 and 1995, respectively, and
$50,684 and $59,595 for the six months ended June 30, 1996 and 1995,
respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
-5-
<PAGE> 6
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $125,213 $122,328 $215,729 $217,618
Cost of goods sold* . . . . . . . . . . . . . . . . . . . . . . . . . . 63,522 57,762 110,570 104,140
-------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,691 64,566 105,159 113,478
Operating, selling, general and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,073 65,316 102,660 114,091
-------- -------- -------- --------
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . 3,618 (750) 2,499 (613)
Other income (expenses):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . 60 461 78 850
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . (16,395) (15,250) (32,063) (30,733)
Equity in (loss) earnings of affiliate . . . . . . . . . . . . . . . (1,260) 354 (2,534) 2,037
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,703 887 1,668 902
-------- -------- -------- --------
(Loss) from continuing operations before income taxes . . . . . . . . . (12,274) (14,298) (30,352) (27,557)
(Benefit) provision for income taxes . . . . . . . . . . . . . . . . . (253) 60 198 (295)
-------- -------- -------- --------
(Loss) from continuing operations . . . . . . . . . . . . . . . . . . . (12,021) (14,358) (30,550) (27,262)
Discontinued operations:
Income from discontinued operations . . . . . . . . . . . . . . . . . 1,114 2,762
Gain on disposal . . . . . . . . . . . . . . . . . . . . . . . . . . 13,138
-------- -------- -------- --------
Income from discontinued operations . . . . . . . . . . . . . . . . . . 1,114 15,900
-------- -------- -------- --------
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(12,021) $(13,244) $(30,550) $(11,362)
======== ======== ======== ========
</TABLE>
_________________________________________________________
* Revenues and Cost of goods sold include federal excise taxes of $29,487
and $33,203 for the three months ended June 30, 1996 and 1995,
respectively, and $50,684 and $59,595 for the six months ended June 30,
1996 and 1995, respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
-6-
<PAGE> 7
BROOKE GROUP LTD. AND SUBSIDIARY
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, 1995 . . . . . . . . 18,497,096 $1,850 $93,186 $(428,173) $(32,339) $ 9,372 $(356,104)
Net (loss) . . . . . . . . . . . . . . . . (28,449) (28,449)
Distributions on common stock
($0.15 per share) . . . . . . . . . . . . (2,775) (2,775)
Stock options granted to consultant . . . . 95 95
Reduction of unrealized holding gain on
investment in New Valley . . . . . . . . (16,567) (16,567)
Effect of New Valley capital transactions . 1,782 1,563 3,345
---------- ------ ------- --------- -------- -------- ---------
Balance, June 30, 1996 . . . . . . . . . . 18,497,096 $1,850 $92,193 $(456,622) $(32,339) $ (5,537) $(400,455)
========== ====== ======= ========= ======== ======== =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-7-
<PAGE> 8
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Common Stock Additional
------------------ Paid-In
Shares Amount Capital Deficit Other Total
------ ------ --------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 . . . . . . . . . . . 100 $ $23,594 $(423,424) $ 9,935 $(389,895)
Distributions paid to parent . . . . . . . . . . (3,621) (3,621)
Net (loss) . . . . . . . . . . . . . . . . . . . (30,550) (30,550)
Reduction of unrealized holding gain
on investment in New Valley . . . . . . . . . . (16,567) (16,567)
Effect of New Valley capital
transactions . . . . . . . . . . . . . . . . . 1,782 1,563 3,345
Forgiveness of debt by parent . . . . . . . . . . 13,705 13,705
--- ----- ------- --------- -------- ---------
Balance, June 30, 1996 . . . . . . . . . . . . . 100 $ $39,081 $(457,595) $ (5,069) $(423,583)
=== ===== ======= ========= ======== =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-8-
<PAGE> 9
BROOKE GROUP LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Six Months Ended
--------------------
June 30, June 30,
1996 1995
-------- --------
<S> <C> <C>
Net cash (used in) operating activities . . . . . . . . . . . . . . . . . $ (735) $(15,093)
-------- --------
Cash flows from investing activities:
Proceeds from sale of businesses and assets . . . . . . . . . . . . . . 4,415 13,699
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (491) (1,965)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . (14,680) (2,752)
Dividends from New Valley . . . . . . . . . . . . . . . . . . . . . . . 6,183 38,645
-------- --------
Net cash (used in) provided by investing activities . . . . . . . . . . . (4,573) 47,627
-------- --------
Cash flows from financing activities:
Proceeds from debt . . . . . . . . . . . . . . . . . . . . . . . . . . 21,154 3,028
Repayments of debt . . . . . . . . . . . . . . . . . . . . . . . . . . (7,769) (26,752)
(Decrease) in cash overdraft . . . . . . . . . . . . . . . . . . . . . (4,266) (1,582)
Distributions on common stock . . . . . . . . . . . . . . . . . . . . . (2,775) (2,737)
Treasury stock purchases . . . . . . . . . . . . . . . . . . . . . . . (135)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (48)
-------- --------
Net cash provided by (used in) by financing activities . . . . . . . . . . 6,344 (28,226)
-------- --------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . 1,036 4,308
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . 3,370 4,276
-------- --------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . $ 4,406 $ 8,584
======== ========
Supplemental non-cash investing and 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
Issuance of promissory notes for shares of LDL . . . . . . . . . . . . . 1,643
Distribution of MAI shares to stockholders . . . . . . . . . . . . . . . $ 27,085
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-9-
<PAGE> 10
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Six Months Ended
------------------------
June 30, June 30,
1996 1995
-------- --------
<S> <C> <C>
Net cash (used in) operating activities . . . . . . . . . . . . . . . . . . $ (73) $(11,647)
-------- --------
Cash flows from investing activities:
Proceeds from sale of business and assets . . . . . . . . . . . . . . . . 4,415 13,699
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (491) (2,765)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . (14,680) (2,528)
Dividends from New Valley . . . . . . . . . . . . . . . . . . . . . . . . 6,183 38,645
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (88)
-------- --------
Net cash (used in) provided by investing activities . . . . . . . . . . . . (4,573) 46,963
-------- --------
Cash flows from financing activities:
Proceeds from debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,512 2,343
Repayments of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,514) (26,467)
(Decrease) in cash overdraft . . . . . . . . . . . . . . . . . . . . . . (3,761) (789)
Distributions paid to parent . . . . . . . . . . . . . . . . . . . . . . (3,621) (5,872)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (206)
-------- --------
Net cash provided by (used in) financing activities . . . . . . . . . . . . 5,616 (30,991)
-------- --------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . 970 4,325
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . 3,370 4,259
-------- --------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . $ 4,340 $ 8,584
======== ========
Supplemental non-cash investing and 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
Issuance of promissory notes for shares of LDL . . . . . . . . . . . . . . 1,643
Distribution of MAI to parent . . . . . . . . . . . . . . . . . . . . . . . $ 24,741
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-10-
<PAGE> 11
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") and other less significant
subsidiaries. Based on the Company's ability to assert sufficient
control, the Company consolidated the accounts of Liggett-Ducat Ltd.
("LDL") at December 31, 1995 and the results of operations for the three
and six months ended June 30, 1996.
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 Reports on Form 10-K,
as amended, for the year ended December 31, 1995, as filed with the
Securities and Exchange Commission ("SEC"). 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 1995 consolidated financial statements have been
reclassified to conform to the 1996 presentation.
2. INVESTMENT IN NEW VALLEY CORPORATION
------------------------------------
Summarized financial information for New Valley Corporation ("New Valley")
as of June 30, 1996 and December 31, 1995 and for the three and six months
ended June 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- -------
<S> <C> <C>
Current assets . . . . . . . . . . . . . . . . . $314,799 $333,485
Investment in real estate . . . . . . . . . . . . 183,122
Other non-current assets . . . . . . . . . . . . 34,537 52,337
Current liabilities . . . . . . . . . . . . . . . 187,361 177,920
Notes payable . . . . . . . . . . . . . . . . . . 159,574
Other long-term obligations . . . . . . . . . . . 16,366 11,967
Redeemable preferred shares . . . . . . . . . . . 222,288 226,396
Common shareholders' deficit . . . . . . . . . . (53,131) (30,461)
</TABLE>
-11-
<PAGE> 12
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- ------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . $ 34,547 $10,032 $ 71,231 $17,701
Cost and expenses . . . . . . . . . . . . . . . . . . . . . 38,909 7,455 80,577 7,753
(Loss) income from continuing operations . . . . . . . . . (4,762) 2,284 (9,646) 8,915
Income from discontinued operations . . . . . . . . . . . . 2,682 4,080
Net (loss) income applicable to common shares(A) . . . . . (20,408) 12,585 (36,475) 7,560
</TABLE>
(A) Includes all preferred accrued dividends, whether or not declared, and
the excess of carrying value of redeemable preferred shares over cost
of shares purchased.
The Company's and BGLS' investment in New Valley at June 30, 1996 is
summarized as follows:
<TABLE>
<CAPTION>
Unrealized
Number of Fair Carrying Holding Earnings
Shares Value Amount Gain (Loss) (Loss)
------ ----- ------ ---------- --------
<S> <C> <C> <C> <C> <C>
Class A Preferred Shares . . . . . . . . . . . . . . . 618,326 $101,407 $101,407 $(8,282) $ 13,910
Class B Preferred Shares . . . . . . . . . . . . . . . 250,885 2,383 2,383 530
Common Shares . . . . . . . . . . . . . . . . . . . . 79,794,229 19,151 (61,986) (16,444)
-------- -------- ------- --------
$122,941 $ 41,804 $(7,752) $ (2,534)
======== ======== ======= ========
</TABLE>
The Class A Preferred Shares and the Class B Preferred Shares are
accounted for as debt and equity securities, respectively, pursuant to the
requirements of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", and
are classified as available-for-sale. Prior to January 1, 1996, the Class
A Preferred Shares' fair value had been estimated with reference to the
securities' preference features, including dividend and liquidation
preferences, and the composition and nature of the underlying net assets
of New Valley. In January 1996, however, New Valley became engaged in the
ownership and management of commercial real estate and, in February 1996,
acquired a controlling interest in Thinking Machines Corporation. Because
these businesses affect the composition and nature of the underlying net
assets of New Valley, the Company and BGLS have determined the fair value
of the Class A Preferred Shares based on the quoted market price
commencing with the quarter ended March 31, 1996. The New Valley common
shares are accounted for under the equity method.
In the first quarter of 1996, New Valley repurchased 72,104 Class A
Preferred Shares for $10,530. As a result of this transaction, the
Company and BGLS now own 59.72% of the outstanding Class A Preferred
Shares. The Company and BGLS have recorded their 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 of $1,782
along with their share of other New Valley capital transactions of $1,563
for the six months ended June 30, 1996.
-12-
<PAGE> 13
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
-----------
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 from the distribution. At June 30, 1996, the accrued and
unpaid dividends arrearage on the Class A Preferred Shares was $124,339 or
$120.08 per share.
At June 30, 1996, the accrued and unpaid dividends arrearage on the Class B
Preferred Shares was $105,170 or $37.68 per share.
As a result of asset dispositions pursuant to New Valley's First Amended
Joint Chapter 11 Plan of Reorganization, as amended (the "Joint Plan"),
New Valley accumulated a significant amount of cash which it was required
to reinvest in operating companies by January 18, 1996 in order to avoid
potentially burdensome regulation under the Investment Company Act of
1940, as amended (the "Investment Company Act"). The Investment Company
Act and the rules and regulations thereunder require the registration of,
and impose various substantive restrictions on, companies that engage
primarily in the business of investing, reinvesting or trading in
securities or engage in the business of investing, reinvesting, owning,
holding or trading in securities and own or propose to acquire "investment
securities" having a "value" in excess of 40% of a company's "total assets"
(exclusive of Government securities and cash items) on an unconsolidated
basis. Following dispositions of its then operating businesses pursuant
to the Joint Plan, New Valley was above this threshold and relied on the
one-year exemption from registration under the Investment Company Act
provided by Rule 3a-2 thereunder, which exemption expired on January 18,
1996. Prior to such date, through New Valley's acquisition of the
investment banking and brokerage business of Ladenburg, Thalmann & Co.,
Inc. and its acquisition of a portfolio of office buildings and shopping
centers, New Valley was engaged primarily in a business or businesses
other than that of investing, reinvesting, owning, holding or trading in
securities, and the value of its investment securities was below the 40%
threshold. Under the Investment Company Act, New Valley is required to
determine the value of its total assets for purposes of the 40% threshold
based on "market" or "fair" values, depending on the nature of the asset,
at the end of the last preceding fiscal quarter and based on cost for
assets acquired since that date. If New Valley were required to register
in the future, under the Investment Company Act, it would be subject to a
number of severe restrictions on its operations, capital structure and
management, including without limitation, entering into transactions with
affiliates. If New Valley were required to register under the Investment
Company Act, the Company and BGLS may be in violation of the Investment
Company Act and may be adversely affected by the restrictions of the
Investment Company Act. In addition, registration under the Investment
Company Act by BGLS would constitute a violation of the 15.75% Series B
Senior Secured Notes due 2001 (the "Series B Notes") indenture to which
BGLS is a party.
SUBSEQUENT EVENT: On July 16, 1996, New Valley declared a cash dividend
of $30.00 per share on its Class A Preferred Shares payable on July 30,
1996. NV Holdings received $18,550 from the distribution.
On July 29, 1996, New Valley effected a one-for-twenty reverse stock split
of New Valley's common shares. After giving effect to this split, the
Company now holds 3,989,710 shares of New Valley common stock.
-13-
<PAGE> 14
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
-----------
3. RJR NABISCO HOLDINGS CORP.
--------------------------
At June 30, 1996, New Valley held 5,161,750 shares of RJR Nabisco Holdings
Corp. ("RJR Nabisco") common stock with a market value of $163,886 (cost
of $158,225) collateralizing margin loan financing of $82,525. At June
30, 1996, New Valley had an unrealized gain of $5,661. At August 13, 1996,
New Valley had an unrealized loss of $20,794.
On February 29, 1996, New Valley entered into a total return equity swap
transaction (the "Swap") with an unaffiliated company (the "Counterparty")
relating to an additional 1,000,000 shares of RJR Nabisco common stock
(reduced to 750,000 shares of RJR Nabisco common stock as of August 13,
1996). The transaction is for a period of up to six months, subject to
earlier termination at the election of New Valley and provided for New
Valley to make payment to the Counterparty of approximately $1,537 upon
commencement of the Swap. At the termination of the transaction, if the
price of the common stock during a specified period prior to such date
(the "Final Price") exceeds $34.42, the price of the RJR Nabisco common
stock during a specified period following the commencement of the swap
(the "Initial Price"), the Counterparty will pay New Valley an amount in
cash equal to the amount of such appreciation with respect to the shares
of RJR Nabisco common stock subject to the Swap plus the value of any
dividends with a record date occurring during the Swap period. If the
Final Price is less than the Initial Price, then New Valley will pay the
Counterparty at the termination of the transaction an amount in cash equal
to the amount of such decline with respect to the shares of RJR Nabisco
common stock, offset by the value of any dividends, provided that, with
respect to approximately 225,000 shares of RJR Nabisco common stock, New
Valley will not be required to pay any amount in excess of an approximate
25% decline in the value of the shares. The potential obligations of the
Counterparty under the Swap are being guaranteed by the Counterparty's
parent, a large foreign bank, and New Valley has pledged certain
collateral in respect of its potential obligations under the Swap and has
agreed to pledge additional collateral under certain conditions. For the
six months ended June 30, 1996, New Valley recorded a charge to operations
of $3,231 representing the unrealized loss on this Swap transaction and
had pledged collateral of $8,569 and $10,687 at June 30, 1996 and August
13, 1996, respectively. Based on the market price of RJR Nabisco common
stock at August 13, 1996, New Valley would recognize a loss of
approximately $4,000 for the three months ended September 30, 1996.
On March 4, 1996, the Company filed a definitive Proxy Statement with the
SEC and commenced solicitation of proxies in favor of its previously
nominated slate of directors to replace RJR Nabisco's incumbent Board of
Directors at its 1996 annual meeting of stockholders. As of June 30,
1996, New Valley had expensed $10,367 for costs relating to its RJR
Nabisco investment. Pursuant to a December 27, 1995 agreement, New Valley
agreed, among other things, to pay directly or reimburse the Company and
its subsidiaries for out-of-pocket expenses in connection with the
Company's solicitation of consents and proxies from the shareholders of
RJR Nabisco. At June 30, 1996, New Valley owed the Company and its
subsidiaries $1,200 pursuant to this agreement, which amount was paid in
July 1996.
-14-
<PAGE> 15
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
-----------
On April 16, 1996, the Company announced that, based on the analysis of
its proxy solicitors, its nominees for election to the RJR Nabisco Board
of Directors would not be elected at RJR Nabisco's 1996 annual meeting of
stockholders.
The Company, BGLS and High River Ltd. Partnership ("High River") were
parties to an agreement dated October 17, 1995, as amended by the letter
agreement dated November 5, 1995 (the "High River Agreement"). New
Valley, ALKI Corp. ("ALKI") and High River were parties to an agreement
dated October 17, 1995, as amended by the letter agreement dated October
17, 1995, and as further amended by the letter agreement dated November
5, 1995 (the "New Valley Agreement").
As of June 5, 1996, High River, the Company and BGLS terminated the High
River Agreement and New Valley, ALKI and High River terminated the New
Valley Agreement by mutual consent. The terminations leave in effect for
one year certain provisions of both the High River and New Valley
Agreements concerning payments to be made to High River in the event New
Valley achieves a profit (after deducting certain expenses) on the sale of
the shares of RJR Nabisco common stock which are held by it or they are
valued at the end of such year at higher than their purchase price or in
the event the Company or its affiliates engage in certain transactions
with RJR Nabisco.
4. INVENTORIES
-----------
Inventories consist of:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Finished goods . . . . . . . . . . . . . . . . . $19,216 $19,129
Work-in-process . . . . . . . . . . . . . . . . 3,376 3,570
Raw materials . . . . . . . . . . . . . . . . . 25,724 29,021
Replacement parts and supplies . . . . . . . . . 4,773 4,903
------- -------
Inventories at current costs . . . . . . . . . . 53,089 56,623
LIFO adjustments . . . . . . . . . . . . . . . . 1,547 3,899
------- -------
$54,636 $60,522
======= =======
</TABLE>
At June 30, 1996, the Company had leaf tobacco purchase commitments of
approximately $31,200.
5. INCOME TAXES
------------
The provision for taxes for the six month periods ended June 30, 1996 and
1995 does not bear the customary relationship to the pretax loss/income
for the Company and BGLS due principally to the effects of taxes provided
for foreign operations and an increase in the valuation allowance related
to U.S. operations.
-15-
<PAGE> 16
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
-----------
6. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
---------------------------------------------------
Notes payable, long-term debt and other obligations consist of:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------------------------
<S> <C> <C>
15.75% Series B Senior Secured Notes due 2001 . . . . . . $232,864
13.75% Series 2 Senior Secured Notes due 1997 . . . . . . $ 91,179
16.125% Senior Subordinated Reset Notes due 1997 . . . . . 5,670
14.500% Subordinated Debentures due 1998 . . . . . . . . . 800 126,295
Notes Payable - Foreign . . . . . . . . . . . . . . . . . 20,698 11,122
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 641 2,084
Liggett:
11.500% Senior Secured Series B Notes due 1993 - 1999 . . . 119,587 119,485
Variable rate Series C Senior Secured Notes due 1999 . . . 32,279 32,279
Revolving credit facility. . . . . . . . . . . . . . . . . 25,386 21,017
-------- --------
Total notes payable and long-term debt . . . . . . . . . . . 432,255 409,131
Less:
Current maturities . . . . . . . . . . . . . . . . . . . . 37,941 2,387
-------- --------
Amount due after one year . . . . . . . . . . . . . . . . . $394,314 $406,744
======== ========
</TABLE>
Offer to Exchange:
15.75% Series A Senior Secured Notes Due 2001 for 13.75% Series 2
Senior Secured Notes Due 1997, and
15.75% Series B Senior Secured Notes Due 2001 for 16.125% Senior
Subordinated Reset Notes Due 1997 and 14.500% Subordinated Debentures:
-------------------------------------------------------------------------
As a result of the Exchange Agreement, dated November 21, 1995 (the "1995
Exchange Agreement"), on November 27, 1995, BGLS commenced an offer to
exchange a total of $232,864 principal amount of 15.75% Senior Secured
Notes due January 31, 2001, for all its outstanding Series 2 Notes, Reset
Notes and Subordinated Debentures. The exchange ratio was $1,087.47
principal amount of new 15.75% Series A Senior Secured Notes ("Series A
Notes") for each $1,000 principal amount of Series 2 Notes exchanged,
$1,132.28 principal amount of new Series B Notes for each $1,000 principal
amount of Reset Notes exchanged and $1,000 principal amount of new Series
B Notes for each $1,000 principal amount of Subordinated Debentures
exchanged. The new Series A Notes and the new Series B Notes were
identical except that the Series B Notes were not subject to restrictions
on transfer.
The holders of in excess of 99% of the Series 2 Notes and 88% of the
Subordinated Debentures agreed, subject to certain conditions, to tender
their securities in the exchange offer. The Exchange offer closed on
January 30, 1996. All $91,179 of the Series 2 Notes and $125,495 of the
Subordinated Debentures were exchanged. In addition, BGLS cancelled all
of the Subordinated Debentures ($13,705) held by the Company.
Subordinated Debentures in the amount of $800 remain outstanding (see
"14.500% Subordinated Debentures due 1998" in the table above).
Holders of Reset Notes did not exchange and, in accordance with the 1995
Exchange Agreement, BGLS issued an irrevocable notice of redemption for
all of the outstanding Reset Notes. On March 7,
-16-
<PAGE> 17
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
-----------
1996, an additional $7,397 face amount of Series A Notes were sold for
$6,300 including accrued interest with proceeds being used for the
redemption of the Reset Notes, which were redeemed on March, 29 1996 for a
total amount of $5,785, including premium, together with accrued interest
of $452.
Pursuant to a registered exchange offer, holders of the Series A Notes
exchanged all of the $107,373 outstanding principal amount for an equal
principal amount of Series B Notes. The exchange closed March 21, 1996.
The Company has cancelled all the Series A Notes.
The new Series B Notes are collateralized by substantially all of BGLS'
assets, including a pledge of BGLS' equity interests in Liggett, BOL and
NV Holdings as well as a pledge of all of the New Valley securities held
by BGLS and NV Holdings. The Series B Notes Indenture contains certain
covenants, which among other things, limit the ability of BGLS to make
distributions to the Company, limit additional indebtedness to $10,000 and
restrict certain transactions with affiliates. Interest is payable at the
rate of 15.75% per annum on January 31 and July 31 of each year, except
for the period ended July 31, 1996 when interest is payable at 13.75% from
October 1, 1995 to January 30, 1996 and 15.75% from January 31, 1996
through July 31, 1996.
7. CONTINGENCIES
-------------
Liggett:
--------
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 actually were commenced against the Company or Liggett), since all
involve the tobacco manufacturing and marketing activities currently
performed by 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
has 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. The
future financial benefit to the Company is not quantifiable at this time
since the arrangements for assistance can be terminated under certain
circumstances. Furthermore, the amount of assistance received, if any,
would be a function of the level of costs incurred. Certain joint defense
arrangements, and the financial benefits incident thereto, have ended. No
assurances can be made that other arrangements will continue. To date a
number of such actions, including several against Liggett, have been
disposed of favorably to the defendants and no plaintiff has ultimately
prevailed in trial for recovery of damages in any such action.
In the action entitled CIPOLLONE v. LIGGETT GROUP INC., et al., the United
States Supreme Court on June 24, 1992, issued an opinion regarding 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. Relying
on The Public Health Cigarette
-17-
<PAGE> 18
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
-----------
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 plaintiff 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 as to whether any of these claims
are viable under state law, but assumed ARGUENDO that they are viable.
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 September 10, 1993, an action entitled SACKMAN v. LIGGETT GROUP INC.,
United States District Court, Eastern District of New York, was filed
against Liggett alone alleging as injury lung cancer. Fact discovery
closed on August 31, 1995; expert discovery continues. On May 25, 1996,
the District Court granted Liggett summary judgment on plaintiffs' fraud
and breach of warranty claims on statute of limitations grounds, but
allowed plaintiffs' personal injury claims to survive. In the same order,
the District Court vacated the Magistrate's March 19, 1996 order
compelling Liggett to produce certain Council for Tobacco Research ("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 Court also ordered the Magistrate to
reconsider his March 19, 1996 order and the effect of the District Court's
summary judgment order. Oral argument concerning the relevancy of the CTR
documents in light of the District Court's summary judgment order was
conducted on August 8, 1996. The Magistrate's ruling on this matter is
pending.
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 CTR and its predecessor. The complaint seeks
equitable relief
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BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
-----------
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.
On October 31, 1991, an action entitled BROIN et al v. PHILLIP MORRIS
COMPANIES, INC., et al., Circuit Court of the 11th 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. On December 12, 1994,
plaintiffs' motion to certify the action as a class action was granted.
Defendants appealed this ruling and on January 3, 1996, the Third District
Court of Appeal in Florida ("Third DCA") affirmed the class certification
order. On May 8, 1996, the Third DCA denied defendants' rehearing
request. On June 5, 1996, the Third DCA denied defendants' petition for a
stay of its order upholding class certification, but granted defendants'
motion for a stay of class notice.
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 others. The class action
complaint was brought on behalf of plaintiffs and residents of the United
States who claim to be addicted to tobacco products and survivors who
claim their decedents were addicted. 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. The
complaint also alleges causes of action sounding in fraud, deceit,
negligent misrepresentation, breach of express and implied warranty,
strict liability and violation of consumer protection statutes.
Plaintiffs seek compensatory and punitive damages and 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
February 17, 1995, the District Court issued an order that granted in part
plaintiffs' motion for class certification. On May 23, 1996, the Court of
Appeals for the Fifth Circuit reversed the District Court's order
certifying the nationwide class action and instructed the District Court
to dismiss the class complaint.
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 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
and allegedly have suffered personal injury as a result thereof.
Plaintiffs seek compensatory and punitive damages together with 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 January 31, 1996, the Third DCA affirmed the
ruling of the trial court certifying the action as a class action, but
modified the trial court ruling to limit the class to Florida citizens and
residents. On May 8, 1996, the Third DCA denied defendants' rehearing
request. On June 5, 1996, the Third DCA denied defendants' petition for a
stay of its order upholding class certification but granted defendants'
motion for a stay of class notice.
On May 6, 1996 an action entitled NORTON, et al. v. RJR NABISCO HOLDINGS
CORP., et al., Madison County, Indiana Superior Court, was filed against
Liggett and others. The class action complaint was brought on behalf of
plaintiffs and all persons in the State of Indiana who allegedly have
become
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BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
-----------
addicted to cigarette products and allegedly have suffered personal injury
as a result thereof. Plaintiffs seek compensatory and punitive damages
together with equitable relief including but not limited to a medical fund
for future health care costs, attorneys' fees and costs. On June 3, 1996,
the defendant tobacco companies filed a notice of removal in the United
States District Court for the Southern District of Indiana.
On May 29, 1996 an action entitled RICHARDSON, et al. v. PHILIP MORRIS
INC., et al., Circuit Court for Baltimore City, was filed against Liggett
and others. The class action complaint was brought on behalf of
plaintiffs and all persons in the State of Maryland who allegedly have
become addicted to cigarette products and allegedly have suffered personal
injury as a result thereof. Plaintiffs seek compensatory and punitive
damages, together with equitable relief including but not limited to a
medical fund for future health care costs, attorney's fees and costs. On
June 27, 1996, the defendant tobacco companies filed a notice of removal
in the United States District Court for the District of Maryland.
On March 12, 1996, the Company and Liggett entered into an agreement to
settle the CASTANO class action tobacco litigation. The settlement
undertakes to release the Company and Liggett from all current and future
addiction-based claims, including claims by a nationwide class of smokers
in the CASTANO class action pending in Louisiana federal court as well as
claims by a narrower statewide class in the ENGLE class action pending in
Florida state court. The settlement is subject to and conditioned upon
the approval of the United States District Court for the Eastern District
of Louisiana. The Company is unable to determine at this time when the
Court will review the settlement, and no assurance can be given that the
settlement will be approved by the Court. Certain items of the settlement
are summarized below.
Under the settlement, the CASTANO class would 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, together with reasonable
fees and expenses of the CASTANO Plaintiffs Legal Committee. Settlement
funds received by the class would be used to pay half the cost of
smoking-cessation programs for eligible class members. 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 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.
The Company and Liggett have the right to terminate the CASTANO settlement
if the remaining defendants succeed on the merits or in the event of a
full and final denial of class action certification. The terms of the
settlement would still apply if the CASTANO plaintiffs or their lawyers
were to institute a substantially similar new class action against the
tobacco industry. The Company and Liggett may also terminate the
settlement if they conclude that too many class members have chosen to opt
out of the settlement. In the event of any such termination by the
Company and Liggett, the named plaintiffs would be at liberty to renew
their prosecution of such civil action against the Company and Liggett.
On May 11, 1996, the CASTANO Plaintiffs Legal Committee filed a motion
seeking preliminary approval of the CASTANO settlement. Non-settling
defendants filed a motion to stay consideration of the
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<PAGE> 21
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
-----------
CASTANO settlement pending the outcome of the appeal of the District
Court's trial class certification order. Non-settling defendants' motion
is scheduled to be heard on September 11, 1996. The motion for
preliminary approval of the CASTANO settlement is scheduled to be heard on
September 25, 1996.
On March 14, 1996, the Company and 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 of the CASTANO settlement or, if earlier, the
completion of a combination by the Company or Liggett with certain
defendants, or an affiliate thereof, in CASTANO, the CASTANO Plaintiffs
agree not to enter into any settlement agreement with any CASTANO
defendant which would reduce the terms of the CASTANO settlement
agreement. If the CASTANO Plaintiffs 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.
An action entitled YVONNE ROGERS v. LIGGETT GROUP INC. et al., Superior
Court, Marion County, Indiana, was filed by the plaintiff on March 27,
1987 against Liggett and others. The plaintiff seeks 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.
A number of proceedings have been filed against Liggett and others by
state and local government entities or officials seeking restitution and
indemnity for medical payments and expenses made or incurred for tobacco
related illnesses. Such actions have been filed by the State of
Minnesota (together with Minnesota Blue Cross-Blue Shield), the State of
Mississippi, the State of West Virginia, the Commonwealth of
Massachusetts, the State of Louisiana, the State of Texas, the State of
Washington, the State of Maryland, the State of Connecticut, and the City
and County of San Francisco. In West Virginia, the trial court, in a
ruling issued on May 3, 1995, dismissed eight of the ten counts of the
complaint filed therein, leaving only two counts of an alleged conspiracy
to control the market and the market price of tobacco products and an
alleged consumer protection claim. In a subsequent ruling, the trial
court adjudged the contingent fee agreement entered into by the State of
West Virginia and its counsel to be unconstitutional under the
Constitution of the State of West Virginia. In Mississippi, the Governor
has recently commenced an action in the Mississippi Supreme Court against
the Attorney General of the state, making application for a writ of
prohibition to bar further prosecution and to seek dismissal of the suit
brought by the Attorney General of the state
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BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
-----------
seeking such restitution and indemnity, alleging that the commencement and
prosecution of such a civil action by the Attorney General of the state
was and is outside the authority of the Attorney General.
On November 28, 1995, each of the major manufacturers in the industry,
including Liggett, filed suit in both the Commonwealth of Massachusetts
and in the State of Texas seeking declaratory relief to the effect that
the commencement of any such litigation (as had been filed by Florida,
Mississippi, West Virginia and Minnesota and now by Massachusetts,
Louisiana and Texas) seeking to recover Medicaid expenses against the
manufacturers by either the Commonwealth of Massachusetts or the State of
Texas would be unlawful. On January 22, 1996, a suit seeking
substantially similar declaratory relief was filed in the State of
Maryland.
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).
Liggett, after initial litigation, entered into a settlement of this
controversy with the State of Florida, the terms of which are described
below.
The Commonwealth of Massachusetts has enacted legislation authorizing
lawsuits similar to the suits filed by the States of Mississippi,
Minnesota, West Virginia, Louisiana and Texas. Aside from the Florida and
Massachusetts statutes, legislation authorizing the state to sue a company
or individual to recover the costs incurred by the state to provide health
care to persons allegedly injured by the company or individual also has
been introduced in a number of other states. These bills contain some or
all of the following provisions: eliminating certain 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.
On March 15, 1996, the Company and Liggett entered into a settlement of
tobacco litigation with the Attorneys General of the States of Florida,
Louisiana, Massachusetts, Mississippi and West Virginia. The 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 $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 would range
from 2-1/2% to 7-1/2% of Liggett's pretax income depending on the number
of additional states joining the settlement. 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
-22-
<PAGE> 23
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
-----------
transaction with another defendant in the lawsuits within three years of
the date of the settlement. At December 31, 1995, Liggett accrued
approximately $4,000 for the settlement with the Attorneys General.
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.
Currently, in addition to the above, approximately 125 product liability
lawsuits, which have been filed in various jurisdictions, are pending and
active in which Liggett is a defendant. Of these, approximately 90 are
pending in the State of Florida. In most of these lawsuits, plaintiffs
seek punitive as well as compensatory damages. Of the pending product
liability lawsuits, the next case scheduled for trial against Liggett is
JAMES T. CLARK v. LIGGETT GROUP INC. This matter is scheduled for trial in
October, 1996.
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 this investigation.
Liggett has been responding to a civil investigative demand from the
Antitrust Division of the United States Department of Justice which
requests certain information from Liggett. The request appears to focus
on United States tobacco industry activities in connection with product
development efforts regarding, in particular, "fire-safe" or
self-extinguishing cigarettes. It also requests certain general
information addressing Liggett's involvement with and relationship to its
competitors. The Company is unable to predict at this time the outcome of
this investigation.
As to each of the cases referred to above which is pending against the
Company, the Company believes, and has been advised by counsel handling
the respective cases, that the Company has a number of valid defenses to
the claim or claims asserted against the Company. 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
actions, adverse political decisions and other unfavorable 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. The Company is
not able to evaluate the effect of these developing matters on pending
litigation or the possible commencement of additional litigation.
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BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
-----------
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. 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.
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 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, 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. An FDA advisory panel has stated that it believes
nicotine is addictive. On August 10, 1995, the FDA filed in the Federal
Register a Notice of Proposed Rule-Making (the "Proposed Rule-Making")
which would classify tobacco as a drug, assert jurisdiction by the FDA
over the manufacture and marketing of tobacco products and impose
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. Liggett and the other
major manufacturers in the industry responded by filing a civil action in
the United States District Court for the Middle District of North Carolina
challenging the legal authority of the FDA to assert such jurisdiction.
In addition thereto, Liggett and the other four major cigarette
manufacturers, as well as others, have filed comments in opposition to the
Proposed Rule-Making. Management is unable to predict whether such a
classification will be made. Management is also unable to predict the
effects of such classification, were it to occur, or of such regulations,
if implemented, on Liggett's operations, but such actions could have an
unfavorable impact thereon.
The Omnibus Budget Reconciliation Act of 1993 ("OBRA") required each
United States cigarette manufacturer to use at least 75% domestic tobacco
in the aggregate of the cigarettes manufactured by it 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 the tobacco stabilization cooperatives organized by
the United States government. OBRA was repealed retroactively (as of
December 31, 1994) coincident in time with the issuance of a Presidential
proclamation, effective September 13, 1995, imposing tariffs on imported
tobacco in excess of certain quotas.
The USDA has informed Liggett that it did not satisfy the 75% domestic
tobacco usage requirement for 1994 and therefore is subject to a marketing
assessment of approximately $5,500. At December 31, 1995, the Company
accrued approximately $4,900 representing the present value of its
obligation for the USDA marketing assessment. The charge was included as
a component of cost of sales in 1995. Liggett has agreed to pay this
assessment in quarterly installments with interest over a five year
period. Under certain circumstances, payment can be accelerated. Since
the levels of domestic tobacco inventories on hand at the tobacco
stabilization organizations are below reserve stock levels, the Company
was not obligated to make purchases of domestic tobacco from the tobacco
stabilization cooperatives.
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<PAGE> 25
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, after
negotiations with the affected countries, declared 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. The Company believes it is unlikely that an end-user licensing
system will be adopted, although no assurances can be given that an
end-user licensing system will not be adopted.
In September 1991, the Occupational Safety and Health Administration
("OSHA") issued a Request for Information relating to indoor air quality,
including ETS, in occupational settings. OSHA announced in March 1994
that it would commence formal rulemaking during the year. Hearings were
completed during 1995 but it is not anticipated that any regulation will
issue prior to the end of 1996. While the Company cannot predict the
outcome, some form of federal regulation of smoking in workplaces may
result.
In January 1993, the United State Environmental Protection Agency (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.
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.
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<PAGE> 26
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
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:
-----------
On November 20, 1995, RJR Nabisco filed an action against the Company and
Messrs. LeBow and Icahn in the United States District Court for the Middle
District of North Carolina alleging violations of the federal securities
laws. Specifically, RJR Nabisco alleges that the Company and Messrs.
LeBow and Icahn violated sections 14(a) and 10(b) of the Securities
Exchange Act of 1934, as amended,
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BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
-----------
and Rules 14a-9 and 10b-5 promulgated thereunder, by purportedly making
materially false or incomplete statements concerning the purpose and
background of the consent solicitation.
The Company and LeBow asserted counterclaims against RJR Nabisco, alleging
that RJR Nabisco had made false statements and material omissions in its
opposition to the Company's consent solicitation. On March 5, 1996, RJR
Nabisco voluntarily dismissed, without prejudice, its claims asserted
against Icahn, and on May 6, 1996 both RJR Nabisco and the Company filed a
stipulation and order of dismissal, without prejudice, of the action.
At June 30, 1996, there were several other proceedings, lawsuits and
claims pending against subsidiaries of the Company. 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.
8. SALE OF ASSETS
--------------
On April 9, 1996, Liggett executed a definitive agreement with the County
of Durham for the sale of certain surplus realty in the amount of $4,300.
The closing of the transaction occurred on May 14, 1996. Liggett
recognized a gain of approximately $3,600.
On April 29, 1996, Liggett executed a definitive agreement with Blue Devil
Ventures, a North Carolina limited liability partnership, for the sale of
additional surplus realty in the amount of $2,200. While the agreement
provides for the closing to occur on or before September 30, 1996, Blue
Devil Ventures has the option to forfeit its deposit of $22 and not close
if it determines that its development project is not feasible.
SUBSEQUENT EVENT: On July 15, 1996, the Company sold substantially all of
the non-cash assets and certain liabilities of COM Products, Inc. ("COM"),
a small subsidiary engaged in the business of selling micrographics
equipment and supplies, for approximately $4,000 which is in excess of
carrying value.
9. ACQUISITION OF MINORITY INTERESTS AND AFFILIATE TRANSACTIONS
------------------------------------------------------------
During the second quarter of 1996, BOL entered into stock purchase
agreements with the chairman of LDL (the "Chairman") and the Director of
LDL's cigarette operations (the "Director", together, the "Sellers").
Under the stock purchase agreements, the Company acquired 142,558 shares
held by the Sellers for a total of $2,143. The purchase price is
payable in installments during 1996 and certain shares of LDL
collateralize BOL's obligation under both the purchase agreements and the
consulting agreements (described below). These transactions increased
BOL's ownership percentage in LDL from 68% to 89%.
Concurrently, the Company entered into consulting agreements with the
Sellers. Under the terms of the consulting agreements, the Company will
pay the Sellers a total of approximately $8,357 over five years.
SUBSEQUENT EVENT: On July 5, 1996, Liggett purchased from BOL 140,000
shares (approximately 20%) of LDL for $2,100. Liggett also acquired a
ten-year option to purchase up to 292,407 additional shares of LDL stock
at the same per share price ($15.00) for $3,400, thereby entitling
Liggett to increase its interest in LDL to approximately 62%. The option
fee is to be credited against the purchase price. In addition, Liggett
has the right on or before June 30, 1997 to acquire another ten-year
option from BOL for $2,200 on the same terms to purchase the remaining
27% of the shares of LDL owned by BOL. These transactions have no impact
on the consolidated financial position or results of operations of the
Company or BGLS.
-27-
<PAGE> 28
NEW VALLEY HOLDINGS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 863 $ 738
Due from affiliate . . . . . . . . . . . . . . . . . . . . . . . . 300
Investment in New Valley Corporation:
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . 101,407 109,386
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . (65,592) (52,045)
-------- --------
Total investment in New Valley Corporation . . . . . . . . . . . 35,815 57,341
-------- --------
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . 2,616
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 39,594 $ 58,079
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current income taxes payable to parent . . . . . . . . . . . . . . $ 4,920 $ 4,472
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 4,918
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 4,920 9,390
-------- --------
Commitments and contingencies
Common stock, $0.01 par value,
100 shares authorized, issued and outstanding . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 12,172 11,020
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . 26,148 32,128
Unrealized holding (loss) gain, net of income tax benefit of
$1,964 and income taxes of $2,983 . . . . . . . . . . . . . . . . (3,646) 5,541
-------- --------
Total stockholder's equity . . . . . . . . . . . . . . . . . . 34,674 48,689
-------- --------
Total liabilities and stockholder's equity . . . . . . . . . . $ 39,594 $ 58,079
======== ========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
-28-
<PAGE> 29
NEW VALLEY HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- -----------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Equity in (loss) earnings of affiliate . . . . . . . . . . . . . . . . $(1,487) $ 311 $(2,983) $ 1,994
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 10 48 391
General and administrative expenses . . . . . . . . . . . . . . . . . (2) (5) (4) (8)
------- ------- ------- -------
(Loss) income from continuing operations before
income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,448) 316 (2,939) 2,377
------- ------- ------- -------
(Benefit) provision for income taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 674 448 2,840
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (520) (3,580) (3,208) (4,171)
------- ------- ------ -------
Income tax (benefit) . . . . . . . . . . . . . . . . . . . . . . . (507) (2,906) (2,760) (1,331)
-------- ------- ------ -------
(Loss) income from continuing operations . . . . . . . . . . . . . . . (941) 3,222 (179) 3,708
Income from discontinued operations of
affiliate, net of income taxes . . . . . . . . . . . . . . . . . . . 724 1,106
-------- ------- ------ -------
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (941) $ 3,946 $ (179) $ 4,814
======== ======= ====== =======
</TABLE>
The accompanying notes are an integral part
of the financial statements.
-29-
<PAGE> 30
NEW VALLEY HOLDINGS, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Additional Unrealized
Common Stock Paid-In Retained Holding
Shares Amount Capital Earnings Gain (Loss) Total
------ ------ ------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 . . . . . . . . . . 100 $11,020 $32,128 $ 5,541 $ 48,689
Increase in capital from
New Valley's repurchase
of Class A Shares and
other capital transactions,
net of taxes of $620 . . . . . . . . . . . 1,152 1,152
Proportionate share of
New Valley's unrealized
depreciation in investments,
net of taxes of $550 . . . . . . . . . . . . 1,022 1,022
Increase in unrealized holding
loss on investment in
New Valley, net of tax
benefit of $5,497 . . . . . . . . . . . . . (10,209) (10,209)
Net (loss) . . . .. . . . . . . . . . . . . . . (179) (179)
Dividends . . . . . . . . . . . . . . . . . . . (5,801) (5,801)
--- ----- ------- ------- -------- --------
Balance, June 30, 1996 . . . . . . . . . . . . 100 $ $12,172 $26,148 $ (3,646) $ 34,674
=== ===== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
-30-
<PAGE> 31
NEW VALLEY HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Six Months Ended
--------------------
June 30, June 30,
1996 1995
-------- --------
<S> <C>
Net cash (used in) provided by operating activities . . . $ (257) $ 383
------- --------
Cash flows from investing activities:
Dividends received from New Valley Corporation . . . . 6,183 38,645
------- --------
Net cash provided by investing activities . . . . . . . 6,183 38,645
------- --------
Cash flows from financing activities:
Payment of dividends . . . . . . . . . . . . . . . . . (5,801) (39,011)
------- --------
Net cash used for financing activities . . . . . . . . (5,801) (39,011)
------- --------
Net increase in cash . . . . . . . . . . . . . . . . . . 125 17
Cash and cash equivalents at beginning of period . . . . 738
------- --------
Cash and cash equivalents at end of period . . . . . . . $ 863 $ 17
======= ========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
-31-
<PAGE> 32
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, 1995, 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 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.
2. INVESTMENT IN NEW VALLEY CORPORATION
------------------------------------
Summarized financial information for New Valley as of June 30, 1996 and
December 31, 1995 and for the three and six month periods ended June 30,
1996 and 1995 follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Current assets . . . . . . . . . . . . . . . . . $314,799 $333,485
Investment in real estate . . . . . . . . . . . . 183,122
Other non-current assets . . . . . . . . . . . . 34,537 52,337
Current liabilities . . . . . . . . . . . . . . . 187,361 177,920
Notes payable . . . . . . . . . . . . . . . . . . 159,574
Other long-term obligations . . . . . . . . . . . 16,366 11,967
Redeemable preferred shares . . . . . . . . . . . 222,288 226,396
Common shareholders' deficit . . . . . . . . . . (53,131) (30,461)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . $ 34,547 $10,032 $ 71,231 $ 17,701
Cost and expenses . . . . . . . . . . . . . . 38,909 7,455 80,577 7,753
(Loss) income from continuing operations . . (4,762) 2,284 (9,646) 8,915
Income from discontinued operations . . . . . 2,682 4,080
Net (loss) income applicable to common
shares(A) . . . . . . . . . . . . . . . . . . (20,408) 12,585 (36,475) 7,560
</TABLE>
(A) Includes all preferred accrued dividends, whether or not
declared, and the excess of carrying value of redeemable
preferred shares over cost of shares purchased.
-32-
<PAGE> 33
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
-----------
The Company's investment in New Valley at June 30, 1996 is summarized as
follows:
<TABLE>
<CAPTION>
Number of Fair Carrying Unrealized Earnings/
Shares Value Value Holding Loss (Loss)
--------- ------ -------- ------------ --------
<S> <C> <C> <C> <C> <C>
Class A Preferred Shares 618,326 $101,407 $101,407 $(8,282) $ 13,910
Common Shares . . . . . . 79,399,254 19,056 (65,592) (16,893)
-------- -------- ------- --------
$120,463 $35,815 $(8,282) $ (2,983)
======== ======= ======= ========
</TABLE>
The Class A Preferred Shares are accounted for as debt securities pursuant
to the requirements of Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities",
and are classified as available-for-sale. Prior to January 1, 1996, the
Class A Preferred Shares' fair value had been estimated with reference to
the securities' preference features, including dividend and liquidation
preferences, and the composition and nature of the underlying net assets
of New Valley. In January 1996, however, New Valley became engaged in the
ownership and management of commercial real estate and, in February 1996,
acquired a controlling interest in Thinking Machines Corporation. Because
these businesses affect the composition and nature of the underlying net
assets of New Valley, the Company has determined the fair value of the
Class A Preferred Shares based on the quoted market price commencing with
the quarter ended March 31, 1996. The New Valley common shares are
accounted for under the equity method.
In the first quarter of 1996, New Valley repurchased 72,104 Class A
Preferred Shares for $10,530. As a result of this transaction, the
Company now owns 59.72% of the outstanding Class A Preferred Shares. 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 of $1,152 net of a tax benefit of
$621 along with its share of other New Valley capital transactions of
$1,022 net of taxes of $550 for the six months ended June 30, 1996.
On March 13, 1996, New Valley declared a cash dividend of $10.00 per share
on the Class A Preferred Shares payable on March 27, 1996. The Company
received $6,183 from the distribution. At June 30, 1996, the accrued and
unpaid dividends arrearage on the Class A Preferred Shares was $124,339 or
$120.08 per share.
As a result of asset dispositions pursuant to New Valley's First Amended
Joint Chapter 11 Plan of Reorganization, as amended (the "Joint Plan"),
New Valley accumulated a significant amount of cash which it was required
to reinvest in operating companies by January 18, 1996 in order to avoid
potentially burdensome regulation under the Investment Company Act of
1940, as amended (the "Investment Company Act"). The Investment Company
Act and the rules and regulations thereunder require the registration of,
and impose various substantive restrictions on, companies that engage
primarily in the business of investing, reinvesting or trading in
securities or engage in the business of investing, reinvesting, owning,
holding or trading in securities and own or propose to acquire "investment
securities" having a "value" in excess of 40% of a company's "total assets"
(exclusive of Government securities and cash items) on an unconsolidated
basis. Following dispositions of its then operating businesses pursuant
to the Joint Plan, New Valley was above this threshold and relied on the
one-year exemption from registration under the Investment Company Act
provided by Rule 3a-2 thereunder, which exemption expired on January 18,
1996. Prior to such date, through New Valley's acquisition of the
investment banking and brokerage business of Ladenburg, Thalmann & Co.,
Inc. and its acquisition of a portfolio of office buildings and shopping
centers, New Valley was engaged primarily in a business or businesses
other than that of investing, reinvesting, owning, holding or trading in
securities, and the value of its investment securities was below the 40%
threshold. Under the Investment Company Act, New Valley is required to
determine the value of its
-33-
<PAGE> 34
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
-----------
total assets for purposes of the 40% threshold based on "market" or "fair"
values, depending on the nature of the asset, at the end of the last
preceding fiscal quarter and based on cost for assets acquired since that
date. If New Valley were required to register in the future, under the
Investment Company Act, it would be subject to a number of severe
restrictions on its operations, capital structure and management,
including without limitation, entering into transactions with affiliates.
If New Valley were required to register under the Investment Company Act,
the Company, as well as BGLS and Brooke, may be in violation of the
Investment Company Act and may be adversely affected by the restrictions
of the Investment Company Act. In addition, registration under the
Investment Company Act by BGLS would constitute a violation of the 15.75%
Series B Senior Secured Notes due 2001 (the "Series B Notes") indenture to
which BGLS is a party.
SUBSEQUENT EVENT: On July 16, 1996, New Valley declared a cash dividend
of $30.00 per share on its Class A Preferred Shares payable on July 30,
1996. The Company received $18,550 from the distribution.
On July 29, 1996, New Valley effected a one-for-twenty reverse stock split
of New Valley's common shares. After giving effect to this split, the
Company now holds 3,969,962 shares of New Valley common stock.
3. RJR NABISCO HOLDINGS CORP.
--------------------------
At June 30, 1996, New Valley held 5,161,750 shares of RJR Nabisco Holdings
Corp. ("RJR Nabisco") common stock with a market value of $163,886 (cost
of $158,225) collateralizing margin loan financing of $82,525. At June
30, 1996, New Valley had an unrealized gain of $5,661. At August 13, 1996,
New Valley had an unrealized loss of $20,794.
On February 29, 1996, New Valley entered into a total return equity swap
transaction (the "Swap") with an unaffiliated company (the "Counterparty")
relating to 1,000,000 shares of RJR Nabisco common stock (reduced to
750,000 shares of RJR Nabisco common stock on August 13, 1996). The
transaction is for a period of up to six months, subject to earlier
termination at the election of New Valley and provided for New Valley to
make payment to the Counterparty of approximately $1,537 upon commencement
of the Swap. At the termination of the transaction, if the price of the
common stock during a specified period prior to such date (the "Final
Price") exceeds $34.42, the price of the RJR Nabisco common stock during a
specified period following the commencement of the Swap (the "Initial
Price"), the Counterparty will pay New Valley an amount in cash equal to
the amount of such appreciation with respect to the shares of RJR Nabisco
common stock subject to the Swap plus the value of any dividends with a
record date occurring during the Swap period. If the Final Price is less
than the Initial Price, then New Valley will pay the Counterparty at the
termination of the transaction an amount in cash equal to the amount of
such decline with respect to the shares of RJR Nabisco common stock,
offset by the value of any dividends, provided that, with respect to
approximately 225,000 shares of RJR Nabisco common stock, New Valley will
not be required to pay any amount in excess of an approximate 25% decline
in the value of the shares. The potential obligations of the Counterparty
under the Swap are being guaranteed by the Counterparty's parent, a large
foreign bank, and New Valley has pledged certain collateral in respect of
its potential obligations under the Swap and has agreed to pledge
additional collateral under certain conditions. For the six months ended
June 30, 1996, New Valley recorded a charge to operations of $3,231
representing the unrealized loss on this Swap transaction and had pledged
collateral of $8,569 and $10,687 at June 30, 1996 and August 13, 1996,
respectively. Based on the market price of RJR Nabisco common stock at
August 13, 1996, New Valley would recognize a charge of approximately
$4,000 for the three months ended September 30, 1996.
-34-
<PAGE> 35
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
-----------
On March 4, 1996, Brooke filed a definitive Proxy Statement with the SEC
and commenced solicitation of proxies in favor of its previously nominated
slate of directors to replace RJR Nabisco's incumbent Board of Directors
at its 1996 annual meeting of stockholders. As of June 30, 1996, New
Valley had expensed $10,367 for costs relating to its RJR Nabisco
investment. Pursuant to a December 27, 1995 agreement New Valley agreed,
among other things, to pay directly or reimburse Brooke and its
subsidiaries for out-of-pocket expenses in connection with Brooke's
solicitation of consents and proxies from the shareholders of RJR Nabisco.
At June 30, 1996, New Valley owed Brooke and its subsidiaries $1,200
pursuant to this agreement, which amount was paid in July 1996.
On April 16, 1996, Brooke announced that, based on the analysis of its
proxy solicitors, its nominees for election to the RJR Nabisco Board of
Directors would not be elected at RJR Nabisco's 1996 annual meeting of
stockholders.
Brooke, BGLS and High River Ltd. Partnership ("High River") were parties
to an agreement dated October 17, 1995, as amended by the letter agreement
dated November 5, 1995 (the "High River Agreement"). New Valley, ALKI
Corp. ("ALKI") and High River were parties to an agreement dated October
17, 1995, as amended by the letter agreement dated October 17, 1995, and
as further amended by the letter agreement dated November 5, 1995 (the
"New Valley Agreement").
As of June 5, 1996, High River, Brooke and BGLS terminated the High River
Agreement and New Valley, ALKI and High River terminated the New Valley
Agreement by mutual consent. The terminations leave in effect for one
year certain provisions of both the High River and New Valley Agreements
concerning payments to be made to High River in the event New Valley
achieves a profit (after deducting certain expenses) on the sale of the
shares of RJR Nabisco common stock which are held by it or they are valued
at the end of such year at higher than their purchase price or in the
event Brooke or its affiliates engage in certain transactions with RJR
Nabisco.
4. FEDERAL INCOME TAX
------------------
At June 30, 1996, the Company has recorded a deferred tax asset of $2,616
based on the determination that it is more likely than not that the
deferred tax asset will be realized through future taxable earnings or
alternative tax strategies. The provision for taxes for the six month
periods ended June 30, 1996 and 1995 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.
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' Series B Notes.
-35-
<PAGE> 36
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 of the
Company include the accounts of BGLS, Liggett Group Inc. ("Liggett"), Brooke
(Overseas) Ltd. ("BOL"), New Valley Holdings, Inc. ("NV Holdings"), other less
significant subsidiaries, and as of December 31, 1995 and for the three and
six months ended June 30, 1996, Liggett-Ducat Ltd. ("LDL").
For purposes of this discussion and other consolidated financial reporting, the
Company's significant business segments are tobacco and real estate.
RECENT DEVELOPMENTS
- -------------------
CERTAIN MATTERS RELATING TO RJR NABISCO HOLDINGS CORP.
As of August 13, 1996, New Valley Corporation ("New Valley") held 5,161,750
shares of RJR Nabisco Holdings Corp. ("RJR Nabisco") common stock. New
Valley's costs for such shares and the amount of related margin loan financing
were $158,225 and $82,525, respectively. As of August 13, 1996, the market
value of the shares was $137,432 and the unrealized loss was $20,794. As of
June 30, 1996, New Valley had expensed $10,367 for costs relating to the
investment in RJR Nabisco common stock. Pursuant to a December 27, 1995
agreement, New Valley agreed, among other things, to pay directly or reimburse
the Company and its subsidiaries for out-of-pocket expenses in connection with
the Company's solicitation of consents and proxies from the shareholders of RJR
Nabisco. At June 30, 1996, New Valley owed the Company and its subsidiaries
$1,200 pursuant to this agreement, which amount was paid in July 1996.
On February 29, 1996, New Valley entered into a total return equity swap
transaction (the "Swap") with an unaffiliated company (the "Counterparty")
relating to an additional 1,000,000 shares of RJR Nabisco common stock (reduced
to 750,000 shares of RJR Nabisco common stock as of August 13, 1996). The
transaction is for a period of up to six months, subject to earlier termination
at the election of New Valley and provided for New Valley to make payment to
the Counterparty of approximately $1,537 upon commencement of the Swap. At the
termination of the transaction, if the price of the common stock during a
specified period prior to such date (the "Final Price") exceeds $34.42, the
price of the RJR Nabisco common stock during a specified period following the
commencement of the swap (the "Initial Price"), the Counterparty will pay New
Valley an amount in cash equal to the amount of such appreciation with respect
to the shares of RJR Nabisco common stock subject to the Swap plus the value of
any dividends with a record date occurring during the Swap period. If the
Final Price is less than the Initial Price, then New Valley will pay the
Counterparty at the termination of the transaction an amount in cash equal to
the amount of such decline with respect to the shares of RJR Nabisco common
stock, offset by the value of any dividends, provided that, with respect to
approximately 225,000 shares of RJR Nabisco common stock, New Valley will not
be required to pay any amount in excess of an approximate 25% decline in the
value of the shares. The potential obligations of the Counterparty under the
Swap are being guaranteed by the Counterparty's parent, a large foreign bank,
and New Valley has pledged certain collateral in respect of its potential
obligations under the Swap and has agreed to pledge additional collateral under
certain conditions. For the six months ended June 30, 1996, New Valley
recorded a charge to operations of $3,231 representing the unrealized loss on
this Swap transaction and had pledged collateral of $8,569 and $10,687 at June
30, 1996 and August 9, 1996, respectively. Based on the market price of the
RJR Nabisco common stock at August 13, 1996, the Company would recognize a
loss on the Swap of approximately $4,000 for the three months ended
September 30, 1996.
-36-
<PAGE> 37
RECENT DEVELOPMENTS (continued)
- -------------------
The Company, BGLS and High River Ltd. Partnership ("High River") were parties
to an agreement dated October 17, 1995, as amended by the letter agreement
dated November 5, 1995 (the "High River Agreement"). New Valley, ALKI Corp.
("ALKI") and High River were parties to an agreement dated October 17, 1995, as
amended by the letter agreement dated October 17, 1995, and as further amended
by the letter agreement dated November 5, 1995 (the "New Valley Agreement").
As of June 5, 1996, High River, the Company and BGLS terminated the 1995 High
River Agreement and New Valley, ALKI and High River terminated the 1995 New
Valley Agreement by mutual consent. The terminations leave in effect for one
year certain provisions of both the High River and New Valley Agreements
concerning payments to be made to High River in the event New Valley achieves a
profit (after deducting certain expenses) on the sale of the shares of RJR
Nabisco common stock which are held by it or they are valued at the end of such
year at higher than their purchase price or in the event the Company or its
affiliates engage in certain transactions with RJR Nabisco.
NEW VALLEY
On July 29, 1996, New Valley completed its reincorporation from the State of
New York to the State of Delaware and effected a one-for-twenty reverse stock
split of New Valley's common shares. After giving effect to this reverse stock
split, the Company now holds 3,989,710 common shares of New Valley.
On January 11, 1996, a subsidiary of New Valley made a $10,600 convertible
bridge loan to finance Thinking Machines Corporation, a developer and marketer
of parallel software for high-end and networked computer systems. In February
1996, the loan was converted into a controlling interest in a partnership which
holds approximately 61% of the outstanding common stock of Thinking Machines.
On January 11, 1996, New Valley's newly formed division, New Valley Realty,
completed the acquisition of four office buildings and eight shopping centers
for an aggregate purchase price of $183,900 which consisted of $23,900 in cash
and $160,000 in mortgage financing.
In the first six months of 1996, New Valley repurchased 72,104 Class A
Preferred Shares for a total amount of $10,530. As a result of this
transaction, the Company owns 59.72% of the New Valley Class A Preferred
Shares.
RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY
- ---------------------------------------------
PRICING ACTIVITY.
On April 8, 1996, Philip Morris announced a list price increase on all brands
of $.40 per carton. The other manufacturers, including Liggett, matched the
price increase.
On May 5, 1995, RJ Reynolds Tobacco Company ("RJR") initiated a list price
increase on all brands of $.30 per carton. The other manufacturers, including
Liggett, matched the price increase.
LEGISLATION AND LITIGATION.
The cigarette industry continues to be challenged on numerous fronts. Several
federal administrative bodies, including the United States Environmental
Protection Agency and the Food and Drug Administration have issued reports or
commenced regulatory proceedings which have had or could have an adverse effect
on Liggett and the cigarette industry as a whole. The rate of filings of
individual product liability cases has increased and Liggett's risk attendant
thereto has correspondingly increased. Several purported class actions have
been commenced against Liggett and other companies in the industry, one of
which actions Liggett has settled. A number of states' Attorneys General have
commenced litigation against the industry asserting numerous different theories
of liability, five of which actions Liggett has settled. The various companies
in the industry are actively engaged in defending against and responding to
these initiatives. The Company is not able to evaluate the effect of these
developing matters but it is possible that the 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 and
regulatory proceedings. For a description of pending litigation and regulatory
proceedings see Note 7 to the Company's consolidated financial statements.
-37-
<PAGE> 38
RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY (continued)
- ---------------------------------------------
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 the State of West Virginia, State of Florida, State of
Mississippi, Commonwealth of Massachusetts and the State of Louisiana to settle
certain actions brought against Liggett by such states.
Under the CASTANO settlement, the CASTANO class would 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, together with reasonable fees and
expenses of the CASTANO Plaintiffs Legal Committee.
Under the Attorneys General Settlement, the states would share an initial $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 would range from 2-1/2% to 7-1/2% of Liggett's pretax
income, depending on the number of additional states joining the settlement.
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.
At December 31, 1995, the Company had recorded a charge of approximately $4,000
for the present value of the fixed payments under the Attorneys General
settlement. 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, will be expensed when known.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Consolidated revenues were $125,213 for the three months ended June 30, 1996
compared to $122,328 for the three months ended June 30, 1995. This 2.4%
increase in revenues primarily resulted from the addition of the tobacco
revenues of LDL in Russia of $9,739 (which results were not included in the
consolidated group in 1995) offset by a decrease of $7,523 at Liggett. The
6.2% decrease in Liggett revenues was due primarily to an 11.6% decrease in
unit sales volume partially offset by the effects of the recent list price
increases (see "Recent Developments in the Cigarette Industry - Pricing
Activity" above). The decline in unit sales volume at Liggett was comprised
of declines within the premium segment of 4.4% and discount segment (which
includes generic, control label and branded discount products) of 13.9%. 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. Further,
Liggett experienced a significant increase in volume at the end of the quarter,
in part due to ongoing trade programs based on quarterly volume targets and in
part due to consumer promotional programs consisting of coupons and variable
price reductions.
Consolidated gross profit was $61,691 for the three months ended June 30, 1996
compared to $64,566 for the three months ended June 30, 1995, a decrease of
$2,875 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 percent of revenues decreased to 49.3% in the current period from
52.8% in the same period in the prior year because of decreased margins at
Liggett and the inclusion of LDL which had negative tobacco margins of 2.6% due
to increased tobacco costs and intense price competition in the Russian market.
Gross profit at Liggett was $60,753 for the three months ended June 30, 1996, a
decrease of $3,327 from $64,080
-38-
<PAGE> 39
RESULTS OF OPERATIONS (continued)
- ---------------------
for the same period in 1995, due primarily to the decline in unit sales volume
discussed above. As a percent of revenues (excluding federal excise taxes),
Liggett's gross profit decreased to 72.5% for the three months ended June 30,
1996 compared to 73.1% for the same period in 1995. 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 recent list price increases.
Consolidated operating, selling, general and administrative expenses were
$58,264 for the three months ended June 30, 1996 compared to $65,196 for the
same period last year. The decrease of $6,932 considers the effects of the
prior year's restructuring at Liggett ($2,548 for the year ended December 31,
1995) and relates primarily to reduced payroll and benefits. Liggett, in
addition, has reduced spending on promotional programs when compared to the
prior period. Further, the Company's operating expenses were reduced due to
lower pension expense in the three months ended June 30, 1996 and lower
expenses recognized relating to LDL in 1996.
Consolidated interest expense was $15,457 for the three months ended June 30,
1996 compared to $14,702 for the same period last year due to a greater amount
of debt outstanding in the current period.
Equity in earnings of affiliate was a loss of $1,260 for the three months ended
June 30, 1996 compared to income of $354 for the three months ended June 30,
1995 and relates primarily to New Valley's net loss of $1,762 in 1996 compared
to net income of $2,884 in 1995.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30,1995
Consolidated revenues were $215,729 for the six months ended June 30, 1996
compared to $217,618 for the six months ended June 30, 1995, a decrease of
$1,889 primarily due to a decline in sales at Liggett offset by tobacco
revenues in Russia from LDL which was not part of the consolidated group in
1995. Net sales at Liggett were $191,774 for the six months ended June 30,
1996 versus $214,569 for the same period last year. This 10.6% decrease in
revenues was primarily due to a 15.4% decline in unit sales volume, partially
offset by the effects of recent list price increases. The decline in unit
sales volume was comprised of declines within the premium segment of 9.9% and
the discount segment of 17.0%. The decline in premium unit sales volume was
due to aggressive trade programs offered by Liggett at year end 1995 and
certain competitors' continuing leveraging rebate programs tied to their
products and increased promotional activity by certain other manufacturers.
Consolidated gross profit of $105,159 for the six months ended June 30, 1996
decreased $8,319 from gross profit of $113,478 for the same period in 1995.
The decrease in gross profit coincides with the decrease in sales revenue at
Liggett. Liggett's gross profit as a percent of revenues (excluding federal
excise taxes) for the period increased to 73.0% compared to 72.6% last year,
due primarily to the recent list price increases and restructuring charges
incurred in 1995 with no similar charges in 1996, partially offset by the
increased tobacco costs discussed above. Tobacco margins at LDL for the six
months ended 1996 were 0.7% for the reasons indicated above.
Consolidated operating, selling, general and administrative expenses were
$103,156 for the six months ended June 30, 1996 compared to $114,504 for the
same period last year, a decrease of $11,348. The decrease resulted from
lower expenses recognized relating to LDL in 1996, reduced administrative
expenses at Liggett resulting from the 1995 restructuring, reduced promotional
expenses discussed above and reduced legal expenses due to the financial
assistance Liggett has been receiving from others in the industry in defraying
the costs incurred in the defense of smoking and health litigation. (See
"Capital Resources and Liquidity").
-39-
<PAGE> 40
RESULTS OF OPERATIONS (continued)
- ---------------------
Consolidated interest expense was $30,234 for the six months ended June 30,
1996 compared to $29,417 for the same period last year. The increase of $817
is primarily due to additional debt issued by the Company and a full six month
period of the higher reset rate at Liggett. (See Note 7 to the Company's
consolidated financial statements).
Other income, net, in the amount of $2,334, reflects a gain of approximately
$3,600 on the sale of surplus realty by Liggett to the County of Durham, offset
by other expense of $1,500 at BOL.
The gain on disposal of discontinued operations of $15,900 for the six months
ended June 30, 1995 primarily reflects the redemption/sale of SkyBox preferred
and common stock. No comparable transaction occurred in the six months ended
June 30, 1996.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Net cash and cash equivalents increased $1,036 for the six months ended June
30, 1996 compared with an increase of $4,308 for the six months ended June 30,
1995.
Net cash used in operations for the six months ended June 30, 1996 was $735
compared to net cash used in operations of $15,093 for the comparable period of
1995.
Cash used in operations for the period ended June 30, 1996 included interest
payments of $13,890 as compared to interest payments made in the same period in
1995 of $26,782. Interest payments on the Company's debt for the period from
October 1, 1995 to July 31, 1996 were made on July 31, 1996 in accordance with
1995 Exchange Offer and the terms of the 15.75% Series B Senior Secured Notes
due 2001 (the "Series B Notes").
Liggett believes that cash flows from operations and its revolving credit
facility ("the Facility") will continue to meet its liquidity requirements for
the twelve months ending June 30, 1997. Management believes that the positive
effects on cash flow from operations resulting from the April 1996 price
increase, estimated at approximately $7,100 on an annual basis, and the
estimated savings resulting from Liggett's 1995 restructuring, estimated at
approximately $6,700 on an annual basis, will enable Liggett to meet its
estimated interest expense of $23,700, the sinking fund payment of $7,500 on
the Notes due February 1, 1997, budgeted capital expenditures of $2,500 and
payments of $1,400 on the USDA marketing assessment. However, there can be no
assurance that such anticipated increases in cash flow will materialize as
there are a number of factors including increased tobacco costs, litigation
expenses and payments based on future income to which Liggett is committed
under the CASTANO and Attorneys General settlement agreements, the amounts of
which are unknown. Further, the Facility was reclassified to short-term debt
because the Facility becomes due in March of 1997 thereby creating a working
capital deficiency at Liggett of approximately $22,000 at June 30, 1996.
Management anticipates the Facility will be refinanced on substantially similar
terms in March 1997, although there can be no assurance that this will be
accomplished.
Liggett has 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. The future
financial benefit to Liggett is not quantifiable at this time since the
arrangements for assistance can be terminated on limited notice, or under
certain circumstances, certain of which have occurred, without notice, and the
amount of assistance received, if any, would be a function of the level of
costs incurred. Certain joint defense arrangements, and the financial benefits
incident thereto, have ended. No assurances can be made that other
arrangements will continue. Liggett expects that the level of financial and
other assistance which it may receive, if any, will be clarified over the
ensuing months.
-40-
<PAGE> 41
CAPITAL RESOURCES AND LIQUIDITY (continued)
- -------------------------------
Cash used in investing activities was $4,573 for the period ended June 30, 1996
compared to cash provided of $46,963 for the same period in 1995. Cash used in
1996 includes capital expenditures of approximately $12,200 for real estate
development at BOL and $2,500 for equipment modernization at Liggett.
Liggett is forecasting further capital expenditures of approximately $1,100
for equipment modernization in 1996. Capital expenditures were offset by
dividends from New Valley to NV Holdings of $6,183 or $10.00 per share on the
Class A Preferred Shares for the six months ended June 30, 1996 and proceeds
from the sale of surplus realty by Liggett. In the same period in 1995,
capital expenditures of $2,752 were offset by dividends from New Valley to NV
Holdings of $38,645 and proceeds from the redemption of SkyBox International
Inc. ("SkyBox") preferred stock for $4,000 plus accrued dividends and the sale
of SkyBox common stock for $9,282.
On May 14, 1996 Liggett sold certain surplus realty in Durham, NC to the County
of Durham for a sale price of $4,300. A gain of approximately $3,600 was
recognized on this sale. Further, on April 29, 1996, Liggett executed a
definitive agreement with Blue Devil Ventures, a North Carolina limited
liability partnership, for the sale by Liggett to Blue Devil Ventures of
certain surplus realty for a sale price of $2,200. While the agreement
provides for the closing to occur on or before September 30, 1996, Blue Devil
Ventures has the option, if it determines that its development project is not
feasible, to forfeit its deposit of $22 and not close.
On July 15, 1996, the Company sold substantially all of the non-cash assets and
certain liabilities of COM Products, Inc. ("COM"), a small subsidiary engaged
in the business of selling micrographics equipment and supplies, for
approximately $4,000.
On July 5, 1996, Liggett purchased from BOL 140,000 shares (approximately 20%)
of LDL for $2,100. Liggett also acquired a ten-year option, exercisable by
Liggett in whole or in part for $3,400, to purchase from BOL at the same
per-share price ($15.00) up to 292,407 additional shares of LDL, thereby
entitling Liggett to increase its interest in LDL to approximately 62%. The
option fee is to be credited against the purchase price.
Cash provided by financing activities for the six months ended June 30, 1996
was $6,344 while cash used in financing activities for the six months ended
June 30, 1995 was $28,226.
Proceeds from debt in 1996 includes the private placement of the Series A Notes
(later exchanged for Series B Notes) for cash proceeds of $6,300 including
accrued interest, borrowings by BOL for real estate development of $8,454 and
net borrowings of approximately $6,000 by Liggett and BOL under their
revolving credit facilities. These transactions were primarily offset by the
redemption for $6,237 of the 16.125% Senior Subordinated Reset Notes,
including premium and accrued interest thereon, and distributions to the
Company's shareholders of $2,775. In the 1995 period, proceeds from debt
were $3,028, offset primarily by redemption of the Series 1 Notes of $23,594
plus accrued interest of $670 on June 12, 1995 and distributions of $2,737 to
the Company's shareholders.
Availability under Liggett's Facility was approximately $15,040 based on
eligible collateral at June 30, 1996. The Facility is collateralized by all
accounts receivable and inventories of Liggett. Borrowings under the Facility
bear interest at a rate equal to 1.5% above Philadelphia National Bank's (the
indirect parent of Congress Financial Corporation, the lead lender) prime rate,
which was 8.25% at June 30, 1996. The Facility contains certain financial
covenants similar to those contained in the 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 imposes requirements with respect to Liggett's
adjusted net worth (not to fall below a deficit of $175,000) and working
capital (not to fall below a deficit of $35,000). At June 30, 1996, Liggett
was in compliance with all covenants under the Facility. Management
anticipates the Facility will be refinanced with substantially similar terms in
March 1997 although there can be no assurance that this will be accomplished.
In December 1995, purchases by Liggett of $7,000 of Series B Notes using
revolver availability were credited against the mandatory
-41-
<PAGE> 42
CAPITAL RESOURCES AND LIQUIDITY (continued)
- -------------------------------
redemption requirement for February 1, 1996. The remaining $500 mandatory
redemption requirement for February 1, 1996 was met by retiring the $500 of
Series C Notes held in Liggett's treasury. Liggett's management anticipates
that the 1997 mandatory redemption will be funded by cash flows from operations
and borrowings under the Facility. There are no definite plans for funding
Liggett's 1998 mandatory redemption requirement of $37,500 at this time.
At June 30, 1996, Liggett had a net capital deficiency of $157,311 and is
highly leveraged. Due to the many risks and uncertainties associated with the
cigarette industry, impact of recent tobacco litigation settlements and
increased tobacco costs, 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 their lenders were to exercise acceleration
rights under the Facility or the Liggett senior secured notes indentures or
refuse to lend under the Facility, Liggett would not be able to satisfy such
demands or its working capital requirements.
Prior to completion of the 1995 Exchange Offer on January 30, 1996, the Company
had substantial near-term debt service requirements, with aggregate required
principal payments of $318,106 due in the years 1995 through 1998. Redemption
of the remaining Reset Notes was effectuated on March 29, 1996 through use of
proceeds from the sale of the additional $7,397 of Series A Notes on March 4,
1996 discussed above. As a result of the 1995 Exchange Offer and the
redemption of the Reset Notes pursuant to the terms of the Reset Note Indenture
on March 29, 1996, BGLS decreased its scheduled debt maturities to $81,942 due
in the years 1996-1998; approximately $79,000 of this debt relates to Liggett
and LDL. In addition, BGLS cancelled all of the subordinated debentures
($13,705) held by the Company.
The Company believes that it will continue to meet its liquidity requirements
through the twelve months ending June 30, 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 June 30, 1996, the remaining
amount available through December 31, 1996 in the Restricted Payment Basket
related to BGLS' payment of dividends to the Company (as defined by BGLS'
Series B Notes Indenture) is $3,225. Company expenditures (exclusive of
Liggett and LDL) in 1996 include the $29,000 interest payment on the Series B
Notes on July 31, 1996. In March and July 1996, New Valley declared and paid
dividends on its Class A Preferred Shares in which NV Holdings received $6,183
and $18,550, respectively. 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 financing
and distributions from New Valley. New Valley may acquire additional operating
businesses through merger, purchase of assets, stock acquisition or other
means, or seek to acquire control of operating companies through one of such
means.
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 LDL, are subject to intense competition,
changes in consumer preferences, the effects of changing prices for its raw
materials and local economic
-42-
<PAGE> 43
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS (continued)
- -------------------------------------------------
conditions. Furthermore, the performance of LDL's cigarette and real estate
development operations in Russia are each 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 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.
-43-
<PAGE> 44
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Reference is made to information entitled "Contingencies" in Note 7
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 3. Defaults Upon Senior Securities
-------------------------------
As of June 30, 1996, New Valley Corporation, the Companies'
affiliate, had the following respective accrued and unpaid dividend
arrearages on its 1,035,462 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) $124.33 million or $120.08 per Class A
Share; and (2) $105.17 million or $37.68 per Class B Share.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
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 June 30, 1996.
99.2 New Valley Corporation's Interim Consolidated
Financial Statements for the quarterly period
ended June 30, 1996.
(b) Reports on Form 8-K
-------------------
No current reports on Form 8-K were filed by either Company
during the second quarter of 1996.
-44-
<PAGE> 45
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: August 14, 1996
---------------
-45-
<PAGE> 46
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.
BGLS INC.
(REGISTRANT)
By: /s/ Joselynn D. Van Siclen
------------------------------
Joselynn D. Van Siclen
Vice President and Chief
Financial Officer
Date: August 14, 1996
---------------
-46-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000059440
<NAME> BROOKE GROUP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 4,406
<SECURITIES> 0
<RECEIVABLES> 21,580
<ALLOWANCES> 0
<INVENTORY> 54,636
<CURRENT-ASSETS> 88,686
<PP&E> 60,332
<DEPRECIATION> 0
<TOTAL-ASSETS> 206,687
<CURRENT-LIABILITIES> 169,380
<BONDS> 394,314
0
0
<COMMON> 1,850
<OTHER-SE> (402,305)
<TOTAL-LIABILITY-AND-EQUITY> 206,687
<SALES> 215,729
<TOTAL-REVENUES> 215,729
<CGS> 110,570
<TOTAL-COSTS> 110,570
<OTHER-EXPENSES> 2,534
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,234
<INCOME-PRETAX> (28,303)
<INCOME-TAX> 146
<INCOME-CONTINUING> (28,449)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,449)
<EPS-PRIMARY> (1.44)
<EPS-DILUTED> (1.44)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000927388
<NAME> BGLS INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 4,340
<SECURITIES> 0
<RECEIVABLES> 21,580
<ALLOWANCES> 0
<INVENTORY> 54,636
<CURRENT-ASSETS> 91,596
<PP&E> 59,951
<DEPRECIATION> 0
<TOTAL-ASSETS> 210,311
<CURRENT-LIABILITIES> 192,878
<BONDS> 394,314
0
0
<COMMON> 0
<OTHER-SE> (423,583)
<TOTAL-LIABILITY-AND-EQUITY> 210,311
<SALES> 215,729
<TOTAL-REVENUES> 215,729
<CGS> 110,570
<TOTAL-COSTS> 110,570
<OTHER-EXPENSES> 2,534
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,063
<INCOME-PRETAX> (30,352)
<INCOME-TAX> 198
<INCOME-CONTINUING> (30,550)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,550)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
FINANCIAL STATEMENTS -- LIGGETT GROUP INC.
Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995 . . . . . . 1
Consolidated Statements of Operations for the three and six months ended June 30,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the six months ended June 30, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 5
FINANCIAL STATEMENTS -- EVE HOLDINGS INC.
Balance Sheets as of June 30, 1996 and December 31, 1995 . . . . . . . . . . . . 17
Statements of Operations for the three and six months ended June 30, 1996 and
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Statements of Cash Flows for the six months ended June 30, 1996 and 1995 . . . . 19
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIGGETT GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,652 $ -
Accounts Receivable:
Trade less allowances of $767 and $815, respectively . 20,364 22,279
Other . . . . . . . . . . . . . . . . . . . . . . . . . 837 1,367
Affiliates . . . . . . . . . . . . . . . . . . . . . . 1,300 1,105
Inventories . . . . . . . . . . . . . . . . . . . . . . 48,943 54,342
Deferred income taxes . . . . . . . . . . . . . . . . . . 3,800 3,800
Other current assets (Note 4). . . . . . . . . . . . . . 1,050 1,703
-------- -------
Total current assets . . . . . . . . . . . . 77,946 84,596
Property, plant and equipment, at cost, less accumulated
depreciation of $27,964 and $26,545, respectively . . . . 18,601 18,352
Intangible assets, at cost, less accumulated amortization
of $16,524 and $15,661, respectively . . . . . . . . . . 4,180 5,036
Other assets and deferred charges, at cost, less accumulated
amortization of $6,425 and $5,440, respectively . . . . 4,346 5,330
-------- --------
Total assets . . . . . . . . . . . . . . . . $105,073 $113,314
======== ========
</TABLE>
(continued)
1
<PAGE> 3
LIGGETT GROUP INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt . . . . . . . . . . $ 32,937 $ 50
Cash overdraft . . . . . . . . . . . . . . . . . . . . - 3,761
Accounts payable:
Principally trade. . . . . . . . . . . . . . . . . 13,123 18,921
Affiliates . . . . . . . . . . . . . . . . . . . . 740 -
Accrued expenses:
Promotional . . . . . . . . . . . . . . . . . . . . 25,167 25,519
Compensation and related items . . . . . . . . . . 86 1,175
Taxes, principally excise taxes . . . . . . . . . . 7,904 7,006
Estimated allowance for sales returns . . . . . . . 5,000 5,000
Interest . . . . . . . . . . . . . . . . . . . . . 8,420 8,412
Other . . . . . . . . . . . . . . . . . . . . . . . 6,289 5,728
-------- --------
Total current liabilities . . . . . . . . . . 99,666 75,572
Long-term debt, less current maturities . . . . . . . . . . . 144,708 173,251
Non-current employee benefits and other liabilities . . . . . 18,010 19,197
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 out-
standing)
Common stock (par value $0.10 per share; authorized
2,000 shares; issued and outstanding 1,000 shares)
and contributed capital . . . . . . . . . . . . . . 53,240 53,240
Accumulated deficit. . . . . . . . . . . . . . . . . . . (210,551) (207,946)
-------- --------
Total stockholder's equity (deficit) . . . . . (157,311) (154,706)
-------- --------
Total liabilities and stockholder's equity
(deficit) . . . . . . . . . . . . . . . . $105,073 $113,314
======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
2
<PAGE> 4
LIGGETT GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales*. . . . . . . . . . . . . . . . . . . . . $113,286 $120,809 $191,774 $214,569
Cost of sales* . . . . . . . . . . . . . . . . . . . 52,533 56,729 88,825 102,083
-------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . . 60,753 64,080 102,949 112,486
Selling, general and administrative expenses. . . . 55,285 57,446 97,403 100,639
Restructuring expense . . . . . . . . . . . . . . . - 1,041 - 1,041
-------- -------- -------- --------
Operating income . . . . . . . . . . . . . 5,468 5,593 5,546 10,806
Other income (expense):
Interest expense. . . . . . . . . . . . . . . . (5,993) (5,951) (11,849) (11,802)
Miscellaneous, net. . . . . . . . . . . . . . 3,710 291 3,698 (42)
-------- -------- -------- --------
Income (loss) before income taxes . . . . 3,185 (67) (2,605) (1,038)
Income tax provision (benefit) . . . . . . . . . . - 60 - (279)
-------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . $ 3,185 $ (127) $ (2,605) $ (759)
======== ========= ======== ========
</TABLE>
*Net sales and cost of sales include federal excise taxes of $29,487, $33,203,
$50,684 and $59,595, respectively.
The accompanying notes are an integral part
of these financial statements.
3
<PAGE> 5
LIGGETT GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,605) $ (759)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 4,013 4,033
Gain on sale of property, plant and equipment . . . . . . . . . . . . . . (3,698) (285)
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 2,250 13,735
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,399 (225)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,043) 42
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 (11,553)
Non-current employee benefits . . . . . . . . . . . . . . . . . . . . . (371) (97)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (882) (415)
-------- ---------
Net cash provided by (used in) operating activities . . . . . . . . (760) 4,476
-------- ---------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment . . . . . . . . . . . . . 4,415 417
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,484) (528)
Acquisition of business from indirect parent . . . . . . . . . . . . . . . . . - (800)
-------- ---------
Net cash provided by (used in) investing activities . . . . . . . . 1,931 (911)
-------- ---------
Cash flows from financing activities:
Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . (127) (458)
Net borrowings (repayments) under revolving credit facility . . . . . . . . . 4,369 (2,318)
Decrease in cash overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . (3,761) (789)
-------- ---------
Net cash provided by (used in) financing activities . . . . . . . . 481 (3,565)
-------- ---------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . 1,652 -
Cash and cash equivalents:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
-------- ---------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,652 $ -
======== =========
Supplemental cash flow information:
Cash payments (refunds) during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,584 $ 11,334
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75 $ (8)
</TABLE>
The accompanying notes are an integral part
of these financial statements.
4
<PAGE> 6
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.
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, 1995 balance
sheet has been derived from audited financial statements. Certain amounts in
the 1995 financial statements have been reclassified to conform with the 1996
presentation with no effect on previously reported net income (loss) or
stockholder's equity (deficit). 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 (Commission File No. 33-75224) as
filed with the Securities and Exchange Commission on April 16, 1996. 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 $157,311 as of June 30, 1996 and is highly leveraged.
Due to the many risks and uncertainties associated with the cigarette industry,
impact of recent tobacco litigation settlements and increased tobacco costs,
there can be no assurance that the Company will be able to meet its future
earnings goals. Consequently, the Company could be in violation of certain debt
covenants and if the 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.
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,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. 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 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, NC, for a
sale price of $2,200. While the agreement provides for the closing to occur
on or
5
<PAGE> 7
before September 30, 1996, Blue Devil Ventures has the option, if it determines
that its development project is not feasible, to forfeit its deposit of $22
and not close. The net book value of those assets ($322) for which the
agreement was signed have been classified as current assets on the Company's
Consolidated Balance Sheet as of June 30, 1996.
On April 9, 1996, Liggett executed a definitive agreement with the
County of Durham for the sale by Liggett to the County of Durham of certain
surplus realty in Durham, NC, for a sale price of $4,300. The net book value
of those assets ($713) for which the agreement was signed have been classified
as current assets on the Company's Consolidated Balance Sheet as of December
31, 1995. The transaction closed on May 14, 1996, at which time a gain of
approximately $3,600 was recognized.
5. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Finished goods ...................................... $18,987 $18,240
Work-in-process...................................... 3,320 3,331
Raw materials........................................ 21,218 24,946
Replacement parts and supplies....................... 3,871 3,926
------- -------
Inventories at current cost.......................... 47,396 50,443
LIFO adjustment...................................... 1,547 3,899
------- -------
Inventories at LIFO cost............................. $48,943 $54,342
======= =======
</TABLE>
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 $31,200 at June 30, 1996.
6. Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- -------------
<S> <C> <C>
Land and improvements .............................. $ 455 $ 542
Buildings........................................... 5,848 6,011
Machinery and equipment ............................ 40,262 38,344
------- -------
Property, plant and equipment....................... 46,565 44,897
Less accumulated depreciation....................... (27,964) (26,545)
------- -------
Property, plant and equipment, net.................. $18,601 $18,352
======= =======
</TABLE>
6
<PAGE> 8
7. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
11.5% Senior Secured Notes due February 1, 1999, net
of unamortized discount of $525 and $627,
respectively . . . . . . . . . . . . . . . . . . $119,587 $119,485
Variable Rate Series C Senior Secured Notes due
February 1, 1999 . . . . . . . . . . . . . . . . 32,279 32,279
Borrowings outstanding under revolving credit
facility . . . . . . . . . . . . . . . . . . . . 25,386 21,017
Other . . . . . . . . . . . . . . . . . . . . . . . . 393 520
-------- --------
177,645 173,301
Current portion . . . . . . . . . . . . . . . . . . . (32,937) (50)
-------- --------
Amount due after one year . . . . . . . . . . . . . $144,708 $173,251
======== ========
</TABLE>
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. The Notes are collateralized by substantially all of the
assets of the Company, excluding accounts receivable and inventory. Eve is a
guarantor for the Notes. The Notes may be redeemed, in whole or in part, at a
price equal to 104%, 102% and 100% of the principal amount in the years 1996,
1997 and 1998, respectively, at the option of the Company at any time on or
after February 1, 1996. 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 initially 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 Note 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.
BGLS purchased $4,500 of the Series C Notes which were subsequently
sold.
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
7
<PAGE> 9
by the lenders) from a syndicate of commercial lenders. Availability under the
Facility was approximately $15,040 based upon eligible collateral at June 30,
1996. The Facility expires on March 8, 1997 and is collateralized by all
inventories and receivables of the Company. Borrowings under the Facility bear
interest at a rate equal to 1.5% above Philadelphia National Bank's (the
indirect parent of Congress Financial Corporation, the lead lender) prime rate,
which was 8.25% at June 30, 1996. The Facility contains certain financial
covenants similar to those contained in the 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 imposes requirements with respect to the Company's
adjusted net worth (not to fall below a deficit of $175,000) and working
capital (not to fall below a deficit of $35,000).
8. Commitments and Contingencies
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 actually were
commenced against BGL 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. 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. The Company has
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. The future financial
benefit to the Company is not quantifiable at this time since the arrangements
for assistance can be terminated on limited notice, or under certain
circumstances, certain of which have occurred, without notice, and the amount
of assistance received, if any, would be a function of the level of costs
incurred. Certain joint defense arrangements, and the financial benefits
incident thereto, have ended. No assurances can be made that other
arrangements will continue. Liggett expects that the level of financial and
other assistance which it may receive, if any, will be clarified over the
ensuing months. To date a number of such actions, including several against
Liggett, have been disposed of favorably to the defendants, and no plaintiff
has ultimately prevailed in trial for recovery of damages in any such action.
In the action entitled Cipollone v. Liggett Group Inc., et al., the
United States Supreme Court, on June 24, 1992, issued an opinion regarding
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. Relying on 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 as to whether any of these claims are viable under state
law but assumed arguendo that they are viable.
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.
8
<PAGE> 10
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 alone alleging as injury lung cancer. Fact discovery closed on
August 31, 1995; expert discovery continues. On May 25, 1996, the District
Court granted Liggett summary judgment on plaintiffs' fraud and breach of
warranty claims on statute of limitations grounds, but allowed plaintiffs'
personal injury claims to survive. In the same order, the District Court
vacated the Magistrate's March 19, 1996 order compelling Liggett to produce
certain Council for Tobacco Research ("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 the same documents. The Court also ordered the
Magistrate to reconsider his March 19, 1996 order and the effect of the
District Court's summary judgment order. Oral argument concerning the
relevancy of the CTR documents in light of the District Court's summary
judgment order was conducted on August 8, 1996. The Magistrate's ruling on
this matter is pending.
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 issues 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 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 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, disgorgement of revenues and profits and the imposition of
a constructive trust. The case is presently in the discovery phase.
On October 31, 1991, an action entitled Broin, et al. v. Philip Morris
Companies, Inc., et al., Circuit Court of the 11th 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. On December 12, 1994, plaintiffs' motion to certify the action as a
class action was granted. Defendants appealed this ruling and on January 3,
1996, the Third District Court of Appeal in Florida ("Third DCA") affirmed the
class certification order. On May 8, 1996, the Third DCA denied defendants'
rehearing request. On June 5, 1996, the Third DCA denied defendants' petition
for a stay of its order upholding class certification, but granted defendants'
motion for a stay of class notice.
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 others. The class action complaint was
brought on behalf of plaintiffs and residents of the United States who claim to
be addicted to tobacco products and survivors who claim their decedents were
addicted. 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. The complaint also alleges causes of action sounding in
fraud, deceit, negligent misrepresentation, breach of express and implied
warranty, strict liability and violation of consumer protection statutes.
Plaintiffs seek compensatory and punitive damages and 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,
9
<PAGE> 11
attorneys' fees and costs. On February 17, 1995, the District Court issued an
Order that granted in part plaintiffs' motion for class certification. On May
23, 1996, the Court of Appeals for the Fifth Circuit reversed the District
Court's order certifying the nationwide class action, and instructed the
District Court to dismiss the class complaint.
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 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 and allegedly
have suffered personal injury as a result thereof. Plaintiffs seek
compensatory and punitive damages, together with equitable relief including but
not limited to a medical fund for future health care costs, attorney's fees and
costs. On October 31, 1994, plaintiffs' motion to certify the action as a class
action was granted. Defendants appealed this ruling. On January 31, 1996, the
Third DCA affirmed the ruling of the trial court certifying the action as a
class action, but modified the trial court ruling to limit the class to Florida
citizens and residents. On May 8, 1996, the Third DCA denied defendants'
rehearing request. On June 5, 1996, the Third DCA denied defendants' petition
for a stay of its order upholding class certification, but granted defendants'
motion for a stay of class notice.
On May 6, 1996 an action entitled Norton, et al. v. RJR Nabisco
Holdings Corp., et al., Madison County, Indiana Superior Court, was filed
against Liggett and others. The class action complaint was brought on behalf
of plaintiffs and all persons in the State of Indiana who allegedly have become
addicted to cigarette products and allegedly have suffered personal injury as a
result thereof. Plaintiffs seek compensatory and punitive damages, together
with equitable relief including but not limited to a medical fund for future
health care costs, attorney's fees and costs. On June 3, 1996, the defendant
tobacco companies filed a notice of removal in the United States District Court
for the Southern District of Indiana.
On May 29, 1996 an action entitled Richardson, et al. v. Philip Morris
Inc., et al., Circuit Court for Baltimore City, was filed against Liggett and
others. The class action complaint was brought on behalf of plaintiffs and all
persons in the State of Maryland who allegedly have become addicted to cigarette
products and allegedly have suffered personal injury as a result thereof.
Plaintiffs seek compensatory and punitive damages, together with equitable
relief including but not limited to a medical fund for future health care costs,
attorney's fees and costs. On June 27, 1996, the defendant tobacco companies
filed a notice of removal in the United States District Court for the District
of Maryland.
On March 12, 1996, BGL and Liggett entered into an agreement to settle
the Castano class action tobacco litigation. The settlement undertakes to
release BGL and Liggett from all current and future addiction-based claims,
including claims by a nationwide class of smokers in the Castano class action
pending in Louisiana federal court as well as claims by a narrower statewide
class in the Engle class action pending in Florida state court. The settlement
is subject to and conditioned upon the approval of United States District Court
for the Eastern District of Louisiana. The Company is unable to determine at
this time when the Court will review the settlement, and no assurance can be
given that the settlement will be approved by the Court. Certain of the terms
of the settlement are summarized below.
Under the settlement, the Castano class would 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, together with reasonable fees and
expenses of the Castano Plaintiffs Legal Committee. Settlement funds received
by the class would be used to pay half the cost of smoking-cessation programs
for eligible class members. While neither consenting to Food and Drug
Administration (the "FDA") jurisdiction nor waiving their objections thereto,
BGL and Liggett also have agreed to phase in compliance with certain of the
proposed interim 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.
10
<PAGE> 12
BGL and Liggett have the right to terminate the Castano settlement if
the remaining defendants succeed on the merits or in the event of a full and
final denial of class action certification. The terms of the settlement would
still apply if the Castano plaintiffs or their lawyers were to institute a
substantially similar new class action against the tobacco industry. BGL and
Liggett may also terminate the settlement if they conclude that too many class
members have chosen to opt out of the settlement. In the event of any such
termination by BGL and Liggett, the named plaintiffs would be at liberty to
renew the prosecution of such civil action against BGL and Liggett.
On May 11, 1996, the Castano Plaintiffs Legal Committee filed a motion
seeking preliminary approval of the Castano settlement. Non-settling defendants
filed a motion to stay consideration of the Castano settlement pending the
outcome of the appeal of the District Court's trial class certification order.
Non-settling defendants' motion is scheduled to be heard on September 11, 1996.
The motion for preliminary approval of the Castano settlement is scheduled to be
heard on September 25, 1996.
On March 14, 1996, BGL and 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 of the Castano settlement or, if earlier, the completion of a
combination by BGL or Liggett with certain defendants or an affiliate thereof in
Castano, the Castano plaintiffs agree not to enter into any settlement agreement
with any Castano defendant which would reduce the terms of the Castano
settlement agreement. If the Castano plaintiffs 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 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.
An action entitled Yvonne Rogers v. Liggett Group Inc., et al., Superior
Court, Marion County, Indiana, was filed by the plaintiff on March 27, 1987
against Liggett and others. The plaintiff seeks 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.
On May 23, 1994, an action entitled Mike Moore, Attorney General, ex
rel. State of Mississippi v. The American Tobacco Company, et al., Chancery
Court for the County of Jackson, State of Mississippi, was filed against Liggett
and others. The State of Mississippi seeks restitution and indemnity for
medical payments and expenses made or incurred by it on behalf of welfare
patients for tobacco related illnesses. Similar actions (although not
identical) have been filed by the State of Minnesota (together with Minnesota
Blue Cross-Blue Shield), the State of West Virginia, the Commonwealth of
Massachusetts, the State of Louisiana, the State of Texas, the State of
Washington, the State of Maryland, the State of Connecticut and the City and
County of San Francisco. In West Virginia, the trial court, in a ruling issued
on May 3, 1995, dismissed eight of the ten counts of the complaint filed
therein, leaving only two counts of an alleged conspiracy to control the market
and market price of tobacco products and an alleged consumer protection claim.
In a subsequent ruling, the trial court adjudged the contingent fee agreement
entered into by the State of West Virginia and its counsel to be
unconstitutional under the Constitution of the State of West Virginia. In
Mississippi, the Governor has recently commenced an action in the Mississippi
Supreme Court against the Attorney General of the state, making application
for a writ of prohibition to bar further prosecution and to seek dismissal of
the suit brought by the Attorney General of the state for such restitution and
indemnity, alleging that the commencement and prosecution
11
<PAGE> 13
of such a civil action by the Attorney General of the state was and is outside
the authority of the Attorney General.
On November 28, 1995, each of the major manufacturers in the industry,
including Liggett, filed suit in both the Commonwealth of Massachusetts and in
the State of Texas seeking declaratory relief to the effect that the
commencement of any such litigation (as had been filed by Mississippi, West
Virginia and Minnesota and now by Massachusetts, Louisiana and Texas) seeking
to recover Medicaid expenses against the manufacturers by either the
Commonwealth of Massachusetts or the State of Texas would be unlawful. On
January 22, 1996, a suit seeking substantially similar declaratory relief was
filed in the State of Maryland.
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 no limited to, diseases allegedly caused
by cigarette smoking) allegedly caused by liable third parties (including, but
not limited to, the tobacco industry). Liggett, after initial litigation,
entered into a settlement of this controversy with the State of Florida, the
terms of which are described below.
The Commonwealth of Massachusetts has enacted legislation authorizing
lawsuits similar to the suits filed by the States of Mississippi, Minnesota,
West Virginia, Louisiana and Texas. Aside from the Florida and Massachusetts
statutes, legislation authorizing the state to sue a company or individual to
recover the costs incurred by the state to provide health care to persons
allegedly injured by the company or individual also has been introduced in a
number of other states. These bills contain some or all of the following
provisions: eliminating certain 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.
On March 15, 1996, BGL and Liggett entered into a settlement of
tobacco litigation with the Attorneys General of the states of Florida,
Louisiana, Massachusetts, Mississippi and West Virginia. The settlement with
the Attorneys General releases BGL 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 share an initial $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 BGL 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 would range from 2-1/2% to 7-1/2% of Liggett's pretax income,
depending on the number of additional states joining the settlement. 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 BGL 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. At
December 31, 1995, the Company accrued approximately $4,000 for the present
value of the fixed payments under the Attorneys General 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, BGL 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.
12
<PAGE> 14
BGL 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. BGL 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.
Currently in addition to the above, approximately 125 product
liability lawsuits, which have been filed in various jurisdictions, are pending
and active in which Liggett is a defendant. Of these, approximately 90 are
pending in the State of Florida. In most of these lawsuits, plaintiffs seek
punitive as well as compensatory damages. Of the pending product liability
lawsuits, the next case scheduled for trial against Liggett is James T. Clark v.
Liggett Group, Inc. This matter is scheduled for trial in October 1996.
As to each of the cases referred to above which is pending against the
Company, the Company believes, and has been so advised by counsel handling the
respective cases, that the Company has a number of valid defenses to the claim
or claims asserted against the Company. 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 actions, adverse political
decisions and other unfavorable 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. The Company is not 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. It is possible that the 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.
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 this investigation.
Liggett has been responding to a civil investigative demand from the
Antitrust Division of the United States Department of Justice which requests
certain information from Liggett. The request appears to focus on United
States tobacco industry activities in connection with product development
efforts regarding, 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 at this
time 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 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, 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. An FDA advisory panel has
stated that it believes nicotine is addictive. On August 10, 1995, the FDA
filed in the Federal Register a Notice of Proposed Rule-Making (the "Proposed
Rule-Making") which would classify tobacco as a drug, assert jurisdiction by
the FDA over the manufacture and marketing of tobacco products and impose
restrictions on the sale, advertising and
13
<PAGE> 15
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. Liggett and
the other major manufacturers in the industry responded by filing a civil
action in the United States District Court for the Middle District of North
Carolina challenging the legal authority of the FDA to assert such
jurisdiction. In addition thereto, Liggett and the other four major cigarette
manufacturers, as well as others, have filed comments in opposition to the
Proposed Rule-Making. 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, or of such regulations, if
implemented, on Liggett's operations, but such actions could have an
unfavorable impact thereon.
On March 12, 1996, Liggett, together with BGL, entered into an agreement
to settle the Castano class action tobacco litigation, and on March 15, 1996,
Liggett, together with BGL, entered into an agreement with the Attorneys General
of the State of West Virginia, State of Florida, State of Mississippi,
Commonwealth of Massachusetts and the State of Louisiana to settle certain
actions brought against Liggett by such states. In these two settlements,
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.
The Omnibus Budget Reconciliation Act of 1993 ("OBRA") required each
United States cigarette manufacturer to use at least 75% domestic tobacco in
the aggregate of the cigarettes manufactured by it 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 the
tobacco stabilization cooperatives organized by the United States government.
OBRA was repealed retroactively (as of December 31, 1994), coincident in time
with the issuance of a Presidential proclamation, effective September 13, 1995,
imposing tariffs on imported tobacco in excess of certain quotas.
The USDA has informed Liggett that it did not satisfy the 75% domestic
tobacco usage requirement for 1994 and therefore is subject to a marketing
assessment of approximately $5,500. At December 31, 1995, the Company accrued
approximately $4,900 representing the present value of its obligation for the
USDA marketing assessment. The charge was included as a component of cost of
sales in 1995. Liggett has agreed to pay this assessment in quarterly
installments with interest over a five year period. Under certain
circumstances, payment can be accelerated. Since the levels of domestic
tobacco inventories on hand at the tobacco stabilization organizations are
below reserve stock levels, the Company was not obligated to make purchases of
domestic tobacco from the tobacco stabilization cooperatives.
On September 13, 1995, the President of the United States, after
negotiations with the affected countries, declared 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. The Company believes it is unlikely
that an end-user licensing system will be adopted, although no assurances can
be given that an end-user licensing system will not be adopted.
14
<PAGE> 16
In September 1991, the Occupational Safety and Health Administration
("OSHA") issued a Request for Information relating to indoor air quality,
including environmental tobacco smoke ("ETS"), in occupational settings. OSHA
announced in March 1994 that it would commence formal rulemaking during the
year. Hearings were completed during 1995 but it is not anticipated that any
regulation will issue prior to the end of 1996. 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
(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.
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.
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.
Liggett's motion to dismiss the complaint is currently pending, and the Court
has stayed discovery until a hearing on Liggett's motion.
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.
9. Related Party Transactions
Since October 1990, Liggett has provided certain administrative and
technical support to Liggett-Ducat Ltd. ("LDL"), a Russian cigarette producer
which is majority owned by an affiliate and of which Rouben Chakalian, a
director of Liggett, serves as a director, in exchange for which LDL provides
assistance to Liggett in its pursuit of selling cigarettes in the Russian
Republic. The expenses associated with Liggett's activities amounted to $2,
$82, $4 and $108 for the three and six months ended June 30, 1996 and 1995,
respectively. (See Note 11.)
Liggett is a 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.
15
<PAGE> 17
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. The expenses associated with Liggett's activities
amounted to $441, $441, $882 and $882 for the three and six months ended June,
1996 and 1995, respectively.
Liggett has entered into an annually renewable Corporate Services
Agreement with BGLS wherein BGLS provides 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 $790, $752, $1,580 and
$1,505 for the three and six months ended June 30, 1996 and 1995, respectively.
This fee is in addition to the management fee and overhead reimbursements
described above.
Since April 1994, the Company has leased equipment from BGLS for $50
per month.
Accounts receivable from affiliates relate principally to advances for
expenses paid by Liggett on behalf of its affiliates. The Company received
payment of $1,200 in July 1996.
Accounts payable to affiliates relate principally to payments for
expenses paid by affiliates on behalf of Liggett and overhead reimbursements
due BGL. Liggett expects to pay these in the near term.
The Company acquired Carolina Tobacco Express Company ("CTEC") from
its indirect parent during 1995 for $800. The excess of cost over carrying
amount of net assets acquired has been charged to stockholder's equity
(deficit). The effect of the accounting treatment presents the investment in
CTEC at carryover basis.
10. Restructuring Charges
During the first half of 1995, Liggett, in an effort to reduce costs,
offered voluntary retirement programs to eligible employees, among other
things, and reduced the Company's headcount by approximately 111 positions. In
connection therewith, the Company recorded a $1,662 restructuring charge to
operations ($621 of which was included in cost of sales) for severance
programs, primarily salary continuation and related benefits for terminated
employees.
11. Subsequent Events
On July 5, 1996, Liggett purchased from Brooke (Overseas) Ltd.
("BOL"), an indirect subsidiary of BGL, 140,000 shares (approximately 20%) of
LDL for $2,100. LDL, one of Russia's leading cigarette producers since 1892,
manufactured and marketed 10.4 billion cigarettes in 1995. 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 LDL, thereby entitling Liggett to increase its
interest in LDL to approximately 62%. The option fee would be credited against
the purchase price. In addition, Liggett has 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 27% of the shares of LDL owned by BOL.
16
<PAGE> 18
EVE HOLDINGS INC.
BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8 $ 8
Office equipment . . . . . . . . . . . . . . . . . . . . . . 2 2
Trademarks, at cost, less accumulated amortization of
$16,443 and $15,593, respectively . . . . . . . . . . . 3,970 4,820
------------ -----------
Total assets . . . . . . . . . . . . . . . . $ 3,980 $ 4,830
============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Federal income taxes currently payable to parent . . . . . . $ 136 $ 164
Dividends payable . . . . . . . . . . . . . . . . . . . . . 2,863 2,536
Deferred income taxes . . . . . . . . . . . . . . . . . . . 1,389 1,687
------------ -----------
Total liabilities. . . . . . . . . . . . . . . 4,388 4,387
------------ -----------
Stockholder's equity (deficit):
Common stock (par value $1.00 per share; authorized,
issued and outstanding 100 shares) and contributed
capital . . . . . . . . . . . . . . . . . . . . . 46,824 47,653
Receivables from parent:
Note receivable - interest at 14%, due no sooner
than February 1, 1999 . . . . . . . . . . . . (44,520) (44,520)
Other . . . . . . . . . . . . . . . . . . . . . . (2,712) (2,690)
------------ -----------
Total stockholder's equity (deficit) . . . . . (408) 443
------------ -----------
Total liabilities and stockholder's equity
(deficit) . . . . . . . . . . . . . . . . $ 3,980 $ 4,830
============ ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
17
<PAGE> 19
EVE HOLDINGS INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1996 1995 1996 1995
------- ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Royalties - parent . . . . . . . . . . . . $2,437 $2,753 $4,150 $4,939
Interest - parent . . . . . . . . . . . . 1,577 1,577 3,153 3,153
------ ------ ------ ------
4,014 4,330 7,303 8,092
Expenses:
Amortization of trademarks . . . . . . . . 425 425 851 851
Miscellaneous, net . . . . . . . . . . . . 35 38 58 58
------ ------ ------ ------
Income before income taxes . . . . . 3,554 3,867 6,394 7,183
Income tax provision . . . . . . . . . . . . . 1,244 1,353 2,238 2,514
------ ------ ------ ------
Net income . . . . . . . . . . . . . $2,310 $2,514 $4,156 $4,669
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part
of these financial statements.
18
<PAGE> 20
EVE HOLDINGS INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,156 $4,669
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 851 851
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . (298) (298)
Changes in assets and liabilities:
Federal income taxes currently payable . . . . . . . . . . . . . . . . . . (29) 187
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 40
------ ------
Net cash provided by operating activities . . . . . . . . . . . . . . 4,680 5,449
------ ------
Cash flows from financing activities:
Dividends/capital distributions . . . . . . . . . . . . . . . . . . . . . . . . (4,658) (5,222)
Increase in due from parent . . . . . . . . . . . . . . . . . . . . . . . . . . (22) 1,352
------ ------
Net cash used in financing activities . . . . . . . . . . . . . . . . (4,680) (3,870)
------ ------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,579
Cash:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2
------ ------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8 $1,581
====== ======
Supplemental cash flow information:
Payments of income taxes through receivable from parent . . . . . . . . . . . . $2,314 $2,625
Dividends/capital distributions declared but not paid . . . . . . . . . . . . . $2,176 -
</TABLE>
The accompanying notes are an integral part
of these financial statements.
19
<PAGE> 21
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. 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.
20
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EXHIBIT 99.2
TABLE OF CONTENTS
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Page
----
<S> <C> <C>
FINANCIAL STATEMENTS - NEW VALLEY CORPORATION
Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1995......................................... 1
Consolidated Statements of Operations for the three months
and six months ended June 30, 1996 and 1995............... 2
Consolidated Statement of Changes in Non-Redeemable
Preferred Shares, Common Shares and Other Capital
(Deficit) for the six months ended June 30, 1996.......... 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 1996 and 1995.............................. 4
Notes to the Quarterly Consolidated Financial Statements.... 5
</TABLE>
<PAGE> 2
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 65,621 $ 51,742
Investment securities 200,223 241,526
Restricted assets 10,391 22,919
Receivable from clearing brokers 17,582 13,752
Other current assets 20,982 3,546
--------- -----------
Total current assets 314,799 333,485
--------- -----------
Investment in real estate 183,122
Investment securities 517 517
Restricted assets 7,423 15,086
Long-term investments 11,506 29,512
Other assets 15,091 7,222
--------- -----------
Total assets $ 532,458 $ 385,822
========= ===========
LIABILITIES AND CAPITAL (DEFICIT)
Current liabilities:
Margin loans payable $ 82,525 $ 75,119
Accounts payable and accrued liabilities 40,331 27,712
Prepetition claims and restructuring accruals 26,737 33,392
Income taxes 16,954 20,283
Securities sold, not yet purchased 17,276 13,047
Current portion of long-term obligations 3,538 8,367
--------- -----------
Total current liabilities 187,361 177,920
--------- -----------
Notes payable 159,574
Other long-term obligations 16,366 11,967
Redeemable preferred shares 222,288 226,396
Non-redeemable preferred shares, Common Shares and
capital (deficit):
Cumulative preferred shares; liquidation preference of
$69,769, dividends in arrears; $105,170 and $95,118 279 279
Common Shares, $.01 par value; 850,000,000 shares
authorized; 9,577,624 and 191,551,586 shares
outstanding 96 1,916
Additional paid-in capital 664,101 679,058
Accumulated deficit (724,010) (714,364)
Unrealized appreciation on investment
securities, net of taxes 6,403 2,650
--------- -----------
Total non-redeemable preferred shares, Common
Shares and other capital (deficit) (53,131) (30,461)
--------- -----------
Total liabilities and capital (deficit) $ 532,458 $ 385,822
========= ===========
</TABLE>
-1-
<PAGE> 3
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
June 30, June 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Principal transactions, net $ 6,172 $ 2,601 $ 14,910 $ 2,601
Commissions 4,820 1,738 8,683 1,738
Real estate leasing 5,958 11,664
Computer sales and service 4,098 8,797
Interest and dividends 4,642 3,938 9,826 10,569
Other income 8,857 1,755 17,351 2,793
-------- -------- -------- --------
Total revenues 34,547 10,032 71,231 17,701
-------- -------- -------- --------
Cost and expenses:
Operating, general and administrative 34,170 7,455 71,314 9,797
Interest 4,739 9,263
Reversal of restructuring accruals (2,044)
-------- -------- -------- --------
Total costs and expenses 38,909 7,455 80,577 7,753
-------- -------- -------- --------
Income (loss) from continuing operations before income taxes (4,362) 2,577 (9,346) 9,948
Provision for income taxes 400 293 300 1,033
-------- -------- -------- --------
Income (loss) from continuing operations (4,762) 2,284 (9,646) 8,915
Discontinued operations:
Income from discontinued operations,
net of income taxes 2,682 4,080
-------- -------- -------- --------
Net income (loss) (4,762) 4,966 (9,646) 12,995
Dividends on preferred shares - undeclared (15,646) (18,647) (31,108) (39,059)
Excess of carrying value of redeemable preferred
shares over cost of shares purchased 26,266 4,279 33,624
-------- -------- -------- --------
Net income (loss) applicable to Common Shares $(20,408) $ 12,585 $(36,475) $ 7,560
======== ======== ======== ========
Income (loss) per common and equivalent share:
From continuing operations $ (2.13) $ 1.03 $ (3.81) $ .36
Discontinued operations .28 .43
--------- -------- --------- --------
Net income (loss) per Common Share $ (2.13) $ 1.31 $ (3.81) $ .79
======== ======== ======== ========
Number of shares used in computation 9,578 9,572 9,578 9,526
========= ========= ======== ========
Supplemental information:
Additional interest absent Chapter 11 filing $ 2,314
=========
</TABLE>
See accompanying Notes to Quarterly Consolidated Financial Statements
- 2 -
<PAGE> 4
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NON-REDEEMABLE PREFERRED
SHARES, COMMON SHARES AND OTHER CAPITAL (DEFICIT)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
$3.00 Class B
Preferred Shares Common Shares Additional
---------------- ---------------- Paid-In Accumulated Unrealized
Shares Amount Shares Amount Capital Deficit Appreciation
------ ------ -------- ------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 2,791 $279 191,551 $1,916 $679,058 $(714,364) $2,650
Net loss (9,646)
Undeclared dividends and accretion
on redeemable preferred shares (21,056)
Purchase of redeemable preferred
shares 4,279
Unrealized appreciation in marketable
securities 3,753
Effect of 1-for-20 reverse stock split (181,974) (1,820) 1,820
Conversion of preferred shares 1
------ ----- --------- ------ -------- --------- ------
Balance, June 30, 1996 2,791 $279 9,578 $ 96 $664,101 $(724,010) $6,403
====== ===== ========= ====== ======== ========= ======
</TABLE>
See accompanying Notes to Quarterly Consolidated Financial Statements
-3-
<PAGE> 5
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (9,646) $ 12,995
Adjustments to reconcile net income to net
cash used for operating activities:
Income from discontinued operations (4,080)
Depreciation and amortization 2,332
Reversal of restructuring accruals (2,044)
Changes in assets and liabilities, net of effects
from acquisition:
Decrease (increase) in receivables and other assets (11,873) 7,170
Decrease in income taxes (3,329) (29,074)
Increase in accounts payable and accrued liabilities 10,234 399
-------- --------
Net cash used for operating activities (12,282) (14,634)
-------- --------
Cash flows from investing activities:
Purchase of real estate and related improvements (24,882)
Payment of prepetition claims (6,655) (568,997)
Collection of contract receivable 300,000
Decrease in restricted assets 20,191 326,537
Sale or maturity of investment securities 60,899
Purchase of investment securities (15,843) (198,902)
Sale or liquidation of long-term investments 14,500
Purchase of long-term investments (1,269) (70,421)
Payment for acquisition, net of cash acquired 1,915 (25,853)
-------- --------
Net cash provided from (used for) investing activities 48,856 (237,636)
-------- --------
Cash flows from financing activities:
Payment of preferred dividends (10,354) (90,628)
Purchase of Class A preferred stock (10,530) (23,029)
Increase in margin loans payable 7,406
Repayment of other obligations (9,217) (7,357)
Exercise of stock options 535
-------- --------
Net cash used for financing activities (22,695) (120,479)
-------- --------
Net cash provided from discontinued operations 2,421
-------- --------
Net increase (decrease) in cash and cash equivalents 13,879 (370,328)
Cash and cash equivalents, beginning of period 51,742 376,170
-------- --------
Cash and cash equivalents, end of period $ 65,621 $ 5,842
======== ========
Supplemental Cash Flow Information:
Cash payments for income taxes $ 3,729 $ 31,194
======== ========
</TABLE>
See accompanying Notes to Quarterly Consolidated Financial Statements
-4-
<PAGE> 6
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 June 30, 1996 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 June 30, 1996 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 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 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 and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995,
as filed with the Securities and Exchange Commission.
Reincorporation and Reverse Stock Split. On July 29, 1996, the Company
completed its reincorporation from the State of New York to the State of
Delaware and effected a one-for-twenty reverse stock split of the Company's
common shares. These changes were approved by the Company's shareholders at
the annual shareholders' meeting held on June 25, 1996. In connection with
the reverse stock split, all per share data have been restated to reflect
retroactively the reverse stock split and a total of $1,820 was reclassified
from the Company's common shares account to the Company's additional paid-in
capital account.
Real Estate Leasing Revenues. The real estate properties are being leased
to tenants under operating leases. Base rental revenue is generally
recognized on a straight-line basis over the term of the lease. The lease
agreements for certain properties generally contain provisions which provide
for reimbursement of real estate taxes and operating expenses over base year
amounts, and in certain cases as fixed increases in rent. In addition, the
lease agreements for certain tenants provide additional rentals based upon
revenues in excess of base amounts.
Revenue Recognition of Computer Sales and Services. Product revenues are
recognized when the equipment is shipped or, in certain circumstances, upon
product acceptance by the customer if it occurs prior to shipment. Contract
revenues are recognized as the related costs are incurred. Service revenues
are recognized over the period in which the services are provided.
2. ACQUISITIONS
On January 10 and January 11, 1996, the Company acquired four commercial
office buildings (the "Office Buildings") and eight shopping centers (the
"Shopping Centers") for an aggregate purchase price of $183,900, consisting
of $23,900 in cash and $160,000 in
-5-
<PAGE> 7
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
non-recourse mortgage financing. In addition, the Company has capitalized
approximately $800 in costs related to the acquisitions. The Company paid
$11,400 in cash and executed four promissory notes aggregating $100,000 for
the Office Buildings. The Office Building notes bear interest at 7.5% and
have terms of ten to fifteen years. The Shopping Centers were acquired for
an aggregate purchase price of $72,500, consisting of $12,500 in cash and
$60,000 in eight promissory notes. Each Shopping Center note has a term of
five years, and bears interest at the rate of 8% for the first two and
one-half years and at the rate of 9% for the remainder of the term.
The components of the Company's investment in real estate at June 30, 1996
are as follows:
<TABLE>
<S> <C>
Land $ 38,921
Buildings 145,939
Construction-in-progress 22
--------
Total 184,882
Less: accumulated depreciation (1,760)
--------
Net investment in real estate $183,122
========
</TABLE>
On January 11, 1996, the Company provided a $10,600 convertible bridge loan
to finance Thinking Machines Corporation ("TMC"), a developer and marketer
of parallel software of high-end and networked computer systems. In
February 1996, the bridge loan was converted into a controlling interest in
a partnership which holds 3.3 million common shares of TMC which represent
61.4% of the outstanding shares. The acquisition of TMC through the
conversion of the bridge loan was accounted for as a purchase for financial
reporting purposes, and accordingly, the operations of TMC subsequent to
January 31, 1996 are included in the operations of the Company. Subject to
final determination, the fair value of assets acquired, including goodwill
of $1,726, was $27,301 and liabilities assumed totaled $16,705, including
minority interests of $9,082.
The following table presents unaudited pro forma and actual results of
continuing operations as if the acquisitions of Ladenburg, Thalmann & Co.,
Inc., TMC, and the Office Buildings and Shopping Centers, had occurred on
January 1, 1995. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would have occurred
had each of these acquisitions been consummated as of such date.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- -----------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
----------- --------- ----------- ----------
Actual Pro Forma
----------- ----------------------------------
<S> <C> <C> <C> <C>
Revenues $ 34,547 $31,795 $ 72,662 $69,504
======== ======= ======== =======
Net (loss) income $ (4,762) $ 2,457 $(10,030) $ 9,377
======== ======= ======== =======
Net (loss) income applicable to
common shares $(20,408) $10,076 $(36,859) $ 3,942
======== ======= ======== =======
Net (loss) income per common share $ (2.13) $ 1.05 $ (3.85) $ .41
======== ======= ======== =======
</TABLE>
-6-
<PAGE> 8
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
3. DISCONTINUED OPERATIONS
Effective October 1, 1995, the Company sold its messaging services business.
Accordingly, the financial statements reflect the financial position and the
results of operations of the messaging services business as discontinued
operations for the periods prior to the sale.
Operating results of the messaging services business for the three months
ended June 30, 1995 were as follows: revenues - $14,635, operating income -
$2,982, and net income - $2,682. Operating results of the messaging services
business for the six months ended June 30, 1995 were as follows: revenues -
$26,662, operating income - $4,535, and net income - $4,080.
4. INCOME TAXES
At June 30, 1996, the Company had net operating loss carryforwards of
approximately $190,000 which expire at various dates through 2007. A
valuation allowance has been provided against the amount as it is deemed more
likely than not that the benefit of the tax asset will not be utilized. The
Company continues to evaluate the realizability of the deferred tax assets.
The provision for income taxes, which represented the effects of the
alternative minimum tax and state income taxes, for the three and six months
ended June 30, 1996 and 1995, 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
Investment securities classified as available for sale are carried at fair
value, with net unrealized gains of $6,403 ($6,824 of unrealized gains and
$421 of unrealized losses) included as a separate component of stockholders'
equity (deficit). The Company had net realized gains on sales of investment
securities available for sale of $58 and $3,192 for the three and six months
ended June 30, 1996, respectively.
As of June 30, 1996, the Company, through a wholly-owned subsidiary, held
approximately 5.16 million shares of RJR Nabisco Holdings Corp. ("RJR
Nabisco") common stock, par value $.01 per share (the "RJR Nabisco Common
Stock"), with a market value of $163,886 (cost of $158,225). The Company's
investment in RJR Nabisco collateralizes margin loan financing of $82,525 at
June 30, 1996. This margin loan bears interest at .25% below the broker's
call rate (6.0% at June 30, 1996).
During 1996, the Company has expensed $10,367 relating to the RJR Nabisco
investment. Included in this amount was $220 owed to Brooke Group Ltd.
("Brooke"), an affiliate of the Company, pursuant to the December 27, 1995
agreement with Brooke in which the Company agreed, among other things, to pay
directly or reimburse Brooke and its subsidiaries for out-of-pocket expenses
in connection with Brooke's solicitation of consents and proxies from the
shareholders of RJR Nabisco. At June 30, 1996, the Company owed Brooke and
its subsidiaries a total of $1,200 pursuant to the Brooke agreement, which
amount was paid in July 1996. The Company's investment in RJR Nabisco Common
Stock decreased from a $5,661 unrealized gain at June 30, 1996 to a $20,794
unrealized loss at August 13, 1996.
-7-
<PAGE> 9
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The details of the investment categories by type of security at June 30,
1996 are as follows:
<TABLE>
<CAPTION>
Fair
Cost Value
--------- ---------
<S> <C> <C>
Available for sale:
Marketable equity securities:
RJR Nabisco Common Stock $158,225 $163,886
Other marketable securities 2,080 2,822
-------- --------
Total marketable securities 160,305 166,708
Marketable debt securities (long-term) 517 517
-------- --------
Total securities available for sale 160,822 167,225
-------- --------
Trading securities (Ladenburg):
Marketable equity securities 24,090 24,429
Equity and index options 7,041 6,739
Other securities 2,684 2,347
-------- --------
Total trading securities 33,815 33,515
-------- --------
Total investment securities 194,637 200,740
Less long-term portion of investment securities (517) (517)
-------- --------
Investment securities - current portion $194,120 $200,223
======== ========
</TABLE>
The long-term portion of investment securities at cost consists of
marketable debt securities which mature in three years.
Long-Term Investments. At June 30, 1996, long-term investments included
investments in limited partnerships of $5,625, equity in a joint venture of
$3,796, an equity investment in a foreign corporation of $2,000, and other
investments of $85. During the first quarter of 1996, the Company
liquidated its position in two limited partnerships with an aggregate
carrying amount of $14,500 and recognized a gain on such liquidations of
$4,086. In July 1996, the Company sold its investment in a Brazilian
airplane manufacturer (the "Brazilian Investment") for $8,285 in cash,
which included $1,300 as reimbursement of the Company's expenses
related to this investment. The Company, after writing down this investment
by $8,698 in 1995, recognized a gain on the sale of the Brazilian Investment
of $4,285 in July 1996 representing a partial recovery of the impaired
carrying value. The Company reclassified this investment to other current
assets as of June 30, 1996. In June 1996, the Company determined that an
other than temporary impairment in the value of its minority equity interest
in a computer software company had occurred and, accordingly, $1,001 was
provided as an impairment charge.
The fair value of the Company's long-term investments approximates its
carrying amount. The Company's estimate 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.
RJR Nabisco Equity Swap. On February 29, 1996, the Company entered into a
total return equity swap transaction (the "Swap") with an unaffiliated
company (the "Counterparty") relating to 1,000,000 shares of RJR Nabisco
Common Stock (reduced to 750,000 shares of RJR Nabisco Common Stock as of
August 13, 1996). The transaction is for a period of up to six months,
subject to earlier termination at the election of the Company, and provided
for the Company to make a payment to the Counterparty of $1,537 upon
commencement of the
-8-
<PAGE> 10
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Swap. At the termination of the transaction, if the price of the RJR
Nabisco Common Stock during a specified period prior to such date (the
"Final Price") exceeds $34.42, the price of the RJR Nabisco Common Stock
during a specified period following the commencement of the Swap (the
"Initial Price"), the Counterparty will pay the Company an amount in cash
equal to the amount of such appreciation with respect to the shares of RJR
Nabisco Common Stock subject to the Swap plus the value of any dividends
with a record date occurring during the Swap period. If the Final Price is
less than the Initial Price, then the Company will pay the Counterparty at
the termination of the transaction an amount in cash equal to the amount of
such decline with respect to the shares of RJR Nabisco Common Stock subject
to the Swap, offset by the value of any dividends, provided that, with
respect to approximately 225,000 shares of RJR Nabisco Common Stock, the
Company will not be required to pay any amount in excess of an approximate
25% decline in the value of the shares. The potential obligations of the
Counterparty under the Swap are being guaranteed by the Counterparty's
parent, a large foreign bank, and the Company has pledged certain collateral
in respect of its potential obligations under the Swap and has agreed to
pledge additional collateral under certain conditions. The Company marks its
obligation with respect to the Swap to fair value which resulted in a charge
to operations for the unrealized loss on the Swap of $3,231 for the six
months ended June 30, 1996. Based on the market price of the RJR Nabisco
Common Stock at August 13, 1996, the Company would take a charge to
operations for the loss on the Swap of approximately $4,000 for the three
months ended September 30, 1996. The Company had pledged U.S. government
securities of $8,569 and $10,687 at June 30, 1996 and August 13, 1996,
respectively, as collateral for this transaction. These amounts are
classified as current restricted assets.
6. REDEEMABLE PREFERRED SHARES
At June 30, 1996, the Company had authorized and outstanding 2,000,000 and
1,035,462, respectively, of its Class A Senior Preferred Shares. At June
30, 1996 and December 31, 1995, respectively, the carrying value of such
shares amounted to $222,288 and $226,396, including undeclared dividends of
$124,339 and $121,893, or $120.08 and $110.06 per share.
In January and February, 1996, the Company repurchased 72,104 of such shares
for $10,530. The repurchase of the Class A Senior Preferred Shares increased
the Company's additional paid-in capital by $4,279 for the 72,104 shares
acquired.
As of June 30, 1996, the unamortized discount on the Class A Senior Preferred
Shares was $5,597.
In March 1996 and July 1996, the Company declared and paid dividends on the
Class A Senior Preferred Shares of $10.00 and $30.00 per share, respectively.
7. 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 $105,170 and $95,118 at
June 30, 1996 and December 31, 1995, respectively. These undeclared
dividends represent $37.68 and $34.08 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-
<PAGE> 11
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
8. RESTRICTED ASSETS
Restricted assets at June 30, 1996 consisted primarily of the $8,569 pledged
as collateral for the RJR Nabisco equity swap as described in Note 5, and
$5,223 pledged as security for a long-term lease of commercial office space.
In May 1996, the Company reached an agreement with First Financial
Management Corporation ("FFMC") whereby FFMC released all of the remaining
$28,742 held in escrow pursuant to the Asset Purchase Agreement, dated as of
October 20, 1994, between the Company and FFMC, relating to the sale of the
Company's money transfer business. In addition, the agreement required the
Company to pay FFMC $7,000 in connection with the termination of the various
service agreements the Company had with FFMC. The Company recognized a
gain on the termination of these service agreements of $1,317.
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. As of June 30, 1996 and December 31, 1995, the Company had
$26,737 and $33,392, respectively, of prepetition claims and restructuring
accruals. The prepetition claims remaining as of June 30, 1996 may be
subject to future adjustments depending on pending discussions with the
various parties and the decisions of the Bankruptcy Court.
10. CONTINGENCIES
Litigation
The Company is a defendant in various lawsuits and may be subject to
unasserted claims primarily in connection with its activities as a
securities broker-dealer and participation in public underwritings. These
lawsuits involve claims for substantial or indeterminate amounts and are in
varying stages of legal proceedings. In the opinion of management, after
consultation with counsel, the ultimate resolution of these matters will not
have a material adverse effect on the Company's consolidated financial
position or results of operations.
Investment Company Act
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 engage
primarily in the business of investing, reinvesting or trading in securities
or engage in the business of investing, reinvesting, owning, holding or
trading in securities and own or propose to acquire "investment securities"
having a "value" in excess of 40% of a company's "total assets" (exclusive
of Government securities and cash items) on an unconsolidated basis.
Following dispositions of its then operating businesses pursuant to the
Joint Plan, the Company was above this threshold and relied on the one-year
exemption from registration under the Investment Company Act provided by
Rule 3a-2 thereunder, which exemption expired on January 18, 1996. Prior to
such date, through the Company's acquisition of the investment banking and
brokerage business of Ladenburg and its acquisition of the Office Buildings
and Shopping Centers (see
-10-
<PAGE> 12
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Note 2), the Company was engaged primarily in a business or businesses other
than that of investing, reinvesting, owning, holding or trading in
securities, and the value of its investment securities was below the 40%
threshold. Under the Investment Company Act, the Company is required to
determine the value of its total assets for purposes of the 40% threshold
based on "market" or "fair" values, depending on the nature of the asset, at
the end of the last preceding fiscal quarter and based on cost for assets
acquired since that date. If the Company were required to register under
the Investment Company Act, it would be subject to a number of material
restrictions on its operations, capital structure and management, including
without limitation its ability to enter into transactions with affiliates.
-11-
