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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
Commission file number 1-5759
BROOKE GROUP LTD.
(Exact name of registrant as specified in its charter)
Delaware 51-0255124
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 S.E. Second Street, Miami, Florida 33131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 579-8000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value New York Stock Exchange
$.10 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of April 1, 1996 was approximately $52,726,529. Directors
and officers and ten percent or greater stockholders are considered affiliates
for purposes of this calculation but should not necessarily be deemed affiliates
for any other purpose.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
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At April 1, 1996, there were 18,497,096 shares of common stock
outstanding.
Documents Incorporated by Reference:
Part III (Items 10,11, 12 and 13) from the definitive Proxy Statement
for the 1996 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission no later than 120 days after the end of the registrant's
fiscal year covered by this report.
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TABLE OF CONTENTS
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Page
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PART I
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Item 1. Business............................................................................................... 1
Item 2. Properties............................................................................................. 16
Item 3. Legal Proceedings...................................................................................... 17
Item 4. Submission of Matters to a Vote of Security-Holders; Executive Officers of the
Registrant............................................................................................. 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................. 19
Item 6. Selected Financial Data................................................................................ 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................................. 20
Item 8. Financial Statements and Supplementary Data............................................................ 21
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................................................. 21
PART III
Item 10. Directors and Executive Officers of the Registrant..................................................... 21
Item 11. Executive Compensation................................................................................. 21
Item 12. Security Ownership of Certain Beneficial Owners and Management......................................... 21
Item 13. Certain Relationships and Related Transactions......................................................... 21
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................... 22
SIGNATURES...................................................................................................... 32
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PART I
ITEM 1. BUSINESS
General
Brooke Group Ltd. (the "Company" or "BGL"), a Delaware corporation
founded in 1980, is a holding company for a number of businesses. The Company is
principally engaged, through its subsidiary Liggett Group Inc. ("Liggett"), in
the manufacture and sale of cigarettes, primarily in the United States; through
its subsidiary Brooke (Overseas) Ltd. ("BOL"), in the manufacture and sale of
cigarettes and the real estate development business in Russia; and through its
investment in New Valley Corporation ("New Valley"), in the investment banking
and brokerage business, ownership and management of commercial real estate and
the acquisition of operating companies. In addition, the Company, through its
subsidiary COM Products Inc. ("Com Products"), distributes computer output
microfiche products. Liggett and BOL are wholly owned subsidiaries of BGLS Inc.
("BGLS"). BGLS is a wholly owned subsidiary of the Company.
The Company is controlled by Bennett S. LeBow, the Chairman and Chief
Executive Officer of the Company, BGLS and New Valley, who owns directly or
indirectly approximately 57% of the Company's common stock. The principal
executive office of the Company is located at 100 S.E. Second Street, Miami, FL
33131, and the telephone number is (305) 579-8000.
LIGGETT'S TOBACCO BUSINESS
General. The Company's tobacco business in the United States is
conducted through its indirect wholly owned subsidiary Liggett, which is the
operating successor to the Liggett & Myers Tobacco Company. Liggett is
headquartered in Durham, North Carolina. Liggett is registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and files
periodic reports and other information with the Securities and Exchange
Commission (the "SEC").
Liggett is engaged primarily in the manufacture and sale of cigarettes.
According to The Maxwell Consumer Report, a recognized industry publication (the
"Maxwell Report"), Liggett's domestic shipments of approximately 10.52 billion
cigarettes during 1995 accounted for 2.2% of the total cigarettes shipped in the
United States during such year. This represents a market share decline of 0.1%
from 1994 and 0.2% from 1993. Liggett produces both premium cigarettes as well
as discount cigarettes (which includes among others, control label, branded
discount and generic cigarettes). Premium cigarettes are generally marketed
under well-recognized brand names at full retail prices to adult smokers with
strong preference for branded products, whereas discount cigarettes are marketed
at lower retail prices to adult smokers who are more cost conscious. Liggett's
cigarettes are produced in over 300 combinations of lengths, styles and
packaging.
Liggett produces four premium cigarette brands: L&M, Chesterfield, Lark
and Eve. Liggett's premium cigarettes represented approximately 32%, 33% and 42%
of net sales
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(excluding federal excise taxes) in 1995, 1994 and 1993, respectively, and
contributed a substantial portion of Liggett's operating profits for the
respective periods. Liggett's share of premium market segment was approximately
0.8% for 1995, compared to 0.9% and 1.1% for 1994 and 1993, respectively,
according to the Maxwell Report.
In 1980, Liggett was the first major domestic cigarette manufacturer to
introduce successfully discount cigarettes as an alternative to premium
cigarettes. In 1989, Liggett established a new price point within the discount
market segment by introducing Pyramid, a branded discount product which at that
time sold for less than most other discount cigarettes. Liggett continues to
produce discount cigarettes with a share of approximately 5.5% of the discount
market segment for 1995 according to the Maxwell Report, compared to 5.4% and
4.7% for 1994 and 1993, respectively. Liggett's share of the discount market
segment increased, despite a decline in discount unit sales volume. The increase
in market share was due to an overall decline in the discount segment.
At the present time, Liggett has no foreign operations, maintains only
one international sales office with one employee and does not own the
international rights to its premium cigarette brands. Liggett does, however,
export cigarettes which are sold primarily in Eastern Europe and the Middle
East. Export sales of approximately 900 million units accounted for
approximately 8% of Liggett's 1995 total unit sales volume. Revenues from export
sales were $5.4 million for 1995, compared to $4.7 million and $5.0 million for
1994 and 1993, respectively. Operating profit (loss) attributable to export
sales for each of the years 1995, 1994 and 1993 were $(2.1) million, $(1.1)
million and $0.5 million, respectively. Management's strategy is to increase
volume in its foreign markets and increase its international brand acceptance in
an effort to reverse this unprofitable trend.
Business Strategy. Liggett's near-term business strategy is to reduce
further certain operating and selling costs in order to increase the
profitability of both its premium and discount products at their current unit
sales volume and to reduce further its investment in working capital. As part of
this strategy, Liggett restructured its headquarters and manufacturing
operations and reduced its workforce by 235 positions in 1993 and reorganized
its sales force in early 1994, reducing its field sales force by 150 permanent
positions and adding approximately 300 part-time positions. Liggett has also
reduced costs in both administrative and manufacturing functions by making
additional modifications to its manufacturing operations and significantly
curtailing employee benefit programs. During 1995, Liggett continued its efforts
towards reducing costs by, among other things, offering voluntary retirement
programs to eligible employees and reduced headcount by an additional 120
positions. Since the 1993 restructuring, Liggett has reduced its headcount by
approximately 14% of its hourly employees and 11% of its salaried employees.
These changes have significantly reduced operating costs.
Liggett's long-term business strategy in the premium segment of the
market is to maintain its market share by offering promotional programs with the
objective of maximizing the profitability of its premium brands. Liggett's
long-term business strategy in the discount segment of the market is to maintain
its market share and increase its profitability by
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consistently providing high quality products and services at prices and terms
comparable to those available elsewhere in the market.
Sales, Marketing and Distribution. Liggett's products are distributed
from a central distribution center in Durham, North Carolina to 27 public
warehouses located throughout the United States. These warehouses serve as local
distribution centers for Liggett's customers. Liggett's products are transported
from the central distribution center to the warehouses via third-party trucking
companies to meet pre-existing contractual obligations to its customers.
Liggett's customers are primarily candy and tobacco distributors, the
military and large grocery, drug and convenience store chains. Liggett offers
its customers discount payment terms, traditional rebates and promotional
incentives. Customers typically pay for purchased goods within two weeks
following delivery from Liggett. One of Liggett's customers accounted for
approximately 11.6% of net sales in 1995. No single customer accounted for more
than 10% of Liggett's net sales in 1994 and 1993.
Liggett's marketing and sales functions are performed by approximately
95 direct sales representatives calling on national and regional customer
accounts, together with approximately 325 part-time retail sales consultants who
service retail outlets. In addition, Liggett employs food broker groups in
certain geographic locations to perform these marketing and sales functions.
Trademarks. All of the major trademarks used by Liggett are federally
registered or are in the process of being registered in the United States and
other markets where Liggett's products are sold. Trademarks typically have a
duration of ten years and can be renewed at Liggett's option prior to their
expiration date. In view of the significance of cigarette brand awareness among
consumers, management believes that the protection afforded by these trademarks
is material to the conduct of its business. All of Liggett's trademarks are
owned by its wholly-owned subsidiaries, Eve Holdings Inc. ("Eve") and Cigarette
Exporting Company of America, Ltd. ("CECOA"). Liggett does not own the
international rights to its premium cigarette brands.
Manufacturing. Liggett purchases and maintains leaf tobacco inventory
to support its cigarette manufacturing requirements. Liggett believes that there
is a sufficient supply of tobacco within the worldwide tobacco market to satisfy
its current production requirements. Liggett stores its leaf tobacco inventory
in warehouses in North Carolina and Virginia. There are several different types
of tobacco, including flue-cured leaf, burley leaf, Maryland leaf, oriental
leaf, cut stems and reconstituted sheet. The two largest components of
cigarettes are the flue-cured and burley tobaccos. While premium and discount
brands use many of the same tobacco products, input ratios of tobacco products
account for the differences between premium and discount products. Domestically
grown tobacco is an agricultural commodity subject to United States government
production controls and price supports which can substantially affect its market
price. Foreign flue-cured and burley tobaccos, some of which are used in the
manufacture of Liggett's cigarettes, are generally 10% to 15% less expensive
than comparable domestic tobaccos. Liggett normally purchases all of its tobacco
requirements
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from domestic and foreign leaf tobacco dealers, much of it under long-term
purchase commitments which expire principally in December 1996. As of December
31, 1995, approximately 87% of Liggett's commitments were for the purchase of
foreign tobacco. On September 13, 1995, the President of the United States
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. Management believes that the TRQ levels are sufficiently high to
allow Liggett to operate without material disruption to its business. However,
increasing 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 could have an
unfavorable impact on Liggett's operations during 1996.
Liggett's cigarette manufacturing facilities are designed for the
execution of short production runs in a cost-effective manner, which enables
Liggett to manufacture and market a wide variety of cigarette brand styles.
Liggett's cigarettes are produced in approximately 300 different brand styles
under Eve's and CECOA's trademarks and brand names as well as private labels for
other companies, typically retail or wholesale distributors who supply
supermarkets and convenience stores. Liggett believes that its existing
facilities are sufficient to accommodate a substantial increase in production.
While Liggett pursues product development, its total expenditures for
research and development on new products have not been financially material over
the past three years.
Competition. Liggett is the smallest of the five major manufacturers of
cigarettes in the United States. The four largest manufacturers of cigarettes
are Philip Morris, Inc. ("Philip Morris"), R.J. Reynolds Tobacco Company
("RJR"), Brown & Williamson Tobacco Corporation (which acquired American Tobacco
Company, Inc. in April 1994) ("B&W"); and Lorillard Tobacco Company, Inc.
There are substantial barriers to entry into the cigarette business,
including extensive distribution organizations, large capital outlays for
sophisticated production equipment, substantial inventory investment, costly
promotional spending, regulated advertising and strong brand loyalty. In this
industry, the major cigarette manufacturers compete among themselves for market
share on the basis of brand loyalty, advertising and promotional activities and
trade rebates and incentives. Liggett's four major competitors all have
substantially greater financial resources than Liggett, and most of these
competitors' brands have greater sales and consumer recognition than Liggett's
brands.
According to the Maxwell Report, Philip Morris' and RJR's sales
together accounted for approximately 71.8% of the domestic cigarette market in
1995. Liggett's domestic shipments of approximately 10.52 billion cigarettes
during 1995 accounted for 2.2% of the approximately 481.10 billion cigarettes
shipped in the United States during such year, compared to 11.32 billion
cigarettes (2.3%) and 11.17 billion cigarettes (2.4%) during 1994 and 1993,
respectively.
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Prior to 1994, industry-wide shipments of cigarettes in the United
States had steadily declined at an average annual rate of 2% to 3%. Although the
Maxwell Report estimates that domestic industry-wide shipments increased by
approximately 6.2% in 1994, such shipments declined by 1.7% during 1995.
Liggett's management believes that industry-wide shipments of cigarettes in the
United States will continue to decline as a result of numerous factors,
including health considerations, diminishing social acceptance of smoking,
legislative limitations on smoking in public places and federal and state excise
tax increases which have augmented cigarette price increases.
Historically, because of their dominant market share, Philip Morris and
RJR have been able to determine cigarette prices for the various pricing tiers
within the industry, and the other cigarette manufacturers have brought their
prices into line with the levels established by the two industry leaders. Prior
to 1993 there had been substantial regular price increases by all cigarette
manufacturers, culminating in premium list prices in excess of $14.00 per
carton. These increases widened the gap between prices of the premium and
discount segments of the market, culminating in a price gap of $7.00 per carton
in July 1993, at which time Philip Morris substantially reduced the price of its
premium brands to 1989-1990 levels, forcing other cigarette manufacturers
including Liggett to do likewise. This price decrease narrowed the gap between
prices of the premium and discount segments to approximately 25%, which has had
an effect on relative volumes. Liggett is more reliant upon sales in the
discount segment of the market, relative to the premium segment, than its
competitors. Since the July 1993 price decrease, list prices at all tiers have
again increased and the relative volume of premium cigarettes has been
increasing. Off-list price discounting by manufacturers, however, has
substantially affected the average price differential at retail, which can be
significantly greater than the manufacturers' list price gap.
Government Regulation. Reports with respect to the alleged harmful
physical effects associated with cigarette smoking have been publicized for many
years and, in the opinion of Liggett's management, have had and may continue to
have an adverse effect on cigarette sales. Since 1964, the Surgeon General of
the United States and the Secretary of Health and Human Services have released a
number of reports which claim that cigarette smoking is a causative factor with
respect to a variety of health hazards, including cancer, heart disease and lung
disease, and have recommended various government actions to reduce the incidence
of smoking.
Since 1966, federal law has required that cigarettes manufactured,
packaged or imported for sale or distribution in the United States include
specific health warnings on their packaging. Since 1972, Liggett and the other
cigarette manufacturers have included the federally required warning statements
in print advertising, on billboards and on certain categories of point-of-sale
display materials relating to cigarettes.
The Comprehensive Smoking Education Act, which became effective October
12, 1985, requires that packages of cigarettes distributed in the United States
and cigarette advertisements (other than billboard advertisements) in the United
States bear one of the following four warning statements, in lieu of the prior
warning notice, on a quarterly rotating
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basis: "SURGEON GENERAL'S WARNING: Smoking Causes Lung Cancer, Heart Disease,
Emphysema, and May Complicate Pregnancy"; "SURGEON GENERAL'S WARNING: Quitting
Smoking Now Greatly Reduces Serious Risks to Your Health"; "SURGEON GENERAL'S
WARNING: Smoking by Pregnant Women May Result in Fetal Injury, Premature Birth,
and Low Birth Weight"; and "SURGEON GENERAL'S WARNING: Cigarette Smoke Contains
Carbon Monoxide". Shortened versions of these statements are also required, on a
rotating basis, on billboard advertisements. By a limited eligibility amendment
to the Comprehensive Smoking Education Act for which Liggett qualifies, Liggett
is allowed to display all four required package warnings for the majority of its
brand packages on a simultaneous basis (such that the packages at any time may
carry any one of the four required warnings), although it rotates the required
warnings for advertising on a quarterly basis in the same manner as do the other
major cigarette manufacturers. The law also requires that each person who
manufacturers, packages or imports cigarettes annually provide to the Secretary
of Health and Human Services a list of ingredients added to tobacco in the
manufacture of cigarettes. Annual reports to the United States Congress are also
required from the Secretary of Health and Human Services as to current
information on the health consequences of smoking and from the Federal Trade
Commission on the effectiveness of cigarette labeling and current practices and
methods of cigarette advertising and promotion. Both federal agencies are also
required annually to make such recommendations as they deem appropriate with
regard to further legislation.
In March and April 1994, the Health and the Environmental Subcommittee
of the Energy and Commerce Committee of the House of Representatives held
hearings regarding nicotine in cigarettes. On March 25, 1994, Commissioner David
A. Kessler of the Food and Drug Administration (the "FDA") gave testimony as to
the potential regulation of nicotine under the Food, Drug and Cosmetic Act, and
the potential for jurisdiction over the regulation of cigarettes to be accorded
to the FDA. In response to Commissioner Kessler's allegations about manipulation
of nicotine by cigarette manufacturers, 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 cigarette
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.
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On March 12, 1996, Liggett, together with Brooke, entered into an
agreement to settle the Castano class action tobacco litigation, and on March
15, 1996, Liggett, together with Brooke, 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 Brooke, 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 Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Recent
Developments in the Cigarette Industry - Legislation and Litigation" for
discussions of the Castano and the Attorneys General settlements.
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.
On February 14, 1995, Liggett filed with the United States Department
of Agriculture (the "USDA") its certification as to usage of domestic and
imported tobaccos during 1994, and an audit was conducted by the USDA to verify
this certification. Liggett has received from the USDA the results of the audit,
which states that Liggett did not satisfy the 75% domestic tobacco usage
requirement for 1994 and therefore may be subject to a marketing assessment
estimated at approximately $5.5 million, which amount is disputed by Liggett. It
is the understanding of Liggett that the levels of domestic tobacco inventories
currently on hand at the tobacco stabilization organizations are below reserve
stock levels, and for such reason, Liggett is of the opinion that it will not be
obligated to make such purchases of domestic tobacco from the tobacco
stabilization cooperatives. Liggett is currently engaged in negotiations with
the USDA in an effort to resolve this matter on satisfactory terms.
On September 13, 1995, the President of the United States, after
negotiations with the affected countries, declared a TRQ on certain imported
tobacco, imposing extremely high tariffs on imports of flue-cured and burley
tobacco in excess of certain levels which levels 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
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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 Liggett. Liggett believes it is
unlikely that an end-user licensing system will be adopted because it would
likely lead to another GATT proceeding. The end-user licensing system has not
been authorized by legislation and it could create significant problems for
United States exports in other product markets. However, no assurances can be
made 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 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 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). This statute purportedly abrogates certain
defenses typically available to defendants. This legislation would impose on the
tobacco industry, if ultimate liability of the industry is established in
litigation, liability based upon market share for such payments made as a result
of such smoking-related diseases. Although a suit has been commenced to
challenge the constitutionality of the Florida legislation, no assurance can be
given that it will be successful. On May 6, 1995, the Florida legislature voted
in favor of a bill to repeal this legislation, but the Governor of Florida
vetoed this repealer bill. On March 13, 1996, the Florida legislature considered
taking certain action to override the veto of the repealer bill if the requisite
vote could be attained, but decided not to take formal action when it was
determined that it could not attain the requisite vote. Massachusetts has also
recently enacted legislation authorizing lawsuits by the attorney general to
recover certain medical assistance payments. See Item 7, "Management's
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Discussion and Analysis of Financial Condition and Results of Operations -
Recent Developments in the Cigarette Industry - Legislation and Litigation" and
Note 16 (Contingencies) to the Company's Consolidated Financial Statements for
a discussion of such legislation and related litigation, and of Liggett's and
Brooke's recent settlement with the Attorneys General of certain states
covering certain of these lawsuits.
All radio and television advertising of cigarettes has been prohibited
by federal statute since 1971 and federal law now prohibits smoking aboard
aircraft for domestic flights of six hours or less. The United States Interstate
Commerce Commission has banned smoking on buses transporting passengers
interstate. In addition, the United States Congress and a number of states and
local government units have enacted or are considering legislation which is
intended to discourage smoking through educational efforts or which imposes
various restrictions or requirements relating to smoking including restrictions
on public smoking. Certain employers have initiated programs restricting or
eliminating smoking in the workplace. Other proposals previously presented to or
currently before Congress and certain states and local government units include,
but are not limited to, legislative efforts to further restrict or ban the
advertising and promotion of cigarettes, to eliminate the income tax
deductibility of expenses incurred for such advertising and promotion, to
restrict or prohibit smoking in public buildings and other areas, to increase
excise taxes, to require additional warnings on cigarette packaging and
advertising, to ban vending machine sales, to eliminate the federal preemption
defense in product liability actions, to place cigarettes under the regulatory
jurisdiction of the FDA and to require that cigarettes meet certain fire safety
standards. If adopted, at least certain of the foregoing legislative proposals
could have a material adverse impact on Liggett's operations.
While attitudes toward cigarette smoking vary around the world, a
number of foreign countries have also taken steps to discourage cigarette
smoking, to restrict or prohibit cigarette advertising and promotion and to
increase taxes on cigarettes. Such restrictions are, in some cases, more onerous
than restrictions imposed in the United States. Due to Liggett's lack of foreign
operations and it not having significant export sales to foreign countries, the
risks of foreign limitations or restrictions on the sale of cigarettes are
limited to entry barriers into additional foreign markets and the inability to
grow the existing markets.
The price of cigarettes includes federal excise taxes at the rate of
$12.00 per 1,000 cigarettes. A substantial excise tax increase could accelerate
the trend away from smoking.
Liggett has been involved in certain environmental proceedings, none of
which, either individually or in the aggregate, rise to the level of
materiality. Liggett's current operations are conducted in accordance with all
environmental laws and regulations. Management is unaware of any material
environmental conditions affecting its existing facilities. Compliance with
federal, state and local provisions regulating the discharge of materials into
the environment, or otherwise relating to the protection of the environment,
have not had a material effect on the capital expenditures, earnings or
competitive position of Liggett.
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Management believes that Liggett is in compliance in all material
respects with the laws regulating cigarette manufacturers except as referred to
above with respect to OBRA during 1994.
BROOKE (OVERSEAS) LTD.
The Company is engaged in the manufacture and sale of cigarettes and
the real estate development business in Russia through Liggett-Ducat Ltd.
("LDL"), in which BOL, at March 29, 1996, held a 68% equity interest. BOL is a
wholly owned subsidiary of BGLS. In April 1996, BOL entered into a stock
purchase agreement to acquire an additional 12% of the outstanding stock of LDL.
See Notes 1 (Summary of Significant Accounting Policies) and 4 (Investment in
Brooke (Overseas) Ltd.) to the Company's Consolidated Financial Statements.
LDL, one of Russia's leading cigarette producers since 1892,
manufactured and marketed 10.4 billion cigarettes in 1995. LDL produces some of
the leading brands in the Russian market including Pegas, Prima and Novosti. The
Company plans to build a new cigarette factory utilizing Western cigarette
making technology with a capacity of 24 billion units per year. The new factory
will produce both American and Russian brands of cigarettes. It is presently
anticipated that the new factory will be operational by the end of 1997,
although no assurance can be given that this will be the case.
In addition to cigarette manufacturing, LDL is actively involved in the
real estate development business in Moscow. LDL has a 98-year lease for 2.2
acres of land in downtown Moscow at the location of the current cigarette
operations. LDL is developing a planned 546,500 square foot class-A American
style mixed-use complex on the property in a three-phase program. In 1993, LDL
successfully completed the initial phase of the program consisting of the
construction and leasing of Ducat Place I, a 46,500 square foot class-A office
building. LDL has leased the building to Citibank (on a triple net lease basis)
for a five-year period, and prior to taking occupancy, Citibank paid LDL $5.4
million of advance rent for the first two years of the lease agreement. In June
of 1995, Citibank paid LDL $6.25 million of advance rent for the remaining three
years of the lease agreement. Citibank has subsequently subleased space in Ducat
Place I to the European Bank for Reconstruction and Development and Morgan
Stanley International. In August 1995, LDL commenced construction on its second
building, Ducat Place II, a 150,000 square foot office building which is
scheduled for completion during the first quarter of 1997. The third phase,
Ducat Place III, is currently planned as a 350,000 square foot mixed-use
complex. Construction is scheduled to begin in 1998.
INVESTMENT IN NEW VALLEY
New Valley is engaged, through its ownership of Ladenburg, Thalmann &
Co. Inc. ("Ladenburg"), in the investment banking and brokerage business,
through its New Valley Realty division, in the ownership and management of
commercial real estate, and in the acquisition of operating companies. New
Valley is registered under the Exchange Act and files periodic reports and other
information with the SEC.
<PAGE> 14
11
The Company indirectly holds, through BGLS and BGLS' wholly owned
subsidiary New Valley Holdings, Inc. ("NV Holdings"), approximately 42% of the
voting interest in New Valley. This approximate 42% interest consists, as of
March 29, 1996, of (i) 394,975 shares of common stock (the "New Valley Common
Shares") (approximately 0.2% of the class) and 250,885 shares of $3.00 Class B
Cumulative Convertible Shares (the "Class B Shares") (approximately 9.0% of the
class) held directly by BGLS and (ii) 79,399,254 New Valley Common Shares
(approximately 41.4% of the class) and 618,326 $15.00 Class A Increasing Rate
Cumulative Senior Preferred Shares (the "Class A Preferred Shares")
(approximately 59.7% of the class) held by NV Holdings. See Note 2 (Investment
in New Valley Corporation) to the Company's Consolidated Financial Statements.
New Valley's Emergence from Bankruptcy Reorganization Proceedings
On November 15, 1991, an involuntary petition seeking an order for
relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy
Code") was commenced against New Valley by certain of its bondholders. On March
31, 1993, New Valley consented to the entry of an order for relief under the
Bankruptcy Code. On November 1, 1994, the United States Bankruptcy Court for the
District of New Jersey entered an order confirming the First Amended Joint
Chapter 11 Plan of Reorganization, as amended (the "Joint Plan"), which Joint
Plan became effective in January 1995. On January 18, 1995, New Valley emerged
from bankruptcy reorganization proceedings and completed substantially all
distributions to creditors under its Joint Plan.
Dispositions Pursuant to the Joint Plan
Pursuant to the Joint Plan, on November 15, 1994 New Valley sold the
assets and operations with which it provided domestic and international money
transfer services, bill payment services, telephone cards, money orders and bank
card services (collectively, the "Money Transfer Business") which included the
capital stock of its subsidiary, Western Union Financial Services, Inc. ("FSI")
and certain related assets, to First Financial Management Corporation ("FFMC"),
and on January 13, 1995, it sold to FFMC all of the trademarks and tradenames
used in the Money Transfer Business and constituting the Western Union name and
trademark. The aggregate purchase price was approximately $1.193 billion,
including $893 million in cash and $300 million representing the assumption by
FFMC of substantially all of New Valley's obligations under its pension plan.
Pursuant to the Joint Plan, all of New Valley's debt and allowed claims were
satisfied in full and all classes of equity and other equity interests were
reinstated and retained all of their legal, equitable and contractual rights.
Through October 1, 1995, New Valley was engaged in the messaging
services business through its wholly owned subsidiary, Western Union Data
Services Company, Inc. ("DSI"). On October 31, 1995, New Valley completed the
sale of substantially all of the assets (exclusive of certain contracts) and
conveyance of substantially all of the liabilities of DSI to FFMC for $20
million in cash, subject to certain adjustments. This transaction was effective
as of October 1, 1995.
<PAGE> 15
12
Acquisitions by New Valley
Ladenburg, Thalmann & Co. Inc. On May 31, 1995, New Valley acquired all
of the outstanding shares of common stock and other equity interests of
Ladenburg for $25.8 million net of cash acquired, subject to adjustment.
Ladenburg is a full service broker-dealer which has been a member of the New
York Stock Exchange since 1876. Its specialties include investment banking,
trading, research, market making, client services, institutional sales and asset
management.
Ladenburg's investment banking area maintains relationships with
businesses and provides them with research, advisory and investor relations
support. Services include merger and acquisition consulting, management of and
participation in underwriting of equity and debt financing, private debt and
equity financing, and rendering appraisals, financial evaluations and fairness
opinions. Ladenburg's listed securities and over-the-counter trading areas
include trading a variety of financial instruments in both national and
international markets. Ladenburg's client services and institutional sales
departments serve accounts worldwide and its asset management area provides
investment management and financial planning services to individuals and
institutions.
Ladenburg is a wholly-owned subsidiary of Ladenburg, Thalmann Group
Inc. ("Ladenburg Group"), which has other subsidiaries specializing in merchant
banking, venture capital and investment banking activities on an international
level. Since the acquisition of Ladenburg, through March 29, 1996 New Valley has
contributed approximately $34 million to the capital of Ladenburg Group. See
Note 2 (Acquisition) to New Valley's Consolidated Financial Statements attached
to this report.
New Valley Realty Division. On January 10 and January 11, 1996, New
Valley acquired four commercial office buildings (the "Office Buildings") and
eight shopping centers (the "Shopping Centers"), respectively, for an aggregate
purchase price of $183.9 million, consisting of $23.9 million in cash and $160
million in non-recourse mortgage financing. The Office Buildings and Shopping
Centers are being operated through New Valley's recently established division,
New Valley Realty.
The Office Buildings consist of two adjacent commercial office
buildings in Troy, Michigan and two adjacent commercial office buildings in
Bernards Township, New Jersey. New Valley acquired the Office Buildings in
Michigan from Bellemead of Michigan, Inc. ("Bellemead Michigan") and the Office
Buildings in New Jersey from Jared Associates, L.P. (each, a "Seller"), for an
aggregate purchase price of $111.4 million. Each Seller is an affiliate of
Bellemead Development Corporation, which is indirectly wholly owned by The Chubb
Corporation. The purchase price was paid for the Office Buildings as follows:
(i) $23.5 million for the 700 Tower Drive property, located in Troy, Michigan;
(ii) $28.1 million for the 800 Tower Drive property, located in Troy, Michigan;
(iii) $48.3 million for the Westgate I property, located in Bernards Township,
New Jersey; and (iv) $11.4 million for the Westgate II property, located in
Bernards Township, New Jersey. The two Michigan buildings were constructed in
1987 and the two New Jersey buildings were constructed in
<PAGE> 16
13
1991. The gross square footage of the Office Buildings ranges from approximately
50,300 square feet to approximately 244,000 square feet.
On January 11, 1996, New Valley acquired the Shopping Centers from
various limited partnerships (AP Century I., L.P., AP Century II, L.P., AP
Century III, L.P., AP Century IV, L.P., AP Century V, L.P., AP Century VI, L.P.,
AP Century VIII, L.P., and AP Century IX, L.P.) (each, a "Partnership") for an
aggregate purchase price of $72.5 million. Each Partnership is an affiliate of
Apollo Real Estate Investment Fund, L.P. ("Apollo"). The Shopping Centers are
located in Marathon and Royal Palm Beach, Florida; Lincoln, Nebraska; Santa Fe,
New Mexico; Milwaukee, Oregon; Richland and Marysville, Washington; and
Charleston, West Virginia. New Valley acquired a fee simple interest in each
Shopping Center and the underlying land for each property. Space in the Shopping
Center is leased to a variety of commercial tenants and, as of March 31, 1996,
the aggregate occupancy of the Shopping Centers was approximately 93%. The
Shopping Centers were constructed at various times during the period 1963-1988.
The gross square footage of the Shopping Centers ranges from approximately
108,500 square feet to approximately 222,500 square feet.
The purchase price was paid for the Shopping Centers as follows: (i)
$3.9 million for the Marathon Shopping Center property, located in Marathon,
Florida; (ii) $9.8 million for the Village Royale Plaza Shopping Center
property, located in Royal Palm Beach, Florida; (iii) $6.0 million for the
University Place property, located in Lincoln, Nebraska; (iv) $9.6 million for
the Coronado Shopping Center property, located in Santa Fe, New Mexico; (v) $7.3
million for the Holly Farm Shopping Center property, located in Milwaukee,
Oregon; (vi) $10.6 million for the Washington Plaza property, located in
Richland, Washington; (vii) $12.4 million for the Marysville Towne Center
property, located in Marysville, Washington; and (viii) $12.9 million for the
Kanawha Mall property, located in Charleston, West Virginia (the properties
described in clauses (i), (ii), (v), (vii) and (viii) are subject to an
underlying mortgage in favor of a single lender and are referred to collectively
as the "Properties"). See Note 21 (Subsequent Events) to New Valley's
Consolidated Financial Statements attached to this report.
The acquisition of the Office Buildings was effected pursuant to a
purchase agreement dated January 10, 1996. The acquisition of the Shopping
Centers was effected pursuant to a purchase agreement dated January 11, 1996. As
of March 21, 1996, an affiliate of Apollo and the Partnerships was the holder of
debt securities of BGLS.
Thinking Machines Corporation. On January 11, 1996, Ladenburg, Thalmann
Capital Corp. ("Ladenburg Capital"), the merchant banking subsidiary of
Ladenburg Group, in connection with the First Amended Joint Plan of
Reorganization (the "Plan") of Thinking Machines Corporation ("Thinking
Machines"), a developer and marketer of parallel software for high-end and
networked computer systems, made a $10.6 million convertible bridge loan (the
"Loan") to TMCA Corp. ("TMCA"), an entity formed to invest the Loan proceeds
(net of certain expenses) in Thinking Machines.
<PAGE> 17
14
On February 8, 1996, the date of confirmation of the Plan, Thinking
Machines emerged from bankruptcy and pursuant to the Plan, TMCA merged into
Thinking Machines thereby converting the Loan into a controlling interest in a
partnership which holds approximately 61% of the outstanding common stock of
Thinking Machines. Thinking Machines will use the Loan proceeds to help fund its
advanced product development and marketing. See Note 21 (Subsequent Events) to
New Valley's Consolidated Financial Statements attached to this report.
RJR Nabisco Holdings Corp. In August, 1995, New Valley filed a
notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 with
respect to the acquisition of up to 15% of the voting securities of RJR Nabisco
Holdings Corp. ("RJR Holdings") in the open market. On August 29, 1995, the
waiting period under such notification expired. As of March 29, 1996, New Valley
held approximately 5.2 million shares of RJR Holdings common stock, representing
approximately 1.9% of RJR Holdings' outstanding common stock. As of March 29,
1996, New Valley's cost for such shares and the amount of related margin loan
financing were approximately $158 million and approximately $83.5 million,
respectively. For additional information concerning New Valley's investment in
RJR Holdings and the Company's and BGLS's involvement with respect thereto and
related matters, see "Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Developments - Certain Matters
Relating to RJR Holdings". See Notes 5 (Investment Securities) and 21
(Subsequent Events) to New Valley's Consolidated Financial Statements attached
to this report.
Miscellaneous Investments. On February 1, 1995, New Valley acquired,
for $12.7 million, a 28.2% equity interest in a holding company that owned a
16.5% voting interest in Empresa Brasileira de Aeronautica, S.A., a Brazilian
airplane manufacturer.
In addition, as of December 31, 1995, New Valley had investments in
limited partnerships of $18.7 million and an equity investment in a software
company of $1.0 million. The principal business of such partnerships is
investing in a variety of securities. New Valley is in the process of
liquidating its interest in certain of the limited partnerships. During the
fourth quarter of 1995, New Valley recognized an impairment loss of
approximately $12 million on certain of its investments. See Note 6 (Long-Term
Investments) to New Valley's Consolidated Financial Statements attached to this
report.
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. There can be no assurance that
New Valley will be successful in targeting or consummating any such
acquisitions.
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
<PAGE> 18
15
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 and its acquisition of
the Office Buildings and Shopping Centers (see "Acquisitions by New Valley -
Ladenburg, Thalmann & Co. Inc." and "- New Valley Realty Division", above), 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. However, no assurance can be
given that New Valley will continue to operate below the 40% threshold, and
accordingly, there may be risk that New Valley will become subject to the
Investment Company Act. If New Valley 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. If New Valley
were required to register under the Investment Company Act, the Company 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 New Valley would constitute a violation under the
Indenture (as defined below).
COM PRODUCTS
The Company is involved in the microfilm products distribution business
through Com Products, a wholly owned subsidiary of BGLS. Com Products is a
distributor of microfilm and related supply products which are utilized in
computer and camera recording systems. These products are used to record, store
and retrieve business records. Com Products has customers in the banking,
financial, insurance, and aerospace industries, among others, and services
various government accounts.
THE SERIES A/SERIES B EXCHANGE OFFER AND RELATED MATTERS
On January 30, 1996, BGLS exchanged (i) its 15.75% Series A Senior
Secured Notes due 2001 (the "Series A Notes") for all of its outstanding
13.75% Series 2 Senior Secured Notes due 1997 and (ii) its 15.75% Series B
Senior Secured Notes due 2001 (the "Series B Notes") for substantially all of
its outstanding 14.500% Subordinated Debentures due 1998. Pursuant to a
registered exchange offer under the Securities Act of 1933, as amended, all of
the Series A Notes were exchanged for an equal principal amount of registered
Series B Notes. The Series A Notes and the Series B Notes were issued under an
indenture dated as of January 1, 1996 (the "Indenture") between BGLS, as
issuer, and Fleet National Bank of Massachusetts, as trustee. As of March 29,
1996, approximately $233,000,000 of the Series B Notes were outstanding. See
Note 8 (Notes Payable, Long-Term Debt and Other Obligations) to the Company's
Consolidated Financial Statements.
Certain Restrictions under the Indenture. The Indenture contains,
among other things, restrictions on BGLS' ability to incur indebtedness, make
certain payments and investments, and enter into certain transactions with
affiliates. See Item 7, "Management's Discussion and Analysis of Financial
Conditions and Results of Operations - Capital Resources and Liquidity". For
further information concerning restrictions on BGLS under the Indenture,
reference is made to the Indenture incorporated as an exhibit to this report
and incorporated by reference herein. In addition, the Indenture contains
certain restrictions on the ability of the Chairman and certain of his
affiliates to enter into certain transactions with, and receive payments above
specified levels from, New Valley.
<PAGE> 19
16
CERTAIN DISPOSITIONS AND OTHER MATTERS
Through 1994, the Company held a majority interest in MAI Systems
Corporation ("MAI"). This interest was distributed in the form of a special
dividend to the Company's common stockholders on February 13, 1995. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Introduction". The Company also previously owned SkyBox
International, Inc. ("SkyBox"). Most of this interest was distributed to the
Company's common stockholders in the form of a special dividend on October 6,
1993. On March 27, 1995, the Company divested its remaining indirectly held
shares of SkyBox common stock through open market sales. On March 29, 1995,
SkyBox redeemed the Company's remaining indirect holdings of its preferred
stock. See Note 5 (Discontinued Operations) to the Company's Consolidated
Financial Statements.
The Company and BGLS are presently considering a reorganization in
which, among other things, all of the assets of BGLS other than Liggett,
would be transferred to a newly formed holding company that would hold all of
the capital stock of the Company ("Holdco"). Holdco would retain an indirect
interest in Liggett through its ownership of the Company.
EMPLOYEES
At April 12, 1996, the Company and its consolidated subsidiaries had
approximately 1,741 full-time employees, of whom approximately 637 were employed
by Liggett and approximately 1,050 were employed by LDL. Additionally, Liggett
employs approximately 376 people on a part-time basis. Approximately 36% of the
Company's (including its consolidated subsidiaries) employees are hourly
employees and are represented by unions. The Company and its consolidated
subsidiaries have not experienced any significant work stoppages since 1977, and
the Company believes that relations with its employees and their unions are
satisfactory.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Miami,
Florida. The Company subleases 12,356 square feet of office space from an
unaffiliated company in an office building in Miami, which it shares with the
Company and New Valley pursuant to an expense-sharing arrangement. The sublease
expires on February 28, 1999.
Substantially all of Liggett's tobacco manufacturing facilities,
consisting principally of factories, distribution and storage facilities, are
located in or near Durham, North Carolina.
<PAGE> 20
17
Such facilities are both owned and leased. The principal properties owned or
leased by Liggett are as follows:
<TABLE>
<CAPTION>
Owned Approximate
or Total Square
Type Location Leased Footage
---- -------- ------ -------
<S> <C> <C> <C>
Corporate Office/
Manufacturing Complex Durham, NC Owned 1,350,000
Warehouse Durham, NC Owned 203,000
Storage Facilities Danville, VA Owned 578,000
Distribution Center Durham, NC Leased 240,000
</TABLE>
Liggett's Durham, North Carolina complex consists of 16 major
structures over approximately 25 acres. Included are Liggett's manufacturing
plant, research facility and corporate offices. Liggett's management believes
its property, plant and equipment are well maintained and in good condition and
that its existing facilities are sufficient to accommodate a substantial
increase in production.
Liggett leases the Durham, North Carolina distribution center pursuant
to a lease which expires in May 1999. Liggett has an option to purchase the
leased property at any time during the term of the lease. Liggett utilizes
approximately 40% of the distribution center and subleases the remaining 60% to
a third party. Liggett also leases excess space in its research facility and
corporate offices to third parties.
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, for a sale price of $4.3 million. It is anticipated that closing
will occur on or before May 31, 1996.
LDL has a 98-year lease for 2.2 acres of land in downtown Moscow at the
location of the current cigarette operations. In 1993, LDL leased Ducat Place 1,
a 46,500 square foot class-A office building to Citibank (on a triple net lease
basis) for a five-year period and has received advance rental payments for the
full five-year term. In August 1995, LDL commenced construction on its second
building Ducat Place II, a 150,000 square foot office building which is
scheduled for completion during the first quarter of 1997. The third phase,
Ducat Place III, is currently planned as a 350,000 square foot mixed-use
complex. Construction is scheduled to begin in 1998.
ITEM 3. LEGAL PROCEEDINGS
Reference is made to Note 16 (Contingencies) of the
Company's Consolidated Financial Statements, set forth on pages C-35 through
C-43 of this report, which contains a description of certain legal
proceedings to which the Company or its subsidiaries is a party and certain
related matters.
<PAGE> 21
18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS; EXECUTIVE OFFICERS
OF THE REGISTRANT
During the last quarter of 1995 no matter was submitted to
stockholders for their vote or approval, through the solicitation of proxies or
otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their respective ages,
and the positions held with the Company, are listed below. Each of the executive
officers of the Company serves until the election and qualification of his
successor or until his death, resignation or removal by the Board of Directors
of the Company.
<TABLE>
<CAPTION>
Year individual
became an executive
Name Age Position officer
- ---- --- -------- -------------------
<S> <C> <C>
Bennett S. LeBow 58 Chairman of the Board, 1990
President and Chief
Executive Officer
Gerald E. Sauter 52 Vice President, Chief 1993
Financial Officer and
Secretary
Rubin V. Chakalian 60 Chairman of the Board of
Liggett 1993
</TABLE>
Bennett S. LeBow (the "Chairman") has been the Chairman of the
Board, President and Chief Executive Officer of the Company, a New York Stock
Exchange-listed holding company, since June 1990, and has been a director of the
Company since October 1986. Since November 1990, he has been Chairman of the
Board, President and Chief Executive Officer of BGLS, which directly or
indirectly holds the Company's equity interests in several private and public
companies. Each of the public companies have been, directly or indirectly,
operating companies.
The Chairman has been a director of Liggett since June 1990
and Chairman of the Board of Liggett from July 1990 to May 1993. He served as
one of three interim Co-Chief Executive Officers from March 1993 to May 1993.
<PAGE> 22
19
He has been Chairman of the Board of New Valley, in which the
Company holds an indirect voting interest of approximately 42%, since January
1988, and Chief Executive Officer since November 1994. He has been Chairman of
the Board, President and Chief Executive Officer of NV Holdings, an indirect
wholly owned subsidiary of the Company which holds certain of the Company equity
interest in New Valley, since September 1994.
He was a director of MAI Systems Corporation ("MAI"), Brooke's
former indirect majority-owned subsidiary, of which the Company distributed its
entire 65.2% equity interest in MAI (comprised of common stock) to the Company's
stockholders in the form of a special dividend on or about February 13, 1995,
from September 1984 to October 1995, its Chairman of the Board from November
1990 to May 1995 and the Chief Executive Officer from November 1990 to April
1993.
GERALD E. SAUTER has been Vice President and Chief Financial
Officer of the Company since April 1993; Vice President and Chief Financial
Officer of BGLS since April 1993; and currently holds various positions with
certain BGLS subsidiaries, including Vice President and Treasurer of Eve
Holdings, Inc., a wholly-owned subsidiary of Liggett ("Eve"), since October 1992
and a director of Eve since December 1992. Mr. Sauter has been Vice President,
Treasurer and Chief Financial Officer of New Valley since November 1994 and
currently holds various positions with New Valley's subsidiaries.
MR. CHAKALIAN has served as a board member of Liggett since
May 1993 and as Liggett's President and Chief Executive Officer from June 1994
until March 1996. Effective April 1, 1996, Mr. Chakalian assumed the title of
Chairman of the Board of Liggett. Prior to June 1994, Mr. Chakalian had served
as a consultant to Liggett. He assumed these duties after serving as one of
three interim co-Chief Executive Officers of Liggett from March 1993 to May
1993. Mr. Chakalian was employed by RJR Holdings in various executive capacities
from 1972 to 1987, including Executive Vice President of R.J. Reynolds Tobacco
International. He served as a Senior Vice President for the Fine Wines division
of Heublein, Inc., a subsidiary of RJR Holdings, between 1987 and 1989. Mr.
Chakalian was Associate Dean of the School of Business at San Francisco State in
1989 and 1990. He served as a consultant exclusively to Liggett between January
1991 and January 1993 during which time he advised the company on expanding its
international business segment. Mr. Chakalian also serves as a member of the
Board of Directors of LDL.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock, $.10 par value per share (the
"Common Stock"), is listed and traded on the New York Stock Exchange ("NYSE")
under the symbol "BGL". The high and low sale prices for a share of Common Stock
on the NYSE, as reported by the NYSE, for each fiscal quarter of 1995 and 1994
were as follows (in dollars):
<PAGE> 23
20
Year High Low
- ---- ---- ---
1995:
First Quarter 4 1/4 3 15/64
Second Quarter 5 1/2 3 1/8
Third Quarter 11 3/8 4 3/8
Fourth Quarter 9 7/8 6 5/8
1994:
First Quarter 2 1/4 1 1/2
Second Quarter 2 1 1/4
Third Quarter 5 3/8 1 3/8
Fourth Quarter 4 1/2 2 5/8
HOLDERS
At April 12, 1996, there were 380 holders of record of the
Common Stock.
DIVIDENDS
During 1995, the Company declared and paid regular quarterly
cash dividends of $.075 per share on the Common Stock. The declaration of future
cash dividends is within the discretion of the Board of Directors of the Company
and is subject to a variety of contingencies such as market conditions, earnings
and the financial condition of the Company as well as the availability of cash.
The payment of dividends and other distributions to the Company by BGLS are
subject to the Indenture. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital Resources and Liquidity"
and Note 8 (Notes Payable, Long-Term Debt and Other Obligations) to the
Company's Consolidated Financial Statements. No cash dividends were paid on the
Common Stock during 1994.
ITEM 6. SELECTED FINANCIAL DATA
See "Consolidated Five-Year Financial Summary" on page A-1 of
this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition
and Results of Operations is set forth on pages B-1 through B-16 of this report.
<PAGE> 24
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and Notes
thereto, together with the report thereon of Coopers & Lybrand L.L.P. ("Coopers
& Lybrand") dated April 15, 1996, are set forth on pages C-1 through C-49 and
quarterly financial results on page C-48 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information is contained in the Company's definitive
Proxy Statement for its 1996 annual meeting of stockholders (the "Proxy
Statement"), to be filed with the SEC not later than 120 days after the end of
the registrant's fiscal year covered by this report pursuant to Regulation 14A
under the Exchange Act, and incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
This information is contained in the Proxy Statement and
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is contained in the Proxy Statement and
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is contained in the Proxy Statement and
incorporated herein by reference.
<PAGE> 25
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) INDEX TO 1996 CONSOLIDATED FINANCIAL STATEMENTS:
The Company's Consolidated Financial Statements and the Notes
thereto, together with the report thereon of Coopers & Lybrand dated April 15,
1996, appears on pages C-1 through C-49 of this report. Financial statement
schedules not included in this report have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or the Notes thereto.
(a)(2) FINANCIAL STATEMENT SCHEDULES:
Schedule II Valuation and Qualifying Accounts .........................Page C-49
(a)(3) EXHIBITS
(a) The following is a list of exhibits filed herewith as part of the report on
Form 10-K:
<PAGE> 26
23
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
* 3.1 Restated Certificate of Incorporation of Liggett Group Inc. (the
predecessor to Brooke Group Ltd. (the "Company"))
(incorporated by reference to the Company's Registration
Statement on Form S-1, Commission File No. 33-16868).
* 3.2 Certificate of Amendment of the Restated Certificate of
Incorporation of the Company (incorporated by reference to
the Company's Form 10-Q for the quarter ended June 30, 1990).
* 3.3 Amended and Restated By-Laws of the Company, effective
December 5, 1995 (incorporated by reference to the Company's
current Report on Form 8-K dated December 5, 1995).
* 3.4 Certificate of Designations of Series A Junior Convertible
Participating PIK Preferred Stock, Series B Junior Convertible
Participating Reset Preferred Stock, Series C Junior Convertible
Participating Reset Preferred Stock and Series D Junior
Convertible Participating Reset Preferred Stock (incorporated
by reference to the Company's Form 10-Q for the quarter
ended September 30, 1990).
* 3.5 Certificate of Designation of Series E Junior Convertible
Participating Preferred Stock of the Company (incorporated by
reference to the Company's Report on Form 8-K dated October
29, 1993).
* 3.6 Certificate of Designation of Series F Junior Convertible
Participating Preferred Stock of the Company (incorporated by
reference to the Company's Report on Form 8-K dated October
29, 1993).
* 3.7 Certificate of Designation of Series G Junior Convertible
Participating Preferred Stock of the Company (incorporated by
reference to the Company's Form 10-K for the fiscal year
ended 1993).
</TABLE>
<PAGE> 27
24
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
* 4.1 Indenture, dated as of January 1, 1996, between BGLS Inc.
("BGLS") and Fleet National Bank of Massachusetts ("Fleet"),
as Trustee, relating to the "Series A Notes" and the 15.75%
Series B Senior Secured Notes due 2001 (the "Series B
Notes"), including the form of Series A Note and the form of
Series B Note (the "Series A and Series B Indenture")
(incorporated by reference to exhibit 4.1 in BGLS's
Registration Statement on Form S-4 dated December 19, 1995,
Commission File Number 33-80593).
* 4.2 Pledge and Security Agreement, dated as of January 1,
1996, between BGLS and Fleet, as Trustee under the Series A
and Series B Indenture (incorporated by reference to exhibit
4.2 in BGLS's Registration Statement on Form S-4 dated
December 19, 1995, Commission File Number 33-80593).
* 4.3 A/B Exchange and Registration Rights Agreement, dated as of
November 21, 1995, among the Company, BGLS, AIF II L.P.,
Artemis America Partnership, Tortoise Corp., and Mainstay
High Yield Corporate Bond Fund (incorporated by reference to
exhibit 4.3 in BGLS's Registration Statement on Form S-4
dated December 19, 1995, Commission File Number 33-
80593).
* 4.4 Pledge and Security Agreement, dated as of January 1,
1996, between New Valley Holdings, Inc. and Fleet, as Trustee
under the Series A and Series B Indenture (incorporated by
reference to exhibit 4.4 in BGLS's Registration Statement on
Form S-4 dated December 19, 1995, Commission File Number 33-
80593).
* 4.5 Indenture, dated as of September 30, 1994, between BGLS and
Shawmut Bank, N.A. ("Shawmut"), as Trustee, relating to the
13.75% Series 2 Senior Secured Notes due 1995 (the "Series 2
Notes"), including the form of Series 2 Note (the "Series 2
Indenture") (incorporated by reference to exhibit 4(ii) in the
Company's Form 8-K dated September 2, 1994, Commission
File Number 1-5759).
* 4.6 Pledge Agreement, dated as of September 30, 1994, between
BGLS and Shawmut, as Trustee under the Series 2 Indenture
(incorporated by reference to exhibit 10(ae) in the Company's
Form 8-K dated September 2, 1994, Commission File Number
1-5759).
</TABLE>
<PAGE> 28
25
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
* 4.7 Indenture, dated April 1, 1988, between BGLS and First Trust
National Association ("First Trust"), as Trustee, relating to the
Subordinated Debentures (the "14.5% Debenture Indenture")
(incorporated by reference to exhibit 4(ff) in the Company's
Form 10-Q for the quarter ended September 30, 1990,
Commission File Number 1-5759).
* 4.8 First Supplemental Indenture, dated September 4, 1990, to
the 14.5% Debenture Indenture, between BGLS and First Trust,
as Trustee (incorporated by reference to exhibit 4(f) in the
Company's Form 10-K for the year ended December 31, 1990,
Commission File Number 1-5759).
* 4.9 Second Supplemental Indenture, dated November 19, 1990,
to the 14.5% Debenture Indenture, between BGLS and First
Trust, as Trustee (incorporated by reference to exhibit 4(g)
in the Company's Form 10-K for the year ended December 31,
1990, Commission File Number 1-5759).
* 4.10 Third Supplemental Indenture, dated November 19, 1990,
to the 14.5% Debenture Indenture, between BGLS and First
Trust, as Trustee (incorporated by reference to exhibit 4(i)
in the Company's Form 10-K for the year ended December 31,
1990, Commission File Number 1-5759).
* 4.11 Fourth Supplemental Indenture, dated October 22, 1993,
to the 14.5% Debenture Indenture, between BGLS and First
Trust, as Trustee (incorporated by reference to exhibit 4(y)
in the Company's Form 10-Q for the quarter ended September
30, 1993, Commission File Number 1-5759).
* 4.12 Fifth Supplemental Indenture, dated January 18, 1995, to
the 14.5% Debenture Indenture, between BGLS and First Trust,
as Trustee (incorporated by reference to exhibit 4(e) in the
Company's Form 10-K for the year ended December 31, 1994,
Commission File Number 1-5759).
* 4.13 Sixth Supplemental Indenture, dated as of January 26,
1996, to the 14.5% Debenture Indenture, between BGLS and
First Trust, as Trustee (incorporated by reference to exhibit
4.13 in BGLS's Registration Statement on Form S-4 dated
December 19, 1995, Commission File Number 1-5759).
</TABLE>
<PAGE> 29
26
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
* 4.14 Indenture, dated February 14, 1992 among Liggett Group Inc.
("Liggett"), Eve Holdings Inc. ("Eve") and Bankers Trust
Company, as Trustee ("Bankers Trust"), including the Forms of
Series A Notes and Series B Notes and the Guaranty thereon
(the "Liggett Indenture") (incorporated by reference to exhibit
4(m) in the Company's Form 10-K for the year ended
December 31, 1991, Commission File No. 1-5759).
* 4.15 First Supplemental Indenture, dated January 26, 1994,
including the Form of Series C Variable Rate Senior Secured
Note and the Guaranty thereon (incorporated by reference to
exhibit 4.2 in Liggett's Registration Statement on Form S-1,
Commission File No. 33-75224).
* 4.16 Security Agreement, dated February 14, 1992 among
Liggett, Eve and Bankers Trust (the "Security Agreement")
(incorporated by reference to exhibit 4(n) in the Company's
Form 10-K for the year ended December 31, 1991, Commission
File No. 1-5759).
* 4.17 Amendment No. 1 to the Security Agreement, dated January
26, 1994 (incorporated by reference to exhibit 4.4 in
Liggett's Registration Statement on Form S-1, Commission File
No. 33-75224).
* 4.18 Deed of Trust and Assignment of Rents, Leases and
Leasehold Interests dated February 14, 1992 by Liggett to
Bankers Trust relating to each of the Virginia and North
Carolina properties, (the "Deed of Trust") (incorporated by
reference to exhibit 4(o) in the Company's Form 10-K for the
year ended December 31, 1991, Commission File No. 1-5759).
* 4.19 Amendment No. 1 to the Deed of Trust (North Carolina),
dated January 26, 1994 (incorporated by reference to exhibit
4.6 in Liggett's Registration Statement on Form S-1,
Commission File No. 33-75224).
* 4.20 Amendment No. 1 to the Deed of Trust (Virginia), dated
January 26, 1994 (incorporated by reference to exhibit 4.7 in
Liggett's Registration Statement on Form S-1, Commission File
No. 33-75224).
</TABLE>
<PAGE> 30
27
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
* 4.21 Loan and Security Agreement, dated as of March 8, 1994
in the amount of $40,000,000 between Liggett and Congress
Financial Corporation (incorporated by reference to exhibit
10(yy) in the Company's Form 10-K for the year ended December
31, 1933, Commission File No. 1-5759).
* 4.22 First Amended Joint Chapter 11 Plan of Reorganization for
New Valley Corporation ("New Valley") dated September 27,
1994, Notice of Modification to the First Amended Joint
Chapter 11 Plan of Reorganization dated October 20, 1994 and
Plan Amendment dated October 28, 1994, all as confirmed by
the United States Bankruptcy Court for the District of New
Jersey, Newark Division on November 1, 1994 (incorporated by
reference to exhibit 2 in the Company's Form 10-K for the
year ended December 31, 1993, Commission File No. 1-2493).
* 4.23 Order Confirming First Amended Joint Chapter 11 Plan of
Reorganization for New Valley entered by the Bankruptcy Court
on November 1, 1994 (incorporated by reference to exhibit
99(b) in New Valley's Form 10-Q for the quarterly period
ended September 30, 1994).
* 10.1 Corporate Services Agreement, dated as of June 29, 1990
between Brooke and Liggett (incorporated by reference to
exhibit 10.10 in BGLS's Registration Statement on Form S-1,
Commission File No. 33-47482).
* 10.2 Corporate Services Agreement, dated June 29, 1990
between the Company and Liggett (incorporated by reference to
exhibit 10.11 in Liggett's Registration Statement on Form
S-1, Commission File No. 33-47482).
* 10.3 Services Agreement, dated January 1, 1992 between the
Company and Liggett (the "Liggett Services Agreement")
(incorporated by reference to exhibit 10.13 of Liggett's
Registration Statement on Form S-1, Commission File
No. 33-47482).
* 10.4 First Amendment, dated as of November 30, 1993, between
the Company and Liggett, to the Liggett Services Agreement
(incorporated by reference to exhibit 10.6 of BGLS's
Registration Statement on Form S-1, Commission File
No. 33-93576).
</TABLE>
<PAGE> 31
28
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
* 10.5 Employment Agreement, dated February 21, 1992, between
the Company and Bennett S. LeBow (incorporated by reference
to exhibit 10(xx) in the Company's Form 10-K for the year
ended December 31, 1991).
* 10.6 Employment Agreement, dated June 1, 1994, between Liggett
and Rouben V. Chakalian (incorporated by reference to exhibit
10.13 of Liggett's Registration Statement on Form S-1,
Commission File No. 33-75224).
* 10.7 Tax-Sharing Agreement, dated June 29, 1990, among the
Company, Liggett and certain other entities (incorporated by
reference to exhibit 10.12 in BGLS's Registration Statement
on Form S-1, Commission File No. 33-47482).
* 10.8 Lease with respect to Liggett's distribution center in
Durham, North Carolina, including letter agreement extending
term of Lease (incorporated by reference to exhibit 10.15 in
BGLS's Registration Statement on Form S-1, Commission File
No. 33- 47482).
* 10.9 Tax Indemnity Agreement, dated as of October 6, 1993,
among the Company, Liggett and certain other entities
(incorporated by reference to exhibit 10.2 in SkyBox's Form
10-Q for the quarter ended September 30, 1993, Commission
File No. 0- 22126).
* 10.10 Exchange and Termination Agreement, dated as of
September 30, 1994, among the Company, BGLS, AIF, Artemis
America LLC and Mainstay (incorporated by reference to
exhibit 10(ac) in the Company's Form 8-K dated September 2,
1994, Commission File No. 1-5759).
* 10.11 Exchange Agreement, dated as of November 21, 1995,
among the Company, BGLS, AIF, Artemis Partnership, Tortoise,
Starfire Holding Corporation and Mainstay (incorporated by
reference to exhibit 10.13 in BGLS's Registration Statement
on Form S-4 dated December 19, 1995, Commission File Number
33-80593).
* 10.12 Registration Rights Agreement, dated as of January 1,
1996, among the Company, New Valley, BGLS and Fleet, as
Trustee (incorporated by reference to exhibit 10.14 in BGLS's
Registration Statement on Form S-4 dated December 19, 1995,
Commission File Number 33-80593).
</TABLE>
<PAGE> 32
29
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
* 10.13 Second Amendment to Services Agreement, dated as of
October 1, 1995, by and between Brooke Management Inc., the
Company and Liggett (incorporated by reference to Exhibit
10(c) in BGLS's Form 10-Q for the quarter ended September 30,
1995).
* 10.14 Agreement among BGLS, the Company and High River
Limited Partnership ("High River"), dated October 17, 1995
(incorporated by reference to Exhibit 10(b) in the Company's
Form 10-Q for the quarter ended September 30, 1995).
* 10.15 Letter Agreement among BGLS, the Company and High River
dated November 5, 1995 (incorporated by reference to Exhibit
10(a) in the Company's Form 10-Q for the quarter ended
September 30, 1995).
* 10.16 Termination and Release Agreement, dated as of December 13,
1995, by and between BGLS, Gary Winnick Trust No. 3,
CAL-W Associates and M.D.C. Holdings, Inc. (incorporated by
reference to exhibit 10.18 in BGLS's Registration Statement on
Form S-4 dated December 19, 1995, Commission File Number
33-80593).
* 10.17 Agreement between New Valley and the Company, dated as
of December 27, 1995 (incorporated by reference to exhibit
10.19 in BGLS's Registration Statement on Form S-4 dated
December 19, 1995, Commission File Number 33-80593).
* 10.18 Expense Sharing Agreement, made and entered into as of
January 18, 1995, by and between the Company and New Valley
(incorporated by reference to Exhibit 10(d) in the Company's
Form 10-Q for the quarter ended September 30, 1995).
* 10.19 Stock Option Agreement, dated January 25, 1995, by and
between the Company and Howard M. Lorber (incorporated by
reference to Exhibit 10(g) in the Company's Form 10-K for the
year ended December 31, 1995).
* 10.20 Agreement among the Company, ALKI and High River, dated
October 17, 1995 (the "High River Agreement") (incorporated
by reference to Exhibit 10(d) in the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1995).
</TABLE>
<PAGE> 33
30
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
* 10.21 Letter Amendment, dated October 17, 1995, to the High
River Agreement (incorporated by reference to Exhibit 10(e)
in the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995).
* 10.22 Letter Amendment, dated November 5, 1995, to the High
River Agreement (incorporated by reference to Exhibit 10(f)
in the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995).
* 10.23 Agreement, dated December 28, 1995, between Jefferies,
the Company, BGLS and Liggett (the "Jefferies Agreement")
(incorporated by reference to Exhibit 7 in the Schedule 13D
filed by, among others, the Company with the SEC on March 11,
1996, as amended, with respect to the common stock of RJR
Nabisco Holdings Corp. (the "Schedule 13D")).
* 10.24 Letter Amendment, dated February 28, 1996, to the
Jefferies Agreement (incorporated by reference to Exhibit 7
in the Schedule 13D).
10.25 Amended and Restated Consulting Agreement, dated as of
March 1, 1996, between the Company and Howard M. Lorber.
* 10.26 Settlement Agreement, dated March 12, 1996, by and between
Dianne Castano and Ernest Perry, the putative representative
plaintiffs in Dianne Castano, et al. v. The American Tobacco
Company, Inc. et al., Civil No. 94-1044, United States District
Court for the Eastern District of Louisiana, for themselves and
on behalf of the plaintiff settlement class, and the Company
and Liggett, as supplemented by the letter agreement dated
March 14, 1996 (incorporated by reference to exhibit 13 in the
Schedule 13D).
* 10.27 Settlement Agreement, dated March 15, 1996, by and
among the State of West Virginia, State of Florida, State of
Mississippi, Commonwealth of Massachusetts, and State of
Louisiana and the Company and Liggett (incorporated by
reference to exhibit 15 in the Schedule 13D).
10.28 Stock Purchase Agreement, dated April 3, 1996, among
Liggett-Ducat Ltd. ("LDL"), Belgrave Limited ("Belgrave"),
Edward Z. Nakhamkin ("Nakhamkin") and Brooke (Overseas)
Ltd. ("BOL").
</TABLE>
<PAGE> 34
31
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
10.29 Consulting Agreement, dated April 3, 1996, among BOL,
Belgrave and Nakhamkin.
10.30 Pledge Agreement, dated April 3, 1996, between BOL and
Belgrave.
21 Subsidiaries of the Company.
27 Financial Data Schedule.
* 99.1 Stipulation and Agreement of Compromise and Settlement
in connection with an action in the Court of Chancery of the
State of Delaware in and for New Castle County entitled
Gyetyan v. Bennett S. LeBow et al., Civil Action No. 12998
(incorporated by reference to the Company's Form 8-K dated
June 2, 1994).
</TABLE>
- -------------------
* Incorporated by reference
(B) REPORTS ON FORM 8-K:
The Company filed the following reports on Form 8-K during the fourth
quarter of 1995:
Date Items Financial Statements
---- ----- --------------------
1. October 2, 1995 5,7 None
2. November 27, 1995 5,7 None
3. December 5, 1995 5,7 None
<PAGE> 35
BROOKE GROUP LTD.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995
ITEMS 6, 7, 8, 14(a) (1) AND (2), AND 14(d)
INDEX TO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Management's Discussion and Analysis of Financial Condition
and Results of Operations, Financial Statements and Schedule of the Registrant
and its subsidiaries, required to be included in Items 6, 7, 8, 14(a) (1) and
(2), and 14(d) are listed below:
Page
----
SELECTED FINANCIAL DATA...................................................A-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .......................................B-1
FINANCIAL STATEMENTS:
Brooke Group Ltd.
Report of Independent Accountants................................C-1
Consolidated Balance Sheets as of December 31, 1995
and 1994................................................C-3
Consolidated Statements of Operations for the years
ended December 31, 1995, 1994 and 1993..................C-5
Consolidated Statements of Stockholders' Equity
(Deficit) for the years ended December 31, 1995,
1994 and 1993...........................................C-6
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994, and 1993.................C-7
Notes to Consolidated Financial Statements.......................C-9
<PAGE> 36
FINANCIAL STATEMENT SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts...................C-49
Financial Statement Schedules not listed above have
been omitted because they are not applicable or the required
information is contained in the Company's Consolidated
Financial Statements or accompanying Notes.
New Valley Corporation
Reports of Independent Accountants.................................C-50
Consolidated Balance Sheets as of December 31, 1995
and 1994..................................................C-52
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993..........................C-53
Consolidated Statements of Changes in Non-redeemable Preferred
Shares, Common Shares and Other Capital (Deficit) for the
years ended December 31, 1995, 1994 and 1993..............C-55
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993....................C-56
Notes to the Consolidated Financial Statements.....................C-58
MAI Systems Corporation
Report of Independent Accountants..................................C-82
<PAGE> 37
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the Company's Consolidated Financial Statements and the notes thereto
included elsewhere in this Report.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------------
1995 1994 1993 1992 1991
--------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS INFORMATION
Revenues(1) . . . . . . . . . . . . . . $461,459 $479,343 $493,041 $632,791 $632,151
Restructuring charges . . . . . . . . . (11,913) (2,200)
(Loss) income from continuing operations (45,344) (17,991) (69,228) (7,724) (36,381)
Income (loss) from discontinued
operations(2) . . . . . . . . . . 21,229 174,683 62,001 (232,397) (113,245)
(Loss) income from extraordinary items (9,810) (46,597) 153,741 7,994
Net (loss) income . . . . . . . . . . . (33,925) 110,095 106,780 (232,127) (149,626)
(Loss) income from continuing operations
per share(3) . . . . . . . . . . . . (1.56) (1.02) (4.19) (1.10) (1.98)
Income (loss) from discontinued operations
per share . . . . . . . . . . . . . 1.16 9.92 3.45 (11.01) (4.93)
(Loss) income from extraordinary items
per share . . . . . . . . . . . . . (0.54) (2.65) 8.55 0.38
Net (loss) income per share(3) . . . . (0.94) 6.25 5.60 (11.73) (6.91)
Cash distributions declared per common
share(4) . . . . . . . . . . . . . . 0.30 0.42 0.70
BALANCE SHEET INFORMATION
(AT PERIOD END):
Current assets . . . . . . . . . . . . $ 95,902 $ 87,504 $114,411 $256,160 $299,552
Total assets . . . . . . . . . . . . . 225,620 229,425 164,819 366,206 581,252
CVR liability, short-term(5) . . . . . 44,943
Current liabilities . . . . . . . . . . 119,177 144,351 220,207 493,631 467,019
Notes payable, long-term debt and
other obligations, less current portion 406,744 405,798 389,671 452,188 329,845
Noncurrent employee benefits, deferred
credits and other long-term liabilities 55,803 54,128 69,623 65,332 89,328
CVR liability, long-term(5) . . . . . . 23,971
Minority interest . . . . . . . . . . . 2,150
Preferred stock of subsidiary . . . . . 7,288
Stockholders' equity (deficit) . . . . (356,104) (374,852) (514,682) (644,945) (338,349)
</TABLE>
- -------------------------
(1) Revenues include federal excise taxes of $123,420, $131,877, $127,341,
$147,701 and $171,029, respectively.
(2) See Note 5 to the Company's Consolidated Financial Statements, "Discontinued
Operations".
(3) Per share computations include the impact of New Valley Corporation's
repurchase of the Class A Preferred Shares in 1995 and the impact of the
CVR liability as described in Note 1(q) to the Company's Consolidated
Financial Statements in the years 1993, 1992 and 1991.
(4) Cash dividends declared per common share exclude other distributions. See
Company's Consolidated Statements of Stockholders' Equity (Deficit).
(5) See Notes 13 and 16 to the Company's Consolidated Financial Statements for
information regarding Contingent Value Rights ("CVRs").
A-1
<PAGE> 38
ITEM 7. 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 results of operations,
capital resources and liquidity of the Company and should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto included elsewhere in this report. The operating results of the
periods presented were not significantly affected by inflation. The
consolidated financial statements include the accounts of BGLS, Liggett, BOL,
NV Holdings, other less significant subsidiaries and, as of December 29, 1995,
LDL.
The Company holds an equity interest in New Valley, which sold its money
transfer business in November 1994 and its messaging service business in 1995.
(See Notes 2 and 5 to the Company's Consolidated Financial Statements).
Accordingly, the Company's earnings from discontinued operations for the year
ended December 31, 1994 and 1995 reflect its portion of the gains ($139,935 and
$5,231, respectively) on disposal of those operations. The Company accounts
for its share of earnings based on its ownership of New Valley common and
preferred stock, which at December 31, 1995 was approximately 42% and 56%,
respectively. The common shares are accounted for pursuant to the equity
method; the Class A Preferred Shares and the Class B Preferred Shares (which
Class B shares were acquired in 1995) are accounted for under SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities".
On February 13, 1995, the Company distributed a special dividend of one share
of MAI common stock for every six shares of the Company's common stock (the
"MAI Distribution"). See Note 5 to the Company's Consolidated Financial
Statements.
On October 6, 1993, the Company effected the SkyBox distribution. On March 27,
1995, the Company sold its remaining common shares (593,572) of SkyBox for
$9,284. In addition, on March 29, 1995 SkyBox redeemed the remaining preferred
stock held by the Company in the amount of $4,000 plus accrued dividends.
Results of these entities have been reclassified as discontinued operations for
all periods presented. See Note 5 to the Company's Consolidated Financial
Statements.
For purposes of this discussion and other consolidated financial reporting, the
Company's significant business segments are tobacco and real estate.
RECENT DEVELOPMENTS
Certain Matters Relating to RJR Holdings. On August 28, 1995, New Valley
received approval from the Federal Trade Commission to purchase up to fifteen
percent (15%) of the voting securities of RJR Holdings.
On October 17, 1995, New Valley entered into an agreement, as amended (the
"Agreement"), with High River Limited Partnership ("High River"), an entity
owned by Carl C. Icahn. Pursuant to the Agreement, New Valley sold
approximately 1,600,000 shares of RJR Holdings common stock to High River for
an aggregate purchase price of $51,000 and the parties agreed that New Valley
and High River would each invest up to approximately $150,000 in shares of RJR
Holdings common stock and may invest up to $250,000 in shares of RJR Holdings'
common stock, subject to certain conditions and limitations. Any party to the
Agreement may terminate it at any time, although under certain circumstances,
the terminating party will be required to
B-1
<PAGE> 39
RECENT DEVELOPMENTS (continued)
pay a fee of $50,000 to the nonterminating party. The Agreement also provides
for the parties to make certain other payments to each other under certain
circumstances, including a net profit override to High River equal to 20% of
New Valley's profit in RJR Holdings common stock, after certain expenses as
defined in the Agreement. Similarly, on October 17, 1995, the Company and BGLS
entered into an agreement, as amended (the "High River Agreement"), with High
River.
Pursuant to each of these agreements, the parties agreed to take certain
actions designed to cause RJR Holdings to effectuate an immediate spinoff of
its food business, Nabisco Holdings Corp. ("Nabisco"). Among other things, the
Company agreed to solicit the holders of RJR Holdings common stock to adopt an
advisory resolution approving an immediate spinoff of Nabisco to RJR
stockholders (the "Spinoff Resolution"). Among other things, High River agreed
in the High River Agreement to grant a written consent to, among others, the
Spinoff Resolution with respect to all shares of RJR Holdings common stock held
by it and to grant a proxy with respect to all such shares in the event that
the Company seeks to replace RJR Holdings' incumbent Board of Directors at its
1996 annual stockholders' meeting with a slate of directors committed to effect
the spinoff. The Company and BGLS agreed not to engage in certain transactions
with RJR Holdings (including a sale of Liggett or a sale of its RJR Holdings
common stock to RJR Holdings) and not to take certain other actions to the
detriment of RJR Holdings shareholders. High River also agreed that it would
not engage in such transactions or take such other actions while the agreement
was in effect. In the event that any signatory engages in such transactions or
takes such other actions, the High River Agreement provides that the party so
doing must pay a fee of $50,000 to the other, except under certain limited
circumstances. Any party to the High River Agreement may terminate it at any
time, although under certain circumstances, the terminating party will be
required to pay a fee of $50,000 to the nonterminating party. The High River
Agreement also provides that BGLS pay certain other fees to High River under
certain circumstances.
On November 20, 1995, the Company, acting to preserve its right to nominate a
slate of directors at RJR Holdings' 1996 annual stockholders' meeting,
submitted to RJR Nabisco information with respect to nominees committed to an
immediate spinoff of Nabisco.
On December 27, 1995, New Valley entered into an agreement with the Company
pursuant to which it agreed to pay directly or reimburse the Company and its
subsidiaries for reasonable out-of-pocket expenses incurred in connection with
pursuing the completed consent solicitation and the proxy solicitation
(described below). New Valley has also agreed to pay to BGLS a fee of
20% of the net profit received by New Valley or its subsidiaries from the sale
of shares of RJR Holdings' common stock after New Valley and its subsidiaries
have achieved a rate of return of 20% and after deduction of certain expenses
incurred by New Valley and its subsidiaries, including the costs of the consent
solicitation, the proxy solicitation and of acquiring the shares of common
stock. New Valley has also agreed to indemnify the Company and its affiliates
against certain liabilities arising out of the completed consent solicitation
and the proxy solicitation.
On December 28, 1995, as amended on February 20, 1996 and April 9, 1996, New
Valley, the Company and Liggett engaged Jefferies & Company, Inc.
("Jefferies") as financial advisor in connection with New Valley's investment
in RJR Holdings and the Company's solicitation of consents and proxies from the
shareholders of RJR Holdings. New Valley has (i) paid to Jefferies an initial
fee of $1,500 and (ii) has agreed to pay to Jefferies for the period commencing
January 1, 1996 and ending March 31, 1996 monthly fees of $250 (which increased
to $500 on February 20, 1996) and, in addition, until March 31, 1996, an
additional monthly fee of $100 and, for the month of April, 1996, a fee of
$160. These companies also have agreed to pay Jefferies 10% of the net profit
(up to a maximum of $15,000) with respect to RJR Holdings' common stock
(including any distributions made by RJR Holdings) held or sold by these
companies and their affiliates after
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RECENT DEVELOPMENTS (continued)
deduction of certain expenses, including the costs of the solicitations, the
proxy solicitation and the costs of acquiring the shares of the common stock.
New Valley and the Company agreed to indemnify Jefferies against certain
liabilities arising out of the solicitations.
On December 29, 1995, the Company filed a definitive Consent Statement with the
SEC and commenced solicitation of consents from stockholders of RJR Holdings
seeking, among other things, the approval of the Spinoff Resolution. On March
13, 1996, the Company was informed by the independent inspectors of election
that consents representing 142,237,880 votes (50.58%) were delivered in favor
of the Spinoff Resolution and 150,926,535 votes (53.6%) were delivered in favor
of the Bylaw Amendment. RJR Nabisco announced that it currently had no plans
to contest the outcome of the vote.
As of December 31, 1995, New Valley held approximately 4,900,000 shares of RJR
Holdings common stock with a market value of $150,446. The cost for such
shares and the amount of related margin loan financing were approximately
$149,000 and approximately $75,100, respectively.
On February 29, 1996, New Valley entered into a total return equity swap
transaction with an unaffiliated company (the "Counterparty") relating to
1,000,000 shares of RJR Holdings common stock. 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 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 1,000,000 shares of common stock
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 1,000,000 shares
of common stock, offset by the value of any dividends, provided that, with
respect to approximately 225,000 shares of 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. As of March 29, 1996, New Valley had an unrealized loss on
this swap transaction of approximately $4,200 and had pledged collateral of
approximately $11,800.
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 Holdings incumbent Board of Directors at its
annual meeting of stockholders. As of March 29, 1996, New Valley had expensed
approximately $10,000 for costs relating to the investment in RJR Holdings
common stock, of which approximately $4,000 was expensed in 1995.
As of March 29, 1996, New Valley held approximately 5.2 million shares of RJR
Holdings common stock. As of March 29, 1996, New Valley's costs for such
shares and the amount of related margin loan financing were approximately
$158,000 and approximately $83,500, respectively. As of March 29, 1996, New
Valley had an unrealized loss of $2,082 on its investment in RJR Holdings
common stock.
New Valley. On January 11, 1996 a subsidiary of New Valley made a $10,600
convertible bridge loan to finance Thinking Machines, 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.
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<PAGE> 41
RECENT DEVELOPMENTS (continued)
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 quarter of 1996, New Valley repurchased 72,104 Class A Preferred
Shares for a total amount of $10,530. The Company now owns 59.72% of the New
Valley Class A Preferred Shares.
For fiscal years beginning after December 15, 1995, the Company will be
required to review long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable, in accordance with the provisions of SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
The Company does not anticipate a significant effect on its results of
operations or its financial position from the adoption of SFAS 121.
RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY
Pricing Activity.
The United States cigarette industry had three or more list price tiers from
1989 to 1993, and as of 1993 had three list price tiers - premium, branded
discount and generic. Cigarette prices in all tiers were raised several times
annually, with the price differentials between the tiers increasing. Between
March 1991 and November 1992, the price gap between premium and generic
cigarettes increased from $.49 to $.76 per pack. As a result, during
1992 and continuing into the first half of 1993, the discount segment (branded
discount and generic) increased market share from 24.9% to 35.8%.
In July 1993, the two largest cigarette manufacturers announced significant
changes in their list pricing structure and reduced the price of premium
cigarettes by $.40 per pack to 1989-90 levels. They further announced
that certain retail and trade discounts offered on certain discount cigarettes
would be discontinued, resulting in a net price increase for those brands.
Subsequently, the remaining cigarette manufacturers announced price changes
identical to those of the two industry leaders. These changes consolidated the
lower two price tiers into one list price tier and significantly reduced the
price gap between premium and discount cigarettes from 43% to 24.5%. Other
cigarette manufacturers and Liggett had a general list price increase in
November 1993. There were no list price changes in 1994.
On May 5, 1995, RJR initiated a list price increase on all brands of $.30 per
carton. Philip Morris and B&W, which together with RJR comprise 90% of the
market, matched the price increase on the same day. Liggett followed on May 9,
1995.
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.
Legislation and Litigation.
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. 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 class actions. These developments generally
receive
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RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY (continued)
widespread media attention. Liggett is not able to evaluate the effect of
these developing matters on pending litigation or the possible commencement of
additional litigation, but it is possible that Liggett's financial position,
results of operations and cash flows could be materially adversely affected by
an ultimate unfavorable outcome in any of such pending litigation. See Note 16
to the Company's Consolidated Financial Statements for a description of legal
proceedings.
The Omnibus Reconciliation Act of 1993 ("OBRA") required United States
cigarette manufacturers to use at least 75% domestic tobacco in the aggregate
of the cigarettes manufactured in the United States, effective January 1, 1994,
on an annualized basis or pay a "marketing assessment" based upon price
differentials between foreign and domestic tobacco and, under certain
circumstances, make purchases of domestic tobacco from the tobacco
stabilization cooperatives organized by the United States government. OBRA was
repealed retroactively (as of December 31, 1994) coincident in time with the
recent issuance of a Presidential proclamation effective September 13, 1995,
imposing tariffs on imported tobacco in excess of certain quotas.
On February 14, 1995, Liggett filed with the Department of Agriculture its
certification as to usage of domestic and imported tobaccos during 1994 and an
audit was commenced during August 1995 to verify this certification. Liggett
has received from the Department of Agriculture the results of the audit, which
states that Liggett did not satisfy the 75% domestic tobacco usage requirement
for 1994 and, therefore, may be subject to a marketing assessment estimated at
approximately $5,500, which amount is disputed by Liggett. It is the
understanding of Liggett that the levels of domestic tobacco inventories
currently on hand at the tobacco stabilization organizations are below reserve
stock levels, and for such reason, Liggett is of the opinion that it will not
be obligated to make such purchases of domestic tobacco from the tobacco
stabilization cooperatives. Liggett is currently engaged in negotiations with
the Department of Agriculture to resolve this matter on satisfactory terms. At
December 31, 1995 Liggett has accrued approximately $4,900 representing its
best estimate of its obligation for the Department of Agriculture marketing
assessment. The charge is included as a component of cost of sales in 1995.
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 prohibitive tariffs on imports of flue-cured and
burley tobaccos 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
materially adverse effect on Liggett. Liggett believes it is unlikely that an
end-user licensing system will be adopted because it would likely lead to
another GATT proceeding. The end-user licensing system has not been authorized
by legislation and it could create significant problems for United States
exports in other product markets. However, no assurances can be made that an
end-user licensing system will not be adopted.
In January 1993, the United States Environmental Protection Agency (the "EPA")
released a report on the respiratory effect of Environmental Tobacco Smoke
("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,
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RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY (continued)
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 Food and Drug Administration (the "FDA") has announced that it is
considering classifying tobacco as a drug, and an FDA advisory panel has stated
that it believes nicotine is addictive. On August 10, 1995, the FDA announced
that it intended to propose regulations (the "Proposed Rule-Making") under
which the FDA would assert jurisdiction over the manufacture and marketing of
tobacco products. Liggett and the other major manufacturers in the industry
responded by the filing of 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 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
the certain actions brought against Liggett by such states. In these two
settlements, Liggett and the Company, while neither consenting to FDA
jurisdiction nor waiving their objections thereto, agreed to withdraw their
objections and opposition to the Proposed Rule-Making and to phase in
compliance with certain of the proposed interim FDA regulations. See
discussions of the Castano and Attorneys General settlements appearing
hereinafter.
The settlement of the Castano class action 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 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 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 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
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<PAGE> 44
RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY (continued)
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 the prosecution of such civil
action against the Company and Liggett.
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 enters into any such transaction, then the Castano
Plaintiffs will be entitled to receive $250,000 within thirty days from the
transacting party.
In 1994, four class action lawsuits were brought against Liggett and other
cigarette manufacturers, representing the first time class actions were brought
against the cigarette industry. In the three cases which remain pending
against the industry, plaintiffs' motions for class certification were granted
in whole or in part, and the defendants have appealed each of these rulings.
In two of these cases, the rulings of the trial courts certifying a class have
been affirmed by an intermediate appellate court. In both of these cases,
defendants have filed petitions for rehearing, for rehearing en banc, and for
further discretionary appellate review.
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). This statute purportedly abrogates certain
defenses typically available to defendants. This legislation would impose on
the tobacco industry, if ultimate liability of the industry is established in
litigation, liability based upon market share for such payments made as a
result of such smoking-related diseases. Although a suit has been commenced to
challenge the constitutionality of the Florida legislation, no assurance can be
given that it will be successful. On May 6, 1995, the Florida legislature
voted in favor of a bill to repeal this legislation, but the Governor of
Florida vetoed this repealer bill. On March 13, 1996, the Florida legislature
considered taking certain action to override the veto of the repealer bill if
the requisite vote could be attained, but decided not to take formal action
when it was determined that it could not attain the requisite vote. On
February 22, 1995, suit was commenced pursuant to the above-referenced enabling
statute by the State of Florida acting through the Agency for Health Care
Administration against Liggett and others, seeking restitution of monies
expended in the past and which may be expended in the future by the State of
Florida to provide health care to Medicaid recipients for injuries and ailments
allegedly caused by the use of cigarettes and other tobacco products.
Plaintiffs also seek a variety of other forms of relief including a
disgorgement of all profits from the sale of cigarettes in Florida.
The States of Mississippi, Minnesota, West Virginia, Massachusetts, Louisiana
and Texas also have brought actions against Liggett and other cigarette
manufacturers seeking restitution and indemnity for certain Medicaid costs
allegedly incurred as a result of tobacco-related illnesses. Other states are
contemplating initiating similar litigation.
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RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY (continued)
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 recent ruling, the
trial court has 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 of such a civil action by the Attorney General of
the state was and is outside the authority of the Attorney General.
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 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.
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 transaction by 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 transaction with another
defendant in the lawsuits within three years of the date of the settlement. At
December 31, 1995, the Company has accrued approximately $4,000 for the
settlement with the Attorneys General.
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<PAGE> 46
RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY (continued)
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.
RESULTS OF OPERATIONS
1995 compared to 1994
Revenues. Consolidated revenues were $461,459 for the year ended December 31,
1995 compared to $479,341 for the year ended December 31, 1994, a decrease of
$17,882 primarily due to a decline in sales at Liggett and other less
significant subsidiaries. Net sales at Liggett were $455,666 for the year
ended December 31, 1995 versus $465,676 for the same period for the prior year.
This 2.1% decrease in revenues was primarily due to a 5.6% decrease in unit
sales volume, partially offset by the effects of the May 9, 1995 list price
increase. See "Recent Developments in the Cigarette Industry - Pricing
Activity" for a discussion of the May 1995 increase in selling prices. The
decrease in unit sales volume was comprised of decreases in the premium,
discount and military categories, partially offset by an increase in the
international category. Both premium and discount products suffered a
temporary decline in volume as a result of the implementation of a new
distribution and marketing program in one of Liggett's sales zones during 1995.
Also, heavy discounting of a competitor's product within the premium segment
contributed to the premium volume decline. The decrease in discount volume was
due to decreases in generic and branded discount brands as a result of
leveraged rebate programs tied to the premium products of other cigarette
manufacturers and trade and promotional programs for new brands offered by
competitors on branded discount products. The decrease in discount volume was
partially offset by the continued growth of Liggett's control label brands
since their introduction in 1993. The decrease in the military volume is
primarily due to heavy discounting of a competitor's product within this
category. The overall decline in unit sales volume would have been much
greater except for aggressive trade programs offered near the end of the fourth
quarter of 1995. The effects of these trade programs may have a negative
impact on sales in future periods.
Gross Profit. Consolidated gross profit of $245,272 for the year ended
December 31, 1995 decreased $4,266 from gross profit of $249,538 for the same
period in 1994, reflecting a decrease in gross profit at smaller subsidiaries
somewhat offset by Liggett which had a slight increase in gross profit ($450)
for the year ended December 31, 1995 compared to the same period in the prior
year. Gross profit at Liggett as a percent of revenue (excluding federal
excise taxes) for the period increased to 73.2% compared to 72.8% for the prior
year, due primarily to the May 9, 1995 list price increase and lower per unit
cost of sales. The reduction in cost of sales is a result of the effects of
Liggett's continuing cost reduction programs begun in 1993. Liggett expects to
continue its cost reduction programs. The cost reductions were offset by the
accrual of approximately $4,900 representing Liggett's best estimate of its
obligation for the Department of Agriculture marketing assessment. See "Recent
Developments in the Cigarette Industry - Legislation and Litigation" for a
discussion of the Department of Agriculture marketing assessment.
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<PAGE> 47
RESULTS OF OPERATIONS (continued)
Expenses. Consolidated selling, general and administrative expenses were
$237,212 for the year ended December 31, 1995 compared to $235,374 for the same
period for the prior year, an increase of $1,838. The increase was primarily
caused by increased spending on trade and promotional programs at Liggett to
combat heavy competition by other cigarette manufacturers for unit sales volume
along with the accrual of approximately $4,000 for the settlement of certain
tobacco litigation. Such increases were partially offset by expense reductions
at corporate which, in 1994, included charges of $7,500 for debt restructuring
and $7,682 of stock compensation expense. See "Recent Developments in the
Cigarette Industry - Legislation and Litigation" for a discussion of the
settlement of certain tobacco litigation. Expenses in 1995 were only partially
offset by the net effects of the 1995 restructuring at Liggett discussed above.
Other Income (Expense). Consolidated interest expense was $57,505 for the
year ended December 31, 1995 compared to $55,952 for the same period for the
prior year. The increase of $1,553 relates to the incurrence of additional
indebtedness by the Company for the Series 1 Notes (which were redeemed on June
12, 1995), increases in the interest rate on the Series 1 Notes and the Series
2 Notes from February 1 through September 6, 1995 (or, in the case of the
Series 1 Notes, through June 12, 1995) and an increase in the interest rate of
the Liggett Series C Notes, which were reset from 16.50% to 19.75% on February
1, 1995 as well as the issuance of additional Series C Notes in November 1994,
such notes being outstanding for all of 1995.
Loss from Continuing Operations. The loss from continuing operations for the
year ended December 31, 1995 was $45,344 compared with a loss of $17,991 for
the same period in the prior year. A tax provision of $342 in 1995 relating to
state income taxes at the subsidiary level increased the 1995 loss while the
loss in 1994 was mitigated by a tax benefit of $24,487 related to the
completion of an audit by the Internal Revenue Service through December 31,
1991.
Other. At December 31, 1995, the Company and its consolidated group had net
operating loss carryforwards for tax purposes of approximately $135,000 which
may be subject to certain restrictions and limitations and which will generally
expire in 2006 and 2009.
Discontinued Operations. Income of discontinued operations of $21,229 for the
year ended December 31, 1995 and $174,683 for the prior year reflects the
redemption/sale of SkyBox preferred and common stock and the sale of New
Valley's message servicing business in 1995 and the redemption/sale of SkyBox
preferred and common stock and New Valley's money transfer business in 1994.
1994 compared to 1993
Revenues. Net revenues for the year ended December 31, 1994 were $479,343 as
compared with $493,041 for the year ended December 31, 1993. Of the
approximately $13,700 decline, $7,700 is attributable to declines in revenues
at Liggett, and $6,000 reflects declines at other, less significant
subsidiaries.
Liggett's net sales were $465,676 for the year ended December 31, 1994 versus
$473,393 last year. This 1.6% decrease in revenues was primarily due to a 5.9%
increase in unit sales, offset by a 7.1% decline in selling prices and the
effects of the change in sales mix. See "Recent Developments in the Cigarette
Industry - Competitive Activity" for a discussion on the decrease in selling
prices in mid 1993. The increase in unit sales volume was comprised of an
increase in the price/value cigarette segment (8.5%), partially offset by a
decline in the full-price branded segment (8.0%). The increase in price/value
cigarette volume was comprised of increases in control label brands partially
offset by decreases in generic and branded discount volume. The decrease in
generic volume was primarily due to the loss of significant accounts to other
cigarette manufacturers who used their greater resources by leveraging rebate
programs tied to their full-price products and by providing large up-front
payments which Liggett was
B-10
<PAGE> 48
RESULTS OF OPERATIONS (continued)
unable to match. The increase in price/value cigarette volume is a reflection
of Liggett's renewed emphasis on the price/value segment. The historical
decline in full-price branded and branded discount unit sales volume was slowed
during the current year due to expanded retail base coverage, reduced selling
prices and more effective promotional programs.
Gross Profit. Consolidated gross profit was $249,536 for the year ended
December 31, 1994 compared to $259,655 for the same period last year. This
$10.1 million decrease is largely due to a decrease of $13.2 million at Liggett
offset by improved margins at less significant subsidiaries.
Gross profit at Liggett was $242,902 for the year ended December 31, 1994, a
decrease of $13,243 from $256,145 last year. Gross profit as a percentage of
revenues (excluding federal excise taxes) for the year decreased to 72.8%
compared to 74.0% for 1993, due primarily to sales mix and reduced selling
prices, partially offset by lower per unit cost of sales. There were no list
price changes in 1994.
Expenses. Consolidated operating, selling, general and administrative expenses
were $235,374 compared to $256,902 for the years ended December 31, 1994 and
1993, respectively. This decrease of $21.5 million from the prior year
reflects reductions made at the corporate level and at Liggett in 1993, in
which the Company took restructuring charges totaling $11.9 million. At
Liggett, the reduction primarily results from lower marketing costs which
include product price decreases and reorganization of the sales force. These
1994 decreases at Liggett were offset by corporate charges for debt
restructuring of $7,500, stock compensation expense of $7,682 and pension
curtailment of $691.
Other Income (Expense). Consolidated interest expense was $55,952 and $54,915
for the years ended December 31, 1994 and 1993, respectively. The increase in
interest expense was primarily due to the issuance of Series C Notes at Liggett
partially offset by lower outstanding revolver balances.
Loss from Continuing Operations. Loss from continuing operations in the year
ended December 31, 1994 was $17,991 as compared to a loss of $69,228 in 1993.
A tax benefit of $24,200 which relates to the completion of an audit by the
Internal Revenue Service through December 31, 1991 mitigated 1994 losses.
There was no tax benefit for 1993 as operating losses were required to be
carried forward and realization is not assured due to historical losses.
CAPITAL RESOURCES AND LIQUIDITY
Net cash used in operations for the year ended December 31, 1995 was $22,936
compared to net cash used in operations of $44,060 for the comparable period of
1994. The net loss for the year ended December 31, 1995 of $33,925 includes
interest expense of $57,505. An increase in liabilities for various legal
settlements, debt issuance costs and unearned revenue and a decrease in
receivables were offset by an increase in inventory levels and the impact of
non-cash adjustments for discontinued operations. In 1994, net income of
$110,095 was due principally to earnings from discontinued operations at New
Valley and SkyBox of $113,515. Other non-cash income included a tax benefit of
$24,487 in which the Company adjusted its reserves upon completion of an audit
by the Internal Revenue Service. This non-cash income was offset by cash
interest payments of $39,429. For the year ended December 31, 1993, net cash
provided by operations was $21,950. Net income of $106,574 was generated
primarily by MAI, now a discontinued operation. With regard to MAI, non-cash
extraordinary items amounted to $110,892 of its income. In addition, other
non-cash income relates to the Company's extraordinary gain on early
extinguishment of debt principally resulting from the repurchase of its 15.501%
Junior Subordinated Secured Notes from Liberty Service Corporation. These
non-cash income items were offset by interest
B-11
<PAGE> 49
CAPITAL RESOURCES AND LIQUIDITY (continued)
paid of $56,217. The decrease in cash in 1994 when compared to 1993 was
further caused by increased trade receivables resulting from December sales,
increased inventories resulting from increased customer demands in 1994 as
compared with a decrease in receivables and inventories in 1993.
The positive effects on cash flow from operations expected to result from the
April 1996 price increase at Liggett discussed above, and Liggett's 1995
restructuring program will be offset by increased tobacco costs, the Department
of Agriculture marketing assessment and settlement of certain tobacco
litigation ($1,000 paid on March 22, 1966). Further, the settlement agreement
commits Liggett to pay legal fees to the plaintiffs' attorneys in the Castano
class action. In addition, the aggressive trade programs offered near the end
of the fourth quarter of 1995 may have a negative impact on cash flows in
future periods.
Net cash provided by investing activities was $66,874 for the year ended
December 31, 1995 compared to cash provided by investing activities of $23,861
for the same period in 1994. In the year ended December 31, 1995, cash was
provided through dividends from New Valley on the Class A Preferred Shares held
by NV Holdings in the total amount of $61,832, the redemption of SkyBox
preferred stock for $4,000 and the sale of the SkyBox common stock for $9,282.
These amounts were offset by capital expenditures, particularly for leasehold
improvements related to real estate development in Russia. At Liggett, capital
expenditures in 1995, 1994 and 1993 to maintain production facilities and for
operational efficiencies at Liggett were minimal although Liggett projects
capital expenditures of $3,600 for 1996. Liggett's management believes capital
expenditures have declined because of significant equipment modernization
occurring in the 1980s and early 1990s and the effects of lower unit sales and
does not anticipate that Liggett's future operations will be adversely affected
by this decline. Liggett's management expects to fund its cash requirements
with cash flows from operations, borrowings under the credit facility and
proceeds from realty.
On April 9, 1996, Liggett executed a definitive agreement for the sale of
certain surplus realty for a sale price of $4,300. It is anticipated that
closing will occur on or before May 31, 1996.
In the year ended December 31, 1994, cash provided by investing activities was
largely the result of the sale/redemption of SkyBox common and preferred stock
(approximately $29,000) offset by the impact of the Company's discontinuation
of its investment in MAI. In 1993, cash provided of $5,222 included proceeds
from the redemption of SkyBox preferred stock and the sale of other assets
which were offset by the impact of discontinued operations including the effect
of changing to the equity method of accounting for SkyBox ($16,078).
Cash used in financing activities for the year ended December 31, 1995 was
$44,794 reflecting the redemption of the Series 1 Notes on June 12, 1995 in the
amount of $23,594, repayments and redemptions of Liggett's long-term debt of
$7,983, repayments under Liggett's revolver of $3,830, distributions by the
Company of $5,475 to shareholders and a decrease in cash overdraft of $594
partially offset by proceeds from debt of $2,343. Cash flows provided by
financing activities in 1994 was $8,765 as compared with cash used in 1993 of
$30,022. Proceeds from financing activities in 1994 included proceeds from
issuance of the Liggett Series C Notes by Liggett, stockholder loan repayments
with interest offset principally by decreases in cash overdrafts and payment of
Series G Preferred dividends.
Cash was used in financing activities in 1993 to repurchase bonds, repay debt,
pay Series G Preferred dividends, purchase treasury stock and in discontinued
operations. This was offset by the return of Contingent Value Rights ("CVR")
collateral and an increase in cash overdraft.
At December 31, 1995 and 1994, the Company's own long-term debt was
approximately $238,000 and $261,000, respectively. The decrease was due to the
redemption of the Series 1 Notes in the amount of $23,594 in June 1995. The
outstanding debt at year end 1993 was $236,000.
B-12
<PAGE> 50
CAPITAL RESOURCES AND LIQUIDITY (continued)
Exchange Agreement. On November 21, 1995, the Company, BGLS and the Majority
Security Holders (as defined therein) entered into an Exchange Agreement (the
"1995 Exchange Agreement") pursuant to which BGLS agreed to undertake the 1995
Exchange Offer and the Majority Security Holders agreed to tender in the 1995
Exchange Offer the Series 2 Notes and Subordinated Debentures owned by them and
to consent to the Proposed Amendments to the Subordinated Debenture Indenture,
in each case, subject to certain conditions. BGLS incurred expenses of
approximately $9,700 related to the 1995 Exchange Offer which was consummated
on January 30, 1996. At March 31, 1996, substantially all corporate long-term
debt of BGLS had been exchanged for the 15.75% Senior Secured Notes due 2001
(the "Senior Notes") with the exception of the Reset Notes which were redeemed
in full on March 29, 1996 and $800 of Subordinated Debt. In accordance with the
terms of the 1995 Exchange Agreement, the Sixth Supplemental Indenture to the
Subordinated Debenture Indenture which essentially removed all covenants under
the original Indenture was effected. Interest on the Senior Secured Notes
($232,868 principal amount outstanding) is payable on July 31 and January 31 of
each year, except in 1996 when interest payable on July 31 will cover the
period from October 1, 1995 through July 31, 1996 in a total amount of
approximately $29,000. Of the total principal amount outstanding at March 31,
1996, $7,397 of the Senior Notes were issued in March 1996 with the proceeds
used to redeem the Reset Notes together with accrued interest as mentioned
above. The Senior Notes Indenture contains certain covenants which include but
are not limited to limitations on transactions with affiliates that exceed
$2,000 in any year subject to certain exceptions which include payments to the
Company not to exceed $6,500 for payments of permitted operating expenses,
payment of the Chairman's salary, bonus and certain expenses and payments of up
to $6,000 per year. Substantially all of the BGLS' assets including
investments in all of its wholly-owned subsidiaries and any securities of New
Valley owned by BGLS and its subsidiaries collateralize the Senior Notes.
Pursuant to the 1994 Exchange and Termination Agreement, the Majority Security
Holders exchanged notes held by them from certain prior agreements for Series 1
Notes which were redeemed by BGLS in June 1995. In addition, the same 1994
Exchange and Termination Agreement provided for the exchange of the Reset Notes
for the Series 2 Notes. At December 31, 1994, only $5,670 (redeemed in 1996,
see above) of the Reset Notes remained outstanding.
The interest rate on the Series 1 and Series 2 Notes (the "Notes") was 13.75%
per annum, payable April 1 and October 1. Pursuant to the Notes Indentures and
the terms of the Notes, the interest rate on the Notes increased until, in the
case of the Series 1 Notes, they were redeemed or, as to the Series 2 Notes, a
registration statement with respect to resales of the Series 2 Notes was
declared effective by the SEC on September 7, 1995. As a result, interest on
the Notes during the interest period from October 3, 1994 through September 30,
1995 reflected a blended rate of 14.17% per annum.
The amount that may be borrowed by Liggett under the Liggett Revolving Credit
Facility (the "Facility") is determined by the amount of eligible inventory and
receivables (as determined in good faith by the lenders) up to a maximum of
$40,000. Availability under the Liggett Facility at December 31, 1995 was
$13,340 based on eligible collateral at December 31, 1995. The Liggett
Facility is collateralized by all inventories and receivables of Liggett.
Borrowings under the Liggett Facility bear interest at a rate equal to 1.5%
above Philadelphia National Bank's prime rate which was 8.75% at December 31,
1995. The Liggett Facility requires Liggett's compliance with certain
financial and other covenants. The Liggett Facility also limits the amount of
dividends and distributions by Liggett. At December 31, 1995, Liggett was in
compliance with all debt covenants under the facility. Liggett anticipates
that the facility will be refinanced with substantially similar terms in March
1997 although there can be no assurance that this will be accomplished.
Management believes that the facility, along with cash flows from operations
will continue to adequately address Liggett's liquidity requirements.
B-13
<PAGE> 51
CAPITAL RESOURCES AND LIQUIDITY (continued)
On January 31, 1994, Liggett issued a total of $22,500 of the Liggett Series C
Notes. Liggett received $15,000 from the issuance in cash and received $7,500
in Liggett Series B Notes which were credited against the mandatory redemption
requirements of Liggett Series B Notes required under the indenture for
February 1, 1994. Liggett used the cash proceeds to satisfy working capital
needs, which included payment of interest related to Liggett Series B Notes of
$8,172. The Liggett Series C Notes have the same terms (other than interest
rate) and stated maturity as the Liggett Series B Notes. The Liggett Series C
Notes bore a 16.5% interest rate, which was reset on February 1, 1995 to
19.75%. Liggett had received the necessary consents from the required
percentage of holders of its Liggett Series B Notes allowing for an aggregate
principal amount up to but not exceeding $32,850 of notes to be issued under
the Liggett Series C Indenture. In connection with the consents, holders of
Liggett Series B Notes received Liggett Series C Notes totaling 2% of their
current Liggett Series B Note holdings. The total principal amount of such
Liggett Series C Notes issued was $2,842. On November 20, 1994, Liggett issued
the remaining $7,508 of Liggett Series C Notes in exchange for an equal amount
of Liggett Series B Notes and cash of $375. The Liggett Series B Notes were
credited against the mandatory redemption requirements for February 1, 1995.
On February 14, 1992, Liggett issued $150,000 in Senior Secured Notes (the
"Liggett Series B Notes"). Interest on the Liggett Series B Notes is payable
semiannually on February 1 and August 1 at an annual rate of 11.5%. The
Liggett Series B Notes and Series C Notes referred to below (collectively, the
"Liggett Notes") require mandatory principal redemptions of $7,500 on February
1 in each of the years 1993 through 1997 and $37,500 on February 1, 1998 with
the balance of the Liggett Notes due on February 1, 1999. The Liggett Notes are
collateralized by substantially all of the assets of Liggett, excluding
accounts receivable and inventory. Eve is guarantor for the Liggett Notes. The
Liggett 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 Liggett at any time on or after February 1,
1996. The Liggett Notes contain restrictions on Liggett's ability to declare or
pay cash dividends, incur additional debt, grant liens and enter into any new
agreements with affiliates, among others. At December 31, 1995, Liggett was in
compliance with all debt covenants under the Liggett Notes indentures.
In December 1995, $7,000 of Liggett Series B Notes were purchased using
revolver availability and credited against the mandatory redemption
requirements for February 1, 1996. The transaction resulted in a net gain of
$1,114. The remaining $500 mandatory redemption requirement for February 1,
1996 was met by retiring the $500 Series C Notes held in treasury. Liggett
anticipates that the 1997 mandatory redemption will be funded by cash flows
from operations and borrowings under the facility. There are no definite plans
as yet for funding the 1998 mandatory redemption requirement.
As of December 31, 1995, Liggett had a net capital deficiency of $154,706 and
is highly leveraged. Due to the many risks and uncertainties associated with
the cigarette industry, impact of recent tobacco litigation settlements and
anticipated 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 revolving credit facility or senior secured notes
indentures or refuse to lend under the revolving credit facility, Liggett would
not be able to satisfy such demands or its working capital requirements.
In October 1995, LDL entered into a loan agreement with the Russian Federation
Foreign Trade Bank, located in Moscow, Russia, to borrow up to $20,000 to fund
real estate development. Interest on the note is based on the London
Interbank Offered Rate ("LIBOR") plus 10%. Principal repayments are due over
the period April through October of 1997. The loan agreement was arranged
through an outside third party for a net fee of $4,044 payable ratably over the
term of the loan. Brooke has guaranteed the payment of the note
B-14
<PAGE> 52
CAPITAL RESOURCES AND LIQUIDITY (continued)
and the broker's fee. The bank has requested that the stock of BrookeMil Ltd.
("BrookeMil"), a wholly-owned subsidiary of LDL, be pledged as collateral for
the loan. LDL intends to repay the loan out of proceeds from leased office
space.
Liggett (and, in certain cases, the Company) and other United States cigarette
manufacturers have been named as defendants in a number of direct and
third-party actions (and purported class actions) predicated on the theory that
they should be liable for damages from cancer and other adverse health effects
alleged to have been caused by cigarette smoking or by exposure to so-called
secondary smoke (environmental tobacco smoke) from cigarettes. As new cases
are commenced, the costs associated with defending such cases and the risk
attendant on the inherent unpredictability of litigation continue. To date, a
number of such actions, including several against Liggett, have been disposed
of favorably to the defendants; no plaintiff has ultimately prevailed for
recovery of damages in any such action. For discussion of recent settlements
see "Recent Developments in the Cigarette Industry - Legislation and
Litigation" and Note 16 to the Consolidated Financial Statements.
Liggett believes, and has been so advised by counsel handling the respective
cases, that Liggett has a number of valid defenses to the claim or claims
asserted against it. Litigation is subject to many uncertainties, and it is
possible that some of these actions could be decided unfavorably. An
unfavorable outcome of a pending smoking and health case could encourage the
commencement of additional similar litigation. Recently, there have been a
number of adverse regulatory, political and other developments concerning
cigarette smoking and the tobacco industry, including the commencement of the
purported class actions referred to above. These developments generally
receive widespread media attention. Neither the Company nor Liggett is able to
evaluate the effect of these developing matters on pending litigation or the
possible commencement of additional litigation.
Liggett is unable to make a meaningful estimate of the amount or range of loss
that could result from an unfavorable outcome of the cases pending against
Liggett. It is possible that Liggett's financial position, results of
operations or cash flows could be materially affected by an ultimate
unfavorable outcome in any such pending litigation.
The 1995 Exchange Offer was initiated to, among other things, extend the
maturities of BGLS' debt to better accommodate BGLS' working capital
requirements and cash flow. Prior to the 1995 Exchange Offer, BGLS had
substantial near-term debt service requirements, with aggregate required
principal payments of $318,106 due in the years 1995 through 1998. 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. The Company believes
that it will have sufficient liquidity for 1996. Company expenditures
(exclusive of Liggett and LDL) in 1996 include debt service estimated at
$29,000. Redemption of the remaining Reset Notes was effectuated on March 29,
1996 through use of proceeds from the sale of an additional $7,397 of Series A
Notes on March 4, 1996. Current operations are being financed with management
fees and other charges to subsidiaries of approximately $5,000. In March 1996,
New Valley declared a dividend on its Class A Preferred Shares in which NV
Holdings received $6,183. Distributions to BGLS and the Company are limited by
terms of the Senior Notes Indenture as described above. 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, 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.
B-15
<PAGE> 53
CAPITAL RESOURCES AND LIQUIDITY (continued)
For information concerning possible regulation under the Investment Company
Act, see Note 2 to the Company's Consolidated Financial Statements. See also,
Item 1, "Business - Investment in New Valley - Miscellaneous Investments".
B-16
<PAGE> 54
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Brooke Group Ltd.
We have audited the accompanying consolidated balance sheets of Brooke Group
Ltd. and Subsidiaries (the "Company") as of December 31, 1995 and 1994 and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
MAI Systems Corporation ("MAI"), a discontinued subsidiary (Note 5), which
statements reflect total liabilities comprising 5% of consolidated total
liabilities at December 31, 1994, and net income comprising 4% and 114% of
consolidated net income for the years ended December 31, 1994 and 1993,
respectively. Further, we did not audit the financial statements of New Valley
Corporation ("New Valley") for the years ended December 31, 1994 and 1993, the
investment in which is being accounted for by the Company using the equity
method of accounting (Note 2). The Company's investment in New Valley
represents 43% of consolidated total assets at December 31, 1994. The equity
in the net income of New Valley represents 85% and 0% of consolidated net
income for the years ended December 31, 1994 and 1993, respectively. Those
statements were audited by other auditors whose reports have been furnished to
us and our opinion on the consolidated financial statements, insofar as it
relates to the amounts included for MAI and New Valley, are based soley upon
the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Brooke Group Ltd. and
Subsidiaries at December 31, 1995 and 1994 and the consolidated results of
their operations and their cash flows for each of three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, in 1993 the
Company changed its method of accounting for postretirement benefits other than
pensions to conform with Statement of Financial Accounting Standards No. 106.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Miami, Florida
April 15, 1996
C-1
<PAGE> 55
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Brooke Group Ltd.
Our report on the consolidated financial statements of Brooke Group Ltd. and
Subsidiaries is included on Page C-1 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule on page C-49 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Miami, Flordia
April 15, 1996
C-2
<PAGE> 56
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
--------------------------------
December 31,
--------------------------------
1995 1994
--------------------------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 3,370 $ 4,276
Accounts receivable - trade . . . . . . . . . . . . . . . . 23,844 31,325
Other receivables . . . . . . . . . . . . . . . . . . . . . 1,448 1,558
Receivables from affiliates . . . . . . . . . . . . . . . . 1,502
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 60,522 47,098
Deferred tax assets . . . . . . . . . . . . . . . . . . . . 1,061
Other current assets . . . . . . . . . . . . . . . . . . . 4,155 3,247
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . 95,902 87,504
Property, plant and equipment, at cost, less accumulated
depreciation of $27,868 and $24,460 . . . . . . . . . . . . 49,065 25,806
Intangible assets, at cost, less accumulated amortization
of $15,679 and $13,936 . . . . . . . . . . . . . . . . . . 5,453 6,728
Investment in affiliate . . . . . . . . . . . . . . . . . . . . 63,901 97,520
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 11,299 11,867
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . $225,620 $229,425
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
C-3
<PAGE> 57
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
--------------------------------
December 31,
--------------------------------
1995 1994
--------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Notes payable and current portion of long-term debt . . . . . . $ 2,387 $ 26,491
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 22,762 12,415
Cash overdraft . . . . . . . . . . . . . . . . . . . . . . . . 4,266 4,860
Accrued promotional expenses . . . . . . . . . . . . . . . . . 25,519 29,853
Accrued taxes payable . . . . . . . . . . . . . . . . . . . . . 25,928 23,905
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . 16,863 17,201
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . 131
Net current liabilities of business held for disposition . . . 4,974
Other accrued liabilities . . . . . . . . . . . . . . . . . . . 21,452 24,521
------- -------
Total current liabilities . . . . . . . . . . . . . . . . . . 119,177 144,351
Notes payable, long-term debt and other obligations, less current
portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 406,744 405,798
Noncurrent employee benefits . . . . . . . . . . . . . . . . . . 31,672 31,119
Net-long term liabilities of business held for disposition . . . 23,009
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 24,131
Commitments and contingencies . . . . . . . . . . . . . . . . . .
Stockholders' equity (deficit):
Preferred Stock, par value $1.00 per share, authorized
10,000,000 shares . . . . . . . . . . . . . . . . . . . . . .
Series G Preferred Stock, 2,184.834 shares, convertible,
participating, cumulative, each share convertible to 1,000
shares of common stock and cash or stock distribution,
liquidation preference of $1.00 per share . . . . . . . . . .
Common stock, par value $0.10 per share, authorized 40,000,000
shares, issued 24,998,043 shares, outstanding 18,497,096 and
18,260,844 shares, respectively . . . . . . . . . . . . . . . 1,850 1,826
Additional paid-in capital . . . . . . . . . . . . . . . . . . 93,186 66,245
Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (428,173) (420,746)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,372 11,365
Less: 6,500,947 and 6,737,199 shares of common stock in
treasury, at cost . . . . . . . . . . . . . . . . . . . . . . (32,339) (33,542)
-------- ---------------
Total stockholders' equity (deficit) . . . . . . . . . . . (356,104) (374,852)
------- -------
Total liabilities and stockholders' equity (deficit) . . . $ 225,620 $ 229,425
======= =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
C-4
<PAGE> 58
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
-----------------------------------------
Year Ended December 31,
-----------------------------------------
1995 1994 1993
-----------------------------------------
<S> <C> <C> <C>
Revenues* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $461,459 $479,343 $493,041
Cost of goods sold* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,187 229,807 233,386
------- -------- -------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . 245,272 249,536 259,655
Operating, selling, administrative and general expenses . . . . . . . . . . 237,212 235,374 256,902
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,913
------- -------- -------
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . 8,060 14,162 (9,160)
Other income (expenses):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . 989 533 2,292
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . (57,505) (55,952) (54,915)
Equity in earnings of affiliate . . . . . . . . . . . . . . . . . . . 678
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,776 (1,221) (2,252)
(Loss) from continuing operations before ------- ----- --------
income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . (45,002) (42,478) (64,035)
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . 342 (24,487) 5,193
------- ------ -------
(Loss) from continuing operations . . . . . . . . . . . . . . . . . . . . (45,344) (17,991) (69,228)
------- -------- -------
Discontinued operations:
Income from discontinued operations . . . . . . . . . . . . . . . . . 2,860 23,693 62,001
Gain on disposal . . . . . . . . . . . . . . . . . . . . . . . . . . 18,369 150,990
------- ------- ------
Income from discontinued operations . . . . . . . . . . . . . . . . . . . . 21,229 174,683 62,001
------- ------- ------
(Loss) income before extraordinary items and accounting changes . . . . . . (24,115) 156,692 (7,227)
------- ------- -----
Extraordinary items:
(Loss) gain resulting from the early extinguishment of debt . . . . . (9,810) (47,513) 42,849
Gain on foreclosure of MAI . . . . . . . . . . . . . . . . . . . . . 64,452
Gain on reorganization of MAI . . . . . . . . . . . . . . . . . . . . 916 46,440
------- -------- -------
(Loss) income from extraordinary items . . . . . . . . . . . (9,810) (46,597) 153,741
-------- --------- -------
(Loss) income before cumulative effect of accounting changes . . . . . . . (33,925) 110,095 146,514
Cumulative effect of accounting changes:
Retiree health and life insurance benefits . . . . . . . . . . . . . (16,167)
Cumulative effect of change in fiscal year end of MAI . . . . . . . . (23,567)
--------- ---------- ---------
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . (33,925) 110,095 106,780
Proportionate share of New Valley capital transaction,
retirement of Class A Preferred Shares . . . . . . . . . . . . . . 16,802
------ ------- -------
Net (loss) income applicable to common shares . . . . . . . . $ (17,123) $110,095 $106,780
========= ======= =======
Per common share:
(Loss) from continuing operations . . . . . . . . . . . . . . . . . . . $(1.56) $(1.02) $(4.19)
==== ===== ====
Income from discontinued operations . . . . . . . . . . . . . . . . . . $ 1.16 $ 9.92 $ 3.45
==== ===== =====
Extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . . . $(0.54) $(2.65) $ 8.55
==== ===== =====
Cumulative effect of accounting changes . . . . . . . . . . . . . . . . $ $ $(2.21)
====== ====== ====
Net (loss) income applicable to common shares . . . . . . . . . . $(0.94) $ 6.25 $ 5.60
==== ===== =====
Weighted average common shares and common stock equivalents outstanding . . 18,301,186 17,610,898 17,977,487
========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
* Revenues and Cost of goods sold include federal excise taxes of
$123,420, $131,877 and $127,341 for the years ended December 31, 1995, 1994
and 1993, respectively.
The accompanying notes are an integral part
of the consolidated financial statements
C-5
<PAGE> 59
BROOKE GROUP LTD. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Preferred Stock Additional
Series E, F and G Common Stock Paid-In
Shares Amount Shares Amount Capital
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 18,646,738 $1,865 $60,561
Common stock exchanged for Preferred stock
Series E 8,929.338 $ 9 (8,929,338) (893) 884
Series F and G 2,194.834 2 (2,194,834) (220) 218
Dividends on Series G preferred
Stock issued to officer and employee 375,000 38 (358)
Stock surrendered by former officers and employees (225,000) (23) 23
Reduction of Contingent Value Rights liability
SERP minimum liability adjustment
Preferred stock exchanged for common stock (8,939.338) (9) 8,939,338 894 (885)
Repayment of Chairman's loans
Net income
Treasury stock, at cost (1,352,142) (135) 135
----------- ---- --------- ----- -------
Balance, December 31, 1993 2,184.834 2 15,259,762 1,526 60,578
Foreign Currency Adjustment
Preferred stock exchanged for common (2,184.834) (2) 2,184,834 218 (216)
Reclassification of former Vice Chairman's
loan to other receivables
Contingent Value Rights Settlement
Repayment by Chairman of interest
Waiver of dividends, shareholder settlement 6,250
Transfer of pension liability to SkyBox
Stock grant pursuant to consulting agreement 250,000 25
Contract settlement (371)
Exercise of warrant 607,889 61
Net income
Unrealized gain on investment in New Valley
Treasury stock, at cost (41,641) (4) 4
----------- ---- --------- ----- ------
Balance, December 31, 1994 18,260,844 1,826 66,245
Net loss
Consolidation of foreign subsidiary 14,435
Distributions on common stock of BGL ($0.075 per share,
per quarter) (5,474)
Stock grant to directors 20,000 2 (2)
Stock grant to consultant 250,000 25
Stock options granted to consultant 938
MAI spin-off
Net unrealized holding gain on investment in New Valley
Effect of New Valley capital transactions 17,043
Other, net (2)
Treasury stock, at cost (33,748) (3) 3
---------- ---- ---------- ------- -------
Balance, December 31, 1995 $ 18,497,096 $1,850 $93,186
========== ==== ========== ======= =======
<CAPTION>
---------------------------------------------------------
Treasury
Deficit Stock Other Total
---------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1992 $(672,823) $(34,548) $(644,945)
Common stock exchanged for Preferred stock
Series E 0
Series F and G 0
Dividends on Series G preferred (30,831) (30,831)
Stock issued to officer and employee (1,345) 2,040 375
Stock surrendered by former officers and employees (863) 459 (404)
Reduction of Contingent Value Rights liability 44,140 44,140
SERP minimum liability adjustment (1,695) (1,695)
Preferred stock exchanged for common stock 0
Repayment of Chairman's loans 15,695 15,695
Net income 106,780 106,780
Treasury stock, at cost (3,797) (3,797)
--------- -------- ---- --------
Balance, December 31, 1993 (540,942) (35,846) (514,682)
Foreign Currency Adjustment $201 201
Preferred stock exchanged for common 0
Reclassification of former Vice Chairman's
loan to other receivables $1,500 1,500
Contingent Value Rights Settlement 1,875 1,875
Repayment by Chairman of interest 1,163 1,163
Waiver of dividends, shareholder settlement 3,200 9,450
Transfer of pension liability to SkyBox 4,305 4,305
Stock grant pursuant to consulting agreement (739) 1,182 468
Contract settlement (371)
Exercise of warrant (2,875) 2,875 61
Net income 110,095 110,095
Unrealized gain on investment in New Valley 11,164 11,164
Treasury stock, at cost 1,672 (1,753) (81)
----------- -------- ----- --------
Balance, December 31, 1994 (420,746) (33,542) 11,365 (374,852)
Net loss (33,925) (33,925)
Consolidation of foreign subsidiary 14,435
Distributions on common stock of BGL ($0.075 per share,
per quarter) (5,474)
Stock grant to directors 94 94
Stock grant to consultant (800) 1,244 469
Stock options granted to consultant (563) 375
MAI spin-off 27,286 (201) 27,085
Net unrealized holding gain on investment in New Valley (2,332) (2,332)
Effect of New Valley capital transactions 1,103 18,146
Other, net 12 10
Treasury stock, at cost (135) (135)
----------- -------- ----- --------
Balance, December 31, 1995 $(428,173) $(32,339) $9,372 $(356,104)
=========== ======== ====== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
C-6
<PAGE> 60
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
---------------------------------------------
Year Ended December 31,
---------------------------------------------
1995 1994 1993
---------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income. . . . . . . . . . . . . . . . . . . $(33,925) $110,095 $106,780
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . 9,076 6,821 11,041
Noncash compensation expense . . . . . . . . . . 559 8,463
Income taxes . . . . . . . . . . . . . . . . . . (24,487) 9,287
Gain on sale of assets . . . . . . . . . . . . . (1,042) (11,925)
Loss (gain) on early extinguishment of debt. . . 9,810 (42,849)
Impact of discontinued operations. . . . . . . . (21,229) (117,275) (106,574)
Other, net . . . . . . . . . . . . . . . . . . . 4,167 6,265 89
Changes in assets and liabilities, net:
Receivables. . . . . . . . . . . . . . . . . 6,561 (4,002) 42,585
Inventories. . . . . . . . . . . . . . . . . (7,490) (9,574) 14,686
Accounts payable and accrued liabilities . . (5,445) (8,576) (25,282)
Other assets and liabilities, net. . . . . . 15,972 135 12,187
------ -------- ----------
Net cash (used in) provided by operating activities. . . . (22,986) (44,060) 21,950
------ ------ ------
Cash flows from investing activities:
Proceeds from sale of business and assets . . . . . . . 14,152 29,542 21,372
Impact of discontinued operations . . . . . . . . . . . (4,555) (16,078)
Investments . . . . . . . . . . . . . . . . . . . . . . (1,965)
Capital expenditures. . . . . . . . . . . . . . . . . . (8,805) (3,023) (443)
Dividends from New Valley . . . . . . . . . . . . . . . 61,832
Other, net . . . . . . . . . . . . . . . . . . . . . . 1,660 1,897 371
------- ---------- ----------
Net cash provided by investing activities . . . . . . . . 66,874 23,861 5,222
------ ---------- -------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
C-7
<PAGE> 61
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
--------------------------------------------
Year Ended December 31,
--------------------------------------------
1995 1994 1993
--------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from debt . . . . . . . . . . . . . . . . . 2,343 12,523 6,498
Deferred financing costs . . . . . . . . . . . . . . (2,705) (520)
Purchase of bonds . . . . . . . . . . . . . . . . . . (10,772)
Repayments of debt . . . . . . . . . . . . . . . . . (40,801) (2,027) (26,059)
(Decrease) increase in cash overdraft . . . . . . . . (594) (12,669) 19,217
Series G preferred dividend . . . . . . . . . . . . . (75) (5,923) (15,695)
Distributions on common stock . . . . . . . . . . . . (5,475)
CVR Settlement (Redemption) .... . . . . . . . . . . . 1,875 (1,122)
Treasury stock purchases . . . . . . . . . . . . . . (135) (21) (3,797)
Return (deposit) of CVR collateral . . . . . . . . . 12,000
Stockholder loan and interest repayments . . . . . . 17,774
Impact of discontinued operations . . . . . . . . . . (437) (8,297)
Other, net . . . . . . . . . . . . . . . . . . . . . (57) 375 (1,475)
------ ------- -------
Net cash (used in) provided by financing activities . . (44,794) 8,765 (30,022)
------ ------- --------
Effect of exchange rate changes on cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . . (63) 795
------ ------- -------
Net (decrease) in cash and cash equivalents . . . . . . (906) (11,497) (2,055)
Cash and cash equivalents, beginning of period . . . . 4,276 15,773 17,828
------ ------- ------
Cash and cash equivalents, end of period . . . . . . . $ 3,370 $ 4,276 $15,773
====== ======= ======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
C-8
<PAGE> 62
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation:
The Consolidated Financial Statements of Brooke Group Ltd. (the
"Company") include the accounts of BGLS Inc. ("BGLS"), Liggett Group
Inc. ("Liggett"), Brooke (Overseas) Ltd. ("BOL"), New Valley Holdings,
Inc. ("NV Holdings"), other less significant subsidiaries and, as of
December 29, 1995, Liggett-Ducat Ltd. ("LDL"). (Refer to Note 4).
Liggett is engaged primarily in the manufacture and sale of cigarettes,
principally in the United States. LDL is engaged both in real estate
development and the sale and manufacturing of cigarettes in Russia.
(b) Liquidity:
The Company believes it will have sufficient liquidity for 1996. This
is based on, among other things, forecasts of cash flow for the
principal operating companies which indicate that they will be
self-sufficient, satisfactory resolution of the Contingent Value Rights
("CVR") suit (refer to Notes 13 and 16), the restructuring of the
Company's debt which includes the exchange of the 13.75% Series 2 Senior
Secured Notes due 1997 ("Series 2 Notes") for the 15.75% Series A Senior
Secured Notes due 2001 ("Series A Notes"), the sale of $7,397 face value
of additional Series A Notes, the proceeds of which were used for the
redemption of the 16.125% Senior Subordinated Reset Notes due 1997 (the
"Reset Notes") on March 29, 1996 and certain funds available from New
Valley Corporation ("New Valley") subject to limitations imposed by the
Company's indenture agreements. (Refer to Notes 2 and 8).
(c) Estimates and Assumptions:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses. Actual results could differ from
those estimates.
(d) Cash and Cash Equivalents:
For purposes of the statements of cash flows, cash includes cash on
hand, cash on deposit in banks and cash equivalents, comprised of
short-term investments which have an original maturity of 90 days or
less. Interest on short-term investments is recognized when earned.
(e) Financial Instruments:
The estimated fair value of the Company's long-term debt is as follows:
<TABLE>
<CAPTION>
At December 31, 1995 1994
-------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Long-term debt $409,131 $343,517 $432,289 $347,912
</TABLE>
C-9
<PAGE> 63
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
Short-term debt - The carrying amounts reported in the Consolidated
Balance Sheets approximate fair value because of the variable interest
rates and the short maturity of these instruments.
Long-term debt - Fair value is estimated based on current market
quotations, where available or based on an evaluation of the debt in
relation to market prices of the Company's publicly traded debt.
The methods and assumptions used by the Company's management in
estimating fair values for financial instruments as required by
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" ("SFAS 107"), presented herein are
not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated
fair values.
(f) Significant Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and trade receivables. The Company places its temporary
cash in money market securities (investment grade or better) with high
credit quality financial institutions.
Liggett's customers are primarily candy and tobacco distributors, the
military and large grocery, drug and convenience store chains. One
customer accounted for approximately 11.6% of net sales for the year
ended December 31, 1995. No single customer accounted for more than 10%
of the Company's net sales in 1994 and 1993. Concentrations of credit
risk with respect to trade receivables are limited due to the large
number of customers, located primarily throughout the United States,
comprising Liggett's customer base. Ongoing credit evaluations of
customers' financial condition are performed and, generally, no
collateral is required. Liggett maintains reserves for potential credit
losses and such losses, in the aggregate, have not exceeded management's
expectations.
(g) Accounts Receivable:
The allowance for doubtful accounts and cash discounts was $1,536 and
$969 at December 31, 1995 and 1994, respectively.
(h) Inventories:
Liggett tobacco inventories, which comprise 83.3% of total inventory,
are stated at the lower of cost or market and are determined primarily
by the last-in, first-out (LIFO) method. Although portions of leaf
tobacco inventories may not be used or sold within one year because of
the time required for aging, they are included in current assets, which
is common practice in the industry. It is not practicable to determine
the amount that will not be used or sold within one year.
Remaining inventories are determined primarily on a first-in, first-out
(FIFO) basis.
C-10
<PAGE> 64
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
(i) Property, Plant and Equipment:
Property, plant and equipment are depreciated using the straight-line
method over the estimated useful lives of the respective assets, which
are 20 years for buildings and 3 to 10 years for machinery and
equipment.
Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are capitalized.
The cost and related accumulated depreciation of property, plant and
equipment are removed from the accounts upon retirement or other
disposition and any resulting gain or loss is reflected in operations.
For fiscal years beginning after December 15, 1995, the Company will be
required to review long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable, in accordance with the provisions of Statement
of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of". The Company does not anticipate a significant effect on
its results of operations or its financial position from the adoption of
SFAS 121.
(j) Intangible Assets:
Intangible assets, consisting of goodwill, trademarks and covenants
not-to-compete, are amortized using the straight-line method over 10-12
years. Amortization expense for the years ended December 31, 1995, 1994
and 1993 was $1,725, $1,722 and $1,971, respectively. Management
periodically reviews the carrying value of such assets to determine
whether asset values are impaired.
(k) Other Assets:
Other assets consist primarily of debt issuance costs and are being
amortized over the life of the debt.
(l) Employee Benefits:
Liggett sponsors self-insured health and dental insurance plans for all
eligible employees. As a result, the expense recorded for such benefits
involves an estimate of unpaid claims as of December 31, 1995 and 1994
which are subject to significant fluctuations in the near term.
(m) Postretirement Benefits other than Pensions:
Effective January 1, 1993, the Company adopted the provisions of SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions". Under SFAS 106, the cost of providing retiree health care
and life insurance benefits is actuarially determined and accrued over
the service period of the active employee group.
As permitted by SFAS 106, the Company has elected to fully recognize the
transition obligation (the excess of the accumulated postretirement
benefit obligation as of January 1, 1993 over the accrued cost). This
resulted in a one-time charge for the Company of $16,167 recorded in
the first quarter of 1993.
(n) Postemployment Benefits:
SFAS No. 112, "Employers' Accounting for Postemployment Benefits", is
effective for fiscal years beginning after December 15, 1993. SFAS 112
establishes standards of financial accounting and reporting for the
estimated cost of benefits provided by an employer to former or
C-11
<PAGE> 65
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
inactive employees after employment but before retirement. No expense
was associated with the adoption since the Company's previous policies
accounted for all items required by SFAS No. 112.
(o) Income Taxes:
Effective January 1, 1993, the Company adopted the provisions of SFAS
No. 109, "Accounting for Income Taxes". Under the provisions of SFAS
109, the Company adjusted previously recorded deferred taxes to reflect
currently enacted income tax rates. The Company has not retroactively
adjusted for business combinations as it is impracticable. Under SFAS
109, a valuation allowance is provided against deferred tax assets when
it is deemed more likely than not that future taxable income will be
insufficient to realize the deferred tax assets.
(p) Revenue Recognition:
Revenues from sales are recognized upon the shipment of finished goods
to customers. The Company provides an allowance for expected sales
returns, net of related inventory cost recoveries. Since the Company's
primary line of business is tobacco, the Company's financial position
and its results of operations could be materially adversely affected by
significant unit sales volume declines, increased tobacco costs or
reductions in the selling price of cigarettes in the near term.
(q) Earnings Per Share:
Per share calculations are based on the equivalent shares of common
stock outstanding and include the impact of the CVR liability decretion
for the year ended December 31, 1993 (Note 13). The decretion increased
earnings by $1.37 for the year ended December 31, 1993. The Series G
Preferred Stock are common stock equivalents; however, in making
per-share calculations for 1993, they have been treated as preferred
stock since treating them as common stock would be anti-dilutive (Note
14). The net income per share calculation for December 31, 1993 assumed
conversion of the outstanding warrant (Note 15). For the year ended
December 31, 1995, per share calculations include the Company's
proportionate share of excess carrying value of New Valley redeemable
preferred shares over the cost of shares repurchased of $16,802.
(r) Foreign Currency Translation:
The Company accounts for translation of foreign currency in accordance
with SFAS 52, "Foreign Currency Translation." The Company's Russian
subsidiary operates in a "highly inflationary" economy and use the U.S.
dollar as the functional currency. Therefore, certain assets of this
entity (principally inventories and property and equipment) are
translated at historical exchange rates with all other assets and
liabilities translated at year end exchange rates and all translation
adjustments are reflected in the consolidated statements of operations.
Because the Company only consolidated the operations of the Russian
subsidiary from December 29, 1995, the translation adjustments were not
material. (Refer to Note 4).
(s) Reclassifications:
Certain amounts in prior years' financial statements have been
reclassified to conform to the current year's presentation.
C-12
<PAGE> 66
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
2. INVESTMENT IN NEW VALLEY CORPORATION
In November 1994, New Valley's First Amended Joint Chapter 11 Plan of
Reorganization, as amended ("Joint Plan"), was confirmed by order of the
United States Bankruptcy Court for the District of New Jersey and on January
18, 1995, New Valley emerged from bankruptcy reorganization proceedings and
completed substantially all distributions to creditors under the Joint Plan.
Pursuant to the Joint Plan, among other things, all of New Valley's $15.00
Class A Increasing Rate Cumulative Senior Preferred Shares ($100 Liquidation
Value), $.01 par value (the "Class A Preferred Shares"), all of New Valley's
$3.00 Class B Cumulative Convertible Preferred Shares ($25 Liquidation
Value), $.10 par value (the "Class B Preferred Shares"), and all of New
Valley's Common Shares, $.01 par value (the "Common Shares") and other
equity interests, were reinstated and retained all of their legal, equitable
and contractual rights.
Prior to December 31, 1994, under the equity method of accounting, the
Company's investment was carried at $0 since the Company had no intention or
commitment to fund New Valley's losses. As of December 31, 1994, the
Company's investment in New Valley was $97,520, principally as a result of
recording its share of New Valley's fourth quarter 1994 income. (Refer to
Note 5).
At December 31, 1994, the Company's investment in New Valley consisted of a
41.6% voting interest. The Company's investment was represented by 618,326
Class A Preferred Shares with an aggregate fair value of $145,963 and
79,399,254 common shares (42.1%) with a quoted market value of $13,498 at
December 31, 1994. In addition, the Company held an irrevocable proxy to
vote an additional 32,543 Class A Preferred Shares. These shares had been
transferred to a third party in December 1994 resulting in compensation
expense of $7,682. This proxy expired on December 31, 1995. Options to
purchase up to an aggregate of 9,000,000 New Valley common shares owned by
the Company were terminated on December 13, 1995 in exchange for $822 of
Series A Notes issued by the Company pursuant to the 1995 Exchange Offer.
(Refer to Note 8). During 1995, the Company acquired an additional 394,975
shares of New Valley common stock at an average price of $0.28 per share and
250,885 shares of Class B Preferred Shares at an average price of $7.39 per
share. At December 31, 1995, the Company's voting interest is 41.9%.
The Company's investment in the common shares (79,794,229 shares or 41.7%)
has a quoted market value of $21,544 at December 31, 1995. The common
shares are accounted for pursuant to APB 18, "The Equity Method of
Accounting for Investments in Common Stock", and have a negative carrying
value of approximately $48,747 and $48,443 at December 31, 1995 and 1994,
respectively. The Company's investment represents its proportionate share
of New Valley's common shareholders' deficit in addition to the accrued and
unpaid dividends on the Class B Preferred Shares. Further, as a result of
the Company's purchase of certain Class B Preferred Shares during 1995, the
Company has recorded negative goodwill which is being amortized over 10
years. Negative goodwill at December 31, 1995 is approximately $3,000.
C-13
<PAGE> 67
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
The Company's investment in New Valley's stock at December 31, 1995 is
summarized as follows:
<TABLE>
<CAPTION>
Number of Fair Amortized Unrealized
Shares Value Cost Holding Gain Earnings
------ ----- ---- ------------ --------
<S> <C> <C> <C> <C> <C>
Class A Preferred Shares 618,326 $109,386 $101,962 $7,424 $28,996
Class B Preferred Shares 250,885 3,262 1,854 1,408
Common Shares........... 79,794,229 21,544 (21,287)(A)
------- ------- ----- ------
$134,192 $103,816 $8,832 $ 7,709
======= ======= ===== ======
</TABLE>
- --------------------
(A) Amount does not include $18,146 of New Valley capital transactions
credited directly to equity.
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 SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities", and are classified as available-for-sale. The Class
A Preferred Shares' fair value has 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. Earnings on the Class A Preferred Shares are comprised of
dividends accrued during the period and the accretion of the difference
between the Company's basis and their mandatory redemption price.
Subsequent to December 31, 1995, however, New Valley became engaged in the
ownership and management of commercial real estate and acquired a
controlling interest in an operating company. Because these businesses
affect the composition and nature of the underlying net assets of New
Valley, the Company will determine the fair value of the Class A Preferred
Shares based on the quoted market price commencing with the quarter ended
March 31, 1996. Had the Company valued its investment in the Class A
Preferred Shares using the quoted market price at December 31, 1995, the
carrying value would have been decreased by approximately $19,100.
In February 1995, New Valley repurchased 54,445 Class A Preferred Shares
pursuant to a tender offer made as part of the Joint Plan. During the
twelve months ended December 31, 1995, at various times, New Valley's Board
of Directors authorized the repurchase of up to 500,000 additional Class A
Preferred Shares. At December 31, 1995, 339,400 of such shares had been
repurchased on the open market at an aggregate cost of $43,405 or an average
cost of $127.89 per share. The Company has recorded its proportionate
interest in the excess of the carrying value of the shares over the cost of
the shares repurchased as a credit to additional paid-in capital in the
amount of $16,802, along with other New Valley capital transactions of $241
for the year ended December 31, 1995.
The Class A Preferred Shares of New Valley are required to be redeemed on
January 1, 2003 for $100.00 per share plus dividends accrued to the
redemption date. The shares are redeemable, at any time, at the option of
New Valley, at $100.00 per share plus accrued dividends. The holders of
Class A Preferred Shares are entitled to receive a quarterly dividend, as
declared by the Board of Directors, payable at the rate of $19.00 per annum.
At December 31, 1995, the accrued and unpaid dividends arrearage was
$121,893 or $110.06 per share. The Company received $61,832 ($100.00 per
share) in dividend distributions in 1995.
C-14
<PAGE> 68
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
Holders of the Class B Preferred Shares are entitled to receive a quarterly
dividend, as declared by the Board, at a rate of $3.00 per annum. At
December 31, 1995, the accrued and unpaid dividends arrearage was $95,118 or
$34.08 per share. No dividends on the Class B Preferred Shares have been
declared since the fourth quarter of 1988.
Each Class B Preferred Share is convertible at the option of the holder into
8.3333 Common Shares based on a $25 liquidation value and a conversion price
of $3.00 per Common Share. At the option of the Company, the Class B
Preferred Shares are redeemable in the event that the closing price of the
Common Shares equals or exceeds 140% of the conversion price at a specified
time prior to the redemption. If redeemed by New Valley, the redemption
price would equal $25 per share plus accrued dividends.
Summarized financial information for New Valley as of and for the years
ended December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
--------- ----------
<C> <C> <C>
Current assets, primarily cash and
marketable securities in 1995 and
cash and cash equivalents in 1994.......... $333,485 $1,039,209
Noncurrent assets............................... 52,337 30,682
Current liabilities............................. 177,920 754,360
Noncurrent liabilities.......................... 11,967 36,177
Redeemable preferred stock...................... 226,396 317,798
Common shareholders' deficit.................... (30,461) (38,444)
Revenues........................................ 67,730 10,381
Cost and expenses............................... 66,064 26,146
Income (loss) from continuing operations........ 1,374 (15,265)
Income from discontinued operations............. 16,873 1,135,706 (A)
Extraordinary item.............................. (110,500)
Net (loss) income applicable to common shares(C) (13,714) 929,904
Company's share of discontinued
operations................................. 7,031 139,935 (B)
Company's share of extraordinary item........... (46,487)(B)
</TABLE>
(A) Includes gain on sale of New Valley's money transfer
business of $1,056,081, net of income taxes of $52,000.
(B) The Company's share of the extraordinary item, $46,487, was
related to extinguishment of debt in 1994. The Company's
share of income from discontinued operations in 1994 was
determined after accounting for losses not recognized in
prior years as follows:
<TABLE>
<S> <C>
42.1% of income from discontinued operations........ $ 477,791
Losses not recognized in prior periods.............. (337,856)
-------
Company's share of equity in discontinued operations
of New Valley.................................. $ 139,935
=======
</TABLE>
(C) Considers all preferred accrued dividends, whether or not
declared and, in 1995, the excess of carrying value of redeemable
preferred shares over cost of shares purchased.
C-15
<PAGE> 69
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
Subsequent Events: On January 11, 1996, a subsidiary of New Valley made a
$10,600 bridge loan to finance Thinking Machines Corporation, a developer
and marketer of parallel software for high-end and networked computer
systems. The loan was converted in February 1996 into a controlling
interest in a partnership which holds approximately 61% of the outstanding
common stock of Thinking Machines Corporation.
On January 10 and January 11, 1996, New Valley acquired four commercial
office buildings (the "Office Buildings") and eight shopping centers (the
"Shopping Centers"), respectively, for an aggregate purchase price of
$183,900, consisting of $23,900 in cash and $160,000 in mortgage financing.
As a result of asset dispositions pursuant to 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 the Office Buildings and the
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 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 the Company would
constitute a violation of the indenture to which the Company is a party.
In the first quarter of 1996, New Valley repurchased 72,104 Class A
Preferred Shares for a total amount of $10,530. The Company now owns 59.72%
of the Class A Preferred Shares.
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. The Company
received $6,183 in the distribution.
C-16
<PAGE> 70
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
3. RJR NABISCO HOLDING CORP.
In August 1995, New Valley received approval from the Federal Trade
Commission to purchase up to 15% of the voting securities of RJR Nabisco
Holdings Corp. ("RJR Nabisco") in the open market. As of December 31, 1995,
New Valley held approximately 4,900,000 shares of RJR Nabisco common stock,
par value $.01 per share (the "RJR Nabisco Common Stock"), with a market
value of $150,446 (cost of $149,005). New Valley's investment in RJR
Nabisco collateralizes margin loan financing of $75,119 at December 31,
1995.
On October 17, 1995, New Valley entered into an agreement, as amended (the
"Agreement"), with High River Limited Partnership ("High River"), an entity
owned by Carl C. Icahn. Pursuant to the Agreement, New Valley sold
approximately 1,600,000 shares of RJR Nabisco Common Stock to High River for
an aggregate purchase price of $51,000 and the parties agreed that New
Valley and High River would each invest up to approximately $250,000 in
shares of RJR Nabisco Common Stock, subject to certain conditions and
limitations. Any party to the Agreement may terminate it at any time,
although under certain circumstances, the terminating party will be required
to pay a fee of $50,000 to the nonterminating party. The Agreement also
provides for the parties to pay certain other fees to each other under
certain circumstances, including a net profit override to High River equal
to 20% of New Valley's profit on its RJR Nabisco Common Stock, after certain
expenses as defined in the Agreement.
On October 17, 1995, the Company and BGLS entered into a separate agreement,
as amended (the "High River Agreement"). Pursuant to each of these
agreements, the parties agreed to take certain actions designed to cause RJR
Nabisco to effectuate a spinoff of its food business, Nabisco Holdings Corp.
("Nabisco"), at the earliest possible date. Among other things, the Company
agreed to solicit the holders of RJR Nabisco Common Stock to adopt the
Spinoff Resolution, which is an advisory resolution to the Board of Directors
of RJR Nabisco seeking a spinoff of the 80.5% of Nabisco held by RJR Nabisco
to stockholders. Among other things, High River agreed in the High River
Agreement to grant a written consent to the Spinoff Resolution with respect
to all shares of RJR Nabisco Common Stock held by it and to grant a proxy
with respect to all such shares in the event that the Company seeks to
replace the incumbent Board of Directors of RJR Nabisco at the 1996 annual
meeting of stockholders with a slate of directors committed to effect the
spinoff. The Company and BGLS agreed not to engage in certain transactions
with RJR Nabisco (including a sale of Liggett or a sale of its RJR Nabisco
Common Stock to RJR Nabisco) and not to take certain other actions to the
detriment of RJR Nabisco stockholders. High River also agreed that it would
not engage in such transactions or take such other actions while the
agreement was in effect. In the event that any signatory engages in such
transactions or takes such other actions, the High River Agreement provides
that the party so doing must pay a fee of $50,000 to the other. Any party to
the High River Agreement may terminate it at any time, although under certain
circumstances, the terminating party will be required to pay a fee of $50,000
to the nonterminating party. The High River Agreement also provides that
BGLS pay certain other fees to High River under certain circumstances.
On November 20, 1995, the Company, acting to preserve its right to nominate
a slate of directors at RJR Nabisco's 1996 annual stockholders' meeting,
submitted to RJR Nabisco information with respect to nominees committed to
an immediate spinoff of Nabisco.
On December 27, 1995, New Valley entered into an agreement with the Company
pursuant to which New Valley agreed to pay directly or reimburse the Company
and its subsidiaries for reasonable out-of-pocket expenses incurred in
connection with pursuing the completed consent solicitation and the proxy
solicitation. New Valley has also agreed to pay to BGLS a fee of 20%
of the net profit received by New Valley or its subsidiaries from the sale
of shares of RJR Nabisco Common Stock
C-17
<PAGE> 71
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
after New Valley and its subsidiaries have achieved a rate of return of 20%
and after deduction of certain expenses incurred by New Valley and its
subsidiaries, including the costs of the consent solicitation, the proxy
solicitation and of acquiring the shares of common stock. New Valley has
also agreed to indemnify the Company and its affiliates against certain
liabilities arising out of the completed consent solicitation and the proxy
solicitation.
On December 28, 1995, as amended on February 20, 1996 and April 9, 1996, New
Valley, the Company and Liggett engaged Jefferies & Company, Inc.
("Jefferies") as financial advisor in connection with New Valley's
investment in RJR Nabisco and the Company's solicitation of consents and
proxies from the shareholders of RJR Nabisco. New Valley has (i) paid to
Jefferies an initial fee of $1,500 and (ii) has agreed to pay to Jefferies
for the period commencing January 1, 1996 and ending March 31, 1996, monthly
fees of $250 (which increased to $500 on February 20, 1996) and, in
addition, until March 31, 1996, an additional monthly fee of $100 and for
the month of April 1996, a fee of $160. These companies also have agreed to
pay Jefferies 10% of the net profit (up to a maximum of $15,000) with
respect to RJR Nabisco Common Stock (including any distributions made by RJR
Nabisco) held or sold by these companies and their affiliates after
deduction of certain expenses, including the costs of the solicitations, the
proxy solicitation and the costs of acquiring the shares of the common
stock. In addition, New Valley and the Company agreed to indemnify
Jefferies against certain liabilities arising out of the solicitations.
On December 29, 1995, the Company filed a definitive Consent Statement with
the SEC and commenced solicitation of consents from stockholders of RJR
Nabisco seeking, among other things, the approval of the Spinoff Resolution.
Subsequent Events: On February 29, 1996, New Valley entered into a total
return equity swap transaction ("The Equity Swap Agreement") with an
unaffiliated company (the "Counterparty") relating to 1,000,000 shares of
RJR Nabisco Common Stock. The transaction is for a period of up to six
months, subject to earlier termination at the election of New Valley and
provides 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
1,000,000 shares of RJR Nabisco Common Stock 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 1,000,000 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. As of March 29, 1996, New Valley had
an unrealized loss on this swap transaction of approximately $4,200 and had
pledged collateral of approximately $11,800.
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 March 29, 1996,
New Valley had expensed approximately $10,000 for costs relating to its RJR
Nabisco investment, of which approximately $4,000 was expensed in 1995.
C-18
<PAGE> 72
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
On March 13, 1996, the Company was informed by the independent inspectors of
election that consents representing 142,237,880 votes (50.58%) were
delivered in favor of the Spinoff Resolution and 150,926,535 votes (53.67%)
were delivered in favor of the Bylaw Amendment. RJR Nabisco announced that
it currently had no plans to contest the outcome of the vote.
At March 29, 1996, New Valley held approximately 5,200,000 shares of RJR
Nabisco Common Stock with a market value $156,143 (cost of approximately
$158,000) collateralizing margin loan financing of approximately $83,500.
4. INVESTMENT IN BROOKE (OVERSEAS) LTD.
On October 1, 1993, the Company transferred the stock of its wholly-owned
real estate development subsidiary, BrookeMil Ltd. ("BrookeMil"), to LDL in
exchange for 58% of the stock of LDL and a promissory note from BrookeMil as
part of the settlement of a dispute with employees of LDL's tobacco company.
Also on October 1, 1993, BrookeMil entered into a long-term lease, as
lessor, of a western style office building in Moscow and received prepaid
rent from the lessee. Cash received from the lessee was used by BrookeMil
to repay the promissory note together with accrued interest of $5,313 and
$4,017 in 1993 and 1995, respectively. These payments have been deferred by
the Company and are being recognized over the lease term. In prior years,
the Company did not consolidate LDL due to certain events continuing through
1995 which impaired the Company's ability to control the operations of LDL.
The amounts invested in Russian ventures of $5,723 and $2,878 in 1994 and
1993, respectively, were expensed, based on the determination that there was
significant uncertainty as to the recoverability of these amounts. The
Company has reexamined the issue of consolidating LDL and at December 29,
1995 determined that a series of events in the latter part of 1995 (see
below) has enabled the Company to exert sufficient control so that the
recoverability of its investment appears reasonable.
In the third quarter of 1995, BOL increased its investment in LDL from
approximately 58% to 68% through a direct purchase of stock from other
shareholders. BOL recorded goodwill in the amount of $435 which is being
amortized over a ten year period.
In October 1995, LDL entered into a loan agreement with Rosvneshtorg Bank,
Moscow, Russia, to borrow up to $20,000 to fund real estate development.
Interest on the note is based on the London Interbank Offered Rate ("LIBOR")
plus 10%. Principal repayments are due from April through October of 1997.
The loan agreement was arranged through a third party for a net fee of
$4,044 payable ratably over the term of the loan. The Company has
guaranteed the payment of the note and the broker's fee. All of the stock
of BrookeMil has been pledged as collateral for the loan. At December 31,
1995, BrookeMil has drawn approximately $8,000 of the loan and accrued
approximately $3,000 of the broker's fee, which has been deferred and is
being amortized over the life of the loan.
Also in October 1995, BrookeMil purchased certain buildings, which it had
previously leased from the Moscow Property Committee, for $4,369 excluding
related transaction costs. BrookeMil has developed, or is in the process of
developing, these buildings for commercial use.
Finally, on December 29, 1995, LDL relinquished its 59.4% ownership in a
joint real estate venture in exchange for 100% ownership of a tobacco
factory owned by the venture with the intention of constructing a new
manufacturing facility on the outskirts of Moscow. LDL's cost basis in the
joint real estate venture of $2,675 was transferred to its basis in the
tobacco factory.
C-19
<PAGE> 73
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
The additional amounts included in the financial statements as a result of
consolidating the Russian subsidiaries at December 31, 1995 are as follows:
<TABLE>
<S> <C>
Current assets...... $12,321
======
Total assets........ 35,359
======
Current liabilities. 10,602
======
Total liabilities... 20,924
======
Stockholders' equity 14,435
======
</TABLE>
Revenues during 1995 from the date of consolidation, December 29, 1995, are
not material.
Amounts invested in the Russian subsidiary during the year ended December
31, 1995 were approximately $18,000. Of this amount, approximately $7,300
was capitalized.
Subsequent Event: On April 3, 1996, the Company entered into a stock purchase
agreement (the "purchase agreement") with the chairman of LDL (the "Seller").
Under the purchase agreement, the Company acquired the 84,540 shares held by
the Seller for $15 per share ($1,268). The purchase price is payable in
installments during 1996 and the 84,540 shares of LDL collateralize the
Company's obligations under both the purchase agreement and consulting
agreement (described below). This transaction is expected to increase the
Company's ownership percentage in LDL from 68% to 80%.
Concurrently, the Company entered into a consulting agreement with the
Seller for services through December 31, 1997. Under the terms of the
consulting agreement, the Company will pay the Seller approximately $5,232
over five years. Also, LDL extended the Seller's employment agreement with
LDL for one year at $384. Additionally, certain obligations of the Seller
totaling approximately $2,300 were assigned to an affiliate of the Seller
and a note receivable from a third party for approximately $3,300 relating
to the sale of a previously owned subsidiary in Russia, which receivables
had been charged to operations in prior years, were assigned to the affiliate
in exchange for a waiver of an additional $1,000 in payments under the
consulting agreement.
5. DISCONTINUED OPERATIONS
A summary of discontinued operations follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
-----------------------------
<S> <C> <C> <C>
Income from discontinued operations:
New Valley...................... $ 1,800
MAI............................. 698 $ 3,628 $28,177
SkyBox.......................... 362 20,065 33,824
------ ------- ------
2,860 23,693 62,001
------ ------- ------
Gain from disposal of operations:
New Valley(A)................... 5,231 139,935
SkyBox.......................... 13,138 11,055
------ ------- ------
18,369 150,990
------ ------- ------
Income from discontinued operations. $21,229 $174,683 $62,001
====== ======= ======
</TABLE>
(A) See Note 2 for discussion of discontinued operations related to New
Valley.
C-20
<PAGE> 74
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
Net revenues of MAI Systems Corporation ("MAI") for the period January 1,
1995 to February 6, 1995 were $6,652 and for the years ended December 31,
1994 and 1993 were $66,095 and $115,291, respectively. Net revenues of
SkyBox were $65,119 for the nine months ended September 30, 1993.
New Valley:
During the fourth quarter of 1994, New Valley sold or was in the process of
selling virtually all of its current operations. In connection with the
implementation of the provisions of the Joint Plan, New Valley completed the
sale of Western Union Financial Services Inc. and certain other assets to
First Financial Management Corporation ("FFMC"). (Refer to Note 2).
Accordingly, the financial statements of the Company reflect its portion of
the gain, $139,935, in gain on disposal of discontinued operations in 1994.
On October 31, 1995, New Valley sold substantially all the assets of its
wholly owned subsidiary, Western Union Data Services Company, Inc. (the
"Messaging Service Business"), and conveyed substantially all of the
liabilities of the Messaging Service Business to FFMC for $17,540 in cash and
$2,460 in cancellation of intercompany indebtedness. The financial
statements of the Company reflect its portion of the gain, $5,231, in gain on
disposal of discontinued operations in 1995.
MAI:
On January 25, 1995, the Board of Directors of BGLS determined to declare a
dividend of the stock of MAI to the Company with the intention of the
Company distributing a special dividend of MAI common stock to its
stockholders (the "MAI Distribution"). Accordingly, the Company approved
the MAI Distribution of the 65.2% equity interest in MAI through a special
dividend to its stockholders of one share of MAI for every six shares of the
Company's common stock. The distribution occurred on February 13, 1995. As
a result, MAI has been treated as a discontinued operation in the financial
statements for all periods presented. The assets and liabilities of MAI at
December 31, 1994 are included in other accrued liabilities and net
long-term liabilities of businesses held for disposition. The MAI
Distribution reduced the stockholder's deficit by $27,085 in the first
quarter of 1995.
On April 12, 1993, MAI filed a voluntary petition under Chapter 11 of the
Bankruptcy Code. MAI emerged from bankruptcy on November 18, 1993. Under
the plan of reorganization, the Company did not receive any distribution for
its original equity ownership but did receive a 44.9% common ownership
interest for the MAI debt it held as MAI's largest single creditor.
Further, on February 1, 1994, the Company renegotiated a December 21, 1992
agreement with an unrelated third party which enabled the Company to
purchase additional MAI equity for $3,565 in the reorganized entity. When
combined with the interest originally received in the reorganization, total
common ownership held by the Company at December 31, 1994 was approximately
65.2%.
The terms of the plan of reorganization provided for the issuance of new MAI
common stock having an estimated fair market value of $50,000 in exchange
for the cancellation of unsecured debt. In connection with the issuance of
the new common stock, the Company recorded an extraordinary gain of $46,440
for the difference between the debt being forgiven and the fair market value
of the new MAI common stock issued.
On March 22, 1993, a syndicate of banks (the "Banks") foreclosed on all of
the outstanding capital stock of certain of MAI's European subsidiaries, on
certain intellectual property of MAI and on
C-21
<PAGE> 75
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
amounts due to MAI from certain of its European subsidiaries (the
"Foreclosure"), in satisfaction of all amounts due under MAI's term loan
facilities and revolving facilities with the Banks. Because management's
estimated fair market value of assets surrendered was less than the amount
of the debt satisfied, the Foreclosure was accounted for as a troubled debt
restructuring. As a result, the difference between the book value and
management's estimated fair market value of the assets surrendered of
$22,187 is included in the gain from discontinued operations and the
difference between the carrying amount of the debt satisfied and the fair
market value of the assets surrendered of $64,452 is classified as an
extraordinary gain on foreclosure. In addition, in connection with a
transaction wherein MAI's United States and Canadian bank lenders took title
to the stock of MAI's European subsidiaries in satisfaction of a total of
approximately $84,000 of indebtedness owed by MAI to such bank lenders, the
Company may be required, under certain limited circumstances, to purchase an
equity interest of up to $7,500 in a holding company controlled by the bank
lenders. The $7,500 is recorded as a liability.
In 1993 MAI changed its year end to December 31 from September 30 and,
therefore, in 1993 MAI was no longer consolidated on a three month lag. This
change, amounting to $23,567, is reported as a change in accounting in the
first quarter of 1993. The condensed statement of operations for this three
month period which ended December 31, 1992 follows:
<TABLE>
<S> <C>
Total revenue............................... $59,183
Direct costs................................ 37,442
-------
Gross profit............................. 21,741
Selling, general and administrative expenses 22,792
Non-recurring charges....................... 15,340
-------
Operating loss........................... (16,391)
Interest, net............................... (4,675)
-------
Loss before taxes........................... (21,066)
Income taxes................................ 2,501
-------
Net loss................................. $(23,567)
=======
</TABLE>
SkyBox:
On October 6, 1993 the Company distributed (hereinafter referred to as the
"Distribution") to holders of record of its common stock at September 20,
1993 one share of common stock of its subsidiary, SkyBox International Inc.
("SkyBox"), for each of its 6,522,929 shares of common stock then
outstanding, representing 81.5% of the SkyBox common stock and 46.6% of its
direct voting power. After October 1, 1993, SkyBox was no longer
consolidated and was accounted for on the equity method. During the fourth
quarter of 1993 and continuing throughout 1994 and the first quarter of
1995, the Company sold all of its remaining SkyBox common stock for
approximately $20,000. In addition, during the same period SkyBox redeemed
the 300 shares of SkyBox Series A Preferred Stock which the Company held at
the stated redemption price of $100,000 per share for a total of $30,000.
C-22
<PAGE> 76
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
6. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
December 31,
1995 1994
----------------
<S> <C> <C>
Finished goods................ $19,129 $18,374
Work-in-process............... 3,570 2,952
Raw materials................. 29,021 20,609
Replacement parts and supplies 4,903 3,754
------ ------
Inventories at current cost... 56,623 45,689
LIFO adjustments.............. 3,899 1,409
------ ------
$60,522 $47,098
====== ======
</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 normally purchases all of its tobacco
requirements from domestic and foreign leaf tobacco dealers, much of it
under long-term purchase commitments which expire principally in December
1996. At December 31, 1995, Liggett had leaf tobacco purchase commitments
of approximately $25,500.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
December 31,
1995 1994
--------------------
<S> <C> <C>
Land and improvements........ $ 541 $ 716
Buildings.................... 31,947 8,703
Machinery and equipment...... 42,877 35,069
Leasehold improvements....... 309 82
Assets held for sale......... 1,259
Asset under capital lease.... 5,696
------- -------
76,933 50,266
Less accumulated depreciation (27,868) (24,460)
------- -------
$ 49,065 $ 25,806
======= =======
</TABLE>
The amounts provided for depreciation for the years ended December 31, 1995,
1994 and 1993 were $4,699, $4,609 and $4,675, respectively.
The amount provided for amortization of assets under capital lease for the
year ended December 31, 1994 was $551.
Subsequent event: 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 for a sale price of $4,300. It is anticipated that
closing will occur on or before May 31, 1996.
C-23
<PAGE> 77
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
8. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
Notes payable, long-term debt and other obligations consist of:
<TABLE>
<CAPTION>
December 31,
1995 1994
--------------------
<S> <C> <C>
13.75% Series 1 Senior Secured Notes due 1995........ $23,594
13.75% Series 2 Senior Secured Notes due 1997........ $91,179 91,294
16.125% Senior Subordinated Reset Notes due 1997..... 5,670 5,670
14.500% Subordinated Debentures due 1998............. 126,295 126,295
Notes Payable - Foreign.............................. 11,122
Other................................................ 2,084 4,940
Liggett:
11.500% Senior Secured Series B Notes due 1993 - 1999 119,485 126,234
Variable rate Series C Senior Secured Notes due 1999. 32,279 29,415
Revolving credit facility............................ 21,017 24,847
--------- ---------
Total notes payable and long-term debt.................... 409,131 432,289
Less:
Current maturities.............................. 2,387 26,491
--------- ---------
Amount due after one year................................. $406,744 $405,798
========= =========
</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 $232,868 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 15.75% Series B Senior Secured Notes
("Series B Notes") for each $1,000 principal amount of Reset Notes exchanged
and $1,000 principal amount of new Series B Senior Secured 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" below). 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 which were redeemed on March, 29 1996 for a total amount of $5,785,
including premium, together with accrued interest of $452.
C-24
<PAGE> 78
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
The new Series A and 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. 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.
The Company recorded an extraordinary charge of approximately $9,700 for the
year ended December 31, 1995 relating to the exchanged debt securities
discussed above, based upon the binding agreement as of November 21, 1995.
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.
Subsequent event: On March 7, 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 (see above).
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.
13.75% Series 1 Senior Secured Notes due 1995
13.75% Series 2 Senior Secured Notes due 1997:
An Exchange and Termination Agreement (the "1994 Exchange Agreement") was
entered into as of September 30, 1994 among the Company, BGLS and certain
holders ("Participating Holders") of the 16.125% Senior Subordinated Reset
Notes due 1997 ("Reset Notes") and the 14.500% Subordinated Debentures due
1998 ("Subordinated Debentures") pursuant to which certain prior agreements
among the parties were terminated. The Participating Holders had advanced
$13,702 to BGLS under the prior agreements.
Under the 1994 Exchange Agreement, on October 3, 1994 BGLS exchanged an
aggregate of $49,900 of new BGLS 13.75% Series 2 Senior Secured Notes due
1997 ("Series 2 Notes") for an equal principal amount of Reset Notes. BGLS
and the Company also agreed, subject to applicable securities laws, to offer
the other holders of the Reset Notes the opportunity to exchange the Reset
Notes for the Series 2 Notes. That offer commenced October 21, 1994 and was
closed December 12, 1994. An additional $33,675 of the Reset Notes were
exchanged.
In related transactions with the same Participating Holders, BGLS issued
$23,594 of 13.75% Series 1 Senior Secured Notes due 1995 ("Series 1 Notes")
to the same Participating Holders in consideration of the transfer to BGLS of
previously issued Senior Secured Notes, on account of new loans by the same
holders in respect of certain interest payable and to cover certain expenses
of the Participating Holders. On June 12, 1995, BGLS redeemed all the Series
1 Notes in the amount of $23,594 plus accrued interest of $670.
In connection with the 1995 Exchange Offer, all of the Series 2 Notes were
exchanged for Senior Secured Notes and no Series 2 Notes remain outstanding.
C-25
<PAGE> 79
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
16.125% Senior Subordinated Reset Notes due 1997
14.500% Subordinated Debentures due 1998:
Pursuant to the 1995 Exchange Offer, discussed above, the Reset Notes were
redeemed on March 29, 1996. The Subordinated Debentures in face amount of
$800 remain outstanding and, as part of the 1995 Exchange Agreement, the
Sixth Supplemental Indenture dated January 26, 1996 was executed by the
Company in which substantially all of the covenants and events of default
were eliminated pertaining to the Subordinated Debentures.
15.501% Junior Subordinated Secured Notes due 2008:
Pursuant to an agreement (the "Purchase Agreement") dated February 23, 1989
among the Company, Liberty Service Corporation ("Liberty") and its parent,
Columbia Savings & Loan Association ("Columbia"), Liberty purchased from the
Company $48,560 of the Company's 15.501% Junior Subordinated Secured Notes
due 2008 (the "Junior Secured Notes") which was utilized to purchase New
Valley securities. In the year ended December 31, 1993, the Company
repurchased $48,560 of the Junior Secured Notes for $10,198. As a result of
this transaction, the Company recorded extraordinary gains on extinguishment
of indebtedness of $38,362 in the year ended December 31, 1993.
Liggett 11.500% Senior Secured Series B Notes due 1993 - 1999:
During the first quarter 1992, Liggett issued $150,000 in Senior Secured
Notes (the "Liggett Series B Notes"). Interest on the Liggett Series B
Notes is payable semiannually on February 1 and August 1 at an annual rate
of 11.5%. The Liggett Series B Notes require mandatory principal
redemptions of $7,500 on February 1 in each of the years 1993 through 1997
and $37,500 on February 1, 1998 with the balance of the Liggett Series B
Notes due on February 1, 1999. The Liggett Series B Notes are
collateralized by substantially all of the assets of Liggett, excluding
accounts receivable and inventory. The Liggett Series B 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 Liggett at any time on or after February 1, 1996. The Liggett
Series B Notes contain restrictions on Liggett's ability to pay dividends,
incur additional debt, grant liens and enter into any new agreements with
affiliates.
Issuance of Series C Variable Rate Notes:
On January 31, 1994, Liggett issued $22,500 of Variable Rate Series C Senior
Secured Notes Due 1999 (the "Series C Notes"). Liggett received $15,000
from the issuance in cash and received $7,500 in Liggett Series B Notes
which were credited against the mandatory redemption requirements of Liggett
Series B Notes required under the indenture for February 1, 1994. Liggett
had received the necessary consents from the required percentage of holders
of Liggett 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 Liggett
Series B Indenture. The Series C Notes have the same terms (other than
interest rate) and stated maturity as the Liggett Series B Notes. In
connection with the consents, holders of Liggett Series B Notes received
Series C Notes totaling $2,842 or 2% of their then current Liggett Series B
Notes holdings. Liggett issued the remaining $7,508 of Series C Notes in
November 1994. The Series C Notes bore a 16.5% interest rate, which was
reset on February 1, 1995 to 19.75%, the maximum reset rate.
C-26
<PAGE> 80
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
On January 26, 1995, the Company sold the Series C Notes it held in face
amount of $2,935.
Revolving Credit Facility - Liggett:
On March 8, 1994, Liggett entered into a revolving credit facility (the
"facility") for $40,000 with a syndicate of commercial banks. The facility
is collateralized by all inventories and receivables of Liggett. At
December 31, 1995, $21,017 was outstanding and $13,340 was available under
the facility. Borrowings under the facility bear interest at a rate equal
to 1.5% above the Philadelphia National Bank's prime rate which was 8.75% at
December 31, 1995. The facility requires Liggett's compliance with certain
financial and other covenants. The facility also limits the amount of
dividends and distributions by Liggett. At December 31, 1995, Liggett
was in compliance with all covenants under the facility.
Foreign Loans:
In October, 1995, LDL, a subsidiary of BOL, entered into a construction loan
agreement with Rosvneshtorg Bank, Moscow, Russia for a period of two years
on behalf of BrookeMil for $20,000. The interest rate is LIBOR plus 10%.
(Refer to Note 4). The outstanding balance at December 31 was $7,967.
Broker's fees of approximately $3,000 were recorded and are payable ratably
over the term of the loan.
In January 1995, LDL entered into a revolving credit facility for $1,667
with the same bank. The facility is denominated in rubles and is due within
180 days with an automatic renewal. Because the credit facility exists in a
hyperinflationary economy, it bears interest at a rate of 85% per annum. At
December 31, 1995, the balance was $155.
Scheduled Maturities:
Subsequent to the closing of the 1995 Exchange Agreement on January 30,
1996 and the redemption of the Reset Notes, scheduled maturities of
long-term debt for each of the next five years are as follows:
<TABLE>
<S> <C>
1996...... $ 2,387
1997...... 38,519
1998...... 38,506
1999...... 107,375
2000......
Thereafter 232,868
-------
$419,655
=======
</TABLE>
9. RESTRUCTURING CHARGES
Liggett:
In early 1993, Liggett restructured its headquarters operations to reduce
operating costs. In connection with the restructuring, Liggett has recorded
a non-recurring net charge to operating income of $5,565 ($2,531 is included
in cost of sales).
C-27
<PAGE> 81
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
In January 1994, Liggett reduced its field sales force and recorded a charge
of $3,000 against operating income in the fourth quarter of 1993.
During the year ended December 31, 1995, Liggett offered a severance and
benefit program to reduce personnel costs on an ongoing basis. This program
resulted in a charge to operations of $2,548.
Headquarters:
In 1993, the Company restructured its domestic and foreign operations
including reduction in personnel and subleasing of certain office spaces to
reduce operating costs. In connection with the restructuring, the Company
recorded non-recurring charges of approximately $5,879 for the year ended
December 31, 1993.
10. EMPLOYEE BENEFIT PLANS
Defined Benefit Retirement Plans:
The Company sponsors several defined benefit pension plans, covering
virtually all of Liggett's full-time employees. These plans provide pension
benefits for eligible employees based primarily on their compensation and
length of service. Contributions are made to the pension plans in amounts
necessary to meet the minimum funding requirements of the Employee
Retirement Income Security Act of 1974 ("ERISA").
In a continuing effort to reduce operating expenses, all defined benefit
plans were frozen between 1993 and 1995. As a result of this, the Company
recorded a curtailment charge of $1,550, $691 and $4,766 in 1995, 1994
and 1993, respectively.
The Company's net pension expense consists of the following components:
<TABLE>
Year Ended December 31,
-------------------------------
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 454 $ 1,140 $ 2,065
Interest cost on projected benefit obligation... 12,850 12,363 13,746
Actual return on assets......................... (23,501) (5,144) (23,925)
Curtailment related to plan restructuring....... 1,550 691 4,766
Net amortization and deferral................... 9,547 (8,337) 8,727
------- ------ -------
$ 900 $ 713 $ 5,379
======= ====== =======
</TABLE>
In accordance with SFAS 87, "Employers' Accounting for Pensions", the
overfunded and underfunded plans with respect to the accumulated benefit
obligation at December 31, 1994 have been segregated for financial statement
presentation. All plans were underfunded with respect to the accumulated
benefit obligation at December 31, 1995. An analysis of the funded status
of the Company's defined benefit pension plans and amounts recognized in the
balance sheets at December 31, 1995 and 1994 for the pension plans are as
follows:
C-28
<PAGE> 82
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
<TABLE>
December 31, December 31,
1995 1994
-----------------------------------------------
Accumulated Assets Exceed Accumulated
Benefits Exceed Accumulated Benefits Exceed
Assets Benefits Assets
-----------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation...................... $166,448 $77,521 $81,472
======= ====== ======
Accumulated benefit obligation................. $172,317 $77,521 $83,471
======= ====== ======
Projected benefit obligation................... $172,317 $77,521 $83,622
Plan assets at fair value........................... 163,913 78,239 78,475
------- ------ ------
Projected benefit obligation in excess of (less
than) plan assets.............................. 8,404 (718) 5,147
Unrecognized net gain............................... 14,449 7,232 11,143
Unrecognized prior service cost..................... (229)
Adjustment required to recognize minimum liability.. 976 803
------- ------ ------
Pension liability before purchase accounting
valuation adjustments.......................... 23,829 6,514 16,864
Purchase accounting valuation adjustments related
to income taxes................................ (3,773) (2,061) (2,060)
------- ------ ------
Net pension liability included in the balance sheets $ 20,056 $ 4,453 $14,804
======= ====== ======
</TABLE>
Assumptions used in the determination of net pension expense and the
actuarial present value of benefit obligations were as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Discount rates............................ 6.25 - 8.50% 5.75 - 8.50%
Accrued rates of return on invested assets 9.0% 9.0%
Salary increase assumptions............... N/A 3.0%
per annum per annum
</TABLE>
Plan assets consist of commingled funds, marketable equity securities and
corporate and government debt securities.
Postretirement Medical and Life Insurance Plans:
BGLS and Liggett
Substantially all of the Company's United States employees were eligible for
certain postretirement benefits if they reach retirement age while working
for the Company; however, there were several modifications made to the
Company's Plans in 1993. Prior to 1994, the Plans had reimbursed 80 percent
of retirees' medical claims. However, the Company announced on November 11,
1993 that retirees would be required to fund 60 percent of participant
medical premiums in 1994 and 100 percent of premiums on a going-forward
basis, effective January 1, 1995. As a result of the above modifications,
the Plan's Accumulated Postretirement Benefit Obligation was decreased from
$39,029 at January 1, 1993 to $15,137 at December 31, 1993.
The components of net periodic postretirement (benefit) cost for the years
ended December 31, 1995, 1994 and 1993 are as follows:
C-29
<PAGE> 83
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- ---------
<S> <C> <C> <C>
Service cost, benefits attributed to employee
service during the year.................. $ 68 $ 63 $ 587
Interest cost on accumulated postretirement
benefit obligation....................... 970 1,037 3,133
Curtailment credits related to restructuring
expense.................................. (623)
Immediate recognition of transition obligation 16,853
Curtailment credits related to modification of
Medical Plans............................ (26,172)
Charge for special termination benefits....... 489
Amortization of net (gain) loss............... (26) 33
----- ----- ------
Net periodic postretirement cost (benefit).... $1,501 $1,133 $(6,222)
===== ===== ======
</TABLE>
The following sets forth the actuarial present value of the Accumulated
Postretirement Benefit Obligation ("APBO") at December 31, 1995 and 1994
applicable to each employee group:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Retired employees................................... $ 8,673 $ 9,292
Active employees - fully eligible................... 1,707 1,170
Active employees - not fully eligible............... 1,078 1,143
------- ------
APBO........................................... $ 11,458 $11,605
Unrecognized net gain............................... 1,339 1,277
Purchase accounting valuation adjustments related to
income taxes................................... (1,181) (1,291)
------- ------
Postretirement liability............................ $ 11,616 $11,591
======= ======
</TABLE>
The APBO at December 31, 1995 was determined using a discount rate of 7.5%
and a health-care cost trend rate ranging from 10% in the near term,
declining to 4% in the third and subsequent years. A 1% increase in the
trend rate for health care costs would have increased the APBO and
postretirement benefit costs by $420 and $50 for the year ended December 31,
1995. The Company does not hold any assets reserved for use in the plan.
Profit Sharing Plan:
Liggett
The 401(k) plans originally called for Liggett contributions matching up to
a 3% employee contribution, plus additional Liggett contributions of up to
6% of salary based on the achievement of Liggett's profit objectives.
Effective January 1, 1994, Liggett suspended the 3% match for the Salaried
Employees' 401(k) Plan. Liggett contributed $900, $420 and $1,787 to the
401(k) plans for the years ended December 31, 1995, 1994 and 1993,
respectively.
C-30
<PAGE> 84
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
11. INCOME TAXES
The Company files a consolidated Federal Income Tax Return that includes
its more than 80% owned United States subsidiaries.
The amounts provided for income taxes are as follows:
<TABLE>
Year Ended December 31,
-----------------------------
1995 1994 1993
-----------------------------
<S> <C> <C> <C>
Current:
U.S. Federal.................................. $(24,714) $1,000
State......................................... $342 227
Deferred:
U.S. Federal.................................. 2,141
State......................................... 2,052
--- ------- -----
Total provision (benefit) for continuing operations $342 $(24,487) $5,193
=== ======= =====
</TABLE>
The tax effect of temporary differences which give rise to a significant
portion of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
-------------------------- --------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales and product allowances........ $ 2,337 $ 2,721
Inventory........................... 831 $ 1,280 550 $ 2,397
Coupon accruals..................... 3,198 4,645
Property, plant and equipment....... 6,200 6,554
Employee benefit accruals........... 13,249 12,502
Debt restructuring charges.......... 5,702 3,403
Excess of tax basis over book basis-
non-consolidated entities...... 4,327 17,508
Excess of book basis over tax basis-
non-consolidated entities...... 5,564 21,306
Other............................... 1,289
Legal settlements................... 3,556
Net operating loss carryforwards.... 54,860 48,501
Valuation allowance................. (73,955) (60,862)
Reclassifications................... (13,044) (13,044) (30,257) (30,257)
------- ------- ------- -------
$ 1,061 $ $ $
======= ======= ======= =======
</TABLE>
Differences between the amounts provided for income taxes and amounts
computed at the federal statutory tax rate are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
(Loss) from continuing operations
before income taxes......................... $(45,002) $(42,478) $(64,035)
------- ------- -------
Federal income tax (benefit) at statutory rate (15,751) (14,867) (22,412)
Increases (decreases) resulting from:
State income taxes, net of federal income tax
benefits.................................. 342 148 1,333
Changes in valuation allowance.............. 11,810 14,432 26,272
Other....................................... 3,941
Reduction of reserves....................... (24,200)
------- ------- -------
Provision (benefit) for income tax.......... $ 342 $(24,487) $ 5,193
======= ======= =======
</TABLE>
C-31
<PAGE> 85
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
The Company favorably settled an audit with the Internal Revenue Service in
the third quarter of 1994 and has adjusted its reserves accordingly.
At December 31, 1995, the Company and its consolidated group had net
operating loss carryforwards for tax purposes of approximately $135,000
which may be subject to certain restrictions and limitations and which will
expire in the years 2006 to 2009.
12. COMMITMENTS
Certain of the Company's subsidiaries lease certain facilities and equipment
used in its operations under both month-to-month and fixed-term agreements.
The aggregate minimum rentals under operating leases with noncancelable
terms for one year or more are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1996.................... $4,014
1997.................... 2,989
1998.................... 2,344
1999.................... 1,252
2000.................... 900
2001 and thereafter..... 24,950
</TABLE>
Lease commitments for 2001 and thereafter relate primarily to the remaining
45 years of a land lease and 23 years of an equipment lease in Russia.
The total of minimum rentals to be received in the future by certain of the
Company's subsidiaries under noncancelable subleases are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1996................... $642
1997.................... 126
---
$768
===
</TABLE>
The Company's rental expense for the years ended December 31, 1995, 1994 and
1993 was $4,449, $4,808 and $7,286 respectively.
13. CONTINGENT VALUE RIGHTS
The CVR entitled the holder (3,117,400 CVRs outstanding at December 31,
1992) to receive on November 15, 1993 a cash payment equal to the amount, if
any, by which the then current market value of the Company's common stock
for a period of 20 trading days ending five days before such date was less
than $19.45 per share, reduced as provided in the CVR agreement for
dividends and distributions, if any, paid on shares of common stock up to
the time of maturity. The Company was
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BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
permitted to redeem the CVRs in whole or in part, at any time after May 15,
1991, for a price equal to $13.75 per share increased from November 1990 at
a 15% compound annual rate as adjusted for dividends paid (the "Target
Price") minus the then market price of the common stock as of a date 60 days
before the redemption date. The CVR obligation, initially recorded at fair
market value which was de minimis, was adjusted to the calculated redemption
value through October 15, 1993, with the change reflected directly in
stockholder's equity.
The CVR's were senior collateralized obligations of the Company and were
freely transferable separately from the common stock. They were
collateralized by assets ($12,000 in cash and certain securities of the
Company) deposited with a trustee.
The Company satisfied the major portion of its liability with respect to the
CVR obligation on October 6, 1993 through the distribution of SkyBox common
stock which removed $44,813 of the obligation. The remaining portion of the
obligation was satisfied pursuant to a Notice of Redemption given on October
15, 1993 whereby the Company redeemed each CVR for $0.36 (a total of $1,122)
on December 9, 1993 or thereafter when such CVR was surrendered to the
Trustee. Accordingly, all collateral (except for the $1,122, above) which
included cash and certain securities of the Company and BGLS was released.
(See also Note 16, "Contingencies", regarding a complaint filed by a group
of CVR holders).
14. EQUITY
Preferred Stock Series E, F and G:
On September 14, 1993, certain officers and an employee of the Company
exchanged 11,124,172 common shares for 8,929.338 shares of Series E and
2,194.834 of Series F redeemable preferred stock. Each share of Series E
Preferred Stock is convertible beginning 30 days after initial issuance into
1,000 shares of the Company's common stock. At October 31, 1993, all Series
E Preferred Stock had been converted into the Company's common stock.
The terms of the Series F Preferred Stock are identical to those of the
Series E Preferred Stock, except that the Series F Preferred Stock are
entitled to receive, in addition to dividends payable on the Series E
Preferred Stock, a special dividend per share in an amount equal to the
appraised value per share of the SkyBox common stock ($14.375) dividended in
the Distribution times the number of shares into which it is convertible,
payable one year from the date of the Distribution, in cash, or at the
option of the Company, in the Company's common stock valued at its average
closing price over the 20 trading days prior to payment. Following payment
of this dividend, each share of Series F Preferred Stock will convert
automatically into Company common stock.
On December 30, 1993, certain present and a former officer of the Company
were offered an exchange for all shares remaining (a total of 2,184.834) of
Series F redeemable preferred stock for 2,184.834 shares of Series G
redeemable preferred stock.
The terms of the Series G Preferred Stock are identical to those of the
Series F Stock, except that the special dividend on Series G stock was
accelerated and paid in two parts. To the extent that dividends were
utilized to facilitate the repayment or defrayal of certain debt obligations
to the Company, cash dividends were disbursed or dividends were waived to
satisfy such obligations. The remaining portion of the special dividend was
payable in four installments on January 1, April 1, July 1 and October 1,
1994 payable in cash or shares of common stock at the option of the Company
using the prime rate announced by Citibank, N.A. discounted by the number of
days between the
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BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
installment payment date and October 6, 1994, the date the Special dividend
on the Series F preferred stock was to have been paid out. (Refer to Note
16 "Contingencies" and Note 17 "Related Party Transactions"). At December
31, 1994, all Series G Preferred Stock had been converted into Company
common stock.
Treasury Stock:
For information concerning the exercise of a warrant for 607,889 shares of
the Company's common stock, for the year ended December 31, 1994, refer to
Note 17.
For the year ended December 31, 1993, the Company purchased at market prices
1,224,200 shares of common stock in the open market for a total amount of
$3,323. In 1995 and 1994, pursuant to a Stock Grant Agreement, the Company
purchased 33,748 and 41,641 shares of common stock, respectively, from two
former employees at market price. Through December 31, 1993, 225,000
unvested shares were surrendered by a former officer and two employees. In
addition, 127,939 vested shares were transferred to the Company by two
former officers and an employee in satisfaction of certain liabilities.
15. STOCK PLANS
The Company's Stock Option Plan (the "Plan") provides that options and stock
appreciation rights ("SAR's") for up to 400,000 shares of common stock may
be granted to officers and other key employees of the Company. All options
must be granted on or before the tenth anniversary of the effective date of
the Plan (September 1, 1997) and at prices not less than the fair market
value of the stock on the date of grant. The exercise price may be paid in
cash or in shares of the Company's common stock having a fair market value
equal to the cash amount for which it was substituted. Shares received upon
exercise of a portion of an option may be applied automatically at their
fair market value to purchase additional portions of the option. Shares
relating to options that expire or are canceled are added back to shares
authorized for future grants. At December 31, 1995, 1994 and 1993, no
options were outstanding; however, there were 212,400 shares available to be
granted under this Plan.
On August 7, 1991, the Company's Board of Directors adopted the 1991 Stock
Incentive Plan (the "1991 Incentive Plan") for officers and other key
employees of the Company and its subsidiaries and authorized the grant of up
to 1,213,343 shares of common stock under the 1991 Incentive Plan. The 1991
Incentive Plan was approved by stockholders on September 12, 1991, and all
shares were granted during 1991.
Of the awards made under the 1991 Incentive Plan, 110,000 shares were
unrestricted shares and the remainder were shares whose transferability were
restricted for a specified period of time and vest over a four-year period
(the "Restricted Shares"). Restricted Shares had full voting rights and,
subject to certain escrow arrangements, were entitled to all dividends.
Holders of unrestricted shares had all rights of a stockholder. In
connection with the Company's 1991 Incentive Plan described above, the
Company issued an additional 998,043 shares of common stock.
During the first quarter of 1993, the Company granted an additional 375,000
shares of common stock to an officer and an employee, under terms
substantially similar to the Restricted Shares described above. During the
fourth quarter of 1993, the officer surrendered the equivalent of 150,000
unvested shares received earlier in the year.
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BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
Pursuant to an agreement dated as of January 1, 1994, the Company granted
500,000 shares of restricted common stock to a consultant who also serves as
the Chairman of SkyBox and a member of the Board of Directors and President
of New Valley. Of the total number of shares granted, 250,000 were
immediately vested and issued during the third quarter. The remaining
250,000 shares were issued in 1995 and will vest in 1997. In addition, on
January 25, 1995 the Company entered into a nonqualified stock option
agreement with the same consultant. Under the agreement, options to
purchase 500,000 shares were granted at $2.00 per share. The options are
exercisable over a ten-year period, beginning with 20% on the grant date and
20% on each of the four anniversaries of the grant date. Unexercised
options do not provide any rights of a stockholder; however, the grant does
provide for dividend equivalent rights on the unexercised shares.
During 1995, 1994 and 1993, the Company recorded charges to income of $557,
$781 and $790 for compensation equal to the excess of the fair market value
for the shares granted over the price paid for them and, in 1995, recorded
charges to income of $150 for the dividend equivalent rights. In 1993,
75,000 restricted shares were cancelled and all other shares were deemed
unrestricted as a result of certain officers' termination of employment.
16. 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 Brooke Group Ltd. in its former name or in
its present name or against Liggett), since all involve the tobacco
manufacturing and marketing activities currently performed by Liggett. 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 assistance from others in the industry in
defraying the costs 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, without
notice, and the amount of assistance received is 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 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
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BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
fraudulent misrepresentation (other than a claim of fraudulently
neutralizing the warning), concealment (other than in advertising and
promotion of cigarettes), conspiracy and breach of express warranty after
1969. The Court expressed no opinion on whether any of these claims are
viable under state law, but assumed arguendo that they are viable.
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 and expert discovery is scheduled to close on July 3,
1996. It is possible that the case will be scheduled for trial during 1996.
On March 19, 1996, the Magistrate Judge assigned to the case ordered
Liggett to produce certain of its documents with respect to which Liggett
has asserted various claims of privilege. Liggett intends to appeal the
decision and order. Upon Liggett's motion, the Court has enlarged the time
to and including May 1, 1996 for Liggett to file its appeal. The other
major cigarette manufacturers and The Council for Tobacco Research U.S.A.,
Inc. have moved to intervene.
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 have appealed
this ruling and on January 3, 1996, the Third District of the Florida Court
of Appeals affirmed the ruling of the trial court. On January 18, 1996,
defendants filed a petition for rehearing, for rehearing en banc and for
certification to the Florida Supreme Court. Defendants' petition has not
been ruled upon as yet.
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BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
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 also so 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 and, inter alia,
fraud, deceit, negligent misrepresentation, breach of express and implied
warranty, strict liability and violation of consumer protection statutes.
Plaintiffs seek compensatory and punitive damages, equitable relief
including disgorgement of profits from the sale of cigarettes and creation
of a fund to monitor the health of class members and to pay for medical
expenses allegedly caused by defendants, attorneys' fees and costs. On
February 17, 1995, the court issued an Order that granted in part
Plaintiffs' motion for class certification for certain claims, together with
punitive damages to the end of establishing a multiplier to compute punitive
damage awards. Defendants' application for discretionary appeal to the
Court of Appeals for the Fifth Circuit was granted. Oral argument was held
on April 2, 1996.
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 District of the Florida Court
of Appeals 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. It is anticipated that defendants will file
a petition for rehearing, for rehearing en banc and for certification to the
Florida Supreme Court.
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 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.
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BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
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 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 enters 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
has been scheduled to commence August 5, 1996.
On May 23, 1994, an action entitled Mike Moore, Attorney General, ex rel
State of Mississippi vs. The American Tobacco Company, et al., Chancery
Court for the County of Jackson, State of Mississippi, was filed against
Liggett and 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 recently by the State of Minnesota
(together with Minnesota Blue Cross-Blue Shield), by the State of West
Virginia and more recently by the Commonwealth of Massachusetts. 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, seeking
a writ of prohibition to bar further prosecution and dismissal of the suit
brought by the Attorney General of the state 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
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BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
effect that the commencement of any such litigation (as had been filed by
Florida, Mississippi, West Virginia and Minnesota and now by Massachusetts)
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 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). This statute purportedly
abrogates certain defenses typically available to defendants. This
legislation would impose on the tobacco industry, if ultimate liability of
the industry is established in litigation, liability based upon market share
for such payments made as a result of such smoking related diseases.
Although a suit has been commenced to challenge the constitutionality of the
Florida legislation, no assurance can be given that it will be successful.
On May 6, 1995, the Florida legislature voted in favor of a bill to repeal
this legislation, but the Governor of Florida vetoed this repealer bill. On
March 13, 1996, the Florida legislature considered taking certain action to
override the veto of the repealer bill if the requisite vote could be
attained, but decided not to take formal action when it was determined that
it could not attain the requisite vote. On February 22, 1995, suit was
commenced pursuant to the above-referenced enabling statute by the State of
Florida, acting through the Agency For Health Care Administration against
Liggett and others, seeking restitution of monies expended in the past and
which may be expended in the future by the State of Florida to provide
health care to Medicaid recipients for injuries and ailments allegedly
caused by the use of cigarettes and other tobacco products. Plaintiffs also
seek a variety of other forms of relief including a disgorgement of all
profits from the sales of cigarettes in Florida.
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 costs incurred by the state to provide health care
to persons injured by the company or individual also has been introduced in
at least nine 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 transaction by 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
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BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
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 transaction with another
defendant in the lawsuits within three years of the date of the settlement.
Settlement funds received by the Attorneys General will be used to reimburse
the states' smoking-related healthcare costs. While neither consenting to
FDA jurisdiction nor waiving their objections thereto, the Company and
Liggett also have agreed to phase in compliance with certain of the proposed
interim FDA regulations on the same bases 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. In the event of any such termination by the Company and
Liggett, the named plaintiffs would be at liberty to renew the prosecution
of such civil action against the Company and Liggett.
Currently, in addition to Cordova, approximately 90 product liability
lawsuits, which have been filed in various jurisdictions, are pending and
active in which Liggett is a defendant. Of these, 68 are pending in the
State of Florida. In most of these lawsuits, plaintiffs seek punitive as
well as compensatory damages. In the product liability lawsuits presently
pending in Florida against Liggett and others, three are scheduled for trial
during 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 the 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 respecting, in particular, "fire-safe" or self-extinguishing
cigarettes. It also requests certain general information addressing
Liggett's involvement with and relationship to its competitors. The Company
is unable to predict at this time the outcome of this investigation.
In March and April 1994, the Health and the Environmental Subcommittee of
the Energy and Commerce Committee of the House of Representatives held
hearings regarding nicotine in cigarettes. On March 25, 1994, Commissioner
David A. Kessler of the Food and Drug Administration ("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
C-40
<PAGE> 94
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
or voluntarily implemented by major manufacturers in the industry. Liggett
and 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 on that day 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 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. In these two settlements, Liggett and the Company, while neither
consenting to FDA jurisdiction nor waiving their objections thereto, agreed
to withdraw their objections and opposition to the Proposed Rule-Making and
to phase in compliance with certain of the proposed interim FDA regulations.
See discussions of the Castano Settlement Agreement and the Attorneys
General Settlement Agreement appearing hereinabove and hereinafter.
The Omnibus Budget Reconciliation Act of 1993 ("OBRA") required United
States cigarette manufacturers to use at least 75% domestic tobacco in the
aggregate of the cigarettes manufactured in the United States, effective
January 1, 1994, on an annualized basis or pay a "marketing assessment"
based upon price differentials between foreign and domestic tobacco and
under certain circumstances make purchases of domestic tobacco from the
stabilization cooperatives organized by the United States government. OBRA
was repealed retroactively (as of December 31, 1994) coincident in time with
the recent issuance of a Presidential proclamation, effective September 13,
1995, imposing tariffs on imported tobacco in excess of certain quotas.
On February 14, 1995, Liggett filed with the United States Department of
Agriculture (the "USDA") its certification as to usage of domestic and
imported tobaccos during 1994 and an audit was commenced by the USDA during
August 1995 to verify this certification. Liggett received the results of
the audit from the USDA, which states that Liggett did not satisfy the 75%
domestic tobacco usage requirement for 1994. The marketing assessment
presently is estimated to approximate $5,500, which amount is disputed by
the Company. It is the understanding of the Company that the levels of
domestic tobacco inventories currently on hand at the tobacco stabilization
organizations are below reserve stock levels, and for such reason, the
Company is of the opinion that it will not be obligated to make such
purchases of domestic tobacco from the tobacco stabilization cooperatives.
The Company is currently engaged in negotiations with the USDA in an effort
to resolve this matter on satisfactory terms. At December 31, 1995, the
Company has accrued $4,900, representing its best estimate for the USDA
marketing assessment. The charge is included as a component of cost of
sales in 1995.
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 prohibitive tariffs on imports
of flue-cured and burley tobaccos in excess of certain levels which vary
from country to country. Oriental (Turkish) 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.
C-41
<PAGE> 95
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
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 materially adverse effect on the Company. The
Company believes it is unlikely that an end-user licensing system will be
adopted because it would likely lead to another GATT proceeding. The
end-user licensing system has not been authorized by legislation and it
could create significant problems for U.S. exports in other product markets.
However, no assurances can be made that an end-user licensing system will
not be adopted.
On March 15, 1996, an action entitled Spencer J. Volk v. Liggett Inc. was
filed in the United States District Court for the Southern District of New
York, Case No. 96-CIV-1921, wherein plaintiff, who was formerly employed as
Liggett's President and Chief Executive officer, seeks recovery of certain
monies allegedly owing to him by Liggett to plaintiff for long-term
incentive compensation. The action presently is in the pleading stage and
discovery has not as yet commenced.
As a consequence of certain tobacco litigation settlements and marketing
assessment contingencies discussed above, Liggett charged approximately
$8,846 to operations in the fourth quarter of 1995. Possible future
payments under the litigation settlements which are based on a percentage of
Liggett's pretax income, if any, will be charged to operations in the period
that Liggett's operating results are known.
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 financial position,
results of operations or cash flows could be materially affected by an
ultimate unfavorable outcome in any of such pending litigation.
As to each of the cases referred to above which is pending against Liggett,
Liggett believes, and has been so advised by counsel handling the respective
cases, that Liggett has a number of valid defenses to the claim or claims
asserted against Liggett. 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.
Liggett is not able to evaluate the effect of these developing matters on
pending litigation or the possible commencement of additional litigation.
The Company:
On September 20, 1993, a group of CVR holders and the CVR trustee filed an
action in the Delaware Court of Chancery , New Castle County, against the
Company and certain of its present and former directors, challenging and
seeking to enjoin or rescind the Distribution. Pursuant to notice given on
October 15, 1993, the Company redeemed its CVRs on December 9, 1993 for a
payment of $.36 per CVR. On June 2, 1994, the Company and the director
defendants entered into a Stipulation and Agreement of Compromise and
Settlement (the "Stipulation") pursuant to which a class of CVR holders,
which includes the plaintiff CVR holders and all other persons who held CVRs
at any time between September 20, 1993 and June 2, 1994, were to receive a
total of $4,000 plus an award of
C-42
<PAGE> 96
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
attorneys' and experts' fees and expenses, as approved by the Court of
Chancery, not to exceed $900. The $4,000 settlement fund has been deposited
into an escrow account for eventual disbursement to all eligible CVR
holders.
By order dated June 10, 1994, the Court of Chancery scheduled a settlement
hearing to be held on August 16, 1994 to determine, inter alia, whether the
Stipulation is fair, reasonable and adequate. That settlement hearing was
adjourned at the named plaintiff CVR holders' request because of issues
arising from the Company's filing of a motion for leave to amend the
Company's complaint in a separate lawsuit pending against the CVR trustee.
The named plaintiff CVR holders subsequently asked the court to rescind the
Stipulation, stating, in substance, that they had mistakenly entered into it
in the erroneous belief that the Company would be unable to assert claims
against the trustee which those CVR holders might have to indemnify. On
December 28, 1994, the court rescinded the Stipulation, finding that such a
mistake had been made; however, the named plaintiff CVR holders and the
defendants continued settlement discussions, seeking to address the named
plaintiff CVR holders' concerns over their obligation to indemnify the
trustee. On March 3, 1995, these parties advised the court that they had
reached an agreement in principle to settle the case on a class basis,
subject to the final resolution of certain remaining issues.
The issues have recently been resolved and on March 21, 1996 a revised
settlement agreement was filed with the court. A hearing on approval of the
settlement is scheduled for June 4, 1996. The CVR trustee withdrew from the
action coincident with the initial presentation of the settlement to the
court in June 1994. Notwithstanding this, all claims, the assertions of
which the CVR trustee initially joined, would be compromised and dismissed
under the proposed settlement. The proposed settlement would leave both the
Company and the plaintiff CVR holders free to pursue claims, in certain
circumstances, against the CVR trustee.
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, 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. RJR Nabisco seeks
temporary and permanent injunctions barring the Company and Messrs. LeBow
and Icahn from proceeding with the consent solicitation until such time as
they remedy the alleged disclosure obligation violations. RJR Nabisco also
alleges that the Company and Messrs. LeBow and Icahn secretly formed a group
of investors to purchase a controlling interest in RJR Nabisco and the
Company. According to the complaint, the purpose for such a combination is
to eliminate certain alleged issues under the Investment Company Act
allegedly applicable to the Company, BGLS and/or New Valley.
The Company and Messrs. LeBow and Icahn believe the allegations are without
merit and are defending the action vigorously. In addition, 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.
At December 31, 1995, 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 the CVR
action, the RJR Nabisco action and such other proceedings, lawsuits and
claims should not materially affect its consolidated financial position,
results of operations or cash flows.
C-43
<PAGE> 97
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
17. RELATED PARTY TRANSACTIONS
Effective June 1993, $14,692 of principal indebtedness (the "Consolidated
Indebtedness") of the Chairman and certain of his affiliates to the Company
were consolidated and the terms of such indebtedness were amended. On
January 5, 1994, the Chairman repaid his principal indebtedness of $14,692
and that of certain of his affiliates in the total amount of $15,695 with
the use of dividends paid on December 31, 1993 on Series G stock. (Refer to
Footnote 13 "Equity"). On March 21, 1994, the Chairman repaid all interest
due on the various debts in the amount of $1,163 and accordingly, the stock
collateralizing the loans was released.
Certain of the various debts under the Consolidated Indebtedness that were
satisfied are discussed below:
In September 1992, the Chairman became indebted to the Company for a
shortfall of $1,640 under a note assigned to the Company in prior years. In
March 1993, a shortfall in the amount of $3,573 arose with respect to a
second note and as a result he became obligated to pay such shortfall amount
(plus interest at prime plus 1%) to the Company. These shortfalls were a
portion of the Consolidated Indebtedness which was repaid in January 1994.
A corporation owned by the Chairman, and subsequently a subsidiary of BGLS,
had an outstanding payable for approximately $994 at December 5, 1993. This
payable had been assigned to BGLS, in September 1992, in exchange for the
cancellation by BGLS of a like amount of debt owed to it by the subsidiary.
Prior to the assignment to BGLS, no interest had been charged in respect of
this receivable. The Chairman had agreed to guarantee payment of this
receivable to BGLS, plus interest at prime rate plus one percent. This loan
was repaid as part of the Consolidated Indebtedness and was repaid in
January 1994.
In December 1991, the Company acquired an option to purchase rights in an
aircraft from a company controlled by the Chairman. The appraised value of
the plane exceeded the purchase price at that time. The option expired
unexercised on January 15, 1993, after which time the aircraft was sold to a
third party. The Chairman's company was obligated to repay the option price
($2,895) as well as an amount of approximately $300 related to unreimbursed
medical payments from another company owned by the Chairman. Both of the
above repayments were a portion of the Consolidated Indebtedness which was
repaid in January 1994.
As of January 1, 1993, the Chairman had approximately $1,650 of other
personal unsecured indebtedness to the Company. In addition, the Chairman
was indebted to the Company in 1993 for approximately $2,049 collateralized
by 6,234,837 shares of common stock and 1,754.657 shares of Series G
Preferred to the Company owned directly or indirectly by the Chairman. On
January 11, 1993, the Company approved a $1,475 line of credit for the
Chairman on the same terms as the unsecured loans described above, of which
$1,475 was outstanding. These loans bore interest at the prime rate plus 1%
and were due on June 30, 1993. All of these amounts were repaid in January
1994 as part of the Consolidated Indebtedness.
Other related party transactions follow:
Effective July 1, 1990, a former executive transferred all of his equity in
the Company to the Chairman and resigned from substantially all of his
positions with the Company and its affiliates. In consideration for this
transfer, a partnership (the "Partnership") controlled by the Chairman
agreed, among other things, to make certain payments to the Company on
account of the former executive's outstanding indebtedness of $8,677
(deducted from equity). In connection with this transaction, the
C-44
<PAGE> 98
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
Partnership had pledged 1,681,713 of the shares it held of the Company's
common stock to secure its obligation. In May 1994, the Partnership paid
$3,200 in partial satisfaction of the obligation. In consideration thereof,
the Company released 1,281,713 of the pledged shares.
The Company and companies in which it has an interest also paid
aircraft-related charges of approximately $376 to affiliated companies
during the years ended December 31, 1993.
Prior to 1990, The Company advanced funds to the former Vice Chairman
($5,126 outstanding as of December 31, 1991, plus accrued interest, and
deducted from equity at December 31, 1991). The loans bore interest at
either the prime rate or federal short-term interest rate and were payable
semiannually or annually. The loans were scheduled to mature in 1995 and
1997, were collateralized by 607,889 shares of the former Vice Chairman's
common stock in the Company and, with the exception of loans in the
principal amount of $1,500, were nonrecourse to him. Effective December 30,
1992, the former Vice Chairman transferred the 607,889 shares of common
stock in the Company which were the collateral for the nonrecourse loan
(approximately $4,600 including accrued interest) in connection with the
termination of such loans. The Company recorded a $2,654 charge to income
as a result of this transfer. In conjunction with the transfer of shares,
the former Vice Chairman was granted a warrant (the "Warrant") to purchase
607,889 shares of the Company's common stock for an exercise price of $7.60
per share. This price was subsequently reduced to $0.10 per share as a
result of the SkyBox Distribution. The Warrant was exercised in November
1994. The remaining loans in principal amount of $1,500 were to mature in
1995, bore interest at the federal short-term rate, are payable semiannually
and are recourse to the former Vice Chairman. On December 31, 1993, the
former Vice Chairman repaid $900 of the loan out of certain dividend
proceeds. Effective January 1, 1994, the former Vice Chairman resigned
waiving all rights in respect of a lump sum severance payment of $1,500
which was part of an employment agreement in effect since January 1, 1991.
The Company waived all rights to the remaining $600 balance on the loan.
The agreement provides that the former Vice Chairman remains as a consultant
to the Company. The former Vice Chairman has served on the Board of
Directors of New Valley since 1990. During the fourth quarter of 1994, he
was elected President and Chief Executive Officer of MAI.
In February 1991, the Company made a loan to a former executive vice
president of the Company in the amount of $250, bearing interest at the
prime rate plus one percent and due March 1, 1994. On July 26, 1993, the
former officer transferred 50,000 shares of the Company's common stock with
a fair market value of $275 to the Company in satisfaction of the loan and
interest thereon.
Pursuant to an agreement dated as of January 1, 1994, as amended, the
Company granted 500,000 shares of restricted common stock (with dividend
equivalent rights) to a consultant who also served as the Chairman of SkyBox
and is currently President and a Board member of New Valley. Of the total
number of shares granted, 250,000 were immediately vested and issued during
the third quarter of 1994. The remaining 250,000 shares have been issued
and will vest in 1997. In addition, on January 25, 1995, the Company
entered into a nonqualified stock option agreement. Under the agreement,
options to purchase 500,000 shares were granted at $2.00 per share. The
options are exercisable over a ten-year period, beginning with 20% on the
grant date and 20% on each of the four anniversaries of the grant date.
Unexercised options do not provide any rights of a stockholder; however, the
grant does provide for dividend equivalent rights on the unexercised shares.
During 1995 and 1994, the Company recorded charges to income of $479 and
$586, respectively, for compensation equal to the excess of the fair market
value for the shares granted over the price paid for them.
An outside director of the Company is a stockholder of and serves as the
secretary and treasurer of a registered broker-dealer that has performed
services for the Company and its affiliates since before
C-45
<PAGE> 99
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
December 31, 1993. The broker-dealer received commissions of approximately
$121, and commissions and other income of approximately $584 from the
Company and/or its affiliates during 1994 and 1995, respectively. In
connection with the acquisition of certain office buildings by New Valley on
January 10, 1996, this director received a commission of $220 from the
seller.
During 1995, the Company and New Valley entered into an expense sharing
agreement whereby New Valley agreed to reimburse the Company for its portion
of certain operating expenses, rent and utilization of personnel. Expense
reimbursements amounted to $571 for the year ended December 31, 1995.
In connection with their agreement to serve as the Company's nominees at RJR
Nabisco's Annual Meeting, two directors of New Valley were each paid $30 by
the Company during the fourth quarter of 1995. In addition, the Company
also entered into an agreement with each of the Company nominees whereby it
has agreed to indemnify such nominees from and against any losses incurred
by such nominees resulting from, relating to, or arising out of any claim in
connection with the solicitation of proxies in support of the nominees'
election at the Annual Meeting, including the right to be advanced by the
Company for any expenses incurred in connection with any such claim.
18. SEGMENT INFORMATION
The Company's major operations are in tobacco products, principally
cigarettes, and real estate development. The tobacco segment operates
primarily in the United States with a much smaller manufacturing facility in
Russia; real estate activities are conducted in Russia. Total assets of the
foreign real estate and tobacco operations included in the consolidated
balance sheet at December 31, 1995 were approximately $45,400. (Refer to
Note 4.)
<TABLE>
<CAPTION>
Real Corporate
1995 Tobacco Estate and Others Consolidated
---- ------- ------ ---------- ------------
<S> <C> <C> <C> <C>
Net sales............. $455,666 $ 5,793 $461,459
Operating income...... 16,725 $(1,990) (6,675) 8,060
Identifiable assets... 123,144 31,149 71,327 225,620
Capital expenditures.. 1,104 7,229 472 8,805
Depreciation and
amortization........ 7,972 1,104 9,076
</TABLE>
C-46
<PAGE> 100
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
19. SUPPLEMENTAL CASH FLOW INFORMATION
In accordance with the requirements of SFAS No. 95, "Statement of Cash
Flows," supplemental cash flow information is disclosed below:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
I. Cash paid during the period for:
Interest................................. $60,158 $ 39,429 $56,217
Income taxes, net of refunds............. 1,735 605 2,110
------ ------- ------
$61,893 $ 40,034 $58,327
====== ======= ======
II. Noncash investing and financing
activities:
Contingent Value Rights liability........ $43,821
Dividends payable........................ $ 131 15,136
Issuance and exchange of long-term debt.. 114,888
Distribution of MAI to stockholders...... $27,085
Common stock received in connection with
debt repayment......................... 275
Financing of equipment purchases......... 3,500
Series G dividend........................ 3,200
Shareholder settlement................... 6,250
Transfer of pension liability to SkyBox.. 4,305
</TABLE>
20. SUPPLEMENTAL INFORMATION
Supplemental balance sheet information at December 31 is as follows:
<TABLE>
1995 1994
----------------
<S> <C> <C>
Other assets:
Deferred financing costs, net of
amortization............................. $10,502 $ 9,933
Other...................................... 797 1,934
------ ------
Total other assets....................... $11,299 $11,867
====== ======
Other accrued liabilities:
Compensation and related items............. $ 1,201 $ 3,913
Debt guarantee............................. 7,500 7,500
Restructuring.............................. 515 1,306
Estimated allowance for future sales
returns.................................. 5,000 5,800
Legal and professional fees................ 1,469 1,510
Unearned revenue........................... 2,955 2,056
Total other accrued liabilities.......... $21,452 $24,521
====== ======
</TABLE>
C-47
<PAGE> 101
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - (CONTINUED)
21. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly data for the years ended December 31, 1995 and 1994 (reclassified)
are as follows(A):
<TABLE>
<CAPTION>
December 31, September 30, June 30, March 31,
1995 1995 1995 1995
-------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $119,741 $124,100 $122,328 $95,290
Gross profit 62,320 69,474 64,566 48,912
(Loss) from continuing operations (17,671) (1,124) (13,639) (12,910)
Income of discontinued operations 5,231 98 1,114 14,786
Extraordinary items (9,810)
Net (loss) income applicable to
common shares (22,269) 1,772 (1,571) 4,945
Per share data:
Loss (income) from continuing
operations $(0.97) $0.09 $(0.15) $(0.53)
===== ==== ===== =====
Income of discontinued operations $0.29 $0.01 $ 0.06 $ 0.80
===== ==== ===== =====
Extraordinary items $(0.54) $ $ $
===== ==== ===== =====
Net (loss) income applicable to
common shares $(1.22) $0.10 $(0.09) $0.27
===== ==== ===== =====
Share prices:
- -------------
High 9 7/8 11 3/8 5 1/2 4 1/4
Low 6 5/8 4 3/8 3 1/8 3 15/64
<CAPTION>
December 31, September 30, June 30, March 31,
1994 1994 1994 1994
-----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $121,715 $124,446 $119,077 $114,105
Gross profit 64,999 66,599 61,129 56,809
(Loss) income from continuing
operations (14,007) 9,113 (6,377) (6,720)
Income of discontinued operations 154,604 9,805 4,960 5,314
Extraordinary items (45,479) (1,118)
Net income 95,118 18,918 (1,417) (2,524)
Per share data:
(Loss) income from continuing
operations $(0.79) $0.52 $(0.37) $(0.38)
===== ==== ===== =====
Income of discontinued operations $ 8.75 $0.55 $ 0.29 $ 0.30
===== ==== ===== =====
Extraordinary items $(2.60) $ $ $(0.06)
===== ==== ===== =====
Net income $5.27 $1.07 $(0.08) $(0.14)
===== ==== ===== =====
Share prices:
- -------------
High 4 1/2 5 3/8 2 2 1/4
Low 2 5/8 1 3/8 1 1/4 1 1/2
</TABLE>
- ---------------------
(A) Results of operations have been reclassified for discontinued operations
in 1994 (Note 5).
C-48
<PAGE> 102
BROOKE GROUP LTD.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
----------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Allowances for:
Doubtful accounts.............. $ 249 $ 260 $ 692 (b) $ 280 $ 921
Cash discounts................. 720 14,579 14,684 615
Sales returns.................. 5,800 1,030 (800)(a) 1,030 5,000
------- ------ ------- ------ -------
Total..................... $ 6,769 $15,869 $ (108) $15,994 $ 6,536
======= ====== ======= ====== =======
Provision for inventory obsolescence $ 1,369 $ 1,072 $ 630 (b) $ 430 $ 2,641
======= ====== ======= ====== =======
YEAR ENDED DECEMBER 31, 1994
Allowances for:
Doubtful accounts.............. $ 235 $ 21 $ 7 $ 249
Cash discounts................. 745 12,337 12,362 720
Sales returns.................. 6,300 $ 2,800 (a) 3,300 5,800
------- ------ ------- ------ -------
Total..................... $ 7,280 $12,358 $ 2,800 $15,669 $ 6,769
======= ====== ======= ====== =======
Provision for inventory obsolescence $ 1,418 $ 520 $ $ 569 $ 1,369
======= ====== ======= ====== =======
YEAR ENDED DECEMBER 31, 1993
Allowances for:
Doubtful accounts.............. $ 300 $ 240 $ 305 $ 235
Cash discounts................. 1,191 13,018 13,464 745
Sales returns.................. 10,700 $ 3,800 (a) 8,200 6,300
Price increase credits......... 919 919
------- ------ ------- ------ -------
Total..................... $ 13,110 $13,258 $ 3,800 $22,888 $ 7,280
======= ====== ======= ====== =======
Provision for inventory obsolescence $ 1,090 $ 350 $ $ 22 $ 1,418
======= ====== ======= ====== =======
</TABLE>
(a) Charged to net sales.
(b) Amounts include impact of consolidating LDL.
C-49
<PAGE> 103
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the
Shareholders of New Valley Corporation
We have audited the accompanying consolidated balance sheet of New Valley
Corporation and subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, changes in non-redeemable preferred
shares, common shares and other capital (deficit), and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
New Valley Corporation and subsidiaries at December 31, 1995, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Miami, Florida
April 10, 1996
C-50
<PAGE> 104
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the
Shareholders of New Valley Corporation
In our opinion, the consolidated financial statements as of December 31,
1994, appearing under Item 14(a)(1) present fairly, in all material respects,
the financial position of New Valley Corporation and its subsidiaries (the
"Company") at December 31, 1994, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluation the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Morristown, New Jersey
March 24, 1995
C-51
<PAGE> 105
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
---------------------------------
December 31,
---------------------------------
---------------------------------
1995 1994
---------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 51,742 $ 376,170
Investment securities 241,526
Contract receivable 300,000
Restricted assets 22,919 354,639
Receivable from clearing brokers 13,752
Other current assets 3,546 8,400
--------- -----------
Total current assets 333,485 1,039,209
--------- -----------
Investment securities 517
Assets of discontinued operations held for sale 5,400
Restricted assets 15,086 25,000
Long-term investments, net 29,512
Other assets 7,222 282
--------- -----------
Total assets $ 385,822 $ 1,069,891
========= ===========
LIABILITIES AND CAPITAL (DEFICIT)
Current liabilities:
Margin loan payable $ 75,119
Accounts payable and accrued liabilities 27,712 $ 10,931
Prepetition claims and restructuring accruals 33,392 619,833
Dividend payable 75,070
Income taxes 20,283 31,907
Securities sold, not yet purchased 13,047
Current portion of long-term obligations 8,367 16,619
--------- -----------
Total current liabilities 177,920 754,360
--------- -----------
Deferred income taxes payable 19,572
Long-term obligations 11,967 16,605
Redeemable preferred shares 226,396 317,798
Commitments and contingencies
Non-redeemable preferred shares, Common Shares and other
capital (deficit):
Cumulative preferred shares; liquidation preference of $69,769,
dividends in arrears: 1995 - $95,118; 1994 - $76,700 279 279
Common Shares, $.01 par value; 850,000,000 shares
authorized; 191,551,586 and 188,725,550 shares
outstanding 1,916 1,887
Additional paid-in capital 679,058 692,001
Accumulated deficit (714,364) (732,611)
Unrealized appreciation on investment securities, net of
taxes of $294 2,650
--------- -----------
Total non-redeemable preferred shares, Common
Shares and other capital (deficit) (30,461) (38,444)
--------- -----------
Total liabilities and capital (deficit) $ 385,822 $ 1,069,891
========= ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
C-52
<PAGE> 106
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
------------------------------------------------
Year Ended
------------------------------------------------
December 31, December 31, December 31,
------------------------------------------------
1995 1994 1993
------------------------------------------------
<S> <C>
Revenues:
Principal transactions, net $ 18,237
Commissions 9,888
Interest and dividends 21,047 $ 7,104 $ 3,369
Other income 18,558 3,277 475
--------- ----------- --------
Total revenues 67,730 10,381 3,844
--------- ----------- --------
Costs and expenses:
Employee compensation and benefits 30,994 219
Interest 2,102 643 2,752
Provision for (recovery of) restructuring charges (2,044) 22,734 9,035
Write-down of long-term investments (Note 6) 11,790
Other expenses 23,222 2,550 3,247
--------- ----------- --------
Total costs and expenses 66,064 26,146 15,034
--------- ----------- --------
Income (loss) from continuing operations before income
taxes and extraordinary items 1,666 (15,765) (11,190)
Income tax provision (benefit) 292 (500) (225)
--------- ----------- --------
Income (loss) from continuing operations before
extraordinary items 1,374 (15,265) (10,965)
--------- ----------- --------
Discontinued operations (Note 3):
Income from discontinued operations, net
of income taxes of $480, $5,500, and
$1,325, respectively 4,315 79,625 38,368
Gain on disposal of discontinued operations, net
of income taxes of $1,400 and $52,000 12,558 1,056,081
--------- ----------- --------
Income from discontinued operations 16,873 1,135,706 38,368
--------- ----------- --------
Income before extraordinary items 18,247 1,120,441 27,403
Extraordinary items:
Loss on extinguishment of debt, net of income
taxes of $3,475 (Note 15) (110,500)
Gain on extinguishment of lease obligation (Note 8) 8,417
--------- ----------- --------
Net income 18,247 1,009,941 35,820
Dividends on preferred shares - undeclared (72,303) (80,037) (68,706)
Excess of carrying value of redeemable preferred
shares over cost of shares purchased 40,342
--------- ----------- --------
Net income (loss) applicable to Common Shares $ (13,714) $ 929,904 $(32,886)
========= =========== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
C-53
<PAGE> 107
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
------------------------------------------------
Year Ended
------------------------------------------------
December 31, December 31, December 31,
------------------------------------------------
1995 1994 1993
------------------------------------------------
<S> <C> <C> <C>
Income (loss) per common share:
Continuing operations before extraordinary items $ (.16) $ (.50) $ (.42)
Discontinued operations .09 6.03 .20
------------ ------------ ------------
Before extraordinary items (.07) 5.53 (.22)
Extraordinary items -- (.59) .04
------------ ------------ ------------
Net income (loss) $ (.07) $ 4.94 $ (.18)
============ ============ ============
Number of shares used in computation 191,086,000 188,298,000 187,723,000
============ ============ ============
Income (loss) per common share assuming full dilution:
Continuing operations before extraordinary items $ (.16) $ (.37) $ (.42)
Discontinued operations .09 5.36 .20
------------ ------------ ------------
Before extraordinary items (.07) 4.99 (.22)
Extraordinary items -- (.52) .04
------------ ------------ ------------
Net income (loss) $ (.07) $ 4.47 $ (.18)
============ ============ ============
Number of shares used in computation 191,086,000 211,558,000 187,723,000
============ ============ ============
Supplemental information:
Additional interest expense, absent
the Chapter 11 filing $ 2,314 $ 46,927 $ 46,927
============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
C-54
<PAGE> 108
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NON-REDEEMABLE PREFERRED
SHARES, COMMON SHARES AND OTHER CAPITAL (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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, 1992 3,025 $ 303 186,163 $1,862 $809,215 $(1,778,372)
Net income 35,820
Undeclared dividends and accretion
on redeemable preferred shares (54,149)
Conversion of preferred shares (234) (24) 1,951 19 5
Accrued compensation associated
with stock options granted 450
----- ----- ------- ------ -------- -----------
Balance December 31, 1993 2,791 279 188,114 1,881 755,521 (1,742,552)
Net income 1,009,941
Undeclared dividends and accretion
on redeemable preferred shares (63,635)
Conversion of preferred shares 3
Exercise of stock options 609 6 115
----- ----- ------- ------ -------- -----------
Balance, December 31, 1994 2,791 279 188,726 1,887 692,001 (732,611)
Net income 18,247
Undeclared dividends and accretion
on redeemable preferred shares (53,821)
Purchase of redeemable preferred
shares 40,342
Exercise of stock options 2,825 29 536
Unrealized appreciation on investment
securities, net of taxes $2,650
----- ----- ------- ------ -------- ----------- ------
Balance, December 31, 1995 2,791 $ 279 191,551 $1,916 $679,058 $ (714,364) $2,650
===== ===== ======= ====== ======== =========== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
C-55
<PAGE> 109
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
------------------------------------------
Year Ended December 31,
------------------------------------------
------------------------------------------
1995 1994 1993
------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 18,247 $ 1,009,941 $ 35,820
Adjustments to reconcile net income to net
cash used for operating activities:
Gain on disposal of business (12,558) (1,056,081)
Income from discontinued operations (4,315) (79,625) (38,368)
Provision for loss on long-term investments 11,790
Reversal of restructuring accruals (2,044) (318) (2,117)
Extraordinary loss (gain) 110,500 (8,417)
Financial restructuring costs 23,052 11,152
Changes in assets and liabilities, net of effects from acquisition:
Decrease (increase) in receivables and other assets 12,292 (7,571) 160
Decrease in income taxes payable and deferred taxes (32,517)
Decrease in securities sold not yet purchased (9,359)
Increase (decrease) in accounts payable and accrued
liabilities 5,223 (16,896) (12,635)
--------- ----------- ---------
Net cash used for operating activities (13,241) (16,998) (14,405)
--------- ----------- ---------
Cash flows from investing activities:
Net proceeds from disposal of business 17,540 467,822
Payment of prepetition claims and restructuring accruals (584,397)
Collection of contract receivable 300,000
Decrease (increase) in restricted assets 341,634 (367,378)
Sale or maturity of investment securities 250,129
Purchase of investment securities (458,017)
Purchase of long-term investments (77,411)
Sale or liquidation of long-term investments 36,109
Payment for purchase of Ladenburg, net of cash acquired (25,750)
--------- -----------
Net cash provided from (used for) investing activities (200,163) 100,444
--------- -----------
Cash flows from financing activities:
Payment of preferred dividends (132,162)
Purchase of Class A preferred stock (47,761)
Increase in margin loan payable 75,119
Payment of long-term obligations (12,890)
Exercise of stock options 565
---------
Net cash used for financing activities (117,129)
---------
Expenses of financial restructuring (23,052) (11,152)
----------- ---------
Net cash provided from discontinued operations 6,105 139,410 71,417
--------- ----------- ---------
Net (decrease) increase in cash and cash equivalents (324,428) 199,804 45,860
Cash and cash equivalents, beginning of year 376,170 176,366 130,506
--------- ----------- ---------
Cash and cash equivalents, end of year $ 51,742 $ 376,170 $ 176,366
========= =========== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
C-56
<PAGE> 110
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
---------------------------------
Year Ended December 31,
---------------------------------
---------------------------------
1995 1994 1993
---------------------------------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the year for:
Interest (including capital leases and
excluding interest on prepetition claims) $ 2,105 $ 476 $ 2,915
Income taxes 33,662 882 834
Non-cash investing and financing activities:
Contract receivable 300,000
Pension liability discharge 245,000
Capital leases 4,982
Detail of Ladenburg acquisition:
Fair value of assets acquired 59,066
Liabilities assumed 32,316
--------
Cash paid 26,750
Less cash acquired 1,000
--------
Net cash paid for acquisition 25,750
========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
C-57
<PAGE> 111
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
Principles of Consolidation
The consolidated financial statements include the accounts of New Valley
Corporation (the "Company") and its majority owned subsidiaries
(collectively, "New Valley"). All significant intercompany transactions
are eliminated in consolidation.
Certain amounts in the 1993 and 1994 financial statements have been
reclassified to conform to the 1995 presentation.
Reorganization
On November 15, 1991, an involuntary petition under Chapter 11 of Title
11 of the United States Code (the "Bankruptcy Code") was commenced against
the Company in the United States Bankruptcy Court for the District of New
Jersey (the "Bankruptcy Court"). On March 31, 1993, the Company consented
to the entry of an order for relief placing it under the protection of
Chapter 11 of the Bankruptcy Code.
On November 1, 1994, the Bankruptcy Court entered an order confirming the
First Amended Joint Chapter 11 Plan of Reorganization, as amended (the
"Joint Plan"). The terms of the Joint Plan provided for, among other
things, the sale of Western Union Financial Services Company, Inc. ("FSI"),
a wholly-owned subsidiary of the Company, and certain other Company assets
related to FSI's money transfer business, payment in cash of all allowed
claims, payment of postpetition interest in the amount of $178,000 to
certain creditors, a $50 per share cash dividend to the holders of the
Company's $15.00 Class A Increasing Rate Cumulative Senior Preferred
Shares ($100 Liquidation Value), $.01 par value per share (the "Class A
Senior Preferred Shares"), a tender offer by the Company for up to 150,000
shares of the Class A Senior Preferred Shares, at a price of $80 per share,
and the reinstatement of all of the Company's equity interests.
On November 15, 1994, pursuant to the Asset Purchase Agreement, dated
as of October 20, 1994, as amended (the "Purchase Agreement"), by and
between the Company and First Financial Management Corporation ("FFMC"),
FFMC purchased all of the common stock of FSI and other assets relating to
FSI's money transfer business for $1,193,000 (the "Purchase Price"). The
Purchase Price consisted of $593,000 in cash, $300,000 representing the
assumption of the Western Union Pension Plan obligation, and $300,000 paid
on January 13, 1995 for certain intangible assets of FSI. The Purchase
Agreement contained various terms and conditions, including the escrow of
$45,000 of the Purchase Price, a put option by the Company to sell to FFMC,
and a call option by FFMC to purchase, Western Union Data Services Company,
Inc., a wholly-owned subsidiary of the Company engaged in the messaging
service business (the "Messaging Services Business"), for $20,000,
exercisable during the first quarter of 1996, and various services
agreements between the Company and FFMC.
On January 18, 1995, the effective date of the Joint Plan, the Company
paid approximately $550,000 on account of allowed prepetition claims and
emerged from bankruptcy. At December 31, 1995, the Company had accrued
$33,392 for unsettled prepetition claims and restructuring accruals (see
Note 15).
C-58
<PAGE> 112
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
On October 31, 1995, the Company completed the sale of substantially
all of the assets (exclusive of certain contracts), and conveyed
substantially all of the liabilities of the Messaging Services Business
to FFMC for $20,000, which consisted of $17,540 in cash and $2,460 in
cancellation of intercompany indebtedness. The sale of the Messaging
Services Business was effective as of October 1, 1995, and the Company
recognized a gain on the sale of such business of $12,558, net of
income taxes of $1,400.
2. ACQUISITION
On May 31, 1995, the Company consummated its acquisition of Ladenburg,
Thalmann & Co. Inc. ("Ladenburg"), a registered broker-dealer and
investment bank, for $25,750, net of cash acquired. The acquisition was
treated as a purchase for financial reporting purposes and, accordingly,
these consolidated financial statements include the operations of Ladenburg
from the date of acquisition. The excess of the consideration paid over
the estimated fair value of net assets acquired of $1,342 has been
recorded as goodwill to be amortized on the straight-line basis over 15
years.
Unaudited pro-forma data giving effect to the acquisition of Ladenburg
as if it had been consummated as of January 1, 1994 are shown below. The
unaudited pro-forma data do not purport to be indicative of what would
have occurred had the acquisition been consummated as of such date.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
---- ----
<S> <C> <C>
Revenues $ 93,072 $ 69,251
Income (loss) from continuing
operations before extraordinary item 1,633 (13,699)
Income before extraordinary item 18,506 1,122,007
Net income 18,506 1,011,507
Net income (loss) applicable to
common shares (13,455) 931,470
Net income (loss) per common share (.07) 4.95
</TABLE>
3. DISCONTINUED OPERATIONS
As noted above, the Company sold FSI during the fourth quarter of 1994
and sold the Messaging Services Business effective October 1, 1995.
Accordingly, the financial statements reflect the financial position
and the results of operations of the discontinued operations of FSI and
the Messaging Services Business separately from continuing operations
which principally consisted of the investment banking and brokerage
business of Ladenburg and income derived from its other investments at
December 31, 1995.
Operating results of the discontinued operations, as shown below, include
the operations of the Messaging Services Business for the nine months ended
September 30, 1995 and the operations of FSI and Messaging Services
Business for the years ended December 31, 1994 and 1993.
C-59
<PAGE> 113
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues $37,771 $489,916 $477,349
======= ======== ========
Operating Income $ 4,795 $ 85,125 $ 39,693
======= ======== ========
Income before income taxes $ 4,795 $ 85,125 $ 39,693
Provision for income taxes 480 5,500 1,325
------- -------- --------
Net income $ 4,315 $ 79,625 $ 38,368
======= ======== ========
</TABLE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash and Cash Equivalents. The Company considers all highly liquid
financial instruments with an original maturity of less than three months
to be cash equivalents.
Fair Value of Financial Instruments. Investments in securities and
securities sold, not yet purchased traded on a national securities exchange
or listed on NASDAQ are valued at the last reported sales prices of the
reporting period. Futures contracts are valued at their last reported sales
price. Investments in securities, principally warrants, which have exercise
or holding period restrictions, are valued at fair value as determined by
the Company's management based on the intrinsic value of the warrants
discounted for such restrictions.
Investment Securities. The Company follows the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" which requires certain
investments in debt and marketable equity securities be classified as
either trading, available for sale, or held to maturity. Trading securities
are carried at fair value, with unrealized gains and losses included in
income. Investments classified as available for sale are carried at fair
value, with net unrealized gains and losses included as a separate
component of stockholders' equity (deficit). Debt securities classified as
held to maturity are carried at amortized cost. Realized gains and losses
are included in other income, except for those relating to the Company's
broker-dealer subsidiary which are included in principal transactions
revenues. The cost of securities sold is determined based on average cost.
Restricted Assets. At December 31, 1995, the current and noncurrent
portions of restricted assets consisted primarily of $28,200 held in escrow
pursuant to the sale of FSI to FFMC, which have been classified based on
the terms of the Purchase Agreement and the anticipated release of the
escrow. Restricted assets consists of investments in U.S. government bonds.
At December 31, 1994, restricted assets consisted of $334,600 held in
escrow for certain debenture holders, which monies were released on January
18, 1995, in addition to $45,000 held in escrow pursuant to the Purchase
Agreement. In addition, pursuant to certain provisions contained in the
Joint Plan, the Company's cash and cash equivalents held at December 31,
1994 were restricted to short-term high grade marketable securities until
January 18, 1995.
C-60
<PAGE> 114
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
Depreciation. Property and equipment (including equipment subject to
capital leases) is depreciated over the estimated useful lives, using the
straight-line method. Leasehold improvements are amortized on a
straight-line basis over their estimated useful lives or the lease term, if
shorter. As property and equipment is retired, its cost and the related
accumulated depreciation are eliminated. Depreciation expense was $600,
$9,000 and $12,400 in 1995, 1994 and 1993, respectively. Depreciation
expense for 1994 and 1993 is included in discontinued operations.
Income Taxes. At December 31, 1995, the Company had $84,678 of unrecognized
net deferred tax assets, comprised primarily of net operating loss
carryforwards, available to offset future taxable income for federal tax
purposes. A valuation allowance has been provided against this deferred tax
assets as it is presently deemed more likely than not that the benefit of
the tax assets will not be utilized. The Company continues to evaluate the
realizability of its deferred tax assets. The provision for income taxes,
which represented the effect of the Alternative Minimum Tax and state
income taxes, for the three years ended December 31, 1995, 1994 and 1993,
does not bear a customary relationship with pre-tax accounting income
from continuing operations principally as a consequence of the reduction
in the valuation allowance relating to deferred tax assets.
Securities Sold, Not Yet Purchased. Securities sold, but not yet purchased,
represent obligations of the Company to deliver a specified security at a
contracted price and thereby creates a liability to repurchase the security
in the market at prevailing prices. Accordingly, these transactions
involve, to varying degrees, elements of market risk, as the Company's
ultimate obligation to satisfy the sale of securities sold, but not yet
purchased, may exceed the amount recognized in the consolidated statement
of financial condition. At December 31, 1995, securities sold, but not yet
purchased, consisted of $10,293 of equity and index options and $2,754 of
common stock.
Income (Loss) Per Common Share. Net income (loss) per common share is based
on the weighted average number of Common Shares outstanding. Net income
(loss) per common share represents net income (loss) after dividends on
redeemable and non-redeemable preferred shares (undeclared) and any
adjustment for the difference between excess of carrying value of
redeemable preferred shares and the cost of the shares purchased. Net
income (loss) per common share assuming full dilution is based on the
weighted average number of Common Shares outstanding plus the additional
common shares resulting from the conversion of convertible preferred shares
if such conversion was dilutive.
New Accounting Pronouncements. In March 1995, the Financial Accounting
Standards Board issued SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No.
121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those
assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable and that long-lived assets and certain identifiable intangibles
to be disposed of generally be reported at the lower of carrying amount or
fair value less cost to sell. SFAS No. 121 is effective for financial
statements for fiscal years beginning after December 15, 1995. The Company
does not expect the adoption of SFAS No. 121 to have a material effect on
its financial position or results of operations.
5. INVESTMENT SECURITIES
Investment securities classified as available for sale are carried at fair
value, with net unrealized gains of $2,944 ($3,252 of unrealized gains and
$308 of unrealized losses) included as a separate component of
stockholders' equity (deficit). The Company had net realized gains on sales
of
C-61
<PAGE> 115
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
investment securities available for sale of $6,736 ($9,223 of realized
gains and $2,487 of realized losses) for the year ended December 31, 1995.
In August 1995, the Company received approval from the Federal Trade
Commission to purchase up to 15% of the voting securities of RJR
Nabisco Holdings Corp. ("RJR Nabisco"). As of December 31, 1995, the
Company, through a wholly-owned subsidiary, held approximately 4.9
million shares of RJR Nabisco common stock, par value $.01 per share
(the "RJR Nabisco Common Stock"), with a market value of $150,446 (cost
of $149,005). The Company's investment in RJR Nabisco collateralizes
margin loan financing of $75,119 at December 31, 1995. This margin loan
bears interest at .25% below the broker's call rate (6.5% at December
31, 1995).
At December 31, 1995, investment securities consisted of the following:
<TABLE>
<S> <C>
Securities available for sale $210,832
Trading securities 31,211
--------
Total $242,043
========
</TABLE>
The details of the investment categories by type of security at December
31, 1995 are as follows:
<TABLE>
<CAPTION>
Fair
Cost Value
---- -----
<S> <C> <C>
Available for Sale:
Marketable equity securities:
RJR Nabisco common stock $149,005 $150,446
Other marketable securities 9,147 10,506
-------- --------
Total marketable equity securities 158,152 160,952
U.S. government securities 49,219 49,363
Marketable debt securities (long-term) 517 517
-------- --------
Total securities available for sale 207,888 210,832
Trading Securities (Ladenburg):
Marketable equity securities 21,431 21,828
Equity and index options 6,253 6,134
Other securities 2,585 3,249
-------- -------
Total trading securities 30,269 31,211
-------- --------
Total Investment securities 238,157 242,043
Less long-term portion of investment securities 517 517
-------- --------
Investment securities - current portion $237,640 $241,526
======== ========
</TABLE>
The $517 long-term portion of investment securities at cost consists of
marketable debt securities which mature in three years.
On October 17, 1995, the Company entered into an agreement, as amended (the
"Agreement"), with High River Limited Partnership ("High River"), an entity
owned by Carl C. Icahn. Pursuant to the Agreement, the Company sold
approximately 1.6 million shares of RJR Nabisco Common Stock to High River
for an aggregate purchase price of $51,000 and the parties agreed that the
Company and High River would each invest up to approximately $250,000 in
shares of RJR Nabisco Common Stock, subject to certain conditions and
limitations. Any party to the Agreement may terminate it at any time,
although under certain circumstances, the terminating party will be
required to pay a fee of $50,000 to the nonterminating party. The Agreement
also provides for the parties to pay certain other fees to each other under
certain circumstances, including a fee to High River equal to 20% of the
C-62
<PAGE> 116
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
Company's profit on its RJR Nabisco Common Stock, after certain expenses as
defined in the Agreement.
On December 27, 1995, the Company entered into an agreement with Brooke
Group Ltd. ("Brooke"), an affiliate of the Company, pursuant to which it
agreed to pay directly or reimburse Brooke and its subsidiaries for
reasonable out-of-pocket expenses incurred in connection with Brooke's
solicitation of consents and proxies from the shareholders of RJR Nabisco.
The Company has also agreed to pay to a wholly-owned subsidiary of Brooke a
fee of 20% of the net profit received by the Company or its subsidiaries
from the sale of shares of RJR Nabisco Common Stock after the Company and
its subsidiaries have achieved a rate of return of 20% and after deduction
of certain expenses incurred by the Company and its subsidiaries, including
the cost of the consent and proxy solicitations and of acquiring the shares
of common stock. The Company has also agreed to indemnify Brooke and its
affiliates against certain liabilities arising out of the solicitations.
On December 28, 1995, the Company, Brooke and Liggett, a wholly-owned
subsidiary of Brooke, engaged Jefferies & Company, Inc. ("Jefferies") to
act as a financial advisor in connection with the Company's investment in
RJR Nabisco and Brooke's solicitation of consents and proxies (as amended
on February 28, 1996 and April 9, 1996, the "Jefferies Agreement"). The
Company has (i) paid to Jefferies an initial fee of $1,500 and (ii) agreed
to pay to Jefferies for the period commencing January 1, 1996 and ending
March 31, 1996 monthly fees of $250 (which increased to $500 on February
20, 1996 and was pro rated for February) and, in addition, until March 31,
1996, an additional monthly fee of $100, and during the month of April
1996, a $160 fee. The companies also have agreed to pay Jefferies 10% of
the net profit (up to a maximum of $15,000) with respect to RJR Nabisco
Common Stock (including the distributions made by RJR Nabisco) held or sold
by these companies and their affiliates after deduction of certain
expenses, including the costs of the solicitations and the costs of
acquiring the RJR Nabisco Common Stock. The Company has also agreed to
indemnify Jefferies against certain liabilities arising out of the
solicitations.
During 1995, the Company expensed $3,879 relating to the RJR Nabisco
investment. Included in this amount is $1,419 in out-of-pocket expenses
owed to Brooke at December 31, 1995 pursuant to the Brooke agreement. In
February 1996, the Company acquired 269,200 additional shares in RJR
Nabisco for an aggregate consideration of $9,220. The Company's investment
in RJR Nabisco decreased from a $1,440 unrealized gain at December 31, 1995
to a $2,082 unrealized loss at March 29, 1996. Since January 1, 1996, the
Company expensed approximately $6,000 relating to its RJR Nabisco
investments.
6. LONG-TERM INVESTMENTS
At December 31, 1995, long-term investments consisted of investments in the
following:
<TABLE>
<CAPTION>
Carrying Fair
Value Value
----- -----
<S> <C> <C>
Limited partnerships $18,715 $23,200
Foreign corporations 6,000 6,000
Joint venture 3,796 3,796
U.S. corporation 1,001 1,001
------- -------
Total $29,512 $33,997
======= =======
</TABLE>
The principal business of the limited partnerships is investing in
investment securities. The estimated fair value of the limited partnerships
was provided by the partnerships based on the indicated market
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<PAGE> 117
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
values of the underlying investment portfolio. At December 31, 1995, the
Company had committed to fund one of the limited partnerships up to an
additional $20,000. The investment in foreign corporations is currently
comprised of an indirect ownership of a 1.9% interest in a Brazilian
airplane manufacturer (the "Brazilian Investment") acquired for $12,698,
and a 10% equity interest in a company that owns a 33.3% interest in a
Russian commercial bank (the "Russian Investment") acquired for $2,000. The
joint venture represents an investment of $6,888 in bonds of a foreign
republic with a face amount of $12,654 at December 31, 1995. The joint
venture partner is in the process of litigation to collect the amounts owed
under these bonds. During the fourth quarter of 1995, the Company
determined that an other than temporary impairment in the value of its
Brazilian Investment and its investment in the joint venture had occurred.
Accordingly, $11,790 was provided for the Brazilian Investment and for the
investment in the joint venture as an impairment charge in 1995. The
investment in a U.S. corporation represents a minority equity interest in a
computer software company.
7. PENSIONS AND RETIREE BENEFITS
New Valley has a Profit Sharing Plan (the "Plan") for substantially all
employees of Ladenburg. The Plan includes three features: a 401(k) option,
profit sharing, and a deferred compensation vehicle. The 401(k) is funded
solely by employee contributions. Contributions to the profit sharing
portion of the Plan are made by Ladenburg on a discretionary basis. The
deferred compensation feature of the Plan enables non-salaried employees to
invest up to 15% of their pre-tax annual compensation. For the year ended
December 31, 1995, employer contributions to the Plan were approximately
$200, excluding those made under the deferred compensation feature
described above.
During 1994 and 1993, New Valley maintained a suspended defined benefit
plan and two defined contribution plans which covered virtually all
full-time employees. Total pension costs accrued under all plans was
$18,900 and $25,100 in 1994 and 1993, respectively. All pension costs for
1994 and 1993 are included in the results of the discontinued operations.
Contributions were made to the pension plans in amounts necessary to meet
the minimum funding requirements of the Employee Retirement Income Security
Act of 1974 ("ERISA"). As discussed in Note 1, the liabilities related to
these pension plans were assumed by FFMC on November 15, 1994. These
liabilities aggregated approximately $245,000 at the date of sale.
Net pension cost accrued under defined benefit plans for 1994 and 1993 was:
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993
---- ----
<S> <C> <C>
Service cost $ 1,250 $ 1,500
Interest cost 35,490 43,928
Return on assets (21,448) (55,046)
Net amortization and deferral -- 30,406
-------- --------
Net pension cost $ 15,292 $ 20,788
======== ========
</TABLE>
Actuarial assumptions underlying the above data for financial statement
purposes were as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Discounted rates 7.5-8.5% 7.5%
Assumed rates of return on invested assets 10.0% 10.0%
</TABLE>
C-64
<PAGE> 118
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
The change in discount rates from 7.5% to 8.5% as of March 31, 1994
resulted in a $29,200 decrease in the minimum pension liability.
New Valley made contributions to its suspended defined benefit pension
plans in amounts necessary to meet minimum funding requirements under
ERISA. Cash contributions to such suspended plans were $20,300 and $24,700
in 1994 and 1993, respectively. Pension expense for defined contribution
plans was $3,100 and $3,500 in 1994 and 1993, respectively. Effective
November 15, 1994, sponsorship of these defined contribution plans were
assumed by FFMC.
8. COMMITMENT AND CONTINGENCIES
Leases
New Valley is currently obligated under two noncancelable lease agreements
for office space, expiring in December 1996 and December 2015,
respectively. The following is a schedule by fiscal year of future minimum
rental payments required under the agreements that have noncancelable terms
of one year or more at December 31, 1995:
<TABLE>
<S> <C>
1996 $ 2,058
1997 3,327
1998 3,324
1999 3,047
2000 3,047
2001 and thereafter 56,020
-------
$70,823
=======
</TABLE>
During 1994 and 1993, New Valley leased certain real properties for use as
customer service centers, corporate headquarters and sales offices. It also
leased certain data communications terminals, electronic data processing
equipment and automobiles. Effective November 15, 1994, virtually all of
these leases were assumed by FFMC as part of the sale of FSI.
Rental expense for operating leases for the years ended 1995, 1994 and 1993
was $1,677, $3,600, and $1,200, respectively. Virtually all of the rental
expense for the years ended 1994 and 1993 are included in the results of
the discontinued operations.
In December 1993, an $8,400 extraordinary gain was recorded as a result of
the extinguishment of a capital lease obligation associated with the
Company's former corporate headquarters.
Lawsuits
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.
C-65
<PAGE> 119
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
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 Note 21), 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.
9. FEDERAL INCOME TAX
In January 1993, New Valley prospectively adopted SFAS No. 109 "Accounting
for Income Taxes" which changes the Company's method of accounting for
income taxes from the deferred method (APB 11) to an asset and liability
approach. New Valley files a consolidated Federal income tax return. Since
1993, Federal income tax provisions were based on Alternative Minimum Tax
rates.
The provision for income taxes on continuing operations differs from the
amount of income tax determined by applying the applicable U.S. statutory
federal income tax rate (35%) to pretax income from continuing operations
as a result of the following differences:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Provision (credit) under statutory U.S. tax rates $ 583 $(5,518) $(3,916)
Increase (decrease) in taxes resulting from:
Nondeductible items 543 2,100 (2,664)
State taxes, net of Federal benefit 180 (122) --
(Decrease) increase in valuation reserve (1,014) 3,040 6,355
------- ------- -------
Income tax provision (benefit) $ 292 $ (500) $ (225)
======= ======= =======
</TABLE>
As described in Note 3, the Company sold FSI and the Messaging Services
Business to FFMC and has therefore reflected these operations as
discontinued. In addition, the Company recognized an extraordinary loss on
the extinguishment of debt in 1994. Income taxes associated with
discontinued operations and extraordinary items have been shown net of the
utilization of the net operating loss carryforward and the change in other
deferred tax assets.
C-66
<PAGE> 120
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
Deferred tax amounts are comprised of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforward:
Restricted net operating loss $ 21,786 $ 21,666
Unrestricted net operating loss 51,156 120,336
Other 14,592 8,750
-------- ---------
Total deferred tax assets 87,534 150,752
-------- ---------
Deferred tax liabilities:
Deferred gain on sale -- (105,000)
Other (2,856) (13,512)
-------- ---------
Total deferred tax liabilities (2,856) (118,512)
-------- ---------
Net deferred tax assets 84,678 32,240
Valuation allowance (84,678) (51,812)
-------- ---------
Deferred tax liability $ -- $ (19,572)
======== =========
</TABLE>
As of December 31, 1994, virtually all of the Company's current and
deferred income taxes payable of $31,900 and $19,600, respectively,
resulted from income taxes on discontinued operations.
In 1995, the Company identified additional potential tax benefits,
principally relating to the amount of net operating losses and changes in
tax rates. Since the Company deems it more likely than not that future
taxable income will not be sufficient to realize the deferred tax assets,
the valuation allowance was increased accordingly.
In December 1987, New Valley consummated certain restructuring transactions
that included certain changes in the ownership of New Valley's stock. The
Internal Revenue Code restricts the amount of future income that may be
offset by losses and credits incurred prior to an ownership change. New
Valley's annual limitation on the use of its net operating losses is
approximately $7,700, computed by multiplying the "long-term tax exempt
rate" at the time of change of ownership by the fair market value of the
company's outstanding stock immediately before the ownership change. The
limitation is cumulative; any unused limitation from one year may be added
to the limitation of a following year. Operating losses incurred subsequent
to an ownership change are generally not subject to such restrictions.
As of December 31, 1995, New Valley had consolidated net operating loss
carryforwards of approximately $180,000 for tax purposes, which expire at
various dates through 2007. Approximately $54,000 of net operating loss
carryforwards constitute pre-change losses and $126,000 of net operating
losses were unrestricted.
New Valley's Federal income tax returns have been examined and settled
through 1980. In addition, the Federal income tax returns for 1981 through
1991 have been preliminary surveyed by the IRS and no changes have been
proposed. In addition, all years through 1991 are closed for audit by
virtue of the statute of limitations except to the extent of net operating
loss carryforwards.
C-67
<PAGE> 121
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
10. LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
December 31,
1995 (b) 1994 (b)
---------------------- ------------------------
Long-term Current Long-term Current
portion portion portion portion
------- ------- ------- -------
<S> <C> <C> <C> <C>
9% note payable due 7/14/92(a) $ -- $ 5,400
Amount payable to FFMC pursuant to
the purchase contract $ 3,500 $6,567 10,967 10,167
Retiree and disability obligations 8,467 1,800 5,638 1,052
------- ------ ------- -------
Total long-term obligations $11,967 $8,367 $16,605 $16,619
======= ====== ======= =======
</TABLE>
- ---------------
(a) The 9% Note that was due 7/14/92 was paid in February 1995.
(b) See Note 15 for additional information concerning Prepetition Claims.
The maturity of the long-term portion at December 31, 1995 is as follows:
1997 - $5,300, 1998 - $1,500, 1999 - $1,000, 2000 - $1,000, and $3,167
thereafter.
11. REDEEMABLE PREFERRED SHARES
At December 31, 1995, the Company had authorized and outstanding 2,000,000
and 1,107,566, respectively, of its Class A Senior Preferred Shares. At
December 31, 1994, there were 1,501,411 Class A Senior Preferred Shares
outstanding. At December 31, 1995 and 1994, respectively, the carrying
value of such shares amounted to $226,396 and $317,798, including
undeclared dividends of $121,893 and $176,761, or $110.06 and $117.73 per
share.
The holders of Class A Senior Preferred Shares are currently entitled to
receive a quarterly dividend, as declared by the Board, payable at the rate
of $19.00 per annum. The Class A Senior Preferred Shares are mandatorily
redeemable on January 1, 2003 at $100 per share plus accrued dividends. The
Class A Senior Preferred Shares were recorded at their market value ($80
per share) at December 30, 1987, the date of issuance. The discount from
the liquidation value is accreted, utilizing the interest method, as a
charge to additional paid-in capital and an increase to the recorded value
of the Class A Senior Preferred Shares, through the redemption date. As of
December 31, 1995, the unamortized discount on the Class A Senior Preferred
Shares was $6,254.
In the event a required dividend or redemption is not made on the Class A
Senior Preferred Shares, no dividends shall be paid or declared and no
distribution made on any junior stock other than a dividend payable in
junior stock. If at any time six quarterly dividends payable on the Class A
Senior Preferred Shares shall be in arrears or such shares are not redeemed
when required, the number of directors will be increased by two and the
holders of the Class A Senior Preferred Shares, voting as a class, will
have the right to elect two directors until full cumulative dividends shall
have been paid or declared and set aside for payment. Such directors were
designated pursuant to the Joint Plan in November 1994.
Pursuant to the Joint Plan, the Company made an $80 per share cash tender
offer for a maximum of 150,000 Class A Senior Preferred Shares. This tender
offer expired February 17, 1995 and resulted
C-68
<PAGE> 122
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
in a payment of $4,355 for 54,445 shares tendered and increased the
Company's additional paid-in capital by $7,358.
Pursuant to the Joint Plan, the Company declared a cash dividend in
December 1994 on the Class A Senior Preferred Shares of $50 per share which
was paid in January 1995. The Company declared and paid cash dividends on
the Class A Senior Preferred Shares of $12.50 per share in July 1995 and
$37.50 per share in September 1995. Undeclared dividends are accrued
quarterly and such accrued and unpaid dividends shall accrue additional
dividends in respect thereof compounded monthly at the rate of 19% per
annum, both of which accruals are included in the carrying amount of
redeemable preferred shares, offset by a charge to additional paid-in
capital.
On April 6, 1995, the Company's Board of Directors (the "Board") authorized
the Company to repurchase as many as 200,000 shares of its Class A Senior
Preferred Shares. The Company completed the repurchase for an aggregate
consideration of $18,674 and thereafter, on June 21, 1995, the Board
authorized the Company to repurchase as many as 300,000 additional shares.
The Company repurchased in the open market 33,000 of such shares in July
1995 and 106,400 of such shares in September 1995 for an aggregate
consideration of $24,732. The repurchase of the Class A Senior Preferred
Shares increased the Company's additional paid-in capital by $26,266 for
the 200,000 shares acquired and $6,718 for the 139,400 shares acquired
based on the difference between the purchase price and the carrying values
of the shares.
For information on Class A Senior Preferred Shares owned indirectly by
Brooke, see Note 17.
12. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS
The holders of the $3.00 Class B Cumulative Convertible Preferred Shares
($25 Liquidation Value), $.10 par value per share (the "Class B Preferred
Shares"), 12,000,000 shares authorized and 2,790,776 shares outstanding as
of December 31, 1995 and 1994, are entitled to receive a quarterly
dividend, as declared by the Board, at a rate of $3.00 per annum.
Undeclared dividends are accrued quarterly at a rate of 12% per annum, and
such accrued and unpaid dividends shall accrue additional dividends in
respect thereof, compounded monthly at the rate of 12% per annum.
Each Class B Preferred Share is convertible at the option of the holder
into 8.3333 Common Shares based on a $25 liquidation value and a conversion
price of $3.00 per Common Share.
At the option of the Company, the Class B Preferred Shares are redeemable
in the event that the closing price of the Common Shares equals or exceeds
140% of the conversion price at a specified time prior to the redemption.
If redeemed by New Valley, the redemption price would equal $25 per share
plus accrued dividends.
In the event a required dividend is not paid on the Class B Preferred
Shares, no dividends shall be paid or declared and no distribution made on
any junior stock other than a dividend payable in junior stock. If at any
time six quarterly dividends on the Class B Preferred Shares are in
arrears, the number of directors will be increased by two, and the holders
of Class B Preferred Shares and any other classes of preferred shares
similarly entitled to vote for the election of two additional directors,
voting together as a class, will have the right to elect two directors to
serve until full cumulative dividends shall have been paid or declared and
set aside for payment. Such two directors were designated pursuant to the
Joint Plan in November 1994. During 1994 and 1993, 3,094 and 1,951,155
Common Shares, respectively, were issued upon conversion of 372 and 234,141
Class B Preferred Shares, respectively.
C-69
<PAGE> 123
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
No dividends on the Class B Preferred Shares have been declared since the
fourth quarter of 1988. The undeclared dividends, as adjusted for
conversions of Class B Preferred Shares into Common Shares, cumulatively
amounted to $95,118 and $76,700 at December 31, 1995 and 1994,
respectively. These undeclared dividends represent $34.08 and $27.46 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.
13. COMMON SHARES
Stock Warrants. In 1995, 1994 and 1993, no warrants were exercised. Stock
warrants outstanding at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Common Shares
Subject to Exercise
Date Issued Warrants Price Expiration Date
----------- -------- ----- ---------------
<S> <C> <C> <C>
September 30, 1987 220,000 $2.50 November 13, 1997
October 30, 1987 220,000 $2.50 November 13, 1997
-------
440,000
=======
</TABLE>
Stock Option Plans. Under the 1987 Stock Option Plan (the "1987 Plan"),
options to purchase up to 30,000,000 Common Shares may be offered to key
employees, including officers, and non-employee directors. Options may be
issued at an exercise price of not less than 35% of the fair market value
of the Common Shares at date of grant.
A summary of transactions during 1995 and 1994 with respect to options is
as follows:
<TABLE>
<CAPTION>
Number
of Shares
Optioned Price Range
-------- -----------
<S> <C> <C>
Outstanding at January 1, 1994 19,270,000 $.20 -- $.48
Exercised (608,750) $.20
Canceled, expired or terminated (1,675,300) $.20
-----------
Outstanding at December 31, 1994(a) 16,985,950 $.20 -- $.48
Exercised (2,825,000) $.20
Canceled, expired or terminated (14,160,950) $.20 -- $.48
-----------
Outstanding at December 31, 1995 --
===========
</TABLE>
- -------------------
(a) 14,401,230 shares exercisable.
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<PAGE> 124
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
14. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The composition of accounts payable and accrued liabilities is as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
---- ----
<S> <C> <C>
Accounts payable and accrued liabilities:
Accrued compensation $ 6,981 $ 95
Taxes (property and miscellaneous) 2,637 2,758
Excise tax payable (a) 6,000 6,000
Accrued expenses and other liabilities 10,675 2,078
Due to affiliates 1,419 --
------- -------
Total $27,712 $10,931
======= =======
</TABLE>
(a) The Excise tax payable relates to an excise tax imposed on annual
contributions to retirement plans that exceed a certain percentage of
annual payroll. The Company intends to vigorously contest this tax
liability.
15. PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS
Those liabilities that are expected to be resolved as part of the Joint
Plan are classified in the Consolidated Balance Sheets as prepetition
claims. On January 18, 1995, approximately $550,000 of prepetition claims
were paid pursuant to the Joint Plan. Another $36,000 of prepetition claims
and restructuring accruals have been settled and paid since January 18,
1995. The remaining prepetition claims may be subject to future adjustments
depending on pending discussions with the various parties and the decisions
of the Bankruptcy Court.
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
---- ----
<S> <C> <C>
Debentures and notes(a) $304,172
Accrued interest - prepetition(a) 44,512
Accrued interest - postpetition(b) $ 3,634 178,000
Restructuring accruals(c) 18,759 74,166
Payable to connecting carriers 3,405 7,648
Money transfer payable(d) 7,444 8,645
Other, miscellaneous 150 2,690
-------- --------
Total $ 33,392 $619,833
======== ========
</TABLE>
- -------------------
(a) The Company's debentures and notes, and accrued interest
thereon, listed above were paid in full on January 18, 1995.
(b) Prior to the Joint Plan being confirmed on November 1, 1994,
no interest expense was accrued on prepetition claims since
December 31, 1992. The terms of the Joint Plan provided for
the
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<PAGE> 125
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
payment of postpetition interest in the amount of $178,000.
An extraordinary loss of $110,500 was recorded for the
extinguishment of this debt.
(c) Restructuring accruals at December 31, 1995 consisted of
$15,600 of disputed claims, primarily related to leases and
$3,200 of other restructuring accruals.
(d) Represents unclaimed money transfers issued by the Company
prior to January 1, 1990. The Company is currently in
litigation in Bankruptcy Court seeking a determination that
these amounts are not an obligation of the Company. There can
be no assurance as to the outcome of the litigation.
16. RESTRUCTURING CHARGES
In 1995, 1994 and 1993, New Valley reversed $2,044, $300 and $2,100,
respectively, of prior year restructuring accruals as a result of
settlements on certain of its prepetition claims and vacated real estate
lease obligations.
In 1994 and 1993, New Valley incurred financial restructuring costs of
$23,100 and $11,200, respectively, which consisted of professional fees
related to its financial restructuring.
17. RELATED PARTY TRANSACTIONS
At December 31, 1995, Brooke, a company under the control of Bennett S.
LeBow, Chairman of the Company's Board of Directors, held indirectly
79,794,229 Common Shares (approximately 41.7% of such class), 618,326
Class A Senior Preferred Shares (approximately 55.8% of such class) and
250,885 Class B Preferred Shares (approximately 9% of such Class) which
represented in the aggregate 42.1% of all voting power. Several of the
other officers and directors of the Company are also affiliated with
Brooke. In 1995, the Company signed an expense sharing agreement with
Brooke to share certain lease, legal and administrative expenses.
The Company expensed approximately $600 under this expense sharing
agreement in 1995.
The Joint Plan imposes a number of restrictions on transactions between
the Company and certain affiliates of the Company, including Brooke, and
establishes certain restrictions on proposed investments.
A director of the Company received a commission of $800 on the purchase of
Ladenburg, of which $400 was paid by the Company and $400 was paid by the
selling shareholders. Two directors of the Company are affiliated with law
firms that rendered legal services to the Company. The Company paid these
firms $1,083 during 1995 for legal services. An executive officer and
director of the Company is a shareholder in a brokerage firm to which the
Company paid $584 in brokerage commissions and other fees during 1995.
In connection with their agreement to serve as Brooke nominees at RJR
Nabisco's Annual Meeting, two directors of the Company were each paid $30
by Brooke during the fourth quarter of 1995. In addition, Brooke also
entered into an agreement with each of the Brooke nominees whereby it has
agreed to indemnify such nominees from and against any losses incurred by
such nominees resulting from, relating to, or arising out of any claim in
connection with the solicitation of proxies in support of the nominees'
election at the Annual Meeting, including the right to be advanced by
Brooke for any expenses incurred in connection with any such claim.
In connection with the acquisition of the Office Buildings by the Company
on January 10, 1996, a director of Brooke received a commission of $220
from the seller.
18. OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
Ladenburg - As a nonclearing broker, Ladenburg's transactions are cleared
by other brokers and dealers in securities pursuant to clearance
agreements. Although Ladenburg clears its customers through other brokers
and dealers in securities, Ladenburg is exposed to off-balance-sheet risk
in the event that customers or other parties fail to satisfy their
obligations. In accordance with industry practice, agency securities
transactions are recorded on a settlement-date basis. Should a customer
C-72
<PAGE> 126
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
fail to deliver cash or securities as agreed, Ladenburg may be required to
purchase or sell securities at unfavorable market prices.
The clearing operations for Ladenburg's securities transactions are
provided by several brokers. At December 31, 1995, substantially all of the
securities owned and the amounts due from brokers reflected in the
consolidated statement of financial condition are positions held at and
amounts due from one clearing broker. Ladenburg is subject to credit risk
should this broker be unable to fulfill its obligations.
Financial Instruments - In the normal course of its business, the Company
enters into transactions in financial instruments with off-balance-sheet
risk. These financial instruments consist of financial futures contracts
and written index option contracts.
Financial futures contracts provide for the delayed delivery of a financial
instrument with the seller agreeing to make delivery at a specified future
date, at a specified price. These futures contracts involve elements of
market risk in excess of the amounts recognized in the consolidated
statement of financial condition. Risk arises from changes in the values of
the underlying financial instruments or indices. At December 31, 1995, the
Company had commitments to purchase and sell financial instruments under
futures contracts of $2,560 and $4,270, respectively.
Equity index options give the holder the right to buy or sell a specified
number of units of a stock market index, at a specified price, within a
specified time from the seller ("writer") of the option and are settled in
cash. The Company generally enters into these option contracts in order to
reduce its exposure to market risk on securities owned. Risk arises from
the potential inability of the counterparties to perform under the terms of
the contracts and from changes in the value of a stock market index. As a
writer of options, the Company receives a premium in exchange for bearing
the risk of unfavorable changes in the price of the securities underlying
the option. At December 31, 1995, the Company had written options to sell
units of various stock market indices with a contract amount of $338,650.
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments have been
determined by the Company using available market information and
appropriate valuation methodologies described below. However, considerable
judgment is required to develop the estimates of fair value and,
accordingly, the estimates presented herein are not necessarily indicative
of the amounts that could be realized in a current market exchange.
<TABLE>
<CAPTION>
December 31, 1995
Carrying Fair
Amount Value
------ -----
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 51,742 $ 51,742
Investments (Note 5) 242,043 242,043
Restricted assets 38,005 38,005
Receivable from clearing broker 13,752 13,752
Long-term investments (Note 6) 29,512 33,997
Financial liabilities:
Short-term loan 75,119 75,119
Redeemable preferred shares 226,396 161,704
</TABLE>
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<PAGE> 127
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDTED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
For cash and cash equivalents, restricted assets, receivable from clearing
broker, and short-term loan, the carrying value of these amounts is a reasonable
estimate of their fair value. The fair value of the Company's redeemable
preferred shares is based on their last reported sales price.
C-74
<PAGE> 128
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDTED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
20. BUSINESS SEGMENT INFORMATION
Prior to the acquisition of Ladenburg on May 1, 1995, virtually all of the
Company's operating businesses were reported as discontinued operations.
The following table presents certain financial information of the Company's
broker-dealer operations of Ladenburg and the Company's corporate
operations as of and for the year ended December 31, 1995.
<TABLE>
<CAPTION>
Broker- Corporate
Dealer and Other Total
------ --------- -----
<S> <C> <C> <C>
Revenues $ 40,418 $ 27,312 $ 67,730
Operating income 300 1,074 1,374
Identifiable assets 61,175 324,647 385,822
Depreciation and amortization 608 -- 608
Capital expenditures 372 -- 372
</TABLE>
21. SUBSEQUENT EVENTS
Purchase of Assets. 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
non-recourse mortgage financing. 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. These Office Buildings consist of two adjacent
commercial office buildings in Troy, Michigan and two adjacent commercial
office buildings in Bernards Township, New Jersey. 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 Shopping Centers are located in Marathon and Royal Palm Beach,
Florida; Lincoln, Nebraska; Santa Fe, New Mexico; Milwaukee, Oregon;
Richland and Marysville, Washington; and Charleston, West Virginia.
The following pro forma condensed balance sheet gives effect to the
purchase of real estate as if it had occurred on December 31, 1995.
<TABLE>
<CAPTION>
As Reported Pro Forma
----------- ---------
<S> <C> <C>
Assets:
Current assets $ 333,485 $ 309,585
Real estate, net -- 183,900
Other non-current assets 52,337 52,337
--------- ---------
$ 385,822 $ 545,822
========= =========
Liabilities:
Current liabilities $ 177,920 $ 181,920
Long-term debt -- 156,000
Other long-term liabilities 11,967 11,967
Redeemable preferred shares 226,396 226,396
Shareholders' deficit (30,461) (30,461)
--------- ---------
$ 385,822 $ 545,822
========= =========
</TABLE>
C-75
<PAGE> 129
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
Acquisition. On January 11, 1996, New Valley, through a partnership
controlled by New Valley, 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.
Pro Forma Information. The following table presents unaudited pro forma
results of continuing operations as if the acquisitions of Ladenburg, 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
the acquisitions been consummated as of such date.
<TABLE>
<CAPTION>
Year Ended
December 31,
1995
------------
<S> <C>
Revenues $ 143,680
Net income 641
Net loss applicable to common shares (30,920)
Net loss per common share (.16)
</TABLE>
Class A Senior Preferred Shares. In January and February, 1996, the
Company repurchased 72,104 Class A Senior Preferred Shares for $10,530.
This repurchase of Class A Senior Preferred Shares increased the Company's
additional paid-in capital by $4,279 based on the difference between the
purchase price and the carrying value of the shares. The Company declared
and paid a cash dividend of $10 per share on the Class A Senior Preferred
Shares in March 1996.
RJR Nabisco Equity Swap. On February 29, 1996, New Valley entered into a
total return equity swap transaction (the Equity Swap Agreement") with an
unaffiliated company (the "Counterparty") relating to 1,000,000 shares of
RJR Nabisco Common Stock. The transaction is for a period of up to six
months, subject to earlier termination at the election of New Valley, and
provides for New Valley to make a payment to the Counterparty of $1,537
upon commencement of the 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 New Valley an
amount in cash equal to the amount of such appreciation with respect to
1,000,000 shares of RJR Nabisco Common Stock 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 1,000,000 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.
At March 29, 1996, the Company had an unrealized loss on this swap
transaction of approximately $4,200 and had pledged collateral of $11,806.
Redomestication and Reverse Stock Split. The Company's Board of Directors
has unanimously approved a proposal to change the Company's jurisdiction of
incorporation from the State of New
C-76
<PAGE> 130
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
York to the State of Delaware (the "Redomestication") pursuant to a merger
between the Company and a newly formed wholly-owned subsidiary of the Company,
which would also provide for a "reverse stock split" of the Company's Common
Shares, that would reduce the number of such shares outstanding on a
one-for-twenty-basis (the "Reverse Stock Split"). The Redomestication (and
attendant Reverse Stock Split) is subject to the approval of the Company's
shareholders at the Company's Annual Meeting of Shareholders in June 1996 in
accordance with the New York Business Corporation Law.
C-77
<PAGE> 131
NEW VALLEY CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Quarters
--------
1st 2nd 3rd 4th
--- --- --- ---
<S> <C> <C> <C> <C>
1995:
Revenues $ 7,669 $ 10,032 $ 21,514 $ 28,515
Expenses(b) 1,038 7,748 18,730 38,840
-------- -------- -------- -----------
Income (loss) from continuing operations 6,631 2,284 2,784 (10,325)
Discontinued operations(d) 1,398 2,682 235 12,558
-------- -------- -------- -----------
Net income $ 8,029 $ 4,966 $ 3,019 $ 2,233
======== ======== ======== ===========
Income (loss) per Common Share:
Income (loss) from continuing
operations $ (.04) $ .06 $ (.04) $ (.14)
Discontinued operations .01 .01 -- .07
-------- -------- -------- -----------
Net income (loss)(c) $ (.03) $ .07 $ (.04) $ (.07)
======== ======== ======== ===========
1994(a):
Revenues $ 345 $ 467 $ 918 $ 8,651
Expenses(b) 5,528 13,420 7,497 (799)
-------- -------- -------- -----------
Income (loss) from continuing operations
before extraordinary item (5,183) (12,953) (6,579) 9,450
Discontinued operations(d) 17,587 29,226 26,071 1,062,822
-------- -------- -------- -----------
Income before extraordinary item 12,404 16,273 19,492 1,072,272
Extraordinary item(e) -- -- -- (110,500)
-------- -------- -------- -----------
Net income $ 12,404 $ 16,273 $ 19,492 $ 961,772
======== ======== ======== ===========
Income (loss) per Common Share:
Loss from continuing operations
before extraordinary item $ (.12) $ (.18) $ (.15) $ (.06)
Discontinued operations .09 .16 .14 5.64
Extraordinary item -- -- -- (.59)
-------- -------- -------- -----------
Net income (loss)(c) $ (.03) $ (.02) $ (.01) $ 4.99
======== ======== ======== ===========
</TABLE>
- -------------------
(a) The quarterly financial data has been restated to reflect the
discontinued operations of FSI and DSI.
(b) Includes provision for Federal and state income taxes, and
reorganization items. Includes write-down in carrying amount of
certain investments of $11,790 in the 4th quarter of 1995. See
Note 6.
(c) Income (loss) per common share is determined after giving effect to
dividends on preferred shares and the repurchase of such shares. The
sum of quarterly income (loss) per share may not equal income (loss)
per share for the year, because the per share data for each quarter
and for the year is independently computed. Fully diluted earnings
per share is anti-dilutive for all periods of 1995 and 1994, except
for the 4th quarter of 1994. See Note 4.
(d) Includes gain on sale of FSI in the 4th quarter of 1994 of
$1,056,081, and gain on sale of the Messaging Services Business in
the 4th quarter of 1995 of $12,558. See Note 1.
(e) Represents extraordinary loss on extinguishment of debt. See Note
15.
C-78
<PAGE> 132
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED FIVE-YEAR FINANCIAL SUMMARY
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------
1995 1994 1993 1992 1991
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:(a)
Total revenues $ 67,730 $ 10,381 $ 3,844 $ 10,908 $ 11,400
Total costs and expenses(b) 66,064 26,146 15,034 65,006 43,047
-------- ----------- -------- -------- --------
Income (loss) from continuing operations
before provision for income taxes and
extraordinary items 1,666 (15,765) (11,190) (54,098) (31,647)
Provision (benefit) for income taxes 292 (500) (225) -- --
-------- ----------- -------- -------- --------
Income (loss) from continuing operations
before extraordinary items 1,374 (15,265) (10,965) (54,098) (31,647)
Income (loss) from discontinued operations 16,873 1,135,706 38,368 34,173 (445)
-------- ----------- -------- -------- --------
Income (loss) before extraordinary items 18,247 1,120,441 27,403 (19,925) (32,092)
Extraordinary items(c) -- (110,500) 8,417 -- --
-------- ----------- -------- -------- --------
Net income (loss) 18,247 1,009,941 35,820 (19,925) (32,092)
Dividends on preferred shares(d) (72,303) (80,037) (68,706) (60,086) (52,148)
Excess of carrying value of redeemable
preferred shares over cost of shares
purchased 40,342 -- -- -- --
-------- ----------- -------- -------- --------
Net income (loss) applicable to
Common Shares $(13,714) $ 929,904 $(32,886) $(80,011) $(84,240)
======== =========== ======== ======== ========
Per Common and equivalent share:
Primary:
Income (loss) from continuing operations
before extraordinary items $ (.16) $ (.50) $ (.42) $ (.61) $ (.46)
Discontinued operations .09 6.03 .20 .18 --
Extraordinary items -- (.59) .04 -- --
Net income (loss) (.07) 4.94 (.18) (.43) (.46)
Fully diluted:
Income (loss) from continuing operations
before extraordinary items (.16) (.37) (.42) (.61) (.46)
Discontinued operations .09 5.36 .20 .18 --
Extraordinary items -- (.52) .04 -- --
Net income (loss) (.07) 4.47 (.18) (.43) (.46)
Dividends declared(d) -- -- -- -- --
</TABLE>
C-79
<PAGE> 133
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED FIVE-YEAR FINANCIAL SUMMARY - (Continued)
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:(a)
Total assets $ 385,822 $ 1,069,891 $ 269,483 $ 242,802 $ 236,391
Long-term debt classified as current(e) -- -- -- -- 98,167
Long-term obligations 11,967 36,177 19,318 7,230 358,998
Prepetition claims(f) 33,392 619,833 791,893 809,185 --
Redeemable preferred shares(g) 226,396 317,798 329,233 275,085 229,002
Non-redeemable preferred shares 279 279 279 303 317
Deficit (30,740) (38,723) (1,020,935) (986,616) (929,234)
Working capital (deficit) 155,565 284,849 64,695 45,967 (395,875)
</TABLE>
- -------------------
(a) The operating results for the years 1993 through 1991 were reclassified to
reflect the discontinued operations of FSI and DSI. See Note 3 to the
Consolidated Financial Statements.
(b) Includes reorganization expense (benefit) of $(2,044), $22,734, $9,035,
$(6,756), and $(12,272) in 1995, 1994, 1993, 1992 and 1991, respectively.
(c) Represents extraordinary loss on the extinguishment of debt in 1994 and the
extraordinary gain on the early termination of a capital lease in 1993.
(d) No dividends on preferred shares were declared for 1993, 1992, and 1991. In
both 1995 and 1994, dividends of $50 per share on the Class A Redeemable
Preferred stock were declared. The 1995, 1994, 1993, 1992, and 1991
dividend amounts include $521, $4,847, $3,999, $3,260, and $2,657,
respectively, accrued on redeemable preferred shares to reflect the
effective dividend yield over the life of such securities. All preferred
dividends, whether or not declared, are reflected as a deduction in
arriving at income (loss) applicable to Common Shares.
(e) At December 31, 1991, New Valley was in default under various loan
agreements and indentures, and, as a result, the portion of the long-term
debt so affected was classified as current in the balance sheet. In
subsequent years such debt is included in prepetition claims. See note (f)
below.
(f) Comprised of prepetition claims against the Corporation in its bankruptcy
case, including long-term notes, debentures, pension liabilities and
certain other obligations. See Note 15 to the Consolidated Financial
Statements.
(g) Includes undeclared cumulative preferred dividends on redeemable preferred
shares of $121,893, $176,761, $193,042, $142,893, and $100,000 at December
31, 1995, 1994, 1993, 1992, and 1991, respectively. See Note 11 to the
Consolidated Financial Statements.
C-80
<PAGE> 134
SCHEDULE II
NEW VALLEY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(THOUSANDS)
<TABLE>
<CAPTION>
Losses
Additions Charged to
Balance at Charged to Reserve, Net Other Balance at
Description January 1, Expenses of Collections Charges (a) December 31,
- ----------- ---------- -------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Year 1994
Allowance for
uncollectible
receivables 8,820 4,614 (4,946) (8,488) --
Year 1993
Allowance for
uncollectible
receivables 9,145 5,130 (5,455) -- 8,820
</TABLE>
(a) The receivable and related allowance for uncollectible receivables were sold
to FFMC on November, 1994.
C-81
<PAGE> 135
Independent Auditors' Report
The Board of Directors and Shareholders
MAI Systems Corporation:
We have audited the accompanying consolidated balance sheets of MAI Systems
Corporation and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of operations, shareholders' deficiency and cash flows
for the years ended December 31, 1994 and 1993, the three-month period ended
December 31, 1992 and the year ended September 30, 1992. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MAI Systems
Corporation and subsidiaries as of December 31, 1994 and 1993, and the results
of their operations and their cash flows for the years ended December 31, 1994
and 1993, the three-month period ended December 31, 1992 and the year ended
September 30, 1992, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Orange County, California
March 9, 1995
C-82
<PAGE> 136
32
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/ Bennett S. LeBow
-------------------------------
Bennett S. LeBow
Chairman of the Board, President
and Chief Executive Officer
Date: April 15, 1996
<PAGE> 137
33
POWER OF ATTORNEY
The undersigned directors and officers of Brooke Group Ltd.
hereby constitute and appoint Gerald E. Sauter and Marc C. Bell, and each of
them, with full power to act without the other and with full power of
substitution and resubstitution, our true and lawful attorneys-in-fact with full
power to execute in our name and behalf in the capacities indicated below, this
Annual Report on Form 10-K and any and all amendments thereto and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, and hereby ratify and confirm all
that such attorneys-in-fact, or any of them, or their substitutes shall lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on April 15, 1996.
SIGNATURE TITLE
--------- -----
/s/ Bennett S. LeBow Chairman of the Board, President
- -------------------------
Bennett S. LeBow and Chief Executive Officer
(Principal Executive Officer)
/s/ Robert J. Eide Director
- -------------------------
Robert J. Eide
/s/ Jeffrey S. Podell Director
- -------------------------
Jeffrey S. Podell
/s/ Gerald E. Sauter Director, Vice President
- -------------------------
Gerald E. Sauter and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE> 138
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
* 3.1 Restated Certificate of Incorporation of Liggett Group Inc. (the
predecessor to Brooke Group Ltd. (the "Company"))
(incorporated by reference to the Company's Registration
Statement on Form S-1, Commission File No. 33-16868).
* 3.2 Certificate of Amendment of the Restated Certificate of
Incorporation of the Company (incorporated by reference to
the Company's Form 10-Q for the quarter ended June 30, 1990).
* 3.3 Amended and Restated By-Laws of the Company, effective
December 5, 1995 (incorporated by reference to the Company's
current Report on Form 8-K dated December 5, 1995).
* 3.4 Certificate of Designations of Series A Junior Convertible
Participating PIK Preferred Stock, Series B Junior Convertible
Participating Reset Preferred Stock, Series C Junior Convertible
Participating Reset Preferred Stock and Series D Junior
Convertible Participating Reset Preferred Stock (incorporated
by reference to the Company's Form 10-Q for the quarter
ended September 30, 1990).
* 3.5 Certificate of Designation of Series E Junior Convertible
Participating Preferred Stock of the Company (incorporated by
reference to the Company's Report on Form 8-K dated October
29, 1993).
* 3.6 Certificate of Designation of Series F Junior Convertible
Participating Preferred Stock of the Company (incorporated by
reference to the Company's Report on Form 8-K dated October
29, 1993).
* 3.7 Certificate of Designation of Series G Junior Convertible
Participating Preferred Stock of the Company (incorporated by
reference to the Company's Form 10-K for the fiscal year
ended 1993).
</TABLE>
<PAGE> 139
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
* 4.1 Indenture, dated as of January 1, 1996, between BGLS Inc.
("BGLS") and Fleet National Bank of Massachusetts ("Fleet"),
as Trustee, relating to the "Series A Notes" and the 15.75%
Series B Senior Secured Notes due 2001 (the "Series B
Notes"), including the form of Series A Note and the form of
Series B Note (the "Series A and Series B Indenture")
(incorporated by reference to exhibit 4.1 in BGLS's
Registration Statement on Form S-4 dated December 19, 1995,
Commission File Number 33-80593).
* 4.2 Pledge and Security Agreement, dated as of January 1,
1996, between BGLS and Fleet, as Trustee under the Series A
and Series B Indenture (incorporated by reference to exhibit
4.2 in BGLS's Registration Statement on Form S-4 dated
December 19, 1995, Commission File Number 33-80593).
* 4.3 A/B Exchange and Registration Rights Agreement, dated as of
November 21, 1995, among the Company, BGLS, AIF II L.P.,
Artemis America Partnership, Tortoise Corp., and Mainstay
High Yield Corporate Bond Fund (incorporated by reference to
exhibit 4.3 in BGLS's Registration Statement on Form S-4
dated December 19, 1995, Commission File Number 33-
80593).
* 4.4 Pledge and Security Agreement, dated as of January 1,
1996, between New Valley Holdings, Inc. and Fleet, as Trustee
under the Series A and Series B Indenture (incorporated by
reference to exhibit 4.4 in BGLS's Registration Statement on
Form S-4 dated December 19, 1995, Commission File Number 33-
80593).
* 4.5 Indenture, dated as of September 30, 1994, between BGLS and
Shawmut Bank, N.A. ("Shawmut"), as Trustee, relating to the
13.75% Series 2 Senior Secured Notes due 1995 (the "Series 2
Notes"), including the form of Series 2 Note (the "Series 2
Indenture") (incorporated by reference to exhibit 4(ii) in the
Company's Form 8-K dated September 2, 1994, Commission
File Number 1-5759).
* 4.6 Pledge Agreement, dated as of September 30, 1994, between
BGLS and Shawmut, as Trustee under the Series 2 Indenture
(incorporated by reference to exhibit 10(ae) in the Company's
Form 8-K dated September 2, 1994, Commission File Number
1-5759).
</TABLE>
<PAGE> 140
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
* 4.7 Indenture, dated April 1, 1988, between BGLS and First Trust
National Association ("First Trust"), as Trustee, relating to the
Subordinated Debentures (the "14.5% Debenture Indenture")
(incorporated by reference to exhibit 4(ff) in the Company's
Form 10-Q for the quarter ended September 30, 1990,
Commission File Number 1-5759).
* 4.8 First Supplemental Indenture, dated September 4, 1990, to
the 14.5% Debenture Indenture, between BGLS and First Trust,
as Trustee (incorporated by reference to exhibit 4(f) in the
Company's Form 10-K for the year ended December 31, 1990,
Commission File Number 1-5759).
* 4.9 Second Supplemental Indenture, dated November 19, 1990,
to the 14.5% Debenture Indenture, between BGLS and First
Trust, as Trustee (incorporated by reference to exhibit 4(g)
in the Company's Form 10-K for the year ended December 31,
1990, Commission File Number 1-5759).
* 4.10 Third Supplemental Indenture, dated November 19, 1990,
to the 14.5% Debenture Indenture, between BGLS and First
Trust, as Trustee (incorporated by reference to exhibit 4(i)
in the Company's Form 10-K for the year ended December 31,
1990, Commission File Number 1-5759).
* 4.11 Fourth Supplemental Indenture, dated October 22, 1993,
to the 14.5% Debenture Indenture, between BGLS and First
Trust, as Trustee (incorporated by reference to exhibit 4(y)
in the Company's Form 10-Q for the quarter ended September
30, 1993, Commission File Number 1-5759).
* 4.12 Fifth Supplemental Indenture, dated January 18, 1995, to
the 14.5% Debenture Indenture, between BGLS and First Trust,
as Trustee (incorporated by reference to exhibit 4(e) in the
Company's Form 10-K for the year ended December 31, 1994,
Commission File Number 1-5759).
* 4.13 Sixth Supplemental Indenture, dated as of January 26,
1996, to the 14.5% Debenture Indenture, between BGLS and
First Trust, as Trustee (incorporated by reference to exhibit
4.13 in BGLS's Registration Statement on Form S-4 dated
December 19, 1995, Commission File Number 1-5759).
</TABLE>
<PAGE> 141
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
* 4.14 Indenture, dated February 14, 1992 among Liggett Group Inc.
("Liggett"), Eve Holdings Inc. ("Eve") and Bankers Trust
Company, as Trustee ("Bankers Trust"), including the Forms of
Series A Notes and Series B Notes and the Guaranty thereon
(the "Liggett Indenture") (incorporated by reference to exhibit
4(m) in the Company's Form 10-K for the year ended
December 31, 1991, Commission File No. 1-5759).
* 4.15 First Supplemental Indenture, dated January 26, 1994,
including the Form of Series C Variable Rate Senior Secured
Note and the Guaranty thereon (incorporated by reference to
exhibit 4.2 in Liggett's Registration Statement on Form S-1,
Commission File No. 33-75224).
* 4.16 Security Agreement, dated February 14, 1992 among
Liggett, Eve and Bankers Trust (the "Security Agreement")
(incorporated by reference to exhibit 4(n) in the Company's
Form 10-K for the year ended December 31, 1991, Commission
File No. 1-5759).
* 4.17 Amendment No. 1 to the Security Agreement, dated January
26, 1994 (incorporated by reference to exhibit 4.4 in
Liggett's Registration Statement on Form S-1, Commission File
No. 33-75224).
* 4.18 Deed of Trust and Assignment of Rents, Leases and
Leasehold Interests dated February 14, 1992 by Liggett to
Bankers Trust relating to each of the Virginia and North
Carolina properties, (the "Deed of Trust") (incorporated by
reference to exhibit 4(o) in the Company's Form 10-K for the
year ended December 31, 1991, Commission File No. 1-5759).
* 4.19 Amendment No. 1 to the Deed of Trust (North Carolina),
dated January 26, 1994 (incorporated by reference to exhibit
4.6 in Liggett's Registration Statement on Form S-1,
Commission File No. 33-75224).
* 4.20 Amendment No. 1 to the Deed of Trust (Virginia), dated
January 26, 1994 (incorporated by reference to exhibit 4.7 in
Liggett's Registration Statement on Form S-1, Commission File
No. 33-75224).
</TABLE>
<PAGE> 142
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
* 4.21 Loan and Security Agreement, dated as of March 8, 1994
in the amount of $40,000,000 between Liggett and Congress
Financial Corporation (incorporated by reference to exhibit
10(yy) in the Company's Form 10-K for the year ended December
31, 1933, Commission File No. 1-5759).
* 4.22 First Amended Joint Chapter 11 Plan of Reorganization for
New Valley Corporation ("New Valley") dated September 27,
1994, Notice of Modification to the First Amended Joint
Chapter 11 Plan of Reorganization dated October 20, 1994 and
Plan Amendment dated October 28, 1994, all as confirmed by
the United States Bankruptcy Court for the District of New
Jersey, Newark Division on November 1, 1994 (incorporated by
reference to exhibit 2 in the Company's Form 10-K for the
year ended December 31, 1993, Commission File No. 1-2493).
* 4.23 Order Confirming First Amended Joint Chapter 11 Plan of
Reorganization for New Valley entered by the Bankruptcy Court
on November 1, 1994 (incorporated by reference to exhibit
99(b) in New Valley's Form 10-Q for the quarterly period
ended September 30, 1994).
* 10.1 Corporate Services Agreement, dated as of June 29, 1990
between Brooke and Liggett (incorporated by reference to
exhibit 10.10 in BGLS's Registration Statement on Form S-1,
Commission File No. 33-47482).
* 10.2 Corporate Services Agreement, dated June 29, 1990
between the Company and Liggett (incorporated by reference to
exhibit 10.11 in Liggett's Registration Statement on Form
S-1, Commission File No. 33-47482).
* 10.3 Services Agreement, dated January 1, 1992 between the
Company and Liggett (the "Liggett Services Agreement")
(incorporated by reference to exhibit 10.13 of Liggett's
Registration Statement on Form S-1, Commission File
No. 33-47482).
* 10.4 First Amendment, dated as of November 30, 1993, between
the Company and Liggett, to the Liggett Services Agreement
(incorporated by reference to exhibit 10.6 of BGLS's
Registration Statement on Form S-1, Commission File
No. 33-93576).
</TABLE>
<PAGE> 143
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
* 10.5 Employment Agreement, dated February 21, 1992, between
the Company and Bennett S. LeBow (incorporated by reference
to exhibit 10(xx) in the Company's Form 10-K for the year
ended December 31, 1991).
* 10.6 Employment Agreement, dated June 1, 1994, between Liggett
and Rouben V. Chakalian (incorporated by reference to exhibit
10.13 of Liggett's Registration Statement on Form S-1,
Commission File No. 33-75224).
* 10.7 Tax-Sharing Agreement, dated June 29, 1990, among the
Company, Liggett and certain other entities (incorporated by
reference to exhibit 10.12 in BGLS's Registration Statement
on Form S-1, Commission File No. 33-47482).
* 10.8 Lease with respect to Liggett's distribution center in
Durham, North Carolina, including letter agreement extending
term of Lease (incorporated by reference to exhibit 10.15 in
BGLS's Registration Statement on Form S-1, Commission File
No. 33- 47482).
* 10.9 Tax Indemnity Agreement, dated as of October 6, 1993,
among the Company, Liggett and certain other entities
(incorporated by reference to exhibit 10.2 in SkyBox's Form
10-Q for the quarter ended September 30, 1993, Commission
File No. 0- 22126).
* 10.10 Exchange and Termination Agreement, dated as of
September 30, 1994, among the Company, BGLS, AIF, Artemis
America LLC and Mainstay (incorporated by reference to
exhibit 10(ac) in the Company's Form 8-K dated September 2,
1994, Commission File No. 1-5759).
* 10.11 Exchange Agreement, dated as of November 21, 1995,
among the Company, BGLS, AIF, Artemis Partnership, Tortoise,
Starfire Holding Corporation and Mainstay (incorporated by
reference to exhibit 10.13 in BGLS's Registration Statement
on Form S-4 dated December 19, 1995, Commission File Number
33-80593).
* 10.12 Registration Rights Agreement, dated as of January 1,
1996, among the Company, New Valley, BGLS and Fleet, as
Trustee (incorporated by reference to exhibit 10.14 in BGLS's
Registration Statement on Form S-4 dated December 19, 1995,
Commission File Number 33-80593).
</TABLE>
<PAGE> 144
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
* 10.13 Second Amendment to Services Agreement, dated as of
October 1, 1995, by and between Brooke Management Inc., the
Company and Liggett (incorporated by reference to Exhibit
10(c) in BGLS's Form 10-Q for the quarter ended September 30,
1995).
* 10.14 Agreement among BGLS, the Company and High River
Limited Partnership ("High River"), dated October 17, 1995
(incorporated by reference to Exhibit 10(b) in the Company's
Form 10-Q for the quarter ended September 30, 1995).
* 10.15 Letter Agreement among BGLS, the Company and High River
dated November 5, 1995 (incorporated by reference to Exhibit
10(a) in the Company's Form 10-Q for the quarter ended
September 30, 1995).
* 10.16 Termination and Release Agreement, dated as of December 13,
1995, by and between BGLS, Gary Winnick Trust No. 3,
CAL-W Associates and M.D.C. Holdings, Inc. (incorporated by
reference to exhibit 10.18 in BGLS's Registration Statement on
Form S-4 dated December 19, 1995, Commission File Number
33-80593).
* 10.17 Agreement between New Valley and the Company, dated as
of December 27, 1995 (incorporated by reference to exhibit
10.19 in BGLS's Registration Statement on Form S-4 dated
December 19, 1995, Commission File Number 33-80593).
* 10.18 Expense Sharing Agreement, made and entered into as of
January 18, 1995, by and between the Company and New Valley
(incorporated by reference to Exhibit 10(d) in the Company's
Form 10-Q for the quarter ended September 30, 1995).
* 10.19 Stock Option Agreement, dated January 25, 1995, by and
between the Company and Howard M. Lorber (incorporated by
reference to Exhibit 10(g) in the Company's Form 10-K for the
year ended December 31, 1995).
* 10.20 Agreement among the Company, ALKI and High River, dated
October 17, 1995 (the "High River Agreement") (incorporated
by reference to Exhibit 10(d) in the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1995).
</TABLE>
<PAGE> 145
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
* 10.21 Letter Amendment, dated October 17, 1995, to the High
River Agreement (incorporated by reference to Exhibit 10(e)
in the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995).
* 10.22 Letter Amendment, dated November 5, 1995, to the High
River Agreement (incorporated by reference to Exhibit 10(f)
in the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995).
* 10.23 Agreement, dated December 28, 1995, between Jefferies,
the Company, BGLS and Liggett (the "Jefferies Agreement")
(incorporated by reference to Exhibit 7 in the Schedule 13D
filed by, among others, the Company with the SEC on March 11,
1996, as amended, with respect to the common stock of RJR
Nabisco Holdings Corp. (the "Schedule 13D")).
* 10.24 Letter Amendment, dated February 28, 1996, to the
Jefferies Agreement (incorporated by reference to Exhibit 7
in the Schedule 13D).
10.25 Amended and Restated Consulting Agreement, dated as of
March 1, 1996, between the Company and Howard M. Lorber.
* 10.26 Settlement Agreement, dated March 12, 1996, by and between
Dianne Castano and Ernest Perry, the putative representative
plaintiffs in Dianne Castano, et al. v. The American Tobacco
Company, Inc. et al., Civil No. 94-1044, United States District
Court for the Eastern District of Louisiana, for themselves and
on behalf of the plaintiff settlement class, and the Company
and Liggett, as supplemented by the letter agreement dated
March 14, 1996 (incorporated by reference to exhibit 13 in the
Schedule 13D).
* 10.27 Settlement Agreement, dated March 15, 1996, by and
among the State of West Virginia, State of Florida, State of
Mississippi, Commonwealth of Massachusetts, and State of
Louisiana and the Company and Liggett (incorporated by
reference to exhibit 15 in the Schedule 13D).
10.28 Stock Purchase Agreement, dated April 3, 1996, among
Liggett-Ducat Ltd. ("LDL"), Belgrave Limited ("Belgrave"),
Edward Z. Nakhamkin ("Nakhamkin") and Brooke (Overseas)
Ltd. ("BOL").
</TABLE>
<PAGE> 146
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
10.29 Consulting Agreement, dated April 3, 1996, among BOL,
Belgrave and Nakhamkin.
10.30 Pledge Agreement, dated April 3, 1996, between BOL and
Belgrave.
21 Subsidiaries of the Company.
27 Financial Data Schedule.
* 99.1 Stipulation and Agreement of Compromise and Settlement
in connection with an action in the Court of Chancery of the
State of Delaware in and for New Castle County entitled
Gyetyan v. Bennett S. LeBow et al., Civil Action No. 12998
(incorporated by reference to the Company's Form 8-K dated
June 2, 1994).
</TABLE>
- -------------------
* Incorporated by reference
<PAGE> 1
Exhibit 10.25
AMENDED AND RESTATED CONSULTING AGREEMENT
THIS AMENDED AND RESTATED CONSULTING AGREEMENT (the "Agreement"), dated
as of March 1, 1996, between BROOKE GROUP LTD., a Delaware corporation with its
principal office at 100 S.E. Second Street, 32nd Floor, Miami, Florida 33131
("BGL"), and HOWARD M. LORBER, an individual with an address at 70 East Sunrise
Highway, Suite 411, Valley Stream, New York 11581 ("Consultant").
W I T N E S S E T H :
WHEREAS, Consultant has been furnishing consulting services to BGL
pursuant to the Consulting Agreement, dated as of January 1, 1994, by and
between the parties, as modified by a Modification to Consulting Agreement,
dated as of January 25, 1995, and as amended and restated by an Amended and
Restated Consulting Agreement, dated as of January 1, 1996 (the Agreement, as so
amended and restated, hereinafter referred to as the "Consulting Agreement");
and
WHEREAS, the parties desire to amend and restate the Consulting
Agreement in its entirety pursuant to the terms and conditions embodied herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth, BGL and Consultant agree as follows:
1. Subject to the terms and conditions of this Agreement, BGL hereby
retains Consultant for the period commencing on the date hereof and ending on
December 31, 1996 (the "Initial Term"), or such earlier date as this Agreement
is terminated pursuant to Paragraph 5 hereof, and Consultant hereby agrees to
use such time and effort during such period as shall be reasonably required, to
perform such consulting services as and when may be reasonably requested by BGL
or any subsidiary or affiliate thereof from time to time (the "Consulting
Services"). Notwithstanding anything embodied herein to the contrary, upon
expiration of the Initial Term, the term of this Agreement shall automatically
be extended on a month-to-month basis, upon the terms and conditions set forth
herein (other than those set forth in Section 5(a) hereof) unless written notice
of termination for any reason is given by either party at least 5 calendar days
prior to the expiration of such month. BGL acknowledges that Consultant is
engaged in substantial business activities unrelated to BGL, its subsidiaries or
affiliates, and that Consultant shall be required to perform Consulting Services
only to the extent that they do not substantially interfere with such other
business activities.
2. BGL shall pay Consultant a fee of $30,000 per month during the
Initial Term or any extension thereof (the "Base Fee"), and shall reimburse
Consultant for his out-of-pocket expenses reasonably incurred in the course of
performing the Consulting Services (subject to compliance with BGL's customary
procedures for documenting and obtaining approval for such expenses in effect
from time to time). The Base Fee shall be payable monthly in arrears no later
than the 10th day of each month. BGL shall periodically review such Base Fee and
may increase it from time to time, in its sole discretion.
<PAGE> 2
3. Consultant will furnish BGL with written reports summarizing the
Consulting Services performed by Consultant and such other information as BGL
shall from time to time reasonably request.
4. In addition to the Base Fee, Consultant received a grant of 500,000
shares of common stock, $.10 par value per share (the "Common Stock"), of BGL in
or about July, 1994 pursuant to the Consulting Agreement (the "Grant"). Upon its
issuance to Consultant, pursuant to the Grant, the Common Stock was validly
issued, fully paid, and nonassessable. 250,000 of such shares of Common Stock
vested as the date of grant while the balance of the shares shall vest on the
third anniversary of such date, subject to the conditions of this Paragraph 4.
Notwithstanding anything embodied in this Agreement to the contrary, BGL shall
pay to the Consultant within ten (10) calendar days of the payment of a dividend
or other distribution in respect of its Common Stock, an amount equal to the
product of (x) the amount of such dividend expressed on a per share of Common
Stock basis and (y) the amount of the shares of Common Stock subject to the
Grant on the date such dividend is declared, which amount may be paid in cash or
other property. Any amount of a dividend or other distribution pertaining to the
unvested portion of the Grant shall be deposited into escrow until such time as
such portion of the Grant has vested. If, for any reason, this Agreement is
terminated prior to expiration of the Initial Term pursuant to Paragraph 5
hereof, any shares of Common Stock subject to the Grant which have not vested as
of the effective date of such termination shall not vest and Consultant shall
have no rights with respect thereto. Consultant understands and agrees that each
certificate for such Common Stock shall bear the following legend until (i) such
Common Stock shall have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), and effectively been disposed of in accordance
with the registration statement; or (ii) in the opinion of counsel for BGL, such
Common Stock may be sold without registration under the Securities Act as well
as any applicable "Blue Sky" or similar securities laws:
"THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE BEEN
REGISTERED FOR RESALE BY THE BENEFICIAL HOLDER HEREOF UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), PURSUANT TO A
REGISTRATION STATEMENT ON FORM S-3 (REGISTRATION NO. 33-63119). THE
SECURITIES REPRESENTED BY THIS CERTIFICATE MAY BE OFFERED OR SOLD ONLY
(I) SO LONG AS THE REGISTRATION STATEMENT RELATING THERETO IS EFFECTIVE
UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS AND A CURRENT
PROSPECTUS RELATING TO THE OFFERING OF THE SHARES REPRESENTED BY THIS
CERTIFICATE IS AVAILABLE, OR (II) IN THE OPINION OF COUNSEL FOR BGL,
SUCH COMMON STOCK MAY BE SOLD WITHOUT REGISTRATION UNDER THE ACT AS
WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR SECURITIES LAWS."
In addition to the foregoing, BGL may, in its sole discretion, pay
Consultant bonuses from time to time, including a cash bonus of $80,000 in
December 1995.
2
<PAGE> 3
5. (a) This Agreement may be terminated during the Initial Term by
either party upon not less than thirty (30) days' prior written notice to the
other party. If during the Initial Term, Consultant shall be unable to perform
his duties hereunder on account of illness, disability or other incapacity, and
such illness, disability or other incapacity shall continue for a period of more
than sixty (60) consecutive days or for ninety (90) days during any one hundred
eighty (180) day period, BGL shall thereafter have the right, on not less than
two (2) weeks' prior written notice to Consultant, to terminate this Agreement.
However, if prior to the date specified in such notice, Consultant shall have
recovered from such illness, disability or incapacity and shall have
substantially resumed the performance of his duties hereunder, Consultant shall
be entitled to continue his relationship with full compensation as though such
notice had not been given.
(b) If Consultant dies during the Initial Term or any
extension thereof, this Agreement shall terminate as of the date of Consultant's
death and the Consultant's estate or beneficiaries shall be entitled to receive
the compensation and benefits earned and accrued, and reimbursement of expenses
incurred, up to the date of death. In the event Consultant voluntarily
terminates this consulting arrangement for any reason, his right to all
compensation shall cease as of the date of termination of his employment,
provided, however, that Consultant shall be entitled to receive all compensation
and benefits earned and accrued and reimbursement of expenses incurred up to
such date of termination.
6. Nothing in this Agreement shall be considered to create the
relationship of employer and employee between the parties hereto. Consultant
shall be deemed at all times to be an independent contractor and shall not be
entitled to any rights, compensation or benefits not expressly set forth herein.
Consultant expressly understands and agrees that he will be solely responsible
for the payment of any federal, state, local or other taxes (income or other)
that may arise out of the this Agreement, the Base Fee, the Grant, the Common
Stock, or any bonus.
7. Consultant acknowledges that in the course of performing the
Consulting Services for BGL, Consultant will be exposed to confidential,
proprietary and trade secret information of BGL and its subsidiaries and
affiliates, including but not limited to information relating to their
businesses, activities, trade secrets, investments and investment portfolio and
plans or contemplated actions. All such information is hereinafter collectively
referred to as "Confidential Information." Consultant shall treat all such
Confidential Information (other than such information as is previously known to
Consultant, or is publicly disclosed by BGL either prior or subsequent to
Consultant's receipt of such information, or is rightfully received by
Consultant from a third party) as confidential, not use such Confidential
Information other than for the benefit of BGL, its subsidiaries or affiliates
during the course of performing Consulting Services and take all reasonable
precautions against disclosure of such Confidential Information to third parties
during and after the Initial Term or any extension thereof. At expiration or
termination of this Agreement, Consultant will promptly return to BGL all copies
of any and all documents, agreements, reports or writings reflecting information
received or prepared by Consultant for or in connection with the Consulting
Services. Consultant acknowledges that disclosure of any Confidential
Information by him will give rise to irreparable injury to BGL or the owner of
such information, inadequately compensable in damages. Accordingly, BGL or such
other party may seek and obtain injunctive relief, specific performance or other
equitable remedies for any breach or threatened breach of the foregoing
undertakings, in addition to any
3
<PAGE> 4
other rights or remedies which may be available. Consultant hereby acknowledges
that he is aware that applicable securities laws prohibit any person who has
material non-public information about a company from purchasing or selling
securities of such company, and agrees to comply with such laws.
8. For three years from and after the termination of this Agreement,
Consultant shall not and shall not permit any of his employees, partners,
agents, affiliates, consultants, successors, transferees or assigns, directly or
indirectly, in the United States of America, to own, manage, operate, join,
control or participate in the ownership, management, operation or control of,
any business (whether in corporate, proprietorship or partnership form or
otherwise) which competes with the business of BGL and/or BGL's subsidiaries and
affiliates. For a period beginning on the date of this Agreement and ending one
year after the termination of this Agreement, Consultant shall not and shall not
permit any of his employees, partners, agents, affiliates, consultants,
successors, transferees or assigns, to solicit for employment, discuss possible
employment with or hire any person who at any time since January 1, 1994 was an
officer or employee of BGL and/or BGL's subsidiaries and affiliates without
BGL's prior written consent, except for clerical employees. Consultant
acknowledges that the restrictions contained in this Paragraph 8 are reasonable
and necessary to protect the legitimate interests of BGL, and that any actual or
attempted breach or violation of this Paragraph 8 by him will give rise to
irreparable injury to BGL, and its subsidiaries and affiliates, inadequately
compensable in damages. Accordingly, BGL and its subsidiaries and affiliates may
seek and obtain injunctive relief, specific performance or other equitable
remedies for the breach or threatened breach of the foregoing undertakings, in
addition to any other rights or remedies which may be available.
9. Consultant shall conduct himself at all times during the Initial
Term or any extension thereof for the benefit of BGL and shall not knowingly
take any action inconsistent with BGL's best interests.
10. Consultant represents and warrants that Consultant is under no
obligation or restriction, nor will Consultant assume any such obligation or
restriction, which would in any way interfere or be inconsistent with the
Consulting Services.
11. (a) To the extent permitted by applicable law, BGL shall indemnify
and hold harmless Consultant from and against all demands, claims, actions,
losses, damages, judgments, settlements, liabilities, costs and expenses,
including but not limited to reasonable attorneys' fees and expenses
(collectively, "Damages") asserted against, imposed upon or incurred by
Consultant resulting from or relating to any third party litigation or claim
arising out of Consultant's performance of his obligations under this Agreement,
whether or not any such Damage shall or may arise by virtue of anything done or
omitted to be done by the Consultant in his capacity as Consultant and while
performing Consulting Services; provided, however, that Consultant acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of BGL, and, with respect to any criminal actions or proceeding, had
no reasonable cause to believe his conduct was unlawful. Consultant shall
indemnify and hold harmless BGL and any subsidiary or affiliate thereof and all
directors, officers, employees, agents and consultants of each of the foregoing
from and against all Damages asserted against, imposed upon or incurred by them
which shall or may arise by virtue of anything done or
4
<PAGE> 5
omitted to be done by Consultant outside the scope of, or in breach of the terms
of, this Agreement.
(b) Any person entitled to indemnification hereunder (the
"Indemnified Party") shall give notice to the person required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party (at its expense) to assume the defense of any
claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be reasonably satisfactory to the Indemnified Party, and the Indemnified
Party may participate in such defense at the Indemnified Party's expense, and
provided, further, that the failure by any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Section 11 except to the extent that the failure results in a failure
of actual notice to the Indemnifying Party and such Indemnifying Party is
prejudiced solely as a result of the failure to give notice. No Indemnifying
Party, in the defense of any such claim or litigation, shall, except with the
consent of the Indemnified Party, consent to entry of any judgment or enter into
any settlement which does not include as a term thereof the giving by the
claimant or plaintiff to such Indemnified Party of an unconditional release from
all liability in respect to such claim or litigation.
(c) The indemnification and reimbursement to Consultant
required by this Paragraph 11 shall be made by periodic payments during the
course of the investigation or defense, as and when bills are received or
expenses incurred; provided that Consultant undertakes in a writing reasonably
satisfactory to BGL to repay any amounts so paid if it shall ultimately be
determined that he is not entitled to be indemnified by BGL as authorized in
this Paragraph 11.
12. The rights and obligations of Paragraph 7 through 11, inclusive,
shall survive the termination or expiration of this Agreement.
13. (a) All notices and communications permitted or required to be
given hereunder shall be in writing, and shall be duly given if delivered to the
other party personally, or sent to the other party by registered or certified
mail (return receipt requested), addressed to the other party at the address
first set forth above, or to such other address as any party may designate by a
similar notice. Any notice or communication deposited in the U.S. mail shall be
deemed to have been given as of the third day after the date so mailed.
(b) This Agreement shall be binding upon and inure to the
benefit of the parties hereto, the executors, administrators and legal
representatives of Consultant and the successors and assigns of BGL. This
Agreement shall not confer any rights on any other persons not expressly set
forth herein. Neither this Agreement nor any rights or obligations hereunder may
be assigned or delegated by either party without the prior written consent of
the other party, and any such purported assignment or delegation without such
consent shall be null and void.
(c) In the event that any provision of this Agreement shall
for any reason be held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement.
5
<PAGE> 6
(d) This Agreement constitutes the entire agreement and
understanding of the parties relating to the subject matter hereof, and may not
be modified or amended except by a writing signed by the party sought to be
charged therewith. No waiver of any breach of this Agreement shall be binding
unless made by writing signed by the party making the waiver, and no waiver of
any breach of this Agreement by either party hereto shall be deemed a waiver by
such party of any prior or subsequent breach of this Agreement, whether known or
unknown.
(e) This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without reference
to the choice of law doctrine of such state.
IN WITNESS WHEREOF, the parties, intending to be legally bound hereby,
have duly executed this Agreement as of the date first above written.
BROOKE GROUP LTD.
By: /s/ Gerald E. Sauter
-------------------------------
Name: Gerald E. Sauter
Title: Vice President
HOWARD M. LORBER
/s/ Howard M. Lorber
___________________________________
6
<PAGE> 1
Exhibit 10.28
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of April 3, 1996, among
Liggett-Ducat Ltd., a Russian closed joint stock company (the "Company"),
Belgrave Limited, a Gibraltar corporation ("Belgrave"), Eduard Z. Nakhamkin, a
citizen of the United States of America ("Nakhamkin"), and Brooke (Overseas)
Ltd., a Delaware corporation ("Brooke").
WHEREAS, Brooke desires to purchase from Belgrave, and Belgrave desires
to sell to Brooke, 84,540 shares (subject to adjustment as described in Section
1.2(A) below) of the Common Stock of the Company, comprising all of the shares
of Common Stock of the Company owned by Belgrave (the "Shares"), on the terms
and conditions set forth herein; and
WHEREAS, contemporaneously with the purchase and sale of the Shares
pursuant to this Agreement, and as an inducement for Belgrave to sell the Shares
to Brooke, Brooke and Belgrave agree to enter into a consulting agreement
providing for the provision by Belgrave to Brooke of certain consulting services
(the "Consulting Agreement");
NOW THEREFORE, the parties hereto agree as follows:
ARTICLE I
Purchase of Stock
1.1 Purchase of Stock. Subject to the terms and conditions herein set
forth and on the basis of the representations, warranties and agreements of the
Company and of Belgrave herein contained, Brooke agrees to purchase from
Belgrave, and Belgrave agrees to sell to Brooke, the Shares for the Purchase
Price (as defined below and subject to adjustment as described in Section 1.2(A)
below) as hereinafter set forth. Belgrave shall deliver certificates for the
Shares to be sold hereunder duly endorsed in blank, or accompanied by stock
powers, to Brooke at the offices of the Company located at 8-10 (Ducat Place)
Gasheka Street, Moscow, Russia 125047, at 10:00 A.M. on April 3, 1996, or at
such other place, time and date as Brooke and Belgrave may agree upon in
writing, the actual time and date on which the Closing hereunder shall occur
being herein called the "Closing Date".
1.2 Purchase Price.
(A) The aggregate purchase price for the 84,540 Shares to be purchased
by Brooke from Belgrave shall be U.S. $1,268,100 (the "Purchase Price") and
shall be payable, by wire transfer to an account designated by Belgrave to
Brooke at least 3 business days prior to any payment, as follows:
<PAGE> 2
(i) U.S. $1,200,000 shall be payable on June 30, 1996;
provided, however, that if, at Brooke's sole option, on such date,
Brooke pays Belgrave U.S. $500,000 then the remaining unpaid balance,
in the amount of U.S. $700,000, shall be payable on September 30, 1996;
and
(ii) U.S. $68,100 shall be payable on December 31, 1996;
provided, however, that in the event one or more of the shareholders of the
Company other than Brooke exercise the preemptive right granted to such
shareholders in the Charter of the Company to purchase Shares which are the
subject of this Agreement, (a) the number of Shares to be purchased by Brooke
from Belgrave under this Agreement shall be reduced by the aggregate number of
Shares so purchased by the shareholders, (b) the Purchase Price payable by
Brooke under this Agreement shall be reduced by an amount equal to U.S. $15.00
multiplied by the aggregate number of Shares so purchased by the shareholders
(with such reduction being applied to the payments to be made pursuant to
clauses (i) and (ii) above in order of their maturity), and (c) the parties
hereto agree to amend the Brooke Note (as defined below) and any other documents
deemed necessary by mutual written agreement of Brooke and Belgrave to reflect
the reduction in the number of Shares being purchased hereunder and the Purchase
Price as described above.
(B) The obligation of Brooke to pay the installments of the Purchase
Price to Belgrave shall be evidenced by a promissory note of Brooke (the "Brooke
Note") issued by Brooke to Belgrave, in the form of Annex A hereto, which shall
be secured by the pledge by Brooke of certain of the Shares purchased by it
hereunder pursuant to a pledge agreement (the "Pledge Agreement"), in the form
of Annex B hereto.
1.3 Closing Date. On the Closing Date, the parties hereto shall enter
into and deliver this Agreement and:
(A) Brooke shall deliver to Belgrave the Brooke Note
evidencing the portion of the Purchase Price set forth in clauses (i)
and (ii) of Section 1.2(A) for the Shares so purchased by Brooke from
Belgrave.
(B) Brooke and Belgrave shall enter into and deliver the
Consulting Agreement, in the form of Annex C hereto, providing for the
provision by Belgrave of consulting services to Brooke.
(C) Brooke shall deliver to Belgrave the Pledge Agreement.
(D) Brooke shall transfer and assign to Belgrave the note
which evidences certain indebtedness of Nakhamkin and Eduard Nakhamkin
Fine Arts, Inc. ("ENFA") under the Agreement dated January 1, 1994 by
and among Brooke Group Ltd., Belgrave, Nakhamkin, ENFA and BGLS Inc.
(the "Belgrave Agreement").
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<PAGE> 3
(E) The Company and Nakhamkin shall enter into a letter
agreement relating to the employment agreement dated as of January 1,
1994 (the "Employment Agreement"), by and between the Company and
Nakhamkin, in the form of Annex D hereto.
(F) Belgrave and Brooke shall enter into and deliver an
agreement, in the form of Annex E hereto, relating to the purchase of
the Shares.
(G) Each of Belgrave and Brooke shall deliver to the other
resolutions of its Board of Directors authorizing this Agreement, the
Consulting Agreement and the agreement referred to in clause (F) above,
and, in the case of Brooke only, the Pledge Agreement and the issuance
of the Brooke Note.
ARTICLE II
Representations and Warranties
2.1 Representations and Warranties by the Company. The Company
represents and warrants to, and agrees with, Brooke as follows:
(A) Organization and Qualification, etc. The Company
is a closed joint stock company duly organized, validly
existing and in good standing under the laws of the Russian
Federation, has the power and authority to own its properties
and assets and to carry on its business, and is duly qualified
to do business as a foreign corporation and is in good
standing in each jurisdiction in which the ownership of its
property or the conduct of its business requires such
qualification. The Company has the power and authority to
enter into this Agreement. This Agreement has been duly
authorized, executed and delivered by the Company, and
constitutes a valid and legally binding agreement of the
Company enforceable in accordance with its terms.
(B) Capital Stock. The authorized capital stock of
the Company consists of 701,000 shares of Common Stock, of
which 700,975 shares are validly issued, fully paid and
nonassessable, and outstanding. All of the outstanding shares
of the capital stock of the Company are owned of record and
beneficially by the shareholders of the Company as set forth
in Schedule A hereto. Other than as described in the proviso
to Section 1.2(A) above, there are no existing options, calls
or commitments of any character relating to the authorized and
unissued capital stock of the Company or any of its
Subsidiaries or to any securities or obligations convertible
into or exchangeable for, or giving any person any right to
subscribe for or acquire from the Company or any of its
Subsidiaries, any shares of capital stock of the Company or
any of its Subsidiaries, and no such convertible or
exchangeable securities or obligations are outstanding.
-3-
<PAGE> 4
(C) Stock Sale to Shareholders. The Company will
offer the Shares to its shareholders, other than Brooke, in
accordance with the provisions of its Charter and applicable
Russian law.
2.2 Representations and Warranties by Belgrave and Nakhamkin. Belgrave
and Nakhamkin represent and warrant to, and agree with, Brooke as follows:
(A) Good Title to Shares. Belgrave has, and
immediately prior to the Closing Date Belgrave will have, good
and valid title to the Shares to be sold by Belgrave
hereunder, free and clear of all liens, encumbrances, equities
or claims, other than the pledge of certain shares made by
Belgrave pursuant to the Belgrave Agreement and pursuant to a
Pledge Agreement dated as of June 30, 1995 made by Belgrave to
Brooke and by Vladimir Tiumentsev (the "Belgrave Pledge
Agreement" and, with the Belgrave Agreement, the "Belgrave
Agreements"); and, upon delivery of such Shares and payment
therefor pursuant hereto, good and valid title to such Shares,
free and clear of all liens, encumbrances, equities or claims,
including pursuant to the Belgrave Agreements, will pass to
Brooke on the Closing Date.
(B) Organization of Belgrave. Belgrave has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of Gibraltar, with corporate power and
authority to own its current properties and conduct its
current business.
(C) Authorization by Belgrave. Each of this
Agreement, the Consulting Agreement and the agreement referred
to in Section 1.3(F) above has been duly authorized, executed
and delivered by Belgrave and constitutes a valid and legally
binding agreement of Belgrave.
(D) Necessary Authority. All consents, approvals,
authorizations and orders necessary for the execution and
delivery by Belgrave of this Agreement, and for the sale and
delivery of the Shares to be sold by Belgrave hereunder have
been obtained, and Belgrave has full right, power and
authority to enter into this Agreement and to sell, assign,
transfer and deliver the Shares to be sold by Belgrave
hereunder.
(E) Defaults under other Instruments. The performance
of this Agreement and the consummation of the transactions
herein contemplated by Belgrave will not result in a breach or
violation of any of the terms or provisions of or constitute a
default under any law, any indenture, mortgage, deed of trust,
note agreement or other agreement or instrument to which
Belgrave is a party or by which Belgrave is bound, or any
order, rule or regulation of any court or governmental agency
or body having jurisdiction over Belgrave or the property of
Belgrave.
-4-
<PAGE> 5
(F) Consultation with Counsel. Each of Belgrave and
Nakhamkin agree that they have had the opportunity to consult
with legal counsel in connection with the transactions
contemplated by this Agreement and the Consulting Agreement.
(G) Belgrave Pledge Agreement. Belgrave hereby (i)
waives any rights it may now or hereafter have pursuant to
Section 8 of the Belgrave Pledge Agreement, and (ii) assigns,
transfers, sets over, conveys and delivers to Brooke all of
its right, title and interest in, to and under the shares of
the Company in which Vladimir Tiumentsev has an interest
pursuant to the Share Purchase Agreement dated May 1, 1995
(and related documents) between Belgrave and Tiumentsev.
2.3 Representations and Warranties with Respect to Brooke. Brooke
represents and warrants to, and agrees with, Belgrave as follows:
(A) Organization of Brooke. Brooke has been duly incorporated
and is validly existing as a corporation in good standing under the
laws of the State of Delaware, with corporate power and authority to
own its current properties and conduct its current business.
(B) Authorization by Brooke. This Agreement, the Brooke Note,
the Pledge Agreement, the Consulting Agreement and the agreement
referred to in Section 1.3(F) above have been duly authorized, executed
and delivered by Brooke and constitute valid and legally binding
obligations of Brooke.
(C) Non-Contravention. The execution and delivery of this
Agreement by Brooke and the consummation of the purchase of the Shares
contemplated hereby will not violate any provision of the Certificate
of Incorporation or By-Laws of Brooke, or any provision of, or result
in the acceleration of, or entitle any party to accelerate (whether
after the giving of notice or lapse of time or both) any obligation
under, any mortgage, lien, lease, agreement, license or instrument, or
violate any law, regulation, order, arbitration award, judgment or
decree to which Brooke is a party or by which Brooke or its property is
bound or violate or conflict with any other material restriction of any
kind or character to which Brooke is subject.
(D) Green Crown Note. Immediately prior to the Closing Date,
the promissory note of Green Crown Corp. dated August 30, 1994 in the
principal amount of U.S. $3,500,000 payable to Brooke Irkutsk Inc. has
not been pledged, hypothecated or otherwise encumbered.
-5-
<PAGE> 6
ARTICLE III
Conditions To The Closing
3.1 Conditions to Obligations of Brooke. The obligations of Brooke to
consummate the purchase of the Shares provided for herein are subject to the
proper tender by Belgrave to Brooke of the Shares, and the fulfillment, prior to
or on the Closing Date, of each of the following conditions:
(A) Regulatory Authorizations for the Company and Belgrave. All
authorizations, consents, orders and approvals of regulatory bodies and
officials and of any association necessary for the performance by the Company
and Belgrave of this Agreement and the consummation of the sale and purchase of
the Shares hereunder shall have been obtained.
(B) Representations and Warranties. The representations and warranties
of the Company and Belgrave contained in this Agreement shall be true and
correct in all material respects at and as of the Closing Date; and the Company
and Belgrave shall have performed or complied in all material respects with all
agreements and covenants required by this Agreement to be performed or complied
with by them on or prior to the Closing Date, including the delivery of such
documents and performance of such acts as are required by Section 1.3 hereof.
(C) Regulatory Authorizations and other Approvals for Brooke. All
authorizations, consents, orders and approvals of regulatory bodies and
officials and of any associations necessary for the performance by Brooke of
this Agreement and the consummation of the purchase of the Shares hereunder
shall have been obtained.
3.2 Conditions to Obligations of Belgrave. The obligations of Belgrave
to consummate the sale of Shares to be sold hereunder are subject to the
fulfillment, prior to or on the Closing Date, of each of the following
conditions:
(A) Regulatory Authorizations. All authorizations, consents, orders and
approvals of regulatory bodies and officials and of any association necessary
for the consummation by Belgrave of the sale and purchase of the Shares to be
sold hereunder shall have been obtained.
(B) Representations and Warranties. The representations and warranties
of Brooke contained in this Agreement shall be true and correct in all material
respects at and as of the Closing Date; and Brooke shall have performed or
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by it on or prior to the Closing
Date, including the delivery of such documents and performance of such acts as
are required by Section 1.3 hereof.
-6-
<PAGE> 7
ARTICLE IV
Miscellaneous
4.1 Waiver of Conditions. Any party may, at its option, waive in
writing any or all of the conditions herein contained to which its obligations
hereunder are subject.
4.2 Notices. Any notices or other communications required or permitted
hereunder shall be sufficiently given if sent by registered or certified mail,
postage prepaid, addressed, in the case of (i) the Company, to Liggett-Ducat
Ltd., 8-10 (Ducat Place) Gasheka Street, Moscow, Russia 125047, Attention:
President; (ii) Belgrave, to Belgrave Limited, 17 Paseo Illetas, Palma de
Mallorca, Spain, Attention: President; (iii) Nakhamkin, to Eduard Z. Nakhamkin,
Belgrave Limited, 17 Paseo Illetas, Palma de Mallorca, Spain; and (iv) Brooke,
to Brooke (Overseas) Ltd., 100 S.E. Second Street, Miami, Florida 33131, U.S.A.,
Attention: Marc N. Bell, General Counsel; or to such other address as shall be
furnished in writing by any party to the others prior to the giving of any
applicable notice or communication, and such notice or communication shall be
deemed to have been given as of the date upon which such notice or communication
is first sent by telex, telecopier or other means of instantaneous
communication, and simultaneously confirmed by mail.
4.3 Brokers. The Company and Belgrave represent and warrant to Brooke
that no broker or finder is entitled to any brokerage or finder's fee or other
commission from the Company or Belgrave based on agreements, arrangements or
undertakings made by the Company or Belgrave or in connection with the
transactions contemplated hereby.
4.4 Press Releases and Confidentiality. Each of the parties to this
Agreement hereby agrees with each other party that (i) no press release or
similar public announcement or communication will be made or caused to be made,
and (ii) no information will be divulged, furnished or made accessible to any
third party, in each case, concerning the execution or performance of this
Agreement or the transactions contemplated hereunder unless specifically
approved in advance by the other parties hereto.
4.5 Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified and supplemented only by a written agreement
of the parties with respect to any of the terms contained herein.
4.6 Expenses; Transfer of Taxes, Etc. Whether or not the transaction
contemplated by this Agreement shall be consummated, each party hereto agrees
that all fees and expenses incurred by it in connection with this Agreement
shall be borne by it. Belgrave agrees that it will pay all sales, transfer or
other taxes which may be payable in connection with the transactions
contemplated by this Agreement.
4.7 Assignment. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted
-7-
<PAGE> 8
assigns, but neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto without the
prior written consent of the other parties, except by operation of law and
except that Brooke may assign its rights and obligations under this Agreement to
any of its affiliates.
4.8 Further Actions. Each of the parties hereto agrees that, subject to
its legal obligations, it will use its best efforts to fulfill all conditions
precedent specified herein, and to do all things reasonably necessary to
consummate the transactions contemplated hereby. Belgrave agrees that it will
use its best efforts to keep the Term Loan Agreement dated June 30, 1995 between
Belgrave, Nakhamkin and Brooke and the Belgrave Pledge Agreement in place and in
full force and effect, in each case, with respect to the shares of the Company
in which Vladimir Tiumentsev has an interest.
4.9 Governing Law. This Agreement and the legal relations among the
parties hereto shall be governed by and construed in accordance with the laws of
the State of New York, without regard to its conflicts of law doctrine.
4.10 Submission to Jurisdiction. Each party hereby consents to the
jurisdiction of the United States District Court for the Southern District of
New York and any of the courts of the State of New York in New York County in
connection with any dispute arising under this Agreement.
4.11 Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
4.12 Headings. The headings of the Sections and Articles of this
Agreement are inserted for convenience only and shall not constitute a part
hereof or affect in any way the meaning or interpretation of this Agreement.
4.13 Entire Agreement. This Agreement, including the Annexes and
Schedules hereto and the other documents and certificates delivered pursuant to
the terms hereof, sets forth the entire agreement and understanding of the
parties hereto in respect of the subject matter contained herein, and supersedes
all prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any officer, employee
or representative of any party hereto.
-8-
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
LIGGETT-DUCAT LTD.
By /s/ Ronald J. Bernstein
---------------------------
Name: Ronald J. Bernstein
Title: President
BELGRAVE LIMITED
By /s/ Eduard Z. Nakhamkin
---------------------------
Name: Eduard Z. Nakhamkin
Title: President
EDUARD Z. NAKHAMKIN
/s/ Eduard Z. Nakhamkin
---------------------------
BROOKE (OVERSEAS) LTD.
By /s/ Ronald J. Bernstein
---------------------------
Name: Ronald J. Bernstein
Title: President
-9-
<PAGE> 10
SCHEDULE A
<TABLE>
<CAPTION>
NAME OF SHAREHOLDER NUMBER OF SHARES HELD AS OF 4/3/96
- ------------------- ----------------------------------
<S> <C>
Brooke (Overseas) Ltd. 479,055
Belgrave Limited 84,540
Employees of Liggett-Ducat Ltd. 137,380
-------
Total 700,975
=======
</TABLE>
<PAGE> 1
Exhibit 10.29
CONSULTING AGREEMENT
THIS AGREEMENT made as of April 3, 1996, by and between BROOKE
(OVERSEAS) LTD., a Delaware corporation (hereinafter the "Company"), with its
principal place of business at 100 S.E. Second Street, Miami, Florida 33131,
BELGRAVE LIMITED, a Gibraltar corporation (hereinafter the "Consultant"), with
its principal place of business at 17 Paseo Illetas, Palma de Mallorca, Spain,
and Eduard Z. Nakhamkin, a citizen of the United States of America
("Nakhamkin").
PREAMBLE
The Company is engaged in making investments throughout the world for
itself and its affiliates. Consultant has been involved in some of the same
investments made by the Company in, among other countries, Russia, for a number
of years, and has accumulated experience in Russia and elsewhere which the
Company believes would be of value in the operation of the Company's businesses
in Russia and elsewhere.
The Company now desires that Consultant enter into this Agreement in
order to induce Consultant to provide consulting services to the Company. The
Company further desires to ensure that Consultant does not compete against the
Company. Consultant agrees to provide consulting services and not to compete
upon the terms and conditions hereinafter set forth.
W I T N E S S E T H :
I. CONSULTING COMMITMENT
1. Nature of the Consulting Commitment. The Company hereby retains
Consultant to serve, and Consultant hereby agrees to provide consulting
services, under the terms and conditions set forth below in the capacity of
Consultant, in connection with investments to be made by, and the operation of
businesses of, the Company (the "Consulting Services"). The Company and
Consultant agree that in its capacity as a Consultant, upon the Company's
reasonable request, Consultant shall be available at reasonable times to provide
Consulting Services to the Company. It is the understanding of the Company and
the Consultant that the Consulting Services commitment herein envisioned is not
one based on hours of work or availability at the Company's offices, but rather
is based on the Consultant's commitment to share with the Company at reasonable
times the value of the Consultant's experience regarding investments to be made
by, and the operation of businesses of, the Company.
2. Consulting Term. The term of the consulting relationship hereunder
shall commence as of April 3, 1996 and shall terminate on December 31, 1997 (the
"Consulting Term"); provided, however, that Consulting Fees (as defined below)
payable by the Company
<PAGE> 2
to the Consultant hereunder shall be paid as scheduled in Annex A hereto. During
the Consulting Term the Consultant shall provide the Consulting Services.
II. CONSIDERATION
1. Consulting Fee. In consideration of the execution and delivery of
this Agreement by the Consultant and in consideration of the provision of
Consulting Services by the Consultant, the Company agrees to pay to the
Consultant the fees set forth on Annex A hereto (the "Consulting Fees"). The
Consulting Fees shall be payable, by wire transfer, to an account designated by
Consultant to the Company at least three (3) business days prior to any payment.
2. Additional Payment. In the event of (i) the sale of 20% or more of
the capital stock of Liggett-Ducat Ltd., a Russian closed joint stock
corporation ("Liggett"), in one or more transactions, (ii) the sale or lease of
any portion of the cigarette manufacturing operations of Liggett-Ducat Tobacco
(the "Cigarette Operations"), (iii) the sale of the real estate and buildings,
situate thereon, located at either 6, 7 or 8-10 Gasheka Street (the "Real
Estate"), or (iv) the prepayment of lease payments relating to the premises at
any Gasheka Street address, the Company shall be required to pay Consultant an
amount equal to 12.1% of the Net Proceeds (as defined below) received from such
sale, lease or prepayment, calculated as of the date of such transaction (the
"Additional Payment") and such Additional Payment shall be credited to the
Company's obligation to pay the remaining unpaid balance of the Consulting Fees,
with such credit being applied in the inverse order of maturity (i.e., first
applied to the last payment due, then applied to the penultimate payment due,
and so on); and, provided, that in no event shall the total of all payments made
hereunder (including, in each case, any Additional Payments) exceed $5,231,900
plus interest, if any (the "Maximum Amount"). The term "Net Proceeds" for
purposes of this paragraph shall mean the proceeds received from any sale, lease
or prepayment after payment of any indebtedness owed to any party other than
Brooke or its affiliates, costs and expenses, fees, taxes or development costs,
all as may be associated or incurred in connection with such sale, lease, or
prepayment.
In the event that the Company or Liggett obtains financing (whether in
the form of a loan or revolving credit agreement or otherwise) for Liggett, the
Cigarette Operations or the Real Estate, and the proceeds of such financing are
used (i) to pay a dividend to the shareholders of Liggett, or (ii) for purposes
other than in connection with the business of the borrower, the Company shall be
required to pay Consultant an amount equal to 12.1% of the amount of the
financing obtained, calculated and credited as provided in the first sentence of
the prior paragraph, and subject to the Maximum Amount. In the event that the
indebtedness repaid in connection with any sale, lease, or prepayment referred
to in the first sentence of the prior paragraph is indebtedness owed to Brooke
or its affiliates, the Company shall be required to pay Consultant an amount
equal to 12.1% of the amount of indebtedness so repaid to Brooke or its
affiliate, calculated and credited as provided in the first sentence of the
prior paragraph, and subject to the Maximum Amount.
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<PAGE> 3
3. Pledge of Stock. As security for the payment of Consulting Fees due
to Consultant hereunder, the Company agrees to pledge to Consultant certain of
the shares of Common Stock of Liggett purchased by the Company from the
Consultant, on the date hereof, pursuant to a Pledge Agreement in the form of
Annex B hereto (the "Pledge Agreement").
4. Green Crown Note and Other Documents. In connection with the
transactions contemplated by this Agreement, the Company agrees to transfer and
assign, on the date hereof, to the Consultant (i) the promissory note of Green
Crown Corp. ("Green Crown") dated August 30, 1994 in the principal amount of
U.S. $3,500,000 payable to Brooke Irkutsk, Inc. ("BI"), (ii) the Interest Pledge
Agreement dated as of August 30, 1994 by and between BI and Green Crown, which
secures the payment under such promissory note, and (iii) the guaranty by Fort
Info International Trading of payments due under Green Crown's promissory note
to BI.
5. Payment of Consulting Fees. The Company understands that due to the
unique nature of the Consulting Services to be rendered by Consultant hereunder,
no specific dollar value can be attached or attributed to the Consulting
Services rendered by Consultant during any particular period or unit of time.
Therefore, in the event that subsequent to the execution and delivery of this
Agreement, the Company for whatever reason fails, or for any reason is unable,
to make use of Consultant's willingness to provide Consulting Services
hereunder, the Consulting Fees described above shall nonetheless and in all
events be due and payable as scheduled.
6. Prepayment. The Company may prepay the Consulting Fees without a
penalty.
III. EVENTS OF DEFAULT AND REMEDIES
1. Default By The Company. Upon the failure by the Company to pay any
portion of the Consulting Fees when due as provided above, the Consultant shall
provide written notice to the Company of such failure to pay and upon receipt of
such notice the Company shall have ten days to pay the amounts currently due to
Consultant hereunder. If such amounts are not received by the Consultant within
ten days after receipt of such written notice, Consultant may treat this
Agreement as being in default, cease to perform Consulting Services hereunder
and enforce its rights under the Pledge Agreement.
2. Default By The Consultant. In the event that the Consultant (a) is
guilty of willful misconduct injurious to the Company, or (b) violates the
provisions of the non-competition and confidentiality provisions of Article IV
hereof, then and in each such event the Company may terminate this Agreement
with no further obligation on the part of the Company to pay the unpaid balance
of the Consulting Fees to Consultant.
IV. NON-COMPETITION & CONFIDENTIALITY
1. Each of Consultant and Nakhamkin covenants and agrees with the
Company that it shall not, until December 31, 2000 (i) directly or indirectly,
in any manner whatsoever,
-3-
<PAGE> 4
including, without limitation, either individually or in partnership or jointly,
or in conjunction with any other person or persons, firm, association,
syndicate, company or corporation, as principal, agent, shareholder (except as
shareholder of not more than 5% of the voting shares of a publicly traded
corporation), employee or in any other matter whatsoever, work for, be employed
by or acquire an interest in any corporation which competes, either directly or
indirectly, with the Company or which is involved in commercial real estate
development in Moscow or in the tobacco industry or permit its name or any part
thereof to be used or employed by a business engaged in the sale, manufacture,
distribution or marketing of tobacco products or the construction or development
of commercial real estate in Moscow or any corporation affiliated with such
businesses; (ii) entice away or otherwise attempt to obtain the withdrawal of
any employee of the Company or its subsidiaries, parent, affiliates or related
partner; or (iii) entice away or otherwise attempt to obtain any customer of the
Company or its subsidiaries, parent affiliates or related partner. For purposes
of this section, the Consultant and Nakhamkin shall not be permitted to compete
with the Company until December 31, 2000 in any business in which the Company is
engaged on or before the date of voluntary cessation, by the Consultant, of the
Consultant's employment with the Company.
2. Consultant and Nakhamkin shall not use, divulge, furnish or make
accessible to anyone any knowledge or information in or coming into Consultant's
possession or control with respect to or concerning (i) confidential or secret
documents, processes, plans, devices or materials relating to the business and
operations of the Company and its affiliates, (ii) any other confidential or
secret aspect of the business of the Company and its affiliates, including,
without limitation, any customer lists, pricing or other information with
respect to the business and operations of the Company and its affiliates, or
(iii) the execution or performance of this Agreement or the transactions and
services contemplated hereunder.
V. MISCELLANEOUS PROVISIONS
1. No Conflicting Agreements and Other Matters. Each of Consultant and
Nakhamkin represents and warrants to the Company that neither the execution and
delivery of this Agreement nor the provision of the Consulting Services
contemplated hereby shall conflict with, result in a breach of the terms of, or
constitute a default under any agreement or other instrument, or of any law or
order of any Court of competent jurisdiction to which it is a party, or by which
it is bound. Each of Consultant and Nakhamkin represents that it has had the
opportunity to consult with legal counsel regarding this Agreement and the
transactions contemplated hereunder.
2. Amendment; Waiver. This Agreement may not be amended, supplemented,
cancelled, modified or discharged, except by a written instrument executed and
delivered by the party affected. No failure to express and no delay in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof. No waiver of any breach of any provision shall be deemed to be a waiver
of any preceding or succeeding breach of the same or any other provision, and no
waiver shall be inferred as a result of any custom or practice between or among
the parties to this Agreement.
-4-
<PAGE> 5
3. Applicable Law. Rights and obligations of the parties hereunder
shall be construed, determined and enforced in accordance with the laws and
decisions of the State of New York applicable to contracts executed and
delivered and performed in such state, and exclusive of the conflict of laws or
rules of the State of New York.
4. Binding Effect, Assignment. The rights and obligations of this
Agreement shall bind and inure to the benefit of the parties hereto and their
respective heirs, successors and assigns. This Agreement may be assigned by the
Company to an affiliate of the Company.
5. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original but all of which together shall
constitute one and the same
instrument.
6. Headings. Any headings contained in this Agreement are for
convenience of reference purposes only, and shall not affect the meaning or
interpretation of this Agreement.
7. Severability. The parties agree, having been advised by counsel,
that the terms and provisions of this Agreement are fair and reasonable as of
the signing of this Agreement. If notwithstanding that stipulation, any one or
more terms, provisions, covenants or restrictions of this Agreement shall be
determined by a Court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
be in no way affected, impaired or invalidated. If any one or more of the
provisions contained in this Agreement shall for any reason be determined by a
Court of competent jurisdiction to be excessively broad as to duration,
geographical scope, activity or subject matter, it shall be construed, by
limiting or reducing it, to be enforceable to the extent compatible with then
applicable law.
8. Notices. Any and all notices referred to herein shall be sufficient
if furnished in writing, sent by certified mail, return receipt requested, to
the party to receive such notice at the address specified below, or to such
other address as such party may from time to time designate by delivery of a
written notice to that effect to the other.
For the Company: Brooke (Overseas) Ltd.
100 S.E. Second Street
Miami, Florida 33131
Attention: Marc N. Bell
General Counsel
For the Consultant: Belgrave Limited
17 Paseo Illetas
Palma de Mallorca
Spain
Attention: Eduard Z. Nakhamkin
President
-5-
<PAGE> 6
For Nakhamkin: Eduard Z. Nakhamkin
Belgrave Limited
17 Paseo Illetas
Palma de Mallorca
Spain
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date and year first above written.
BROOKE (OVERSEAS) LTD.
By /s/ Ronald J. Bernstein
---------------------------
Name: Ronald J. Bernstein
Title: President
BELGRAVE LIMITED
By /s/ Eduard Z. Nakhamkin
---------------------------
Name: Eduard Z. Nakhamkin
Title: President
/s/ Eduard Z. Nakhamkin
---------------------------
Eduard Z. Nakhamkin
-6-
<PAGE> 7
ANNEX A
CONSULTING FEES
1. U.S. $1,231,900 shall be payable on December 31, 1996.
2. U.S. $4,000,000 shall be paid in quarterly installments of U.S. $250,000 each
commencing on January 1, 1998 and ending on October 1, 2001; provided, however,
that interest thereon (simple and not compounding) at the rate of 10% per annum
shall only commence accruing on January 1, 1998 on the unpaid principal balance
and shall be payable quarterly in arrears commencing on April 1, 1998 and only
out of the operating profits of the Company and, if no interest is paid by the
Company in the calendar years 1998 and/or 1999, such interest shall accrue and
be payable in full on January 1, 2000 and, if no interest is paid by the Company
in the calendar years 2000 and/or 2001, such interest shall accrue and be
payable in full on January 1, 2002.
-7-
<PAGE> 1
Exhibit 10.30
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT, dated as of April 3, 1996, is entered into by and between
BELGRAVE LIMITED, a corporation duly organized and validly existing under the
laws of Gibraltar ("Belgrave"), and BROOKE (OVERSEAS) LTD., a corporation duly
organized and validly existing under the laws of Delaware ("Brooke").
W I T N E S S E T H
WHEREAS, on the date hereof, Brooke has purchased from Belgrave, and Belgrave
has sold to Brooke, 84,540 shares of Common Stock (the "Common Stock") of
Liggett-Ducat Ltd., a Russian closed joint stock company ("Liggett"), and Brooke
has issued to Belgrave a note (the "Brooke Note") to evidence its obligation to
pay the purchase price for the Common Stock, all pursuant to a Stock Purchase
Agreement;
WHEREAS, on the date hereof, Brooke and Belgrave have entered into a Consulting
Agreement pursuant to which Belgrave will provide certain consulting services to
Brooke;
WHEREAS, pursuant to the terms of the Stock Purchase Agreement and the
Consulting Agreement, Brooke has agreed to transfer and assign, or to cause to
be transferred and assigned, certain indebtedness to Belgrave;
WHEREAS, on the date hereof, Belgrave has released to Brooke 16,908 shares of
Common Stock which had been pledged to Brooke by Belgrave, and has waived
certain rights under a Pledge Agreement dated June 30, 1995 made by Belgrave to
Brooke; and
WHEREAS, to secure the payment obligations of Brooke under the Brooke Note and
the payment when due of all Consulting Fees (as defined in the Consulting
Agreement) payable by Brooke to Belgrave pursuant to the Consulting Agreement,
Belgrave has requested that Brooke pledge 67,632 shares of Common Stock (the
"Shares") owned by Brooke to it;
NOW, THEREFORE, in consideration of the mutual agreements set forth herein and
for other good and valuable consideration, the parties hereto hereby agree as
follows:
<PAGE> 2
1. SECURITY AGREEMENT
1.1 Security Interest in the Collateral
(a) In order to secure the due and punctual payment (whether at
maturity or by acceleration) of any amount that Brooke is obligated to pay under
the Brooke Note or the Consulting Agreement, Brooke hereby pledges, assigns,
transfers, sets over and delivers to Belgrave and grants for the benefit of
Belgrave a security interest in and to all of the following in which Brooke may
now or hereafter have any right, title or interest:
(i) the Shares;
(ii) all certificates and instruments representing such
Shares; and
(iii) all cash, securities, distributions and other
property at any time and from time to time received,
receivable or otherwise distributed in respect of or
in exchange for any or all of the foregoing (all of
the property described in the foregoing clauses
(i)-(iii) is hereinafter referred to as the
"Collateral").
(b) The Shares and all certificates and instruments representing such
Shares shall be deposited on the date hereof with Clyde E. Rankin, III of
Coudert Brothers, a New York general partnership engaged in the practice of law,
located at 1114 Avenue of the Americas, New York, New York 10036, as
representative of the parties hereunder (the "Representative"). All securities
and other certificated property at any time and from time to time received,
receivable or otherwise distributed in respect of or in exchange for the Shares
(collectively with the Shares, the "Property"), shall also be deposited with the
Representative when received. In the event of any ambiguity or uncertainty
hereunder or in any notice, instruction or other communications received by the
Representative, or any dispute or conflicting claims among the parties hereto
with respect to the Property held by the Representative hereunder, the
Representative may, in its sole discretion, refrain from taking any action other
than to retain possession of such Property, unless the Representative receives
written instructions signed by all parties hereto, which eliminates such
ambiguity or uncertainty or resolves such dispute or conflicting claim. All
costs and expenses incurred by the Representative in connection with its
activities hereunder shall be the joint and several obligation of the parties
hereto.
(c) The parties hereto agree that, on the date on which Brooke makes a
payment of monies under the Brooke Note or the Consulting Agreement to Belgrave,
the percentage of the Collateral equal to the percentage obtained by dividing
the amount of the payment so made by U.S. $6,500,000 shall be released from the
pledge of this Agreement and returned to the possession of Brooke and no longer
constitute Collateral under this Agreement, as follows:
-2-
<PAGE> 3
<TABLE>
<CAPTION>
Payment Date Payment Amount Number of Shares to be Released
- ------------ -------------- -------------------------------
<S> <C> <C>
6/30/96 $ 500,000 5,411
9/30/96 700,000 7,440
12/31/96 1,300,000 13,526
4/1/98 500,000(A) 5,157 minus 500 = 4,657 (B)
10/1/98 500,000(A) 5,157 minus 500 = 4,657 (B)
4/1/99 500,000(A) 5,157 minus 500 = 4,657 (B)
10/1/99 500,000(A) 5,157 minus 500 = 4,657 (B)
1/1/00 --- 1,000 (B)
4/1/00 500,000(A) 5,157 minus 250 = 4,907 (B)
10/1/00 500,000(A) 5,157 minus 250 = 4,907 (B)
4/1/01 500,000(A) 5,157 minus 250 = 4,907 (B)
10/1/01 500,000(A) 5,156 plus 1,750 = 6,906 (B)
</TABLE>
- ----------------
(A) Although payments required to be made by Brooke from January 1, 1998 to
October 10, 2001 are quarterly, the parties agree to release Shares twice a year
as set forth above.
(B) The parties agree that Belgrave shall be entitled to hold, as Collateral to
secure the payment by Brooke of interest, if any, on amounts due by it under the
Brooke Note or the Consulting Agreement, 500 Shares which would otherwise be
released on each of 4/1/98, 10/1/98, 4/1/99 and 10/1/99, and 250 Shares which
would otherwise be released on each of 4/1/00, 10/1/00 and 4/1/01; provided,
however, that in the event Brooke has made all payments of principal and
interest due under the Brooke Note and the Consulting Agreement, 1,000 Shares
held as Collateral to secure payment of interest shall be released on January 1,
2000, and 1,750 Shares held as Collateral to secure payment of interest shall be
released on October 1, 2001.
;provided, however, that if payment by Brooke under the Brooke Note or the
Consulting Agreement is accelerated, the release of the Shares pursuant to this
provision shall also be accelerated pro rata to the date of such accelerated
payment; and, provided further that, for purposes of releasing the Shares from
the pledge of this Agreement, payments made by Brooke under the Brooke Note or
the Consulting Agreement shall be applied first to interest and then to
principal.
1.2 Voting Rights; Distributions; Etc.
(a) So long as no Event of Default (as defined below) shall have
occurred and be continuing:
(i) Except as set forth in paragraph (b) below, Brooke shall
be solely and exclusively entitled to exercise any and all voting, consensual
and other rights and powers relating or pertaining to the Collateral or any part
thereof that Brooke may now or hereafter have as the owner of the Shares for any
purpose not inconsistent with the terms of this Agreement; and
-3-
<PAGE> 4
(ii) Brooke shall be solely and exclusively entitled to
receive and retain dividends and other distributions payable upon the Shares.
(b) Upon the occurrence and during the continuance of an Event of
Default, all rights of Brooke to exercise the voting, consensual and other
rights and powers which Brooke is entitled to exercise pursuant to subparagraph
(i) of paragraph (a) above and to receive the distributions which Brooke is
authorized to receive and retain pursuant to subparagraph (ii) of paragraph (a)
above shall cease and Belgrave shall have the sole and exclusive right and
authority to exercise such voting, consensual and other rights and powers and to
receive the dividends and other distributions which Brooke would otherwise be
authorized to retain pursuant to such subparagraph (ii) of paragraph (a), and
any such dividends and other distributions received by Brooke shall immediately
be paid over to Belgrave. Any and all money and other property paid over to or
received by Belgrave pursuant to the provisions of this paragraph (b) shall be
retained by Belgrave as part of the Collateral and be applied in accordance with
the provisions hereof.
2. REPRESENTATIONS, WARRANTIES AND COVENANTS
2.1 Title to Shares
Brooke hereby represents and warrants that it owns now or will shortly
become owner of good and marketable title to the Shares, free and clear of any
liens, charges, encumbrances or security interests of any kind whatsoever, and
that the Shares are not subject to any restriction on alienation or transfer, in
each case, other than this Agreement. Brooke covenants to defend the right,
title and special property of Brooke in and to the Shares against the claims and
demands of all persons whatsoever. Brooke hereby represents, warrants and
covenants that Brooke is currently, or shall be, the only owner of the Shares
and that Brooke does not, and will not have, outstanding rights, options,
warrants, conversion rights or other commitments or agreements for the purchase
or acquisition of the Shares.
2.2 No Transfer
Brooke covenants not to sell, assign, transfer or otherwise dispose of,
or grant any option with respect to, or pledge or otherwise encumber, any of the
Shares, other Collateral or any interest therein, unless (i) it obtains the
prior written consent of Belgrave, or (ii) all obligations of Brooke under the
Brooke Note and the Consulting Agreement have been paid in full.
2.3 Corporate Organization and Authority
Brooke represents and warrants that:
(a) it is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, has full corporate power and
authority to own its assets and to transact its business as now conducted, and
is in good standing under the laws of those
-4-
<PAGE> 5
jurisdictions in which the business conducted or the assets owned or leased by
it makes qualification to do business as a foreign corporation necessary;
(b) this Agreement has been duly executed and delivered by Brooke and
constitutes a legal, valid and binding obligation of Brooke, enforceable in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditor's rights generally and by general principles of equity;
(c) the execution, delivery and performance by Brooke of this Agreement
(i) will not violate any provision of any applicable law applicable to Brooke or
to any of its assets, (ii) will not violate any provisions of the Certificate of
Incorporation or By-laws of Brooke, and (iii) will not violate any provisions
of, or constitute a default under, or result in the creation or imposition of
any lien (other than the lien created hereby) on any of the properties, revenues
or assets of Brooke pursuant to the provisions of any applicable law, contract,
agreement or other undertaking to which Brooke is a party or which purports to
be binding upon Brooke or upon any of its assets; and
(d) no consent or authorization of, or other act by or in respect of,
any governmental authority, and no consent of any person is required in
connection with the execution, delivery, performance, validity or enforceability
of this Agreement.
3. EVENT OF DEFAULT
For purposes of this Agreement an "Event of Default" shall exist
hereunder upon the occurrence of a payment default under the Brooke Note or the
Consulting Agreement (whether any such event shall be voluntary or involuntary
or come about or be effected by operation of law or pursuant to or in compliance
with any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body or otherwise).
4. REMEDIES UPON DEFAULT
4.1 Rights under the Uniform Commercial Code
If any Event of Default shall have occurred and be continuing, Belgrave
shall have the right to exercise any and all rights and remedies of a secured
party upon default under the Uniform Commercial Code then in effect in the State
of New York.
4.2 Sale of the Pledged Collateral
(a) In addition to the aforesaid rights and remedies under the Uniform
Commercial Code, upon the occurrence and during the continuance of an Event of
Default, Belgrave may, to the extent permitted by law, sell the Collateral, or
any part thereof, at any public or private sale or at any broker's board or on
any securities exchange, for cash, upon credit or for future
-5-
<PAGE> 6
delivery, as Belgrave shall deem appropriate. Belgrave shall be authorized at
any such sale (to the extent it deems it advisable to do so, in its sole
discretion) to restrict the prospective bidders or purchasers to persons who
will represent and agree that they are purchasing the Collateral then being sold
for their own account for investment and not with a view to the distribution or
resale thereof, and upon consummation of any such sale Belgrave shall have the
right to assign, transfer and deliver to the purchaser or purchasers thereof the
Collateral so sold. Each such purchaser at any such sale shall hold the property
sold absolutely and free from any claim or right on the part of Brooke. At any
such sale Belgrave may bid for or purchase, free from any right of redemption on
the part of Brooke (all said rights being also hereby waived and released), all
or any part of the Collateral offered for sale, and Belgrave may, upon
compliance with the terms of the sale, hold, retain and dispose of such property
without further accountability therefor.
(b) Belgrave shall give Brooke at least ten (10) days' written notice
of the intention of Belgrave to make any such public or private sale or sale at
any broker's board or on any securities exchange. Such notice, in case of public
sale, shall state the time and place fixed for such sale and, in the case of
sale at a broker's board or on a securities exchange, shall state the board or
exchange at which such sale is to be made and the day on which the Collateral,
or portion thereof, will first be offered for sale at such board or exchange.
(c) Any such public sale shall be held at such time or times within
ordinary business hours and at such place or places as Belgrave may fix in the
notice of such sale.
(d) At any such public or private sale, the Collateral or part thereof
to be sold may be sold in one lot as an entirety or in separate parcels, as
Belgrave may in its sole discretion determine.
(e) Belgrave shall not be obligated to make any sale of Collateral if
it shall determine not to do so, regardless of the fact that notice of sale of
Collateral may have been given. Belgrave may, without notice or publication,
adjourn any public or private sale or cause the same to be adjourned from time
to time by announcement at the time and place fixed for sale, and such sale may
without further notice be made at the time and place to which the same shall
have been so adjourned.
(f) As an alternative to exercising its rights under the Uniform
Commercial Code or the power of sale herein conferred upon it, Belgrave may
proceed by a suit or suits at law or in equity to foreclose on and to sell the
Collateral or any portion thereof pursuant to a judgment decree of a court or
courts of competent jurisdiction.
4.3 Application of Proceeds of Sale and Other Cash Received
The proceeds of sale of Collateral sold pursuant to Section 4.2 and
cash constituting Collateral received under Section 1.3(b) shall be applied by
Belgrave as follows:
FIRST: to the payment of the costs and expenses of such sale, including
the out-of- pocket expenses of Belgrave and the fees and out-of-pocket expenses
of legal advisers employed
-6-
<PAGE> 7
by Belgrave in connection therewith, and to the payment of all advances made by
Belgrave hereunder and the payment of all costs and expenses incurred by
Belgrave in connection with the administration and enforcement of this
Agreement;
SECOND: to the payment in full of the Brooke Note, and default interest
thereon, if any, and the Consulting Fees due or to become due under the
Consulting Ageement, plus interest thereon at the rates prescribed therein, if
any; and
THIRD: the balance (if any) of such proceeds to Brooke, the successors
or assigns of Brooke, or as a court of competent jurisdiction may direct.
4.4 Remedies Not Exclusive and Cumulative
The remedies upon default available to Belgrave pursuant to this
Article 4 are not exclusive and Belgrave may pursue more than one of such
remedies at the same time.
5. OTHER PROVISIONS
5.1 Termination
The security interest created by this Agreement shall terminate on or
after the date when any and all amounts due and payable by Brooke under the
Brooke Note and the Consulting Agreement shall be paid in full, at which time
Belgrave shall reassign and redeliver, or cause to be reassigned or redelivered,
without recourse to or warranty by Belgrave and at the expense of Brooke and
together with appropriate instruments of reassignment and release, to Brooke,
against receipt, such of the Collateral (if any) as shall not have been sold or
otherwise applied by Belgrave pursuant to the terms hereof and not theretofore
reassigned and redelivered to Brooke or such person or persons as Brooke may
have designated, which Collateral (if any) shall not have been encumbered by
Belgrave.
5.2 Further Assurances
Brooke agrees to do such further acts and things, and to execute and
deliver such additional conveyances, assignments, agreements and instruments as
Belgrave may at any time reasonably request in connection with the
administration or enforcement of this Agreement or related to the Collateral or
any part thereof or in order better to assure and confirm onto Belgrave its
rights, powers and remedies hereunder.
5.3 Certain Waivers, etc.
(a) No delay on the part of Belgrave in exercising any power of sale,
lien, option or other right hereunder, and no notice or demand which may be
given to or made upon Brooke with respect to any power of sale, lien, option or
other right hereunder, shall constitute a waiver thereof, or limit or impair the
right of Belgrave to take any action or to exercise any power of sale, lien,
option or any other right under this Agreement or otherwise, nor shall any
single or
-7-
<PAGE> 8
partial exercise thereof, or the exercise of any power, lien, option or any
other right under this Agreement, or otherwise, preclude any other or further
exercise thereof all without notice or demand, nor shall any of the same
prejudice Belgrave's rights against Brooke in any respect.
(b) Each and every remedy of Belgrave shall, to the extent permitted by
law, be cumulative and shall be in addition to any other remedy given hereunder
or now or hereafter existing at law or in equity or by statute.
(c) Belgrave shall have no duty or obligation to satisfy the
indebtedness secured hereby out of any other property, or pursuant to any other
pledge, undertaking or security relating to such indebtedness and may realize on
the Collateral and/or any other security available to it in such order or
concurrently as it may see fit and Belgrave will not be required to take any
recourse against Brooke or any other person or persons before realizing on the
Collateral.
5.4 Expenses
Brooke shall pay Belgrave on a full indemnity basis all reasonable
costs and expenses (a) incurred by Belgrave in realizing upon any of the
Collateral and (b) paid or incurred by Belgrave in enforcing or attempting to
enforce its rights hereunder, which costs and expenses shall include the fees
and expenses of legal advisers and counsel to Belgrave. The obligation of Brooke
hereunder to make such payments to Belgrave shall constitute obligations secured
by the Collateral.
5.5 Entire Agreement; Amendment
This Agreement, the Brooke Note, the Consulting Agreement and the
documents referred to herein and therein constitute the entire agreement of the
parties with respect to the subject matter hereof and shall supersede any prior
expressions of intent or understanding with respect to this transaction. This
Agreement may be amended but only by an instrument in writing signed by the
party or parties to be bound or burdened by such amendment.
5.6 Assignment, Successors and Assigns
No assignment of this Agreement or any right or obligation hereunder
whatsoever shall be made by Belgrave or Brooke.
5.7 Applicable Law
The provisions of this Agreement and all rights and obligations
hereunder shall be governed by and construed in accordance with the laws of the
State of New York, without reference to New York's conflict of laws rules.
-8-
<PAGE> 9
5.8 Jurisdiction
Brooke and Belgrave agree that any legal action or proceedings arising
out of or in connection with this Agreement may be brought in any court of the
State of New York located in New York City or any Federal court of the United
States of America located in New York, New York, and, by execution and delivery
of this Agreement, Brooke and Belgrave hereby submit to and accept with regard
to any such action or proceeding, each for itself and in respect of its
property, generally and unconditionally, the jurisdiction of the aforesaid
courts and waives any objection which it may now or hereafter have to any such
court as the venue for any such proceeding on the ground that it may constitute
any inconvenient forum. The agreement set forth in this Section 5.9 is given
solely for the benefit of the parties hereto and such agreement is not intended
to and shall not inure to the benefit of any other person.
5.9 Notices
Any notice, communication or demand to be given or made by or to
Belgrave or Brooke pursuant to this Agreement shall be in writing and shall be
(i) personally delivered, (ii) transmitted by postage prepaid registered mail,
with return receipt requested (airmail if international) or (iii) transmitted by
telecopy (confirmed by prepaid registered air mail letter) addressed and sent to
Brooke, at:
Brooke (Overseas) Ltd.
100 S.E. Second Street
Miami, Florida 33131
U.S.A.
Telecopier: (305) 579-8001
Attention: Marc Bell, Esq.
General Counsel
and to Belgrave at:
Belgrave Limited
17 Paseo Illetas
Palma de Mallorca
Spain
Telecopier: 011-34-71-400065
Attention: Mr. Eduard Z. Nakhamkin
or to such other address and telecopy number as either Belgrave or Brooke
respectively may notify to each other. Any such notice, communication or demand
shall be effective on (x) the date of receipt if delivered personally, (y) the
date of receipt or the date seventy-two (72) hours after the same was posted,
whichever is earlier, if transmitted by mail, or (z) the date of transmission
with confirmed answerback, if transmitted by telecopy, whichever shall first
occur.
-9-
<PAGE> 10
5.10 Invalidity
Any provision hereof prohibited by or unlawful or unenforceable under
any applicable law of any jurisdiction shall as to such jurisdiction be
ineffective without affecting or impairing the remaining provisions of this
Agreement which shall remain in full force and effect. In the event that any
such applicable law may be waived, it is hereby waived by the parties hereto to
the fullest extent permitted by law to the end that this Agreement shall be
deemed to be a valid and binding agreement enforceable in accordance with its
terms. In the event that any provision of this Agreement or of any document
executed pursuant hereto shall be deemed to be invalid or become invalid, the
parties hereto shall substitute for such invalid provision a new provision which
serves the purpose of the invalid provision to the best possible extent.
5.11 Headings and Counterparts
The headings of this Agreement are for the purpose of reference only,
and shall not limit or otherwise affect any of the terms hereof. This Agreement
may be executed in counterparts and any single counterpart or set of
counterparts signed, in either case, by all the parties thereto shall be deemed
to be an original, and all such counterparts when taken together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
BROOKE (OVERSEAS) LTD. BELGRAVE LIMITED
By /s/ Ronald J. Bernstein By /s/ Eduard Z. Nakhamkin
-------------------------- ---------------------------
Name: Ronald J. Bernstein Name: Eduard Z. Nakhamkin
Title: President Title: President
-10-
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE COMPANY
The following is a list of the active subsidiaries of the
Company as of March 29, 1996, indicating the jurisdiction of incorporation of
each and the names under which such subsidiaries conduct business. In the case
of each subsidiary which is indented, its immediate parent owns beneficially all
of the voting securities, except New Valley Corporation, of which BGLS Inc. and
New Valley Holdings, Inc. collectively own approximately 42% of such voting
securities.
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
BGLS Inc. Delaware
Liggett Group Inc. Delaware
New Valley Holdings, Inc. Delaware
New Valley Corporation New York
Brooke (Overseas) Ltd. Delaware
Not included above are other subsidiaries which, if considered
in the aggregate as a single subsidiary, would not constitute a significant
subsidiary, as such term is defined by Rule 1-02(w) of Regulation S-X.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
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0
0
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</TABLE>
